Thursday, May 28, 2015

Hastert Resigns from CME for Paying to Hide His Bad Behavior

Eight days after being re-elected to the Board of the CME Group Former Speaker of the House Dennis Hastert resigned.  The FBI charged Hastert for concealing payments to someone he knew to hide prior acts by Hastert.  The misconduct was not described in the news piece:

According to the indictment, Hastert met with the person several times around 2010 and discussed past misconduct by the former lawmaker. Eventually, Hastert agreed to pay the person $3.5 million in compensation to conceal the misconduct, the indictment said. 

Shortly afterward, Hastert began making cash payments to the individual, according to the indictment.
That's serious money for "misconduct."  I hate to think what someone might have gotten if they were the victim of a crime by Dennis Hastert.  

The Illinois Republican, who left office in 2007, was charged with structuring the withdrawal of $952,000 in cash in order to evade the requirement that banks report cash transactions over $10,000, and lying to the FBI about his withdrawals.
Hastert served on CME Group's Board since 2008  He's also on the board of Rex American Resources Group.  Consider what Rex's latest proxy statement said about Hastert:
Mr. Hastert is currently also a director of CME Group, Inc., a derivatives marketplace that includes the Chicago Merchantile Exchange (CME), Board of Trade of the City of Chicago (CBOT), New York Merchantile Exchange (NYMEX) and Commodity Exchange (COMEX). Mr. Hastert is Chairman of the Compensation Committee and serves on the Governance, Nominating and Strategic Steering Committees of CME Group. Mr. Hastert’s prior government service, government leadership roles and experience in commodities markets will assist the Board and management in governmental and regulatory matters affecting our business. 
 I'll venture Dennis Hastert treated someone like a commodity and that's why he secretly agreed to pay $3.5 million.  It seems fitting that a key leader of a major financial institution would be so ethically tainted.  

Bermuda's Tax Loopholes Enticing for Walkers

Bloomberg reported:

Walkers Global doesn’t offer English or U.S. legal services, but the 400-lawyer international offshore law firm with roots in Grand Cayman, counts companies from those countries as its clients, including Blackstone, The Carlyle Group, Merrill Lynch and others.

This month, it announced two expansions: Opening an office in Bermuda; and the launch of Walker Professional Services, which will provide companies in Cayman with a registered office, registered agents, corporate secretarial services and other services. It hopes to launch Walker Professional Services by mid-June, marking its re-entrance to what it calls “the corporate and fiduciary services business,” after selling a similar business in 2012.
Carlyle has hundreds of Cayman Islands subsidiaries.  Walkers spread internationally since its Cayman founding in 1964.  Both Walkers and Carlyle make huge money avoiding U.S. corporate taxes.  It's the water in which they swim and drive their yachts.  

Wednesday, May 27, 2015

Private Equity Targets Family Wealth

Australia's BrisbaneTimes reported:

Private equity firms want wealthy families for more than just their money.

Family offices bring expertise in buying companies, usually have fewer regulatory restrictions and can take bigger risks than pensions or endowments, Michael Arpey, a managing director at Carlyle who oversees fundraising, said in an interview.

Some private equity firms are enticing family offices to invest with the promise of co-investment opportunities. That's when families invest alongside the firms rather than through a pooled vehicle, and are charged reduced or no fees.

The story highlights efforts by The Carlyle Group, KKR, Blackstone and Blackrock to recruit wealthy family offices for investment.

"There's been an explosion of family offices," Feurtado said. "It's a very, very vibrant and growing industry."
As worker's income stagnated, wealthy families' assets exploded. 

There are an estimated 4000 family offices globally, according to London-based researcher Campden Wealth.  
Private equity underwriters follow big money.  They trot out their heavy hitters to entice wealthy family offices to invest.  KKR had General David Petraeus meet with a middleman for several rich families. 

Family offices and their advisers manage an estimated $US4 trillion.
 And the rest of the world has how much?

Feds Push No Raise Meme

Bloomberg reported:

The Fed asked non-self-employed workers whether they'd prefer to work more, less, or the same amount that they now work if their hourly wage was unchanged. The goal of the question was to help gauge the amount of underemployment in the economy, according to the report.

The Fed signaled corporations they can continue with their lid on wage increases:

Still, if a large enough share of people are willing to work longer hours at their current rate, that limits the pressure employers feel to raise wages. Average hourly earnings were up just 2.2 percent in the year ended April.
A Jeffries LLC money manager offered:

"Until workers perceive that there are more opportunities available that offer higher wages, they will be content to work for the same rate rather than take a risk for more."  

I saw no question about worker contentment with current wages.  In addition, there were no questions on risks employees might take to increase their income.   Chairwoman Yellen, signal delivered.

Higher Learning Bows at PEU Feet

Rennselaer Polytechnic Institute President Dr. Shirley Ann Jackson wrote on HuffPo:

During the course of this month, millions of American students will graduate from institutions of higher learning, only to enter a world beset by challenges that threaten the stability of societies around the globe: new geopolitical tensions and the rise of radical non-state actors; new forms of cyber-aggression; a changing climate; health-related challenges that include infectious diseases such as Ebola; the global competition for natural resources; and growing income inequality in developed economies, as well as inequalities between nations.

