Tuesday, December 16, 2008

Hair of the Dog from the Fed

The Federal Reserve Bank announced it would keep the Fed funds rate at record low levels, while it buys mortgage backed securities. It wants to get loan securitization restarted.

Isn't this the same juice that fermented the American economy? Imagine if Johnson & Johnson kept cyanide tainted Tylenol on the shelf. What if J & J asked the federal government to buy traunches of possibly poisonous product, while they kept production lines running?

Of course, non-tampered caplets have residual value. The government will resell them later. Just do it before the expiration date!

Our current economic hangover hurts like heck. Hair of the dog should get rid of it. Where's the next round of greed and leverage? Who's willing to lie, cheat and steal for performance based pay? There are no executive pay restrictions when the Fed TARPies! Let your hair down, Ben Bernake...

Fed Loaned Lehman Brothers $138 Billion Post Bankruptcy

The Bush administration cited it had no choice but to let Lehman Brothers fail. Months before, it saved Bear Stearns. Within days it rescued AIG. Treasury and the Fed said their hands were tied in mid-September as Lehman cratered.

Andrew Ross Sorkin reported the Fed loaned the firm $138 billion shortly after the bankruptcy. Why did they say one thing, and do another?

I believe politics played a major role. A Republican administration bailing out the President's close relatives wouldn't do. Bush cousin, George Herbert Walker, and brother Jeb worked for Lehman.

Sarah Palin had yet to botch basic interview questions and the race was close. Did Lehman fail to save the Bush brand?

Jeb and George Herbert Walker came out smelling like roses. They kept their share of the $2 billion bonus pool. The bankruptcy judge chose not to roll those funds up to satisfy creditors.

The judge granted a second gift when he selected Mr. Walker and management's bid for Neuberger Investment Management over Bain Capital's. Cousin George got the firm for half price with no money down. Sweet!

Bush's open and transparent financial rescue reflects none of this. The Fed considers its $2 trillion in loans and collateral "trade secrets". It looks like more Bush sponsored Corporafornication to me.

Arthur Levitt's SEC

Ex-Securities and Exchange Commission Chair Arthur Levitt defended his agency relative to the $50 billion Bernie Madoff Ponzi scheme. NYT Dealbook reported:

“At this point, I don’t see any evidence that the S.E.C. dropped the ball,” Mr Levitt, now an adviser to Carlyle Group, told the newspaper. Mr. Levitt was known for his investor-friendly administration at the regulator.

Harry Markopolos shared his concerns with the SEC in 1999. What did Arthur's SEC do? Anything? What about the SIPC? Who reviewed Madoff's auditors, sworn to uphold the public trust?

Did the SEC drop the ball elsewhere? They failed with backdated stock options. It took a college professor to find the widespread illegal scheme maximizing CEO compensation. Cheating occurred in 30% of stock options studied. The SEC slapped a few hands for robbing shareholders. Most executives got off Scott free. Ask Apple's Steven Jobs.

Mr. Levitt is a Senior Adviser of The Carlyle Group. I have some Harry Markopolos like questions regarding one of their affiliates, LifeCare Hospitals.

LifeCare lost 24 patients in Hurricane Katrina, the largest death toll in any Gulf Coast hospital. Carlyle purchased the company two weeks before landfall. Yet, LifeCare's two dozen deaths warranted not one mention in the White House Lessons Learned report. Why not?

Frances Townsend, White House Homeland Security adviser, jumped on a plane to Saudi Arabia while New Orleans sat in toxic gumbo. When she returned, Fran crafted the investigative report. What else did she leave out?

LifeCare rented a floor in Memorial Medical Center. Memorial lost 10 patients. MMC was owned by for-profit Tenet Health. While HCA chartered medical helicopters to evacuate patients from dead hospitals, Tenet and LifeCare let staff and patients swelter in a stinking death house. None of that was mentioned.

There are odd coincidences. George W. Bush served on the board of Carlyle affiliate, CaterAir in the 1990's. Carlyle's corporate office is just down Pennsylvania Avenue from the White House, 1001 vs. 1600. A year after the White House released their "ro"-less bust of an investigative report, Tenet Health appointed Jeb Bush to their Board of Directors, at significant annual compensation.

"At this point I don't see any evidence where LifeCare or Tenet dropped the ball."

If it's not in the report, it's very hard to see.

