Next Prayer is for Honesty

CPA Congressman Mike Conaway asked for his constituent's prayers on September 26th. He coveted requests to the Almighty for wisdom and knowledge to handle America's credit crisis. Funny, I expected a certified public accountant to have unique insight on the financial meltdown. I also counted on him explaining what broke in the credit markets. He never answered my e-mails.

But Mike spent a week on 2 Chronicles 1:10 -- "Give me now wisdom and knowledge, that I may go out and come in before this people, for who can rule this great people of yours?" He said that same prayer prior to his vote on October 2.

I complied with his podcast request, even posted a comment on his blog. Next time I'm praying for honesty. The Bush-Conaway partnership isn't known for it. Maybe, they'll repent.

Bush Signs Pork Laden $700 Billion Bailout

Jack Bovender to Parachute from Infected HCA

Long time CEO Jack Bovender announced his retirement effective December 31. He will remain Executive Chairman of the hospital company for another year. Two years ago a consortium of private investors took the company private. Investors include Bain Capital, Kohlberg Kravis Roberts., Merrill Lynch Global Private Equity, and the founding Frist family. In HCA’s SEC filings they refer to the transaction as “the Recapitalization.”

HCA’s latest 10-Q and annual report reveal the burdens of playing with the big money boys:

1. Debt of $27 billion, of which $5.5 billion is subject to variable rates of interest
2. Annual interest expense of $2.2 billion (a $1.4 billion increase from pre-purchase levels)
3. Management fees of $440 million
4. Taxes paid to Uncle Sam fell from $730 million in 2005 to $316 million in 2007.
5. Derivative investments of $1.6 billion in their insurance subsidiary. The quality is level 2 or level 3. This includes $652 million in auction rate securities backed by student loans.

The largest private hospital company could soon line up for the $770 billion Treasury bailout. Is that influencing Jack Bovender’s retirement? If he steps down now, will his golden parachute be insured? The firm didn’t have their best quarter due to the growing number of uninsured patients.

Times are tough all around, but KKR affiliate HCA will get help for their clogged arteries. Uninsured patients will have to wait.

The economy may be sicker, systemically infected from dice rolling CEO’s. At Treasury's junk investment redemption counter, HCA could join two failed affiliates of another private equity firm, The Carlyle Group. Carlyle Capital Corporation leveraged borrowed money to load up on mortgage backed securities. While the public fund failed, their rollup could be dramatically improved by an Uncle Sam bailout.

SemGroup, an energy distribution company, declared bankruptcy due to hedging. That practice was not listed as primary activity of the firm.

Who knew hospitals and gas pipeline companies bet so regularly at the Wall Street casino? Will the Treasury buy underwater forward looking contracts and help SemGroup reorganize? How deep is the infection, and is the Senate plan capable of stemming, much less curing, the disease?

Gas Prices Higher as Demand Drops 7%

The gasoline supply and demand relationship offered by House Republicans during their protest in dark House chambers took another hit. Demand for fuel dropped according to the Energy Department’s Energy Information Administration. MSNBC reported:

Fuel consumption for the four-week period ended Sept. 26 reached about 19 million barrels a day, down 7 percent from the same period a year ago, according to the EIA.

“The demand just isn’t there,” said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore. “The refineries aren’t buying crude to turn it into gasoline because consumers aren’t buying it on the road.”

Demand fell 7% from the same period last year, so prices dropped accordingly? They're nearly $1 per gallon higher. While the exact rise is 85 cents, it's a sharp needle to the Republican gas price balloon.

Taxpayer Cleared Recapitalization, Gift for Carlyle Group & Company

Carlyle Group co-founder William Conway called the current financial crisis one of recapitalization, not liquidity. The financial sector is undergoing traumatic change, with shareholders frequently losing their total investment.

