Financial Hostage, Planned Meltdown?

If fifty big money men in a room can break the credit market seizure, why won't they? Are they holding the U.S. economy hostage, until their list of demands are met? Credit markets are more locked up than three weeks ago, when Hank Paulson rang alarm bells.

The big money men are scared, fleeing to Uncle Sam's safe harbor for protection. What's in the water? Maybe, shark like risk from shoddy lending practices and packaged financial Ginshu knives, two sided and razor sharp.

Uncle Sam didn't do so well saving flooded citizens of New Orleans. It looks like private sector lifeguards will need to rescue failing financial institutions. Private equity underwriters and foreign sovereign wealth funds are flush with billions in cash and trillions in assets. These Supermen expect SuperReturns, 20-25% per year. Their greed sets the foundation for the next round of excesses.

To take down Wall Street's house of cards, one firm had to fail. Hindsight calls Lehman's failure a huge mistake, given the disastrous dominos sent in motion.

Did the feds purposefully tip Lehman? Did they do it to clear the deck for PEU's and SWF's? Did they consider the impact on the political House of Bush? I don't know the answers, but would love to hear them.

Big Money Boys Perpetual Hand Out

Uncle Sam stocked the financial rescue buffet with more goodies for big money men. Wall Street requested stock purchases, guarantees of interbank lending, insuring exchange trades, and tax cuts.

Private equity underwriters joined their commercial bank counterparts in demanding lower taxes. PEU managers already benefit from preferred taxation on their "carried interest" income.

Pete Peterson, a founder of Blackstone Group, wants to cut entitlement spending without having PEU boys pay a fair share of their ample income. His foundation barnstormer, David Walker, wouldn't give on this point in yesterday's CNBC interview, even under the huge tax weight of the bailout.

To garner their 20-25% annual returns, private equity seeks firms with growing chunks of government business. But they hate paying taxes. Apparently emptying the federal coffers is O.K., but it's a sin to fill them with PEU managers' tax money.

Yes, our nation faces hard and difficult choices. Supplanting the old system of greed that undermined the foundation of storied Wall Street firms, with a newer, private, SuperReturn version doesn't change underlying causes. Greed remains.

The projected change may look impressive, but it's not radical. Wait to see the impact of steroids on PEU's. George Bush wants to "pump them up." The American taxpayer's wallet is clearing the deck for that to happen. SuperReturns for the new financial Supermen...

A Tale of Two Meetings

The G-7 group of nations formulated a plan to address the faltering global economy in Washington, D.C. Halfway across the globe, private equity underwriters (PEUs) gather in Dubai for the SuperReturn Conference. In case anyone forgot, pursuit of super returns by Wall Street investment houses helped get us into our current pickle. The Scotsman reported on the G-7 meeting:

The wider, five-point G7 plan is:

• Take decisive action and use all available tools to support important financial institutions and prevent their failure.
• Take all steps to unfreeze credit and money markets.
• Ensure banks can raise capital via public and private sources.
• Ensure national deposit guarantee programs are robust.
• Take action, where appropriate, to restart the "secondary markets" for mortgages and other assets.

However, there was no further detail last night. In a surprisingly brief statement after their meeting, the G7 also stopped short of backing a UK plan to guarantee lending between banks – a move many on Wall Street saw as vital.

"The G7 agrees the current situation calls for urgent and exceptional action," the statement by US, Canada, Britain, France, Italy, Germany and Japan said.

Finance leaders are to continue meeting this weekend to agree a global solution. Analysts said the summits, which involve the G7 and G20 nations, as well as the International Monetary Fund and World Bank, are of "truly monumental importance".

The Gulf Daily News reported on SuperReturn:

A top private equity conference, SuperReturn, has a strong line-up of global thought-leaders speaking at its second Middle East conference taking place next week in Dubai.
SuperReturn Middle East will be held from tomorrow to Wednesday at the Intercontinental Hotel, Festival City, Dubai.

Headlining speakers at the event will include eminent and powerful global private equity figures, such as Investcorp's president and chief operating officer Gary Long, Carlyle Group chairman David Rubenstein and Blackstone Group chief executive officer and co-founder of Steve Schwarzman.

"We are delighted to be a principal partner of such a prestigious event," said Mr Long. "SuperReturn is the definitive private equity forum. Its success and standing in Europe is now being replicated here in the Middle East at a time of increasing excitement and opportunity for the local private equity industry."

