PEU Boys Want to Profit from Publicly Financed, Private Education

The greed and leverage boys, also know as private equity underwriters (PEU), want to "save education" via corporate machinations.  It's bad enough education has imitated poor management practices that pit people against one another and result in widespread cheating, a.k.a. fraud. 

It's our PEU world, where politicians Red and Blue love PEU.  Predictable public money flows are tantalizing to modern day Robber Barons, thus their interest in education, health care and infrastructure. 

Diane Ravitch, Assistant Secretary of Eduation under President George W. Bush changed her mind on privatizing education after studying the issue in depth:

What surprised me the most, quite frankly, was the lack of any leadership in the democratic party to say no. And as I saw the amount of campaign contributions in state after state going to both parties, as I realized that anyone who wants to run for president has to go to Wall Street, it became very frightening to think that there might be a political way to actually stop this movement to destroy public education and to monetize public education.

Once the monetization starts it becomes a cycle of flipping, with each buyer looking to make their fortune on the backs of the affiliate's customers and its next buyer.

When I see a status quo that's controlled by the wealthiest people on our country in alliance with the political power in our country, it makes me want to rail against it. And I'm railing against it as best I can.

I resonate with her motivation, which was in part why I started PEU Report seven years ago.  Unfortunately, the toxins have spread.  I hate to think how education and health care will further distort in our PEUbiquitous world.

CalPERS Gives PEU Information to Oxford but Not to Naked Capitalism

Reuters reported:
 

The California Public Employees’ Retirement System has lawyered up as it continues to face withering criticism from a financial blog that says the system is stonewalling its public records request. The system has brought in Steptoe & Johnson — the firm that ran CalPERS’ internal investigation into pay-to-play activities a few years ago — to help deal with a data request from blog Naked Capitalism in a situation that has escalated to almost absurd levels.

CalPERS is not talking, preferring to leave it to the lawyers to handle the situation.

The data in question runs from 1990 to the end of 2008.   Why would CalPERS freely share data with Oxford University researchers and not with a respected financial blogger?  Clearly they view one as an ally and the other worthy of lawyering up.

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.  At the time Reuters reported:

CalPERS received $225.2 million in carry, fees and distributions from its Carlyle stake. By adding these distributions to the $284.1 million current public value of CalPERS's shares, CalPERS nets a combined, nominal value for its investment of $509.2 million. That figure represents a cash-on-cash multiple over its initial $175 million investment of 2.9x, and an IRR of between 12 and 13 percent over CalPERS's 11-year ownership period.

CalPERS has also invested in 26 Carlyle funds since 1996, making commitments exceeding $4 billion, far more than the $175 million ownership investment in the firm.

CalPERS did monetize their Carlyle Group equity investment in 2013, grossing an additional $90 million for waiting.  Bloomberg reported:

At Monday's closing price of $29.39, a sale of CalPERS' full stake would generate $374 million in proceeds, more than two times the pension fund's 2001 investment. That return doesn't take into account the dividends CalPERS has collected from its ownership.

Carlyle likes to brag about its 30% annual return on equity from its private equity investments.  That could be one reason for CalPERS to obfuscate PEU performance information.

Industry associated researchers seem happy to only include investment winners in their samples.  No bankruptcies allowed.  Many researchers stop the analysis when the affiliate is monetized.  This ignores how debt bloated firms perform after their ejection from the PEU system.

As for the end of 2008, that's a dicey time in the financial world.  Carlyle made over $680 million in capital calls to CalPERS during the financial crisis.

Eight Apollo funds called a total of $1.71 billion from CalPERS last year. 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 in 2008. Fort Worth, Texas- based TPG, which also has piled into distressed debt, drew down $272 million, and Blackstone Group LP in New York, manager of the world’s largest buyout fund, called $143 million. 

How might this information be represented in the Oxford numbers?

Naked Capitalism closed with:

CalPERS seems to see indulging the PE industry’s mania for secrecy as more important than meeting its obligations under the law and doing what is in the best interest of its beneficiaries. 

Bingo!  Welcome to our PEU world, infected by the greed and leverage boys and their need for stories to be told their way.  That's the function of the PEU research crew, foreign and domestic. CalPERS equals PEUbiquity in a world where politicians, Red and Blue, love PEU.

Update 4-2-14:  CalPERS clarified their noncooperation with Naked Capitalism by stating "perhaps the true intent of her infatuation with CalPERS was to seek a means to gain exposure for herself, her financial advisory services firm, or her blog (where paid advertising and her own book for sale are prominently displayed)."  More evidence that CalPERS sees Naked Capitalism as their foe in our PEUbiquitous world.

