Wednesday, March 31, 2010

Freeh Report Shows Carlyle Profited Before SemGroup Darkened

The Carlyle Group and joint venture energy partner Riverstone Holdings paid $105 million for 30% of SemGroup in January 2005. Three years later SemGroup went bankrupt on billions in bad energy bets. Dow Jones Financial News reported:

Because it bought and sold oil and gas, SemGroup was legitimately expected to hedge its business activity against price volatility. A bankruptcy court probe found SemGroup was trading for the sake of trading, and losing big.

Funny, hedging pricing risk was never mentioned in SemGroup's SEC filings. Their 2008 10-K only mentions interest rate swaps, not energy prices.

As of February 2008, SemGroup paid Carlyle/Riverstone $107 million in dividends. That's $2 million more than the initial investment, a significant disappointment for a private equity underwriter (PEU) expecting sugar plums.

$88 million prior to February 2008
$19 million in February 2008 (30% of 56% of the $100 million distribution)
$107 million total

Louis Freeh investigated SemGroup's implosion.

Examiner Louis Freeh said SemGroup executives actively hid the losses from the firms that held seats on its management committee.
Some losses stacked up in Westback Purchasing Co, a firm controlled by Thomas Kivisto, the SemGroup chief executive who was the mastermind of the trading strategy.
Westback Purchasing is not listed as a subsidiary of SemGroup in their 2008 10-K. How much is Price Waterhouse Coopers at risk for this financial audit? How about SemGroup's CEO Kevin Foxx and CFO Michael Brochetti? If this misrepresentation isn't criminal behavior under Sarbanes-Oxley, what is?

Note the fired CEO, Thomas Kivisto, is different from the CEO attesting to the 2008 SEC filing, Kevin Foxx. How many CEO's did SemGroup have?

While many investors made their money back through dividends, creditors are stuck with more than $1 billion in unpaid bills.

How did private equity dice rolling and fence swinging contribute to SemGroup's bad bets. Was there pressure to make fast cash to pay off PEU investors like Carlyle? Did it express itself in dysfunctional ways?

This deal has a PEU odor, one not suppressed by Freeh's attempted err freshening. For those interested in the latest iteration of SemGroup, it's now Blueknight Energy Partners.

"Happy PEU investing to all and to all a Blue Night."

Update 4-22-12:  Louis Freeh is "investigating" MFGlobal's failure.

Update 8-28-12:  Freeh sold his firm(s), effectively monetizing his holdings in a PEU like manner.

Update 3-23-14:  Court documents put a new spin on "free shares.":

Tuesday, March 30, 2010

CalPERS Leads PEU Investor Push Back

Investors saved private equity underwriters (PEU's) from Lehman Brothers' fate by ponying up capital. CalPERS received $2.8 billion in capital calls from PEU's in fall 2008. Their option? Sell their investments in a virtually nonexistent secondary market, thus CalPERS paid up. Investors want more than a "thank you" for their efforts.

They summonsed major private equity firms. Dealbook reported:

Executives of the Carlyle Group, TPG, Avenue Capital Group and Kohlberg Kravis Roberts are planning a meeting Tuesday with investors who are seeking lower fees and more control over their investments, Bloomberg News reported, citing three people briefed on the gathering.

The meeting, which
Bloomberg said will be moderated by the Calper’s chief investment officer, Joseph Dear, follows the release earlier this month of a “set of principles” by the Institutional Limited Partners Association, a group that represents 215 members controlling more than $1 trillion in private-equity assets. The so-called wish list, first reported by The Wall Street Journal, included calls for a cap on fees, more disclosure and greater investor control for clients of buyout shops.
Maybe the right to say "no" to capital calls?

How did the PEU boys respond?

“at least three large private-equity firms have retained outside counsel to examine potential antitrust issues.

Carlyle has an interesting history of using lawyers.

Monday, March 29, 2010

Carlyle Group's Tea Leaves Read Middle East Lighting

The Carlyle Group announced its Middle East/North Africa (MENA) fund acquired a 30% of General Lighting Company, Saudi Arabia's largest lighting fixtures manufacturer and supplier. The WSJ interviewed Walid Musallam, managing director and head of Carlyle’s MENA operations. He said:

The company is a full solution provider and market leader in the manufacturing and distribution of lighting fixtures. It has a market share significantly larger than its competitors. It is well run and has potential for growth both inside and outside Saudi Arabia.
Walid mentioned Egypt as a potential area for growth. Will President Hosni Mubarak use any proceeds from his $50 million U.S. taxpayer funded endowment on GLC lighting? Carlyle's Musallam went on to say:

We are delighted to have made our first investment in Saudi Arabia and second in the Mena region in just three months. We look forward to supporting GLC in achieving its expansion ambitions.
Don't let GLC's CEO talk with his Vought Aircraft Industries counterpart. Elmer Doty repeatedly cited liquidity and capital crunches as causes of Vought's gunking up Boeing's Dreamliner production line.