The Middle East is full of dollar stuffed sovereign wealth funds. They have $2.5 trillion in assets. They're front and center as U.S. banks look for new capital. World Bank President Bob Zoellick already had them on the agenda. What luck!

"You will also see the sovereign wealth funds – and they have already been doing this – play a role in recapitalising financial institutions. You've already seen some of those investments and I undoubtedly believe that you'll see more. So, it's part of the change in the international financial and economic system," said Mr Zoellick.

Restructuring the global financial system will take time. SWF's want in. A U.S. meeting on the topic is scheduled for Monday. "Keeping Markets Open for Sovereign Wealth Fund Investment" is headlined by a Treasury big wig and Goldman Sachs. It appears private equity and sovereign wealth funds will garner SuperReturns on their bank investments.

The Carlyle Group expects 20-25% annual returns and likes deals stacked in their favor. What can the boys at the G-7 deliver for Carlyle & company? Whatever it is, Carlyle co-founder David Rubenstein is optimistic.

".... by and large the private equity firms are probably going to emerge from this far stronger than many of the other kinds of economic engines of our society."

Carlyle hates a level playing field. How is this one stacked in their favor?

Ex-Fed Governor Angell Lays Out PEU Plan on Recapitalizing Banks

Wayne Angell suggested the federal government form a new government services enterprise to recapitalize the flagging financial sector. The feds would pony up 10% of the initial capital, the private sector provides the rest. Governor Angell expects private money to flood the GSE, such that it could garner a AAA rating. Private equity underwriters would finally get their way.

The GSE would provide capital to shore up failing banks, in return for an ownership position. Existing shareholders would take it on the chin. The PEU boys could become major players on the cheap. With crisis, comes opportunity. The Carlyle Group knows this well.

When William Conway & David Rubenstein Speak, The White House Listens

Not long ago Carlyle Group co-founder William Conway suggested banks need recapitalization, more than liquidity. That means new owners come out far rosier than old. Guess who wants to be a new owner? The Carlyle Group, the politically connected private equity underwriter (PEU).

Today, fellow Carlyle founder David Rubenstein weighed in with Lee Hudson Teslik of the Council on Foreign Relations. David's interview is on the CFR website. He closes with:

Nobody is immune from the laws of gravity, and private equity will have its problems as well, but by and large the private equity firms are probably going to emerge from this far stronger than many of the other kinds of economic engines of our society.

Taxpayers are clearing the deck for Carlyle & Co. to ride in, take positions, and profit mightily. The government industrial monstrosity continues its plundering. Consider David's prescription to address the economic infection:

I also believe that the more times we can get the congressional leadership and the president meeting together and agreeing on things would be helpful. And the more we can get business leaders meeting with governmental leaders and agreeing what should be done and coming out and giving the country a sense that the leadership of the country-business and government-have a common view on what should be done, would be helpful.

Recall that fifty big money men in a room could reverse the credit crisis overnight. That doesn't address the gloomy economic outlook, but it's the immediate antifreeze for the economic engine. But Carlyle wants to help out. It offered medicine to regulators struggling to deal with the crisis. Affiliate FRSGlobal announced it is offering all official regulatory bodies a version of its risk and regulatory software without charge to better facilitate prudent oversight of the financial markets and help provide a single, global regulatory model for the 21st Century.

How all this impacts future winners, I'll leave to Mr. Conway and Rubenstein to prognosticate. But they clearly want PEU's to be far stronger, more stunning to wealthy investors. Deutsche Bank thinks Carlyle is worth courting. They want more than one date.

Will Lehman Credit Default Swaps Deliver?

Rather than an expected 12 cents on the dollar, Lehman credit holders got 9 3/4 cents. In other words, Lehman debt fell short by 91.25 cents. That's the preliminary report from CNBC. Final numbers are worse.

Credit default swap holders promised to make losers whole. Will they deliver or default? The week of October 20th will be informative.

Greed vs. Fear in Halls of Power

"Fifty people in a room can break the financial fever," at least one CNBC expert suggested such. He added, "the government has the power to correct it quickly."

That the crisis deepened over a three period means what? Did the government not do the right things? Did the big money boys hold their cards, upping the ante with each government giveaway?

Greed got our economy into a precarious position. The Ghost of Credit Past visited Wall Street in September. Imposition of payment for past sins sent the big money boys into an underwear soiling panic. They fled to Hank Paulson for help. Once safe behind the tall bureaucrat, the big money boys noticed Paulson's fat wallet. Greed set back in, but the Ghost lingers....