Update 4-4-14:  Naked Capitalism's foe position was strengthened by a DealBook piece.  It identifies a concern that actual PEU returns could be calculated and real returns could be much less than represented. I smell another Carlyle Group puffery defense. 

GM Recall Focuses on Executives without Carlyle Affiliation

Reuters reported:

When General Motors Co Chief Executive Mary Barra faces Congress next week she will have to explain how the top brass at the biggest U.S. automaker can say they knew nothing for more than a decade about a faulty ignition switch linked to crashes and at least 12 deaths.

GM's CEO "gets high marks for admitting wrongdoing. On the other hand, she hasn't been there very long," said Senate Commerce Committee Chairman Jay Rockefeller, a West Virginia Democrat, who is overseeing the Senate hearing.

The article mentioned former GM CEOs Rick Wagoner and Fritz Henderson, but omitted Barra's predecessor, Daniel Akerson.  Akerson left The Carlyle Group to head up GM for four years, recently returning to Carlyle as Vice Chairman and accepting a board seat at Lockheed Martin.  

"Why did these dots not get connected? Or worse, if they were connected, why did it take so long to do something?" said one former executive with experience in service matters, who asked not to be identified.

It's the PEU way, never admit error or responsibility.  Carlyle executives know how to keep their good name.

The senator said he would look at documents and listen to testimony before deciding about GM, and that the committee would be looking for explanations. "You have to have lessons," he said.

The lessons don't have to be the result of a competent investigation.  New Jersey Governor Chris Christie showed that just days ago.

An older version comes from the White House Lessons Learned report on Hurricane Katrina.  Author Frances Townsend omitted LifeCare, the Carlyle owned hospital chain, and their 25 deaths from Hurricane Katrina.  She made no mention of Memorial Hospital, where LifeCare rented a floor and the facility's total 35 deaths in Katrina's aftermath.

One year after the Bush White House gave Carlyle's LifeCare and Tenet a free pass, Jeb Bush was appointed to Tenet's board of directors.  There are lessons, some less obvious. Even Reuters may know who not to challenge.

OregonLive indicated Akerson should've been aware of the problem:

Cobalt owner Penny Brooks feels betrayed by GM and by the government. She bought a used 2005 Cobalt, with 40,000 miles on it, five years ago. Last year, her husband was driving about 60 mph when the engine suddenly stalled. They made it safely to the side of the road and took the car to a mechanic, who could find nothing wrong.

Since then, the car has stalled two more times when Brooks hit bumps in the road that caused the ignition to slip out of the run position. "Nobody should have to sit there and pray, 'Keep me safe until I get back home,'" said Brooks, a licensed cosmetologist from Kingsport, Tenn.

She filed a complaint on NHTSA's website last year and says she even wrote a letter to GM's then-CEO, Dan Akerson, but got no responses.

Welcome to my world Penny Brooks, where the stories grow more disturbing over time.  Townsend, Bush, Akerson are in the club.  We aren't.

Update 4-1-14:  Detroit Free Press reported: "Pressed for the first time publicly on whether her predecessor, CEO Dan Akerson, knew about the ignition switch defect, Barra responded: 'Not to my knowledge.'"

Update 4-4-14: Many aren't buying the free pass given former CEO Dan Akerson in this case.  Private equity mavens rarely talk about their real failures.  Sure, they'll throw in a red herring, one that is a PEU compliment in disguise.  I'd venture Akerson made it clear no negative news was to rise to his office.  Not acknowledging bad news is a classic PEU move.

Update 4-8-14:  Forbes picked up on this possibility with a story.  They referred to it as a "conspiracy theory."  The simple way to end such talk is have Akerson testify under oath.

Update 4-19-14:  Fortune ran a serious piece on this theme (nearly three weeks after PEUReport).

Update 7-23-14:  The AP reported "GM is conducting a company wide safety review as it tries to correct a dysfunctional corporate culture in which safety was a low priority."  Akerson was the most recent CEO of safety silent GM.

Architect Ezekial Emanuel Finally Pulls PPACA Curtain

"Step right up, Ladies and Gentlemen.  Witness the blue-chip employer Great Health Insurance shedding.  Watch Captains of Industry slither from past promises.  Dare to look as they gnash on retirees' pocketbooks!"