Another article cited the private equity underwriter's (PEU's) global footprint:

Carlyle has made 118 investments in Asia to date, including 45 in China and 22 in India.
Indian affiliate Repco Home Finance received $130 million in Overseas Private Investment Corporation loans

Carlyle knows how to read and profit handsomely from signs. It acquired a Brazilian tour operator with World Cup soccer and the Summer Olympics but years away.

Why a Middle East lighting company? Will demand come from new construction or destruction? Either way, Carlyle's PEU tea leaves read lighting.

Update: Carlyle Group co-founder Bill Conway met with Jordan's King Abdullah on investing in his country. Might it involve cheap Palestinian labor and Obama public-private partnerships (PPP's)?

Sunday, March 28, 2010

SEIU-Carlyle Fight Over ManorCare Was for Show

In numerous posts prior to The Carlyle Group's ManorCare buyout, I opined SEIU"S objections were theater for the masses. The Toledo Blade confirmed this assertion. It reported:

Even the Service Employees International Union, which lobbied to block the deal on grounds that patient care would suffer, conceded last week that it hasn't kept an eye on the situation to know whether care worsened.

There was good reason to grill Carlyle before the merger closed, but elected officials kept their heads underwater. However, SEIU wasn't the credible party in challenging the politically connected, private equity underwriter (PEU). Yet, the global media fails to notice.

Two years after their contentious battle, SEIU President Andy Stern partnered with Carlyle on Connecticut area rest stops.

The romance blossomed, when together they pushed health reform. An ex-ManorCare board member and representative on its Quality Oversight Committee, Gail Wilensky, testified before the Senate Finance Committee on reform. However, she failed to declare her numerous conflicts of interest in her public testimony.

PPACA provides $160 million for Uncle Sam to perform employee screening at long term care facilities. How much will ManorCare and sister company LifeCare save on personnel costs? Will it be more than the tax break for buying back ManorCare CMBS debt for pennies on the dollar? That was a feature of the Obama stimulus plan?

PEU's know how to leech off Uncle Sam, even if it's a few million at time. Given their focus on health care, it will add up. Washington Life Power 100 Andy Stern and David Rubenstein will strike a truce over money. If their gamble to restore union pension funds to healthy levels fails, taxpayers will shoulder the burden.

Saturday, March 27, 2010

Treasury Undersecretary for Domestic Finance

Private equity firms, currently garnering a virtual free pass in the Dodd financial reform bill, have a strong link to senior Treasury positions. Consider former Undersecretary, Randal Quarles. He quit to work for The Carlyle Group, a private equity underwriter (PEU).

The current Undersecretary is Jeffrey Goldstein, Managing Director for private equity firm Hellman & Friedman from 2004 to 2009. After Congress failed to act on his appointment in a timely fashion, he received a recess appointment by President Obama.

Hellman & Friedman bid for Lehman Brothers' Neuberger Berman investment unit, but lost to a group led by George Hebert Walker, cousin of President George W. Bush.

History shows a PEU leading For-Profiteering health reform. Surely, they can craft toothless financial regulations.

Former Undersecretary Quarles coordinated development of administration's policy on hedge funds and derivatives, as well as regulatory reform of Fannie Mae and Freddie Mac. That worked out rather badly.

Obama's reliance on shadow bankers as staffers portends ill for the country. They have no problems with PEU's excessive profit requirements. It's in their meme's.

(Thanks to Economic Policy Journal)

Friday, March 26, 2010

Carlyle's Rubenstein to Speak at Princeton

Carlyle Group co-founder David Rubenstein will explore the topic "Is America's Global Economic Leadership a Relic of the 20th Century?" on March 31 at Princeton University. Will he clarify his role in shifting economic power overseas? Will he confess to his financial sins as a shadow banker? If past talks are any indication, highly doubtful.

McKinsey Quarterly provided a preview of Rubenstein's message:

All of us on this panel grew up in a world where the US was the dominant economy in the world. Many of you are going to live in a time when the US will not be the dominant economy in the world. And your children are going to be in a time when the US will certainly not be even close to the dominant economy in the world. China will probably be the largest economy in the world by 2030 or 2035, and then India will probably be, not long behind that, number two in the world.

