Monday, November 30, 2009

Carlyle Group's Whistle Blower Lawsuit regarding Sequa Corporation

An Oklahoma whistle blower said The Carlyle Group:

defrauded the United States by approving, certifying, and presenting “certain airplane engine parts as serviced according to Specifications without actually and/or fully complying with the Specification."

The qui tam lawsuit involves Carlyle affiliate Sequa Corporation and airline parts division, Chromalloy. Carlyle tried to weasel out of the suit, saying it does not do business in Oklahoma. Oddly, six of Sequa's eight board members are Carlyle Group employees. The judge denied Carlyle's motion for removal.

However, the judge found lacking the "evidence of fraud." He dismissed the case, with one caveat:

The court, however, grants the relator leave to file an amended complaint within twenty (20) days of the date of this order. It is so ordered this 16th day of November, 2009.

The whistle blower has a week to rebuild his case. Like robber baron Cornelius Vanderbilt, The Carlyle Group knows how to use the court system to their favor. Ask Dunkin' Donuts franchisees or LifeCare hospital patients post Hurricane Katrina.

Update 9-2-15:  Uncle Sam will send Chromalloy $74 million in business via Oklahoma's Tinker Air Force Base. 

Update 9-3-22:  Carlyle will sell Chromalloy to Veritas Capital. 

Sunday, November 29, 2009

World Economic Forum Met in Dubai Before DW Debt Payment Postponement

The World Economic Forum met in Dubai November 20-22 to brainstorm and prioritize solutions to global problems. The closing session is available online (for how much longer, I don't know). Most ideas orbited around globalization. I'll share a few that stuck out in my mind.

Values-the group encouraged a common language for going forward, the language of business

Role of Private Sector
-sovereign funds (like Dubai World) were touted as solutions to global infrastructure needs, however such funds won't invest long term in underdeveloped nations due to political risk. A new structure is needed to mitigate such political risks, such that sovereigns will invest. (They didn't say what that was, insurance, economic unions, governmental unions)

-the need for a global structure to handle the movement of people.

Global Health Risk Institute
-such a group would go well beyond traditional medicine in identifying health risks for populations.

Mitigating Policy Risk
-it called for the next generation of public policy machinery for leaders (code talk for what?)
Some of these ideas need revisiting in light of Dubai World's difficulties. Summit Co-Chair Mohamed Alabbar, Chairman of Emaar Properties, United Arab Emirates, made several comments at the meeting's close. He said:

The meeting was ending with hope and optimism.

The people in this room know how to deal with prosperity and challenges. We are leaders in vision and execution.

Three days later Dubai World called for a halt on its debt payments. It remains to be seen how much water this throws on the WEF's global agenda.

Update: Dubai World may offer creditors 60 cents on the dollar in a debt restructuring.

General Wesley Clark's Wind Farm Stock Options

Political blogs skirmished over generals pushing alternative energy sources, all in the name of U.S. security. They failed to note financial inducements for any general's position. Take Wes Clark, a member of the Blue team. He sits on five corporate boards, including Juhl Wind, Inc., a wind farm company. This is from Juhl's recent prospectus:

In addition, on June 29, 2009, we granted General Clark options to purchase 500,000 shares of our common stock outside of our 2008 Incentive Compensation Plan at $2.00 per share, with 166,666 options immediately exercisable, 166,667 options vesting on June 29, 2010, and 166,667 options vesting on June 29, 2011.

Clark even helped Juhl raise money for a new equity fund. I sent this information to a blue chip Blue blogger. His comment:

People sure like to cash in in Washington.

Well stated.

Low PEU Bar for Connecticut Rest Stops

The Hartford Business Journal reported on The Carlyle Group's first infrastructure deal with Connecticut regarding 23 highway rest stops:

Carlyle told officials that it had not paid any placement agents or hired any lobbyist to obtain the rest stop contract.

He (Carlyle's Daniel A. D’Aniello) wrote that the firm’s contract proposal had been submitted without collusion or fraud and that none of his firm’s subcontractors or employees had bribed or attempted to bribe a state employee in connection with the deal.

Connecticut ignored its unethical history with Carlyle:

Carlyle a decade ago figured prominently in what was known as the “Silvester scandal,” in which it and other investment firms paid lucrative “finder’s fees” to associates of the corrupt former state Treasurer Paul Silvester to secure hundreds of millions of dollars in state pension fund investments.

It failed to account for ample evidence of the firm's shady dealings. The Carlyle Group and its energy joint venture Riverstone Holdings paid a combined $50 million to the New York State attorney general to make another pension pay to play investigation disappear. What ethical papers did they sign to garner Connecticut, New York or New Mexico pension fund investments? What makes the current one better than past assurances?

Carlyle purchased Synagro Technologies in April 2007. Later that year, Synagro officials bribed Detroit city councilwoman Monica Conyers, wife of Rep. John Conyers, in regards to a sludge hauling/incineration contract. Her sentence is yet to be decided.

