Wednesday, June 17, 2009

PEU's & SWF's Get Little Mention in Obama's Regulatory Reform Plans

Private equity underwriters (PEU's) and sovereign wealth funds (SWF's) got little mention in 88 pages on President Obama's regulatory reform. PEU's got 3 mentions while SWF's got zero.

Larry Summers headed the regulatory restructuring team. He ignored the advice he gave as a private citizen in regard to SWF's.

The Obama team was generous in their free passes. Investment banks, responsible for due diligence on packaged financial products, got a freebie from the Obama team.

Market discipline broke down as investors relied extensively on credit rating agencies.
The Obama piece blames consumers, i.e. users of credit.

Households saw significant increases in access to credit, but those gains were overshadowed by pervasive failures in consumer protection, leaving many Americans with obligations that they did not understand and could not afford.

Producers of financial innovation were responsible for quality. Yet, the Bush and Obama administrations bailed out purveyors of financial junk. President Obama opened his report with:

Over the past two years we have faced the most severe financial crisis since the GreatDepression.

Not another Bush-like unprecedented event! This isn't the first time big money boys were omitted from a key government report. The Carlyle Group's LifeCare Hospitals and their 24 patient deaths got no mention in President Bush's Katrina Lessons Learned report. But that's an old story. In the President's announcement, he said:

With the reforms we're proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly without the fragility in which normal business cycles suddenly bring the risk of financial collapse. We want a system that works for businesses and consumers.
That's not a robust set of plans, if it only meets the needs of normal business cycles. Didn't he say something about a Great Depression? So why the bait and switch? Is it a diversion?

Greed and leverage brought America to its knees. Private equity did its part. The Carlyle Group used ample borrowings to finance its deals. The politically connected PEU lost:

Carlyle Capital Corporation
Blue Wave Partners
Hawaiian Telecom
IMO Carwash sits on the brink of loss to creditors.
How is ManorCare, the huge nursing home provider, holding up under a heavy debt burden? Carlyle has a history of failing patients in a time of crisis. A closer look at the deal shows JP Morgan and CitiGroup Global Markets advising ManorCare's Board.

Pursuant to an engagement letter between Manor Care and JPMorgan, we have agreed to pay JPMorgan a transaction fee of 0.55% of the aggregate consideration to be paid in the transaction, or approximately $34.8 million (less the amount of the opinion fee to Citigroup Global Markets Inc.), $5 million of which was payable upon delivery of its opinion and the remainder of which is payable upon and contingent on consummation of the merger. In addition, affiliates of JPMorgan will be entitled to receive fees from MergerCo pursuant to debt commitment letters delivered by affiliates of JPMorgan to MergerCo as described under “The Merger — Financing — Debt Financing” beginning on page 37.

JP Morgan's affiliates were free to work the other side of the buyout, Carlyle's commercial mortgage backed securities (CMBS) financing. Funny, the Obama administration didn't mention conflicts of interest. But that's a touchy subject. His health care reform team is full of for-profit insiders. I'm beginning to see a pattern.

(Note: Chairman of failed Carlyle Capital Corporation, Carlyle Senior Adviser James Hance landed a spot on the Morgan Stanley board. That beats a jail cell!)