Wednesday, April 29, 2009

Big Money Boys Own the Capital

Senator Dick Durbin confirmed what many understand, America has a corporatist government. He said:

And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place.

Dick left out the shadow banking system, many of which fled to commercial bank status last fall. Private equity, hedge funds and sovereign wealth funds remain in the shadows. They also own the place.

President Obama works to restart greed, with a tad less leverage. His plans have shadow bankers saving commercial bankers. They'll do so with taxpayer funding.

Despite my vote to throw the money changers out of our hallowed halls of government, it's clear corporatists own the Capital and the White House. Populist rhetoric sinks under dirty D.C. waters. A pox on the red/blue houses and their multitudes of corporate sponsors.

(Update from EPJ: Goldman Sachs new chief lobbyist, Michael Paese, was Rep. Barney Franks' top staffer. Add this name to the list of Goldman influence peddlers on financial system reform. Rep. Frank chairs the house committee undertaking reform.)

SEC Fraud Gets Fine, Little More

The Chief Executive Officer of American Home Mortgage Investment Corp. settled with the SEC on fraud charges. The SEC brought charges against three AHMI executives for misrepresenting the firm's finances. CEO Micheal Strauss agreed to pay a $2.45 million fine and not serve as an officer or director of a public firm for five years.

This level of "justice" is common for executives. Pay a fine and don't admit guilt. That leaves them free to abuse another day. Surely a private firm will hire Strauss.

PEU's Look to Buy Distressed & Good Banks

Kings of private equity have their eye on banks, the good and the struggling. Thomas Lee said his two firms are exploring bank deals. Bloomberg reported on his thinking:

“We’ve looked at several different platforms,” Lee said. The U.S. government is willing to provide financial assistance for bank deals, he said.
Thomas Lee isn't the only private equity underwriter (PEU) interested in bank deals.

Buyout investors including Washington-based Carlyle Group and J.C. Flowers & Co. and Blackstone Group LP in New York have said they’re interested in buying banks at discounts.

PEU's rely on leverage to do their thing. Carlyle's David Rubenstein made this very point on the sidelines of the SuperReturn Conference in Miami. With lending knotted up, Uncle Sam provides the financial assistance, aka leverage. Once PEU's own banks, they can get more financing (leverage) through their captive affiliate, at least until they flip them for huge profits.

Will they then cram down their debt holders while getting a Congress supplied $25 billion tax break? History can repeat itself. Something stinks. It's a combination of PEU's and the Government Industrial Monstrosity, Eisenhower's MIC on steroids.

Geithner Sings "You Say You Want a Stock Dilution"

Stockholders who invested as result of stellar bank first-quarter earnings may spit at Treasury Chief Tim Geithner. Recall he postponed stress tests so as not to interfere with the one quarter "mark to fantasy" mumbo jumbo and billions funnelled into the banking sector via AIG. Bloomberg reported on looming dilution for many bank shareholders. It will come one of three ways:

Geithner has said that banks can add capital by a variety of ways, including converting government-held preferred shares dating from capital injections made last year, raising private funds or getting more taxpayer cash. With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.

More taxpayer cash means greater government control and restrictions. America's Sovereign Debt Fund continues to stuff taxpayer wallets with kajillions in IOU's. If I purchased bank shares in the last month, I'd think Tim Geithner owed me.

Tuesday, April 28, 2009

Carlyle Group Considers Geither's Public-Private Partnerships: Taxpayer Provides Leverage

Speaking from the sidelines of the SuperReturn Conference in Miami, Carlyle Group co-founder David Rubenstein laid down his expectations of Tim Geithner's public-private investment partnerships. Rules need to be clear, other than taxpayers will provide up to 93% of start up capital and profits will be split 50-50, even for firms only ponying up 7%. Reuters reported Rubenstein wants private equity underwriters (PEU's) to have:

1. Knowledge of the ground rules
2. The rules won't change (no additional regulations, disclosure or compensation limits)
3. There will be something to buy (cheaply, that can be resold later for big profits)
I'm sure Tim got the order. He already built in yacht loads of taxpayer funded capital, the leverage that David Rubenstein lamented is greatly reduced.

CDS Writer Syncora Stops Payments

Syncora Guarantee, a New York underwriter of credit protection on residential mortgage backed securities, suspended all claims payment under the order of insurance authorities. Oddly, the same day the firm announced an offer:

The BCP Voyager Master Funds SPC, Ltd., acting on behalf of and for the account of, the Distressed Opportunities Master Segregated Portfolio (the "Fund"), today announced that it has extended the expiration date of the Fund's offer for 56 classes of residential mortgage backed securities ("RMBS") insured by Syncora Guarantee Inc. ("Syncora Guarantee") to 11:59 p.m., New York City time, on Friday, May 15, 2009. The Fund also announced that all holders of RMBS that tender into the offer on or prior to the expiration date will be eligible to receive the premium price that was previously offered only to holders that tendered their RMBS prior to the early consideration date.
In other words, RMBS holders have no credit protection from any credit default swap purchased through Syncora Guarantee. Fifty six classes of RMBS securities insured by Syncora are now in deeper limbo than before. Syncora Holdings was a division of XL Capital. Bermuda based XL established a firewall from Syncora's burning CDS's. XL transferred its 46% ownership into a trust.

This one story says much about America's free wheeling financial system. Selling products one won't back, using offshore corporations to ringfence liability and tax obligations, and leaving the customer in the cold with few good options.

Is Health Care Dump Behind Big Union Wins at GM and Chrysler?

Unions agreed to take on retirement health care via VEBA's during the last round of automaker contract negotiations. Companies committed billions to these innovative arrangements, where unions hold responsibility for retiree health care coverage.

