Hertz Bad Dream: PEU Legacy?

Consider that Hertz withdrew guidance for its 2014 financial performance and will restate financials for 2011 and revise those for 2012 and 2103.  This is huge news for the former private equity affiliate, controlled until 2011 by The Carlyle Group, Clayton-Dubilier-Rice and Merrill Lynch.

How did executive incentive pay impact confessed "accounting errors" the last three years?

In June, the company said it needed to review and correct financial statements from the last three years because an audit had uncovered accounting errors. Earlier this month, Hertz delayed filing its second-quarter results because of that review.

Hertz ceased to be PEU controlled on March 21, 2011 but that left little time for a different board slate in the April 6, 2011 Def-14a proxy statement.  Clearly the Hertz caravan rolled through 2011 with significant PEU momentum.

Hertz 2011 Definitive Proxy Statement dealt with restated financials and its potential impact on executive incentive pay:

Effective as of January 1, 2010, our Board approved an amended and restated Standards of Business Conduct applicable to our employees, including our named executive officers, on a prospective basis, in order to include a "claw back" policy for all executive officer annual incentive, long-term incentive, equity-based awards and other performance-based compensation arrangements. Specifically, a repayment obligation is triggered by an award of compensation based on achievement of financial results that were the subject of a restatement, if the Compensation, Nominating and Governance Committee determines that the executive officer's gross negligence, fraud or misconduct caused or contributed to the need for the restatement and the need for a restatement is identified within three years after the first public issuance or filing of financial statements. The Compensation, Nominating and Governance Committee retains discretion as to implementation and interpretation of all matters relating to the "claw back." In addition, Section 304 of the Sarbanes-Oxley Act of 2002 provides for the forfeiture of certain bonuses and profits by our CEO and CFO in connection with certain accounting restatements. In 2011, these "claw back" policies will likely be revised, as necessary, to reflect the SEC's rules promulgated under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

How much is there to potentially clawback?

Executives earned over $25 million as a group for 2011.  It's rare any C-suite exaggerators are asked to pay funds back.

I wonder how much Carlyle et al made in later equity sales based on fudged finances.  (Goldman Sachs purchased 50 million shares in March 2011 and JP Morgan bought another 50 million shares in December 2012.)  That's what should be clawed back.

Hertz was PEU led and directed through 2011.  I imagine the culture of equity optimization stuck through the next few years.

Lying, cheating and stealing to get the prize is a core part of extrinsic motivation schemes.  It will be interesting to hear more of the "accounting error" story, however I don't expect any investigating firm to honestly state behaviors or causes.  Covering for the board room boys garners much more future business than being truthful with the public or shareholders.

Update 8-20-14:  Carl Icahn announced his increased stake in Hertz. Forbes reported "Icahn said he intends to have discussions with representatives of Hertz’s board of directors about “accounting issues, operational failures, underperformance relative to its peers” and “lack of confidence in management.” 

PEU Assets Hit $7.4 Trillion

FINalternatives reported:

Hedge funds registered with U.S. regulators managed $8.9 trillion at the end of May, the Securities and Exchange Commission said. That amounts to a 22% increase—or $1.6 trillion—from just a year earlier.

Private-equity firms grew even more, with assets rising 23% to $7.4 trillion.

Which PEU will hit $1 trillion in AUM first? 

Carlyle Targets Treasury

The headline brought to mind The Carlyle Group's Boston Private taking $153 million from Treasury's TARP program.  However this Treasury is an Australian company with global wine holdings.  Brands include 19 Crimes, Sledgehammer, Squealing Pig, Black Grape Society and Fifth Leg.

Two other PEU's are in the running for Treasury Wine Estates.  KKR and TPG have bid on the company with a bland name but distinctive product offerings.  Which PEU in the Greed/Leverage Society will win?

Billionaire "Just Us"!

One billionaire got his bribery charge dropped by bribing the legal system, while another got to keep his good name, despite being the middleman in a longstanding bribery scheme by Alcoa.

The Guardian reported:

The Formula One boss, Bernie Ecclestone, is to make a $100m (£60m) payment to end his trial on bribery charges, a district court in Munich has confirmed.

This echoes "settlements" by The Carlyle Group and Riverstone on hiring middlemen to push pensions to invest Carlyle's way. 

