Today, the world’s biggest bank delivers dreadful results. Citigroup recorded a net loss of $9.8 billion, driven by a whopping $18.1 billion in pre-tax write-downs and credit costs on exposure to subprime mortgages.
Worse, it is no longer just collateralised-debt obligations and other complex securitised products that are hurting the world’s largest bank (by assets if no longer by market value). Credit cards and other consumer-finance businesses are deteriorating fast as America’s economy flirts with recession.
Capital markets around the world ended the day all in red digits. What more can we expect the upcoming weeks when other leading financials record their 4Q and FY2007 results? How much more write downs can capital markets digest? How can we fix it?
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With the appointment of Mr. Thain as the new chief executive of Merrill Lynch, one fact becomes more and more apparent: Goldman Sachs is not only increasingly inescapable as financial power but also in fostering new leaders.
First of all Goldman Sachs is recording immense profits year after year and apparently avoided the woes besetting its rivals by deftly betting against subprime mortgages. Secondly for many years now, it is the world’s most premier and perennial leader in investment banking products and services. Lately it becomes apparent that they are also great in nurturing (new) great leaders.
With the appointment of Mr. Thain (currently CEO of NYSE-Euronext) as CEO at Merril Lynch, Goldman Sachs’ top executives and personnel seem to be increasingly in demand across the entire financial service industry. Thain started out on the bond desk at Goldman Sachs and left the firm as its chief operating officer. Please consider the names of Goldman alumni who have popped up in the news over the past few weeks (source):
- Mr. Rubin, the former Goldman co-C.E.O. who became Treasury Secretary in the Clinton administration, is now Citi Group’s chairman.
- Duncan L. Niederauer, Mr. Thain’s successor as chief executive of NYSE Euronext. Before joining the bourse in February as president and chief operating officer, he was a managing director and co-head of Goldman’s equities execution services.
- Daniel Och, co-founder and head of Och-Ziff Capital Management, which on Wednesday became the first pure-play domestic hedge fund to go public in the United States. Former Goldman trader.
- Robert Steel, Treasury undersecretary for domestic finance who helped direct the creation of a bailout vehicle for banks colloquially known as the Super-SIV (special investment vehicle). Former Goldman vice chairman under Mr. Paulson.
- Robert S. Kaplan, interim head of the Harvard Management Company. A former vice chairman and head of Goldman’s investment banking and investment management businesses.
- John L. Thornton, chairman of the Brookings Institution and longshot candidate for Citigroup’s CEO spot. A Goldman former president and co-chief executive alongside Mr. Thain.
- Edward S. Lampert, hedge fund manager and chairman of Sears Holdings. A protégé of Mr. Rubin’s in the Goldman risk arbitrage department. (Admittedly, his name has come up because his investment in Citigroup appears to have lost money at the moment.)
- J. Christopher Flowers, the head of J.C. Flowers & Company, which is now fighting over the buyout of Sallie Mae. Founded Goldman’s financial institutions merger practice.
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I am not trying to make a political statement here, or whatsoever with the teaser and image headlining this blog entry. I just wanted to have a catchy and provocative picture accompanying the headline.
The private equity industry is growing at a stunning pace for several consecutive years in a row now, transforming the structure and balance of power in global business. Mark O’Hare, managing director of Private Equity Intelligence - a research group based in London - compiled a ranking of the fifteen largest private equity firms, based upon assets under management. Find here the ranking published by BusinessWeek.
In a previous post I wrote about the real soul of private equity firms. What is their real core business nowadays? With respect to the fact that, PE firms are broadening their service offerings to other areas of “high class” finance.
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Capital continues to flow between all major stock exchanges around the world. According to research conducted by McKinsey, “the world’s financial assets ranging from equity, fixed income, and other instruments now total more than $140 trillion and are on pace to reach $214 trillion by decade’s end.”
Putting in perspective, it accounts now for more than three times the current global GDP. Deeper financial markets promote a more efficient allocation of capital and risk and offer households and businesses more choices for investing savings and raising capital, respectively.
According to current economic trends including the abundance of capital in financial markets, it is most likely that the number of private equity deals will overpass last year’s record year. Today BusinessWeek reports on the fifteen largest Private Equity firms. These firms have assets under management with a value ranging from $17 billion to $49.7 billion.
Subsequently, Red Herring published an interesting article on private equity in the Tech sector “Will private equity change tech? Or will tech change private equity?“, The Economist devotes a story on “The booming buy-out business” and “The real risks of private equity“.
UPDATE @ February 10th: Morgan Stanley’s Journal of Applied Corporate Finance published articles on “Public vs. Private Equity“(PDF) and “Private Equity and Its Import for Public Companies” (PDF).
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Are private-equity firms the new conglomerates? The two look more and more alike. The dozen or so top private-equity firms have taken positions in an extraordinarily diverse range of operating companies, much as big conglomerates have done. Each week brings another batch of multi-billion-dollar deals.
Today, Blackstone Group LP raised its cash offer for Equity Office Properties Trust to $39 billion to thwart rival bidder Vornado Realty Trust a day before shareholders vote on what would be the largest-ever leveraged buyout. (Bloomberg)
So what, exactly, are private equity firms such as Carlyle Group, Blackstone Group, Texas Pacific Group, and Kohlberg Kravis Roberts nowadays? Part buyout shop, part investment bank, part asset-management firm. Colin Blaydon, director of the Centre for Private Equity & Entrepreneurship at Dartmouth’s Tuck School of Business says “There are going to be some major financial institutions that emerge from the phenomenal growth [in private equity] of the last years.” For example “Carlyle is very deliberately moving in that direction. It looks a bit like the mid-’80s, when a handful of big, multiline investment-banking firms emerged as the bulge bracket.” (BusinessWeek)
Another trend, the art of private equity is finding and polishing diamonds in the rough. No wonder, then, that more firms are venturing off the beaten path in search of uncut gems. With record sums pouring into the asset class in recent years, more investors and fund managers are turning to the developing world. (Economist)
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