Tuesday, June 30, 2009

General Peter Pace Lands Another Board Slot with Defense CyberSecurity Firm

Qualys announced the appointment of General Peter Pace to its Board of Directors. Qualys provides cyber security services. Products include defense department applications. Business Wire reported:

With four decades of distinguished Marine Corps service, most recently as the 16th Chairman of the Joint Chiefs of Staff of the U.S. Military, General Pace brings expertise and interest in cybersecurity and geopolitical issues to help guide Qualys expansion within state and government agencies.

"Qualys, who pioneered the Software-as-a-Service (SaaS) model for IT security and compliance, has demonstrated significant traction and industry leadership. Qualys continues to help organizations and government agencies address the significant security challenges we are facing,” said General Pace. “Cybersecurity threats have become a national priority and I look forward to working with the Qualys team to provide strategic guidance around the issues that affect IT security and foreign and domestic governance

This makes the fifth company utilizing General Pace's management skills and insider political connections. The list includes:

Berman Capital
SM&A Strategic Advisers (first year compensation $560,000 for part time work)
Neohapsis (owned by Trident Capital, which also owns Qualys)

Qualys is privately owned, mostly by venture capital firms. The firm did not release Peter's board compensation. General Pace is an insider in America's Government-Industrial Monstrosity, Eisenhower's Military-Industrial Complex on steroids. He mines his contacts for big money. Obama's General James Jones loves Cyber-Warfare, Peter Pace wins.

Update: General Pace landed a board seat with Pike Electric Corporation.

Update 11-21-10:  Pace is now on the board of ILC Industries and Pelican Products, according to Pike's SEC filing.

Update 3-18-11:   General Pace sits on the board of AAR Corp.  It's Government and Defense Services division is the fastest growing segment and now provides the largest share of revenue.  Pace received 2,000 shares in a restricted stock award.

Carlyle Group's New $1 Billion Asia Fund

The Carlyle Group's new $1.04 billion Asia fund will target Chinese and Indian companies with potential for rapid growth. WSJ reported:

"Asia remains a core focus of our global business, and Carlyle continues to devote more resources to China and India," said Carlyle founder David Rubenstein in a statement.

What is Carlyle's track record in Asia? In addition to some big winners:

Carlyle saw its $25 million investment in China's Credit Orienwise Group Ltd. sour as the overleveraged credit guarantee firm struggled with losses and the company admitted to fraud taking place at a unit.

This isn't the first Carlyle affiliate to get a bloody nose. Vought gummed up the Boeing 787 Dreamliner production. SemGroup imploded overnight from forward looking contracts. Synagro Technologies bribed Rep. John Conyers wife. LifeCare Hospitals lost 24 patients post Hurricane Katrina, a fact omitted from the Bush league Lessons Learned report. But back to Carlyle's latest investment opportunity. FT reported:

New investors accounted for 40 per cent of the fourth fund, with half of all money provided by government pension funds and financial institutions – which traditionally have allocated more capital to buy-out opportunities. There was also rising commitment from investors within Asia and from Latin America.

Pension funds need to earn back lost principal. Double down! A decoupling is coming.

Update: The Carlyle Group invested in a Chinese infant formula maker. Recall tainted formula sickened tens of thousands of Chinese babies. Carlyle will use its considerable knowledge of quality to optimize investment returns and executive pay. The product? Not so much. At least LifeCare, Vought and Synagro point to major quality problems.

Canadian Pension Buying Whole PEU Infrastructure Fund from Macquarie

The Canada Pension Plan Investment Board received regulatory approval to buy Macquarie Communications Infrastructure Group, which owns and operates broadcast infrastructure in Australia and Britain. Rather than spin off companies within an investment portfolio, the Australian private equity underwriter (PEU) is selling the whole fund.

The CPPIB wants more of Macquarie's infrastructure, according to the Wall Street Journal. Cash strapped states search for ways to raise revenue. Selling critical infrastructure to PEU's or pension plans is one method. Expect to hear more about it in the future.

The Obama team loves private equity underwriters. They are his prescription for the ills of banks, the tonic for toxic assets, the catalyst for education, and the resuscitation of health care.

Pension plans used to invest big money in PEU's. Now they buy a whole syndication. It's called doubling down. The odds are with GIM House. GIM stands for the Government-Industrial Monstrosity. It's Eisenhower's MIC on steroids and it infects much more than the military.

Update 11-09: CPP in two U.S. buyouts worth $11 billion

Saturday, June 27, 2009

New Financial World Order Merits a Draghi

Mario Draghi, head of the Financial Stability Board, is an ex Goldman Sachs man. He now serves on the European Central Bank council and is governor of the Bank of Italy. Mario likes the world economy's "convincing signs of recovery." Bloomberg reported:

The Financial Stability Board looks at risks to financial markets and ensure that regulators in each country act upon them. Its members represent economies from Argentina to the United States and institutions such as the European Central Bank and the International Monetary Fund.

Not long ago, Mario gathered with fellow members of the Bilderberg Group. Reports suggest Bilderbergers want the IMF to serve as global Treasury Department and the World Health Organization to act on global public health issues. Mario's comments support the former objective:

The FSB will “make an integrated proposal to strengthen the capital and liquidity regime by end-2009,” Draghi said, including requirements to address systemic risk.

