When UK mortgage lender HBOS Plc went to market to raise capital, the outcome was a bust. The company sold only about 8% of the securities. In the end, HBOS's underwriters -- Morgan Stanley (NYSE: MS) and Dresdner Kleinwort Ltd. -- were stuck with $7.6 billion in unwanted paper.
In light of this, it's going to be tough for UK financial institutions to bolster their balance sheets. But there is an alternative: private equity.
In fact, it looks like The Blackstone Group LP (NYSE: BX) is taking a look at Paragon, a UK mortgage lender. It appears that Paragon is opening up its books to engage in some initial due diligence.
Of course, this is still nascent, and deals can easily fall apart, especially in tough markets. However, investors are certainly excited. In London trading, Paragon's shares spiked 23%.
Even so, the value of Paragon is still down 87% over the past year, so it should be no surprise that the private equity folks sense opportunity.
It's hard to believe, but the credit crunch is getting close to a year old. When it first hit, the result was stunning as pending deals came under much pressure, such as with price renegotiations, litigation and abandonments. There was also an evaporation of mega deals.
However, lately there are signs that buyouts are making a comeback. A recent example is Carlyle's $2.54 purchase of the government business of Booz Allen Hamilton.
But that's not enough to support the heavy dealmaking infrastructure on Wall Street. As a result, we are now seeing some major layoffs as well as the departures of key players.
For example, according to a piece in Bloomberg.com, the co-head of leveraged finance at Morgan Stanley (NYSE: MS), Ashok Nayyar, has left the firm. And the global leveraged finance chief at Deutsche Bank AG, Michael Paasche, is also leaving.
Of course, this doesn't mean that leveraged finance will go away. If anything, major private equity firms will likely bolster their own platforms. Or, we may see other banks entry the fray, such as Barclays Capital (NYSE: BCS).
Last week, Citadel Investment Group, a Chicago hedge fund, bought E*Trade Financial (NASDAQ: ETFC)'s collateralized debt obligation (CDO) portfolio for 27 cents on the dollar according to The Wall Street Journal [subscription]. If this price was applied to the Level 3 assets of nine of the largest banks, it would wipe out the capital of three of them.
It's important to point out, before presenting this analysis, that the 27 cents on the dollar price that Citadel paid applied only to E-Trade's CDOs. It may represent a worst case scenario price for these banks. Furthermore, the Level 3 assets of these nine banks include other illiquid securities besides their CDOs. Finally, the calculations I'll show are based on the most recent Level 3 assets and equity of these banks as of last month.
Having said that, here are the three banks whose capital would be wiped out if that 27 cents on the dollar valuation was applied to their Level 3 assets and written off from their most recent capital levels:
This week, investment bank Lazard Ltd. (NYSE: LAZ) reported its quarterly earnings. As should be no surprise, the results were solid, with profits of $61.5 million, or 53 cents.
True, this compares to $62.9 million, or $0.60 per share in earnings in the same period a year ago. Then again, investment banking can be volatile -- a couple engagements can have a big impact. And there is lots of competition from biggies like Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS).
But, with a hefty stock price, Lazard has also been buying up some rivals, such as Australia-based Carnegie, Wylie & Co.
What's more, Lazard's Chairman, Steve Golub, had some interesting insights regarding the problems with private equity and tightening credit.
Interestingly enough, it could be a boost for M&A. How? Well, first of all, valuations are better.
And, assuming private equity firms are having issues, it could make it easier for strategic buyers to purchase companies.
Assuming all this pans it, it would of course be a very nice thing for Lazard.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
The Wall Street Journal is reporting that the sale of $12 billion in debt related to the Cerberus Capital purchase of Chrysler Group from DaimlerChrysler (NYSE: DCX) has been postponed. Apparently the debt underwriters -- including J.P. Morgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs Group (NYSE: GS), Bear Stearns (NYSE: BSC) and Morgan Stanley (NYSE: MS) -- have been unable to find buyers for the debt, which is part of a $20 billion loan package planned for Chrysler. The money will be used in Chrysler's production and finance operations.