The United States Justice Department only referred to Alcoa bagman as "Consultant A."  Bloomberg reported:

Not named and not charged in the case was the person who made those payments, whom the Justice Department identified in court only as “Consultant A.” 

Bloomberg believes this to be billionaire Victor Dahdaleh, a London-based businessman.

“In the Middle East, there is a concept called wasta -- ‘connectedness’ -- a trust network that these intermediaries are part of,” says Bishara, whose research focuses on Middle Eastern business ethics. “You traditionally use middlemen to avoid accountability and transparency, especially with this kind of large corporation, such as Alcoa. You use intermediaries to keep everything at arm’s length.” 

At arm's length used to mean an uninfluenced deal, struck at an ethical distance.  How does one bribe someone at arm's length?  It happens in a world redefined by the greed and power boys. 

This "Just Us" crew delegates responsibility for ethics to underlings.

"Managers (not executives) are the day-to-day interface with employees and the carriers of culture.  Unless they are effectively and properly trained, organizations will struggle to meet their top training objective of building an ethical culture.”

The buck stops nowhere, as evidenced by Consultant A.  The system, driven by money, is insular and protective of its own.

Ack!: Pershing Square IPO Looms

CNN Money reported, i.e. gave billionaire investor Bill Ackman free media space to sell his latest venture:

In a letter to investors Wednesday, Ackman said he plans to take one of his funds -- Pershing Square Holdings -- public later this year. 

That means regular people across America could get a stake in his fund that has only been open to the wealthy and connected.  

Regular people, those with 36% lower net worth the last decade?  Thbbft!  Only as the last mark.  The billionaire race to the top requires federal government giveaways and equity monetizations.

Dukes Join 'Em: PEUKES 'a coming

Bloomberg reported:

Issuance of securities linked to offbeat collateral has been rising as central banks around the world suppress interest rates, pushing investors toward riskier deals with higher yields. Sales of esoteric asset-backed deals, which encompass transactions that aren’t tied to traditional consumer lending, reached a record $30 billion in 2013.

Moonshiners in Southwest Virginia issued debt where interest payments vary based on the proof of alcohol they distill.  J.D. "Uncle Jesse" Morgan brought the tax free securitization to market through his partnership with PEU Boss Hogg.  Uncle Jesse decided to join Boss Hogg in his get rich quick schemes.

Uncle Jesse said "I initially gagged on the deal, but everyone's gunning for return and their no faster way to make green than to join the get rich quick boys.  They're going to give me millions and all I have to do is promise to pay it back.  Ha!  Boss Hogg gave me his word that he'll stand 100 proof behind our Series B debt.  After some of our 100 proof he won't be standing."     

This might be the next movie out of La la land.  Everyone's intent on making private equity the savior of our planet, Africa included. 

Disclosure:  Other than the Bloomberg quotation this piece is parody.

PEU La La Times

PEU La La, PEU La La...  It's the beat of our times and that of the Los Angeles Times, now run by a former private equity underwriter with the Blackstone Group and Evercore Partners co-founder.  If PECKER and The Carlyle Group can't improve private equity's image, then PEU La La might.  If they can sell to Hollywood, big entertainment can foist PEU memes onto to the unsuspecting public. 

Governors with Aspirations Need PEU Funding?

Bloomberg reported on a Republican led legal challenge on banned donations from firms that manage state pension money or public funds.

The SEC’s rule took effect in 2011 after disclosures that investment advisers were raising money for politicians who in turn helped them win business from state pension funds.

In response, the SEC decided that if a financial firm or certain of its executives make more than a nominal campaign donation to a state official with a say over contracts for investment plans, the firm should be barred from managing the state’s assets for two years. The regulation covers current office-holders and candidates in state races as well as state officials running for a federal office.

Many banks, hedge funds and private equity firms, which profit from their work for state pension and college savings plans, decided to forgo giving to any state officials to avoid the possible consequences.

Two Republican groups believe the need to raise funds outweighs rules over ethical behavior

“We see this as something that has been a great detriment to our ability to help out candidates,” said Jason Weingartner, executive director of the New York Republican State Committee, which brought the case along with the Tennessee Republican Party. “This is something that needs to change.”

The legal challenge comes amid a general loosening of U.S. campaign finance rules. Over the past seven years, U.S. Supreme Court decisions have steadily eroded limits on contributions. Meanwhile the Federal Election Commission hasn’t updated its regulations. Together, those developments have opened new avenues for corporations to support candidates.