The Carlyle Group charges affiliates a 2% management fee. For that, they should be intimately involved with Synagro's management practices. Did they directly order the bribe or institute reward systems that encourage people to lie, cheat or steal to meet the objective?

As for other due diligence available to Connecticut, SemGroup and Vought Aircraft offer unique insights. SemGroup imploded from forward looking contracts or hedging. The staid oil pipeline firm placed risky bets on the price of oil. SemGroup's SEC filings did not mention this practice or associated risk.

Vought Aircraft industries took $35 million from the state of Texas in 2004, promising over 3,000 new jobs. None arrived. It sent Boeing 787 production to South Carolina, which offered $66.7 million. When a 787 joint venture gunked up the plane's roll out, Vought CEO Doty cited "liquidity problems." Isn't that Carlyle's specialty?

Carlyle wants Connecticut rest stops for two reasons. One, it provides a platform for rapid expansion of company owned Dunkin' Donuts stores. Pay no attention to Dunkin's lawsuit happy harassment of franchisees. Two, it allows Carlyle to approach other states with a certified win under their belt.

The Carlyle Group has a long history of "unlevel playing field" activity. William Conway, David Rubesntein and Daniel D'Aniello wouldn't have it any other way. If a piece of paper does the tilting, so be it. So much for government due diligence. Maybe Virginia can do better.

(Note to Hartford Business Journal: The joint venture is Project Service LLC. Doctor's Associates, Inc. is the JV partner. The Stamford Advocate got the name, plus more right.)

Update 11-14-15:   "Subcontractors Angered By Long-Delayed Payments For Work On Highway Service Plazas".  It turns out Project Service is the one that owed contractors big bucks.  I wonder how the delays helped Carlyle make more money.

Saturday, November 28, 2009

American Capital Crams Down Debt Holders

American Capital defaulted on $2.3 billion in unsecured debt in May. Credit default swaps did not pay as the U.S. eliminated debt restructurings as a trigger. WaPo reported a debt restructuring is in the works.

American Capital, a key financial player in the Washington region for decades, said it has reached agreements with lenders on 95 percent of its loans in an attempt to avert bankruptcy, the company said in a regulatory filing Friday.

The recession has hammered the value of the companies in American Capital's portfolio.

More than the recession hammered one American Capital subsidiary, Scientific Protein Labs (SPL). American Capital's website says it owns 87% of SPL. Scientific Protein Labs is the company that supplied a deadly heparin ingredient to Baxter. Most of the toxic material came from an SPL joint venture in China. It's not clear what role owner driven profit targets and cost cutting played in the production of deadly heparin ingredients.

American Capital is a private equity underwriter (PEU). Despite the proven financial risks to this model, the Obama team sees PEU's as the answer to America's ills from infrastructure to health care to education to banking. At least two of those sectors could be deadly.

Friday, November 27, 2009

Dubai World Credit Default Swaps at Post Lehman Levels

Credit coverage on Dubai bonds reached levels seen the week of Lehman Brothers' implosion. MarketWatch reported:

The spread on five-year Dubai World credit default swaps soared to 708.96 basis points in early afternoon activity, up 167.75 basis points from Thursday's close, according to CMA DataVision. That means it would cost nearly $709,000 a year to insure $10 million in debt against default.

Dubai Ports World is a subsidiary of Dubai World.. Reuters reported:

Dubai Ports World (DPW) five-year CDS rose to 818.5 bps from a Thursday close of 608.6 bps, CMA said.

That's $818,500 a year for coverage on $10 million in debt. The impact is UAE wide, but not at crisis levels.

Contracts on Abu Dhabi rose 23 basis points to 183.

The unease rippled slightly in the U.S. financial system. CDS prices rose 10 to 20 basis points, but nowhere near 2008 implosion levels.

(Thanks to Economic Policy Journal)

Update 9-6-10:
Dubai World's reorganization might produce 50 cents on the dollar under a forced sale scenario. Assets, previously stated as "ring fenced", are on the chopping block according to Reuters. Dubai World's CDS are roughly half the rate of a year ago, at 460 basis points. Might they soar again? Reuters projects problems with Dubai World debt to spill over into UAE sovereign debt. The question is how the Fed will wash money through the ECB to help our partner in the Persian Gulf.

Update 9-8-10 Dubai World sweetens debt offer. Bloomberg has a piece on the debt restructuring

Thursday, November 26, 2009

Dubai World Delays Debt Payment

Bloomberg reported:
Dubai World, the government investment company burdened by $59 billion of liabilities, roiled markets around the world yesterday by seeking to delay repayment on much of its debt.
Outside the U.S. debt restructuring triggers credit default swaps.

