American Express Approved as Bank Holding Company

The Federal Reserve Board on Monday announced its approval of the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company and American Express Travel Related Services Company, Inc., both of New York, New York, to become bank holding companies.

With The Carlyle Group's Daniel F. Akerson and Yale University president Richard C. Levin on the Board of Directors, Amex is certainly part of the inner circle.

Don't be surprised if the next announcement is $10 billion in "bailout" money to Amex.


“Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced or may introduce to support U.S. financial institutions. We will continue to build a larger deposit base to broaden our funding sources. With Federal Reserve oversight we should gain greater access to the capital on offer under the current and any future government-sponsored programs. This decision to become a bank holding company does not fundamentally change American Express' core focus on the payments industry, nor will it require any significant divestitures,” said Kenneth I. Chenault, Chairman and Chief Executive Officer, American Express

Carlyle Group Has $86 Billion on the Sidelines...

...ready to pounce. $86 BILLION.

Carlyle held a conference call with its investors "to demonstrate that we understand what is happening and we are taking good care of our portfolio. We are looking for choice investment opportunities in the midst of this market tumult," according to WaPo.

The firm's co-founders, Bill Conway, Dan D'Aniello and David Rubenstein were all on the call.

The big plays are going to be in the banking sector:

While there may be fewer deals, Carlyle is trolling the bruised financial sector, looking for bargain-basement prices, according to Carlyle insiders who declined to speak for the record because they are not authorized. Carlyle made a relatively smallish deal last July in Boston Private Financial Holdings, Inc.

Look for more, and bigger deals by Carlyle in the financial sector.

Trump Sues The Carlyle Group

In papers filed last week, Donald Trump is suing the Extell Development Company and the Carlyle Group for tortious interference.

Details are vague but it appears that someone, according to Trump, sent a wire of "$16.5 million to the BNP Paribas Bank of London for the purpose of obtaining an unlawful advantage with respect to the purchase" of the former Penn Central rail yards, located in Manhattan. The parcel extends from 59th Street to 72nd Street east of the West Side Highway. Extell and the Carlyle Group jointly purchased the property for $1.76 billion.

Trump claims the Cheng Group sold the property for approximately $1 billion less than what it could have obtained. Cheng Group owned a controlling 70 percent interest in the 77-acre parcel while Trump owned 30 percent.

-RW

Carlyle Making Noises About Taking The Plunge Into Bank Stocks

So where can you get the best take on the current investment opportunities in bank stocks?Quite possibly in Dubai.

Back in April, Carlyle Group managing director Randal Quarles said that banks were facing more trouble. He sure nailed that.

Now Carlyle co-founder, David Rubenstein, says there are great opportunities in bank stocks. Rubenstein is spreading these words of wisdom in the Middle East at the Super Return private equity conference in Dubai.

Rubenstein said the financial services sector was a very attractive investment opportunity right now.

He said financial institutions like banks and insurance companies seeking to sell assets are probably going to sell them at distressed prices.

Some smaller banks and financial service companies that need equity injections could also be attractive, he said.

"Right now there's an enormous opportunity for private equity to get into the financial service industry and invest in banks, insurance companies, other organizations that are heavily hit ... by the credit crunch," Rubenstein said in a speech at the conference, according to Reuters.

Rubenstein also said that credit-related investments, such as buying debt, remains very attractive.

If you can get into financial stocks at prices close to where these guys cut their private deals, you are likely to have a solid, big upside, investment opportunity.

Mirror, Mirror On The Wall, How Will Private Equity Profit From It All?

The PEU Report speculates on some of the ways The Carlyle Group, Bain Capital, KKR, and Merrill Lynch Private Equity may profit from the Paulson Plan, here.

BANKS ARE IN PLAY: Randal Quarles Gets His Change In Fed Rules

Those who have been following EPJ for sometime know that I have been carefully watching the activities of ultimate insider, Carlyle Group managing director Randal Quarles. One thing Quarles has been aggressively pushing for is to get an increase in the size of stakes that private equity firms, like Carlyle, can acquire before triggering bank holding company regulations. Today, Quarles got his wish.y.

Not only has the Fed granted Goldman Sachs status as a bank holding company, but, today, the Fed announced the approval of a policy statement on equity investments in banks and bank holding companies. The policy statement provides additional guidance on the Board's position on minority equity investments in banks and bank holding companies that generally do not constitute "control" for purposes of the Bank Holding Company Act.

The new policy raises the limit for those with a minority stake to 33% and allows some investors to have as many as two board seats.

Goldman gets bank holding status, Quarles gets the increase in the size of a position the Fed considers a minority stake, it can't be any clearer that the boys are ready to start buying bank stocks at fire sale prices and that bank stocks are in play.

-Robert Wenzel

Carlyle Group: "It's Going To Get Worse"

Pay attention here. These are the insiders who have the money to scoop up distressed assets when the time is right. FT reports:

The group believes the current economic slowdown is still in its early days, even if the financial system recovers quite quickly. "It creates a lot of opportunity for us," says Mr Raymond Whiteman, co-head of Carlyle Strategic Partners fund. "When corporate slowdown collides with corporate profit pressure it creates defaults, corporate bankruptcies and restructuring."

"We are deep value investors, we are patient and we think it is going to get worse before it gets better," says Mr Whiteman. "We are well positioned to make great investments."

-Robert Wenzel

If Lehman Liquidates, Wall Street Gets Set to Make a Killing

WSJ's Evan Newmark tells it the way it is:.

Goldman has billions of dollars dedicated to distressed debt situations just like this. It may very well run counter to the interests of Goldman investors and shareholders to subsidize any deal for Lehman.

This is where the Lehman death drama turns into farce. It isn’t a shortage of outside capital that is driving Lehman into bankruptcy. It is the bid-ask spread on its bad assets, or the difference between a buyer’s and seller’s views on price.