If the SEC ban were eliminated, Wall Street firms and their employees would be an even larger potential source of campaign cash. 

Yes, they would.  International Business Times reported:

With the $3 trillion public pension system controlled by elected officials generating billions of dollars worth of annual management fees for Wall Street, Securities and Exchange Commission regulators originally passed the rule to make sure retirees' money wasn't being handed out based on politicians' desire to pay back their campaign donors.

“Elected officials who allow political contributions to play a role in the management of these assets and who use these assets to reward contributors violate the public trust,” says the preamble of the rule, which restricts not only campaign donations directly to state officials, but also contributions to political parties.

Public interest be damned.  PEU interest is all that matters.  Politicians Red and Blue love PEU. 

The last two sitting governors elected President were Arkansas Governor Bill Clinton and Texas Governor George W. Bush.  They governed from the White House while private equity rose from meager beginnings, amply enabling their meteoric rise in numerous ways.  FT reported:

In the mid-1990s, private equity paid just 2 or 3 per cent of all investment banking fees.  Private equity companies have paid a record 32 per cent of US investment banking fees so far this year,

A disturbing, dark symbiosis arose between campaign funders and federal budgeteers that both parties want reinstated.  Republicans lead the way on the lawsuit, but Clinton Democrats are cheering mightily.  Frankly, these folks are shameless.

Don't stand behind any governors aspiring to be President or Vice President.  You'll likely encounter an offensive PEU. 

Eric Cantor House Majority PEUtz

FinAlternatives reported:

According to Politico, Eric Cantor (R-Va) is leaning towards Wall Street over K Street and taking most seriously opportunities in banking or alternative investments. The website notes that since his shocking primary defeat, Cantor has spent most of his summer in the Hamptons, where he’s likely to have been rubbing shoulders with the financial elite. Cantor has long been a close ally of Wall Street on Capitol Hill. 

That's not Hampton, Virginia.

The majority of U.S. elected officials support their PEU sponsors, including the White House and Congress.   Water carrier Eric Cantor kept preferred carried interest taxation in place for the last decade, as Congress defeated repeated challenges.   

So Eric Cantor will join Evan Bayh (Apollo), Bill Frist (Cressey), Joe Lieberman (Victory Park), Tim Geithner & Phil Gramm (Warburg Pincus), David Petraeus & Ken Mehlman (KKR), John Snow & Dan Quayle (Cerberus), Mac McLarty & Charles Rossotti (Carlyle Group).  Bill Clinton PEU'd twice, once with Yucaipa and another with Teneo as did Al Gore (Kleiner Perkins).

Eric Cantor may soon be a PEU.  I view the lot as greedy putzes.  

The CV Veteran: Instructive for Our Time

Every story must be told in its time.  Here is an update to The Little Match Girl, courtesy of The Guardian.

David Clapson was found dead last year after his benefits were stopped on the grounds that he wasn't taking the search for work seriously. He had an empty stomach, and just £3.44 to his name. Now thousands of other claimants are being left in similarly dire straits by tough new welfare sanctions.

We know that David Clapson was actively searching for work when he died because a pile of CVs he had just printed out was found a few metres from his body. The last time he spoke to his sister, a few days before he died, he told her he was waiting to hear back about an application he had made to the supermarket chain Lidl.

But officials at the Jobcentre believed he was not taking his search for work seriously enough, and early last July, they sanctioned him – cutting off his benefit payments entirely, as a punishment for his failure to attend two appointments.

Clapson, 59, who had diabetes, died in his flat in Stevenage on 20 July 2013, from diabetic ketoacidosis (caused by an acute lack of insulin). When Gill Thompson, his younger sister, discovered his body, she found his electricity had been cut off (meaning that the fridge where he kept his insulin was no longer working). There was very little left to eat in the flat – six tea bags, an out-of-date tin of sardines and a can of tomato soup. His pay-as-you-go mobile phone had just 5p credit left on it and he had only £3.44 in his bank account. The autopsy notes reveal that his stomach was empty.

 Consider the man and his life's arc:

She (the sister who discovered his body) is at pains to describe her brother as someone who had worked for 29 years, anxious to stress that he should not be seen as "scrounger". He spent five years in the army, two of them serving in Belfast, 16 years working for BT and another eight at other companies before he stopped working to care for their mother who had developed dementia.