The Dubai announcement drove up the cost of protecting emerging-market sovereign debt against default. Credit-default swaps tied to debt sold by Dubai rose as much as 131 basis points to 571 according to CMA DataVision. Contracts linked to Saudi Arabia climbed 18 to 108, while Bahrain rose 30.5 to 225, CMA prices show. Debt swaps linked to Abu Dhabi government bonds increased 18.5 to 155, Vietnam rose 39 to 252, Indonesia climbed 27 to 229 and Russia added 13 to 205.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

An Abu Dhabi sovereign wealth fund (SWF) owns 7.5% of The Carlyle Group. They purchased their chunk in 2007, in the midst of a worldwide investment spree by private equity underwriters (PEU's) & SWF's.

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the global recession. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG. Banks around the world have written off more than $1.7 trillion as the credit crisis trashed the value of their assets.

Swaps linked to Mubadala Development Co., a government-backed investor that announced an $8 billion joint venture with General Electric Co. last year, rose 111 basis points to 247, according to CMA.
Mubadala Development is Carlyle's 7.5% owner. Who's at risk from from the Dubai World debt service failure?

Dubai World’s lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation.

The result of the latest shakedown in global financial markets?

European stocks fell the most in seven months and bonds jumped as Dubai’s attempt to reschedule its debt rattled investors seeking higher returns in emerging markets. The dollar slid to a 14-year low against the yen.
A different Bloomberg article stated:

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

Recall private equity and sovereign funds being the world savior from infrastructure to banking? The Obama administration is counting on PEU's & SWF's. Ask Tim Geithner, Ray LaHood, Arnie Duncan, Rahm Emanuel, Larry Summers or David Axelrod. They'll call Dubai World a "one off," an isolated event. It's not.

“It’s very important to resolve this in a way that will minimize contagion across the region,” Matrix Group’s Loftus said.
This is not good news on Thanksgiving. However, in PEU like fashion, Dubai World will ring fence its best assets from creditors. Never the less, the market hates surprises.

Wednesday, November 25, 2009

White House Visits Involving Health Czar

The Obama administration released information on 1660 White House visitors. Visits involving White House Health Czar Nancy Ann DeParle are below. It is important to note that this is a fraction of Ms. DeParle's actual visitors.

Using the White House Super Bowl Party as an example, only 3 of more than 75 participants were listed. That is 2.5% of attendees. Nancy-Ann's visitors include:

Errol Alden-American Academy of Pediatrics-August 11

Cybele Bjorkland-House Ways & Means Committee Staffer-May 28

Sheila Burke-Director of WellPoint & Chubb-August 27
Ms. Burke's annual compensation for her WellPoint board service is $326,500

Katherine M. Campbell-House Energy & Commerce Committee Staffer-August 7

John J. Castellani-President Business Roundtable-Eight visits to the White House from Feb. 18 to July 23. Only one involved Nancy-Ann DeParle.

Stephen Ciccone-lobbyist for Eastman Kodak-July 23

Richard A. Deem-Senior VP American Medical Association-August 11

Jack C. Ebeler-House Energy & Commerce Committee-May 28. Ebeler is the former President Association of Community Health Plans & Multiplan employee. The Carlyle Group purchased MultiPlan in 2006.

Ted D. Epperly-President American Academy of Family Physicians-August 11

Judith M. Feder-Professor of Public Policy Georgetown University, principal architect of failed Clinton health care plan, had 2 unsuccessful runs for Congress in Virginia-April 9

Jennifer L. Friedman-Chicago area OB/GYN, a D.C. based woman of the same name donated $250 to Judy Feder for Congress-May 28

Maria Ghazal-Director of Public Policy for Business Roundtable-July 23

Tim Gronniger-House Committee on Energy & Commerce Staff-August 7

Robert T. Hall-Personal Injury Attorney in Reston, Va-August 11

Michael M. Hash-Principal at Health Policy Alternatives, a health care lobbying firm-April 21, April 28-29. Mr. Hash gave a presentation on March 8 to the AAGP. Their website details his credentials.

Renee R. Jenkins-Vice President American Academy of Pediatrics-August 11

Therese M. Jornlin-Corporate Wellness-August 29

Purvee P. Kempf-House Energy & Commerce Committee Staffer-August 7

Jeanne M. Lambrew-HHS Office of Health Reform, worked at John Podesta's CAP on health reform, served in HHS for Clinton's failed health reform-Jeanne had 27 visits to the White House between April 28 & August 31. Ten were with Nancy-Ann DeParle.

Jason Levitis-former policy analyst CCBP, member of Obama-Biden Transition Team-Four visits from April 21 to August 14

John C. Lewin-CEO American College of Cardiology-3 visits from March 25 to August 10, one with Nancy-Ann.