Sure, the $53 billion in assets are illiquid, but at some price there is a buyer. Are the assets worth 10 cents on the dollar or 50 cents on the dollar? Dick Fuld was afraid to find out.

Still, there are tens of billions of dollars of Wall Street capital happy to bid for the assets. Goldman, private-equity firms like J.C. Flowers, Kohlberg Kravis Roberts, Carlyle Group, TPG or Blackstone Group, hedge funds, distressed-debt funds and sovereign-wealth funds all have capital. They are just waiting for the clearing prices on Lehman’s assets to get attractive...

but what about the collective well-being of the markets? What about a feared-for financial apocalypse brought about by the unwinding of Lehman’s $600 billion balance sheet?

It may not be pretty, but apparently Wall Street has decided that the price won’t be too steep. Or else, it would have put up the money.

If a Chapter 7 filing is made, Wall Street will move on. In offices and conference rooms not far from the New York Fed, bankers probably are already gathering to prepare for bids on assets they hope to pick up on the cheap in any potential Lehman liquidation.

In the coming weeks, Wall Street’s vultures will pick over Lehman’s still-warm body–and wait for one or two more victims to come their way.

Bottom line: Goldman Sachs, the Carlyle Group and friends come out on top again, and, for Goldman, another competitor bites the dust.

The Carlyle Group During The Bush Years

The PEU Report cranks out the numbers:

While the average citizen's personal income stagnated under the Bush Presidency, one politically connected private equity underwriter (PEU) made out like bandits. The Carlyle Group went from managing $5.8 billion in assets in 2001 to over $89.3 billion in 2008.

In 2000 the mean household income was $57,047. By 2007 mean household income rose to $67,609.

Carlyle grew its asset base by 1,440% while income rose 18%. Adjusted for inflation, the 18% rise disappears.

...and this all occurred before Randal Quarles gets to perform his magic act for Carlyle's banking division. The players are in the right places. As the PEU Report puts it:

Carlyle senior advisers just landed key jobs as CEO of Freddie Mac and CFO of Wachovia. Why are these moves important? Carlyle expressed interest in buying chunks of troubled banks and government backed mortgage underwriters. They now have people on the inside who can work that same agenda.

-Robert Wenzel

Randal Quarles Is Sleeping Well Tonight

Things are moving along according to plan for Randal Quarles.

Long time EPJ readers know Quarles as the ultimate insider, and that Quarles always shows up at the right place at the right time.

He has just done it again.

The new CEO of Freddie Mac is David Moffett. Guess where Moffett worked before grabbing the CEO stint at Freddie? Yup, the Carlyle Group, right along side Quarles, in the global financial services sector.

This is all coincidence of course. Paulson's hand was just forced a couple of days ago. And if you believe that,I have some Freddie Mac common stock I'd like to sell you, cheap.

Carlyle To Buy Distressed Apartments

File under: "Buying while there is blood in the streets."

GFI Capital Resources Group and The Carlyle Group formed a $300 million joint venture to buy distressed residential apartment buildings, said Michael Weiser, executive vice president of acquisitions and dispositions at GFI, a Manhattan-based diversified real estate company.

The venture will leverage that cash to buy $1.2 billion worth of properties.

Weiser said the driving force of the venture was to capitalize on the deteriorating real estate market which is forcing some owners to sell buildings at deep discounts. He says GFI has a history of buying buildings in down markets.

“There is going to be a lot of opportunity out there,” said Weiser.

Insiders Are Ready To Start Bank Buying Binge

Randal Quarles, the ultimate insider,--current managing director of Carlyle Group, former Treasury Undersecretary and former Treasury liaison to the Plunge Protection Team, who, since early in the year, has accurately called the play by play developments in the banking crisis (See Carlyle Group's Plan to Takeover the Banking Industry)-- told Reuters that he expects to see Private Equity start buying into the banking sector before the year is up:

Private equity firms have been eyeing troubled banks and thrifts as investment opportunities as the credit crisis has taken a toll on share prices.

Randal Quarles, managing director at Carlyle Group CYL.UL, one of the world's largest buyout firms with $83 billion under management, forecasts that many of the investments will be minority stakes -- which can be accomplished without dramatic changes in the Fed's rules.

Quarles, previously undersecretary of the U.S. Treasury, said there could be an uptick in investment activity before the end of the year.

"It is going to be hard to raise (capital) in the public markets, particularly for depository institutions," he said. "I think that's going to drive a lot of private equity deals."

Interesting situation, we have a very smart guy in Quarles ready to take the plunge in bank stocks, while we have Bernanke about to the torpedo the entire economy (see Crashing Money Supply Numbers Signal Depression). If Bernanke doesn't start pumping M2 money and if Quarles starts buying without that M2 money pumping, Quarles is going to have his ass handed to him, courtesy of Bernanke.

On the other hand, if Benanke figures out that he has launched a torpedo at the economy, he may actually start printing money again and Quarles will make a fortune.

Stay tuned. We are watching money supply very closely and will report on what we see.

Randal Quarles Is Polishing His Presentation of Why Carlyle Group Should Takeover Banking

Oligarch of the future, Randal Quarles, spoke to FT recently and appears to have polished his presentation as to why private equity operator Carlyle Group should be allowed to plow into the banking sector with privileges allowed none other.

FT reports:

"Private equity really is almost tailor-made to solve the difficulties currently faced by financial institutions in a way that will cause less friction down the road," says Randal Quarles, managing director of the Carlyle Group's new financial services team.

"A number of investments by private equity will tend not to be majority investments, which make can them even more politically palatable," says Mr. Quarles, who is a former US Treasury undersecretary for domestic finance.

Quarles is clearly more sensitive to the political aspects of PE investing aggressively in the banking sector. This is the first time to my knowledge that he has publicly discussed the non-majority nature of investments PE plans to make in the banking sector and the political palatablity of such.

Mr Quarles says private equity is an ideal solution for politicians concerned at the cost of bailing out banks...

