Sunday, October 5, 2008

Lining Up at the Treasury Window

Private equity underwriters clamored for bank ownership rule changes so they can be part of the solution to America's financial meltdown. They offered their substantial billions to shore up the system. The Bush administration delivered.

Now that Congress passed the pork laden $700 billion bailout, those same PEU's can line up for their handout. The Carlyle Group, Bain Capital, KKR, and Merrill Lynch Private Equity could take their turn at the Treasury window. A few examples are below:

1. Carlyle Capital Corporation failed months ago. The highly leveraged mortgage security holder is in roll up. The foreign based fund meets the criteria for help. What junk do they have left and how much can they get their Pennsylvania Avenue buddies to pay?

2. Carlyle financed their recent acquisition of ManorCare with commercial mortgage debt obligations. If those get turned into Paulson, Treasury can sell them back to Carlyle for pennies on the dollar. Buying back debt on the cheap is a stated strategy of David Rubenstein, Carlyle's co-founder.

3. Carlyle lost SemGroup, an oil and natural gas pipeline company to bad financial bets. The firm is currently in bankruptcy. Will Uncle Sam end up with their bad forward looking contracts? Will Carlyle get something out of their busted deal?

4. Bain, KKR, and Merrill can request Hank buy their $1.6 million in HCA's level 2 and 3 investments held by their professional liability insurance subsidiary.

One might expect energy distribution and healthcare firms to be on sound footing. But risky management practices infected SemGroup and HCA.

Congress did not institute a fix. Clogged arteries is a misdiagnosis. Executive suites and board rooms are infected. Banning golden parachutes does not touch America's pathologically greedy management practices.

In this crisis, the PEU boys still talk about 20-25% annual returns on their investments in a recapitalized financial sector. Guess who's clearing the junk for that recapilization to occur? The taxpayer. My CPA Congressman, Rep. Mike Conaway had the temerity to say. "He knows that were this a business deal he was doing on Wall Street, he and his investors would make a lot of money." That's the plan....