Monday, September 22, 2008

Bank Bailout Plan a Potential PEU Financial Windfall

Private equity firms found one more way to benefit from the current financial crisis. The Wall Street Journal reported the Federal Reserve relaxed rules on who can own banks. Recall Goldman Sachs and Morgan Stanley switched to commercial bank status over the weekend. The piece stated:

The Federal Reserve, unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and private investors to take big stakes in banks.

It marks the latest move by the Fed to rewrite the rulebook in response to the financial crisis. Regulators have grown worried about a shortage of capital at banks, in particular smaller thrifts and regional institutions. The Fed has been crafting this policy for at least two years, and private-equity firms have been aggressively lobbying for more lenient policies.

How can a private equity firm benefit? The Carlyle Group already showed two ways they can win:

1) Managers of their distressed company fund felt things would get worse, before they got better. Tighter credit could stress good companies, steering them to private equity underwriters, like Carlyle, for investment.

2) Carlyle purchased ManorCare last year, using mortgage backed securities to the tune of $4.6 billion. If those instruments end up in Uncle Sam's coffers, the PEU could buy back their securitized debt for pennies on the dollar.

3) Cash heavy Carlyle can buy larger chunks of distressed banks, something they've lobbied hard for the last six months. Their financial segment is led by an ex-Number 2 to Hank Paulson and the brother of French President Sarkozy.

4) Failed fund Carlyle Capital Corporation can submit their mortgage backed assets to the feds for purchase. They may be able to salvage more from their bankrupt fund.

Welcome to disaster capitalism! Carlyle grew from $5.8 billion to some $90 billion during the George W. years. It looks like that trend will continue. Even Reuters noted the opportunities...