Any private equity group with more than 25 per cent is considered a "bank holding company" and required to make "source of strength" commitments to provide more capital if required.

Mr Quarles argues that these regulations should be relaxed to encourage capital to flow where it is needed. In any case, he says private equity is likely to find ways to invest consistent with the rules, such as by investing via separate vehicles.

The above is about limiting downside risk. If PE puts in chips to buy a stake in bank, they want to be protected against being required to ante up a second time.

Ben Bernanke, chairman of the Fed, last month promised to clarify bank holding company regulations. "Private equity is a very good source of capital. There are the issues relating to effective control . . . what constitutes control. We are looking at that and we will make a clear statement about that."

Mr Quarles says: "Private equity has become popular to demagogue unfairly but I don't believe that politicians are succumbing to that temptation."

"Private equity is really about standing between the taxpayer and these losses for a finite period, then returning the stake to the public markets once the problems are addressed."

"Private equty is about sttanding between the taxpayer and these losses for a finite period, then returning the stakes to the public markets once the problems are addressed." Hmm.

This nobility of Quarles to protect taxpayers means only one thing, Quarles sees the banking crisis as overblown . While fear runneth in the streets, Quarles is going to aggressively buy into the sector, add capital where needed, whip the banks into shape and then blow the shares out the door into the public's hand, again. What a play!!

As we have stated in the past, we have no qualms with any operator willing to step in and buy into the banking sector, however, we suspect that along with stepping up to the plate, PE will have government created special privileges that will ease its operation in the field. That said, PE, Carlyle and Quarles are going to make a fortune on the banking sector.

Watch wherever they put their money and if the stocks are still publicly trading and at a price close to the insider price they negotiate for themselves, then it is certainly an investment to take a look at. These guys know what they are doing. Why not go along for the ride if you can?

The Carlyle Group Numbers

It pays to be an insider,a real major league insider.

Carlyle owns 224 companies, from Hertz to Dunkin' Donuts; employs 950 professionals; and manages $82.7 billion from clients in 68 countries.

Forty-one percent of Carlyle's investors are pension funds, and 32 percent are financial institutions, according to its annual report. Most of the rest are wealthy individuals.

Carlyle was founded by Daniel D'Aniello, William Conway Jr. and David Rubenstein. Forbes estimates that all three are billionaires. The company last year returned $8.9 billion in equity and profit to investors, its second richest year, after 2006, when it gave back $10.2 billion, according to its annual report.

-Data via WaPo

The Conspiracy Theory View of the Banking Crisis

J. T. Holley at Daily Speculations writes:

Sometimes I think that all these banks with brokerages attached are issuing 8%-9% preferred while simultaneously driving down their own common to be able to buy back their own stock later on the cheap and ride it back up gaining momentum until the 2013 call dates on all these preferred where they'll do secondary offerings pay off the preferred and the beat goes on! I know it ain't that simple but it sure looks like that is what is going on to me. I mean the real probability of a bank run has what been elevated from what, 2%, to 2.5% probability?

Holley has a point here, but I think it is a much more sophisticated and complex game. There is stuff going on at the individual bank level as Holley suspects, but it is a multi-level game, that at the top level includes the Treasury Secretary and the connected, such as the Carlyle Group. They are settling old scores and positioning themselves for huge profits.

Given that the mismatched short liabilities/long assets balance sheets of the entire financial industry could result in a liquidity crisis for nearly any financial institution in the United States, isn't it quite curious that the financial institutions that seem to have had, or are having, the most liquidity troubles are those that Treasury Secretary Paulson always wanted to see taken out, i.e. Bear Stearns, Freddie and Fannie?

The mortgage/housing crisis is real, but the inside players are certainly using it to set up their next big score.

Boston Private Financial Holdings Appoints Carlyle Group Man To Its Board Of Directors

Boston Private Financial Holdings, Inc. (NASDAQ: BPFH), today announced that John Morton III has been elected to the Board of Directors.

Morton has extensive experience leading organizational turnarounds, acquisition integrations, business growth and corporate governance activities, according to oston Private.

Most recently, Morton was President of Premier Bank, a unit of Bank of America serving the entire financial needs spectrum for 750,000 affluent customers. Prior to that, Morton served as President of the mid-Atlantic region for Bank of America, and before that he was President, Private Client Group for NationsBank. Previously, Morton was successively CEO of Perpetual Financial Corporation of McLean, VA; Farm and Home Financial Corporation of Kansas City, MO; and Boatmen’s National Bank of St. Louis, MO.

Morton was suggested to Boston Private as a potential board member by The Carlyle Group. This was done in conjunction with a $75 million investment made in Boston Private by The Carlyle Group on July 22, 2008 where it was agreed that The Carlyle Group is entitled to maintain a board seat as long as it owns at least 5% of Boston Private’s outstanding shares.

The Players Have Settled On A Loophole

Bank stocks have been crushed and Private Equity is ready to step in and scoop up the pieces. And, it appears they have settled on a loophole du jour to do it.

First, we hear from HEC Private Equity/Venture Capital Club:

Considering that the private sector is always better at coming up with solutions to business problems than the public sector (i.e. government), there’s been ever increasing discussion that private equity should take a larger role in helping turn around the banks. The catch being pesky U.S. regulations. But as everyone should know, if there’s a law or rule then there is a way around it and private equity firms are beginning to find ways to bypass stipulations on bank ownership.

One method is to simply create a separate, unique fund without ties to a firm’s other funds which is what J. Chistopher Flowers of JC Flowers is doing. He’s created a fund under his own name that is not directly connected to his firm’s funds. This would
allow him to take controlling interest of a financial institution (at least greater than 24.9% in the U.S.) while permitting JC Flowers & Co. to own other businesses, which they wouldn’t be allowed to due if they controlled more than that percentile threshold in a bank. Nicely done.

