Wednesday, June 3, 2009

PEU's: The New Financial Oligarchs

Private equity underwriter's (PEU's) with trillions on the sidelines are the solution to America's ills. The FDIC looks to PEU's to save the imploding banking sector. President Obama proposed a Transportation Infrastructure Bank to help PEU's do public-private infrastructure projects.

Treasury looks to partner with PEU's to buy up toxic assets gunking up balance sheets. That plan could disappear with enough whole bank sales. Rather than buy the junk, buy the bank and let purchase accounting do the work (not already done by fair value accounting changes).

How can the government make bad banks attractive investments? Wipe out existing shareholders, offer billions in subsidy and require a paltry investment from each PEU partner, one that can easily be refunded back to the investor in short order.

How can the PEU boys avoid their prior sins, bidding wars and gross over leveraging? With Uncle Sam the fiscal backstop, the leverage worry is gone. But how to prevent over paying for distressed assets? Oligarchs in the past divied up markets, by product or territory. Surely, there are plenty of distressed banks in the South for the big money boys to get a bank or two. The question is how to structure a profitable distribution.

One man advises a bank consulting firm, Promontory Financial Group, serves as Senior Adviser to The Carlyle Group and advises Goldman Sachs. He is Arthur Levitt. Carlyle and Goldman competed for BankUnited, an FDIC shuttered Florida bank. That's a sweet spot to be in, if one were an oligarch.

The Carlyle Group has BankUnited, which will now focus on commercial loans. How many Carlyle affiliates switched accounts to BankUnited? Carlyle is in talks with the FDIC over Silverton Bank, a bank of banks. How long before that becomes a bank for PEU's?

Someday, Uncle Sam will stop serving as the banker for the economy. PEU's with captive banks will in a better position to refinance debts. A five year hold enables PEU's to get through the staggering amounts of debt that need refinancing between 2010 and 2014. Arthur Levitt's associate at Carlyle, David Marchick, told a Senate Banking Subcommittee that fact in his recent testimony. Oh, and the credit markets are still broken. That's why PEU's need banks. Uncle Sam distributes them on the cheap.

Arthur Levitt chairs a domestic working group on financial regulatory reform. It looks like the PEU boys will avoid regulatory scrutiny. Mr. Levitt has a clear history in this regard. History repeats itself. Uncle Sam sponsors greed with a tad less leverage using public dollars. It's also known as corporafornication.