NYT's You're the Boss:  The Agenda shared a prediction by Ezekial Emanuel, M.D., a paid advisor to the Obama White House on health reform (PPACA):

By 2025, “fewer than 20 percent of workers in the private sector will receive traditional employer-sponsored health insurance.” The source of this claim? Dr. Ezekiel J. Emanuel, in his just-published book, “Reinventing American Health Care.” 

Dr. Emanuel is an accomplished oncologist, medical ethicist and academic (and contributing opinion writer to The New York Times). And, of course, he’s no stranger to politics: He helped craft the Affordable Care Act as a health policy adviser to the Obama administration

Mr. Emanuel argues that in the next two or three years, “a few big, blue-chip companies will announce their intention to stop providing health insurance. Instead, they will raise salaries substantially or offer large, defined contributions to their workers. Then the floodgates will open.” He says that few small businesses will join the SHOP exchanges set up for them and that most of those that offer coverage are even more likely than big companies to drop it, since those who employ fewer than 50 workers face no mandate to offer it in the first place, which Mr. Emanuel thinks is fine.

How kind of Dr. Emanuel to reveal the end game for PPACA.  It is five years after my prediction.

I believe reform sets the table for employers to shed that pesky health insurance benefit.

Many big, blue chip employers recently jettisoned retirees from their health plan, foisting them into individual exchanges with a defined contribution.  PPACA provided $5 billion to employers to encourage maintaining early retiree health coverage.  Over $2 million went to the owner of Newport News Shipbuilding, which later dumped their over 65 retirees onto an exchange.   Other companies jettisoning retirees include:

IBM, TimeWarner, Energizer, DuPont, GM, Ford, Honeywell, 3M and Caterpillar 

These are big, blue chip companies who already did to retirees what Emanual states they'll do to their employees.

Presidents Obama and Clinton got together to push PPACA last year.  I wrote:

PPACA set up the acceleration of the great employer health insurance shedding, already well underway.  It also rejiggered the health care table for private equity underwriters (PEU's) to make billions buying and selling health care companies.  Think KKR and HCA, Cerberus and Caritas Christi Health System, Gentiva and Capstar's Harden Healthcare, CCMP Capital Partner's sale of CareMore to WellPoint. 

Obama's White House Health Reformer had PEU origins and returned to her PEU roots after her public service.  Look for Nancy-Ann DeParle's Consonance Capital to lever PPACA to great profit. 

Oddly, Nancy-Ann continued to receive private equity distributions from previously undeclared investments while serving in the Obama White House.  No conflicts here.  As P.T. Barnum would say "Move on the to Great Egress."

The Great Egress is where employer sponsored health insurance is going.  President Obama's advisors finally told us so, five years after implementing the game plan.

Catch Ezekial Emanuel on CNBC Sunday to hear it from the barker's mouth.

Update 11-16-14:   CNBC reported PPACA's future could include "Employees may experience up to a $6,150 reduction in their health-care benefits and little or no increase in their pay."

Update 12-8-14:  Ezekial laid the groundwork for the government to stop paying for medicines and treatments for people 75 and older.  Pretty easy for a 57 year old to say.

Update 6-18-17:  Ex-President Obama accepted $400,000 to speak for one hour at Cantor Fitzgerald's healthcare conference this September.  The man who turned health care further into a for-profit wasteland is getting his payback.

Update 3-15-18:   Skyhigh healthcare costs differentiate the U.S. from the rest of the globe.  PPACA's cost curve bent in the wrong direction, acceleration.

Update 7-4-19:   Health equity declined since 1993 despite PPACA's promises.

Update 9-25-19:  Employers shifted costs to employees via higher deductibles and increased co-pays.   PPACA has not helped make healthcare more affordable.  It has made a lot of money for the PEU boys.

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?  

Rubenstein's Latest PEU Lament

After Jim Cramer rolled over on the subject of private equity Carlyle Group co-founder David Rubenstein told CNBC;s national audience of private equity's difficulty in getting their message out:

"I wish we were better at getting our message across, so maybe we should figure out how to do that better.  But in the end private equity (underwriting) (PEU) is a great industry for the United States."

Yes, they employ many retired politicians and public servants, but how does a guy with regular public access via CNBC, Bloomberg, WaPo, WSJ, FT, get his backside handed to him, such that the public has negative perceptions of private equity?  I'd venture it's the stark hand dealt to employees within the PEU family.  Word of mouth on jobs cut, retirement plans frozen or eliminated, years with no pay increases and the trauma of being flipped beats slick PEU ads and presentations. 