Sobering. While Rubenstein didn't confess to his firm's particular sins, he did note the industry's pattern of undesirable behavior:

The situation, with respect to credit, in my view, is that because our financial institutions in the United States were so levered and that we had so much debt and we really exported that concept more or less to Europe, that as we de-lever—and it’ll take years to do this—the markets that are going to pick up and benefit will be the so-called emerging markets, which were not as levered as we were.

And by the year 2014, the GDP of all the emerging markets, so called, will bypass the GDP of the so-called developed markets. So not only are their GDPs going to be greater than ours, but their balance sheets are going to be much better.

Global shadow bankers made the mess, alongside job exporting U.S. branded multinationals. They did with Uncle Sam's help. Carlyle hired Treasury's Undersecretary for Domestic Finance. Randall Quarles retirement announcement stated:

Mr. Quarles has played a major role in some of the most significant economic policy issues faced by the Treasury during the Bush Administration, including:

The U.S./E.U. financial services dialogue, which he led and which brought the Federal Reserve, the SEC, and the European Commission together to resolve cross-border financial regulatory issues.

Quarles aided the spread of America's most egregious financial practices. He's now helping his politically connected PEU employer buy banks and avoid regulation. Quarles will speak in Utah at the Governor's Solid Growth: Today and Tomorrow conference. Funny, his record contributed to more of a boom and bust.

The American economic engine can run again. Hopefully, it won't take another World War, one that destroys manufacturing capacity across the globe. WWII enabled a Phoenix to rise from the ashes. Rather than quality leaders, America has the "mean & greedy" version.

Greed and fear are always in the balance. And greed will ultimately come back.--David Rubenstein

Near the end of the program David cracked a joke:

You forgot to mention the preservation of carried interest taxation for capital gains to private equity. That’s the most important thing.

Are you laughing?

Wednesday, March 24, 2010

Geithner's Fannie & Freddie Omissions

Treasury Secretary Tim Geithner testified before the House Financial Services Committee on the future of housing finance. Tim's testimony omitted two groups. While he testified on the role of government service organizations, Geithner left out Fannie Mae and Freddie Mac's governing boards. They approved key decisions on capital and underwriting standards.

High paying board positions served as plums for high profile politicians. Blue Rahm Emanuel sat on the Freddie Mac board, while Red Ken Duberstein not only served on Fannie's board, he was on the Assets and Liabilities Policy Committee. That committee was responsible for oversight of management’s interest rate risk, credit risk, and capital management activities. Ken Duberstein also earned over $1.8 million performing regulatory consulting services for Fannie.

Rep. Carolyn Maloney asked Geithner about the management of Stuyvesant Town at the 56:05 mark of the hearing. Stuyvesant Town went under, leaving Fannie and Freddie as bag holders. BlackRock, the firm bailing on the project, does huge work for Tim's Treasury department. If the IRS can chase deadbeat dads, one might expect Tim Geithner to ask BlackRock to make up any GSE losses.

Geithner avoided two groups responsible for major aspects of the current mess. Both are politically connected. It's a virtual guarantee that every time Tim opens his mouth, he'll say nothing but generalities and political platitudes.

Update: Tim mentioned "covered bonds" as a new model for mortgage finance. Guess who has a financial interest in such products? George Soros.

Update 2: Randall Quarles, Treasury Undersecretary for Domestic Finance under President Bush, had Fannie and Freddie, as well as derivatives, under his purview. Quarles now works for The Carlyle Group, a private equity underwriter doing its best to avoid any form of regulation. He'll serve as keynote speaker at a Utah economic conference. Check out his bio.

Tuesday, March 23, 2010

Carlyle Group Cashes Out of Vought Aircraft

The Carlyle Group exited from the remainder of Vought Aircraft Industries. Triumph Group purchased Vought for $1.44 billion, of which $525 million was cash.

In 2009 the company sold its 787 Dreamliner production facilities to Boeing. Vought had a clear history of holding up Dreamliner production. The WSJ got wind of the sale in July.

Triumph inherits Vought's $35 million Texas Enterprise Fund commitment. Under Carlyle Group ownership Vought promised to add 3,000 jobs by 2009. According to Vought employment numbers posted on their website, it cut 35 full time positions. That's $1 million per job lost. Governor Rick Perry made an executive decision, rewriting the TEF contract and effectively lowering the bar for Vought's employment promises. The company doesn't employ in eight locations what it promised for Texas.

One Carlyle commitment is history, now the responsibility of Triumph. An enterprising business professor could create a great case from Carlyle's packaging and unpacking of Vought-Aerostructures. It would need to include Vought's milking Texas and South Carolina for a combined $100 million, as well as how Vought gunked up Dreamliner production. Quotes from CEO Elmer Doty on access to capital, private equity vs. publicly traded, would be part a critical part of the case.