Tackling these interconnected global challenges requires a new type of leader who themselves embody a new type of resilience.

This vision of preparing and challenging the next generation of leaders lies at the core of our mission, and annual Commencement exercises present an ideal opportunity to both assess our progress and - more importantly - continue the conversation with our community. In that spirit, each year at Commencement we invite a group of leaders such as Admiral Howard to join us and help our students and faculty think through the hard problems of the day in a lively panel conversation we call the President's Colloquy. This year, Adm. Howard will be joined by three other leaders who have also demonstrated remarkable resilience in their own careers and lives: Award-winning filmmaker and scholar Dr. Henry Louis Gates Jr.; cybersecurity and technology policy visionary Craig Mundie, the former chief strategy officer at Microsoft; and financial industry pioneer and Carlyle Group co-founder David M. Rubenstein. 
Five years ago an ex-financial reporter wrote:

The Carlyle Group scares me more than anything I've ever seen on Wall Street. It seems to exist to corrupt politicians and it's hard to know who they even represent.
I watched a video interview of (David) Rubenstein and his arrogance is really beyond tolerance. He was going on about the debt ceiling problem and how there would need to be cuts in services and higher taxes. When the reporter asked him about tax on carried interest he turned really disdainful and said that this "only" amounted to $22 billion over some number of years and this was not serious money. Boy, nothing like everybody doing their small part to save the country from oblivion!
Dr. Jackson, you've invited the cause of growing income disparity in our country, mean and greedy leadership.  But that is the fishbowl you swim in:

Board of Directors -- Marathon Oil, FedEx Corporation, International Business Machines Corporation, Medtronic, Inc.and Public Service Enterprise Group Incorporated
Former Chairman of NYSE Group, Inc.
Former Director of AT&T, U.S. Steel, KeyCorp and NYSE Euronext 

Ms. Jackson has by far the most corporate board positions and director income (on President Obama;s Intelligence Oversight Board).  Also, four of the five public companies are global.  
She knows well the drive to the lowest global common denominator on worker pay/benefits, taxes and regulations.  That what Rubenstein and American branded corporations inflicted on the world the last two decades.  Resilience is a trait displayed by workers in far more instances than unbalanced management with its obsession on ever growing profits, massively better metrics, and compliance, the absurd legalization of every aspect of business.

Our new type of leader is rooted in our past and will be based on fairness, balance, ethics and an understanding of management theory, specifically the teachings of Dr. W. Edwards Deming.  He's not alive to attend, but many of disciples remain.  They should be at the table counterbalancing The Carlyle Group's meanness, greed and numerous ethics abuses.

The ex-financial reported commented on the impact of Carlyle and private equity underwriters (PEU):

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.
Resilient workers should also be represented.  Rubenstein is not the tonic our world needs from leaders.  His management theory and methods are toxic.

Update 5-29-15:  Rubenstein is getting an honorary degree from RPI.  His ilk continues to do quite well relative to everyone else.

Tuesday, May 26, 2015

Financial Crime Flashback Is Flashforward under Obama

President Obama wouldn't go after criminal behavior contributing to the financial crisis and that practice seems to apply to long term financial fraud by big banks.  NYT reported:

,,, nothing much has changed for the banks. And that means nothing much has changed for the public. There is no meaningful accountability in the plea deals and, by extension, no meaningful deterrence from future wrongdoing. 
Flashback to 2009 when the Obama team represented:

The task force of top federal officials will work with state and local authorities to pursue financial fraud cases stemming from the crash of the housing market and the Wall Street meltdown, administration officials said 

The Financial Fraud Enforcement Task Force will attack what Holder called "unscrupulous executives, Ponzi scheme operators and common criminals."
But Holder said the mandate of that task force wasn't broad enough to go after all the types of crimes involved with the financial crisis.
President Obama's sees no jailable crimes in a five year currency rigging scam, most of which occurred on his shift in office.  At least one SEC Commissioner protested the absurd decision as unconscionable. 

The Commission has granted:
  • Barclays its third WKSI waiver since 2007;
  • UBS its seventh WKSI waiver since 2008; 
  • JPMC its sixth WKSI waiver since 2008; and 
  • RBSG its third WKSI waiver since 2013.
 Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored.  It is not sufficient to look at each waiver request in a vacuum. 

Obama has a Government Corporate Monstrosity to protect and serve 

Update 11-18-18:  NYT Columnist Maureen Dowd wrote about President Obama's abdication from prosecuting financial fraud.

Saturday, May 23, 2015

Carlyle's Refinery Has 3rd Fire in 2015

Philadelphia Energy Solutions' refinery, a joint venture between Sunoco and The Carlyle Group, experienced its third fire this year.  As usual Carlyle's name did not make the banner screen.  Sunoco got full billing.  

Bakken oil is more volatile for shipping and pipelines.  It might also be more explosive in refining.

Tuesday, May 19, 2015

ETEORRA is Really Trade Promotion Authority

When leaders resort to deception it's time for citizens to be concerned.