Of course, Goldman Sachs opaque energy futures market will skate through cleanly. Private equity underwriters should avoid any serious regulatory scrutiny. The big money boys have more risk games to play.

Friday, June 26, 2009

Carlyle Group Affiliate Bribed Rep. John Conyer's Wife

Synagro Technologies gave two payments to Detroit City Councilwoman Monica Conyers in late 2007. The company paid Mrs. Conyers for her support on a $47 million contract for sewage sludge processing and incinerator construction/operation. A court accepted Monica's guilty plea.

The Carlyle Group purchased Synagro Technologies in April 2007. They charge affiliates a management fee for their operational expertise.

(Note: Carlyle and their energy joint venture Carlyle/Riverstone paid $50 million to New York State to make a pension pay for play investigation disappear.)

Carbon Traders Set to Benefit

Goldman Sachs and Morgan Stanley have carbon trading desks and stand to benefit mightily from pending U.S. climate control legislation. These same firms have opaque energy futures desks, which transform oil & gasoline from energy products into hedging instruments.

Energy futures offer a window into carbon trading. Despite a 15 month drop in U.S. miles driven, gas prices soared to over $4 a gallon, imploded to $1.40 before rebounding to $2.50. Demand consistently dropped, while prices whip sawed in roller coaster like fashion. What Goldman Sachs and Morgan Stanley did for energy, they stand to do for carbon. Make yacht-loads of money.

FDIC's Promised Guidance for PEU's

When the FDIC approved the sale of BankUnited to a consortium including The Carlyle Group, it noted:

it is close to providing more guidance for how private equity firms can invest in failing banks. The government is looking for ways to better tap the $1 trillion of total uninvested private equity capital.

Five weeks later, the public remains clueless. Do the PEU boys know the new rules?

(Note: Reuters gave a July 2nd date for the FDIC to release guidance to PEU's.)

Citi Lacks an Awareness of Improvement

Japanese financial regulators ordered CitiGroup to stop marketing its products. Reuters reported:

The Financial Services Agency said Citi had not developed adequate systems to detect suspicious transactions such as money laundering, the same violation that prompted the regulator to shut down Citigroup's private banking business in 2004.

One might expect five years a sufficient time to make change.

Its head of retail banking in Japan, Darren Buckley, made a public bow of apology, the traditional sign of remorse employed by Japanese executives, repeating the gesture made by Citi's then-CEO Charles Prince five years ago.

"Our controls need strengthening," Buckley said at a news conference, adding the bank had failed to properly institute changes following the 2004 punishment.

Was Citi too busy with financial innovation to meet the basics?

The FSA said the lack of compliance showed Citigroup executives "... lack an understanding of the rules applied in Japan, such as laws and regulations, and an awareness of improvement."
Citi isn't alone. Wall Street ignored quality in packaging investment junk. Besides Japan, Citi has U.S. quality issues. The bank temporarily suspended mortgage applications from brokers due to inadequate quality control on appraisals and income verification.

America's hallowed halls of government and corporate board rooms haven't a clue regarding improvement, as taught by Dr. W. Edwards Deming. For that America experiences heavy losses.

Thursday, June 25, 2009

Carlyle Group Bid for BankUnited Wasn't Highest

The highest bid didn't win failing BankUnited. The Carlyle Group's bid was less than that of J.C. Flowers. Bloomberg reported:

The offers, kept sealed by the FDIC when the sale was completed last month, show that making the highest bid for assets of a failed bank doesn’t guarantee victory. BankUnited underscores the divisions between private-equity firms seeking profits and regulators keen to protect taxpayers as buyout firms step up investments in lenders crippled by the credit freeze.

The Fed and FDIC do deals outside the light of sunshine. FDIC sales are a TARP workaround, where buyers get government capital and avoid restrictions on executive pay. Corporafornication lives and the Obama team is as creative as George W. in funneling ka-ching to the PEU boys. (PEU stands for private equity underwriter)

AIG Shell Game Continues

AIG will shift Federal Reserve Bank debt to preferred shares in two subsidiaries. Bloomberg reported:

The New York Fed will get $16 billion of preferred shares in American International Assurance Co and $9 billion in American Life Insurance Co.
No one has been paid back. AIG shifted its capital structure in the subsidiaries. Yet, it's being sold a major move:

The transaction “represents a major step toward repaying taxpayers and preserving the value of AIA and Alico,” Liddy said in the statement.
Actually, it's a major step in making the Fed whole, in improving its balance sheet. That's not the taxpayer.

The insurer’s bailout is valued at $182.5 billion, which includes the $60 billion Fed credit line, a $70 billion investment from Treasury and $52.5 billion to fund two vehicles to retire credit-default swaps and the insurer’s securities- lending program.

None of the $25 billion debt shift went toward Treasury or repaying AIG's risky credit bets.

(HT-Economic Policy Journal)

Wednesday, June 24, 2009

Soldiers Out of Iraq, Barbarians In

While American troops plan to draw down from Iraqi cities, U.S. branded multinational companies are moving in. Iraqi oil fields deals are expected next week. Exxon/Mobil may finally get a chunk of the world's third largest oil reserves.

