Avoiding Scrutiny & Accountability

Recent stories showed the Obama administrations letting insiders and corporations off the hook.  The first dealt with the Department of "Just Us":  Fortune reported:

In late 2010, in the waning months of the Financial Crisis Inquiry Commission, the panel responsible for determining who and what caused the financial meltdown that lead to the worst recession in decades voted to refer Robert Rubin to the Department of Justice for investigation. The panel stated it believed Rubin, a former U.S. Treasury Secretary who has held top roles at Goldman Sachs and later Citigroup “may have violated the laws of the United States in relation to the financial crisis.” Rubin, the commission alleged, along with some other members of Citi’s top management, may have been “culpable” for misleading Citi’s investors and the market by hiding the extent of the bank’s subprime exposure, stating at one point that it was 76% lower than what it actually was.

No government action was ever brought against Rubin. And there is no evidence that Department of Justice acted on the crisis commission’s recommendations.

The Obama administration knows how to hide the extent of a disaster, financial or natural.  OMB Chief Peter Orszag, who later landed an executive position with Citigroup, minimized the extent of the BP Oil Spew in the Gulf of Mexico.

Obama's IRS took more of a hand's off approach with corporate auditing:

Large U.S. corporations had a good tax-filing season in 2015. Firms with at least $10 million in assets faced the lowest IRS audit rates in at least a decade as the tax agency coped with staffing declines, new data show.

Another way to avoid scrutiny and accountability is to coopt the regulator or better yet, self regulation.

Wall Street’s top lobbying group wants a closer relationship with the policy makers that oversee its member firms. 

John Rogers, chairman of the Securities Industry and Financial Markets Association and a top official at Goldman Sachs Group Inc., on Tuesday called for a standing body made up of bankers and regulators to discuss developments in policy, examination and enforcement. A key responsibility for the panel would also involve regularly providing guidance on postcrisis rules and other issues to financial firms.

Even those caught red handed only pay a temporary price, as evidenced by the SEC's approving Steven Rattner's fee income deal with Guggenheim.  Bloomberg reported:

The former head of Quadrangle Group, Rattner has faced limits on his financial activities after the 2010 resolution of an SEC probe into kickbacks in connection with a New York state pension fund.

President Obama should be rewarded handsomely for his administration's service to the insider class.

Allergan to Enrich "Let Go" Executives Further

Bloomberg reported:

Three days before Allergan Plc announced a $160 billion deal with Pfizer Inc. last year, its board sent a message of reassurance to its executive team: if you’re let go after the acquisition closes, we’ll cover the tax bill for your severance packages.

As a result, Allergan could end up reimbursing its five top managers as much as $86 million for taxes they’d have to pay on top of ordinary income taxes if they aren’t offered jobs in the combined company.

The tax reimbursements would come on top of exit packages worth a combined $300 million for the five executives if they were let go.

Allergans top brass had this to say about employees in their Q1 2015 earnings call:

I am so proud of each of the people on our combined global team. One thing is clear: this combined team rallies quickly around surprising opportunities, focuses on the key objectives and executes flawlessly. When it comes to execution, we are like a finely tuned, high-performance engine.

I would just, again, close with saying that this team has continued to take bold and decisive action to create value. 

The "value" employees created will accrue to top executives in an inordinate manner by the board's action.  Top executives are in a class by themselves, distinguished by greed.

The New Yorker offered:

All things considered, it’s hard to avoid seeing the merger proposal as a cynical move designed to boost Pfizer’s stock price and generate a windfall for the company’s senior managers, who are compensated mainly in equity.

At the JP Morgan Healthcare Conference on 1-12-2016 top brass said the deal was about growth and efficient capital allocation around the globe.  Allergan's tax bill alleviating separation deal efficiently allocates millions in capital to executives no longer employed after the merger.  But alleviating taxes is the basis for the deal.  Companies and executives hate paying taxes.  Only the little people pay in our PEU world. 

NPR Unsure What to Do with PEUs

Lord John Browne of Madingley, the Don Blankenship of oil refining, spoke to NPR about corporate social responsibility last week.  BP's Texas City refinery blew up eleven years ago resulting in 15 deaths and injured 170 more.  Browne's deposition came after his resignation as BP's President.  He denies knowledge of operations changes from corporate executive edicts that contributed to the disaster.  Someone truly socially responsible would've accepted responsibility. but Browne already moved on to his next big money gig.