Monday, December 15, 2008

PEU's Commission Study for U.S. Economic Future

The trade group for private equity underwriters (PEU'S) hired two economic experts to weigh in on America's economy and priorities for our new government. The authors represent the center-right of the economic spectrum. Martin Baily served in the second Clinton administration, when President Clinton privatized USIS. The Carlyle Group flipped USIS for a hefty profit. Martin is the centrist. Matthew Slaughter served under the first President Bush.

The study focused on four areas: infrastructure, tax policy, education and training, & international trade policy and regulation.

The PEU boys want in on infrastructure. They're willing to drop their 30% annual returns for long term guaranteed infrastructure profits of 15-20%. That's on top of management fees they charge affiliates.

They'd love to keep their preferred taxation on carried interest. If not, at least delay the change as long as possible with a bi-partisan study.

The study failed to highlight the burden of nearly 50 million uninsureds on America's health care system, but it did imply business can't carry the burden of ever increasing health care costs.

PEU boys like cheap labor. If they can't export jobs, then import workers willing to work for less. Thus, eliminate caps under the H-1B visa program for highly skilled workers. They also want public institutions to fund worker training.

The study hedges on regulation, despite the Bernie Madoff's of the world. While we wait for the next $50 billion Ponzi scheme shoe to drop, regulation should not "discourage competition" or "micromanage industries."

Will Congress and the Obama administration play the PEU game? Highly likely. The connections are in place. The study is complete. It's time to close the sale. The Carlyle Group and company have the thoroughbreds to do it.

Saturday, December 13, 2008

Carlyle Group Uses European Study to Promote U.S. Private Equity

The Carlyle Group posted results of a study on employee treatment under private equity ownership. Only they didn't interview employees. They sampled 190 human resource professionals and company executives. The results?

Number of companies with a unionised workforce is static post-buyout at 71%. No surprise, given their relatively short term ownership position and goal of flipping for large profits. How did union leaders feel about PEU ownership? Oh, they weren't interviewed.

Real earnings of non-managerial employees increased in just over half (51%) of cases. A large minority of 47% experienced no change. How does this vary by union membership?

Availability of occupational pension schemes increased from 76% of companies before a buyout to 81% afterwards. Are non pension retirement options included, i.e. the European version of 401(k)'s?

Amount spent on non-managerial employee training increased post-buyout in 45% of cases, and fell for just 3%.

Employee commitment best practice increases, with regular team briefings up from 71% to 90% of cases. Briefings are good, but what's the impact on product or service quality? Boeing cited Carlyle's Vought Aircraft for numerous delays in its 787 Dreamliner program.

The proportion of private equity-backed companies that had a consultative committee in place increased from precisely half before the buyout to 63% afterwards. And the impact of such committees on pay, benefits, safety, workplace conditions?

Carlyle Capital Corporation failed. So did Blue Wave Partners and SemGroup declared bankruptcy, as did Hawaiian Telecom. How many of those made the sample? They didn't.

The study involved European private equity owned companies. It was conducted prior to the global financial implosion.

How do 100 Carlyle Group nonunion employees feel about their layoff? How will politically connected Carlyle spin this study, as they look to pick up broken banks for a song? The survey doesn't say. Might Carlyle? Stay tuned...

The Ghost of Pharma Quality

The Food and Drug Administration planned to allow drug companies to market "off label" uses of their products as long as an article on the practice has been published by a trade magazine.

Merck manipulated dozens of publications to promote Vioxx, a dangerous drug. The drug maker drafted dozens of research studies for a best-selling drug, then lined up prestigious doctors to put their names on the reports before publication.

Wyeth paid ghost writers to produce favorable journal articles on Prempro. Company executives came up with ideas for medical journal articles, titled them, drafted outlines, paid writers to draft the manuscripts, recruited academic authors and identified publications to run the articles — all without disclosing the companies’ roles to journal editors or readers.

Buyer beware belongs in the era of snake oil salesman. It's return under the George W. Bush administration is most disturbing.

Friday, December 12, 2008

Carlyle Group Gets CalPERS Sponge for Bloody Financial Gutters

The Carlyle Group gained $150 million for its distressed financial assets fund. Pensions & Investments reported:

CalPERS committed $150 million to Carlyle Global Financial Services Partners, a new private equity fund that will target distressed sellers and divisional carve-outs in the financial services industry, such as banking, insurance, asset management, financial technology and consumer and commercial specialty finance companies.

