Carlyle Group's Arthur Levitt to Testify on Credit Meltdown

The Senate Banking Committee announced a hearing to examine the turmoil in the credit markets. The hearing will take place on Thursday, October 16th. Witnesses include Arthur Levitt, Senior Advisor for the Carlyle Group, among other financial experts.

Will ex-SEC chair Levitt mention greed or leverage as causes? Carlyle prides itself on both. They cite their historic 20-25% annual returns for investors. They leveraged Carlyle Capital Corporation 39 parts borrowing to 1 part equity. It imploded this past Spring.

Ex-IRS Chief Charles Rossotti also works for Carlyle. His prior testimony in front of the Senate Finance Committee recommended a 25% corporate income tax and 8.25% capital gains rate. John McCain's campaign promises mirror that request nicely, only John lowers capital gains taxes to 7.5%.

Will the private equity boys indict their selfish management practices? When America optimizes part of the system, it suboptimizes the whole. Private equity's greed is insatiable. Like all extrinsic motivators, it cannot be fulfilled. But they will use their insider political influence to get their way....

PEU Vultures Circling

Private equity firms search for distressed companies to put their billions to work. One private equity underwriter spoke to Maria Bartiromo on CNBC. He indicated his firm would look at banks, now that the government support structure is clear, i.e. good for investors.

Treasury didn't hammer existing share or debt holders with their preferred, non-voting shares. That leaves room for private equity to put their money to work, to gain control of management and governance. But first, they need a little more distress to bring down acquisition prices. I bet it's on the way...

McCain Proposes Carlyle Group's Tax Wish List

Republican Presidential candidate John McCain delivered a tax plan that mirrors one requested in September 2006. The Senate Finance Committee conducted hearings on taxation. Charles Rossotti, Senior Adviser for the Carlyle Group, asked for capital gains taxes at 8.25% and corporate taxes of 25%. McCain proposes 7.5% for capital gains and Charles' 25% for business income.

While tesitifying as an ex-IRS Commissioner, Charles made no mention of his private equity employment. Mr. Rossotti has been with The Carlyle Group since 2003. At the time of his testimony, Charles had 3 1/2 years in Carlyle tenure.

This morning John McCain's economic advisers rolled out something close to Carlyle's wish list. It's a private equity underwriter's dream. Flush with billions in cash and ready to put it to work in the financial/insurance sector, McCain's tax cuts could help guarantee their string of SuperReturns.

It's a PEU economy, sponsored by the government industrial monstrosity, Eisenhower's military industrial complex on steroids.

The Fall of Lehman Conspiracy Quiz

Did Lehman Brothers fall in order to:

1) Keep the Bush brand from direct government bailout taint. Jeb and cousin George Herbert Walker worked for Lehman. The move preserves their potential bonuses.

2) Knock down the house of cards known as America's financial system, so private equity and foreign sovereign wealth funds could pick through their carcasses.

3) Inspire the latest Jewish conspiracy theory, that $400 billion of Lehman's funds were sent to Israel the night before the investment bank declared bankruptcy.

4) Turn CEO Dick Fuld into the evil Mr. Henry F. Potter from It's a Wonderful Life

5) All of the above

6) None of the above

There is no correct answer! That's the problem with conspiracy theories. They're terribly difficult to investigate.

Take #3. Dealbook reported:

Lehman Brothers is opposing its creditors’ request for documents related to the investment bank’s operations before its bankruptcy filing, saying that the demands are inappropriate and oppressive, according to court documents.

Creditors, including Harbinger Capital Master Fund and Wells Fargo, had sought permission from the U.S. Bankruptcy Court in the Southern District of New York to conduct depositions and access documents saying there had been no disclosure of how cash was distributed before the bankruptcy filing, among other complaints.

But in court documents filed on Sunday, Lehman Brothers Holdings said that the demands were “inappropriate” and would unduly burden the company.

Lehman asked the court to deny the motion.

Shazaam!