Private equity underwriters (PEU's) have their eye on Iraqi power, telecommunications, banks, infrastructure and cement companies. The Carlyle Group has a new $500 million Middle East/North Africa fund. Soldiers leave, while financial barbarians stand at the gate.

Red Roof Inn Foreclosed on Baltic Avenue

Highly mortgaged Red Roof Inns defaulted on $367 million in debt obligations. Battered CitiGroup owns 79% of the hotel chain. The WSJ reported:

The debt on Red Roof's properties is multilayered and complicated, hinting that Citigroup and the now-defunct Bear Stearns hadn't finished securitizing some of it when the market for commercial mortgage backed securities, or CMBS, shut down in the summer of 2008, according to CMBS analysts. A Citigroup representative declined to comment. At least $367 million of Red Roof's debt is in securitized mortgages. Another $655 million is in mortgages not securitized, and $164 million is mezzanine debt.

Extended Stay Inc., which operates roughly 680 hotels catering to budget-minded travelers on long trips, filed for Chapter 11 bankruptcy protection on June 15. Of Extended Stay's $7.4 billion in debt, $4.1 billion is a securitized mortgage.

The big money boys borrowed heavily during the corporate buyout frenzy. Many of those deals are unraveling. The Carlyle Group's David Rubenstein predicted looming bankruptcies. The red roof fell in. Who's next?

(HT-Economic Policy Journal)

American Taint

Bloomberg reported:

EnTrust Capital Inc., a hedge fund firm that’s handled New York Attorney General Andrew Cuomo’s personal and campaign money, received state pension funds to invest from a company he has identified as paying possible illegal kickbacks.

The investment presents a potential conflict of interest for Cuomo, legal ethics experts said.

Who doesn't have a conflict of interest in America's government-industrial monstrosity? The big money boys know how to buy influence, bury damaging stories, settle investigations with no admission of guilt, get favorable legislation passed, and dangle on the taxpayer's tit.

A pox on the houses of the red and blue team.

Tuesday, June 23, 2009

Pete Peterson on CNBC

Pete Peterson spoke to Melissa Francis. He anticipates a $2 trillion deficit next year. Peterson had more questions than answers. He mentioned engorged entitlements, but not the wealthy paying even a smidgen more in taxes.

This is the man Tim Geithner and Barack Obama hold up as their deficit hawk. Pete spread the fiction of the public "not paying anything" for health care. He failed to mention premium sharing, soaring deductibles and co-payments.

He proposed a Grand Bargain to get America's financial house in order. With the super-wealthy kicking and screaming over taxing carried interest as income, it's a safe bet who'll win the grand bargain, wealthy campaign donors or the Pete Peterson's of the world.

UBS Could Soon Be Off the Hook

A U.S. official said the Justice Department may drop a case against UBS, the giant Swiss bank. It seeks the names of 52,000 wealthy Americans suspected of offshore tax cheating. The NYT reported:

Of the 52,000 clients on the agency’s original list, prosecutors are focused on several thousand ultrawealthy Americans with offshore accounts containing from tens to hundreds of millions of dollars.

How many were advised by UBS Vice Chairman Phil Gramm? How many are major campaign donors, even elected officials? The public will likely never know.

(Note: Minutes ago the WSJ reported the Justice Department is not dropping the suit, at least not yet. 7-12-09 Court filings indicate a settlement may be near.)

Monday, June 22, 2009

Carlyle Group Executive to Join Morgan Stanley Board

James Hance, Senior Adviser for the Carlyle Group, will become the 13th board member for Morgan Stanley, America's sixth largest bank. His twelve peers pocketed from $325,000 to $375,000 in director's compensation from Morgan Stanley in 2008. Sweet!

Not to mention the dance between former investment banks and private equity underwriters. Keep your friends close and your enemies closer!

(Note: Carlyle Senior Adviser Charles Rossotti sits on the board of Bank of America.)

Calpers to Double Down on PEU's

The California public pension fund plans to increase investments in private equity underwriters (PEU's). The pension is currently underfunded. Rather than ask for greater contributions, it plans to invest its way out of the shortfall. LA Times reported:

Private equity deals generated an average annual return of 8.8% over the last decade, compared with an average annual loss of 0.9% for publicly traded stocks.
PEU returns have outpaced other investment vehicles after a recession. That is if the recession is truly over.

Calpers will roll the dice, throwing cash at the usual suspects.

Thursday, June 18, 2009

Rubenstein Forecasts Tsunami of Bankruptcies

After the initial signs of economic trouble, private equity underwriters (PEU's) overpaid and over leveraged some $500 billion worth of deals. Carlyle co-founder David Rubenstein sees a wave of corporate bankruptcies as a result. He shared his thoughts at the Aspen Global Leadership conference.

Other prognostications include high inflation (4-6%), high interest rates, and a wave of tax hikes. What if the PEU boys paid their fair share in taxes the last nine years? How might things look? Likely not as bad.