Caya B. Lewis-HHS Office of Health Reform-3 visits from July 31 to August 14, two with Ms. Deparle

Virgil A. Milller-House Energy & Commerce Committee staff-August 7

Karen Nelson-Aide to Rep. Henry Waxman-2 visits, May 28 & August 7

Elizabeth J. Noyes-Associate Executive Director American Academy of Pediatrics-August 11

Judith Paltrey-Pediatrician, Harvard School of Medicine-August 11

Antonio Perez-Chairman and CEO Kodak-July 23

Laura Petrou-HHS Chief of Staff (Tom Daschle staffer for 20 years)-6 visits between April 19 & May 18, three visits with Nancy-Ann

William F. Pewen-Congressional Staff for Senator Olympia Snowe-August 31

John D. Podesta-Lobbyist, President Center for American Progress-7 visits between April 13 and August 27, one visit with Ms. DeParle

Andy Schneider-Medicaid Policy LLC, part of Podesta's CAP team for health reform-August 7

Kathleen Sebelius-HHS Chief-3 visits between Feb. 20 and March 13, one with DeParle

Meena Shesamani-HHS Office of Health Reform-3 visits between April 28 & August 15

Rosemarie Sweeney-VP Public Policy American Association of Family Physicians-March 25 & August 11, one with DeParle

Neera Tanden-HHS Office of Health Reform, former John Podesta CAP staffer-4 visits January 28 to August 14, three with Nancy-Ann

David T. Tayloe-President American Academy of Pediatrics-August 11

Nancy E. Taylor-Greenberg Traurig, lobbying firm-Nancy Taylor has numerous health care clients-July 23

John P. Tooker-American College of Physicians (ACP)-Society of Internal Medicine & Director of National Committee for Quality Assurance-August 11

Richard L. Trachtman-Director of Legislative Affairs ACP-August 11

Michele Varnhagan-Congressional Staffer-May 28

Therese Vaughan-Senior Consultant for Charles River Associates-April 21

Brian Webb-One time Blue Cross/Blue Shield lobbyist-Manager Health Policy & Legislation for National Association of Insurance Commissioners-April 21

Chiquita White-Procter & Gamble-May 28

I have several observations. One, numerous Congressional staffers met with Nancy-Ann DeParle. This leads me to believe she had input in the writing of various bills. Two, the list of physician groups is mostly primary care, family practice, internal medicine and pediatrics. I find it hard to believe specialty physician groups weren't stating their case during this time. Three, clearly a number of lobbyists had input. And four, the number of Podesta CAP affiliated visitors stands out.

Goldman Sachs' White House Visits

White House visitor records show visits by Goldman Sachs executives and board members.

Lloyd Blankfein-Chairman & CEO-Feb. 4, Feb. 13, March 27

Gary D. Cohn-President & COO- March 3, March 23

James A. Johnson-Board Member & Former member of Obama VP selection team-May 5

John Rogers-Board Secretary-There are numerous visits by a John Rogers with no middle initial, including the Obama Super Bowl party. Two visits by a John W. Rogers-Jan. 21 & Feb. 2
If anyone believes the John F. W. Rogers visits are in error, consider his appointment by President Obama on November 9:

President Obama will also appoint the following individuals to serve on the Ronald Reagan Centennial Commission:

John F. W. Rogers, Member, Ronald Reagan Centennial Commission
John F.W. Rogers is a managing director and member of the Management Committee of Goldman, Sachs & Co., where he serves as the firm’s chief of staff and secretary to the Board of Directors.

Two Goldman Board members attended the State Dinner at the White House:

Rajat Gupta

John Rogers-Board Secretary
I found the White House visitor records remarkably incomplete. Only 3 people signed in for the Superbowl Party, when 75 people attended.

Numericable: Carlyle's Latest Haircut

What a difference a year makes. March 2008 saw The Carlyle Group buy a 37.8% stake in French cablenet company Numericable. Carlyle purchased half of Cinven's position. Cinven is a UK based private equity underwriter (PEU).

Fall 2009 found Numericable begging creditors for a haircut. Reuters reported:

Numericable has reached a deal with its creditors over the restructuring of its debt, the French cable television operator said on Wednesday.

Numericable's private equity owners, Cinven, Carlyle Group and media and telecom investment group Altice, have also agreed to delever the company by injecting 50 million euros in cash and cutting debt by 180 million euros.
How many credit default swaps (cds) did the debt restructuring trigger? America eliminated debt restructuring as a cds trigger. The EU is yet to follow. Add Numericable to Carlyle's growing list of imploded or troubled deals. Bankrupt or debt restructured firms include:

Carlyle Capital Corporation-bankrupt
BlueWave Partners-folded
Hawaiian Telecom-bankrupt
IMO Carwash-forced debt restructing
Stallion Oilfield Services-bankrupt
American Achievement-teetering
Numericable-debt restructuring

Stressed deals include:

Allison Transmissions

Freescale Semiconductor

Frontier Drilling

HD Supply
LifeCare Holdings

Oriental Trading

PQ Corporation

Sequa Corporation
Synagro Technologies
TSI Acquisitions (Titan Specialties)

UCI Holdco (United Components)

Veyance Technologies

Debt holders must be nervous, unless it's a backdoor strategy to equity ownership.