This setback for the debt sale offers further evidence that liquidity is drying up and deals are becoming more expensive. Interest rates on these debt-fueled loans have been climbing rapidly, and are now headed toward 10% and higher. However, even at these rates, Cerberus's bankers had trouble finding buyers. As a result, the bankers will provide $10 billion in loans from their own pockets, with plans to sell the debt to the public at a later date. Cerberus and Daimler will kick in another $2 billion.
Cerberus and its bankers have stated that this financing problem will not delay the closing of the deal, which is scheduled for August 3.
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).
While Blackstone is a premier firm, KKR is still the pioneer. Back in the 1970s, the firm invented much of the foundation for private equity.
Although, even if KKR can file a prospectus within the next couple weeks, an IPO is not likely until the fall. It's usually tough to get enough investor interest during the doldrums of the summer.
Gasparino also thinks other firms -- like Apollo, Carlyle and Texas Pacific Group -- will go public. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
The Blackstone Group submitted an update to its IPO filing yesterday. As usual, there is quite a bit of verbiage, but there are definitely some interesting developments.
For one thing, the firm has put together a sterling board of directors.
First, there is William Parrett. He is a senior partner at Deloitte & Touche USA and will be critical in helping Blackstone deal with auditing and financial matters.
Next, there is Lord Nathaniel Charles Jacob Rothschild (yes, that's quite a name). He is the founder of RIT Capital Partners and a veteran of money management.
And, finally, there is the Right Honorable Brian Mulroney. From 1984 to 1993, he served as the 18th Prime Minister of Canada. He is now a senior partner at Ogilvy Renault.
So what's the director compensation? There will be an annual cash retainer of $100,000 and an equity grant of 10,000 deferred restricted common units.
Look at the history of Wall Street and you will see a major theme: conflicts of interest. After all, the business is based on relationships.
Conflicts of interest are not necessarily bad. So long as there is disclosure – and clients understand the dynamics – it should be fine.
But, there should still be vigilance. That's the take from a recent piece in the New York Times.
In fact, with the surge in private equity deals, it's getting tough to see who's representing who.
Perhaps the biggest issue is when investment banks engage in their own deals and also advise the client. This is actually becoming common for firms like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and Merrill Lynch (NYSE: MER)
But in this scenario, is the client really getting good advice? Or is the investment bank just trying to get a juicy deal?
One way to manage this has been for investment banks to invest alongside others. Thus, there would be no control position.
But with Goldman raising a $20 billion fund and other investment banks in the process of forming mega funds, is this realistic?
In other words, investment banks are going to start looking more and more like private equity funds – that, incidentally, provide advisory services.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
After a while, it starts to add up, and that's the report from a recent piece in Bloomberg.com. In the first quarter, hedge funds were able to attract a whopping $60 billion in fresh capital (the data comes from Hedge Fund Research Inc.). This is a 3x increase from the same period last year. In all, hedge funds have $1.57 trillion in assets (that's about what the U.S. spends on health care each year).
The irony is that, in general, hedge funds have been under-performing the markets. Oh, there are also some implosions, such as Amaranth. Even the mighty Goldman is having persistent issues with its returns.
So why is money pouring into hedge funds? I think part of it is that major institutions -- like endowments, insurance companies, and pensions -- are in the process of reallocating their portfolios into alternative assets. These institutions also tend to have long-term horizons. As a result, even if there are some recent troubles, it may not be a big issue -- at least not for now.
But the irony is that traditional assets, like stocks, have done quite well. More importantly, they do not have the hefty fee structures of alternative assets.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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When UK mortgage lender HBOS Plc went to market to raise capital, the outcome was a bust. The company sold only about 8% of the securities. In the end, HBOS's underwriters -- Morgan Stanley (NYSE: MS) and Dresdner Kleinwort Ltd. -- were stuck with $7.6 billion in unwanted paper.
It's hard to believe, but the credit crunch is getting close to a year old. When it first hit, the result was stunning as pending deals came under much pressure, such as with price renegotiations, litigation and abandonments. There was also an evaporation of mega deals.
This week, investment bank 
With the 
Look at the history of Wall Street and you will see a major theme: conflicts of interest. After all, the business is based on relationships. 
