Clouds on the Horizon

In his recent article entitled "The Takeover Boom, About to Go Bust" Stephen Pearlstein, economic writer for the Washington Post, talks about the recent spate of company buyouts and the amount of debt versus the operating profits of companies that have been bought out. He writes “It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring. Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines. And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption. It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happen this time."

And just who are the winners in such a scenario? One of the players appears to be the Carlyle Group. This group includes many high profile investors, many of whom have inside government connections. In a memorandum dated January, 2007, founding partner William E. Conway stated when the current “liquidity environment” (the end of cheap credit) ends “the buying opportunity will be a once in a lifetime chance.”

And the losers? Millions of ordinary people (like me) who are loaded down with debt. Mortgage debt, student loans, credit card debt just to name a few. Also, workers who have their pensions tied to the stock market through their 401(K) will feel the blow.

This 'business go-go party' will come to an unpleasant end and the results will not be fun. I have written about this before and will probably do so again. Stay tuned....