Cerberus-Chrysler

No need to link to the dozens of relevant articles, but: 1. what a bold purchase by Cerberus

2. what a remarkable disaster for Daimler. Buy at $36B and give away for free in the downcycle. Given Chrysler's 20 up/down cycles over the last 30 years, couldn't they have waited for the next hit and then sold?

3. Fence-sitting prediction:

a) this is too much for even cerberus to handle

or

b) cerberus cleans a few things up, catches a hit or two and then floats it for a multiple of its money (in other words, what Daimler should have done).

Fortress Reports Results

The Fortress Investment Group became the first American hedge fund and private equity firm to report quarterly earnings Tuesday, and the disclosures highlighted the difficulties the public markets have in dealing with businesses whose income streams are volatile and difficult to predict. Fortress’ stock fell 4.4 percent to $28.90 a share after it reported $62 million in net income for the first quarter of 2007, a drop from about $130 million in the comparable period last year. The company’s revenue rose 13 percent, to $416.3 million.

The company said its revenue growth was sapped by rising costs, including expenses related to its recent initial public offering.

Just wait until the inevitable *bad* quarter...

New Century and Gain on Sale Accounting

The world once again discovers that Gain on Sale accounting is open to abuse, as if this had not previously happened with subprime lending in 1998. It will also happen some day, in a big way, in derivatives. From the New York Times

In the spring of 1998, the chief financial officer of New Century Financial, a lender to home buyers with blemished credit, wrote an unusual paper describing a then little-known accounting technique.

The executive, Edward F. Gotschall, marketed his white paper at industry seminars and conferences, and promoted it to Wall Street analysts as an insider’s look at New Century, according to people who read the paper. New Century was at the time one of the nation’s fastest-growing subprime lenders.

Now that technique, called gain on sale, may be coming back to haunt the company, which filed for bankruptcy protection on April 2 after disclosing a month earlier that federal prosecutors and securities regulators were investigating accounting mistakes and stock sales at the company.

...

But some financial analysts say that New Century appears to have also used gain on sale to hide losses as the subprime market began to falter late last year.

...

The use of gain on sale was a factor in the collapse of Enron in 2001 and of major specialty lenders in the late 1990s through this decade. Conseco, a large insurance and finance company that made loans to subprime home buyers, filed for bankruptcy protection in 2002, one of the largest corporate bankruptcies ever.

Critics say that the accounting technique remains ripe for abuse, even though federal accounting regulators tightened up the rules in the wake of Enron.

“The thing about gain on sale accounting is that you can create a machine that just manufactures earnings out of thin air,” said Richard Benson

...

But Mr. Benson said that the stock prices of subprime home lenders like New Century Financial had “collapsed so fast because the income and balance sheet had been built on gain on sale, which turns out to be imaginary.”

“The market woke up to the fact that there’s no there there,” Mr. Benson said.

Private Equity Debt Bubble

"I think of this as a debt bubble, not a private equity bubble," Landry (AP note CEO of TA) says. "That's the horse, and we're the cart." Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies.

Got that? Low rates, more leverage, practically no conditions. How do you think that story is going to end?

"The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says Scott Sperling , copresident of Thomas H. Lee Partners, the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."

There is another issue beyond default of course. Exit valuations will go down if this type of financing goes away.

From the Boston Globe