PEU Partners in Death: Wilbur Ross & The Carlyle Group

Wilbur Ross and The Carlyle Group partnered to save BankUnited, a dead financial institution. The FDIC provided $4.9 billion in subsidies for the deal. However, Wilbur Ross and Carlyle face wrongful death lawsuits related to companies they own, firms that paid them substantial management fees.

Wilbur Ross formed International Coal Group, owner of the Sago Mine. A 2006 explosion killed 12 miners. Ross charged ICG $2 million in management fees.

The Carlyle Group's LifeCare Hospitals lost 24 patients in the aftermath of Hurricane Katrina. They are vigorously fighting lawsuits five years later. LifeCare pays Carlyle $500,000 per year in management fees, over $2 million to date.

The Carlyle Group's energy joint venture, Riverstone Holdings, hired Lord John Browne of the Texas City refinery disaster. A 2005 explosion killed 15 workers. James A. Baker, III published a whitewash, similar in quality to Fran Townsend's Katrina Lessons Learned report. Who leaves out the hospital with the highest patient death toll (LifeCare)? Townsend did, only to land a job at Baker Botts, James A.'s law firm.

While progressive talking heads pound Don Blankenship of Massey Coal, they ignore Wilbur Ross and Carlyle's David Rubenstein. How do heavy debt loads, large interest burdens, huge profit requirements and dividend siphoning manifest in the workplace?

Who does due diligence anymore? Not the FDIC. Anybody?

Update: The latest on PEU management fees.

PEU Barbarians to Knock Down Health Care Wall

Private equity underwriters (PEU's) crashed through the health care gate with their purchase of U.S. Oncology, LifeCare Hospitals, ManorCare, HCA and MultiPlan. They borrowed heavily to finance buyouts and in HCA's case to fund dividend payments to owners.

Salivating over 30% annual returns under health reform, PEU's bolstered their top talent. Reuters reported:

Global private equity firm The Carlyle Group said it has hired Robert Essner, former chief executive of pharmaceutical company Wyeth, as a senior adviser to its Global Healthcare group.

Essner, who was CEO at Wyeth for about seven years, retired in 2008 before the company's takeover by drugmaker Pfizer Inc.

Former Procter & Gamble Co Chief Executive A.G. Lafley joined private equity firm Clayton, Dubilier & Rice as a special partner

Having tasted the nectar of health care profits, PEU's see a bonanza under health reform.

"We see a range of opportunities in the U.S. and globally for private capital to help strengthen and improve the efficiency and effectiveness of the healthcare sector," Essner said in a statement.

Who will benefit from financial barbarians implementing their misdeeds in health care? Not clinicians, not the patient. It's on their back PEU's will generate their engorged returns.

Update: The Blackstone Group added a pharma specialist to its health care team.

Marilyn Tavenner #2 at Center for Medicare/Medicaid Services

The Center for Medicare/Medicaid Services will soon have a new Chief, Dr. Donald Berwick. Dr. Berwick's Principal Deputy Administrator is Marilyn Tavenner, the former Virginia Secretary of Health and Human Resources and HCA Group President.

Dr. Berwick and Ms. Tavenner have the largest implementation job since Tom Scully designed and implemented Medicare Part D, the prescription drug benefit. White House Health Czar Nancy-Ann DeParle crafted much of the passed health reform legislation.

Tom and Nancy-Ann have more in common than designing major reform. Neither testified before Congress on their foundational beliefs or actions in staking out new coverage territory. Both negotiated back room deals.

Tom Scully refused to testify on his orders to Medicare actuary Richard Foster. Rep. Bill Thomas (R-CA) watched Scully's back, before Tom left government service for a lobbying position at Alston & Bird and a Senior Advisor slot at private equity underwriter (PEU) Welsh, Carson, Anderson & Stowe. Ironically, Nancy-Ann was a PEU for CCMP Capital Advisers prior to her elevation to czar.

Medicare actuary Richard Foster's name arose in DeParle's reform with his prediction that 17 million Americans would lose employer coverage. Shifting the burden of health insurance to the individual and a tapped out Uncle Sam is clearly the behind the scenes plan. Few Red or Blue politicians were willing to state the obvious.

Marilyn Tavenner refused to share a privately funded health reform study in her Virginia role. She used the study as an "internal working document" to reform Virginia's publicly provided health services.

What internal documents await or are on order? Will the public hear her testify? So much precedence and so little public accountability.

Update 11-23-11:  Tavenner will replace Dr. Don Berwick as CMMS Chief.

Update 4-3-22:   The average health insurance premium more than tripled for a family plan since PPACA passed in 2010.  Cost curve bent but in the wrong direction.  Concave went convex.  