CalPERS and Carlyle are ready to mop up in the midst of carnage. I trust they can wash the blood off.

PEU Boys Keep $750 Billion on Sidelines

Private equity underwriters (PEU's) have significant uninvested assets, to the tune of $750 billion. Reuters reported:

Private equity is sitting on some $450 billion of capital committed for buyouts, according to data from consultancy firm Preqin, with funds still on the road targeting a further $300 billion.
While the Bush administration mobilizes over $7 trillion in public funds, the private sector watches from box seats. Sometimes, they make an order. The Carlyle Group has $40 billion in uninvested capital, yet affiliate Boston Private Financial Holdings received $153 million in TARP money. What do those tea leaves say? Despite $750 billion in dry powder and Uncle Sam's good will, investors dump private equity investments, some for less than 50 cents on a dollar. Tea leaves say investment is dead for many investors, killed by greed and leverage.

$50 Billion Ponzi Scheme Madoff Signs Out of Jail

The Jerusalem Post said Bernie Madoff signed out of jail after his arrest for defrauding investors of $50 billion. His victims included high net worth individuals, hedge funds, institutional customers and Jewish charities. How could this happen?

Bernard L. Madoff Investment Securities was founded in 1960. It operated more than two dozen funds. Did they have a board of directors? Who did their audits? How could internal accountants keep quiet under such conditions? Where was the SEC? Madoff's website states:

Madoff Securities is a registered US broker/dealer regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, Inc.

He lauds his firm as a member of the SIPC? Where were they while Bernie milked new investors to pay off old?

Who steals billions and exits jail under their signature? Bernie Madoff did under George W. Bush's "zero tolerance" America. Madoff, the latest nail in the coffin of investing.

Wednesday, December 10, 2008

Lehman's Neuberger: $1.2 Billion in Bush Beats $2.15 Billion from Bain

President George W. Bush's close relations got the deal of a lifetime. For zero down, i.e. no cash, George Herbert Walker and Neuberger's management got 51% of an independent Neuberger Investment Management. The bankruptcy court chose the certain $1.2 billion stock deal over a prior bid by Bain Capital for $2.15 billion.

The Bush family wins again. Cousin George Herbert Walker is NIM's Chairman, while brother Jeb retains his advisory role for their private equity group. Bloomberg reported:

Neuberger management received the deal of a lifetime by obtaining 51 percent of the common stock for no cash.

But more Bush sponsored Corporafornication. (Update: the deal is worth $922 million after adjustments)

Carlyle Short on Chinese Guanxi

The Carlyle Group lost a Chinese medical research company due to lack of "guanxi", connections in English. It's rare for the politically connected private equity underwriter to lose deals in such a fashion. Co-founder William Conway likes a playing field tilted in Carlyle's favor.

Carlyle has the stable to steer deals and garner big government business in many parts of the world. They had the horses to sell American airport operations to Dubai Aerospace without a peep from the media. Landmark Aviation and Standard Aero sold between the out roars over Dubai Ports World's purchase of U.S. port operations and the Dubai Bourse buying a chunk of NASDAQ.

When the Chinese clinical research firm backed out of the deal, they sent an e-mail to Carlyle with "pray forgive". Carlyle sued for $206 million.

It's not the first time Carlyle mobilized teams of attorneys. They sued Tenet Health on behalf of affiliate LifeCare Hospitals. The two firms settled liability for Memorial Medical Center after Hurricane Katrina. Thirty four patients died, 10 at Tenet's MMC & 24 in LifeCare's LTAC unit which rented space in Memorial. The settlement is secret.

LifeCare lawyers blamed rogue clinicians, yet a grand jury failed to indict Dr. Anna Pou. Carlyle legal experts then pointed the finger at the feds. Their novel claim suggests LifeCare patients became wards of the federal government as soon as FEMA evacuation teams set up in New Orleans. This defense is laughable to health professionals. How does this pass as sound management or legal practice? Only in the world of avoiding responsibility or protecting one's good name.

Carlyle's not having the guanxi to close the China deal could be a mirror experience. Is there an image to see?

Monday, December 8, 2008

Carlyle's Mack McLarty Teams Up with Carlyle's Bob Johnson on Dealerships

A week after the credit crisis hit, a Carlyle Group Senior Adviser and joint venture partner got together to purchase a Little Rock Harley Davidson dealership. Mack McLarty and Robert L. Johnson did the deal. Fortunately, the big money men had the resources to close, even as credit evaporated.