Wednesday, June 17, 2009

PEU's & SWF's Get Little Mention in Obama's Regulatory Reform Plans

Private equity underwriters (PEU's) and sovereign wealth funds (SWF's) got little mention in 88 pages on President Obama's regulatory reform. PEU's got 3 mentions while SWF's got zero.

Larry Summers headed the regulatory restructuring team. He ignored the advice he gave as a private citizen in regard to SWF's.

The Obama team was generous in their free passes. Investment banks, responsible for due diligence on packaged financial products, got a freebie from the Obama team.

Market discipline broke down as investors relied extensively on credit rating agencies.
The Obama piece blames consumers, i.e. users of credit.

Households saw significant increases in access to credit, but those gains were overshadowed by pervasive failures in consumer protection, leaving many Americans with obligations that they did not understand and could not afford.

Producers of financial innovation were responsible for quality. Yet, the Bush and Obama administrations bailed out purveyors of financial junk. President Obama opened his report with:

Over the past two years we have faced the most severe financial crisis since the GreatDepression.

Not another Bush-like unprecedented event! This isn't the first time big money boys were omitted from a key government report. The Carlyle Group's LifeCare Hospitals and their 24 patient deaths got no mention in President Bush's Katrina Lessons Learned report. But that's an old story. In the President's announcement, he said:

With the reforms we're proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly without the fragility in which normal business cycles suddenly bring the risk of financial collapse. We want a system that works for businesses and consumers.
That's not a robust set of plans, if it only meets the needs of normal business cycles. Didn't he say something about a Great Depression? So why the bait and switch? Is it a diversion?

Greed and leverage brought America to its knees. Private equity did its part. The Carlyle Group used ample borrowings to finance its deals. The politically connected PEU lost:

Carlyle Capital Corporation
Blue Wave Partners
Hawaiian Telecom
IMO Carwash sits on the brink of loss to creditors.
How is ManorCare, the huge nursing home provider, holding up under a heavy debt burden? Carlyle has a history of failing patients in a time of crisis. A closer look at the deal shows JP Morgan and CitiGroup Global Markets advising ManorCare's Board.

Pursuant to an engagement letter between Manor Care and JPMorgan, we have agreed to pay JPMorgan a transaction fee of 0.55% of the aggregate consideration to be paid in the transaction, or approximately $34.8 million (less the amount of the opinion fee to Citigroup Global Markets Inc.), $5 million of which was payable upon delivery of its opinion and the remainder of which is payable upon and contingent on consummation of the merger. In addition, affiliates of JPMorgan will be entitled to receive fees from MergerCo pursuant to debt commitment letters delivered by affiliates of JPMorgan to MergerCo as described under “The Merger — Financing — Debt Financing” beginning on page 37.

JP Morgan's affiliates were free to work the other side of the buyout, Carlyle's commercial mortgage backed securities (CMBS) financing. Funny, the Obama administration didn't mention conflicts of interest. But that's a touchy subject. His health care reform team is full of for-profit insiders. I'm beginning to see a pattern.

(Note: Chairman of failed Carlyle Capital Corporation, Carlyle Senior Adviser James Hance landed a spot on the Morgan Stanley board. That beats a jail cell!)

Sunday, June 14, 2009

The Coming Hard Sale of Good Times

President Obama badly wants to create an improved economic reality. Pumping trillions into various government programs clearly helped stem the bleeding. What happens when the tourniquet is removed? Will markets return to their unstable state of summer/fall 2009?

Dollar fear is back, turning oil into a dollar hedge instead of an energy product. Naked credit defaults swaps remain a "risk management" tool, which is patently laughable. Securitization has been restarted with taxpayer money. The types of credit being packaged is due to expand.

Derivatives took down Lehman Brothers overnight. They would've wiped out AIG, if not for hundreds of billions of taxpayer money. They remain a dangerous product, especially when combined with securitization. Is it safe?

Not to worry. This Wednesday President Obama will tell us "financial regulatory reform" will make things safe. It ignores that greed is back, with a tad less leverage, much of it taxpayer supplied.

The new President is much like the old in practice, but he sells a whole lot better. His promises sound good, but Obama's implementation is Bush quality corporafornication. Sad days, indeed...

Friday, June 12, 2009

Where's Phil Gramm in UBS Tax Cheating?

Senator Phil Gramm joined UBS as Vice Chair in 2002. Yet, Gramm's name is never mentioned in reports on widespread tax cheating by UBS. Bloomberg reported:

UBS sent private bankers to U.S. art auctions and regattas to find rich Americans, reel them in as depositors and advise them on setting up sham companies and bogus trusts to shield their money from the tax man, the bank now admits.

What was Gramm's role? Did any of his investment bank clients dodge taxes per Phil's advice? How about the two Japanese businessmen trying to smuggle $134 billion in U.S. bonds into Switzerland. Were they UBS investment advisers?

How about a Congressional investigation on Phil Gramm's role in the widespread UBS tax dodge? It won't happen. The tainted Capital boys look after their own, keeping friends out of the limelight. Ask Kenneth Duberstein.

Larry Summers at CFR

President Obama's Chief Economic Adviser gave a shout out to private equity underwriters (PEU's) in his speech at the Council on Foreign Relations. Larry Summers knows how to read his audience. Many PEU's sit on the influential council. He pandered to David Rubenstein, Pete Peterson, and Henry Kravis.

