China to invest in Blackstone

You don't see that every day. Of course the historic track record of cash rich foreigners investing in prestigious US assets is mixed (see: Japanese, late 80s)

China has agreed to take a $3 billion stake in U.S. private-equity giant Blackstone Group, which marks an unusually aggressive start to the country's long-anticipated campaign to diversify how it invests massive foreign-exchange reserves.

Under the terms of the deal, a soon-to-be-established state foreign-exchange investment company will buy nonvoting shares in Blackstone, according to a joint press release. The move comes as private-equity firms have faced problems ramping up their own investments in China. The state investment company agreed not to sell the shares for four years. According to a person briefed on the deal, the investment company also agreed not to invest in a competing private-equity firm for one year. At the end of the four-year lock-up period, the company may begin selling one-third of its shares a year.

From WSJ $

Cerberus-Chrysler

No need to link to the dozens of relevant articles, but: 1. what a bold purchase by Cerberus

2. what a remarkable disaster for Daimler. Buy at $36B and give away for free in the downcycle. Given Chrysler's 20 up/down cycles over the last 30 years, couldn't they have waited for the next hit and then sold?

3. Fence-sitting prediction:

a) this is too much for even cerberus to handle

or

b) cerberus cleans a few things up, catches a hit or two and then floats it for a multiple of its money (in other words, what Daimler should have done).

Fortress Reports Results

The Fortress Investment Group became the first American hedge fund and private equity firm to report quarterly earnings Tuesday, and the disclosures highlighted the difficulties the public markets have in dealing with businesses whose income streams are volatile and difficult to predict. Fortress’ stock fell 4.4 percent to $28.90 a share after it reported $62 million in net income for the first quarter of 2007, a drop from about $130 million in the comparable period last year. The company’s revenue rose 13 percent, to $416.3 million.

The company said its revenue growth was sapped by rising costs, including expenses related to its recent initial public offering.

Just wait until the inevitable *bad* quarter...

New Century and Gain on Sale Accounting

The world once again discovers that Gain on Sale accounting is open to abuse, as if this had not previously happened with subprime lending in 1998. It will also happen some day, in a big way, in derivatives. From the New York Times

In the spring of 1998, the chief financial officer of New Century Financial, a lender to home buyers with blemished credit, wrote an unusual paper describing a then little-known accounting technique.

The executive, Edward F. Gotschall, marketed his white paper at industry seminars and conferences, and promoted it to Wall Street analysts as an insider’s look at New Century, according to people who read the paper. New Century was at the time one of the nation’s fastest-growing subprime lenders.

Now that technique, called gain on sale, may be coming back to haunt the company, which filed for bankruptcy protection on April 2 after disclosing a month earlier that federal prosecutors and securities regulators were investigating accounting mistakes and stock sales at the company.

...

But some financial analysts say that New Century appears to have also used gain on sale to hide losses as the subprime market began to falter late last year.

...

The use of gain on sale was a factor in the collapse of Enron in 2001 and of major specialty lenders in the late 1990s through this decade. Conseco, a large insurance and finance company that made loans to subprime home buyers, filed for bankruptcy protection in 2002, one of the largest corporate bankruptcies ever.

Critics say that the accounting technique remains ripe for abuse, even though federal accounting regulators tightened up the rules in the wake of Enron.

“The thing about gain on sale accounting is that you can create a machine that just manufactures earnings out of thin air,” said Richard Benson

...

But Mr. Benson said that the stock prices of subprime home lenders like New Century Financial had “collapsed so fast because the income and balance sheet had been built on gain on sale, which turns out to be imaginary.”

“The market woke up to the fact that there’s no there there,” Mr. Benson said.