The Carlyle Group has a history of discerning federal tea leaves. Affiliate Boston Private will pocket $153 million in TARP money.

Will Mack or Bob garner any of the Big 3 auto bailout money, given their status as the largest minority owned dealership group? If dealers don't get a chunk of phase 1, are they angling for a post Obama giveaway?

Billionaire community banker Bob Johnson milked his minority status in a picture with President Bush. I think his status helped Urban Trust in the federal student loan arena, where they partner with Goldman Sachs.

Pay attention, folks. $7 trillion is washing through our financial system and a $1 trillion stimulus package is soon to follow. The big money men want their hands on America's sovereign IOU fund.

Where there's a will, there's a way. The Carlyle Group, Mack McLarty, and Bob Johnson understand both will and way.

Carlyle Group Scrubs IMO's Balance Sheet

The Carlyle Group purchased IMO Car Wash last year for 450 million pounds, borrowing 350 million from banks. Hemscott reported Carlyle hired NM Rothschild to help restructure the debt. IMO has 300 Arc Clean Car Centers in Britain.

How does a private equity underwriter (PEU) gain leverage on banks holding their corporate debt? Would owning credit default swaps on IMO help Carlyle negotiate? How do the SemGroup, Carlyle Capital Corporation, Blue Wave Partners, and Hawaiian Telecom bankruptcies factor into the bank's decision?

Carlyle has $14 billion ready to buy distressed debt. How much PEU affiliate debt will they buy on the cheap? Stay tuned.

Sunday, December 7, 2008

America's Economic Undevelopment

In our recessionary times, the federal government prints trillions for distribution to failing companies. In return, the benefitting firms shed jobs. For a snapshot of this economic undevelopment, see below:

1. CitiBank slashed 53,000 jobs for $45 billion, plus $306 billion in loan guarantees
2. UBS cut 13,500 positions for $60 billion
3. The Carlyle Group dropped 100 jobs while affiliate Boston Private Financial Holdings netted $153 million

It's a good thing Carlyle didn't get billions in support. Think of all the jobs they could cut in return.

Saturday, December 6, 2008

Private Equity Flush with Uninvested Capital

News reports show plenty of dry powder on the sidelines as taxpayer money rescues failing company after company. The Apollo Group has $20 billion ready to invest. Others include:

Bain Capital $20 billion
TPG $30 billion
Carlyle Group $40 billion
KKR $16 billion

Private equity is stressed from high leverage and investing in Wall Street's innovative products, the ones that burrow deep into a portfolio before exploding. Yet, the similarly stressed individual taxpayer is forced by Congress to fund bailout after bailout.

Carlyle Group affiliate Boston Private Financial Holdings got $153 million in TARP money. BPFH caters to the high net worth marketplace. Thank heaven the rich can get loans on the taxpayer's back. And thank heaven, the PEU boys can sit on billions while our financial system continues imploding. Cake anyone? Or is it tea and crumpets...

Despite Heavy Cash Position, Carlyle Group Stressed

The Carlyle Group is a tale of two companies. Layoffs and office closings greeted Carlyle employees this past week. Yet, the private equity underwriter (PEU) is loaded with $40 billion in cash.

Bloomberg reported on a Standard & Poors study of managed loan funds. It revealed more pain for Carlyle.

Loan funds managed by American International Group Inc., Carlyle Group and KKR Financial Holdings LLC may face downgrades after Standard & Poor’s review of 197 portions of collateralized loan obligations.

“Rapid deterioration in the credit quality of the corporate loans in the underlying collateral pools in recent weeks” led to the move, the New York-based ratings company said today in a statement. The securities, valued at $3.89 billion at issuance, are from 127 CLOs including deals overseen by the three managers, S&P said.

“We will be reviewing the individual investment portfolios of both insurance companies and financial institutions in the upcoming weeks for large exposures to the tranches that are being placed on credit watch,” the report said.

In other words, more dokie is coming in the worldwide economic meltdown. Carlyle has a European Leveraged Finance Team with almost 6 billion Euro's under management. How far will those CELF investments free fall?

Thursday, December 4, 2008

Credit Freeze Approaches Absolute Zero

Despite $7 trillion in approved federal interventions, corporate borrowing remains severely constrained. No high yield corporate bonds were issued in November, a worldwide phenomenon.

Ex-White House economic adviser Al Hubbard predicted TARP passage would ensure a nice outcome. That "happy ending" remains elusive. Mr. Hubbard's sorry track record continues.

