David Rubenstein of Carlyle Group doesn’t have anything to gain by saying bad things about banks, and he is well connected, so odds are good he is on to something (hat tip reader Abdul).
He also repeated a theme that we’ve heard earlier: don’t count on sovereign fund rescues. While they were active buyers in the first round of bank fundraising, they’ve been burned, and will hold back until they have clearer indications that the worst is past.
The article notes he was far more bullish on April 28. Wonder what he learned in the meantime?
From Bloomberg:
U.S. and European banks and financial institutions have “enormous losses” from bad loans they haven’t yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.
“Based on information I see,” it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn’t name any companies.
“The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,” Rubenstein said. “Many financial institutions aren’t going to be able to survive as independent institutions.”…
On April 28 at a conference in Baltimore, Rubenstein said financial institutions and financial assets are “the single greatest investment opportunities” in the U.S. and “a lot of private-equity firms like ours are going to try to make investments in these firms.”….
Rubenstein said today that the industry and broader economy aren’t likely to turn around until early next year.
“The truth is, we’re in some kind of economic slowdown,” Rubenstein said. “I don’t think it’s going to be over for quite a while.”
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If you look back at the last two quarters, I believe you will find an amazing correlation between the bank debts written down/off and the capital infusions they have received at any particular time.
By this time, I am convinced the banks are using valuation techniques, changing as they need to, that enable them to declare losses approximately equal to the amount of capital they have been able to acquire. I do not believe this is a coincidence. I guess this is “managing” your losses, i.e.–declare what you can cover rather than show up as insolvent.
With some $400 billion of an estimated $1 trillion in real estate losses now declared, it makes perfect sense that this oozing of declared losses will extend well into next year as Rubinstein suggests. This is especially true as the financial institutions face increasing problems garnering new funds from new investors whether they are foreign sovereign wealth funds, vulture hedge funds, small-time investors, or even the Fed.
Frankly, it could take through next year as the projection of total losses increases and resistance to new investments in financial institutions grows. In the process, I think some of the big names (not to mention the mid- and smaller-sized names) will go under.
We’re a long way from stability in the financial sector.
Don’t worry. Those losses will only be recognized after our esteemed banks push their garbage onto the Fed’s balance sheet. And the taxpayer will be the one realizing them.
If BSC wasn’t allowed to fail, there’s no way any bank of size larger than neighborhood credit union will be allowed to go under. At least until the Fed itself goes under (where’s a good Austrian school economist when you need him?)…
Jamie Dimon has just jumped on the Rubinstein bandwagon (“recession is just beginning”). See calculated risk post today.
“The truth is, we’re in some kind of economic slowdown,” Rubenstein said. “I don’t think it’s going to be over for quite a while.”
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In other words: I don’t know what it is, but I know it’s bad.
Let’s just call it economic apoplexy.
Jeez.
Carlyle just raised $1.35B for a distressed debt fund.
http://www.usatoday.com/money/markets/2008-04-07-carlyle-distress-fund_N.htm
VennData,
Your point? That article was from early April. The fund had closed by then. The hard part is raising the money, and that task was complete. Why did Rubenstein change his tune from two weeks ago?
Carlyle Group is bidding on distressed debt; that means they are actually getting a good look at what some players are holding. Since they have been one of the very few buyers with major money in hand, I suspect CG’s had rather a few hush-hush asset tenders since ‘things stabilized’ in April. CG runs the numbers, and the size of the sum next to the minus sum tells Rubenstein and his boys he is dealing with dead men. —And that’s if he completes these deals. If he stands back, they’re dead and buried.
No, this ‘our thing’ isn’t over.