The matter is still unsettled. Has the tide turned or not?
We’re watching the beer bottles and Coke cans. Floating on the surface, they should tell us what way the water is running. But they seem to be uncertain themselves; caught up in eddies and backwashes, it’s not clear which way the trash is going. And the stock market still can’t make up its mind.
Subprime mortgages…and the garbage investments derived from them…clearly seem to be ebbing away. And they are taking with them many of the brightest profits, reputations and careers on Wall Street. Many executives have already been set adrift. Hundreds of billions in losses have been booked or projected. The masters of the universe don’t look quite as smart as they did a few months ago.
Ah, yes, let us recall the geniuses at private equity. When the tide of global liquidity was at its peak, no boat floated higher. But as Marx observed of capitalism in Das Kapital, we observed of private equity in Markets and Money – private equity would be undone by its ‘internal contradictions’.
It didn’t make sense. Individual investors can surely outsmart their brethren from time to time. If they get lucky…and do their homework…they might find a company that “the market” has mispriced. But the idea of private equity was that large, sophisticated investment companies could do so consistently. Private equity firms pretended to be smarter than everyone. They could find valuable assets where the millions of other investors had missed them… But their conceit didn’t stop there; they then pretended to find ways to improve the businesses they bought – making changes that, somehow, previous managers had been unable to see or unable to implement.
What bread did these private equity geniuses eat? What air did they breathe? How did they get to be so superior that were not only able to spot undervalued companies better than anyone else…but to run them better too?
And for a while, it almost seemed to be true. Private firms bought companies from the public, pimped them up, loaded them down with debt, and sold them back to the very same public market investors.
And then the absurd pretensions turned into preposterous contradictions. Private equity firms turned to public market investors and offered to sell them shares! ‘We are so much smarter then you,’ they said to the public markets. ‘But we will give you a way to participate; we’ll let you buy shares in our business.’
What was this? The privateers were going to take the public’s money to buy companies from the public markets so they could squeeze the juice out of them and then sell them back to the public. How long could this go on? Not long.
Just as we predicted, as the private equity demi-gods stepped out on the water…they sank.
“If buyout firms are so smart,” asked a New York Times headline, “why are they so wrong?”
What they are wrong about is the very thing they’re supposed to be good about – making deals. Since the summer, the deals have been coming apart. The buyout experts are no longer buying in. Instead, of buying out…they’re walking out, giving up on the deals they thought were so good. Cerberus, for example, is giving up a US$100 million deposit rather than have to go ahead with its US$4 billion acquisition of United Rentals.
“Circumstances have changed,” say the private equity firms.
They’re right about that, at least. Trouble is, anticipating a change of circumstances is what you’re supposed to do in the financial markets. Good deals are supposed to be able to survive changed circumstances…because circumstances are always changing.
Think of the poor turkeys! No, we’re not talking about the private equity boys, or the subprime lenders. We’re talking about the kind of turkeys with feathers. Things have been going pretty swell for them too. They’ve been eating well…they live in nice, dry, warm digs…they even get free medical attention. The turkeys’ lives have been all upside. Things have been getting bigger and better, day after day. And then, what do you know? This week, the whole picture changes; circumstances change dramatically in most turkeys’ lives.
Markets and Money