Tuesday, November 24, 2009

The Business Side of State Dinners

The Thanksgiving week state dinner for Indian Prime Minister Singh seemed a touch off base, given the holiday's Indian or Native American origins. Setting that aside, several business dignitaries attended the soiree. They include:
Jeff Immelt, General Electric CEO Neal Wolin, Deputy Secretary of Treasury (formerly of The Hartford, insurance) Michael Bloomberg, NYC Mayor (owner of Bloomberg) Nancy Ann DeParle, White House Health Czar (formerly of CCMP Capital) General James L. Jones, National Security Adviser (formerly on the Chevron Board & head of the U.S. Chamber of Commerce's 21st Century Energy initiative) David Cote, Honeywell CEO, JP Morgan Board of Directors Jim Crown, President of Henry Crown & Company Jackie Clegg Dodd, Member of five corporate boards including CME Group, Managing Partner of Clegg International Consultants, LLC, wife of Senator Chris Dodd John Doerr, Kleiner Perkins Caufield & Byers (private equity underwriter) & Google board member Mark Gorenberg, Hummer Winblad Venture Partners & donor Earl Graves, Earl G. Graves Publishing Rajat Gupta, McKinsey & Company, Board of Directors Goldman Sachs & others George Haywood, Obama contributor, financial adviser and former bond trader Moore Capital Management Chris Hughes, Facebook founder Vernon Jordan, Director of numerous corporate boards Matrice Ellis-Kirk, Managing Partner Heidrick & Struggles, former board member Ace Cash Express Marc Lasry, Avenue Capital Group Brian Mathis, Provident Group Martin Nesbit, CEO of The Parking Spot Jim Owens, CEO of Caterpillar Colin Powell, Strategic Limited Partner Kleiner Perkins Caufield & Byers Penny Pritzker, Board chair & director John Rogers, Ariel Capital Management & Goldman Sachs Board Secretary Marie Therese Royce, Alcatel- Lucent Public Affairs Jim Sullivan, Public Relations Consultant
Heads of trade groups or lobbying firms:
Andy Stern, President Service Employees International Union Charlene Gaynor, CEO of Association of Educational Publishers Robert Creamer, lobbyist with Strategic Consulting Group Bob Bauer, registered lobbyist with Perkins Coie LLC Hunter Biden, lobbyist Marland Buckner, lobbying firm owner Lucy Calautti, lobbyist for Major League Baseball & Senator Conrad's 2nd wife, she is a registered lobbyist Kathleen May joined Rep. Steny Hoyer. Is it lobbyist Kathleen May? Newt Minow, Sidley Austin LLP (not a registered lobbyist) Kathryn Thomson, Partner at Sidley Austin
Members of the media:
Robin Roberts, ABC Brian Williams, NBC News Katie Couric, CBS News Tom Friedman, NYT Fareed Zakaria, Newsweek & CNN Gayle King, editor Oprah magazine
However, two attendees may be a tad embarrassed:
Char Lugar for her DUI arrest after a traffic accident in McLean, Virginia. Rep. Jan Schakowsky for Sibel Edmonds' testimony. Her husband Bob Creamer is capable of advising her on standing straight.

Hopefully loved ones kept them out of any trouble. I trust the mainstream media to delve into the entertainment side of the invitee list. What about the donor element? Will the White House get the free pass given to Bush's Dover Sole with Queen Elizabeth? Illumination of business dignitaries, that's my contribution to open and transparent government. Some oligarchs made the White House visitor list more than once. The visitor list has a private equity underwriter (PEU) taint.

Update 10-4-21:  Hunter Biden lobbyist and future PEU.  Hunter still owns 10% of a Chinese private equity firm through Skaneateles LLC.  Hunter is the sole owner of Skaneateles. 

"Front loaded" Infrastructure Projects

Democratic House leaders, Nancy Pelosi and Dick Durbin, proposed "front loaded" infrastructure projects. This bodes well for private equity underwriters (PEU's), who hold over $120 billion in funds targeting infrastructure. The Obama administration clearly expressed its preference for public-private partnerships (PPP's). States are embracing PPP's, as are the wealthy.

The Carlyle Group, a politically connected PEU, closed its first infrastructure deal, Connecticut highway rest stops. They partnered with former enemy, SEIU, on cleaning staff for the facilities. The timing is good for Carlyle, as it markets port and rest area PPP's to Virginia.

Carlyle co-founder David Rubenstein called the first economic stimulus package from Seward's Folly. He did so before people outside Washington D.C. became aware of a looming "stimulus." Reubenstein advised Alaskans to line up for their share.

Round #2 of stimulus will help PEU's. Citizens' assets will go into PPP's. Financially stressed state and local governments will sell their infrastructure franchises on the cheap.

What happens when White House love combines with stimulus? I predict more corporafornication behind the blue curtain. I'm scared to ponder any potential offspring.