And, FT is covering the story:

Executives of large private equity firms believe they have found ways of overcoming US rules that make it difficult for their funds to buy large stakes in banks. This would position them to bolster the faltering sector without changes in regulations.

Private equity firms have trouble buying banks because federal rules bar investors holding more than 24.9 per cent of a bank from owning other kinds of companies. This was intended to prevent conglomerates taking control of banks and using them to fund themselves.

Funds have also been skittish about bank investments because of fears that financial regulators could compel them to provide additional capital to such institutions in bad times.

However, with banks trading at historically low valuations, private equity firms have been scouring the sector for bargains, while their lawyers work on structures that would make such purchases palatable from a regulatory standpoint.

At the head of the pack isJC Flowers, a renowned investor in struggling financial institutions. The solution of its chairman, Christopher Flowers, has been to launch a fund under his own name - with no ties to his other funds - that would enable him to buy a controlling stake in a bank.Carlyle, the private equity group, could also consider establishing funds in the names of individuals, lawyers familiar with the matter say. Meanwhile, Carlyle has taken a 17.8 per cent stake - including 9.9 per cent of the voting stock - in Boston Private Financial Holdings, which has a subsidiary that is a private bank in addition to an asset management arm.

The Carlyle stake is of interest because the Federal Reserve does not usually sign off on private equity purchases of more than a 14.9 per cent stake in a bank. Carlyle has also been able to name a director at Boston.

Tony James, president of rival buyout house Blackstone, referred to the Fed rules as a problem in an earnings conference call on Wednesday. However, he hinted that Blackstone might try to back an experienced bank management team in raising a fund to buy bank stakes.

Will we be hearing of the formation of a Randal Quarles/Oliver Sarkozy Fund soon?

Whichever way Quarles decides to buy into the banking sector, keep an eye on the deals he makes. He is a SAP--Sharp, Aggressive and government Protected. If you can buy into a deal on the open market, at a price close to the insider price he cuts for himself, it is the best way I can think of to bottom fish the banking sector. BTW: The Boston Private Financial Holdings/Carlyle deal was his deal.

Is The Fed About To Change The Rules For Randal Quarles?

As long time readers of EPJ know, Future American Oligarch Randal Quarles wants his Carlyle Group to be able to buy into banks stocks without additional supervision. Well, ladida, notice this news from Bloomberg. The Fed is considering changing the rules for private equity, i.e. Randal Quarles. Notice the Fed isn't considering changing the rules for everyone, just private equity.

So here's how the play remains. Henry Paulson continues to scare the s#@*t out of bank shareholders, a few bank lines thrown in for good measure, and Randal Quarles wants to buy into the bank stocks Big Time, just him and his private equity cronies. Get it? You aren't going to be able to play in his sandbox, it has gold in it.

Here's the latest from Bloomberg:

The Federal Reserve, looking to spur investment in lenders hit by credit-market losses, is weighing three measures to ease rules for private-equity funds that buy bank stakes, people with knowledge of the deliberations said.

Notice how the change in rules mentions private equity only.

One proposal would permit buyout firms to use ``silo'' funds walled off from their other investments to buy the stakes without subjecting the rest of their holdings to more federal oversight, said the people, who declined to be named because the talks aren't public. Under another scenario, the Fed would let private equity firms exercise more control of banks they invest in. A third plan would encourage firms to team up on bank deals.

So Henry Paulson is talking about giving the Federal Reserve greater authority so the financial industry can be regulated more intensly by the Fed, and simulataneously the Fed is meeting with Randal Quarles so that there is less regulation of private equity funds that buy into banks. Cute.

Buyout firms are ``hesitant to invest in banks because of the various levels of regulation that would apply to them,'' said Thomas Vartanian, a partner at Fried Frank Harris Shriver & Jacobson LLP in Washington who advises buyout funds and lenders. ``The banks need capital, and private equity has it. Necessity is often the mother of invention.''

So Thomas Vartanian is a new front man for Quarles and private equity. Everything he is quoted as saying, Quarles said privately at a luncheon months ago.

Treasury Secretary Henry Paulson has called on banks and brokerages to raise cash as their losses from the collapse of the mortgage market and the ensuing credit-contraction climb to more than $466 billion. Blackstone Group LP and Carlyle Group, the world's two biggest private-equity firms, discussed the topic when they met with Paulson this month, say people briefed on the talks.

They just started talking about this plan in the heat of the crisis this month? Who makes up these movie scripts? Read my report from the Quarles luncheon again and you will know this play has been in motion for months.

Boston Private Announces $75 Million Investment by The Carlyle Group

Randal Quarles finds a financial services company he likes.

"In these challenging economic times, we have looked at many investment opportunities in the financial services sector and have seen few that we have found as attractive. We are attracted to Boston Private's strong history of growth and their diversified business structure that derives revenues not only from the private banking business but from strong fee-based businesses," said Quarles as part the announcement that Carlyle will invest $75 million in Boston Private Financial Holdings, Inc. (NASDAQ: BPFH).

Carlyle will purchase two series of non-voting preferred stock, one of which is mandatorily convertible into common stock and one of which is convertible only if Boston Private shareholders approve the conversion. The shares of mandatorily convertible preferred stock will, on an as-converted basis, represent 9.99% of the pro-forma outstanding common shares (including the shares issued in Boston Privates public offering and the shares issuable on conversion of the mandatorily convertible preferred stock). The mandatorily convertible preferred stock will convert automatically following a shareholders' meeting we expect to hold later this year at an initial conversion price of $5.52 per share. The conversion price was based on the average closing price of Boston Private common stock during the week of July 7, 2008.

The contingent convertible preferred stock will, on an as-converted basis, when combined with the mandatorily convertible preferred stock, represent approximately 19% of Boston Private's pro-forma common shares outstanding. The conversion price of the contingent preferred stock will also be $5.52 per share.