Summers smiled repeatedly as he spoke of the important role of private equity underwriters. He said the government wouldn't manage like PEU's. Hank Paulson's sovereign debt fund conducted equity injections, short term in nature. PEU's have a "long term focus."

PEU's have a legitimate right to impact board, management, and influence strategy. Larry sold the government wants to get the team set prior to public investment, then remain hands off. History shows this not to be the case.

Summers stressed that government tools imitated private sector solutions. Yet, the plan is get out as soon as possible. That fits with "socialize the losses, privatize the gains."

The Council on Foreign Relations works to spread American branded multinational corporations throughout the world. Larry noted in his opening remarks that countries with "Golden Arches" don't attack each other. Can morbidly obese people serve in a military?

Did portly Larry Summers improve his chances for Fed Chief with his speech? Someone's gunning for Ben Bernanke. The Fed Chief has been remarkably absent from the airwaves, given accusations of heavy handedness on the Merrill Lynch deal.

Larry's talk is a prism, reflecting the Obama team's core beliefs. Government does not exist to perform functions the private sector can't or won't. It exists to send huge chunks of work to the private sector, while paving the way for increased corporate profits, domestically and internationally. A golden era for the PEU boys, sad...

Thursday, June 11, 2009

Carlyle Group & Riverstone Pony Up $50 million for Pension Pay to Play

The Carlyle Group and its energy joint venture Riverstone Holdings paid a combined $50 million to the New York State Attorney General to settle a "pay to play" investigation. The Carlyle Group paid $20 million and Riverstone $30 million.

Does anyone else find it odd that a private equity underwriter (PEU) can buy its way out of a corruption probe?

Wednesday, June 10, 2009

Carlyle Group Fractal in Government Industrial Monstrosity

The Obama administration loves private equity underwriters (PEU's). They stand to save flagging banks, rebuild America's infrastructure, and reform health care & education. But PEU affiliates also serve the federal government, now mostly a general contracting operation.

Booz, Allen, Hamilton
2008 federal contracts-$2.8 billion
Reported annual revenue-$2.0 billion

Federal contracts to reported revenue 140%

2008 federal contracts-$718 million
Reported annual revenue-$300 million

Federal contracts to reported revenue 240%

ARINC's federal contracts exceeded reported revenue due to funneling of "helicopters for Iraq" through the engineering firm.

These are only two of Carlyle's nearly 1000 firms. The Government Industrial Monstrosity gives generously to insiders.

Questions for Carlyle Group Co-founder David Rubenstein?

Steve Hamm from BusinessWeek is soliciting questions for this week's Aspen Global Leadership Network conference. His pleas for questions target four speakers:

David Rubenstein, co-founder and managing director of The Carlyle Group

Sonal Shah, the newly appointed head of the White House Office of Social Innovation

Walter Isaacson, CEO of the Aspen Institute and former CEO of CNN

John Wood, founder of Room to Read and author of Leaving Microsoft to Change the World

If any of GlobeSpotting’s readers want me to ask one of these four a question, please e-mail at my personal e-mail: stevehamm31@hotmail.com.

I have an outstanding question, one Mr. Rubenstein may be able to answer. How did The Carlyle Group get the Bush White House to omit any mention of 24 LifeCare hospital deaths in its Katrina Lessons Learned report? Carlyle purchased LifeCare from GTCR Golder Rauner weeks before Hurricane Katrina struck the Gulf Coast. Ten deaths in the same facility, Memorial Medical Center belonged to Tenet Health.

I hate to ask the distinguished Carlyle Group co-founder, but Frances Townsend and the Bush White House, Senator Cornyn, Senator Hutchison, Representative Conaway, the FBI, Justice Department and Homeland Security never responded to my various inquiries.

BusinessWeek would be interested in the six degrees of Kevin Bacon to the Memorial's 34 deaths. But it's likely not a tasteful question for the Aspen gathering. Social innovation has the hard questions lingering for years. Ask Harry Markopolos.

My new question would be, what did Mr. Rubenstein and Rahm Emanuel discuss over dinner at the Blue Duck Tavern? So far the Obama team delivered for private equity underwriters via government public-private partnerships. He even gave companies the incentive to go private to avoid executive pay scrutiny.

I would ask Ms. Shah if her position, the Office of Social Innovation, came from George Orwell's 1984, but I don't expect anything other than a highly vetted answer with lots of Axelrod/Emanuel buzz words. Did Ms. Shah meet with the group of billionaires, that recently gathered to talk about the future of philanthropy? Did they discuss tax policy and giving control of projects to heavy hitters? Sonal happens to have Goldman Sachs in her background. What questions do you have?

Tuesday, June 9, 2009

Carlyle Group Goes Carnaval

It's party time for private equity underwriters (PEU's)! What better way to celebrate than in Brazil? Bloomberg reported:

Carlyle Group, the world’s second- largest private-equity firm, plans to invest $1 billion in Brazilian companies during the next five to seven years, an executive said today.
The Carlyle Group is going Carnaval. The orgy of Corporafornication continues from the Middle East/North Africa to South America to Carlyle's home base in the U.S.