Who Has Your Back?

The Obama administration wants citizens to believe government is a capable watchdog. Consider the following data on prefilled syringes, containing either heparin or saline:

Department of Health and Human Services

FDA report to AM2PAT (dba) Salient Health Care TechnologyInc.

August 11,

You are using an unvalidated automatic filling machine to fill syringes. An appropriate installation and operation qualification could not be performed as there are no manufacturing or operating instructions for the equipment.

There was no indication of sample sizes utilized and no actual test results available for the packaging runs.
Several years later, the news reported.

FDA Recalls All Pre-filled Syringe Flushes
January 29, 2008

FDA has announced a nationwide recall of all lots of heparin and saline pre-filled flush syringes manufactured by AM2 PAT, Inc., of Angier, NC.

Two lots have been found to be contaminated with Serratia marcescens, a bacterium that can cause serious injury or death.

These syringes are manufactured by AM2 PAT under the brand names Sierra Pre-filled, Inc. and B. Braun. They are sold in fill sizes of 3mL, 5mL and 10mL, and syringe sizes of 6mL and 12mL.

Consumers and healthcare facilities with any of the recalled, pre-filled Heparin Lock or Normal Saline IV Flush syringes should stop using the product immediately. Healthcare facilities should immediately quarantine the products in their inventory and return them to their distributor.

Only the producer can assure quality. AM2PAT has a short history:

The company's headquarters is in Chicago, where it was incorporated as AM2PAT in 2001, according to Illinois records. AM2PAT formed a North Carolina operation in 2003, according to state corporation records. It does business as Sierra Pre-Filled.

Government reliance on inspection regimes will not improve quality. If it catches organizations pursuing profits over people (like AM2PAT), it will be long after the damage is done.

The North Carolina plant shut down in February 2008, much like E. Coli tainted meat packers or salmonella peanut butter makers.

A year later, two AM2PAT managers were convicted for their role in "sending out improperly labeled syringes linked to hundreds of bacterial infections and some (five) deaths." Injured patients are suing the firm for almost $10 million.

AM2PAT was joined by Qualitest Pharmaceuticals, which recalled 250 million Accusure insulin syringes it distributed since 2002.

Profound knowledge is needed in our hallowed halls of government and corporate board rooms. It is sorely lacking. Quality begins in the board room, but greed keeps edging it out.

Who knew "buyer beware" would return with a vengeance? Is it a byproduct of every Gilded Age?

Monday, November 23, 2009

Bad Sign: Health Reform Entices PEU's

Bloomberg reported:

Buyout managers see opportunity in health care, where companies are trimming costs and spinning off units in response to the economy, even as the industry stands to gain from U.S. legislation that may expand care to more than 30 million Americans, said Karen Bechtel of the Carlyle Group, the world’s second-largest equity firm.

“The combination of health-care reform and the recession has forced companies to be more careful about running their businesses,” said Bechtel, who heads the Washington firm’s health-care unit, in a telephone interview. “That’s driving (buyout) activity, and it will accelerate.”

Why should the public be excited about private equity underwriters (PEU's) adding an annual 2% management fee, huge amounts of interest on debt, before reselling the health care company, pocketing 20% of the monstrous profits?

The sale of HCA to KKR and Triad to CHS raised health care costs over $2 billion annually. It was all interest expense.

One potential PEU target is LifePoint Hospitals, itself a profit generating spin off from HCA. When KKR holds an initial public offering for HCA, it will the company's fourth IPO in its relatively short lifespan.

When PEU boys sniff around your industry, they do so for one reason: to make big money. That they're nosing around health care reform is a bad sign.

Horse trading is the fractal on health reform. Congress is looking pretty lame. The Carlyle Group and public servants have an interesting history.

The Carlyle Group's Karen Bechtel sits on the board of LifeCare, HCR ManorCare and Multiplan. The Senate health reform bill has sweeteners for long term care companies, including LifeCare and ManorCare.

LifeCare lost 25 patients after Hurricane Katrina in 2005. Did Karen thank the White House and Senate Homeland Security Committee for omitting the hospital with the highest patient death toll from their 2006 Katrina investigation reports? Or did LifeCare's lobbyists do the thanking?

Did Frances Townsend call Karen Bechtel during the White House investigation? The report read better as a risk management document for LifeCare, than any credible investigation. Armies of LifeCare lawyers rose to the company's defense, mostly by going on offense.

After failing patients in one of 21 LifeCare long term acute care hospital facilities, Congress approved Carlyle's buyout of ManorCare, with nearly 500 nursing homes. The stuffed stocking deal went through days before Christmas 2007.

Lessons Learned author Frances Townsend recently testified before the Senate Homeland Security Committee, now inflicted with amnesia. Townsend quit public service, citing fear of a subpoena. She is now a risk management consultant for Baker Botts, the law firm of James A. Baker, III, formerly of Carlyle Group fame.

