08/06/2013 01:20 pm ET

Private Equity Firms Are Back To Their Pre-Crisis Shenanigans


It has been almost five long years since the collapse of Lehman Brothers, and you know what that means: It's about time we had ourselves another financial crisis, already.

Fortunately, Wall Street is working on the problem. The Wall Street Journal's Ryan Dezember and Matt Wirz report that private-equity firms are back to engaging in some pre-crisis shenanigans: Namely, loading companies up with debt to pay themselves a huge dividend.

"So far this year, $47.4 billion of new loans and bonds have been sold by companies to pay dividends to the private-equity firms that own them, according to data provider S&P Capital IQ LCD," Dezember and Wirz write. "That is 62 percent more than the same period last year, which wound up being the biggest year on record, with $64.2 billion sold to fund private-equity payouts."

Believe it or not, these numbers are way, way bigger than before the crisis, when private equity firms would borrow, at most, $30 billion a year for what are known as "dividend recaps." This is the fancy term for buying an already struggling company and saddling that company with even more debt and using the proceeds to write yourself a ginormous check. Capitalism, ladies and gentlemen!

This foolishness has utterly no use to society, aside from maybe enriching the pension funds and endowments that are invested in the private equity firm. Otherwise, the bulk of it goes to making already stupidly wealthy people even more stupidly wealthy.

This sort of thing was standard practice before the financial crisis, when the credit flowed like oxygen, but shut down abruptly when the crisis made all the credit disappear. Now the credit is back, and in fact it is flowing even more freely than before the crisis -- unless, that is, you are a "person" trying to buy a house or something, in which case, tough luck, try being richer next time.

But if you are a private-equity firm, then investors just can't wait to lend you money. One private-equity executive remarked earlier this year that "credit markets to me seem like the go-go years of 2006 and 2007."

And private-equity firms have been only too happy to oblige by piling on more debt.

Investors are so hot to lend money to private equity firms, in fact, that they'll close their eyes and ignore all kinds of warnings about how risky these loans can be. For example, the WSJ points out the comeback of a kind of debt known as the "pay in kind toggle," which basically lets the company occasionally get away with not paying its debts every now and then, like when the meth cook gets spoiled and they're a little short on cash. Sounds risky, and it is, but investors are willing to lend money on these ridiculous terms at ridiculously low interest rates, according to the WSJ. Because that has never ended badly before, right?

To be fair, this sort of behavior was not the cause of the last financial crisis (although it was not an innocent bystander). And it will probably not start a new financial crisis tomorrow or anything. A lot of this is predicated on the Federal Reserve keeping interest rates at rock-bottom, forcing investors into ever-riskier investments in their desperate thirst for yield. The Fed can pop this bubble any time it likes, and may have tried to do that a little bit recently by talking about "tapering" its program to buy $85 billion in super-safe bonds every month.

But this is just the latest in a string of signs that memories of the crisis are starting to fade on Wall Street. Credit-rating agencies are starting to ease up on their standards a bit in order to win new business, as they did with toxic mortgage junk ahead of the crisis. Banks are also loosening their standards for lending money to already-indebted companies, a practice that got the attention of the Federal Reserve earlier this year.

Wall Street has even tried to revive the market for synthetic collateralized debt obligations, the "monstruosities!!!" as Fabrice "Fabulous Fab" Tourre described them, that really were at the heart of the last crisis.

Fortunately, memories aren't that short on Wall Street, and investors have roundly rejected synthetic CDOs so far. Just give it some more time.



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