Triumph's stock soared on the news, up almost $8 to $70 a share. The pop makes Carlyle's win even bigger, given their 31% stock ownership in Triumph once the deal closes.

The Carlyle Group cashed in on Vought, with aims to sell ARINC. The two Vought sales are over $2 billion, $590 billion to Boeing (per Vought's press release) and $1.44 billion to Triump. That should give the PEU boys' carried interest a nice lift.

As an aside, Vought's SEC filings have not appeared on EDGAR since 11-09. One might expect a redone contract with the State of Texas to be an addendum to the company's financial statements. Will it show up on Triumph's SEC filings?

Sunday, March 21, 2010

Carlyle Group Ready to Flip ARINC reported on ARINC, an affiliate of the Carlyle Group. When Carlyle purchased the company in 2007, ARINC's Standard & Poors rating fell to "speculative grade." That was before the financial meltdown. The article pointed toward Carlyle's intentions:

"I came in 10 years ago," said ARINC CEO John Belcher. "Since then we took the company from $200 million (in annual revenue) to about $1.2 to $1.3 billion. Carlyle will look at a company like ours, will buy a company, turn it around and then want to sell it. That's where we are right now; I really couldn't say much more than that."

According to recent wire reports, Goldman Sachs has been tasked with finding suitable bidders for the sale, which could reach $1 billion.
Under Carlyle's management ARINC had big successes and failures. They bungled a Russian helicopter deal for Iraq. Nevertheless, Uncle Sam has been good to ARINC.

The Carlyle Group is renowned for its affiliates suckling on the federal teat. It's also a global player. ARINC's big success came in Egypt.

The article nailed ARINC's capabilities, nurtured by Carlyle:

ARINC also has a business jet division.
"Anything you need - we now have over 2,100 business jets around the world that are part of this service," said Belcher.
There's seemingly no end to what ARINC is involved with including railways, port security, military/government communications, network connectivity, and information technology.

But it's time for ARINC to leave Carlyle's distressed deal list (prepared by Moody's) and return some green. This one should go the opposite of Willcom, which cratered before Carlyle could sell the firm. ARINC has an order book, much of it supplied by Uncle Sam.

Update 4-6-12:  Carlyle may have to monetize ARINC's government consulting division before it can cash in the rest of the firm.  At least that's Reuter's take.

Saturday, March 20, 2010

Environmental Defense Fund Strikes Deal with Carlyle Group

Fresh off deals with WalMart and Kohlberg, Kravis, Roberts (KKR), the Environmental Defense Fund partnered with The Carlyle Group on greening their corporate affiliates.

This isn't your father's EDF, the group that took on chemical makers of DDT. It's the PEU version:

PEU = private equity underwriter

Thirteen EDF board members come from the investment class. One is the grandson of WalMart's Sam Walton. Many are PEU's.

Philanthropedia states the following about the EDF:

"They are very political and focused."
"They are very market oriented and politically astute."
"They keep advocacy front and center."

"They have effective activism for the best solutions (sometimes market based, sometimes regulatory)."
"They are clearly linked to the policy process."
"They do smart policy work and lobbying."

Those words could describe any politically-connected private equity firm. Congress frequently grants PEU's huge chunks of government business, special tax breaks, preferential market territory or regulatory free zones.

One Philanthropedia comment described EDF's work on Texas coal fired power plants.

"They influence market players, but are more effective in their energy campaigns on the ground, e.g. Texas coal."
EDF's press release on 2-26-07 stated:

News just broke that Texas Pacific Group and Kohlberg Kravis Roberts & Co. are seeking to acquire Texas-based energy giant TXU Corp.

As part of the sale agreement, Environmental Defense helped negotiate an aggressive environmental platform that will, among other things:

  • Terminate plans for the construction of 8 of 11 coal-fired power plants TXU had hoped to build

TPG and KKR took on huge amounts of debt in the $43.8 billion TXU deal. By eliminating 8 of 11 coal fired plants, the company's capital budget decreased by billions. The original 11 plants were projected to cost $10 billion. The EDF "deal" saved TPG & KKR $7.2 billion.

The company's latest SEC filing shows:

Total debt as of 12-31-09 stands at $43.9 billion, with net debt of $41.1 billion. The company has a leverage ration of 9.40x.

Think how much higher debt would've been without the "EDF deal."

EDF's PEU board members know the importance of paying interest to bondholders while maintaining profit margins. Did they provide their financial expertise to TPG, KKR et al?

