3

When the next domino falls, look out Canada


 

Via Paul Kedrosky’s blog, I came across this column by Nouriel Roubini, whose predictions about this financial crisis so far have come true with astonishing precision. He address where he sees the contagion spreading next. In short, first the hedge funds will fall, then private equity firms will crumble:

Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite” clauses, which do not include traditional default triggers, and “payment-in-kind toggles”, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk.

Roubini doesn’t mention that other gargantuan private equity buyout of the last year, BCE, at $50 billion. Wait a minute, you say, the buyer wasn’t a shodily-run Wall Street firm, but the highly-respected investment arm of the Ontario Teachers’ Pension Plan. Doesn’t matter. To do the deal Teachers’ teamed up with U.S. firms Providence Equity Partners and Madison Dearborn Partners. In fact, a large number of Canadian companies were gobbled up by, or received huge investments from, U.S. private equity players (CanWest, Masonite, Hudson’s Bay Co., the list goes on… ) The obvious question is, what happens if Roubini is proven right yet again, and those PE firms controlling a vast swath of the Canadian corporate landscape go the way of Bear Stearns and Lehman Brothers?


 

When the next domino falls, look out Canada

  1. It’s starting to make me wonder if this election is actually the election to lose?

  2. One way to improve healthcare might be a model for improving finance. Hospitals need to be transparent about things like incidence of CDAD. They aren’t.
    The lobby against this sort of transparency in finance is the people who got rich of the recent USA pyramid scheme. But with derivative (including mortgages) transparency, reports of outstanding positions weekly or even daily, someone like the Finance Minister or BofC prez could implement countermeasures against increased derivative exposure (by definition you need to be rich to play derivatives so it is a slot machine from the get-go).
    If annual derivatives plays outstanding are 75-150% of GNI, do nothing (just using value stock screening methodology here). If they go up past 200% of GNI, begin charging more for additional marginal derivative plays. Make bigger capital reserve ratios, or restrict position up on the volatility ladder, or higher mortgage rates. This gives a first mover advantage that could perhaps be limited by limiting size of positions when derviative BETA is low.
    Instead we have Finance Minister telling people not to invest in his workplaces’s province, while Ontario just finished 1st in a Canada healthcare ranking. Tax-cuts encourage pyramid schemes without appropriate public regulation. How about a publicly funded credit rating agency? Have it track global derivative exposures as a service to pension funds and soveriegn capital funds (like AB’s).

  3. Roubini is right, more shoes will drop on Wall Street. Canada and every other country with U.S. investments will suffer collateral damage. Perhaps if Barack Obama wins the U.S. presidential election, some degree of confidence will be restored to the financial markets.

Sign in to comment.