Tag: Business

The SEC and Private Equity

Naked capitalism‘s Yves Smith appeared in RT news Boom/Bust to discuss the risky business and abuses of private equity in the real estate rental market. Her segment starts at 3:45.

In her article, Yves also noted this piece from an article on private equity from Friday’s Bloomberg News:

PE Slump

Private-equity transactions overall have fallen 22 percent to $53 billion through April, data compiled by Bloomberg show, led by the drop in buyouts of public companies. The value of those leveraged buyouts declined to $3.2 billion compared with an average of $34 billion in the 10 years through 2013.

The peak for buyouts came before the financial crisis, when U.S. funds struck $659 billion of deals from 2005 through 2007, including the purchases of HCA Inc., Hilton Worldwide Inc. and Biomet Inc., the data show. Buying inexpensive public companies was generally easier for the funds than carve-outs are, said Raymond Lin, a mergers and acquisitions attorney at Latham & Watkins LLP.

“The easy days for private-equity buyers are over when they profited from buying undervalued companies,” he said. “Carve-out deals require a lot of up-front work that would incur additional costs and could affect returns.”

The Standard & Poor’s 500 Index, which reached a record this week, trades at 17.4 times reported profit, the highest level since 2010, according to data compiled by Bloomberg.

PE’s Limits

While high valuations haven’t scared off dealmaking between companies, buyout firms are motivated by different factors, said Gordon Caplan, chairman of the private-equity practice group at law firm Willkie Farr & Gallagher LLP.

“If business growth slows, companies have to buy things,” he said. “Private-equity buyers can’t create synergies like company mergers can in most cases.”

Corporations are more willing to spin off divisions as management continues to clean up underperforming businesses and pay down debt following the financial crisis, said Tom Franco, a partner at Clayton Dubilier.

SEC Official Describes Widespread Lawbreaking and Material Weakness in Controls in Private Equity Industry

Posted on May 8, 2014 by Yves Smith

At a private equity conference this week, Drew Bowden, a senior SEC official, told private equity fund managers and their investors in considerable detail about how the agency had found widespread stealing and other serious infractions in its audits of private equity firms.

In the years that I’ve been reading speeches from regulators, I’ve never seen anything remotely like Bowden’s talk. I’ve embedded it at the end of this post and strongly encourage you to read it in full.

Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers. [..]

Bowden pointed out that private equity is unique among the investment advisers the SEC supervises. The general partners’ control of portfolio companies gives them access to their cash flows, which the GPs can divert into their own pockets in numerous ways. Naked Capitalism readers may recognize that this arrangement is similar to the position mortgage servicers are in: they control the relationship with the funds source, and they are also responsible for records-keeping and remitting money to investors. And as we’ve chronicled at considerable length, servicers have shown remarkable creativity in lining their wallets and investors have been unable to discipline them. [..]

Needless to say, this overly cozy arrangement has proven to be a ripe breeding ground for illegal conduct.

Monday Business Edition

Our regular news editor ek hornbeck is experiencing technical difficulties.

  • Greek gloom rocks markets, troubles lenders

    By Harry Papachristou and Jan Strupczewski

    ATHENS | Mon Oct 3, 2011 12:14pm EDT

    (Reuters) – Greece’s admission that it will miss its deficit target this year despite harsh new austerity measures sent stock markets reeling on Monday and raised new doubts over a planned second international bailout.

    The gloomy news from Athens brought the specter of a debt default closer and will weigh on talks among euro zone finance ministers in Luxembourg later on Monday on the next steps to try to resolve the currency area’s sovereign debt crisis.

  • Greek economy stuck in recession, complicates fiscal efforts

    By Harry Papachristou and Ingrid Melander

    ATHENS | Mon Oct 3, 2011 10:59am EDT

    (Reuters) – Greece will remain trapped in recession next year, threatening the country’s efforts to cut deficits and claw its way out of a debt crisis shaking the euro zone, budget figures showed on Monday.

    The economy will suffer a fourth consecutive year of contraction, shrinking by 2.5 percent in 2012 after an expected 5.5 percent slump this year, according to the 2012 budget draft submitted to parliament after talks with international lenders.

Should have brought the Gatlings

Monday Business Edition

Europe Readying Yet Another "This Really Will Do the Trick" Bailout Package

Yves Smith, Naked Capitalism

Saturday, September 24, 2011

(I)n another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all. The problem is that was the premise of several of the last grand schemes, such as the EFSF and the ESM. The market calming effect relatively short lived because analysts quickly pencilled out the programs were inadequate in size and failed to address the problems of lack of a fiscal mechanism at the EU level and the need to address the elephant in the room, bank solvency.