It was a "very smart move on their part to have talked in advance with environmental groups," said Barry Abramson, a utility analyst with Gabelli Asset Management Inc., which owns shares of TXU.
Smart move, something The Carlyle Group knows much about. PEU's infiltrated most bastions of power in the last decade, a time of explosive growth. It shouldn't be a surprise they're governing environmental groups.

Who knew the EDF wanted to make The Carlyle Group more profitable with an EcoValueScreen? Are we down the Rabbit Hole? Is it time to Scream?

Update: EDF reported how they helped KKR become more profitable.

Private Equity Underwriters Acted Reasonably During Boom

Private equity underwriters (PEU's) had little to do with meltdown, at least that was the message Carlyle Group co-founder David Rubenstein delivered at a WSJ breakfast talk. He sounded remarkably like a subprime mortgage borrower:

Debt was offered to you no matter what,” he said, laying out a hypothetical example to make his case. It went something like this:

Let’s say you have a $1 billion buyout in mind, and J.P. Morgan, hypothetically, offers you $650 million in debt, at 200 basis points over Libor, with a 1% to 2% fee.

Let’s say you go to Citigroup, hypothetically, to see what they’ll offer, and they say they’ll match those terms, but also with no covenants on the debt.

So you go back to J.P. Morgan, and they offer to match all that, and also throw in some PIK toggle notes - in other words, notes that you don’t necessarily even have to pay any interest on.

Right about now, you’re thinking the debt terms couldn’t possibly get any better, but you go back to Citigroup, and turns out they’ll make sure there’s no Material Adverse Change clauses on their offer. Or as Rubenstein put it, even if “a nuke goes off in the corporate headquarters of the company you’re about to buy,” they’ll still fund the deal.

Surely J.P. Morgan can’t do any better than that? Well, maybe they can. How about not only all of that but also an equity bridge?

Sold! “Very few of us were able to resist the temptation,” Rubenstein said.

Highly leveraged, cheap debt terms, frothy bidding, it wasn't our fault! Apparently nothing is Carlyle's fault. They backed away from the implosion of Carlyle Capital Corporation, an offshore investment they set up in the Channel Islands. Long time Arab investors are livid over their losses.

Rubenstein likes China, which might be a nice fit. Chinese firms regularly manufacture dangerous goods, comparable in quality to junk Wall Street innovation. Carlyle used commercial mortgage backed securities to finance many real estate and other buyout deals. Deteriorating CMBS's stink up many bank balance sheets. Systemic risk.

What happened to loans Carlyle Group took on in frothy deals? Many imploded or teeter on the edge. Rubenstein noted:

“Banks don’t really want to take over these companies.”
Which means Carlyle can buy back debt for pennies on the dollar, while exercising an Obama stimulus plan tax break. Rubenstein omitted his firm's welshing on those bank debt deals. Systemic risk.

In his talk Rubenstein noted the impact of financial reform on bank private equity and hedge fund divisions. Non-bank (PEU's) received a free pass in the Dodd bill.

While the Volcker rule might benefit firms like Carlyle, by banning banks from investing in private equity deals and thereby getting rid of a group of competitors, Rubenstein said he doesn’t really see the need for such legislation. “The problems…did not come about because banks were investing in private equity or hedge funds,” Rubenstein said. The rule is not “the salvation of the Western world.”

Yet PEU's, with $400 billion on the sidelines, apparently are America's salvation. The White House believes private equity is the solution for our ills in infrastructure, banking, education and health care. Carlyle & company received up to $4.9 billion in FDIC subsidy for taking over BankUnited, a failed Florida bank. After rewriting the rules, Uncle Sam is now providing capital. Another rule tweak may be in order.

Who rode to the rescue of private equity in the meltdown? PEU's had some risk, despite the incredibly lax debt deals. Public pension funds ponied up. CALPERS put up $2.8 billion in private equity capital calls, over $600 million to Rubenstein's Carlyle Group. What if pension said no, we want our money back. PEU run, which equals systemic risk. But Congress and the White House will ignore all this.

What kind of year did the Carlyle co-founder have? "Trust Us" David Rubenstein made back $1.1 billion since the implosion. As for paying taxes on his monstrous gains:

He doesn’t expect the issue of changing how carried interest is taxed to normal income rates from capital gains rates to be addressed by Congress this year. More likely, he said, is that it will be part of a comprehensive look at tax reform next year.

How long have Democrats promised to make this change? Long enough, such that when it occurs, the PEU boys have an offshore workaround. As for comprehensive tax reform, even Rep. Charlie Rangel is calling for lower corporate tax rates.