Both series of preferred stock initially will be entitled to receive dividends payable on Boston Private's common stock on an as-converted basis. If Boston Private does not hold a shareholders' meeting prior to the record date for Boston Private's 4th quarter dividend period, the mandatorily convertible preferred stock will carry a fixed dividend of 20% (accruing from September 30, 2008) until a meeting is held. If Boston Private shareholders do not approve the conversion of the contingent preferred stock prior to the record date for our 4th quarter dividend period, the contingent preferred stock will carry a fixed dividend initially of 14% (accruing from September 30, 2008), increasing to 15.5% and ultimately to 20% in the following two six-month periods if our shareholders do not approve the conversion at a subsequent meeting.

For every five shares of common stock issuable upon conversion of its preferred stock, Carlyle will receive warrants to purchase two shares of Boston Private's common stock during the next five years at a price of $6.62 per share (20% over Carlyle's initial common stock purchase price). As a result, Carlyle's economic interest in Boston Private, assuming conversion of all of its preferred stock and exercise of all of its warrants, would be 24.99%.

"The terms of Carlyle's investment with Boston Private closely aligns its interests with those of our current shareholders, without the various forms of special downside protection seen in many other private equity investments in this sector. Their willingness to partner with us and make this type of investment in Boston Private is a gratifying validation that our business model is positively differentiated from our competitors," said Timothy Vaill, Chairman and CEO of Boston Private.

George H. W. Bush Call Your Offce

Carlyle Group said it dropped its plan to invest in China's Xugong Group Construction Machinery Co., citing "significant changes in the market environment."

"Both parties have decided not to proceed with the investment and Xugong will embark independently on its restructuring," Carlyle said in joint statement with the Chinese building machinery maker, without elaborating.

Carlyle was forced to abandon the purchase after its failure to gain approval from China's government for the transaction even after changing its bid three times and cutting the size of the stake.

But, Carlyle isn't completely taking no for an answer, "We believe that Xugong's expansion will create opportunities for partnership with both Carlyle and its portfolio companies worldwide," today's statement said.

Carlyle, said it has invested more than $1.3 billion in China during the past two years. It has stakes in 30 different Chinese companies.

China's government raised scrutiny of foreign buyouts after Carlyle signed an agreement to buy 85 percent of Xugong for $375 million, the first offer by a private-equity company for a major government-owned enterprise in China. A year later, the buy-out firm offered to cut the size of the planned purchase to 50 percent for about $230 million. The last offer, for 45 percent of Xugong, was made in March last year.

China's government in August 2006 decreed that overseas investors would need Ministry of Commerce clearance to buy controlling stakes in key industries, well-known trademarks or ``old Chinese brands.'' Deals can be vetoed or scaled back if they affect the ``security'' of China's economy.

Randal Quarles Sure Does Get Around

Future American oligarch Randal Quarles was spotted in Waterloo, Ontario Canada this weekend at an International Monetary Fund conference.

Waterloo's The Record noted coldly:

The conference also drew the presence of Randal Quarles, managing director of the controversial Carlyle Group, the American private-equity investment firm which manages funds of more than $81 billion.

Looks like Quarles would like to see the type of policy advice that is dispensed by the IMF changed. The Toronto Globe and Mail's Kevin Carmichael reported:

Others, including Randal Quarles, a former U.S. Treasury official, said the IMF's standing would improve if it offered policy advice other than that based on orthodoxy or fad.

Something to keep an eye on: Changes in posture and/or personnel at the IMF

Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks Borrowers With Subprime Junk

Those who call for regulators to supervise the financial industry fail to get that government is spelled g-o-v-e-r-n-m-e-n-t, not g-o-d.

In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No".

I issued a reply to their paper, at that time writing under a pen name because of other business commitments:

...the record climb in housing prices is, indeed, a bubble... the Federal Reserve study fails to consider past declining interest rates as a cause of the bubble. The faulty conclusions reached by Federal Reserve economists Jonathan McCarthy and Richard W. Peach may make many potential new home buyers comfortable about a purchase, when, in fact, we are very near the top of a housing market that will experience substantial declines in prices...

They reach the conclusion that because of ....[the] "fundamental factor" of low nominal interest rates, higher housing prices are justified.

But does this mean real estate prices will not drop? Our answer is decidedly no. Indeed, McCarthy-Peach report that "since 1995, real home prices have increased about 36 percent, roughly double the increase of previous home price booms in the late 1970's and late 1980''s." We view this increase as largely the result of the Federal Reserve's lowering of interest rates and the pumping of liquidity into the banking system, thus producing the byproduct of higher housing prices. But by incorporating falling nominal interest rates as a "fundamental factor" that can not be a cause of a bubble, McCarthy-Peach have literally defined the cause of the current bubble from being taken into consideration....

Further, the current structure of many mortgage loans whereby no money down is acceptable and/or adjustable rate mortgages are popular, sets up the possibility that many may walk away from current mortgage commitments down the road as interest rates begin to climb. Indeed, as ARM's rates become more and more burdensome and as housing prices begin to decline, walk away situations are likely to become quite prevalent, thus adding even more downward pressure to the housing market.

It is our conclusion, then, that by defining nominal interest rates as a fundamental factor and not as the Fed induced causal factor of the real estate boom, and by completely ignoring the structual features of current mortgage loans, McCarthy and Peach have blinded themselves to the real estate bubble that does exist. They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."

Apparently, McCarthy and Peach thought my reply was funny and included this quote from me in their power point presentation, when they went around the country declaring there was no housing bubble. Under the headline Opposing View, they would flash this quote from me:

The faulty analysis by Federal Reserve economists McCarthy and Peach may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.

Last I heard, they aren't using that power point presentation anymore.

The point being that regulators do not have a magic wand that makes their beliefs 100% accurate. But, the problem is that regulators will direct regulation in the direction of what they believe and not, "Opposing Views". Thus, any crashes under heavy regulation become greater, because regulators have driven ALL market participants in that direction.

