Editor’s Note: Private Equity To The Rescue?

We know who the losers are in this historic financial crisis but is anyone going to come out a winner?

JPMorgan Chase and Bank of America are looking like opportunistic survivors. Goldman Sachs and Morgan Stanley, to their credit, knew when to cut bait. Warren Buffett has been characteristically cagey, waiting out the banks (and others) until he got the deal he wanted. At press time, the details of the government’s bailout plan were still being hammered out, if it ever even gets past partisan politics. But even then, if Uncle Sam steps in to act as a clearing house for all these bad assets, who is going to buy any of this stuff? And who is going to help rebuild the banking market? Some would say that’s where private equity should step in.

The theory is sound. The sizes of equity checks on conventional deals have been moving higher as the credit crunch deepens, making buyouts less attractive. Moreover, the Federal Reserve is helping out, slackening its restrictions on bank investments. And while Congress is still mulling the merits of that $700 billion bailout plan, private equity remains well-capitalized. On a global basis, buyout firms still have somewhere between $400 billion and $450 billion in commitments left to deploy from the fundraising heyday of the 2005-2007 period, according to data provider Prequin.

Of course, there is a great deal of irony to be found in the notion that buyout shops could play a big role in leading us out of this mess. If a lack of oversight was the crux of the problem, if that’s what ultimately led to the proliferation of so many risky, complex trading instruments and such rampant irresponsible lending, is it really wise to expect the private equity industry, which operates with comparatively little scrutiny, to provide much help?

It’s going to come down to how well-aligned the interests of the different players become. Where buyout shops see opportunity amid the wreckage, they’ll look to take advantage. Sometimes that will involve fixing companies, taking what’s there and making it better, more profitable. Sometimes that will involve dismantling companies, firing workers, selling off assets piece by piece to the highest bidder without regard for any broader social impact.

The industry’s image problem stems from the latter, obviously, but the events of the next few years could go a long way towards changing that, at least where it counts, in Washington, D.C. How many politicians will be advocating higher taxes on carried interest and increased reporting responsibilities for buyout shops if the Blackstones and KKRs of the world step in and buy troubled assets that might otherwise have hit voters in the pocketbook?

The goodwill may already be building. David Rubenstein, co-founder of The Carlyle Group, has said his firm might be willing to take on some of the assets the government could end up purchasing if the bailout plan comes to fruition. TPG also got kudos in many circles for getting out of the way so Washington Mutual could seek a merger before its seizure, although that move has to be viewed through the prism of attempting to preserve the value of its own holdings. The purest moment so far has to be Robert Willumstad’s decision to reject a $22 million severance payment related to his brief time as AIG’s chief executive officer. Willumstad, who served in the role for only three months, is the co-founder of Brysam Global Partners, a New York-based buyout shop. Take that Angelo Mozilo.

The economists will tell you that markets are all about efficiency, but recent events have shown that’s not always the case. Some entities, it would seem, are simply too big to be allowed to fail. Buyout shops, along with their hedge fund and venture capital brethren, have always sat outside the official system, relying on wit and wherewithal. There just might be a lesson in that for U.S. financial markets as a whole. At the very least, some displaced investment bankers should be able to secure employment with buyout shops, helping jobless claims numbers. After all, when things get this bad, every little bit helps.