Saturday, March 7, 2009

What Happens When Carlyle Sells to Carlyle?

The global shadow banking system includes unregulated private equity. The Carlyle Group manages over $91.5 billion in assets. The private equity underwriter (PEU) owns both corporations and debt instruments in their various portfolios.

The economic stimulus package, passed by Congress, included $25 billion in tax breaks for companies buying back their debt. This provision was inserted by Senator Max Baucus, D-MT, chair of the Senate Finance Committee. How might this play out? The Peninsula, a Qatar daily reported:

“Private equity firms will spend 70 percent of their time shoring up their investments, 20 percent of their time shoring up their investor base, 5 percent trying to raise new money and 5 percent trying to do new deals,” says David Rubenstein, co-founder of Carlyle. Keeping the companies they own alive through a brutal slowdown is, as Rubenstein implies, practically a full-time job. Firms are attempting to restructure the debt in those companies, buying the debt of their deals either because it is cheap or to have a seat at the table when the companies hit the wall and control goes to the creditors."

The Carlyle Group lost one affiliate, SemGroup, to debt holders. They assure a seat at the bankruptcy table if more fall, like TPG's Aleris and KKR's Masonite International. Currently Carlyle is trying to restructure debt at Freescale Semiconductor and IMO Carwash.

Carlyle co-founder David Rubenstein also noted debt is cheaply priced. How many pennies on the dollar is that? For Carlyle's American Achievement Group it's 23 cents on the dollar. Add in the tax benefits and it becomes more attractive.

But what happens when one offering of Carlyle sells to another? Who's watching to make sure that goes fairly? Irish Stock Exchange Carlyle Capital Corporation sold debt holdings of other Carlyle affiliates at a loss of $30 to 40 million.

If Carlyle has an affiliate approaching bankruptcy, can they buy credit default swaps on that company's debt? Hawaiian Telecom, Edscha, Freescale and IMO are candidates for such a strategy. Recall, one doesn't have to hold the underlying asset to buy credit coverage. Who's watching that?

America's unregulated shadow banking system set up our global financial implosion. Who's ensuring a more sound future foundation? It can't be PEU's and their political lapdogs. They got us in this fix.