Regulators aren't gods. As we learn today in a WSJ report even the FDIC got caught up in te sub prime madness:

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.

The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.

Hundreds of borrowers who took out Superior subprime loans on the FDIC's watch -- some with initial interest rates higher than 12% -- have lost their homes to foreclosure, data on the loans indicate...

The Superior situation could be costly for the FDIC. Texas-based Beal Bank SSB, which bought a portfolio of Superior loans, about half of them originated under the FDIC, is suing the agency in U.S. District Court in Washington. The suit claims many of the loans were made improperly and are plagued with problems.

An internal FDIC legal assessment, obtained by Beal Bank and filed in court last month, acknowledged "numerous appraisal deficiencies" in the portfolio and a "small number of loans that appear to be fraudulent from inception." Calling the FDIC's legal position poor, the undated 26-page assessment suggested that the agency's liability could be as much as $70 million. Another FDIC official, in a deposition, estimated that the cost of settling the case could be less than one-third that amount.

In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior...

Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. -- which the bank in turn sold to investors -- also has been troubled. As of April, investors had suffered "realized losses" -- which generally occur after foreclosures -- on 511 of the 3,964 loans in that pool, according to data provided to investors...

FDIC Chairman Sheila Bair has been unusually forthright in putting part of the blame for the mortgage mess on regulators, who she has said should have acted earlier

.

And Paulson wants to put Fannie Mae and Freddie Mac under the control of the Federal Reserve, and the likes of McCarthy and Peach? I'd rather see Randal Quarles and Carlyle Group in there right now competing against other private equity firms--as long as others are also allowed to compete for the banks and their assets.

What's going to happen, though, is that, at a minimum, new regulation will be instituted so that no one but Quarles will understand what the hell is really going on. At worst, Paulson will takeover Freddie Mac and Fannie Mae and carve it up in some way that Quarles and other private equity firms will be able to pick off the juicy meat. And at the same time new regs will be saddled on the banking industry overall, making it more difficult to operate, especially for those survivors who were smart enough to stay away from the subprime wacky loan business in the first place.

That's government at work, not God.

Will The Mortgage Crisis Create The First Trillionaires?

In yesterday's Washington Post, Franklin D. Raines, chairman and chief executive of Fannie Mae from 1999 to 2004 charged that

...ideologues in the Bush administration and commercial competitors of Fannie and Freddie have skillfully manipulated the markets to undermine Fannie and Freddie for more than six years. The result has been a weakening of the two linchpins of the housing finance system just when they are needed most...

Raines is no saint. It appears he manipulated Fannie Mae's books to insure a larger pay out to himself to the tune of tens of millions, and Fannie Mae is certainly a vulgar monstrosity from the FDR era. But he may have something with the charges that Fannie Mae and Freddie Mac were being undermined.

Indeed, certain parts of this mortgage crisis appear to be setting some people up to get very, very rich.

Back in the Spring of 2007, I attended the Michael Milken Conference in Beverly Hills, California. Among the attendees at the conference were Robert Toll, Chairman and CEO, Toll Brothers Inc.,and Angelo Mozilo, Chairman and CEO, Countrywide Financial. It was early in the the crisis. At one point Toll got up to speak and he rattled of a few areas of the country where trouble in the housing markets appeared to be developing. Then Mozilo got up to speak and one of his off the cuff remarks was that there were a "couple of minor regulatory changes" that made it more difficult for some to get mortgages. Hmmm. I made a note to myself. When you have a roaring bull market, like you did up to the early part of 2007, you need more and more new buyers, not even a tiny few less because of a "couple of minor regulatory changes".

These minor regulatory changes were I believe the snowball that started the mortgage crisis avalanche.

So when former-Fannie Mae chairman Raines talks about skillful manipulations attempting to take down Fannie Mae, it has a ring of truth to it. Tiny changes in regulations can make a big difference when you know where to make the changes.

And, clearly, the Treasury has been out to smash Freddie Mac and Fannie Mae for sometime.

Here are remarks from Randal Quarles two years ago on July 19, 2006 at the Reuters Panel Discussion on Government Sponsored Enterprises. Quarles was then Under Secretary for Domestic Finance, U.S. Department of the Treasury. He said, in part, at the conference:

Secretary Paulson has made it clear to me that he believes there is systemic risk associated with the GSE's retained portfolios. While he shares the view that a legislative outcome is preferable, he has instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority should that become necessary. If a legislation solution is not achieved, Treasury will have no choice but to consider additional action.

It's obvious that Treasury has been after Fannie Mae and Freddie Mac for years. They are using the current crisis to put a nail in the coffin. This would not be a bad thing if it was just a case of disassembling Fannie and Freddie, and ultimately leaving the mortgage business up to the free markets. After all, Fannie Mae is a throwback to the FDR era of government make work programs and other monstrosities that should be put to sleep.

But that is not what appears to be going on. What appears to be going on is a Russian oligarch style takeover of major parts of the financial sector. Randal Quarles, who spoke for the Treasury warning that changes would have to be made at Freddie and Fannie, is gone from the Treasury and is now at the Carlyle group. I attended a luncheon in Washington D.C. where he spoke in April. My report on that luncheon is here.

At the luncheon, I learned that Quarles is aggressively pushing to get rules changed so that private equity firms, such as Carlyle Group, can aggressively buy bank stocks. Now, word has leaked that Carlyle, presumably Quarles, has been having "on going dialogue" with the Fed.

Quarles also, along with Oliver Sarkozy (half brother of French President Nicolas Sarkozy), recently wrote an Op-Ed piece for WSJ calling for restrictions to be removed from private equity firms that make it difficult, if not impossible, for them to take more than a 10% positon in a bank.

Say what? People are lining up outside banks trying to get their money out and Quarles is writing Op-Ed pieces so that Carlyle Group can buy huge chunks of bank stocks? What's going on here? Back in April, at the luncheon I attended, he said there would be more bank failures and at the same time he said that private equity was in the best position to invest in these banks.

