Blackstone Sees Pain Ahead for Regional Banks

Reuters
August 7, 2008

Private equity firm Blackstone Group (BX.N: Quote, Profile, Research) said on Wednesday the weak economy and high consumer debt levels may hurt regional banks, which may lack sufficient reserves to withstand potential losses.

"There's a lot more pain to be taken in financial institutions, particularly the regional banks," Blackstone President and Chief Operating Officer Tony James said on a conference call.

The comments were made during a conference call after Blackstone posted better-than-expected second-quarter results despite the weak market for leveraged buyouts.

James said regional banks may lack enough reserves to absorb losses or customer defaults on subprime auto loans, construction loans, home equity loans and credit cards.

The regional banks may have difficulty raising extra funding given the tight credit markets, and may lack the brand name or size to lure help from international funds, James said.

Sovereign wealth funds, based mainly in Asia and the Middle East, have provided funding to larger financial institutions such as Citigroup Inc (C.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research).

Regulators are looking at easing rules to help private equity firms take stakes in U.S. banks. That might only offer a short-term benefit, however, since private equity firms typically invest for five years or less.

Private equity firms like Carlyle Group [CYL.UL] are pushing regulators to loosen the rules, but the U.S. Federal Reserve has not made any final decision.

Last month, Goldman Sachs analysts said U.S. banks may need to raise $65 billion of additional capital to cope with mounting losses from a global credit crisis that may not peak until 2009. That would be on top of the estimated $120 billion already raised by U.S. banks, Goldman said.

The KBW RegionalBank Index is down almost 15 percent this year, while the Standard & Poor's Financials Index has dropped almost 24 percent.

Several financial companies, such as Merrill Lynch & Co MER.N, have already taken write-downs of more than $400 billion due to their exposure to mortgages and complex debt.

Blackstone, Meet Blackstone

Could the private equity firm buy itself out?

By Daniel Gross
July 23, 2007

The next target of a private equity firm takeover should be a private equity firm: the Blackstone Group.

LaRouch Press Release

Executive Intelligence Review, EIRNS
June 26, 2008

Soros, Carlyle Group Say Locusts Will Take Over; LaRouche Says `This is Fascism'

With the banks bankrupt, and the investment banks collapsing, George Soros says not to worry — the private equity funds will save us all. In a joint interview in the British Prospect Magazine with his British brothers Martin Wolf (Financial Times), Anatole Kaletsky (London Times), and John Gieve (Deputy Governor of the Bank of England), Soros said the financial sector is "overblown," and that it should shrink. Who will benefit? "If we do pass through this without a hitch," said the blood sucker, "you will find that the private equity funds wil replace the investment banks as the dominant force in the economy, because they are the ones who are now buying the assets."

LaRouche immediately identified this as pure fascism, exactly of the sort being demanded by Michael Bloomberg and the Rockefeller Foundation.

The drive was backed up by another of the leading Private Equity funds, the Carlyle Group. Today's Wall Street Journal runs an op-ed by two of Carlyle's managing directors, Olivier Sarkozy (Nicolas Sarkozy's half-brother) and Randal Quarles, a former Bush Treasury official. It is modestly titled: "Private Equity Can Save the Banks." Noting that the financial services industry has so far taken about $350 billion in losses, they add:

"This is only the beginning," saying losses will go to $1 trillion (one wag in Leesburg noted that the oligarchs are now getting to within a few orders of magnitude of the true figure).

But, the Carlyle boys argue, the Private Equity firms have "demonstrated the ability to shoulder risk and improve efficiency and profitability," so: do away with the "needless regulations, restrictions and disincentives" against the unregulated hedge funds and private equity funds; i.e., usher in Mussolini fascism.

Hearing on Medicare Payment Advisory Commission's Annual March Report

U.S. House of Representatives, Committee on Ways and Means, Subcommittee on Health
November 15, 2007

The Subcommittee met, pursuant to notice, at 10:13 a.m., in room 1100, Longworth House Office Building, Hon. Fortney Pete Stark (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Mr. STARK. With an apology to my colleagues and our guests for the late start, I would like to begin our hearing on the issue of nursing home quality. Thank you for joining us in the first of a series of hearings on nursing home quality issues. It has been 20 years since the passage of the Nursing Home Reform Act, and I guess over a decade since we have held any hearings on nursing home issues on the Committee on Ways and Means. Despite improvements in areas of quality, there is still much to be done. I think our return to this issue is long overdue.