Soldier, longtime worker and family caregiver, yet these facets mattered not in a system that required compliance and performance.  

The Little Match Girl died in a dehumanized system, as did The CV Veteran.

Note that financial securitizations are non-taxed and private equity underwriters (PEU) keep their preferred carried interest taxation which make their firms virtual nonprofits.  Obviously, elected leaders believe these group's have earned and deserve the government's help.

I have seen so many people -- particularly those in their 50s - 70s -- taken apart by what has happened in their industry as greed has hollowed out the economy. These are people took pride in their jobs and held themselves to this invisible standard that we all just took for granted, but is being wiped out.

Others, like the people mentioned above, not so much.

(Cross posted from Ari's Freedom Switch)

PEU Bayh to Cover for CIA

Ex-Senator Evan Bayh will head an inquiry into CIA disciplinary action or reforms needed as a result of the CIA spying on members of Congress.  Note that Bayh is already a member of the CIA advisory board.  Insiders, the kind that don't criticize one another, get these kind of appointments.

Compliant elected leaders make hay in retirement.  Evan Bayh is a Senior Advisor to Apollo Global Management, a private equity underwriter (PEU).

As partner with law/lobbying firm McGuire Woods, Bayh provides strategic advice to the firms largest clients, one of which is Apollo Group, the monster for-profit educator part owned by Apollo Global Management.  

Bayh sits on five corporate boards, Berry Plastics, Fifth Third Bank, McGraw-Hill Education, Marathon Petroleum, and RLJ Lodging Trust.  RLJ is Blue team backer Robert L. Johnson, founder of BET and Carlyle Group joint venture partner.

Bayh served on the Senate's Select Committee on Intelligence from 2001 to 2010.  When he was appointed to the CIA Advisory Board is unclear.  A search of the CIA's website produced no hits on "Evan Bayh."

President Obama's Intelligence boards don't show Evan's name.

Heck, even a search of Bayh's name on Apollo Global's website produced no results (see picture at top of this piece).

NYT wrote about the period of time in which these offenses occurred.

Committee Democrats have spent more than five years working on a report about the C.I.A.’s detention and interrogation program during the Bush administration, which employed brutal interrogation methods like waterboarding. 

It's highly likely Bayh was a sitting Senator when the CIA rooted through Congressional computers set up specifically for this investigation.  Evan Bayh has a standing conflict of interest as a directly involved party in the case.  But who better to hide the truth, ask people to move along, say nothing to see here. I expect the most Bayh and company to do is to delegate blame to underlings.

The wording in news reports is revealing.  Even before the report has been released the public gets words of minimization and obfuscation:

According to an unclassified summary of the inspector general's report obtained by Reuters, he found that five agency employees, two lawyers and three information technology staffers, "improperly accessed" a data network Senate investigators were using to pursue their inquiry. 

Here's the frame for no one being charged in potentially the biggest case since Watergate.

However, the inspector general's summary said it turned out that the "factual basis" for the criminal referral the agency sent to the Justice Department "was not supported" because the lawyer making the referral "had been provided inaccurate information."  

This is the kind of horse hockey that causes citizens to view our leaders as fools. We're the fools if we buy their fictions and cover-up.  Ex-Senator Evan Bayh will give us a story and it will be one listened to on the inside. At least Larry Summers will find it a scintillating tale.

Reverend Martin Luther King, Jr. had a dream.  Summers and Bayh had a choice.  Their dreams were to raise themselves up by protecting their ilk.  The rest be damned.

Apollo to Bet Against PEU Affiliate Debt

FinAlternatives reported:

Apollo Global Management is seeking investors for a new junk-bond hedge fund it launched last year.  The fund bets against junk-rated U.S. bonds.

PEU Apollo's new fund will bet against bonds issued by PEU affiliates.  PEU's issued trillions in junk debt courtesy of the Federal Reserve, which prevented an interest rate reset to adequately handle risk after the 2008 financial crisis. 

PEU affiliate debt used to fund "sponsor dividends" totaled $130.4 billion the last two years.  How will such balance sheet stress impact corporate survivability in the next major downturn? 

ValueWalk added on the Fed's role in this issue:

Bond investors have benefited from an almost uninterrupted 30-year bull market as the Fed fought secular inflation, but the next couple of years could be the short traders turn to shine.

Private equity loves market dislocation, ones they anticipate or others they or their political sponsors create.