GM and Chrysler offered new plans. None have been adopted, yet. Ownership falls out as:


Union 55%
Fiat 35%
Government and bondholders 10%


Government 50%
Union 39%
Bondholders 10%

Unions end up with significantly greater chunks of the company than expected. Financial experts wonder why. VEBA's are part of the answer. The NYT reported:

The government wants the union to accept company stock to finance half of G.M.’s $20 billion obligation for retiree health care.

Chrysler would give the union a 55 percent stake to cut its obligations to the health care trust in half. The deal suspends cost-of-living pay increases, limits overtime pay and reduces paid time off. It also eliminates dental and vision benefits for retirees.

What about employee health insurance? Will that shift to the union under Obama health care reform? Highly likely.

Other oddities? The union will be on both sides of the negotiating table. It also would manage billions in funds for pensions and employee/retiree health care coverage. Who will invest their ample funds? I smell a PEU, private equity underwriter. They are the solution to every problem, right? President Obama believes so.

Monday, April 27, 2009

Uncle Sam's Sovereign Debt Fund to Buy 50% of GM?

Middle Eastern countries, flush with oil cash, have sovereign wealth funds. Uncle Sam's foray into big equity stakes is debt financed. Recall the leverage used by Wall Street and private equity underwriters (PEU's)? It's re-branded red, white and blue.

The federal government began buying equity stakes in banks last fall. GM proposed the U.S.. Treasury own 50%. GM's President said Treasury viewed its stake in General Motors like a PEU investment. I'll second that motion.

GM will dump its Pontiac line and shed another 21,000 jobs. How many billions will taxpayers pay to the company in a reverse economic development move? Uncle Sam is a consistent PEU, giving billions to firms firing tens of thousands of Americans.

The reorganization has plenty of cram down. Treasury gets 50% of equity, while bondholders garner 10%. The United Auto Workers get 39%. That leaves 1% for existing equity holders. Bond and stock holders take it in the shorts.

The Obama government is either a sovereign debt fund or a PEU. Sad days indeed.

Geithner Finance Industry's Lackey?

President Obama offers soaring rhetoric about accountability, transparency, limits on executive pay, and a firm regulatory hand for America's financial sector. But those are just words. The NYT reported:

Even as banks complain that the government has attached too many intrusive strings to its financial assistance, a range of critics — lawmakers, economists and even former Federal Reserve colleagues — say that the bailout Mr. Geithner has played such a central role in fashioning is overly generous to the financial industry at taxpayer expense.

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

Tim says he's saving the world. It looks more like he's saving Wall Street's backside, while leaving most shadow bankers free from any regulatory yoke. Geithner wants to restart greed with a tad less leverage. He does so with taxpayers' trillions. Corporafornication lives under the blue team.

Carlyle Group to Lose IMO CarWash?

Private Equity News reported The Carlyle Group is set to lose control of IMO Car Wash Group as part of its debt restructuring negotiations with lenders. If it implodes under the weight of excessive leverage or exotic financial instruments, the Carlyle list of failures includes:

Carlyle Capital Corporation
Blue Wave Partners
Hawaiian Telecom
IMO Car Wash

Sunday, April 26, 2009

AIG's ILFC Bids Are Less than $5 billion

The AIG fire sale continues. The Financial Times reported all three bids for AIG's aircraft leasing unit came in under $5 billion, well below ILFC's book value of $7.6 billion. Bids are also less than the line of credit the New York Fed was ready to extend to ILFC.

Who will walk away with the deeply discounted prize, financed by taxpayer dollars? Will it be The Carlyle Group/Thomas Lee Partners, Onex Corp/Greenbriar Equity, or an undisclosed third bidder? Stay tuned. Grand returns await.

Saturday, April 25, 2009

Swiss Government Asks U.S. to Move On & Drop UBS Investigation

On the sidelines of the IMF meeting, Switzerland asked the U.S. to drop the legal case against UBS, the giant Swiss bank. The Justice Department seeks information on 52,000 more tax cheats. The UBS settlement included a $780 million fine and the release of 300 names out of 17,000.

Swiss President Hans-Rudolf Merz asked Treasury Chief Tim Geithner to drop the case. Will Tim overrule Eric Holder? Where was Phil Gramm? Working behind the scenes on behalf of his employer, UBS? Highly likely.

Billions in Bonds Coming from IMF & Fed

The International Monetary Fund and the Federal Reserve Bank are adopting new tools for dealing with the financial crisis. They include issuing hundreds of billions in bonds.

The IMF also has the ability to effectively print its own currency via strategic drawing rights. SDR's will be based on the dollar, the euro, the yen and the pound.

Back filling for the imploded shadow banking system is a huge job. New tools are needed to fill the ever expanding sink hole. How many trillions will it take?

Will TALF Ride to CDO Rescue?

Two booms occurred simultaneously. Widespread cheap credit fueled both a housing bubble and a private equity buying spree. Housing is deflating as are corporate asset values. Some instruments were less than long term. That means refinancing is needed. NYT reported:

Moody’s reports that leveraged companies need to refinance $26 billion in loans this year, $44 billion in 2010 and $120 billion in 2011. If credit markets remain tight, we could see lots of defaults even among companies that are doing well enough to make their interest payments.
The TALF program aims to restart credit via securitized debt. It's slated for expansion into corporate and commercial real estate loans. Will refinancings be covered in the debt packages? If so, that explains the Carlyle Group's participating with Treasury in its smattering of innovative solutions. Ignore that the new collateralized debt obligation (CDO) looks a lot like the old. Restart greed with a tad less leverage...

Friday, April 24, 2009

Fed to Line Up at TARP Window?

I'd worried about insurance companies ponying up to Treasury's TARP window. Bloomberg indicated The Federal Reserve Bank may ask taxpayers to make it whole. The Fed took a $9.6 billion hit on prime assets it took from AIG and Bear Streans.

