Wednesday, October 1, 2008

Taxpayer Cleared Recapitalization, Gift for Carlyle Group & Company

Carlyle Group co-founder William Conway called the current financial crisis one of recapitalization, not liquidity. The financial sector is undergoing traumatic change, with shareholders frequently losing their total investment.

Who's coming back in? Which firms are providing the cash for the needed recapitalization of financial institutions? So far it has been Warren Buffet and Berkshire Hathaway. His gold seal of approval inspires other investors to put their feet in turbulent waters. Buying billion dollar chunks of Goldman Sachs and General Electric, Buffet got preferred shares paying a 10% annual dividend and the right to buy more general shares at low, fixed prices.

Expect the private equity underwriters (PEUs) to dive in next. The Bush administration relaxed ownership rules allowing such firms to take a bigger stake, to control more board seats. This enables them to impact strategy and execution. What do they expect? A 20-25% annual return on their money.

How does it feel knowing your $700 billion taxpayer dollars will clear the deck for the PEU boys to clean up? Oh, and the Senate version has tax breaks. Might they crank up the return to 28-30%? Be sure to watch what Congress does with carried interest taxation. That's your clue as to how deep the grinding heel will go.