Carlyle Group Cuts 10% of Staff, Holds $40 billion in Cash

The Carlyle Group announced a 10% reduction of staff in light of dormant deal making. One hundred employees will get pink slips as Christmas approaches. If a private equity underwriter (PEU) with $40 billion in dry powder can slash employment, what are other companies to do?

I'm surprised David Rubenstein and company didn't hold out. CitiGroup got $45 billion in TARP cash and $300 billion in loan guarantees for shedding 50,000 jobs. Big Three auto companies may get over $30 billion in financing to layoff tens of thousands.

Carlyle got a mere $153 million for affiliate Boston Private Financial Holdings. If Hank Paulson ponied up more green, would the PEU inflict more employee pain? How will layoffs play out? Ex-Clinton staffer and Carlyle spokesman Chris Ullman said the majority of cuts would be in the U.S. Will it impact Lana Axelrod, a health care investment expert in New York? Did huge government consulting firm Booz, Allen & Hamilton advise Rubenstein and company on the cuts? The mood around Carlyle must be blue.

Wednesday, December 3, 2008

Oracle of Pennsylvania Avenue Speaks

Carlyle Group co-founder David Rubenstein mentioned the coming "mother of all stimulus packages" on October 25, long before the media posited such a thing for public consideration. He offered his prediction on Alaskan Public Radio.

The Oracle of 1001 Pennsylvania Avenue delivered again, at the National Press Club. He sees Washington becoming the corporate power center and good times for lobbyists and consultants. Rubenstein also foresees:

1. Unemployment over 10%
2. Recession for another year
3. Hedge funds will lose value
4. Private equity will remain hampered due to lack of leverage
5. Financial engines have dramatically changed & will take years to return
6. Deepest recession since Great Depression

7. President elect Obama will deliver a $1 trillion stimulus package

He didn't say anything about his favorite strategy, buying affiliate debt for pennies on the dollar. Nor did he mention taking credit default swaps on bankrupt holdings. Carlyle has a way to make money in the current difficult environment. They have 30% annual returns to generate.

Tuesday, December 2, 2008

AIG's Distressed Asset Sale of ILFC

The Financial Times reported on the likely sale of AIG's aircraft leasing division, International Lease Finance Corp (ILFC). The Federal Reserve Bank controls 80% of AIG through its $150 billion life support.

ILFC had $9 billion in bank debt and commercial paper mature in 2008. Did the Fed make good on these obligations, or do they pass on to any buyers? Given the locked up credit markets, $9 billion can be hard to come by.

FT believes there to be a small list of potential buyers, the large private equity firms like TPG, KKR and the Carlyle Group. GE was mentioned as they already own portions of aircraft leasing companies.

The economic crisis means any sale would occur in a distressed environment. Assets are likely to be sold at a discount, deeper if the government won't offer sweeteners. One source noted "that the government is extraordinarily exposed through its investment in AIG and is attempting to raise whatever money it can." The piece stated:

The second source said he believed ILFC would be highly leveraged because its assets are strong collateral and can be levered extensively. He said a more likely scenario could include asking the government for some lingering support whereby allowing the buyer to maintain ILFC’s single A rating.

If the government has hopes of securing full value for ILFC, it will have to provide some ongoing support, the same source said. Conversely, if the government does not provide aid to buyers, the company is expected to be sold at a lower price.

Government support, discounted price, equals the opportunity to make 30% annual returns. Could there be more taxpayer funded corporafornication for the Carlyle Group?

Monday, December 1, 2008

Carlyle Group's Hawaiian Telecom Goes Chapter 11

Saddled with over $1 billion in debt, Hawaiian Telecom declared Chapter 11 bankruptcy. The Carlyle Group purchased the company in 2005 for $1.6 billion. It suspended interest payments in November as it negotiated with debt holders. Forbes reported:

"Our decision to restructure through a Chapter 11 filing allows the company to reduce its level of debt and reorganize its business, so we can emerge a stronger and more financially secure company better able to compete in the ever-changing communications industry," President and Chief Executive Eric Yeaman said in a statement.

Apparently Carlyle can buy their affiliate's debt cheaper under a bankruptcy markdown. Did they bet on their affiliate's failure? How many of HT credit default swaps do other Carlyle funds own? An ex-Goldman Sachs executive will handle the legal proceedings for Carlyle.