Paulson's $250 Billion Bank Investment

Nine of America's largest banks have a new shareholder, Uncle Sam. Treasury announced a plan to buy $250 billion of senior preferred, nonvoting shares. It will also take warrants amounting to 15% of the preferred investment. Highlights include:

1. Dividends will continue to be paid to existing preferred and common shareholders
2. New senior secured debt issued by bank will be guaranteed by Uncle Sam for three years
3. Extend FDIC deposit coverage to all small business accounts, i.e. no limit
4. Banks must deploy capital via lending

It looks like credit can move again. Morgan Stanley's credit default swaps fell to 3.75% this morning. A year's coverage soared to 26% last Thursday. Hank Paulson hit the panic button when it hit 9% the week of September 15.

The toxic asset repurchase plan continues forward. Large non banks, like GMAC and GE Capital, hold nonperforming assets. So do insurance companies. How much equity will Uncle Sam eventually own?

Mike Conaway Blames Individual Depositor Scared by Cornyn

The Senate passed the Wall Street bailout bill, after the House initially nixed it. Rep. Mike Conaway ignored the will of his West Texas constituents by voting for the Senate version of the bill. Senator John Cornyn (R-TX) explained his vote in an October 1 press release. It stated:

A widespread financial collapse will have a domino effect throughout our State. It might begin on Wall Street but it will ultimately hit Texas families and small businesses the hardest. This is not a theory or hyperbole or a scare tactic. It is a fact.

Rep. Mike Conaway accused those individual bank depositors of compounding the credit crisis. He said the following about those Nervous Nellies to America's Business Radio:

"I lobbied along with a lot of my friends to increase the FDIC (Federal Deposit Insurance Corporation) insurance limit for banks and savings and loans and credit unions from $100,000 a borrower to $250,000 a borrower. That's a confidence builder. And what we're talking about is confidence in these bank officials to continue to do what they do on every single day. And if we calm down the individual depositors, help calm down some of the small businesses who might have more than $100,000 in the bank and quit moving that money around unnecessarily because they are trying to avoid being in an uninsured position, then that's kind of a little oil on the water itself."

People weren't moving money around when Hank Paulson rang the alarm bell the week of September 18th. The big money boys quit lending to each other at reasonable rates. Credit default coverage rose dramatically. Wall Street didn't trust their peers to make good on their debt. Loan rates reached "pay day loan" level for investment houses.

Representative Conaway voted against the bailout bill, before he voted for it. He angered many of his constituents and is in the midst of a "Forgive Mike" tour. His district rounding is actually called "Ask Mike Anything." But that doesn't mean he'll answer your question. At a San Angelo Open House last year, Mike took my question, pivoted and "answered the question he wished I'd asked." Yes, those were his actual words! But Mike did talk to Bloomberg about his vote. They reported:

"Credit is the lubricant that oils the engine of the economy'' and if it dries up, "then the engine seizes up,'' said Republican Representative Michael Conaway of Texas, who switched his vote last week to support the financial rescue. The inability of a major corporation to renew its short-term loans would have "a devastating impact on the economy.''

Note no mention of individual depositors on October 5th. It's big companies and their short term loans. What happened since Mike switched his vote to free up lending?

Credit froze up more. Morgan Stanley credit default swaps his $2.5 million for a year's coverage on $10 million in debt. That's nearly 3 times the $900,000 on September 18, the day Hank Paulson hit the panic button.

The demands from big money boys kept coming. Will they stop if they get guaranteed interbank lending? A financial expert on CNBC said 50 of the right people in a room could unfreeze credit overnight. The big money men don't trust each other to pay on their debts. Uncle Sam's promise to pick up the tab (to the tune of $3 trillion) made no difference to date.

While stock exchanges are up today, credit markets are closed. Bankrupt Lehman Brother's credit default swaps settle up next week. That will say boatloads. Will the big money boys stand behind their risky financial bets? Or will they slough it off on taxpayers via a just ramped up toxic assets buyback program?

Whatever the answer, I don't expect to hear it from certified public accountant, Rep. Mike Conaway.