President Obama promised to support businesses in the Middle East in his Cairo speech. Funny, the Carlyle Group has a $500 million fund targeting the region. Look for Obama promises regarding South America, then follow the money. What role will Rahm Emanuel play in creating business opportunities for PEU's?

(Bloomberg removed the original story but traces of it can be found here, as long as it lasts. Did Bloomberg Board member and Carlyle Group Senior Adviser Arthure Levitt intervene? The WSJ added a piece on attrative investments in Brazil with a quote from the same Carlyle Group bean spiller.)

Monday, June 8, 2009

Shifting Sands for Big Money Boys

Two financial news stories point to rapidly shifting sands in the desert that once was Wall Street. Storied investment banks are no more, their business model in severe jeopardy. Who fill their role in packaging deals for investors? FT reported:

Mutual fund group Fidelity is teaming up with Kohlberg Kravis Roberts, the private equity firm, in an unusual deal that will give Fidelity’s huge retail client base access to future public listings of KKR-owned and underwritten companies.

The exclusive arrangement will give KKR guaranteed retail distribution for its initial public offerings, and will allow Fidelity to offer its brokerage customers an equity investment they might not find elsewhere.

KKR owns almost 50 companies, including Hospital Corp of America, Dollar General, First Data, SunGard, the former TXU, a Texas utility, and Alliance Boots.

There have been virtually no IPOs in the past two years, but as conditions and sentiment improve in the stock market, KKR and its peers are expected to list many of the companies they bought in the boom years.

Reuters reported on another major deal:

Money manager BlackRock Inc, known for working with institutions and governments, could get a lot closer to retail investors as a result of a potential marriage with Barclays Global Investors, or BGI.

For New York-based BlackRock, which built its reputation by offering debt funds to institutional clients, BGI would add $1.5 trillion in new assets, give it access to fast-growing exchange traded funds and attract retail clients.

A deal would also help BlackRock, long popular with big pension funds and endowments, woo retail investors through BGI's hugely popular exchange traded funds, which trade like stocks and are often less expensive than mutual funds.

The financial world undergoes reordering. Who will end up on top? My bet is private equity underwriters (PEU's). The rules keep changing in their favor and any regulation looks to be powder puff.

Declining Need to Socialize CDO Losses

May saw prices for collateralized debt obligations (CDO's) improve dramatically. Bloomberg reported:

A “remarkable change” in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month, according to Morgan Stanley analysts.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk, or junk, loans and slice them into securities of varying risk and return. Pieces graded AA, the third-highest level of investment grade, rose to 47 cents on the dollar from 23 cents in the past month, Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a June 5 report. Securities ranked A have gained 13 cents to 23 cents since the end of last month, the report said.

The top-rated CLO bonds have risen to 77 cents on the dollar from 71 cents in May, the report said.
Improved investor sentiment could be behind Treasury Chief Tim Geithner's and Sheila Bair's predictions that public-private investment partnerships (PPIP) may not be needed. How did the $25 billion tax break for firms buying back debt factor into the equation? President Obama can stimulate the big money boys.

In February, Obama invited Sheila Bair into his office on Air Force One.

"Sheila, come on back. I want to talk to you," Obama told Bair, who was seated in the plane's conference room. He then escorted her into his airborne Oval Office for their first private meeting, where they discussed the government's role in alleviating the worst financial crisis since the 1930s.
Did he and Bair discuss allowing private equity underwriters to buy banks? I don't know, but the rules keep changing in favor of PEU's.

Schlocky Frame Hides Race to Global Lowest Common Denominator

What's the best way to dis an idea? Call it "schlocky." The NYT has an odd article on "conflict" within the Obama economic team. It ends with:

Mr. Summers pressed Mrs. Romer to make the argument that health care reforms could make American businesses more competitive globally, adding that it was among the political advisers’ favorite “talking points.”

He did so again when Mrs. Romer outlined her final draft at a recent well-attended meeting. She cut him off, saying that some of his own staff agreed the point did not belong in the paper.

“I’m not going to put schlocky arguments in there,” she said.

“I’m not making a schlocky argument,” he replied.

Schlock means "cheap or inferior, trash. " This frame does not apply to health care reform, as business clearly wants to reduce or dump the health care benefit to employees. While details are lacking, this could be an underlying aim of reform. It's the goal of the U.S. Chamber of Commerce.

Look for "schlocky" to cover other races, the drive to lower corporate taxes and the effort to create powder puff financial regulation. The Obama team isn't taking America out of the Bush rabbit hole. Mad Hatters lead us deeper.

Sunday, June 7, 2009

Carlyle Group's Price for Permian Tank $50 million

When The Carlyle Group and joint venture partner Riverstone Holdings purchased Permian Tank in December 2007, the private equity underwriter refused to share the buyout price. Local West Texas newspapers had little comment on the deal.

However, an attorney who worked on the deal revealed the purchase price. The lawyer stated this on their resume:

Associate, M&A/Private Equity and Securities (New York, NY) (Sept 2006-Nov 2007) Representations included:

Carlyle Group in $50 million acquisition of a manufacturer of oil and gas storage tanks

The attorney revealed what the Fourth Estate did not. Did this deal encumber another West Texas employer with burdensome debt? If so, don't expect to read about in a Scripps Howard paper.