Does anyone else recall Ben Bernanke bragging about the Fed's quality collateral? He'll take a 13% hit on those primo holdings. What's left to fall? Bloomberg said:

The central bank lent $2 trillion to financial institutions and hasn’t disclosed information about most of the collateral backing those loans.

Will Ben ask Treasury to make up other declines in a rescuer to rescuer capital call?

Remakers of Global Financial System Have Goldman Sachs Pedigrees

The IMF/World Bank and the re-badged Financial Stability Board will play critical roles in managing the global financial crisis. Two of the top three leaders have Goldman Sachs Managing Director on their resume. World Bank President Robert Zoellick and FSB Chair Mario Draghi worked for Goldman Sachs. In case you need a refresher, here are a few more Goldman alums:

Hank Paulson, Treasury Director under President Bush
John Thain, ex-Merrill Lynch CEO

(Recall CEO Ken Lewis' statement that Paulson strong armed Bank of America into closing the deal with Merrill. )

Josh Bolten, Bush White House Chief of Staff
Robert Rubin, Chairman CitiGroup
Ed Liddy, ex-AIG CEO
Robert Steel, Wachovia CEO
Neel Kashkari, TARP manager
Robert Zoellick, World Bank President
Mario Draghi, Chair Financial Stability Board

Over the last 20 years, Goldman ranks #4 among all U.S. political donors, contributing over $30 million to campaigns and politicians. It's the highest of any financial institution. Goldman Sachs was the second highest contributor to the Obama campaign.

Treasury Chief Tim Geithner's #1 staffer, Mark Patterson, is an ex-Goldman lobbyist. Politico reported on Patterson's role:

For Patterson, that translates into grueling hours managing Geithner’s equally punishing days and deciding who gets to see the treasury secretary and who doesn’t. “The big picture is, does this use of his time serve one of our broad priorities?” Patterson said. “If it doesn’t serve one of those priorities, it doesn’t get on the calendar.”

What happens when a member of the Goldman Club calls? Better yet, what happens when Draghi, Zoellick, and Geithner/Patterson get together to revamp the system? Maybe more Goldman Sachs sleight of hand?

Zoellick Said "As the Recession Deepens"

World Bank President Robert Zoellick spoke to the global recession in WBG/IMF Opening Press Conference for the 2009 Spring meetings. He said:

We have more work to do, and will need more resources, to deal with a broader set of problems in developing countries where real economies are being hit by the second and third waves.

First and foremost, we need to ensure that we don't repeat the mistakes of the past. When financial crises hit Latin America in the 1980s and Asia in the 1990s, the debate about numbers silenced a debate about people. Basic health, nutrition, and education budgets were cut back severely. We saw social unrest, deprivation, and even violence. Poor people suffered most from the mistakes of others.

We need to be ever-vigilant, whether it is financing, instruments, or policy prescriptions, that we deliver on our commitments and are held accountable for doing so. As the recession deepens, leaders will be under pressure to protect home markets. Such retreats behind barriers will only make the economic crisis worse.

Second and third waves? It sounds like an indiscriminate tsunami. Mistakes of others? Said more directly, poor people suffered from loan conditions imposed by the IMF.

Bob Zoellick clearly stated a deepening global recession. What happened to green shoots? The IMF will be awash in green as G20 nations boost its coffers by $500 billion. It targeted $250 billion in Strategic Drawing Rights for countries needing to stabilize their currency. Things are moving fast and furious on the international front. Two groups benefit from the global revamp, the aforementioned IMF/World Bank and the Financial Stability Board (FSB). Until April 2009 the FSB was known as the Financial Stability Forum. In an April 2 press release on their new name, the FSB stated:

14. The FSB and IMF will intensify their collaboration, each complementing the other’s role as per the 13 November 2008 letter by the Managing Director of the IMF and the Chair of the FSF. The FSB and the IMF will collaborate in conducting Early Warning Exercises and make a joint presentation to the IMFC on financial risks and vulnerabilities and policy recommendations to mitigate such risks and vulnerabilities.
There is more work to do by the two benefactors of global financial crisis. They meet this weekend alongside the G20.

Discounted Private Equity Stakes

Declining asset values is both a boon and a bust for private equity underwriters (PEU's). The Carlyle Group went from $91.1 billion under management to $85.5 billion with the stroke of a pen. Mubadala Development Co., a United Arab Emirates sovereign wealth fund, owns 7.5% of the declining PEU. Mubadala took a 40% accounting hit, writing down their investment in Carlyle by $543 million. While the UAE fund has deep pockets, other investors may not want to ride out the economic hurricane.

Goldman Sachs will take discounted private equity stakes off investor's hands. Goldman started a $5.5 billion fund to acquire PEU investments on the cheap.

Who might be dumping? AIG held investments in private equity. They're moving anything not nailed down. It's difficult to sling cash from a financial black hole.

Pension funds got capital calls from PEU's after Wall Street imploded. CALPERS and the New York State pension fund ponied up new money, but other pension funds may want out.

Ex-Wall Street investment banks, now commercial banks, played hard and fast in the PEU arena. Lehman Private Equity, with Jeb Bush as an adviser, landed on its feet post bankruptcy. Will bank stress tests require any "shiny new commercial banks" to raise capital? If so, will their PEU investments go on the block?

Carlyle co-founder David Rubenstein spoke at length on how PEU's can boom in the bust, other than buying back affiliate debt for pennies on the dollar and getting an Uncle Sam tax break to boot. Rubenstein emphasized the importance of government seeing private equity as part of the solution. Last week, David hosted White House Senior Economic Adviser Larry "Sleepy" Summers at the Economic Club of Washington. He spoke of Larry's strong tennis game.

This week Mr. Rubenstein gave an award to Treasury Chief Tim "Fiscal Hawk" Geithner. Tim dropped his fiscal dovishness under the tutelage of Peter G. Peterson, co-founder of The Blackstone Group, another PEU. The Obama administration clearly believes private equity is part of the solution. They avoided regulation at the G20 meeting and look to do likewise in the U.S. regulatory revamp.