"My job as I see it is to form the best opinion I can, the most informed, intelligent,” Conaway says.

It's a shame Mike isn't passing that information on to voters. Does he think we can't handle the truth?

If only he'd host a session titled "Mike Will Answer Everything." That, I'd attend.

Mike Conaway's Albertine Earmark

Disguising earmarks is a skill, apparently one held by my Congressman. Rep. Mike Conaway denoted his $1.6 million earmark for "Office of Naval Research." The Seattle Times reported on the true recipient:

Other co-sponsors tagged the money for Global Delta, a young company created by two longtime lobbyists.

John Albertine and his brother James, past president of the American League of Lobbyists, have knocked on lawmakers' doors seeking earmarks on behalf of clients. In 2003, they formed Global Delta and decided to get an earmark for themselves. Several months later, they succeeded. With no background in engineering, the two lobbyists landed a $4.1 million contract with the Office of Naval Research to study and develop advanced, cost-effective radars.

Soon after getting the contract in June 2004, John Albertine hired a couple of engineers to do research. Meanwhile, he and his brother continued to operate Albertine Enterprises, their lobbying firm.

Over the past five years, Global Delta officials have donated $35,000 to Conaway and others who sponsored its earmarks. Conaway's office said he was unavailable for comment.

Wow, it turns out Mike is silent on more than the causes of our current credit crisis. Rep. Conaway received $7,300 from Albertine Enterprises for his virtually unopposed 2008 campaign. Information on one of the two Albertine Brothers came from John M.'s appointment to the Intersection Inc's Board of Directors:

Dr. Albertine, 64, has been the chairman and chief executive officer of Albertine Enterprises, Inc., a consulting and merchant-banking firm, since 1990. He also has served since 2005 as a principal of JJ&B, LLC, an investment bank he founded that provides finance, public policy and legal assistance to clients; and since 2004 as the executive chairman of Global Delta, LLC, a Washington, D.C.-based government contractor specializing in advanced sensor radio frequency and electro-optical technologies. Dr. Albertine served as president of the American Business Conference, founded by Arthur Levitt, Jr.

Several things pop out in the above paragraph. The description of Albertine Enterprises omits their function as a lobbying firm. Also, Global Delta's mission implies a high tech firm with significant capabilities.

The company snagged a defense earmark in 2006 for $3 million and another in 2007 for $1 million. John Albertine said he asked for $4 million in 2008 but landed only $1.6 million.

Global Delta turned down the earmark because it wasn't enough funding, he said. They opted to search for private funding so they could own the intellectual property rights to some of the research, he said.

Their concept was to build a low-cost radar system to track ships. A prototype was never built, Albertine said.

Why weren't intellectual property rights an issue with the 2006 and 2007 earmarks? After spending $4 million, it never went beyond the concept stage? Why didn't "engineers" build a test model?

The Albertine brothers are ardent supporters of Mike Conaway. James and Anne of Bethesda, Maryland gave $4,700. John and Mona of Fredericksburg, Virginia contributed $5,500.

The first burst of donations, totalling $5,000, came in Spring 2007. The next round of $4,500 fell between the end of September and Thanksgiving that same year. The remaining $700 arrived in February 2008.

Refunds reduced total donations to $3,500 for the Bethesda Albertine's and $3,800 for the Virginia family.

When did the Defense bill with Mike's co-sponsored Albertine earmark pass the House? The bill was introduced to the House on March 20, 2007. Mike's first burst of checks arrived that same month. A $2,300 check from John Albertine arrived a week before the bill's initial presentation.

Fall saw the greatest House action and another $5,000 from the East Coast Albertine's. After George W. Bush approved the bill January 28, 2008, the final $700 arrived in Mike's office.

It turns out Dr. John Albertine and I share an alma mater, the University of Virginia. The historic Lawn has Jeffersonian gardens, hidden behind serpentine walls. Federal earmarks lie behind similarly twisted structures. Kudos to the Seattle Times for knocking a few bricks out. Let the light shine through.