Florida Unwilling to Compile 130 Side Letters

The state of Florida invested billions in public retirement funds with private equity underwriters (PEU's). Politically connected people made millions in placement fees. The Carlyle Group settled with New York Attorney General Andrew Cuomo for $20 million. It came with no admission of liability.

Florida's State Board of Administration invested funds with PEU's, using side letters to detail aspects of the agreement. The St. Petersburg Times reported:

Florida has invested hundreds of millions of dollars in at least six deals with Carlyle.

The state's "side letters'' could contain the names of placement agents, the intermediaries who private investment managers may have paid to win huge blocks of public pension money.

Placement agents can make 1 to 2 percent of the value of a pension fund investment. So if a state agrees to invest $100 million, the placement agent can make $1 million to $2 million.

When Florida's oversight board met in April, Attorney General Bill McCollum asked SBA executive director Ash Williams if Florida had potential problems.

Williams said no, because when it comes to private deals, Florida requires investment firms to disclose the use of placement agents in the "side letters.''

"To the extent a manager is paying a placement agent, we will not pay those fees,'' Williams said. He stressed that in Florida, things are done "in the sunshine."

Pension funds don't pay placement fees, PEU's do. Sunshine would involve the compilation and releasing of letters. That Florida hasn't and won't, is very concerning.

I smell a PEU with little to no oversight. Funny, those are the Obama administration's regulatory reform plans. Until then, the SEC is on the case.

Saturday, June 6, 2009

Rahm & Rubenstein Break Bread

President Obama's Chief of Staff Rahm Emanuel dined with Carlyle Group co-founder David Rubenstein at the Blue Duck Tavern. The DealBreaker broke the story on June 2nd. The Deal ran with it the same day. Both speculated on the topics of discussion.

Did the power pair address carried interest taxation or private equity underwriters (PEU's) buying banks? How about Carlyle's $500 million Middle East North Africa fund? President Obama would soon speak from Cairo, promising to support business development in the region. Did they talk public private partnerships, ranging from education to health care to public infrastructure to legacy financial assets? Did they talk financial regulation and a free pass for PEU's? What about China and the Treasury Secretary's trip? Rahm is now pulling Tim Geithner's strings. What about relieving the burden of health insurance so corporations can compete in a global economy?

Did they reminisce over the gold ole days, before Rubenstein's Carlyle Group purchased LifeCare Hospitals from Rahm's old client, GTCR Golder Rauner? So much to discuss and so little time....

Thursday, June 4, 2009

Obama to PPP on Muslim World

Public-private partnerships (PPP's) seemed the underlying theme of America's support for the moderate Muslim world. Under the women's rights section President Obama talked about microfinancing. But he nailed it under the economic development portion:

And while America in the past has focused on oil and gas in this part of the world, we now seek a broader engagement.

On education, we will expand exchange programs, and increase scholarships.

(We will) create a new online network, so a teenager in Kansas can communicate instantly with a teenager in Cairo.

On economic development, we will create a new corps of business volunteers to partner with counterparts in Muslim-majority countries. And I will host a Summit on Entrepreneurship this year to identify how we can deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world.

On science and technology, we will launch a new fund to support technological development in Muslim-majority countries, and to help transfer ideas to the marketplace so they can create jobs. We will open centers of scientific excellence in Africa, the Middle East and Southeast Asia, and appoint new Science Envoys to collaborate on programs that develop new sources of energy, create green jobs, digitize records, clean water, and grow new crops. And today I am announcing a new global effort with the Organization of the Islamic Conference to eradicate polio. And we will also expand partnerships with Muslim communities to promote child and maternal health.

All these things must be done in partnership.
Public-private partnership? That's an ambitious agenda, one that will provide multiple opportunities for American branded multinational corporations. Private equity underwriters (PEU's) targeted the Middle East/North Africa. The Carlyle Group has a $500 million MENA fund and is aggressively courting Libya. Will Carlyle benefit from the new corps of business volunteers?

The Obama Summit on Entrepreneurship comes after Tony Blair's workshop on entrepreneurship for the Palestinian people. Israel followed up Blair's education with a different kind of lesson. It razed Gaza.

The "new fund to support technological development in Muslim-majority countries," is it a sovereign debt fund like TARP? Might it be a PEU or sovereign wealth fund, like many in the region investing billions in oil cash?

What role will cash heavy Middle Eastern governments play in partnership efforts? Why should the U.S. play global Santa for commerce, education, technology development and health care?

U.S. foreign aid could soon have a PPP componenet. The richest people in America recently conferenced on philanthropy. Word has Uncle Sam considering a match of tax dollars for private donor projects. Could Obama money end up supporting an international effort of the Peter G. Peterson Foundation?

I smell PPP's partnering with PEU's.

Wednesday, June 3, 2009

PEU's: The New Financial Oligarchs

Private equity underwriter's (PEU's) with trillions on the sidelines are the solution to America's ills. The FDIC looks to PEU's to save the imploding banking sector. President Obama proposed a Transportation Infrastructure Bank to help PEU's do public-private infrastructure projects.