Carlyle can bring its risky financial and operating practices to health care. Fran and her boss can write softball reports, defending their friends. Deform is coming. PEU's stand ready.

Sunday, November 22, 2009

The Carlyle Group and Corporate Boards

Carlyle Group senior leaders occupy seats in corporate board rooms across the land.

Charles Rossotti
Bank of America (Jan. 2009)
AES Corporation
Merrill Lynch

James Hance
Morgan Stanley (Aug. 2009)
Duke Energy
Rayonier (alongside Jeb Bush)
Sprint Nextel
Cousins Properties
Ford Motor (July 2010)

Daniel F. Akerson
General Motors
American Express
Time Warner
Freescale Semiconductor
The Nielsen Company
Booz Allen Hamilton

T..F. "Mac" McLarty, III
Union Pacific
Acxiom Corp
Asbury Automotive Group

John P. Jumper
Goodrich Corp
TechTeam Global
Somanetics Corp
Jacobs Engineering Group

Arthur Levitt
M&T Bank Corp
RiskMetrics Group
Bloomberg LP

Louis V. Gerstner, Jr.
IBM China/Hong Kong Ltd
Approach Software
Bristol Meyers Squibb

Thomas W. Rabaut
Cytec Industries Inc
Kaman Corp
Burdeshaw Associates

Christopher V. Dodds
Investment Technology Group
Cost Plus Inc.

Louis Giuliano
ITT Industries

William P. Johnston
Hartford Income Shares Fund
FMC Supervisory Board

Rakesh K. Kaul
Oriental Trading Company

William E. Kennard (Obama's nominee for EU Ambassador)
New York Times Co
Sprint Nextel
Hawaiian Telecom
Insight Communications

Randall K. Quarles
NTR Acquisitions Co.

Peter J. Clare
Booz, Allen Hamilton
Sequa Corp
Vought Aircraft
Wesco Aircraft

Patrick Siewert
Coca Cola
Avery Dennison Corp
Computime International
Coates Group
Eastern Broadcasting Co
kbro Co

Ryan M. Schwarz
Sight Resource Corp
AcuFocus Inc
Carefx Corp
Fairchild Imaging Inc
NeoVista Inc
PixelOptics Inc
Primary Health Inc
Proteus Biomedical Inc

Daniel A. Pryor
HD Supply
John Maneely Co
Veyance Technologies

Gregory S. Ledford
Allison Transmissions
United Components

Edward J. Mathias
Allied Capital Corp
NexCen Brands Inc
Victory Acquisition Corp
Triple Crown Acquisition Corp

Mr. Mathias serves as a member of the Investment Committees for Carlyle Growth, Asia Growth, European Technology, Middle East Northern Africa (MENA), Mexico Growth, and The Riverstone Funds.

Gregory L. Summe
State Street Corp
Automatic Data Processing Inc
PerkinElmer Inc

Eliot P.S. Merrill
AMC Entertainment
The Nielsen Co.

Brian W. Hayhurst
Compusearch Software Systems
SchoolNet Inc
Archive Systems

James F. Burr
Wachovia (2008)

Karen H. Bechtel
HCR ManorCare

Allan M. Holt
HCR ManorCare Inc
HD Supply Inc
Sequa Corp
SS&C Technologies Inc
Vought Aircraft

Sandra J. Horbach
Dunkin’ Brands
Oriental Trading Co
Philosophy Inc

James C. Shevlet, Jr.
United Road Towing

Claudius E. Watts IV
Freescale Semiconductor
CPU Technology
Firth Rixson, Ltd
Open Solutions
SS&C Technology

William E. Conway, Jr (Carlyle co-founder)
Sprint Corp

David Calhoun (CEO of Carlyle's Nielsen Co)

Kent Kresa (ex-Carlyle Senior Adviser)
Interim Chair of GM Board

While a number of firms are Carlyle affiliates, many are well known American branded multinationals. What would it say if I missed more than I found?

Saturday, November 21, 2009

Senate Bill, Long Term Care & PEU's

The Senate health reform bill has provisions related to long term care. Language includes:

Despite the Pepper Commission and Olmstead decision, the long-term care provided to our Nation‘s elderly and disabled has not improved. In fact, for many, it has gotten far worse.

The big change in long term care the last few decades? Private equity underwriters (PEU's) buying nursing homes. Congress approved The Carlyle Group's purchase of ManorCare in December 2007, despite concerns about PEU profits over quality. Carlyle had a clear track record of failure to LifeCare "long term acute care" (LTAC) hospital patients in a time of crisis.

Yet, Congress wants to do more than approve deals involving characters with questionable track records.:

SENSE OF THE SENATE.—It is the sense of the Senate that— (1) during the 111th session of Congress, Congress should address long-term services and supports in a comprehensive way that guarantees elderly and disabled individuals the care they need; and (2) long term services and supports should be made available in the community in addition to in institutions.