Update 5-22-15:  Senate passed the bill giving President Obama the power to complete his trade pacts.  The NYT article never gave the name of the bill.

Sunday, May 17, 2015

Wesley Clark Joined Jeb Bush as InnoVida Consultant

Bloomberg reported on General Wesley Clark's numerous board seats and consulting arrangements.  One of those, InnoVida, took in Jeb Bush, first as a consultant and then a full fledged fiduciary board member.

Clark says he also sensed trouble at privately held InnoVida, whose product—a new type of building material—he once pitched to the president of Haiti. After further researching the company, Clark says he rejected an invitation to be on the board. InnoVida’s founder is serving a 12-year prison sentence for fraud. 
 Bloomberg left off the Jeb Bush connection.  Did Bloomberg extend a courtesy to Jeb whose InnoVida settlement included a non-disparagement clause? 

Consider InnoVida a portal into the Government-Corporate Monstrosity.  It's American branded but clearly global in nature.  As I've written many times, politicians Red and Blue love PEU.

How Management Produced Massive Toxic Coal Ash Spill

Charlotte Business Journal reported:

Duke Energy’s glaring failure leading to its massive coal-ash spill and other environmental violations is the company's repeated decision against conducting a $20,000 video pipe inspection at the Dan River Steam Station.
GE's Jeff Immelt, said in 2010, four years before Duke Energy's 39,000 ton toxic coal ash spill.:

We are at the end of a difficult generation of business leadership, and maybe leadership in general. Tough-mindedness, a good trait, was replaced by meanness and greed, both terrible traits.
Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together.
Consider what knowledgeable employees repeatedly recommended to Duke's management:

In May 2011, the engineers assigned to review coal-ash operations at the plant first recommended the video examination of the pipes. When they were overruled for budget reasons, the plant manager warned the person who made that decision that the inspection was necessary, that Duke did not know the condition of the pipes and that “if it failed there would be environmental issues,” Rangarajan said.
The same engineers made the same recommendation in 2012 and again were overruled
Thus, they were trained not to make the recommendation a third time.  Senior executives denied the request for money.

The decision was bounced around because of the corporate policy at Duke — which took many plant decisions away from engineers who knew the local operations. And it got tangled up in Duke's unexpectedly difficult merger with Progress Energy, which clearly absorbed a lot of corporate attention.

The final decision against running a camera through the pipes at Dan River in both 2011 and 2012 was made by the vice president at Duke in charge of plants that were closing during the merger and integration. 
Duke has declined to identify the person who made that decision, or those who advocated for the inspection, except by title.
Substitute ignorance and greed.  How much bonus money did this Vice President receive from 2011 to 2014?  That number is not included in Duke Energy's SEC filings, however Chief Financial Officer Lynn Good, the one who ensured budget performance, got nearly $1.85 million in non-equity performance awards and $3.5 million in stock awards from 2010-2012.  

Consider what Duke said about the merger in its 2011 10-K.  First up is fear of job loss:

Employee retention and recruitment may be particularly challenging prior to the completion of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite Duke Energy’s retention and recruiting efforts, key employees depart or fail to accept employment with Duke Energy because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, Duke Energy’s financial results could be affected. 
Second is the prime directive:  Money:

The pursuit of the merger and the preparation for the integration of Progress Energy into Duke Energy may place a significant burden on management and internal resources. The diversion of management attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could affect Duke Energy’s financial position, results of operations or cash flows. 
Duke Energy's 2012 Annual Report lists a Vice President who is no longer with the company:

Lee T. Mazzocchi -- Senior Vice President and Chief Integration and Innovation Officer
Charlotte Business Journal reported Mazzochi took this role in early 2011.  It's ironic the media source that interviewed him could not connect the dots.  An additional irony comes from Duke Energy receiving an award five months before the Dan River toxic coal ash deluge.

“Sustainability continues to be a priority for Duke Energy. It helps us create value throughout the company, and do business in ways that balance the interests of customers, shareholders and the environment,” said Lee Mazzocchi, senior vice president and chief integration and innovation officer. “The plans, decisions and actions of our 28,000 employees demonstrate our commitment and lead to our sustainability achievements.”
Mazzochi made the 2013 Annual Report photo but not the 2014 report.  Duke Energy had a year to explore the executive decision making chain that resulted in the massive coal ash spill.  They won't say who did it, but corporate priorities are the clear cause.

Changeover at the top occurred July 1, 2013 with the appointment of Lynn Good as President and CEO.

"I have a high degree of confidence in the strength of our company's leadership and dedicated employees." "I will work to ensure Duke Energy is positioned to continue its track record of outstanding customer service and operational and financial excellence," Good added.

Good, 54, has served as Duke Energy's executive vice president and chief financial officer since July 2009.
Good created the budget that overruled the inspection of the pipes.  The coal ash spill happened February 2014.  Fortune dinged Good's silent response to the event, but told other hero stories about her intelligence and decision making abilities.