His 2008 deposition stated:

Q. (BY MR. COON) Mr. Browne, you indicated that your present employment is with Riverstone Holdings?
A. That's correct.
Q. Is that your primary position at this time, sir?
A. It is.
Q. And that is a holding company that is associated with The Carlyle Group, is it not, sir?
A. Carlyle is a shareholder in the company.
Q. Do you know something about the shareholders in The Carlyle Group, sir, that you work for?
A. Well, we don't work for The Carlyle Group. The Carlyle Group is a shareholder in Riverstone Holdings, L.L.C., and I am the managing partner of Riverstone Holdings, L.L.P., which is owned by the L.L.C.
Q. Yes, sir. And if you go to the Carlyle website, you can see the list of their locations around the world; and one of them that they, interestingly, list is Riverstone. Do you know why that would be?
A. I don't know. I haven't seen their website.
Q. Okay. Do you know some of the shareholders in The Carlyle Group, sir?
A. I know the -- I met, several times, the founders, Mr. Dan D'Aniello, Mr. David Rubenstein and Mr. Bill Conway.

Which leads us to the next NPR story.

Lord John Browne and Carlyle's David Rubenstein have deep political connections.  They've each used their contacts to enrich themselves handsomely as private equity underwriters.  PEUs preferred tax status is a social cancer that this pair enjoyed while their businesses failed employees and customers.  The Carlyle Group's LifeCare Hospitals had 26 deaths in the aftermath of Hurricane Katrina in August 2005.

How much has Lord John Browne and David Rubenstein saved in preferred taxation from 2005 until now?  That's a question an alert media, who understands the deeper relationships between politicians and the PEU boys, might ask. 

Rubenstein Recalls His Book

Showbiz*411 reported:

A few years ago Rubenstein signed a contract with HarperCollins for a book called “Beyond Wall Street: Inside The Rise Of Private Equity.” It was listed in all the HarperCollins catalogs and due for publication in 2009. Well, calendar pages flew by, and the most recent date scheduled was for December 2015. But that date came and went. Now I’m told that Rubenstein has pulled the book, even though it was written, edited, and ready to be sold.

Google Books promoted Rubenstein's book with:

A founder of the Carlyle Group explains how a rise in private equity is changing the future of investing, in a guide that covers how private equity works, the inner functions of private equity firms, and how everyday investors can make significant returns.

Book Depository.com hawked the book with:

Rubenstein offers the first look at an industry that touches ordinary investors through pension funds, university and charitable endowments, and funds that may someday be available to almost anyone who is attracted to returns that consistently outperform the stock market

I'd like to think PEUReport chronicles the meteoric and frightening rise of private equity underwriters over the last nine years.  WSJ just did a piece on a Carlyle fund that echoes these themes.

Another Rubenstein Carried Interest Story

ProPublica reported how Carlyle Group co-founder David Rubenstein ensured wealthy private equity underwriters (PEU) would continue paying minimal taxes via their preferred carried interest taxation.

On June 8, 2010 Rubenstein’s cell phone rang as he was speaking to supporters of the Economic Club, at the Phillips Collection. He left the stage to take the call. Among those in the audience was Gary Shapiro, the consumer-electronics lobbyist who was Rubenstein’s travel companion to Japan in the ’80s. After a few minutes, Shapiro recalls, Rubenstein returned and said, “That was a senator. That one call just saved us on carried interest.”

PEUReport readers know how Presidents George W. Bush and Barack H. Obama curry favor by dining with Mr. Rubenstein and his wife Alice Rogoff.  ProPublica also told a number of dinner stories.

The first serious run at removing the carried interest loophole came in 2007.  PEUs won.  Another attempt occurred in 2010.  PEUs won.  The next year America learned about the policy making billionaire.

Today elected officials are no closer to righting this wrong.  Americans are clearly concerned about our abysmal leaders, who seem to serve billionaires over the common man.

It's been a tough decade since the public learned about carried interest and our elected officials sat on their fattened hands.  Thank heaven ProPublica noticed what others have.  It's a bipartisan world with lots of love for PEUs.  Politicians Red and Blue love PEU.

Lewitt Identifies Two Worrisome PEU Moves

Michael Lewitt's Sure Money reported:

The private equity industry is under serious pressure right now.