How else might the Senate help long term care? It will allow physician assistants (PA's) to order post hospital extended care services. Will this allow LTAC PA's, a lower cost provider, the same privilege?

The bill has $10 million for long term care worker training. It provides another $10 million for geriatric career education to "foster greater interest among a variety of health professionals in entering the field of geriatrics, long-term care, and chronic care management."

It refers to the Five Star rating system for nursing homes, but specifies a demonstration project for nursing home chains. Will this give large corporations, like ManorCare, a leg up on adjusting to the standards?

The bill supplies $160 million for required LTC worker background check programs, including fingerprinting of employees. How many background checks does ManorCare and LifeCare perform annually? How big are their savings with the feds footing the bill?

Few talk about these long term care provisions in health reform. Corporafornication likes back room deals. On that, the Reds & Blues are bipartisan.

Friday, November 20, 2009

Carlyle-SEIU to PPP at Connecticut Rest Stops

The Carlyle Group's infrastructure fund chugged into Connecticut's highway rest stops. It will plunk $178 million into the 23 rest stops in return for a share of the revenue. Carlyle will install Subway and Dunkin' Donut operations in the centers. WaPo reported:

Carlyle launched its infrastructure practice in 2006, and the Connecticut deal is that unit's first public-private partnership (PPP). Other Carlyle infrastructure deals include a wastewater treatment company and a freight transfer firm.

The wastewater firm is Synagro Technologies, which bribed Detroit City Councilwoman Monica Conyers, wife of Rep. John Conyers. Monica was convicted in the crime. Two Synagro officials plead guilty.

WaPo noted lower returns earned by private equity underwriters (PEU's) in the infrastructure space.

Public-private partnerships are generally reliable investments, earning about 15 percent a year, a Carlyle spokesman said. Those returns, however, are generally below the historical average of what private-equity firms earn on their investments.

How many citizens would like a guaranteed 15% return on their IRA? Carlyle is bidding on Virginia ports. Does it help to have a signed Connecticut deal as it courts the Old Dominion or other state infrastructure deals?

Under the Connecticut agreement, the state will own the facilities while Carlyle will manage and maintain them. After 35 years, the operations and maintenance of the facilities will revert to the state.

Carlyle co-founder David Rubenstein noted his desire to hold an asset at the end of a PPP. Do the Dunkin' franchises fill this bill? Carlyle owns Dunkin' Brands, which includes Baskin-Robbins. If PEU's stick to their game plan, Dunkin' will flip several times during the 35 year period.

Carlyle proved its ability to collaborate with the "enemy" in Connecticut.

As part of the deal, the Service Employees International Union, a frequent Carlyle critic, will provide custodial service jobs at the centers.
Did the SEIU sign a 35 year deal as well? Who's providing health insurance coverage for employees; the state, the private side of the partnership or the union? That answer would be telling.

Carlyle and company named the venture Project Service LLC. Who's servicing whom?

Thursday, November 19, 2009

Sea Change: Lehman Redux?

President Obama shifted rhetoric from recovery to "possible double dip recession" this week. Today short-term Treasury bills went negative on yield. ZeroHedge noted this happened after the fall of Lehman Brothers. The big money boys were scared to loan to one another, to park money in failing institutions. They put their billions in safe haven T bills.

In early November CIT imploded, old news except for their credit default swap settlement. Ambac and CapRes/GMAC sit on the brink of collapse. Is it someone bigger? Maybe a shadow banker like Lehman or a sovereign country.

Credit bets on Greece rose in price, according to the WSJ. The Philippines borrowed heavily to finance a deficit budget. Goldman Sachs and CitiGroup Global Markets are advising the Philippine government. Will they implode Manila's version of Wall Street, before a second U.S. dip?

The same CitiGroup Global Markets Inc. (CGMI) had two negative news stories. The first was a possible Moody's downgrade: DeHavilland reported:

Moody's has announced that it has placed on review for possible downgrade its ratings of the credit default swap tranche of Citigroup Global Markets Limited -- Cayenne Court 2004-1 referencing a static portfolio of corporate entities.

The second dealt with CGMI's steering a charity, St. Anthony's, into risky auction rate securities. St. Anthony's wants its $2 million back.

Credit betting came up in today's House hearing on financial regulatory reform. Treasury Secretary Tim Geithner refused to answer a question on the kind of AIG credit default swaps Goldman held. Taxpayers funneled $12.9 billion to Goldman and Geithner won't say if Goldman held the underlying debt instruments? Reuters had Peter DeFazio's account:

Geithner would not answer my question when I said, “Were those naked credit default swaps by Goldman or were they a counter party?” He said, “I will not answer that question.”

I think they were naked credit default swaps. They were bets. They should not have gotten their money back.

What do negative T bills portend? What kind of financial boogeyman lurks? Is it domestic or foreign? Is it the ghost of Lehman? If so, who might he haunt?