"Suddenly, it was all about crisis management,” Good says. “It’s something that never should have happened. That’s not what Duke Energy is about.”
Three months after the spill Good spoke to MBA graduates at UNC.  She highlighted everyday heroes:

Every one of you has the capacity to be a courageous leader. And although there is no magic formula – for me, it is built on a sense of purpose, conviction to do the right thing, a call to action to shape your future, and a call to empower those around you.
Good's Duke Energy did none of those things in response to potentially heroic engineers.  Duke Energy's mean and greedy leaders spewed toxic coal ash into the Dan River, doing so under the guise of continuous improvement.  The Justice Department press release stated:

“Duke Energy's crimes reflect a breach of the public trust and a lack of stewardship for the natural resources belonging to all of the citizens of North Carolina,” said U.S. Attorney Thomas G. Walker for the Eastern District of North Carolina.  “The massive release at the Dan River coal ash basin revealed criminal misconduct throughout the state – conduct that will no longer be tolerated under the judgment imposed by the court today.”
Good rotated Lee Mazzocchi off the leadership team in time for the $102 million EPA settlement. Heroes tell the truth, accept responsibility and make things right.  This is not the case in the Dan River coal ash spew, not from Duke Energy or the EPA.  Duke Energy cleaned up a mere 7.7% of the spill, while the EPA defined coal ash as nonhazardous.

Frankly, it has the feel of misplace management priorities and bad leadership, signature aspects of private equity underwriters.  That is punctuated by another Duke Energy settlement of $146 million.  Bad faith is bad faith and Duke Energy will pay nearly $3.8 for its series of management misdeeds.

Tuesday, May 12, 2015

Health Care Fraud Perpetrated by PPACA Designers

Recall the role health insurers played in the design of President Obama's health reform, The Patient Protection and Affordable Care Act, abbreviated as PPACA.  One company discovered a multi-decade fraud employed by Blue Cross Blue Shield of Michigan.

It turns out that one of the reasons workers have been paying more for their coverage is allegedly a common practice among insurers:  charging their employer customers unlawful hidden fees.

The fees came to light when Hi-Lex Controls, an automotive technology company, took Blue Cross Blue Shield of Michigan (BCBSM) to court in 2013 after becoming suspicious that the company had been systematically cheating it over 19 years. After reviewing evidence in the case, a judge ordered that BCBSM stop charging the hidden fees and pay Hi-Lex $6.1 million.
This is the group President Obama's PEU health reformer Nancy-Ann DeParle embraced wholeheartedly in creating PPACA.  What did these long term cheats do to ensure their profitability at the expense of the "customer"?  They stole long before PPACA and likely rigged new features to ensure their profits. 

It's also one more case of healthcare fraud where no one goes to jail. 

Monday, May 11, 2015

Carlyle Co-founders Lose Two Senior Executives

The Carlyle Group lost co-President Michael Cavanaugh and Chief Financial Officer Adena Friedman, two leaders touted as Carlyle's future when hired for top positions.  Cavanaugh took the CFO job at Comcast while Friedman returned to NASDAQ as CEO.  Seeking Alpha reported:

Two of the group of five expected to be the next generation of Carlyle's leadership - and for whom Carlyle created an entire financial structure to retain them - have now left. 
Working for the DBD's must be a challenge, helping each one move up the billionaire lists.  Can they pay anyone enough to do that job?

Sunday, May 10, 2015

PEU Karma for Deals Gone Bad

Several private equity deals unraveled badly for investors.  Among these are Apollo Global Management's Caesars Entertainment, The Carlyle Group's Carlyle Capital Corporation and Energy Future Holdings, owned by KKR and TPG.  All three went bankrupt.

Bloomberg reported that bond holders are reluctant to buy deft from Apollo Global affiliates.

Apollo Global Management LLC is meeting with some of the bond market’s biggest investors to smooth over strained relationships amid accusations it has shortchanged creditors of some of its biggest corporate buyout.

The private-equity firm co-founded by Leon Black will travel to the offices of money managers who buy high-yield debt, seeking to persuade them that the bonds and loans issued by its companies are worthwhile investments.

A group of bondholders in a bankrupt unit of Caesars Entertainment Corp., the casino operator Apollo and TPG Capital took private for $30.7 billion in 2008, has claimed in lawsuits that the business was stripped of billions of dollars in assets before the Chapter 11 filing in January.
Dallas Morning News provided the latest twist on Energy Future Holdings bankruptcy proceedings.

A U.S. bankruptcy judge put Energy Future Holdings’ restructuring plan on hold Monday, giving creditors more time to work on an alternative strategy to conclude the Texas electricity giant’s $42 billion bankruptcy case.

The ruling comes a little more than a year into what is one of the largest bankruptcies in U.S. history, pitting some of Wall Street’s biggest names against each other. In 2007 private equity firms KKR & Co. and TPG paid $40 billion to take over the former TXU Corp. through a leveraged buyout, betting that Texas power prices were poised to rise. They were wrong. 
Carlyle Group's latest 10-K included an update on their legal troubles with the failure of Carlyle Capital Corporation, a highly leveraged mortgage backed security scheme.

