Jay Jordan: Re-Install Glass-Steagall, China’s Dangerous Shadow Banking System, S&P’s Credibility And Other Ruminations

Jay Jordan has been a low-key, respected buyout pro for more than 30 years. The conservative (he hates excessive leverage), decidedly old-school (he doesn’t e-mail) dealmaker began his career in the 1970s at Carl Marks & Co. In 1982 he co-founded The Jordan Company, which has sponsored more than 400 acquisitions, including add-ons. Currently, the firm is investing from the $3.6 billion Resolute Fund II LP, closed in 2008.

Jordan spoke with Buyouts earlier today about Standard & Poor’s downgrade, China (his firm was among the first U.S.-based buyout shops established there, in 1996) and financial reform.

What do you make of the downgrade?

“I’ve always suggested that this downgrade is much ado about nothing. You have to question S&P given their failure in mortgaged-backed securities. I thought we’ll have a few days to a week of emotional volatility and then things will settle. But there are much more severe problems in Europe.”

How has it impacted the buyout market?

“I haven’t really seen it impact the buyout market. The bottom line is, the single safest asset class, which has really been the case since before World War II, is senior corporate debt. Now, assuming private equity-owned companies are not over-leveraged, then it’s a great asset because these companies can withstand the vicissitudes of the global economy. Obviously, there are other factors that would weigh against that, for instance if you over-leverage.”

How do you feel about China?

“China is a big question mark. Is it a bubble? China represents the final demand of approximately 45 percent of significant commodities, from steel to oil to pork. If they slow down, it will reverberate throughout the global economy. Also, most people do not realize that approximately 80 percent of China’s GDP is internal sovereign debt, of which approximately $1.65 trillion is in the banking system controlled by the People’s Bank of China. But the remaining debt is in a shadow banking system (off-balance sheet third-party debt run through entities that aren’t controlled by the People’s Bank) of a couple trillion. Nobody knows that. They have a shadow banking system that is very dangerous. It used to be that ‘So goes GM so goes the U.S.’ Well, now it’s ‘So goes China, so goes the global economy.”

What are your thoughts on Dodd-Frank?

“It’s a complete disaster. People in Congress just don’t get it. All they had to do is two things: Re-install Glass-Steagall, and then you deal with leverage. And then you go have lunch. A 2,700 page document could have been 10 pages. Glass-Steagall was only about 33 pages.”

Is your opinion on Glass-Steagall shared by your friends in banking?

“Of course not. Their comp packages would be cut dramatically and they couldn’t build their empires. Now, one major, reasonable concession to Glass-Steagall is the Volcker Rule. I’m just saying they didn’t even have to do that. They should’ve just said, ‘We’re going back to Glass-Steagall,’ and then gone to lunch.”