The latest government goody could have PEU's owning larger chunks of commercial banks. Carlyle bid on BankUnited, a failed bank under the control of the FDIC. The bank regulator sold IndyMac to a consortium of hedge funds and PEU's.

Boon, bust? Stay tuned for more soaring rhetoric from President Obama. But my nose belies my ears. Something smells. It's PEU's corporafornicating on our tax money.

Thursday, April 23, 2009

Boring Credit Card Interest?

Was it a vigorous doubles tennis match against Carlyle Group co-founder David Rubenstein and a local pro? Did the President's rhetoric ring hollow for Mr. Summers? Was Larry trying to send a clue to his corporacratic brethren? No matter the reason, photographers had a field day while Larry fielded zzz's.

Carlyle Group Falls to #3 in Five Year Funds Raised

Private Equity International ranked private equity underwriters (PEU's) by the direct capital investment raised over the last five years. Their statistics show:

1. TPG $52.3 billion
2. Goldman Sachs $48.9 billion
3. Carlyle Group $47.7

That's odd. A different statistic, funds under management, tells a different story regarding Carlyle.

December 2003 $17.5 billion
December 2008 $91.5 billion

That's five year growth of $74 billion, over 420%. The Carlyle Group rode the greed and leverage train. With the bubble burst, Carlyle now manages $85.5 billion in assets. They had to issue capital calls to pension funds and other large investors.

The rankings raise another question. Did any of Goldman's $10 billion in taxpayer bailout money satisfy capital calls for Goldman Sachs' PEU? Money is fungible, and fudge-able.

Wednesday, April 22, 2009

Carlyle Group Could be on Both Sides of TARP Distressed Asset Sales

Treasury Chief Tim Geithner's public-private partnerships will buy bad assets from banks. The idea is to rid bank balance sheets of toxic junk. Private equity underwriters (PEU's) and hedge funds are expected to participate in Tim's scheme.

How could the big money boys ensure a win? What if a PEU owned a bank and had intimate knowledge of the quality of their internal assets? Would that help them decide which bits to bid on and which to avoid? For a mere 7% of initial capital, PEU's could garner 50% of the profits. Bloomberg reported:

Blackstone Group LP, Carlyle Group and billionaire Wilbur Ross are preparing a bid for BankUnited Financial Corp., a Florida bank that has been designated “critically undercapitalized” by federal regulators, according to people familiar with the offer.

Gaming the system at each step tilts the playing field in PEU's favor. Carlyle co-founder William Conaway loves an unlevel playing field. At a minimum, a captive bank could refinance Carlyle affiliate's rolling debt. Big boys may just win again!

Geithner Says US Largely to Blame for Financial Crisis

Carlye Group co-founder presented Treasury Secretary Tim Geithner an award at the Economic Club of Washington. The Carlyle Group epitomizes the greed and leverage that took down Wall Street. It lost Carlyle Capital Corporation, Blue Wave Partners, SemGroup, Hawaiian Telecom, and Edscha to bankruptcy.

David Rubenstein believes the government will increasingly look to private equity underwriters (PEU's) for solutions. A quick glance at Carlyle's performance with Vought Aircraft Industries and LifeCare Hospitals will raise eyebrows.

So a big offender presented an award to "solution man" Geithner. Tim's smile indicates what? Are the big money boys still in charge? Have they found a new group to funnel money to their corporate and personal coffers? Tim's words slung open the door to such activity.

The IMF plans to distribute half of the $500 billion in general allocation via Stategic Drawing Rights to member countries. The U.S. will be able to use its share of the $250 billion SDR's to meet its foreign currency obligations. Some suggest SDR's are the new exchange currency. If the dollar fades, the U.S. wants to control the new system via the IMF and its sister organization, the World Bank.

President Obama sent a letter saying Congress to quickly approve America's $100 billion contribution, as it would be backed by IMF collateral, which includes gold deposits. Is this a backhanded way to a gold backed system, at least in part?

What about the IMF's $250 billion slated for loans? Will loans be extra-Congressional as well? Who decides who gets the billions? The unitary executive or the IMF?

The big money boys are moving fast and furious to set up a global currency backstop. It is a curious activity in light of all the green shoots. Rest assured, the greed and leverage boys are still in charge. Tim's award reiterates this sad fact.

Conde Nast Rips Carlyle Group's Management of Vought Aircraft in 787 Dreamliner Nightmare

The Carlyle Group's reputation as a skilled operator took a hit in the May edition of Conde Nast Portfolio. The magazine excoriated Vought Aircraft Industries as a major culprit in the two year (and growing) delay of the 787 Dreamliner. It noted:

But Boeing didn’t realize that the Carlyle Group, which had acquired Vought in 2000, was starving it of resources while making a few cosmetic improvements to attract potential buyers—a once-common private equity tactic. By early 2006, Vought was facing a severe “liquidity crisis” and nearly went bankrupt, chief executive Elmer Doty told analysts. It couldn’t afford the new plants, employee training, and fuselage design and assembly and had to “reconstitute” its engineering department. “We are among the riskiest, if not the riskiest” of the Dreamliner suppliers, Doty acknowledged.

Liquidity crisis in early 2006? How could that be? The Carlyle Group was floating high in the private equity bubble. The private equity underwriter grew from $3.3 billion under management in 2000 to $41.9 billion in 2006 and $58.5 billion in 2007. Surely some of that money was available to deliver a quality product to Boeing.

What about the $66.7 million from the state of South Carolina? Palmetto State money kept Vought from adding jobs in Texas per a $35 million grant. Where did all that taxpayer cash go? SEC filings show Vought paid the Carlyle Group an annual $2.1 million management fee.

The Boeing 787 Dreamliner will fly two years late, in part due to the failure of Carlyle affiliate, Vought Aircraft Industries.