Not too shabby for a flawless firm in a protected industry. It's sweet being a financial oligarch.

Update: In another talk Rubenstein reiterated his interest in Canada and suggested many PEU's would go public. He conveniently forgot about Carlyle Capital Corporation, pension capital calls and the PEU's numerous bankruptcies in this talk.

Thursday, March 18, 2010

Vought Aircraft Loves Texas Congressmen

Vought Aircraft's PAC donated to 14 incumbent members of the House of Representatives thus far in 2010. Seven or 50% are from Texas. Of $33,500 in House member campaign donations, $23,000 or nearly 70% went to Texas leaders. Why would Vought tilt the donation field so heavily toward the Lone Star state? Is it the C-17 or something else?

2010 is the year Vought Aircraft has to make good on its Texas promises. In 2004 Governor Rick Perry gave Vought $35 million in Texas Enterprise Funds for a promised 3,000 new jobs. Vought's employment numbers declined over the five year period, such that Rick Perry gave $1 million per job lost. Perry made clear his intentions not to act on citizens behalf, by altering the contract with Vought and another Carlyle Group affiliate, Authentix.

With the Governor unwilling to make public his new decrees, federal legislators could be a resource for concerned citizens. Who will Congressmen pay more attention to, a letter writing constituent or a $5,000 donor? The Carlyle Group and Vought clearly know the answer.

I've written leaders, including Congressman Mike Conaway on this issue for years. He received $2,000 from Vought in 2010, $3,000 in 2008, and $1,000 in 2006. You can deduce his response.

Wednesday, March 17, 2010

Volcker Rule to Disappear in Reform Bill

CNBC's Steve Liesman reported the Volcker Rule would not last as the Senate considers financial reform. What is it? BusinessWeek states:

The rule is named after former Federal Reserve Chairman Paul Volcker, now an Obama adviser who has said banks supported by federal deposit insurance shouldn’t be allowed to engage in proprietary trading or own hedge funds or private-equity firms.
If that falls, Chris Dodd's bill is a uniform free pass for private equity underwriters (PEU's). The Obama White House continues catering to the big money boys.

Tuesday, March 16, 2010

Feds Watched Lehman's Shenanigans before Implosion

Lehman housed New York Fed and SEC officials for six months prior to the firm's epic fall. NYT/CNBC reported:

“Even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities,” Yves Smith, the author of “ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism,” wrote on her blog last week. “Its game-playing was in full view.”
Government officials and accounting firm Ernst & Young signed off on virtually everything Lehman did during that period. So much for these two looking after the public trust.

I looked at Lehman's SEC filings the week of its implosion, writing Derivatives + Off Balance Sheet Items = Overnight Failure. Who knew financial regulators and accountants approved it all? Hank Paulson and Tim Geithner shouldn't have been the least bit surprised.

Having the Fed as a systemic risk regulator? Not too reassuring.

Update: Senator Chris Dodd wants a criminal investigation into Lehman's accounting practices. This is patently laughable given the SEC's presence in Lehman for six months before its implosion and widespread use of off balance sheet items. Don't forget Congress bullying FASB's Chief Accountant to lessen fair value standards or President Obama's "moving forward" position on any shenanigans or fraud that caused the meltdown.

Monday, March 15, 2010

Senator Chris Dodd's PEU Joke

"Beware the ides of March," the day Senator Chris Dodd introduced his Chairman's Mark on financial reform. The bill says little about private equity underwriters (PEU's) in its 1,336 pages. Private equity was mentioned a handful of times. On page 378 it states:

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3) is amended by adding at the end the following:
‘‘(1) IN GENERAL.—Except as provided in this subsection, no investment adviser shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund or funds.
‘‘(2) MAINTENANCE OF RECORDS AND ACCESS BY COMMISSION.—Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules— ‘‘(B) to define the term ‘private equity fund’ for purposes of this subsection.’’
Page 381 authorizes a study for private fund self regulation

SEC. 414. GAO STUDY ON SELF-REGULATORY ORGANIZATION FOR PRIVATE FUNDS. The Comptroller General of the United States shall conduct a study of the feasibility of forming a self-regulatory organization to oversee private funds, private equity funds, and venture capital funds, and shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 1 year after the date of enactment of this Act.

Page 476 defines private equity in relation to restrictions on capital market activity.

(a) DEFINITIONS.—In this section— (1) the terms ‘‘hedge fund’’ and ‘‘private equity fund’’ mean a company or other entity that is exempt from registration as an investment company pursuant to section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) or 80a-3(c)(7)), or a similar fund, as jointly determined by the appropriate Federal banking agencies; (3) the term ‘‘sponsoring’’, when used with respect to a hedge fund or private equity fund, means— (A) serving as a general partner, managing member, or trustee of the fund; (B) in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund; or (C) sharing with the fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.

