For buyout pros there is mild cause for concern that Barack Obama has selected Joe Biden as his running mate and fellow agent for change. Although it’s too early for any fierce speculation on how sound bites from the senator from Delaware will translate into policy, the time seems right for a tame observation or two.
The quote that leaps out from Biden, known for being forthright to a fault, comes from a debate among Democratic candidates held in August 2007. Asked about the credit crunch, and specifically the Federal Reserve’s actions at that time, Biden put the blame for the then-nascent crisis outside the public realm and hinted at a classic Democratic solution—increased regulation.
“We need more transparency, particularly with regard to hedge funds and private equity funds,” Biden said on ABC’s “This Week” in an Aug. 17, 2007 debate moderated by George Stephanopoulos. “They are the ones causing this thing to go under. And there’s no transparency, no accountability. We don’t know how deep this problem is.”
The tough part to stomach there is the casual attribution of fault for what even then was looking like a monumental mess. The part that private equity firms played in the credit crunch is bit actor at best in comparison to the star turns of a Countrywide Financial or any of the big public banks that keep recording multi-billion dollar asset writedowns and credit losses quarter after quarter.
Private equity wasn’t driving the subprime lending market. Private equity didn’t come up teaser rates, interest-only payments, or any of the other gimmicks that the mortgage industry employed as the housing market boomed. Nor did it invent CLOs and CDOs, credit default swaps and auction-rate securities, or any of the other acronyms and trading instruments that rose to prominence in those heady days, although it did famously take advantage of easy credit.
Of course, the quote can also be viewed as a throwaway comment, a sloppy simplification that shouldn’t be taken literally. Indeed, all any of the candidates did at that time was agree with the Fed’s decision to lower the discount rate for banks and state that upstanding Americans (even those who live beyond their means) shouldn’t lose their homes. No one was providing any detailed plans to fix the problem.
But at the very least, Biden’s view—really the attitude it reveals—should sound an alert for PE pros. It’s another indication that increased scrutiny is on the way. Sides are being chosen, and with the economy in rough shape, LBO shops are easy targets. The lazy perception of a buyout transaction as some sort of financial sleight of hand is dangerous, and if the accompanying rhetoric brings out the vote, hold onto your carried interest.
The irony of Biden’s statement is that it looks like private equity now may be in a position to help staunch the bleeding for one of Wall Street’s most prominent investment banks, Lehman Bros. Recent reports list top shops—
We’re still early in the election process and there are far too many unknowns to get worked up one way or the other about what view the new administration is going to take towards the private equity industry. Prior to the selection of Alaska Governor Sarah Palin as John McCain’s running mate there was plenty of talk that
So Romney being out of the picture should help private equity keep a lower profile for the time being. But the regulatory issues the industry faces aren’t going away. Against this backdrop, it can’t hurt to bear in mind Biden’s view, along with something else he said in that August debate: “In my public life, there hasn’t been a time I haven’t said what I thought.”