Monday, April 13, 2009

A Golden Easter Egg for Goldman

"Goldman Sachs has raised $5.5 billion for a fund to buy discounted private equity holdings – the largest amount ever raised for a fund of this type – as investors anticipate a flood of forced sellers trying to offload private equity stakes," reports FT.

Note the words "forced sellers". A lot of this will be the government forcing banks to sell their PE stakes. It reminds me of the huge forced sales of junk bonds around the time of the S&L collapse. The government forced banks to sell their junk bonds, and those who bought the avalanche of junk bonds coming on the market made a fortune.

As FT writes:

Banks, which account for about 25 per cent of private equity investors, are expected to be big sellers of their holdings as they seek to raise capital.

David de Weese, a principal at Paul Capital, a secondary market firm, said: “There is $130bn of private equity on the balance sheets of the six big US banks and AIG. AIG alone has $30bn. When you have a federal regulator sitting in your office, you develop a new view of what you are willing to sell.”
Of course, if you were an EPJ reader back in February, you knew this kind of stuff was going to happen. When the stress test program was announced, I wrote:

How would a stress test kill off some players? By defining some kind of paper as bad paper that would result in that paper being dumped by banks immediately onto the markets. Who knows who and how such paper would be defined? When the government wanted to kill the junk bond market, it ruled that banks and S&L's couldn't own junk paper even if it was sound paper unlikely to ever go bad. The junk market crash dived, good paper and bad--never too recover.

Banks are not going to hold paper that the government for whatever reason wants to declare a non-passing security in a stress test--it will be gone and muck up the markets as that type of security is sold by banks and other financial institutions across the country.
There are probably other holdings that the government will view as must sell by banks to raise more liquid capital, but the government's view on PE stakes is another gift to Goldman and the like. My suspicion is that there is at least one other bank the government wants to take out, this bank will be holding a significant PE stakes and the government will be sure to define as problem paper other securities held by this bank.

There will be other sellers of PE stakes as well, but to the degree banks are forced to sell this paper NOW, will determine how far the PE market crashes.

1 comment:

  1. On the next takedown, I thought it might be Wells Fargo as retribution by Bair for the Wachovia coup, but that would be too overtly political, esp. in light of their "positive" earnings projection. It looks like ex-Carlyle Ned Kelly was put in Citi to sell off pieces from the inside. BofA seems pretty tight with the administration. Assume the House of Morgan never falls. I don't know much about Taunus. Of the 19 largest, I saw only National City on Weiss' list (assets: $141 B).

    Beware of what you say about G01dman, you might get served: