Friday, August 29, 2008

Carlyle Group's "Hair of the Dog" Strategy on Banks

The Carlyle Group's Randall Quarles, prior Undersecretary of Treasury, wants banking regulations changed. He wants the Federal Reserve to grant private equity underwriters (PEU's) greater flexibility in buying chunks of American banks. This involves relaxing current restrictions on how large a stake non-banking firms can own.

And why are current restrictions considered onerous? Reuters said:

They can still take smaller stakes that are below certain ownership levels, but the firms fear they will then have too little power to sway a bank's strategy.

Sway a bank's strategy? Oh, they mean crank up the risk/reward curve. Isn't that what got banks in trouble to begin with? They wrote down billions in investments in high risk loans, packaged as Triple-A securities by hard partying, fee generating Wall Street.

Also, Carlyle has experience cranking that risk/reward curve. Highly leveraged Carlyle Capital Corporation and dice rolling, energy affiliate SemGroup declared bankruptcy.

The rationale for allowing private equity to own greater portions of banks is "they have the money." Yes, and liquor stores have plenty of alcohol. Welcome to "hair of the dog" financial reactioneering.

Carlyle goes to the bottle frequently for billions in loans. How nice to have their own still, I mean a captive bank. Will George W. allow them to make their own hooch?