Carlyle's Financial Fund Closes at $1.1 Billion

Dealbook reported:

The Carlyle Group said on Tuesday that it has raised $1.1 billion for its first fund dedicated to acquiring financial services firms. So far, the fund, Carlyle Global Financial Services Partners, has poured about 30 percent of its capital into three investments: Bank of N.T. Butterfield and Son, BankUnited Financial and Boston Private Financial Holdings.

Butterfield is a Bermuda bank with a Cayman Islands/Barbados presence. BankUnited got $4.9 billion in FDIC subsidies. Boston Private, serving the high net worth marketplace, received $153 million in TARP funds and is yet to pay $103 million back.

Carlyle formed its financial services group in June 2007 under Olivier Sarkozy, a veteran financial institutions banker, and the team now includes Randal K. Quarles, a former Treasury Department under secretary for domestic finance.

Randall Quarles' bio states he oversaw reform of Fannie Mae and Freddie Mac, as well as derivatives as Bush's Undersecretary of Treasury. That worked out rather badly.

Carlye co-founder commented in a press release about his crack team:

"...demonstrated to investors along the way that we had assembled a talented group at the right time to capitalize on a range of opportunities in the financial services space."

The White House loves private equity underwriters (PEU’s). Don't worry, Randall Quarles old spot will be occupied by another PEU, as President Obama nominated Jeffrey Goldstein.

Carlyle and their PEU brethren are in a sweet spot. Financial reform gives private equity a free pass. It seems their prayers have been answered. Now they need their marketing lines to work.

Carlyle Group's LifeCare in Long Haul Defense of Katrina Deaths

The Carlyle Group closed the deal for LifeCare Hospitals on August 11, 2005. Hurricane Katrina struck the Gulf Coast two weeks later. The LifeCare unit inside Memorial Medical Center lost 24 patients during their five day wait for rescue. Beginning in September 2006 LifeCare's SEC filings included the following statement:

We have been named as a defendant in various civil lawsuits and actions filed with the Louisiana Patient Compensation Fund by former patients at Memorial Medical Center who allege damages as a result of injuries sustained during Hurricane Katrina.

We are currently defending ourselves against a variety of Hurricane Katrina related lawsuits or matters under review by the Louisiana Patient Compensation Fund. We are vigorously defending ourselves in these lawsuits, however, we cannot predict the ultimate resolution of these matters.

How long does it take for the Louisiana Patient Compensation Fund to complete a review? It's going on five years since Katrina pummeled the coast. The Louisiana Patient Compensation Fund 2005 strategic plan provides insight into how it operates:

Whenever possible, attempt joint settlements with primary carrier or self-insured so PCF can negotiate while liability is still an issue.

LifeCare doesn't want to settle. It's vigorously defending the company, using innovative (i.e. laughable) legal strategies. Carlyle attorney's claim patients became wards of the federal government as soon as FEMA evacuation teams set up in New Orleans. This ignores LifeCare's responsibilities, including caring for patients until they can be safely transferred to able clinicians. In the meantime, LifeCare had a duty to keep non-LifeCare physicians and employees away from patients.

LifeCare has a carrier, although it is not identified in the company's SEC filings. It's latest 10-K states:

On June 5, 2009, we reached an agreement with the insurance carrier regarding the reservation of rights matters whereby they will continue to pay all costs, indemnification and related expenses for the Hurricane Katrina claims in consideration for $1.0 million to be paid by us, payable in three equal installments, due July 1, 2009, March 31, 2010, and March 31, 2011.

While patients and loved ones wanting justice face a long haul, Carlyle received compensation quickly. LifeCare received settlements of $12.3 million for damages related to Hurricane Katrina in 2006. They settled with Tenet Health, owner of Memorial Medical Center in a sealed agreement. The White House Lessons Learned Report omitted any mention of the hospital with the highest patient death toll.

LifeCare continues paying Carlyle a $500,000 annual management fee.

String it out, watch victims fall by the wayside. That describes the Bush Katrina rescue and Carlyle's legal defense strategy on LifeCare.

Vought's Texas Bait & Switch Under Carlyle Group

While Texas Governor Rick Perry rails about the evils of Washington, D.C., he used the Lone Star treasury to enrich The Carlyle Group, a D.C. based private equity underwriter (PEU). Texas gave Carlyle affiliate Vought Aircraft Industries $35 million in grant money to add 3,000 jobs. The Texas General Land Office mulled purchasing Vought's facilities for $65 million, leasing the facilities back to the company.