The new rescue program seeks to create a sovereign debt crisis firebreak at Greece, Portugal, and Ireland, when contagion has already put Spain, Ireland, and Belgium in the crosshairs. The high concept is leverage on leverage plus monetization: the EFSF, which is basically a CDO, would then provide the equity to a new fund, and the ECD would provide “protected ‘debt'” I’m not at all certain what the latter is supposed to mean; reader input is welcome. But this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt. Nevertheless, this mechanism will allegedly allow for sovereign bailout program of €2 trillion.

Similarly, the size of the bank recapitalization program is in the “tens of billions”, vastly short of the €2-€3 trillion that some experts think is necessary. And note this is backwards: the debt needs to be written down directly (rather than trying to squeeze blood out of turnips via austerity) and banks recapitalized directly. Instead, the focus is (yet again) on bailing out the sovereigns, who will presumably still be expected to wear austerity hairshirts, which will worsen their debt to GDP ratios (even if this program does succeed in getting them cheaper debt in sufficient volumes).

The Eurocrats are going to be slow out of the gate. They want to launch the plan at the next G20 meeting, which is six weeks away, November 4. Mr. Market doesn’t care about the schedules of the officialdom, and is highly unlikely to wait that long.

Euro Zone Death Trip

By PAUL KRUGMAN, The New York Times

Published: September 25, 2011

European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact – namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.

Think of it this way: private demand in the debtor countries has plunged with the end of the debt-financed boom. Meanwhile, public-sector spending is also being sharply reduced by austerity programs. So where are jobs and growth supposed to come from? The answer has to be exports, mainly to other European countries.

But exports can’t boom if creditor countries are also implementing austerity policies, quite possibly pushing Europe as a whole back into recession.

Also, the debtor nations need to cut prices and costs relative to creditor countries like Germany, which wouldn’t be too hard if Germany had 3 or 4 percent inflation, allowing the debtors to gain ground simply by having low or zero inflation. But the European Central Bank has a deflationary bias – it made a terrible mistake by raising interest rates in 2008 just as the financial crisis was gathering strength, and showed that it has learned nothing by repeating that mistake this year.

As a result, the market now expects very low inflation in Germany – around 1 percent over the next five years – which implies significant deflation in the debtor nations. This will both deepen their slumps and increase the real burden of their debts, more or less ensuring that all rescue efforts will fail.

Part of the problem may be that those policy elites have a selective historical memory. They love to talk about the German inflation of the early 1920s – a story that, as it happens, has no bearing on our current situation. Yet they almost never talk about a much more relevant example: the policies of Heinrich Brüning, Germany’s chancellor from 1930 to 1932, whose insistence on balancing budgets and preserving the gold standard made the Great Depression even worse in Germany than in the rest of Europe – setting the stage for you-know-what.

Greece needs to default on its debt and exit the eurozone

If the current Greek government can’t take the necessary steps to do this, it should give way to other political forces than can

Stergios Skaperdas, The Guardian

Monday 26 September 2011 05.00 EDT

Preparing for default involves the formation of a large number of expert teams to defend Greek interests with conviction. For the debt that is based on Greek law, Greece has the upper hand. Negotiations for other debt will be more difficult and protracted.

Since Greek banks will become insolvent, they will have to be nationalised and preparations will need to be made for that. The insurance and pension funds will need to be bailed out, too. For both banks and funds to be bailed out, the country will need its own currency. Therefore, exit from the eurozone would follow.

(T)here is little doubt among economists that the easiest mechanism for a country to gain competitiveness is to have its currency depreciate. Hence, Greece having its own currency is the easiest path to gaining international competitiveness. Cars and iPhones will become more expensive but food might actually become cheaper and employment will pick up within a few months after the introduction of the new drachma. By contrast, unemployment and deprivation with no end in sight are the predictable results of following the troika’s policies.

The main problem with an exit from the eurozone is the transition period. Capital controls will have to be imposed. Temporary measures to ration foreign exchange for the importation of petroleum and other essential items will have to be undertaken. How will the Bank of Greece settle with the ECB? How will debt be converted from euros to drachmas?

Monday Business Edition

Due to playing in the mud (don’t ask, trust me it’s messy), the Monday Business Edition will brought to you by c’est moi.

Consumer spending set to restrain second-quarter growth

(Reuters) – Consumer spending was flat in May, breaking a string of 10 straight months of gains, as households struggled with rising prices and automakers failed to deliver the models Americans wanted.

