The title of this post is a diirect quote from Martin Fridson, the leading expert on junk bonds, speaking of financial firms and buyout companies.
I hate being right.
The private equity kings and warlords who for the past decade have been making monster paychecks are suddenly seeing their investments sink. The Titanic was a rubber raft compared to what’s happening to these guys. Blackstone, KKR and others are seeing their buyouts, which were financed by cheap credit, suddenly change into multi-billion dollar losses. I actually think that a lot of these private equity guys saw this coming ahead of time, which is why they went public with their companies last year. The kings of finance saw the warning signs and got their money out of the investments and now everyone who was too slow, too optimistic, or too stupid to do the same is about to get slapped in the face by a boulder.
In the last few days, the stock market has dropped toit’s lowest point in two years. Word on the street is that there is a bigtime Wall Street bank about to be in deep, deep doo-doo. Blackstone’s earnings have crashed 89% in the last three months and there is no sight of bottom.
First, the subprime market crashed. Then the credit market for corporations completely froze up. Now private equity banks are gazing into the eyes of death. Companies that have been purchased by the private equity banks have their loans and junk bonds trading at rates so ridiculous that investors are obviously betting that they will go bankrupt. Many of these businesses, while still current on their debt, have investors trading it at 70 cents on the dollar- investors think there is a very good chance the companies won’t pay.
Citigroup, Goldman Sachs and the Lehman Brothers are currently holding $130 billion dollars in leveraged loans supporting their private equity deals… and a lot of that money could be worthless. This is just symptomatic of the larger market right now- things are looking very dreary indeed. Even the chairmen of the major Fed banks have been making statements that, coming from them, sound like a desperate plea to avoid the falling axe.
The president of Blackstone, Hamilton James, has publicly stated that “Our view is that things will get worse before they get better”.
Our economy has many strong signs of trouble ahead: rising fuel prices, energy and water shortages, massive debt load, financial markets that are drying up and slowing consumer spending. My recommendation to everyone out there is to prepare for the worst.