The Guernsey liquidators who took control of CCC in March 2008 filed four suits on July 7, 2010 against Carlyle, certain of its affiliates and the former directors of CCC in the Delaware Chancery Court, the Royal Court of Guernsey, the Superior Court of the District of Columbia and the Supreme Court of New York, New York County (Carlyle Capital Corporation Limited v. Conway et al.) seeking $1.0 billion in damages. They allege that Carlyle and the CCC board of directors were negligent, grossly negligent or willfully mismanaged the CCC investment program and breached certain fiduciary duties allegedly owed to CCC and its shareholders. The liquidators further allege (among other things) that the directors and Carlyle put the interests of Carlyle ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing Carlyle’s reputation and its “brand” over the best interests of CCC.

The Court (Royal Court of Guernsey) has set the case schedule and trial is scheduled for the first available date after February 1, 2016.
Carlyle's insurers have been freed from covering any liability in a case where plaintiffs "accused Carlyle of falsely promising high returns with little risk, failing to warn about the fund’s dimming prospects and ignoring the threat posed by deteriorating market conditions."

The wheels of justice rotate slowly and stiffed creditors have options while they turn.  They don't have to buy PEU debt without a risk premium.

Saturday, May 9, 2015

Clintons Above Review: Therefore Unaccountable

Politico reported:

The foundation has also come under scrutiny for failing to clear all foreign government donations through an agreed-upon State Department vetting process when Hillary Clinton was secretary of state, and for failing to identify foreign government donations on tax returns.
President Obama's State Department took this position.

"The State Department has not and does not intend to initiate a formal review or to make a retroactive judgment about items that were not submitted during Secretary Clinton's tenure."
This is surprisingly similar to Obama's head in the sand position on fraud leading up the 2008 financial crisis.

The Clintons failed to live up to their proactive commitment and legal obligation, thus there will be no retroactive review.  Typical for the group that makes their own rules (like the Baron Class who wrote the Magna Carta).

Long ago I questioned the sources of Clinton Foundation cash.  I renamed the Clinton Global Initiative (CGI) as Conflicts of Global Interest.  Once upon a time the Clinton Foundation released donor names.

Frankly, it's difficult to comply with internal accounting controls and shovel fists full of cash to your friends.  The Foundation itself confessed to operational problems and making mistakesNYT reported:

The Clinton Foundation had become a sprawling concern, supervised by a rotating board of old Clinton hands, vulnerable to distraction and threatened by conflicts of interest. It ran multimillion-dollar deficits for several years, despite vast amounts of money flowing in. 

And concern was rising inside and outside the organization about Douglas J. Band, a onetime personal assistant to Mr. Clinton who had started a lucrative corporate consulting firm — which Mr. Clinton joined as a paid adviser — while overseeing the Clinton Global Initiative, the foundation’s glitzy annual gathering of chief executives, heads of state, and celebrities.
As for how the Clintons play consider this statement:

And efforts to insulate the foundation from potential conflicts have highlighted just how difficult it can be to disentangle the Clintons’ charity work from Mr. Clinton’s moneymaking ventures and Mrs. Clinton’s political future, according to interviews with more than two dozen former and current foundation employees, donors and advisers to the family. Nearly all of them declined to speak for attribution, citing their unwillingness to alienate the Clinton family.

Friends won't alienate and officials won't review.  Life as a Clinton means you write your own rules and can change them at a whim.

Update 5-11-15:  Clinton arrogance can be seen in their strong arming a charity rating website.  The rules never apply to Bill and Hillary.

Update 10-28-15:  Accounting restatements may reveal the Clinton Foundation's history of ethical transgressions 

Update 9-19-22:  The Clinton Global Initiative is back.  Fall needed a Davos type gathering for deals to get done. 

Brintons: Carlyle Group Special Situation

The Carlyle Group acquired Brintons, a British carpet maker in October 2011. 

Carlyle’s Special Situations & Corporate Opportunities team specializes in making alpha-driven debt and equity investments in companies that offer downside protection but with the opportunity to unlock substantial upside potential. The team specializes in investing in (i) distressed, complex, or underappreciated assets, (ii) cyclical, contrarian, or event-driven situations and (iii) broader market dislocations to identify attractive investment opportunities. 

In an effort to maximize returns and value, the team seeks to exert influence or obtain control in its investments whenever possible.

The Telegraph reported:

Rather than buying the family's equity stake, Carlyle bought the company's debt (at a discount to its face value, no doubt). Once they had acquired the debt Carlyle then used a controversial pre-pack administration to seize control – placing the carpet-maker into administration, then buying it straight back. 
The descendants of the founding Brinton family accused Carlyle of breaking a string of promises to gain control. 

Brintons' upside potential arose from shafting retirees and the public.

By using a pre-pack to acquire the business, Carlyle was able to jettison Brintons' pension fund – complete with its £10.5m deficit. The Pension Regulator is investigating. 

The Pension Protection Fund has been left to pick up the pieces and will almost certainly end up taking over the 1,500-member scheme.

