In recent weeks and months, it is far from a secret that private equity financings and buyout financings have become more and more aggressive. This would be fine and dandy if it was being lent entirely by private institutions or by only private equity lenders and investors. But the problem is that these private equity funds have raised billions not just from wealthy investors and large pension funds. Lenders now include public fund retirement system pension plans from states, and the private equity firms that are making these acquisitions are going out to the large money center banks and getting further financial backing to make larger acquisitions with less capital coming out of the private equity firms' own pockets.
What we are in is an LBO world gone mad, yet no one wants to admit the term. The problem gets a little larger when you include that all of the federally chartered banks have regulators, and regulators are starting to ask how much additional risk these money center banks are taking. It's one thing if a private equity fund of only wealthy individuals would implode from overextending themselves, but the regulators don't want to chance that a money center bank would suddenly be in the financial hot soup by overextending itself.
A large bank wouldn't even have to face initial implosions for there to become more widespread economic problems. All that would be required is a sharp "re-evaluation" of a few billion dollars here and a few billion dollars there. This would create credit-rating risks and that in and of itself could start making ripples. It is currently easier and cheaper to borrow money because of the "large liquidity" that is essentially competing for the same financings.
Fed Chairman Bernanke has noted that banks need to monitor their risks and even Ken Lewis, head of
Bank of America (NYSE:
BAC) has noted the risks that banks will look back and realize they did some stupid things. Now banks are making more aggressive loans in part because the yield curve inverted and flatness in their traditional investment horizons partly creates the need to look elsewhere.
Bank of America,
JP Morgan Chase (NYSE:
JPM), and
Citigroup (NYSE:
C) are all active in this sort of lending, although they also syndicate loans with smaller banks to dilute the risks. The truth is that even if this is a private equity bubble, the risks are probably more spread out than regulators initially fear. There will be some "out of compliance" issues that come up because there always are when trends take full swing. Go ask lenders who were making sub-prime home loans that they thought were not sub-prime.
This is a risk, that is no doubt. But when you consider that the banks and brokerage firms all weathered the Enron storm with barely more than a blip or hickey you'll be able to figure this won't be an economic death knell.
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
With the mega offering of Blackstone, it's inevitable that other top tier private equity shops will file to go public. In fact, according to a report from CNBC's Charles Gasparino, it appears that KKR is getting its papers together and has even retained Morgan Stanley (NYSE: MS) and Citigroup (NYSE: C).