After two years of heavy courting, Vought's 2006 10-K (annual report) showed the company backsliding on Texas promises:

On February 26, 2004, we announced plans to consolidate portions of our manufacturing operations to Dallas and Grand Prairie, Texas. We received a $35 million grant from the Texas Enterprise Fund in April 2004.

The consolidation plan, as originally designed, would renovate and modernize the Dallas facilities and would close the Nashville and Stuart sites and reduce the size of the Hawthorne site In December 2005, the Company announced its intention to keep the Nashville and Stuart facilities open to support certain programs whose future deliveries did not justify the costs to move the programs to Dallas.

A note in the 2006 report refers to the TEF grant:

Amounts previously disclosed for 2004 have been updated to reflect a reclassification of $35 million in grants received from the State of Texas from operating activities to financing activities.

One year after Texas infused millions into Vought, the company reneged on its promises. Yet, the state could do nothing until 2010, according to the Texas Enterprise Fund agreement.

2010 arrived and Vought ponied up a refund to Texas. Their latest 10-K states:

As a result of our failure to maintain the required employment levels, we repaid $0.9 million to the Texas Enterprise Fund in 2010. Our failure to satisfy these commitments in the future could result in the requirement to repay some or all of the remaining portion of $35 million grant over the next nine years.

Vought doesn't employ company-wide its Texas commitment of 6,300 workers. Page 10 of the 10-K states:

As of December 31, 2009, we employed approximately 5,900 people.

State Rep. Drew Darby said this about the commitment:

Vought Aircraft is required to add 3,300 jobs through 2009. I have questioned the Governor's office about the contract between the State and Vought for clarification of the contract. Vought Aircraft's first official reporting requirement under their contract will be in the Spring of 2010. If Vought does not meet this objective, the TEF grant will fall into default. The company will have two options in repaying the state, clawback or repayment plus interest. The clawback is calculated on a financial model which takes into account the amount granted and the number of jobs not met plus interest.

How did they not have to pay back $3.5 million plus interest? Why did clawback or repayment plus interest garner such a pittance when Vought completely abdicated on its promises, as stated in annual reports?

Governor Rick Perry changed the agreement after the fact, making terms "more favorable for the firms." So favorable that Vought paid back $900,000, roughly 2.5% of the principal at zero interest.

The Carlyle affiliate had $35 million for six years. Its owner brags of a 30% annual returns. Did the Carlyle Group work their magic on TEF funds? If so, Vought's repayment looks even measlier. Note: Vought's pension fund is badly in need of Carlyle like returns, currently underfunded by $650 million. Retired employee health and life insurance plans are unfunded.

The Carlyle Group is selling Vought to Triumph, which will assume the Texas obligation. Getting back $35 million plus interest would be a triumph for Texas taxpayers. Quality leaders are sorely missing.

"Executed in truly horrific style" sums it up.

Update 6-1-11:  HB 2457 purports to fix the problems with Perry's Texas Enterprise Fund, only Vought's agreement had all the elements required in the new legislation.  The bill is silent on Perry's ability to renegotiate deals, which he did with Vought in Spring 2010.

30% Annual Returns Still the Target for PEU Rubenstein

Carlyle Group co-founder David Rubenstein believes health care reform will be a profit-a-pallooza for private equity underwriters (PEU's). CNN Money reported:

Rubenstein, 60, travels the world raising money from investors and looking for the next promising deal, striving to maintain Carlyle's amazing average return of 30% a year since its launch in 1987.

The Carlyle Group isn't alone in hearing the siren song of for-profit health care. Mitt Romney's Bain Capital and a plethora of PEU's have health care in their sites. Reuters reported:

Private equity firms expect to pay higher prices for assets in competitive sectors such as healthcare, as they see a pick up in deal activity after a torrid year for the industry in 2009, a survey said on Thursday.

Prices for quality businesses have bounced back in the first quarter, prompting some to believe a "mini-bubble" is brewing as deal-hungry private equity firms race to deploy some $500 billion in so-called "dry powder"

Mr. Rubenstein addressed the impact of health reform.

You're going to see more and more of our GDP going into health care, and I think any health-care legislation that passes Congress will just exacerbate the situation.

What does Rubenstein have to sell Uncle Sam that will reverse this trend? It has PPO affiliate MultiPlan, which recently closed its acquisition of Viant from fellow PEU Welsh, Carson, Anderson & Stowe. Modern Healthcare reported:

Healthcare cost management provider MultiPlan said it has completed its acquisition of Naperville, Ill.-based Viant, which provides cost-control strategies to healthcare payers

How might Carlyle's 30% annualized returns, atop the interest on debt loads from "a tad less leveraged" buyouts, contribute to the growth of health care costs in America? Be wary when the greed and leverage boys show up with major plans for your industry.