What happened since Carlyle's £40 million backdoor takeover?   The story started out rosy, according to The Telegraph:

“All trade creditors were paid, and no employees fired. With a pension deficit that was going to sink the company a pre-pack was the only option to keep 1,800 people in work,” said Mr Coates. “We were insolvent for only 15 minutes and as a result never stopped making carpets or serving our customers.”

It took just five months to return to profitability. Turnover levels (annual revenues) have now reached £80m with a profit of £3m recorded last year. 
It didn't stay that way.  Carlyle cut jobs, went through a CEO, saw revenue go down and conducted yet another restructuring.

Newly filed accounts revealed that sales at the group fell to £68.7m in the year to 27 September 2014, compared with £82m a year earlier. Pre-tax losses also widened to £6.3m from £4.2m.

Brintons incurred exceptional costs of £3.7m during the period, with £2m of redundancy costs. By September 2014, the group employed 1,398 compared with 1,427 in 2013.

Directors said that there had been "opportunities to improve efficiency and streamline practices and processes" by eliminating unnecessary jobs and roles.
Note the 1,800 jobs saved fell over 400 under Carlyle's "job saving" ownership.   Sales fell 16% in the last year, while employment went down 22% since The Carlyle Group poached Brintons.

Carlyle searches for the key to unlock Brintons significant upside potential.  One strategy is to spend £300,000 on marketing.  Carlyle's counting on that investment paying off big

The question is who owns Brintons' debt now?  Will they consider employing Carlyle's tactics and shaft the equity holder?

Update 1-21-17:  Brintons' revenue picture is up but is a yo-yo over the last few years.

Friday, May 8, 2015

TPP to Accelerate Global Race to Bottom

The global race to the bottom has been underway since President George W. Bush and his near twin, President Barack Obama.  These two two-termers stoked the profits of billionaire private equity underwriters, while individual citizens have struggled. 

I wrote about the global race to the bottom in 2009 and raised the "lowest common denominator" theme many times since.  The White House and Congress provide outstanding service to the billionaire class.  They ensure the PEU will is done. 

Obama's trade deal won't lead to the global race to the bottom, long underway.  It will accelerate it, like gasoline.

Tuesday, May 5, 2015

Lord Browne Surfaces at L1 Energy reported

Sarah Wiggins, a M&A partner at Linklaters, estimates there is $180 billion of “dry powder” ready to be deployed by funds including distressed equity investors. Wiggins points to $8 billion recently raised in the bond markets by ExxonMobil, the US giant, which has said it is “alert” to bolt-on acquisitions. 

Other possible energy company buyers include private equity groups such as Carlyle and Blackstone, while Russian billionaire Mikhail Fridman has launched a $10 billion fund, run by former BP chief executive Lord Browne, to hunt for acquisitions. 
The return of Lord John Browne is proof that past sins don't matter.  Browne's BP paid a $373 million fine   His company killed 15 workers and injured 170 more in the 2005 Texas City refinery explosion.  It also manipulated natural gas prices.

Here's how NYT referred to Browne in the Russian deal:

”It is a very interesting time to come back into the energy industry,” Mr. Browne said in a telephone interview on Monday.

Mr. Browne, known for his deal-making prowess during the years he ran BP, before leaving in 2007, plans to use Mr. Fridman’s cash to take advantage of falling oil prices and buy up companies cheaply for their company, L1 Energy. 
Browne's leadership resulted in loss of life, injury, destruction and criminal acts.  His prowess is in death dealing and not claiming responsibility.  Carlyle Group joint venture energy partner Riverstone provided Browne a safe place to run to.  Now it's Russian backed L1 Energy.  L1 is ironic in that Browne didn't have the spine to admit his role in BP's debacles while CEO.

PPACA Shafts Seniors, but Helps Corporations

MarketWatch reported:

It may not be exactly like being cast adrift on an ice floe, but today’s seniors and retirees are hurting nonetheless.

The advent of Obamacare has cost many retirees their company-sponsored health plan by taking away their firms’ tax deduction. It no longer pays for companies to subsidize the cost of their retirees’ health care, so many have exited these programs.

Now that they are in the open market, retirees and seniors are confronted by soaring premiums when they seek to purchase a health plan.
Exited.  That's the word private equity underwriters use when they've cashed in on an investment.  Benefit cuts for workers are not a new phenomenon.  Consider this 2011 story on rapidly disappearing benefits:

Employers have significantly cut many of the benefits they offer to workers over the past five years.  "The two biggest areas where cuts have come have been in health care and retirement because that's where costs have increased the most."

The time frame covered is 2006 to 2015.  Over this decade private equity underwriters became as common as cockroaches.   President Obama's health reformer, PEU Nancy-Ann DeParle, designed  a program that shifts the burden for health insurance from employers to individuals and a tapped out Uncle Sam. 

Not only do seniors and retirees face a greater financial burden, they enter an insurance and health care delivery system with overwhelming complexity.  Obama deforms health care with profiteering and distorting bribes/punishments.  The underlying goals and methods of PPACA are no different than Wall Street's incentive compensation which resulted in widespread criminal behavior.

While seniors and retirees are set adrift in a sea of mind boggling complexity, the investor class makes big bets on healthcare.   They'll happily pick seniors' pockets for their 30% annual returns.

