Private equity firms (especially the “mega funds” of $5 billion and above) have now significant amounts of money to invest, as in half a trillion dollar. These funds come with a “due date” on them: most funds were raised in 2005-2008 with an investment period of 4-5 years, meaning that this dry powder is going to “expire” in 2010-2012. Only invested funds will earn a 2% management fee when the investment period ends, which creates a perverse incentive to invest at any cost.
Finally there is a major supply and demand imbalance that is building up: when the time will come to realize these investments (made when funds needed to invest a lot of money) in 4-5 years, there won’t be as much “dry powder” floating around, given a 70% plunge in private equity fundraising that is now back at “new normal” levels of 2004.
As unlikely as it may seem, there is still a massive slack in the private equity industry (again, especially in the large LBO market) that will take another 4-5 years to work out.
The 2001 currency-swap deal arranged by Goldman trimmed Greece’s deficit by about a 10th of a percentage point of GDP for that year. By comparison, Greece failed to book €1.6 billion ($2.2 billion) of military expenses in 2001—10 times what was saved with the swap, according to Eurostat, the EU’s statistics authority.
Before we get into the implications, here are the “revelations” (even though these have been part of the public record for nearly ten years) about Italy, which is now certain to attract everyone’s attention as the source of potential near-term eurozone destabilization.
Those who invest only when commentators are
upbeat end up paying a heavy price for meaningless reassurance.
In my view a board of directors of a huge financial institution is derelict if it does not insist that its
CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other
employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees –
the financial consequences for him and his board should be severe.
It has not been shareholders who have botched the operations of some of our country’s largest financial
institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most
cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the
last two years. To say these owners have been “bailed-out” is to make a mockery of the term.
The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may
have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these
CEOs and directors that needs to be changed: If their institutions and the country are harmed by their
recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by
insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some
meaningful sticks now need to be part of their employment picture as well.
There’s also a nice story about paying acquisition prices with undervalued or overvalued stock.
In the absence of substantive measures to reduce the structural elements of the U.S. budget deficit, the U.S. debt burden will worsen. Investors are smart enough to recognize this, which means the time may not be far over the horizon when investors will focus more intensely on the U.S. situation and ask perhaps the most significant question of our age: If the U.S. is backing its financial system, who is backing the U.S.?
The global economy is messing up GDP and balance of payment accounting. Think about US companies building their factories in China, whose revenues are included in the Chinese GDP and whose exports from China are added in the Chinese current account.
For all the huge trade surplus that China is purportedly ‘enjoying’ it turns out that little benefit is being derived from it. Over 50% of China’s exports are produced by foreign corporations.
