Tuesday, August 19, 2008

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

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?

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