A big round of applause for Obama's vulture investor class and PPACA's absurd architects.  The system is fulfilling its design.  Seniors are to suffer or die for their country's financial sector.

Profit optimization is the primary goal.  Everything else is secondary, including retirees and the elderly.

Update 4-16-20:  A coronavirus pandemic revealed America's broken healthcare system and PPACA's many shortcomings. How many  22 million newly unemployed  can afford the premiums?  How many of these will get COVID-19 and die at home without proper care?  

Update 1-20-22:  In 2020, the average health insurance premium contribution was 6.9% of median income, while the average deductible was 4.7%, combining for a mighty 11.6% of median income.  Curve not bent in the least.  

Sunday, May 3, 2015

CalPERS Doesn't Know about Twelve Year PEU Investment

NYT reported:

J. J. Jelincic, a member of the California Public Employees’ Retirement System board since 2010, has often raised the problem of fee transparency in the fund’s private equity investments. Mr. Jelincic, who before joining the board was on the Calpers staff for 24 years, said in an interview that being in the dark on fees created problems for the overseers of the $300 billion pension fund.

“You don’t think to negotiate on fees that you’re not aware you’re being charged,” he said. “As a trustee I’m really concerned about not knowing what we’re paying on private equity. We may be getting a really good deal, we may be getting a really bad deal. I just don’t know.”
 This doesn't ring true for CalPERS investment in one private equity underwriter (PEU).  

CalPERS invested $175 million in The Carlyle Group in 2001.  They purchased 5.5% of Carlyle, which fell to 4.2% by the time Carlyle went public in 2012. 
As a part owner of Carlyle one would expect CalPERS to clearly understand their investment, it's revenue streams and expense makeup.  I don't believe for one minute that CalPERS didn't understand how Carlyle made money, fees, charges, etc.  I'm sure they had to sign some super secret deal that they would never reveal the golden PEU fee goose hidden in the basement of 1001 Pennsylvania Avenue.  

Another reason CalPERS should understand Carlyle's fees for add-on nose hair trimming and blackhead removal is below:

Washington, D.C.-based Carlyle Group, the world’s second-largest private-equity firm, made $681.3 million of capital calls on the pension fund (CalPERS) in 2008. 
CalPERS saved Carlyle's backside in the financial meltdown, in addition to holding an ownership stake in The Carlyle Group for twelve years, finally exiting in 2013.  

I don't believe this putz saying he doesn't understand how private equity makes its money.  He was a trustee for four years of CalPERS ownership stake in Carlyle and an employee prior to that.  Flash back to 2010 the same year this yahoo joined CalPERS board:  Themes for a meeting between Carlyle, KKR, TPG, Avenue Capital and CalPERS included:

calls for a cap on fees, more disclosure and greater investor control for clients of private equity firms.
Five years ago the parties discussed resolving the issue of fee transparency and it still exists. This disturbing heel dragging is compounded by what CalPERS should have known as an owner of Carlyle.

If CalPERS did not understand their 5.5% investment in Carlyle for over a dozen years our public retirement system is incompetent and as morally bankrupt as the PEU greed and leverage boys.

Update 9-8-15:   CalPERS staff spouted General Partner frames when questioned about PEU investments.  It's likely a hangover from CalPERS twelve year PEU binge as a 5.5% Carlyle Group owner.
Update 5-5-22:  The PEU "public pension savior" narrative may burst if one New York Assemblyman gets his wish for PEUs to reveal their contracts and fee arrangements with New York's public pension funds.  

Saturday, May 2, 2015

"60 Minutes" Finally Finds PEU Rubenstein

CBS News program 60 Minutes has been absent without leave for decades on The Carlyle Group.  It finally found Carlyle co-founder David Rubenstein.  The piece fawns over Rubenstein's patriotic philanthropy.

"Well, the government doesn't have the resources it once had," says Rubenstein. "We have gigantic budget deficits and large debt and I think private citizens now need to pitch in."
David Rubenstein did his part to ensure gigantic budget deficits and large debt with his annual pilgrimage to Congress to preserve his preferred taxation on carried interest.  The Carlyle Group is a virtual nonprofit and Rubenstein's pay from Carlyle is setup for tax avoidance.  Their recent 10-K states:

The Carlyle Holdings partnerships and their subsidiaries primarily operate as pass-through entities for U.S. income tax purpose. Prior to our initial public offering in May 2012, we operated as a group of pass-through entities for U.S. income tax purposes and our profits and losses were allocated to the individual senior Carlyle professionals, who were individually responsible for reporting such amounts.
60 Minutes had plenty of opportunities to tell investigative stories on The Carlyle Group.  There are several generations of pension pay to play scandals, sewage sludge bribery to a Congressman's wife, the implosion of Carlyle Capital Corporation and subsequent investor lawsuits, losing a pipeline firm to billions in bad energy bets, over 150 Carlyle affiliates based in the Cayman Islands, twenty five hospital deaths after Hurricane Katrina, dumping British pensioners, free use of Texas taxpayers' $35 million for six years without providing a single new job at Vought Aircraft, and the announced demise of two Carlyle Group mutual fund offerings.

