The Revolving Door Between Wall Street and Upper Echelon Government

Bloomberg recaps, the goings on:

Former U.S. Senator Tom Daschle's...$1 million-a-year consulting contract with the New York-based firm [InterMedia Advisors LLC.]highlights how buyout firms often turn to former politicians to court investors and make deals. Former President George H.W. Bush, ex-Treasury Secretary John Snow and former Senate Majority Leader William Frist have all worked for private-equity funds...

Washington-based Carlyle Group helped pioneer the use of former government officials as fund raisers and dealmakers. Former President Bush and ex-U.K. Prime Minister John Major have advised the firm, and its ranks currently include former U.S. Treasury Undersecretary Randal Quarles.

Cerberus Capital Management LP, the New York-based firm that owns Chrysler LLC, counts John Snow as its chairman and former Vice President Dan Quayle as chairman of its international unit.

Not to be forgotten is that French president Nicholas Sarkozy's half brother, Olivier Sarkozy, works alongside Quarles at Carlyle Group as head of Carlyle's Global Financial Services group.

Bush Plans Summit of World Leaders Over Crisis

At the urging of French President Nicolas Sarkozy (His half-brother, Oliver Sarkozy, is a Managing Director and co-head of the Global Financial Services at The Carlyle Group), President Bush will plan to hold a summit of world leaders "to discuss the global response to the financial crisis and ideas to prevent such a crisis from recurring in the future and to preserve our free market system."

At this point in his administration, it is clear that Bush "preserving our free market system" is the equivalent of Hitler favoring national healthcare for Jews, just before shipping them to Auschwitz.

Sarkozy in particular has pressed for the economic summit to be held in New York City, where, he says, "everything started".

This should be quite the show.

The summit is likely to include the member states of the Group of Eight – the U.S., Japan, Germany, the U.K., France, Italy, Canada and Russia – as well some developing countries that haven't traditionally had a seat at the table, such as China, India, Brazil and South Korea. Saudi Arabia, South Africa, Switzerland and Australia also are being mentioned as possible invitees, according to WSJ.

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.

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 course, identifying him as such would add a new layer of mystery to the always mysterious operations of Carlyle.