Private equity has earned its reputation with each and every management stroke.  It's the PEU boys that get the happy ending.  Everyone else, not so much.

Update 6-22-14:  Forbes did a piece on Cramer vs. Rubenstein. 

Dimon Protege to Diversify Carlyle Group

Bloomberg reported:

When former JPMorgan Chase & Co. (JPM) executive Mike Cavanagh arrives at Carlyle Group LP (CG) this summer, he’ll be asked to expand a firm that’s fallen behind rivals even as it delivers some of the best returns in private equity.

Carlyle, the second-largest manager of alternative investments such as private-equity funds and real estate, has increased its assets at a 13 percent annual rate in the past two years, the slowest pace among peers, according to calculations by Bloomberg. Blackstone Group LP (BX), the largest private-equity manager, expanded at a 26 percent pace, the same as KKR & Co. and Apollo Global Management LLC (APO) grew at a 46 percent rate. 

Cavanagh, 48, until today co-chief of investment banking at JPMorgan and a close deputy to Chief Executive Officer Jamie Dimon, will need to find ways to further diversify Carlyle from private equity and expand assets. He will share a co-president role with Glenn Youngkin, a 19-year veteran of the firm, Washington-based Carlyle said in a statement. 

Fortune added:

Moreover, there are fewer regulatory headaches at a private equity firm than at a Wall Street bank -- not to mention fewer Congressional hearings (Cavanagh didn't get rave reviews for his performance last March at a Senate hearing on the London Whale).

Cavanagh looks like he'll fit in well with the Great Whites. May there be chum in PEU waters.

Update 3-29-14:  Cavanagh will earn $7 million per year as Carlyle's co-President.  Carlyle submitted an SEC filing detailing Cavanagh's pay.

Corporate Lies, Shareholder Recourse: Carlyle's SemGroup Implosion:

NYT reported:

Companies do not have a right to lie to their shareholders, a German judge ruled this week. But sometimes, she added, lies are necessary.

And with that Carola Wittig, a judge in the state court in Stuttgart, dismissed a suit filed by a group of hedge funds that lost a lot of money when Porsche Holding, the owner of the Porsche automaker at the time, lied about its intentions regarding Volkswagen. 

The article went on to describe a looming U.S. court case that could eliminate erode shareholder recourse.

The United States Supreme Court is considering whether to reverse a decision it made a quarter-century ago and in effect make it impossible for most investors to ever recover if they fall victim to corporate lies. A decision is expected by June.

There often can be layers of lies.  Take The Carlyle Group's defense of a SemGroup investor lawsuit.  SemGroup declared bankruptcy from billions in energy trading losses, something not referenced in the company's SEC filings.   Carlyle's lawyers used a "puffery" defense.  The judge didn't take Carlyle's bait:

Vague statements of corporate optimism or "puffery" cannot be materially misleading because "generalized statements of optimism are not capable of objective verification and reasonable investors do not rely on them in making investment decisions."

Carlyle and company settled the case in 2011 for $28 million in cash and stock.  Don't cry for Carlyle as they'd already pulled $106.9 million in partner distributions from SemGroup.  That's $2 million more than their initial investment.

The looming question involves PriceWaterhouse-Coopers (PwC), SemGroup's accounting firm.  SemGroup's bankruptcy trustee is suing PwC for accounting failures, which resulted in larger financial losses for the company's creditors.  The court filing states:

Remarkably, in July 2008, just four months after PwC's last clean audit opinion - and during an oil boom - SemGroup collapsed and filed for bankruptcy protection. After SemGroup filed for bankruptcy, PwC withdrew the audit opinion it had issued in March 2008, saying that it was no longer reliable.

The Trust contends that PwC failed to exercise due professional care in performing its role as an auditor for its client, SemGroup. PwC knew or should have known that that certain transactions were improperly reported in SemGroup's financial statements. PwC knew, for example, that SemGroup's CEO was using company money to fund over $300 million of his own personal financial losses and that this was not reported properly and completely in the financial statements. By March 2008, when PwC issued its audit report, PwC also knew or should have known about SemGroup's precarious financial condition. But rather than conduct any extended "going concern" procedures or issue any "going concern" warnings in its audit report, PwC gave SemGroup a clean bill of health, and SemGroup collapsed just four months later.

A jury trial is set for August 11, 2014.  Companies lying to shareholders is concerning enough.  What happens when auditors, the arbiters of truth, do likewise?