Rather than self-made billionaire I would refer to Mr. Rubenstein as a tax preferred, government subsidized billionaire.  Don't believe me?  Look at how many Carlyle affiliates supply Uncle Sam and the number garnering direct government subsidies.  Boston Private received  TARP funds while the FDIC granted  BankUnited massive amounts of free money.

Here's another reason Rubenstein should be tarred and feathered, not lionized:

It estimated that more than half of private equity costs charged to United States pension funds were not being disclosed.

CBS News joins CNN, FT, WSJ, NYT and many more in offering puff pieces on a man that has done much to destroy America's middle class, increase our deficits, utilize offshore tax havens and send management theory back decades in the quality arena.

Greed is as greed does.  That includes smearing makeup on it so it looks like something else. Makeup hides Carlyle's second quarterly decline in assets under management.  Once over $202.7 billion assets under management are now $192.7 billion.  That last happened after the 2008 financial crisis.  Let's ignore the underbelly of the PEU beast and enjoy the roaring 2015's.  Bully, bully Mr. Rubenstein!    

Next Liquidity Crisis Has Multiple Candidates

Low interest rates make borrowing cheap.  The financial crisis was marked by mispriced risk, i.e. low interest rates relative to their underlying assets.  Investment quality declined as firms pushed cheap debt to individuals (subprime mortgages) and companies (covenant lite loans).  This boosted commissions and executive compensation soared. 

When poorly screened borrowers started going belly up and underlying asset prices fell, liquidity evaporated.  The cycle ramped up when investors began placing bets on who would default next, via credit derivatives.

Consider where we are today.  WSJ reported

The Federal Reserve is justified in keeping rates near zero for now, and should be cautious as it considers raising them later this year given the potential economic costs of prematurely tightening financial conditions, a top former Federal Reserve official said Monday.

Brian Sack, former head of the New York Fed’s markets desk and now senior vice president at hedge fund D.E. Shaw, told a conference sponsored by the National Association for Business Economics that despite recent strides in the job market, the economy was still far from fully recovered.

“I see plenty of reasons for rates to be at zero today,” Mr. Sack said. “We’ve had employment improvement but GDP [gross domestic product] growth is relatively moderate.

“Then you just have this calculus of the benefits and risks. When you’re at the zero bound it’s very costly to make a mistake in liftoff,” he said.

The Fed has left official borrowing costs near zero since December 2008 in an effort to jumpstart and support economic recovery from the deepest recession in generations.
Cheap borrowing, part of the cause of the crisis, became its solution.  Nearly seven years later the risks seem heightened as liquidity crisis warnings abound:

Financial engineering that preceded the last two financial crises is back, International Monetary Fund warns
Investors across corporate bond markets are finding it harder to buy and sell company debt. And some investors are beginning to fear that the lack of liquidity will be the spark that ignites the next crisis in financial markets.   

Companies that have been flooding the primary market with debt have met voracious demand from investors hunting for yield in the low rate environment.  

The ultra-loose monetary policies pursued by the Fed, the Bank of England and the European Central Bank has resulted in a torrent of bond issuance in recent years from companies seeking to capitalise on rock bottom interest rates. “Now is the perfect time to borrow if you’re a company."

But the moment when bond investors change investment strategies and rush to sell bonds could soon be at hand. 

U.S. corporate debt market increased 44.5 percent to $7.82 trillion since 2008, spurred in part by low interest rates. During the same period, asset managers have increased their corporate debt holdings from $246 billion to $1.45 trillion while new regulations have restricted banks’ ability to provide liquidity to the market. In other words, when the holders of these assets go to sell, there may be no buyers
It is not just company bond markets that have been affected. Sovereign debt may also be hit

Puerto Rico
Puerto Rico's top finance officials said the government of the US territory will likely shutdown in three months because of a 'looming liquidity crisis' and warned of a devastating impact on the island's economy.

Puerto Rico is largely reliant on hedge funds for its financing needs.  

Faced with debt payments totaling about 1 billion euros to the International Monetary Fund on May 6 and May 12, Greece hopes there will be enough progress in the talks by next week to allow the European Central Bank to restore liquidity access for the country’s cash-strapped banks.

Greece will proceed this year with the sale or leasing of stakes in several strategic assets, including Piraeus Port Authority SA and 14 regional airports, according to Greek officials with direct knowledge of the matter.

I smell opportunity for private equity underwriters as stressed countries offload strategic assets on the cheap.  Other areas vulnerable to liquidity crises include ZimbabweLatin America, specifically Venzuela, Ecuador and Argentina.   China backstopped these countries, just as hedge funds once did for Puerto Rico.

Liquidity is supposed to dry up in a crisis, so a time out can occur and the market return at levels customers are willing to pay.  It becomes problematic when a corollary market exists with investors placing bets on your demise or survival.  That corollary investment option can cause big swings in the value of a country's debt or a company's debt/equity.

Something will happen to bring great joy or horror to debt and equity markets.  The question is when.  On that, I'm not betting.