I don't want to prejudge any segment of the industry or anyone in the industry, but I am concerned about a trend that is underway. In recent years, several nursing home chains have changed their corporate structure in ways that may obfuscate the real ownership and management of the individual facilities. I will talk more just for a second at the conclusion of my remarks about that by itself. It seems that--I will talk more about that in a minute.

Without this transparency and accountability, it is hard to hold chains accountable for the quality of care of an individual unit. I worry that this move to more large private equity firm ownership will exacerbate that trend. It has been suggested that there is a negative effect on quality that may result from these corporate structures. I was alarmed to read The New York Times article earlier this year that suggested the decline in quality among private equity owned nursing homes. I guess in a nutshell, they are suggesting that the private equity firms spin off the real estate to leverage the value of the real estate to pay for the acquisition, and in so doing either increase the interest payments needed by the individual units to support the increased mortgages or increase, if they spin it off into a REIT, for instance, they increase the rent to the individual units to sustain their purchase obligations.

I have no quarrel with that if it doesn't result in their reducing the funds they spend for the needed facilities and needed employment to maintain quality of care. I don't intend to question what they do as a business practice. But I do worry that the end result could create an incentive to cut costs, as we like to say. The only costs that I know that they can cut are either in nursing care or food or tender loving care. I don't know how you legislate tender loving care. This industry operates largely on the government's dime. Sixty percent of the spending on nursing homes annually comes from the government, and the remainder is out-of-pocket or from private insurance. At any time nearly 80 percent of the residents in nursing homes are supported by public funds.

The same nursing home industry is enjoying very healthy Medicare--and I have to underline Medicare because there is a distinct difference here between Medicare and Medicaid throughout the industry. But with margins of nearly 13 percent at the last reportable period, and we hear indirectly they are close to that even in the most recent figures that are available, the for-profit nursing homes are doing even better, with Medicare margins north of 15 percent. For those of you who follow the hospital margins, we are used to dealing with acute care hospitals in the neighborhood of somewhere between zero and far out would be five percent margins. The industry is publicly supported, and therefore must be held accountable to the public for the care it provides. The nursing home chains should be striving to improve care and not cut corners to increase profits at the expense of the seniors and people with disabilities. I plan to continue looking into the issue of nursing home quality and accountability. We have already received some policy recommendations from a coalition of consumer groups. I would like to review those.

I would like to enter into the record a letter from the National Consumer Voice for Quality Long-Term Care, a letter addressed to Mr. CAMP. and myself. Without objection I would make that part of today's record.

Behind the Buyouts: Inside the World of Private Equity

How Carlyle Hurts Public Services by Avoiding Taxes

The Carlyle Group was literally born out of profits made from tax loopholes. In 1987, David Rubenstein and three partners saw an opportunity to profit off the financial troubles and bankruptcies of Native Alaskan Corporations.i Taking advantage of new tax laws that allowed struggling Native Corporations to sell their (tax deductible) debt to other parties, who could then write off the debt on their own corporate taxes, the partners did an estimated $1 billion worth of deals, and their share--approximately $10 million--allowed them to set up the Carlyle Group.

Carlyle continues to benefit from favorable tax rules. Rubenstein himself pays only the 15% capital gains tax rate on his take of buyout profits rather than the 35% income tax that regular wage earners in his tax bracket are required to pay.iii The IRS is investigating whether private equity firms may also be using offshore corporate structures, cross-border loans and improper accounting methods to shield earnings and assets from the taxman. Carlyle and other firms have paid dearly to protect their tax break--both through big lobbying bills and big political contributions--arguing alternately that it is "equitable" and that it is justified simply because it's long been on the books.

But the carried interest debate is just the tip of the private-equity-tax-avoidance iceberg; by loading up the companies it buys with high levels of debt, Carlyle -- like every other private equity firm -- benefits from big tax deductions. Already, corporate taxes account for only 7% of the country's tax revenues, and this practice has the potential to drive big business' share even lower.

How does this play out in practice? Consider the proposed Carlyle buyout of Manor Care nursing homes. Because the buyout includes $4.6 billion in new debt, under Carlyle ownership Manor Care will be required to pay little or no corporate taxes. This practice of avoiding corporate taxes is especially troubling in the case of Manor Care because, like most nursing home companies, the company receives two-thirds of its revenue from federal and state taxpayer-funded payments, including Medicare and Medicaid.

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