Seeking Alpha

Graham and Dodd Investor's  Instablog

As the author of "A Modern Approach To Graham and Dodd Investing," http://www.amazon.com/Modern-Approach-Graham-Investing-Finance/dp/0471584150/ref=sr_1_1?ie=UTF8&s=books&qid=1260900496&sr=1-1.html I use a relatively pure form of the Graham and Dodd methodology reminiscent... More
My business:
R.W. Wentworth & Co.
  • Sheila Bair Has a Point About Private Equity 2 comments
    Jul 11, 2009 06:49 PM

    Here's the latest example of why private equity firms should not be buying banks (except in rare cases like those outlined by Sheila Bair). It is the looming bankruptcy of Kellwood Group, and apparel company.

    Kellwood was taken private in what was basically a leveraged buyout (LBO) with a debt load of $544 million. Of this, $140 million is due next week. This is a bad time to be trying to raise money of this sort. And even if it were somewhat available,  Kellwood might not be the investment of choice, given the recent uneven pace of consumer spending.

    That basically sums up Private Equity's modus operandi: Leverage the company as much as you need to get the deal done, putting in as little equity as possible. Under ORDINDARY circumstances, the company will just survive. Then the returns on equity will be a maximum, meaning that profits to stock holders will be maximized.

    Banks are inherently leveraged operations. They don't need another round of leveraging. They need to be managed with a greater margin of safety than in the past.A strategy that gives than barely better than a 50-50 chance of surviving would put too many depositors, and ultimately the economy, at risk.

    Sheila Bair also wants to prevent banks from going the "other way," and taking "hedge fund" risks. Specifically, she wants to impose fees on no-lending activities of banks such as proprietary trading. These are really two separate skill sets, and banks (and other institutions) probably shouldn't be doing both. This is the spirit, if not the letter of the Glass-Steagall legislation that separated investment and commercial banking activities.

Back To Graham and Dodd Investor's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

This post has 2 comments:

  •  
    or....the gov. could mandate a minimum amount of equity a pe firm puts in if they buy a bank. Oh, wait.....I guess if they did that then you wouldn't have an article to write about for your shameless self-promotion and I wouldn't have to point out the obvious to you via this comment. if you don't have any insight into anything you should probably stay away from writing because your self-promotion becomes that much more obvious.
    Jul 13 02:42 PM | Link | Reply
  •  
    You are right in theory. But private equity firms have basically said that they would not do business under Sheila Bair's rules. Then they have no business buying banks at all.

    We need people on this site to differentiate between what people say and what people mean (usually worse for the public).. It's time that you picked up your share of the load.


    On Jul 13 02:42 PM anon wrote:

    > or....the gov. could mandate a minimum amount of equity a pe firm
    > puts in if they buy a bank. Oh, wait.....I guess if they did that
    > then you wouldn't have an article to write about for your shameless
    > self-promotion and I wouldn't have to point out the obvious to you
    > via this comment. if you don't have any insight into anything you
    > should probably stay away from writing because your self-promotion
    > becomes that much more obvious.
    Jul 15 01:34 PM | Link | Reply
Full index of posts »
Latest Followers

StockTalks

  • Chicago PMI is strong. But contradicting a bunch of other indicators.
    about 19 hours ago
  • Treasury bills may soon sell at a premium, meaning a (nominal) capital loss.
    about 19 hours ago
  • "Big breakout in (DECK)." Glad to own some.
    about 19 hours ago
More »
Posts by Ticker
AXP, BRK.A, C, COP, F, GE, GS, LUV, MCO, SLV, TGT

Latest Comments


Most Commented
  1. Another State Goes Belly Up (12 Comments)
  2. Should Bernie Madoff Be Given A Jail Sentence He Might Survive? (8 Comments)
  3. Re-Election of Iranian Hardliner Spells Hard (Political) Times (7 Comments)
  4. We Don't Need "Payday" Lenders (7 Comments)
  5. Insider Personal Liability: An Idea Whose Time Has Come (7 Comments)
Posts by Themes
Airline industry, Auto Industry, Banking, Bear, China, Copenhagen, Corporate Governance, Corporate governance , Energy, Finance, Generations, hedge funds, India, Kurt Wulff, Obamacare, Politics, Precious Metals, SEC
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.