Note: Carlyle Group co-founder David Rubenstein recently said government will increasingly look to private equity for solutions. Vought's multiple failures on the 787 project are instructive. It's not the first time Carlyle botched a job. Affiliate LifeCare Hospitals lost 24 patients after Hurricane Katrina. But that's another sordid story!

Tuesday, April 21, 2009

Carlyle Group Lobbied for John Maneely Sale

The Carlyle Group spent $380,000 in 2008 with King & Spalding, a lobbying firm. Carlyle inked a $3.5 billion deal with a Russian firm for the sale of steel maker John Maneely Co. The deal imploded alongside Wall Street. Carlyle's DBO Holdings sued and received a $234 million settlement.

While the deal didn't go through, the $380,000 likely went to grease the CFIUS process. Carlyle got magical results when it sold Landmark Aviation and Standard Aero to Dubai Aerospace. The silent sale passed CFIUS between the Dubai Ports World brouhaha and the NASDAQ/Bourse uproar.

The Carlyle Group knows how to purchase influence, when it's not hiring same.

Monday, April 20, 2009

David Rubenstein's Bill to Move Forward in House

Senators Leahy, Dodd and Cochran sponsored a resolution providing for the appointment of David M. Rubenstein as a citizen regent of the Board of Regents of the Smithsonian Institution.

It's not as exciting as David getting his picture on the Michele Bachmann one world currency, but never the less, the Carlyle Group co-founder got his own bill in Congress. The House vote is Wednesday. America's government-industrial monstrosity will vote yes.

Carlyle Group Placement Fees and White House Torture

Stop the questionably legal practice. Move on with fingers crossed that no real investigation will occur.

That's the Obama administration's prescription for torture. It's The Carlyle Group's solution to placement fees to politically connected middlemen, that bear a resemblance to bribes. Private equity underwriters (PEU's) and hedge funds paid placement fees for pension investments in their funds.

Bush's enhanced interrogation techniques = torture

PEU placement fees = bribery, graft (now known as pay for play)?

Keep up with the new meaning of words. One needs a spin dictionary nowadays.

Sunday, April 19, 2009

Rahm Emanuel Channels Denny Shelton, Legacy Health CEO

President Obama's Chief of Staff spoke on ABC's This Week with George Stephanopoulos. His remarks on health care reform are below:

EMANUEL: Well, first of all, what we have to do is squeeze out all the basic costs in the system, before we talk about any other type of revenue. There's a lot that has to be changed.

Unfortunately, I know a little about health care reform from my family. The fact is, we had all the wrong incentives in the health care system. And if you change the incentives toward medical I.T., which we put in place the resources to start basically having a way to control costs there; if we change the way the doctors are paid -- so, rather than fee for service, for outcomes; change the way -- in fact, rewarding people who take care of themselves and get their health together. All those are what you have to consider.. (CROSSTALK)

STEPHANOPOULOS: But all of that is only going to get you a fraction of the place where you need to be in order to cover everyone as the president has said is the goal as well. And he laid out a plan, a reserve package of about $600 billion; the plan he laid out to pay for it, shaving deductions for wealthy Americans. Democrats and Republicans alike on Capitol Hill say, no way, we're not going to do it. So how is the president going to fill the gap? How is he going to pay for the programs?

EMANUEL: Well, (inaudible) George, it's not just the president. It's what we work with Congress. That process is beginning. I think, in this next five weeks, you'll see tremendous progress at the -- at the committee level, to getting that done. And he does not believe that's the first step. And what you have to do, as he believes, is make the cuts in the system that we have today because we're overpaying for a lot of things; and second, is change the incentives before you get to immediately going to a default position that you have to raise taxes.

STEPHANOPOULOS: But is he open to taxing employer benefits?

EMANUEL: He -- he has said he opposed that, as he said in the campaign. And that's what he believes, and believes is, before you get there, you have got to address the priorities.

STEPHANOPOULOS: So he won't sign a bill that includes that?

EMANUEL: George, I'm not going to do any absolutes on your show.

That's odd. The New York Times said President Obama is now open to taxing employer paid health insurance. As for driving basic costs from the system, where have I heard that before?

Ex-Triad Hospitals CEO Denny Shelton used those words at an Angelo State University session on the Future of Healthcare. Mr. Shelton just made over $40 million in the sale of his for-profit hospital company. He said:

He'd be willing to pay more taxes once "inefficiencies" are driven out of the system.

What does Denny Shelton have to do with White House lingo on health reform? Mr. Shelton worked alongside White House Health Czar Nancy-Ann DeParle. She served on the Triad Board of Directors and grossed $1.4 million on Triad's sale. That relationship grew when Nancy-Ann's CCMP Capital Partners hired Denny Shelton as a health care investment adviser. CCMP then bankrolled Denny's newest for-profit hospital venture, Legacy Health Partners.

Ms. DeParle knows the business case for health care reform. Denny advised her and Nancy-Ann is now advising Rahm Emanuel. The race to the global lowest common denominator on worker pay/benefits continues. Taxing employer health insurance (while keep individual deductibility) is a prescription for businesses to dump responsibility for health coverage on to the worker. Sound familiar? It's a Wyden plan with lipstick. Nancy Ann, Denny and Rahm know how to apply it.

Saturday, April 18, 2009

Bankruptcy Judges Love Bonuses

A bankrupt Lehman Brothers paid $2 billion in bonuses to high ups, including Jeb Bush and cousin George Herbert Walker. Now, bankrupt Hawaiian Telecom will pay $6 million in bonuses.

What is it with bankruptcy judges? Performance pay caused CEO's to undertake riskier strategies, to swing for the fences. The big money boys love pay for performance.

Lehman was a Wall Street investment bank. Hawaiian Telecom is an affiliate of The Carlyle Group, a politically connected private equity underwriter (PEU).