With the Super Crash on the way, financial stocks are taking a beating – particularly private equity stocks like Apollo (APO), Ares (ARES), KKR (KKR), Blackstone (BX), Carlyle (CG), and Fortress (FIG). The thing all of these companies have in common is heavy exposure to the high debt levels that built up since the financial crisis. The market is telling us that it is very worried that the Debt Supercycle is over and that a lot of this debt isn’t going to be paid back.

Carlyle is off its lows from several weeks ago.  Lewitt is concerned about two private equity practices given the huge debt levels corporations. i.e PEU affiliates, have taken on.  Private equity firms also package, sell  and service corporate debt through collatoralized loan obligations (CLO). 

Concerning practice #1 is well know to PEU Report readers., dividend recaps or what I call dividend bleeding.

The first “private equity indicator” I watch for is an increase in the frequency of “dividend deals.”

Also known as a “dividend recapitalization,” this infamous transaction involves a private equity‐owned firm borrowing money to pay a dividend distribution to its owners. We’ve seen this behavior all over the news lately – KKR-backed GenesisCare seeking $285m in loans, American Tire Distributors acquiring $805m in junk bonds to pay dividends to TPG Capital, JCrew borrowing $500 million to cash out its shareholders, and Vogue International LLC borrowing over $200 million to pay a shareholders’ dividend to The Carlyle Group.

The debt raised in these transactions is not used to enhance the business of the borrower in any way, for example, by building additional facilities, funding research and development, creating new products, or hiring new workers. The money instead is paid out to the private equity sponsor in order to reduce the capital it originally invested in the business.  It saddles companies with more debt while reducing or eliminating any skin that the private equity firm has in the game – leaving bondholders holding the bag.

Practice #2 is monetizing a PEU affiliate via sale to another PEU.  Rarely is the price paid revealed in a PEU to PEU deal.

This second practice that indicates that the credit cycle is entering its terminal stages is the phenomenon of private equity‐owned companies being sold by one buyout firm to another, which I call “passing the hot potato.”

This has been happening at a dizzying pace lately – if you’ve been tracking our failing private equity firms, you’ve seen Ares Management buying CHG Healthcare Services from J.W. Childs Associates and snapping up Farrow & Ball from European Capital Limited; KKR selling off TASC Inc. to Engility Holdings; Blackstone and TPG teaming up to buy Kensington Group from Investec; and Blackstone selling GCA Services to Goldman Sachs Group Inc’s private equity arm and Thomas H.Lee Partners LP.

Selling an affiliate to a peer avoids public disclosure.  It enables the repricing of asset values and debt to be reissued.  It also enables both PEUs to charge deal fees.

The real reason such deals are done, of course, is to generate fees for private equity firms. The selling firm is able to generate a “realization event” that triggers a “transaction” fee and allows it to return capital to investors, while the buying firm is able to pay itself a transaction fee on the purchase. The wonder is that lenders continue to finance such transactions, which are done at higher and higher multiples of cash flow and contribute little to economic growth.

Carlyle frequently charges a huge fee to make up for losing years of expected PEU management fees.

Private equity firms have mastered the art of enriching themselves at the expense of virtually everybody else with whom they come into contact in the economy.  

Lewitt believes the credit cycle is nearing a bad end.  That would spell trouble for PEUs.

City of San Angelo Sues PEU Owned Hirschfeld

The Standard Times reported:

What began as a promising multimillion-dollar economic venture to generate hundreds of wind energy-related jobs in San Angelo turned into an undertaking that blew south.

The city of San Angelo Development Corp. and the city are seeking to recoup more than $2.7 million in damages, attorneys' fees and minor costs resulting from a 2009 investment to bring a wind turbine tower fabrication plant to town.

COSADC and the city hope to recover the money through a summary judgment hearing scheduled Wednesday in the 119th District Court and avoid going to trial.

The City's press release cited the difficulty negotiating with a private equity owned company.

Negotiating with the private equity hedge fund that today controls Hirschfeld is more challenging than partnering with local ownership with whom the City has had close personal and working relationships for decades.

Texas politicians, starting with Governor Rick Perry, trained PEU owners and affiliates that public money was loose and nearly free.

 "The City and the COSADC could not agree to a minimal repayment," the release stated. "Doing so, and allowing Martifer-Hirschfeld to walk away with millions in taxpayer dollars, would constitute a serious breach of public trust."

It's hard for Insight Equity to monetize Hirschfeld with a multi-million dollar lawsuit hanging over its head.  The City of San Angelo is the first I've come across that cited a PEU owner in suing for economic nonperformance.  I hope it becomes a trend.