Who's coming back in? Which firms are providing the cash for the needed recapitalization of financial institutions? So far it has been Warren Buffet and Berkshire Hathaway. His gold seal of approval inspires other investors to put their feet in turbulent waters. Buying billion dollar chunks of Goldman Sachs and General Electric, Buffet got preferred shares paying a 10% annual dividend and the right to buy more general shares at low, fixed prices.

Expect the private equity underwriters (PEUs) to dive in next. The Bush administration relaxed ownership rules allowing such firms to take a bigger stake, to control more board seats. This enables them to impact strategy and execution. What do they expect? A 20-25% annual return on their money.

How does it feel knowing your $700 billion taxpayer dollars will clear the deck for the PEU boys to clean up? Oh, and the Senate version has tax breaks. Might they crank up the return to 28-30%? Be sure to watch what Congress does with carried interest taxation. That's your clue as to how deep the grinding heel will go.

CEO's Should Show Japanese Management Contrition

The ranking member of the Senate Finance Committee called for Wall Street CEO's to bow deeply and apologize for their mismanagement. However, to keep this from becoming a Lyndie England symbolic event, additional groups should join the big bow.

That includes Boards of Directors of those same Wall Street firms. Boards approved risky corporate strategies, structured dice rolling executive incentive compensation, and were aware keenly of off balance sheet accounting practices.

America's elected leaders need to tighten their abdominal muscles for that bow of apology to taxpayers. From deregulation to voluntary regulation to not enforcing existing rules, the federal government played a key role. Bush lauded financial innovation, which turned out to be vaporware.

The irony comes from the man who taught the Japanese management, Chuck Grassley wants expressed. Dr. W. Edwards Deming educated Japanese leaders on quality as part of their economic recovery post World War II. He evolved his teachings to a comprehensive theory of leadership, one that George W. Bush and our Congress ignore at every turn.

The heavy losses are here, and many should apologize. But new knowledge of Dr. Deming's teachings is required. Study up, Chuck!

Investment Houses Downsize to Shacks

Five storied Wall Street investment houses are no more. Four managed their way into safer commercial bank waters, two with lifeguard Uncle Sam's direct assistance. The fifth, Lehman Brothers went under. Its failure is odd given the firm's employ of two Presidential relatives, cousin George Herbert Walker and brother Jeb Bush.

Three groups have the money to open boutique investment shacks in that empty New York real estate, private equity firms, sovereign wealth funds, and the posse of welfare mothers that took down Wall Street. I envision the following for each investment niche:

The PEU Investment Trust

Private equity underwriters (PEU) will open a branch office, now known as an outhouse. There they plan to buy banks loaded with crappy "mortgage related securities", the government definition of which includes credit derivatives, car loans, credit card debt and student loans. They will temporarily store the fecal like investment products until the Treasury pulls up with a sewage truck to empty their investment septic tank of billions in bad paper. Competitors on Wall Street will can it the PEU Stink Tank.

The Three Sheiks (which sounds like Shack when pronounced by a Bostonian)

Sovereign Wealth Funds, overflowing from our gas money, will build a rotating skyscraper that looks like a clenched hand, only one finger will be raised. The middle one will protrude high into the New York skyline. The rotating finger will point to all of America at some time during its 24 hour rotation. The state of the art building will collect methane produced by workers. Rather than an opening bell, this firm will expel the gas loudly when it buys or sells a key U.S. asset. Once released in a giant farting sound, the methane will be flared to as not to contribute to global warming.

The Two Shaqs

The welfare mother who took down Wall Street, Shaquilla Brown and her posse of welfare queens will join with NBA star Shaquille O'Neil and open a branch. They will manage Robert Johnson's billions. Mr. Johnson made big money from his BET sale and is the owner of two Charlotte, N.C. professional basketball teams. Another niche for the boutique investment firm will be investing money for overpaid New York Knick players recently acquired from the Charlotte Bobcats.

Look for big changes on Wall Street. They could be entertaining, but then again, not.