From Davos to Dante in one easy step
Let’s start with this quote from David Rubinstein, head of private equity leaders The Carlyle Group, apparently uttered during the most recent World Economic Forum meeting in Davos: the golden age, the WSJ reports, of private equity was over. It had now entered its “purgatory age. We have to atone for our sins a bit.”
A related story explains how Carlyle Capital, managed by and 15% owned by the Group, is having massive liquidity problems.
Many banks are feeling the pinch these days, paying for a variety of sins: getting used to receiving too many fees per quarter for refinances, for instance, or dipping into the less ethical ponds of fraudulent appraisals or knowingly lending to those who could not afford to pay.
But that is penny thievery, and anyone from the Street knows it. To get a really good picture of how screwed up things can quickly get, you have to leave the world of amateurs and move into the heady world of the professional. After all, it takes a Citibank or a Merrill to blow off $20B in a quarter. It’s just too hard for the rest of us to do.
Which brings me back to the Carlyle Group, which by the way has halted all capital calls and redemptions, and whose trading was also halted last week after the share price dropped from above 20 to 5.
What had they done wrong? Well, with only $670MM in capital, the fund had borrowed enough (32x?) to leverage up, all the way to $21.7B in bonds. According to the WSJ, some observers suggested that this leverage was a bit “on the high side.”
Now, of course, the whole thing has blown up, or is about to.
I only have one question about this kind of investment practice:
Who let these fools anywhere near the palace keys?
As people become familiar with the gigantic screwups common to today’s NY/London/HK scene, they aren’t going to look at their own mortgage pain and feel any kind of kinship with the folks like Carlyle Capital. Rather, they will try to find a tall tree, with plenty of branches.
Dante should have added one new level to describe what this leverage will bring its transgressors.
No wonder the world is nervously waiting for what next shoe might fall. Who knew that the same idiocy practiced daily in DC had leaked up to Wall St.?