Treasury looks to partner with PEU's to buy up toxic assets gunking up balance sheets. That plan could disappear with enough whole bank sales. Rather than buy the junk, buy the bank and let purchase accounting do the work (not already done by fair value accounting changes).

How can the government make bad banks attractive investments? Wipe out existing shareholders, offer billions in subsidy and require a paltry investment from each PEU partner, one that can easily be refunded back to the investor in short order.

How can the PEU boys avoid their prior sins, bidding wars and gross over leveraging? With Uncle Sam the fiscal backstop, the leverage worry is gone. But how to prevent over paying for distressed assets? Oligarchs in the past divied up markets, by product or territory. Surely, there are plenty of distressed banks in the South for the big money boys to get a bank or two. The question is how to structure a profitable distribution.

One man advises a bank consulting firm, Promontory Financial Group, serves as Senior Adviser to The Carlyle Group and advises Goldman Sachs. He is Arthur Levitt. Carlyle and Goldman competed for BankUnited, an FDIC shuttered Florida bank. That's a sweet spot to be in, if one were an oligarch.

The Carlyle Group has BankUnited, which will now focus on commercial loans. How many Carlyle affiliates switched accounts to BankUnited? Carlyle is in talks with the FDIC over Silverton Bank, a bank of banks. How long before that becomes a bank for PEU's?

Someday, Uncle Sam will stop serving as the banker for the economy. PEU's with captive banks will in a better position to refinance debts. A five year hold enables PEU's to get through the staggering amounts of debt that need refinancing between 2010 and 2014. Arthur Levitt's associate at Carlyle, David Marchick, told a Senate Banking Subcommittee that fact in his recent testimony. Oh, and the credit markets are still broken. That's why PEU's need banks. Uncle Sam distributes them on the cheap.

Arthur Levitt chairs a domestic working group on financial regulatory reform. It looks like the PEU boys will avoid regulatory scrutiny. Mr. Levitt has a clear history in this regard. History repeats itself. Uncle Sam sponsors greed with a tad less leverage using public dollars. It's also known as corporafornication.

Tuesday, June 2, 2009

Goldman Sachs Hires New Adviser Arthur Levitt

The Goldman Sachs family grew with the hiring of Arthur Levitt, former SEC Commissioner and Senior Adviser to The Carlyle Group. Arthur will advise Goldman on public policy issues. Levitt heads a domestic working group on financial regulatory reform. Levitt also serves as adviser to Promontory Financial Group and Global Electronic Trading Co.

I wondered how Mr. Levitt might navigate potential conflicts of interest as Carlyle and Goldman pursue similar strategies, private equity (new funds and trading PE investments in a secondary market), investments in public infrastructure, targeting distressed assets, keeping innovative financial instruments like derivatives/hedging, and buying bankrupt banks.

Goldman surely wants to keep their huge energy futures business, which turns oil into an investment vehicle such that supply and demand have no affect on prices. Goldman Sachs wants to keep its franchise in derivatives, of which credit default swaps are but a portion. Arthur Levitt has the connections. Will Arthur disclose his conflicts of interest before he testifies before Congressional committees? I doubt it.

Note: Arthur Levitt served on the board of M&T Bankcorp and just stepped down from the board of RiskMetrics Group. Arthur has 20,000 shares of RiskMetrics and options to purchase 160,417 shares. He set up a trust for his M&T shares, which includes options that vest in between 2010-2014 and expire in 2019. In 2003 Levitt sat on the board of Neuberger Berman, when it was acquired by Lehman Brothers.

Monday, June 1, 2009

Bush Cousin's Neuberger Berman Targets Public Infrastructure

George Herbert Walker, CEO of Lehman Brother's Neuberger Berman, walked away with firm at half price. The management led buyout from bankruptcy occurred . What happened since?

The Chinese and U.S. governments announced stimulus plans. China's billions targeted public infrastructure, while President Obama's included $25 billion in tax breaks for firms buying back their debt. Pensions & Investments said:

In the U.S., the infrastructure dollars set aside in the economic stimulus package are barely enough to fill potholes.

The U.S. President proposed a national infrastructure bank. He's counting on the private sector to deliver. That creates opportunity for the Bush cousin.

Neuberger Berman Group LLC, New York, has restarted the infrastructure investment unit that former parent Lehman Brothers Holdings Inc. started building before the bank went bankrupt last September. Emil W. Henry Jr., a former assistant treasury secretary who joined Lehman Brothers in July 2007, is preparing to raise money for a new Neuberger Berman fund this year, sources said.

By the time George Herbert Walker's fund makes, the government could be trained on how to structure profitable deals for the private equity underwriting (PEU) sector.

Carlyle in Discussions to Buy "Bank of Banks"

The FDIC seized Silverton Bank on May 1. The Carlyle Group is interested in owning Silverton, which serves bank vs. individual customers. WSJ reported:

Like the BankUnited transaction, the Silverton deal would come with government assistance, according to people familiar with the deal. That means the Federal Deposit Insurance Corp. would share in future loan losses at the bank, limiting Carlyle's downside.

These non-TARP deals come without restrictions. Socialize the losses, privatize the gains.