Please Don’t Do It

At the end of my CNBC segment today, Dylan Ratigan asked if private equity firms would buy up the Treasury Department’s refried home mortgages. My condensed answer: “I sure hope not.”


The question has gained some traction of late, for two main reasons. First, many big private equity firms have mountains of dry powder – having closed new funds just before credit tightened up. Second, David Rubenstein of The Carlyle Group made some public comments seeming to imply that his firm might be interested in what Hank Paulson has to offer.


I understand the appeal for buyout firms, since most everyone believes Treasury will offer these mortgage packages at absurdly low prices. Almost a classic buy low, sell high situation (and who else is going to buy? Undercapitalized banks? Disappearing hedge funds?). But that’s the same argument we heard early this year when buyout firms began scooping up distressed corporate debt packages, believing them to be at a bottom.


Oops. Most of those notes were nowhere near a bottom, as evidenced by the margin calls that are beginning to roll in. And herein might lie the savior for PE firms tempted to roll the dice on mortgages: Limited partners have been fooled once, and don’t want to be fooled twice (shame on them, if so).


Many LPs are under extraordinary liquidity pressure, to the extent that some GPs have begun to worry about their investors being able to meet capital calls. Most funds do not have the inherent flexibility to expand into something like what is being proposed, so would have to secure an LPA amendment. Even those that do have the flexibility would probably ask for permission, so as not to harm the GP/LP relationship for future fundraising. And the typical answer, from what I’m told, would be a resounding “Hell No!”


Maybe that’s why Carlyle folks keep privately trying to walk back Rubenstein’s remarks…