When adjusted for inflation, spending slipped 0.1 percent, the Commerce Department said on Monday, falling for a second straight month.

Los Angeles Dodgers file for bankruptcy

(Reuters) – The Los Angeles Dodgers filed for bankruptcy protection, blaming Major League Baseball Commissioner Bud Selig for rejecting a television deal that would have given the financially strapped baseball team a quick injection of cash.

Monday’s filing marks a dramatic attempt by Dodgers owner Frank McCourt to keep the league from seizing the storied team, which he has owned since 2004.

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1 Japan’s TEPCO shares down 28% to record-low

by Miwa Suzuki,AFP

2 hrs 38 mins ago

TOKYO (AFP) – Shares in Japan’s TEPCO lost more than a quarter of their value Monday following a media report that the operator of the country’s tsunami-hit nuclear plant would log a $7 billion loss in fiscal 2011.

The stock was also hit by a reported comment by Tokyo Stock Exchange president Atsushi Saito that Tokyo Electric Power Co. should file for bankruptcy protection, a move that could hit shareholders hard.

TEPCO stock fell to 206 yen mid-morning, down 80 yen or 28.0 percent from Friday, the maximum loss allowed for one trading day. It closed a shade better at 207 yen, down 79 yen or 27.62 percent.

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From Yahoo News Business

1 Germany to close all nuclear plants by 2022

by Deborah Cole, AFP

57 mins ago

BERLIN (AFP) – Germany on Monday became the first major industrialised power to agree an end to nuclear power in the wake of the disaster in Japan, with a phase-out due to be completed by 2022.

Chancellor Angela Merkel said the decision, hammered out by her centre-right coalition overnight, marked the start of a “fundamental” rethink of energy policy in the world’s number four economy.

“We want the electricity of the future to be safer and at the same time reliable and affordable,” Merkel told reporters as she accepted the findings of an expert commission on nuclear power she appointed in March in response to the crisis at Japan’s Fukushima plant.

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From Yahoo News Business

1 Spain’s Socialists suffer local election thumping

by Daniel Silva, AFP

Sun May 22, 6:01 pm ET

MADRID, Spain (AFP) – Spain’s ruling Socialists reeled from spectacular local election losses Sunday as protesters vented outrage over the highest jobless rate in the industrialized world.

Support for the government collapsed in the face of the beleaguered economy, soaring unemployment and massive street protests, a grim omen for 2012 general elections.

With 98.21 percent of the municipal ballots counted, the Socialists had just 27.81 percent of the total vote compared to 37.58 percent for their conservative Popular Party opponents.

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1 Strauss-Kahn casts shadow over EU debt crisis talks

by Roddy Thomson, AFP

Mon May 16, 3:41 am ET

BRUSSELS (AFP) – The storm over the IMF chief’s sex assault case threw a giant cloud Monday over a European finance ministers’ meeting aimed at easing the euro debt crisis and considering a new bail-out for Greece.

Domininque Strauss-Kahn, who has played a key role in striving to tame Europe’s debt crisis, had been due at the talks that start from 1300 GMT.

Replaced by his number two John Lipsky as acting International Monetary Fund chief as he battles to clear his name, Strauss-Kahn’s arrest — just as he was leaving to meet German Chancellor Angela Merkel — saw the euro wobble badly before recovering in Asian trade.

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1 Greece heads for audit after euro exit scare

by John Hadoulis, AFP

Sun May 8, 2:09 pm ET

ATHENS (AFP) – Greece heads for another audit of its battered finances this week after European officials closed ranks to quash fears of an inglorious Greek exit from the euro cited in a German online report.

A high-level team of experts from the EU, the IMF and the European Central Bank will pore over plans by the Greek government to economise some 26 billion euros over three years to help bring down the country’s enormous debt.

“The mission will begin on Tuesday,” a finance ministry source said.

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From Yahoo News Business

1 Japan passes 4 trillion yen disaster relief budget

by David Watkins, AFP

Mon May 2, 3:57 am ET

TOKYO (AFP) – Japan’s parliament on Monday passed an emergency 4 trillion yen ($49 billion) relief budget to help fund reconstruction after the deadly March 11 earthquake and tsunami devastated northeastern regions.

Ruling and opposition lawmakers put aside their differences in an effort to launch efforts to rebuild the country’s quake-hit northeast as quickly as possible.

But analysts warned the passing of the budget will not ease pressure on under-fire Prime Minister Naoto Kan, who has faced criticism over the government’s handling of the crisis and the subsequent nuclear emergency.

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