Pages 479-480 prohibit bank holding companies and deposit insured institutions from having private equity or hedge funds. (This provision may not last according to CNBC's Steve Liesman)

(c) PROHIBITION ON SPONSORING AND INVESTING IN HEDGE FUNDS AND PRIVATE EQUITY FUNDS.— (1) IN GENERAL.—Except as provided in paragraph (2), and subject to the recommendations and modifications of the Council under subsection (g), the appropriate Federal banking agencies shall, through a rule making under subsection (g), jointly prohibit an insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.), or any subsidiary of such institution or company, from sponsoring or investing in a hedge fund or a private equity fund.

Transactions between banks and their hedge fund or PE divisions won't be backstopped by the taxpayer (pages 481-482):

(e) LIMITATIONS ON RELATIONSHIPS WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.— (1) COVERED TRANSACTIONS.—An insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.), and any subsidiary of such institution or company that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund may not enter into a covered transaction, as defined in section 23A of the Federal Reserve Act (12 U.S.C. 371c) with such hedge fund or private equity fund.

The very last mention comes on page 482.

(2) AFFILIATION.—An insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.), and any subsidiary of such institution or company that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) as if such institution, company, or subsidiary were a member bank and such hedge fund or private equity fund were an affiliate.

Here's my take. PEU's have six months after financial reform passes to influence the definition of private equity, even mobilize activists. They have a year pass while the GAO studies PEU "self regulation." Funny, how the media missed this. PEU customers haven't.

Banks won't segregate their private equity divisions until the definition comes in, if then. Should something bad happen in the meantime, it might be comforting to know deposit insurance won't cover their backsides. At least until I recall how AIG, Fannie Mae and Freddie Mac got billions outside the deposit insurance system.

Add CALPERS $2.8 billion in private equity capital calls, $681 million from The Carlyle Group, and I get a little more nervous. Pensions have over $140 billion invested in PEU's. Should "the risk boys" roll unloaded dice and lose big, pensions could fail. Guess where insolvent pensions land? In the taxpayer pocket.

Senator Chris Dodd and his bipartisan friends gave PEU's a virtual free pass. This was predictable given their bipartisan political connections, red, white and blue. Might retiring Chris Dodd be laughing his way to a new job?

Update: Senator Dodd's Chief Counsel bought financial stocks during the meltdown. 

Update 3-22-15:  Carlyle Group co-founder David Rubenstein stated in a 2013 Yale interview:  Dodd Frank "more or less didn't do anything to private equity ."

Thursday, March 11, 2010

Rubenstein Ticker

Forbes released their list of world billionaires, populated by numerous private equity underwriters (PEU's). David Rubenstein made the list. His 2010 net worth is $2.5 billion. That happened to be his net worth in 2007, when Rubenstein first stormed the list. Forbes' data shows:

Rubenstein's Net Worth:
2007 $2.5 billion
2008 $2.7 billion
2009 $1.4 billion
2010 $2.5 billion

Has your net worth recovered in similar fashion?

It's been a heck of a decade for Rubenstein and The Carlyle Group. They managed $5.8 billion when Texas Governor George W. Bush ran for President. Bush served on the board of Carlyle affiliate CaterAir in the 1990's. The Carlyle Group achieved stratospheric growth during the Bush years, reaching $91.5 billion in managed assets.

When the bubble burst, heavily leveraged affiliates imploded. It started with two canaries, Carlyle Capital Corporation and hedge fund BlueWave Partners. Carlyle sashayed away from these implosions, but the carnage continued. Carlyle bankruptcies include:

Carlyle Capital Corporation
BlueWave Partners
Hawaiian Telecom
IMO Carwash
Stallion Oilfield Services
Verari Systems
Oriental Trading
Moody's believes more are at risk, including:

Allison Transmissions

American Achievement-rated selective default
Freescale Semiconductor

Frontier Drilling

Harrah's-(not credited to Carlyle in the report)
HD Supply
LifeCare Holdings

PQ Corporation

Sequa Corporation
Synagro Technologies
TSI Acquisitions (Titan Specialties)

UCI Holdco (United Components)

Veyance Technologies
One might expect this record and Carlyle's $681 million capital call to CALPERS in 2008 to add up to systemic risk. Sorry.