The greed and leverage boys set up Lehman and HT for failure. Both firms were highly leveraged. The big money lenders lost faith in Lehman's ability to pay on its obligations. Carlyle purchased HT in the PEU bubble and wants to cram down debt holders.

How many financiers will do business with the Carlyle Group after being burned? Lehman imploded overnight. It might take longer for Carlyle to feel the effects, but an absence of trust is toxic for future deals.

Friday, April 17, 2009

Carlyle Group's Twin Davids on PEU Regulation

Two Carlyle Group spokesmen relayed very different images of private equity underwriters (PEU's). David Marchick, Carlyle's PR man and ex-Clinton White House staffer, told the Wall Street Journal that PEU's pose little risk.

That doesn't jive with Carlyle co-founder David Rubenstein's talk at the Super Return Conference in February. A few of David's points are below:

1. More than a few of the best known and largest investments completed in the 2005-2007 period will have to be recapitalized in order to be preserved. (slide 17)

This means capital calls. What if investors don't want to pony up more money? What if they want to cash in on their investment?

2. Opportunities for exit have been reduced, resulting in lower returns and fewer distributions. PE firms will have to hold onto their companies longer or take prices far below their once anticipated exit levels; and provide less frequent distributions than once projected. (slide 16)

Investors were sold a projected rate of return and distribution schedule. How many will find the patience to remain, leaving their funds invested?

3. Some investors will continue selling their stakes in private equity funds; the sales will yield larger than normal discounts to NAV (net asset value). (slide 21)

Might there be a PEU run? Who will provide the recapitalization, if PEU's don't have current investors ponying up for capital calls? How will any dilution be handled?

4. PE firms have recognized the enormous difficulty of raising new funds for the foreseeable future. (slide 14)

5. Other investors will increase their private equity stakes, and some investors not yet in private equity will enter the private equity world. (slide 21)

6. More than a few well known investments will likely not survive (slide 22)

Is that why Treasury Chief Tim Geithner proposed backstopping non-banks? Will Uncle Sam help recapitalize PEU's?

After the usual comment about government regulation on financial firms constraining lending, David noted that many 2009 deals will be outside the U.S., in Europe and developing countries. But the future looks good:

7. Reduced prices will likely yield very high returns for private equity capital invested now and over the next 2-3 years. (slide 23)

In other words, the federal interventions and economic crisis will restart the greed cycle, with a bit less leverage. Maybe the federal government will partner with PEU's in public-private partnerships.

8. Government and others will increasingly see private equity as a solution to problems. (slide 24)

This would be tacit acceptance of taxpayers backing "very high returns". Greed restarted, with Uncle Sam providing the leverage. Now how to sell it?

9. Enhanced recognition that private equity was not a cause of systemic risk, not a cause of the economic decline. (slide 24)

Not a cause of systemic risk? Carlyle Capital Corporation, levered 40 to 1, imploded early. Blue Wave Partners followed. Carlyle lost SemGroup to bankruptcy for hedging or forward looking contracts. There was no mention of hedging contracts in the firm's SEC filings. Hawaiian Telecom and Edscha declared bankruptcy. Carlyle and its affiliates levered. They used some of the same risky financial instruments as Wall Street investment bankers.

Rubenstein contradicts his comments in Slide 2, where he cited increasing deal sizes, rising price multiples and greater use of leverage. The bidding frenzy he mentioned (2005-2007) reflects PEU systemic risk.

10. This is not your father's private equity world. (slide 26)

11. It is up to the industry to ensure that governments understand and value private equity. (slide 27)

12. The public needs to be treated as a partner if the industry is going to survive and prosper; and partners need to be informed about what is actually occurring on a timely basis. (slide 29)

The public needs to know because the PEU boys plan to suckle on as many nipples as possible of America's federal cash sow. The twin Davids, Rubenstein and Marchick, employed the same practices that brought America's financial system to its knees, greed and leverage. They want the system restarted ASAP.

Pay to Play on New York Pensioners Money

The New York State pension investigation shows who matters in today's world. It's not the retirees expecting a livable pension. Investment firms, private equity underwriters (PEU's) and hedge funds, paid placement fees to politically connected intermediaries. One investment professional plead guilty to fraud for his role in moving pension funds to specific companies.

The heady world of big money is intertwined with red and blue politics. Two firms under investigation include The Carlyle Group and Quadrangle Group.

Carlyle Group co-founder David Rubenstein introduced Hank Paulson and interviewed Larry Summers at the Economic Club of Washington. His stable of blue players goes along with Carlyle's longtime reputation of red stars, like George W. Bush, George Herbert Walker Bush, and James A. Baker, III.

Qaudrangle Group co-founder Steve Rattner is head of President Obama's auto task force. It's negotiating the restructuring of General Motors and Chrysler.

The money washes between friends in the various alliances. Pay for play is alive and well in our hallowed halls of government. It's a pox on our democracy.

The big money men didn't rob retirees with a gun. But neither did Bernie Madoff. Returns too good to be true? Consider Carlyle's 30% annual ROI. They see government's role as getting their profit train back on track. At whose expense? The taxpayer, the retiree, the employee ... Somebody has to fund Carlyle co-founder William Conway's unlevel playing field. (In the picture above, David Rubenstein is the man in the middle, William Conway is on the right.)

Thursday, April 16, 2009

Powder Puff G20 Financial Regulation

Tax haven nations perspired nervously as the G20 meeting approached, worried about looming global financial regulation. Nicholas Sarkozy of France played the bad cop. This is ironic as his half brother Olivier works for The Carlyle Group, a huge politically connected private equity underwriter (PEU).

President Barack Obama performed as good cop. He worked magic with a word change on the tax haven resolution. Problem solved.

Now, no one is sweating. G-20 powder puff regulation soaked up any perspiration.

