Just another Reality-based bubble in the foam of the multiverse.

Thursday, January 01, 2009

Follow the money down the rabbit hole

Guess which private equity groups are going to benefit from the wrecking of the global economy?

The usual suspects- with the Carlyle Group leading the way.

Michael Wolff:

Here’s a parlor game, played best by the people who are in it: Which private-equity firm’s going bust first? Carlyle? Fortress? K.K.R.? Cerberus? Apollo? Could it even be mighty Blackstone, with its vast real-estate holdings? Which of these one-word-branded enterprises (the word should emphasize strength, opacity, and preferably be culled from mythology—though no one in private equity, rest assured, reads his Bulfinch’s) that make up what’s been called the world’s “shadow banking system” will collapse and, in the domino pattern of this financial crisis, take the other firms with it?

There’s an urgency to this question because no big firm has actually gone bust—yet. All of the behemoth investment groups that sit on top of trillions of dollars of the largest capital accumulation outside the public markets remain suspended over the global economy like awfully big shoes waiting to drop. The wait increases both the suspense and the bitchiness of the game: somehow every private-equity guy (private-equity guys have been among the most unpopular figures of the great bubble) feels he’s been more prudent and responsible than all the others. Given the credit crunch, no private-equity deals are getting done now—chances are that what you’re doing with your idle hours as a P.E. man is trying to figure out who deserves to crash and burn before you...

...Carlyle Capital Corporation, the arm of the Carlyle Group that invests in mortgage-backed securities, had defaulted last spring on more than $16 billion...

When I was 11, my father, a businessman who, in his day, took a dubious risk or two, gave me a key lesson in finance and life which I knew was meaningful without understanding it. “You’re not bankrupt,” he said, “until people know you’re bankrupt.”

By which he meant, I’ve come to understand, that money is a complicated reality. It’s a master illusionist’s game. The artifice is everything. Transparency is the enemy of making it really big—which is one reason the word “private” got joined to “equity.”

This may have something to do with the message I got when I called up Stephen Schwarzman, the head of the Blackstone Group, and the most successful of all private- equity players. At the top of the market, in June 2007, when Blackstone went public (a top-of-the-market irony was to have firms specializing in taking companies private doing it with public money), he was, briefly, the richest man in New York, stepping over Michael Bloomberg, but now may be down to his last billion.

“Mr. Schwarzman’s office,” said the receptionist, “is no longer taking calls.”

“Ever?”

“Not for the foreseeable future, I’ve been told.”

This might seem to be a sort of going to ground, or holing up in a single room, as you are surrounded by creditors and police, the gun in your hand. Blackstone, which with Fortress Investment Group went public a year and a half ago, is now at a fraction of its former value—whereas K.K.R. has altogether failed in its efforts to go public.

And those other kinds of funds, hedge funds—which make short-term investments in securities rather than, like private-equity funds, long-term investments in companies—are, everywhere, shutting their doors. Investors in those funds are, sensibly, demanding their money back—or what’s left of it.

And yet, even though you might not be able to get through to Mr. Schwarzman, the greater point is that he is still in his office. His thousand or so employees around the world are still there, too. Indeed, few people in private equity—in the middle of the greatest financial crisis of the era, even as everybody in private equity awaits the collapse of everyone else in private equity—have actually lost their jobs. Even with no business to be done, it’s business as usual. This is an extraordinary demonstration of denial, or of a dreamworld, or of an alternative reality—or of my father’s dictum. Nobody knows if the world’s great P.E. firms are out of business—the guys who run these firms may not even know...


Follow the link to read it all.

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