So what we have here is a huge, I MEAN HUGE MONEY GRAB, Quarles' former boss Paulson continues to make statements that scare bank shareholders. While Quarles gets ready to scoop up bank stocks.

We are at the scare the public stage, and they sure have that running well. Next, when fear is everywhere, they will start the scooping up of the bank stocks. Keep in mind that Fannie Mae and Freddie Mac, alone, have $5 trillion in mortgages or guarantees on their books. With the housing market down by about 20%, the value of their mortgages and guarantees has probably shrunk by about 20% or $1 trillion. Thus, a current valuation on Fannie and Freddie will knock more than $1 trillion off old estimates, perhaps $2 trillion--if you consider the current fear in the markets. And, this doesn't apply just to Fannie and Freddie but also most other bank stocks. So who knows which banks Carlyle and other private equity firms will buy up. But this is a multi-trillion dollar play. And once the stocks are all bought up, Paulson (or his successor)will put the call into Bernanke, who appears to be Paulson's new lap dog, and tell Bernanke to start the money printing presses so all those losses on the banks books will be erased and become gains. Trillions of dollars in gains, and the United States will have the world's first trillionaires. And America will also have their first Russian-style oligarchs.

Pass the caviar, please.

Monday Is Going To Be Interesting

Freddie Mac is due to sell $3 billion worth of short-term debt in the morning. Let's see how well that goes.

Today, WSJ is reporting that:

U.S. Treasury Secretary Henry Paulson is insisting that if Fannie Mae (FNM.N) and Freddie Mac (FRE.N) need rescuing, the plan should not benefit shareholders of the giant mortgage finance firms.

This news should drive down all bank stocks. While former Paulson employee Randal Quarles does everything he can for his new employers, the Carlyle Group, to buy up the bank stocks that Paulson is driving down in price.

Get it? Paulson statements drive down bank stocks, former Paulson Treasury employee Quarles buys up banks stocks driven down by Paulson, for his new employees, the ultimate insiders, the Carlyle Group.

Is Treasury Secretary Paulson Trying To Drive Bank Stocks Down?

The markets are reeling because of fears that Freddie Mac and Fannie Mae are about to go under.

This is the lead summary this weekend from CNBC:

Analysts say hurdles for the stock market in the coming week include continued uncertainty about the financial sector—specifically mortgage giants Fannie Mae and Freddie Mac...

Here's MarketWatch this weekend:

It's an uncertain week ahead for U.S. stock markets, as IndyMac bank falls and jitters slam Fannie Mae and Freddie Mac.

You would really have to be an idiot not to get the fact that two quasi-government organizations with over $5 TRILLION in liabilities might be a concern to Wall Street. Generally, at times like this, government officials step up to the plate with statements to calm the markets. Stuff like: "We will do what is necessary to maintain the integrity of the market.", "We stand by to do whatever is necessary."

So what did Treasury Secretary Henry Paulson do yesterday as Fannie Mae and Freddie Mac stock were crashing? He issued a statement that began:

Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form...

Say what? The present form of Freddie Mac and Fanne Mae is crash mode. Why would Paulson issue such a market scaring statement?

We have no objections to the government staying out of markets, but it is a very curious time for Hank Paulson to get this religion, since only weeks ago he planned to bring the financial sector under tighter regulatory control. But, Paulson getting free market religion yesterday can only spook markets and spook shareholders in any banks stocks.

So let's back up a little and get some perspective.

Back in April, I attended a luncheon where Carlyle Group managing director Randal Quarles spoke. Who is Quarles? Before Carlyle, he worked for Paulson at the Treasury and, according to his Carlye profile he was(our emphasis):

Under Secretary of the U.S. Treasury, where he led the Department’s activities in financial sector and capital markets policy, including coordination of the President’s Working Group on Financial Markets, development of administration policy on hedge funds and derivatives, regulatory reform of Fannie Mae and Freddie Mac...

Of the luncheon, itself, I reported at the time:

Quarles spoke at a luncheon meeting... His topic: “Restructuring Financial Regulation”. Quarles told the luncheon group that he chose the topic in January. Hmmm. Didn’t Treasury Paulson just make the proposal to restructure the financial regulatory agencies last week? How did Quarles pick this topic back in January? Short-answer, Quarles is a major insider and his comments should be monitored to get a sense for what insiders are thinking.

In his talk, Quarles said that estimates go into the hundreds of billions in terms of capital that will be required by the financial industry because of losses sustained as a result of the current crisis. He said there will be more financial institutions that will go under in coming months.

He said that public markets will not supply the necessary funds because they don’t have the capabilities to study in detail the risks and potential rewards of the complex financials of financial institutions. He said private equity firms have the capabilities to do so and to supply the necessary funds. (N.B. Carlyle Group is a private equity firm).

So Quarles, who worked under Paulson knows in January to choose financial regulatory reforms as his topic, in April he knows that more banks are going to fail and proposes that regulations be changed so that private equity firms can aggressively by banks stocks. In late June, we learn that someone from Carlyle, probably Quarles, is talking to the Fed to make it easier for private equity to buy into bank stocks.

So enough on Quarles, for the minute. You get the picture. Now, another point.

Curiously there is a report out of Reuters late Friday after the market closes that:

Fed Chairman Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window...The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

Again, this is not free market news, but it is in line with the way Bernanke has been approaching the crisis, and it is market calming news. So what happens on Saturday morning, less than 24 hours since the market calming news breaks? The Fed kills the market calming news. From WSJ:

Federal Reserve officials haven’t discussed discount-window access with government-sponsored enterprises Fannie Mae and Freddie Mac, a Fed spokeswoman said Friday.

“Federal Reserve officials are following the situation closely, but there have been no discussions with the GSEs about access to the discount window,” Fed spokeswoman Michelle Smith said when asked about a report that Fed Chairman Ben Bernanke had told Freddie Mac’s chief executive that the GSEs were eligible to use the facility.