Not even The Carlyle Group, with subsidiary corporations in the Cayman and Channel Islands, is sweating. Guernsey based Carlyle Capital Corporation imploded last March. Neither "island of financial dodge" made the tax haven list. As a matter of fact, the list of tax avoiding countries is empty.

President Barack Obama can talk populist, but actions speak louder than words. Obama is a corporatist.

Carlyle Group's David Rubenstein Digs at Protesters

Carlyle Group co-founder David Rubenstein attended the Super Return conference in Munich, Germany. He bemoaned how unaccustomed he is to speaking without protesters. A mere pair of miscreants interrupted his interview of Senior Obama economic adviser Larry Summers at the Economic Club of Washington.

Does Mr. Rubenstein have other protest worries? What if New York State pensioners wish to show their displeasure over graft, stealing from their retirement? They may have a legitimate beef with The Carlye Group, currently under investigation. How serious is the matter?

Carlyle hired Mary Jo White of Debevoise & Plimpton. Her bio states:

When Mary Jo White left her post as US Attorney for the Southern District of New York in January, 2002, she was acclaimed for her nearly nine years as the leader of what is widely recognized as the premier US Attorney’s office in the nation. She had supervised over 200 Assistant US Attorneys in successfully prosecuting some of the most important national and international matters, including complex white collar and international terrorism cases.

In addition, Ms. White served as a Director of The Nasdaq Stock Exchange, and on its Executive, Audit and Policy Committees (2002 to February 2006). She is also a member of the Council on Foreign Relations.

David Rubenstein hired an ex-New York Attorney, one who had supervised over 200 Assistant US attorneys. How many of those are left? How many are working the placement fee case?

The Carlyle Group is a cesspool of ex-government insiders. Both the red and blue teams are represented. Watch for Carlyle to be dropped from the investigation. At the worst, expect a settlement with no admission of guilt, but a meager fine for the $85.5 billion PEU.

My hope is pensioners learn of their fleecing and turn out in droves next time David Rubenstein speaks in New York. Then he won't have to bemoan.

Wednesday, April 15, 2009

Carlyle Group's Latest Investigation

New York Attorney General Andrew Cuomo continued investigating placement fees paid by private equity underwriters (PEU's) and hedge funds to intermediaries. Fees arose from garning New York State pension investments. Some were paid to politicians and their advisers, others to politically connected investment professionals.

Barret Wissman, an investment executive, plead guilty to a felony securities fraud charge and agreed to pay a $12 million fine. Mr Wissman effectively steals from New York State pensioners and walks away with a fine? That fits with the SEC's kid gloves for the plethora of executives backdating stock options. Stealing from shareholders garnered little in the way of punishment.

Caught in the New York pension investigation net is The Carlyle Group. I don't expect the PEU to linger long, not with their blue connections. Carlyle avoided any mention of LifeCare affiliate’s 24 patient deaths after Hurricane Katrina in Bush’s WH Lessons Learned report. Surely they can ditch a New York state investigation.

Ex-Clinton White House staffer Chris Ullman read Carlyle's defense. Ullman "told The NY Times that Carlyle was cooperating fully in what it called “an industrywide investigation” and had done nothing improper."

If the New York pension fund had the same experience as CALPERS, they received a capital call, a request to pony up more money or lose their investment. Pensioners took it on the chin twice, but Carlyle keeps on ticking. They have a good name to keep. An ex-New York Attorney General may do the trick. Mary Jo White will try to control "a populist frenzy." Paying big money for ex-insider performance is a fractal in Carlyle's world.

Carlyle Group Sheds Wall Street English for Big Profit

Champagne must be flowing at 1001 Pennsylvania Avenue. The Carlyle Group stemmed a series of bankruptcies and write downs with a profitable partial flip.

The Carlyle Group purchased Wall Street Institute (WSI) from Laureate Education in February 2005. SEC filings state Carlyle paid $40 million for the English language training firm.

The Wall Street Journal reported:

Pearson, an international education and information company, said Wednesday that it acquired Wall Street English from parent company Wall Street Institute, which is majority-owned by global private equity firm The Carlyle Group, for $145 million in cash.

Wall Street English is China's provider of premium English language training to adults, it said.

Carlyle sold part of an affiliate for 3.4 times what it paid for the whole kitten caboodle. That's a sweet $105 million profit. It's a nice break from SemGroup's bankruptcy due to hedging contracts and an 85% scalping on Freescale Semiconducter's valuation.

While other affiliates implode, Carlyle cashed in one winner, teaching Chinese people English. Will the remnants of WSI now do the opposite, teach Americans the Chinese tongue?

The Chinese symbol for crisis combines danger and opportunity. The Carlyle Group aims to milk the current financial crisis for big gains. From Boston Private's $153 million TARP money to infrastructure spending to Treasury's public-private partnerships, Carlyle intends to profit. A 30% ROI will do.

Saturday, April 11, 2009

Second Security Head Quits on Short Notice

The head of the National Reconnaissance Office, the U.S. spy satellite agency, announced his resignation. Scott Large, a career government servant, gave NRO employees a ten day notice that he was stepping down. The timing of his announcement is interesting for three reasons. One, he is the second security head to quit on relatively short notice. The head of America's cybersecurity quit in early March. Rod Beckstrom specifically mentioned the long arm of the National Security Agency as a factor. Mr. Large gave an interview on the future of the NRO in late March. He mentioned the NSA's leveraging the NRO's capabilities. Two, a report recently recommended America's National Labs be taken from the Energy Department and placed under the National Security structure. Frances Townsend chaired the study group. After leaving the White House, Ms. Townsend worked alongside President Obama's new NSA Chief General James L. Jones at the U.S. Chamber of Commerce. Three, Scott Large's announcement came just a day after the U.S. government said it would buy expensive new spy satellites and order more imagery from two commercial providers. A Reuters piece implied embattled Boeing would not get the order. Funny, General James L. Jones served on the Boeing board of directors. Will Boeing keep the work after all? The rumor is General Jones is building a national security powerhouse. The General wants to be the one-stop shop for security information for President Obama. Are the changes part of his consolidation of power? "State secret" turf needs defending, often at the expense of liberty. Of course, only spooks know for sure. They're not talking. But pattern recognition is still available for the attentive.
Update 10-19-22:  Retired General James Jones is a paid advisor to Saudi Crown Prince Mohammed bin Salman, the man who ordered the death of Washington Post journalist Jamal Khashoggi. 