Yet, Rubenstein's personal portfolio made a resounding comeback. How much came from the taxpayer? Carlyle affiliate Boston Private Financial Holdings received $153 million in TARP funds? Unlike many banks, they are yet to return all the money. Carlyle invested in BankUnited, a recipient of $4.9 billion in FDIC subsidies. A U.S. agency loaned $130 million to Carlyle's Repco Home Finance to support mortgage lending in India.

With direct government help and insider political connections, how much higher will David Rubenstein's net worth grow? It depends on how mean and greedy he is. If his Blue Duck Tavern dining partner is any indication...

Update: Monica Conyers, wife of Rep. John Conyers, received a three year jail sentence for accepting bribes from The Carlyle Group's Synagro Technologies. This stain hasn't hurt Carlyle's success in landing other infrastructure projects.

Update 6-30-11:  I shifted Oriental Trading from distressed to bankrupt

Wednesday, March 10, 2010

General Harding: PEU Partner

General Robert Harding is the new nominee for head of the Transportation Security Administration. He headed his own security firm, Harding Security Associates (HSA), which does work in the Intelligence and Defense communities. The General's firm, started in 2003, has small business, minority owned and disabled veteran owned designations. HSA partnered with at least two Carlyle affiliates since its inception, QinetiQ and Booz, Allen, Hamilton.

The General announced he would sell his firm to Six3 Systems in June 2009. Six3 Systems was founded in April 2009 in partnership with GTCR Golder Rauner, LLC. Obama's Chief of Staff Rahm Emanuel has strong ties to GTCR from his investment banking days. The press release regarding the acquisition of HSA provided the following descriptions:

About Six3 Systems
Six3 Systems, headquartered in Fairfax, Virginia, is a company focused on acquiring government services providers with a focus on national security.

About GTCR
Founded in 1980, GTCR Golder Rauner, LLC is a private equity investment firm and long-term strategic partner for outstanding management teams. The Chicago-based firm pioneered the investment strategy of identifying and partnering with exceptional executives to acquire and build companies through a combination of acquisitions and strong internal growth. GTCR currently manages more than $8 billion of equity capital invested in a wide range of companies and industries.

The parties commented on the deal. "Since we announced the formation of Six3, we have actively targeted providers of specialized services in high-growth areas within the defense budget. We believe HSA fits squarely within this strategy,” added GTCR Principal Craig Bondy. “GTCR and Six3's investment in HSA is an excellent example of our partnering with an industry-leading executive and pursuing strategic acquisitions."

“I am very pleased to have Harding Security Associates join forces with Six3 Systems,” commented Major General Robert A. Harding, USA (Ret.), Chief Executive Officer of HSA. “I believe this acquisition will provide enhanced career opportunities for our people while continuing our track record of outstanding service and support to our customers.”

How did the General benefit from the sale, cash, Six3 equity or a combination? Did HSA keep their minority-owned and disabled vet designations after the sale to GTCR Golder Rauner?
How might General Harding send work to his old firm as TSA Chief? Harding Security is at the forefront of “biometric enabled intelligence analysis.” Is TSA going biometric?
Six3 Systems didn’t stop with the purchase of Harding Security. It added BIT Systems, an intelligence, surveillance, and reconnaissance (ISR) company.
Six3 claims a Cyber Security niche. It’s a sweet spot to be in with the heightened emphasis on cyber defense, as well as offensive capabilities.
Should General Harding have a stake in Six3 Systems, he could look after his old employees in his new role. The Government-Industrial Monstrosity, Eisenhower’s MIC on steroids, remains alive and well.
Given Homeland Security monitored social networking sites during the Vancouver Winter Olympics, Big Brother could be here. Only General Harding knows if Six3 Systems had a role in that peek into social posts and tweets. The public knows TSA wants to look into the general public’s briefs and panties. It gives new meaning to generals and privates.
Update: This post originally appeared on Economic Policy Journal. Rumor suggests it was popular with DOD, DHS & NATO. Who knew PEU Report had fans in government ranks?
Update 2: The Pentagon investigates spying allegations against International Media Ventures, a military contractor in Afghanistan. IMV used layers of subcontractors, some with special forces trained personnel. Why would the Pentagon make this public now? Is the focus on Michael Furlong a look away from General Harding's outfit? Why does retired military man Furlong not have his rank in the piece? Furlong headed up Pentagon PSYOPS, served in the Air Force's Space Policy Office and worked for SAIC and Booz, Allen, Hamilton. I smell a PEU diversion.
Update 3: General Harding withdrew his nomination for TSA Chief

Update 4-26-12:  Six3 Systems purchased Ticom Geomatics, a provider of geolocation and intelligence, surveillance and reconnaissance services for the defense and intelligence industries.