Was the Reuters reporter making the initial report up? Extremely unlikely. Something unusual is going on here. Market calming news is killed and Paulson comes out with a statement that does the opposite of calming the markets. All this is just going to continue to kill the financial sector, to kill bank stocks. Meanwhile, Quarles, with probably the strongest insider credentials I have ever come across, is paddling like crazy to do everything he can to change bank regs, including writing an WSJ Op-Ed calling for the changes to make it easier for his firm, Carlyle Group, to buy huge chunks of bank stocks.

So let's add up the pieces here. The Federal Reserve kills a market calming story. Treasury Paulson issues a statement that states it is "supporting Fannie Mae and Freddie Mac in their current form..." Which is crash mode. Thus, banks stocks are crashing. At the same time the ultimate insider Quarles, former Undersecretary, former coordinator at the Treasury for President’s Working Group on Financial Markets (aka, The Plunge Protection Team) and former developer for the Bush Administration "regulatory reform of Fannie Mae and Freddie Mac", is using every avenue possible to change regs so Carlyle Group can aggressively buy banks stocks.

Here's the final equation: Treasury Secretary Paulson issues statements driving banks stocks down + other government operatives kill market calming news = Carlyle Group buying bank stocks cheap, real cheap.

Why You Read EPJ

John Crudele in today's New York Post reports:

A reliable Wall Street source tells me that private-equity firms are poking around the ruins of the banking industry. At least four of these firms are expressing interest.

But there's a problem.

Because of Washington regulations, private-equity funds can't acquire more than 10 percent of a bank without putting themselves in a precarious financial position.

At that level, the investors would be presumed to be in control of those banks. They'd be on the hook if the financial institutions needed more equity, according to this source's interpretation of current rules.

So the Federal Reserve will have to alter these requirements if American investors will ever come to the last rescuer of banks.

Jeez John, you have to read EPJ more often. We had this story, months ago, in April! And, even back then we named Carlyle Group as the lead private equity trying to get the bank regs changed. It all right here, John.

Bank Of America Basically Wrote the Bank Mortgage Bailout Bill

In posts below we detailed the curious meetings between the Federal Reserve and private equity funds such as Carlyle Group, on the attempts to change banking regulations to make it easier for private equity funds to buy large chunks of banks. We wrote:

While we have no problem with free markets being allowed to operate, as we asked in our earlier post, what's all this "dialogue" between the Fed and Carlyle Group and other private equity funds about?... There's a few lessons to be learned here about how the power elite operate. First, they always take advantage of crisis to make a grab...[And]They always make things complicated.

Always be suspicious of "dialogue" between a regulator and the regulated. It usually ends up being a plot by the regulated to carve out some benefit.

Indeed, the mortgage crisis is turning into a feast for the well connected power elite to take advantage of the crisis atmosphere and use it for their own benefit. Not only is private equity attempting to grab the banks, but the elite banks are writing the mortgage bailout bill to their benefit. Where's my proof. Here's my proof. My comments on private equity attempting to grab banks is here, here and here. As for the power elite banks, consider:

It appears that Bank of America essentially wrote the bailout section of the Dodd-Shelby mortgage bailout bill. National Review Online obtained a copy of an internal Bank of America's 64 page “discussion document” on the Dodd-Shelby bill.

Stephen Spruiell at NRO writes:

Almost all of BofA’s preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as “We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market.”... the similarities between BofA’s ideal bill and the bill before the Senate are obvious even to the layperson — read the document, then read David C. John’s analysis of the bailout and see for yourself.

The bill itself, as would be expected, is totally to the benefit of the likes of Bank of America and Countrywide. (Bank of America agreed in January to buy Countrywide.) MrMortgage writes:

This $300 billion Dodd-Shelby bailout is an absolute crime. It bails out the banks by limiting their loss to 10%; a joke since many of the problem areas like CA are down as much as 30% already on the median in the past 12-months and the rate of acceleration of the price declines are picking up steam. The subprime crisis is nearly over and now Prime, Alt-A, Pay Option ARMs and Home Equity Lines/Loans are failing. If they get this $300 billion passed, another $1 trillion+ will have to come on its heels for all of the other bailouts.

This needs to be fought and/or vetoed or it’s potentially $300 billion of taxpayer money down the toilet.

Timothy Carney reports:

We call it the 'Bank of America bill on steroids.'" A House staffer told me that, demanding anonymity, but speaking on behalf of aides to GOP members of the House Financial Services Committee.

Quarles Goes Public With His Case for Allowing Private Equity to Buy Bank Stocks, Without Current Restrictions

Apparently the full court press is on. In addition to Bloomberg reports on the Carlyle Group talking to the Fed on "reforming" the restriction on limitations to the size of positions private equity funds can take in bank stocks, there's also an Op-Ed calling for the same.

Carlyle Group managing directors Oliver Sarkozy (half brother of French President Nicolas Sarkozy) and Randal Quarles are now aggressively promoting, very publicly, their reasons why private equity should be allowed to own major stakes in bank stocks.

While we have no problem with free markets being allowed to operate, as we asked in our earlier post, what's all this "dialogue" between the Fed and Carlyle Group and other private equity firms about? Only one sentence is required to remove the restrictions.

Further, Quarles continues to bring up the fact that public markets will not be able to provide the necessary funds the banking sector will need. Does this really mean that Quarles is angling to prevent public markets from investing at any new level that private equity funds will be allowed to invest at?

This has been an on going project for Quarles. His current argument is not any different from his argument during the luncheon I attended back in April.

See my report here.

See his recent WSJ Op-Ed piece here.

Note that the WSJ article identifies him as the former "under secretary of the Treasury for Domestic Finance in the Bush administration." More precisely, and importantly, he was the Treasury's coordinator to the President's Working Group on Financial Markets (aka, The Plunge Protection Team) But, of cour