Friday, April 10, 2009

Larry Summers Offers U.S. Chamber Rationale for Health Care Reform

During his interview at the Economic Club of Washington, White House Senior Economic Adviser Larry Summers made a case for health care reform. He cited the need to control the "most rapidly growing component of labor costs."

I heard this logic two years ago from Triad Hospitals CEO Denny Shelton. Shelton just sold his firm, pocketing over $40 million. Yet in a Peter G. Peterson kind of way, Denny didn't want to pay more in taxes to cover children. In a more noble move, he did offer to pay for his Medicare coverage. Shelton went on to start up Legacy Health Partners.

Billionaire Pete Peterson, co-founder of the Blackstone Group, is on a crusade to cut federal entitlement spending, specifically social security and health care. Treasury Chief Tim Geithner recently kow towed to Pete at a Council on Foreign Relations meeting. Tim joked that fiscal doves have fled, that everyone is now a fiscal hawk.

What does this portend for health care reform? Business clearly wants to shed responsibility for the pesky health insurance benefit. The government will do more, but temporarily. Fiscal conservatism means the individual will garner greater responsibility for health care.

Yet, health insurance is Act III. A long Act I had businesses shifting the cost of retirement to the employee over a period of decades. They froze defined benefit plans, substituting 401(k)'s and 403(b)'s. When the economy imploded, retirement matches were quickly frozen.

Act II was substituting cheap foreign labor for American workers. Over 2 million U.S. jobs migrated to the cheap siren call of low Asian wages. CEO incentive compensation soared.

But back to Act I, the Obama team wants laws requiring automatic enrollment in IRA and 401(k) plans. Expect something similar in health care, a requirement to purchase health care coverage. The fight is on over who pays. The other struggle is shaping reforms to benefit for-profit vs. nonprofit healthcare.

In the photo Larry Summers walks next to Carlyle Group co-founder David Rubenstein. Carlyle invests in for-profit health care companies. They range from MultiPlan, a PPO with a cost management division, to LifeCare, a long term acute care hospital provider, to ManorCare, a huge nursing home company. Did David plug a version of reform to Larry, one that benefits his health care portfolio?

Private health care has insider access to the Obama Health Care reform team. Health Czar Nancy-Ann DeParle is a private equity underwriter (PEU) like Mr. Rubenstein. Her board pay was over $550,000 in 2007 and her stock holdings/sales from private healthcare firms are over $7 million. She sits on the board of Denny Shelton's Legacy Health Partners. While Nancy-Ann already said "I'm in business," President Obama officially unveiled the White House Health Care Reform office just yesterday.

Health care deform is in play. Pay attention folks. The signs from Larry Summers and Nancy-Ann DeParle are worrisome. The devil will be in the details.

How quickly will America dive to the lowest global common denominator on worker pay/benefits? How tough will financial regulation really be, if it leaves out PEU's and their foreign friends, sovereign wealth funds? How will the big money boys strong arm world governments to continue dropping corporate income and capital gains taxes?

Those who have more, don't want to pay. War has been fought for less. Leadership is absent, replaced by greedership and bleedership. Pete Peterson proves that with nearly every speech. President Obama's team reinforces the point with his U.S. Chamber of Commerce lingo on health reform. Hold on tight. It could be a very rough ride.

Thursday, April 9, 2009

Regulatory Reform Likely to Give Passes to PEU's & SWF's

America's shadow banking system included investment banks, hedge funds, private equity underwriters (PEU's) and foreign sovereign wealth funds (SWF's). After Lehman Brothers imploded, investment banks disappeared. All ran to the safe harbor of commercial banking, already regulated. That leaves hedge funds, private equity and sovereign wealth funds as candidates for regulation. Bloomberg reported:

Bernanke and Geithner also called for stronger regulation to constrain the risks taken by firms that could endanger the financial system.
Yet, signs point to hedge funds as the only new group under a regulatory umbrella. Do SWF's and PEU's not pose a systemic risk? Knowledge @ Wharton reported in December 2007:

Writing in the Financial Times last July, former Treasury Secretary and Harvard president Lawrence Summers noted that government shareholders may not always have the same interests as ordinary shareholders. "The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares," he wrote. "It is far from obvious that this will over time be the only motivation of governments as shareholders. They may want to see their national companies compete effectively, or to extract technology or to achieve influence."

Governments of target, or "host," countries could find themselves in awkward situations, he said. "What about the day when a country joins some 'coalition of the willing' and asks the U.S. president to support a tax break for a company in which it has invested? Or when a decision has to be made to bail out a company, much of whose debt is held by an ally's central bank?"

Given his stated concerns, wouldn't Larry Summers, now President Obama's Chief Economist, put SWF's under some kind of review structure? Is it because he wants them to pony up funds for public-private partnerships? Will taxpayer backed profits help make up for past U.S. financial pain?

What about PEU's? While their investors are wealthy, that doesn't mean no capital calls. Should a few get skittish, like Wall Street the week of September 15, 2008, a PEU run could occur. The Carlyle Group made $681.3 million of capital calls on Calpers, the huge pension fund in 2008. What if Calpers said no and asked for its investment back? Crater time, or do other options exist?

Regulation is about more than the risk of a PEU run. Many private equity firms have a wide variety of investment funds. Insider information from one arm could turn into profits for another. Basic, ethical oversight is warranted.