Value Added: Carlyle's Bill Conway On The Bailout

Here's Tom Heath's latest column on Washington's business community:

It was just a few months ago when I was eating a hamburger with Carlyle Group co-founder Bill Conway at a Northern Virginia restaurant and he was predicting that the mayhem on Wall Street would get worse and last at least a year.

Credit cards. Home equity loans. Every form of credit would be affected, he said. He also said that the best time to invest would be when the economy and headlines were most gloomy.


On Monday, after one of the scariest weeks ever on Wall Street, I checked back with Conway. The Carlyle Group is one of the richest and most successful private equity firms in the world, with around $80 billion under management. As chairman of its investment committees, Conway has the final word on where Carlyle places its investors' money.

I wanted to know whether the economy had bottomed out and what he thought of the bailout plan proposed by U.S. Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke.

"I knew it would be bad, but the current situation is much worse," he said in an e-mail. "I fear that Americans may view this [the $700 billion rescue plan] as a bailout of Wall Street rather than a bailout of America."


David M. Rubenstein, from left, and William Conway Jr. and Daniel D'Aniello founded Carlyle Group in 1987.

He went on to outline some of his concerns.

"Here is the critical question: How much is the $700 B government financing of mortgage loans going to cost us [taxpayers]?"

Conway said that if the government buys the toxic assets from the banks just to take it off their hands, that would cost the government less. In fact, he said, the government may be able to make enough to break even on those assets.

If, on the other hand, the purpose is to recaptialize the banks and make them healthy, the government would purchase the impaired assets for more than they are actually worth. In that case, said Conway, the government should get an equity stake in the banks in return for recapitalizing those institutions.

"I fear that the package is being 'sold' as the former (liquidity), but is in reality the latter (equity recapitalization)," he said by e-mail.

Conway said he is comforted by the fact that Paulson, formerly of investment bank Goldman Sachs, is in charge.

"He is the right man for the job," he said.

And for three reasons.

Here's what Conway said in his e-mail:

"First, although I have only had very limited business dealings with him personally (when he was at Goldman), in those dealings, he was tough, but A MAN OF HIS WORD. Second, his background at Goldman prepared him (to the extent anyone could be!!) for the tumultuous MARKET CHAOS that we have and will face. Frankly, his market instinct for action may be the right counterbalance to Fed Chairman Bernanke's academic training. Finally, I believe that he is seen as someone who can work in the POLITICAL MIDDLE."

But Conway was quick to add that "even the right man needs some oversight. The original draft bill had no provision for an oversight board."

He pointed toward several issues that were also raised this week by Conway's partner and co-founder at Carlyle, David M. Rubenstein. Both said the buying and selling process involving the entity should be watched carefully.

"Whoever advises the Treasury in the asset purchase process, should NOT be a participant in the buying and selling (too many conflicts)," Conway said by e-mail. "Frankly, they also ought to let others other than the U.S. Government be buyers in the process (e.g., sovereign wealth, foreign banks, pension funds, etc.)---better prices, more transparency, more firepower focused on the process."

Carlyle is 7.5 percent owned by Mubadala Development, which is owned by the government of Abu Dhabi. Carlyle takes investments from several overseas sovereign wealth funds, as well as from big U.S. pension funds, universities, foundations and wealthy people. The California Public Employees' Retirement System (Calpers) owns a 5.5 percent stake in the firm as well.

Conway enjoys near mythical status as an investor, mostly among current and former Carlyle employees but others in private equity as well. He isn't perfect. Remember the costly implosion earlier this year of Carlyle Capital, an offshore public company that invested in mortgage-related securities?

But it's difficult to argue with Carlyle's results: 26 percent annual net rates of return for its investors. Conway has a novelist's eye for detail when it comes to investing, from the growth of food lines at downscale sandwich shops to the nuances of the home rehabilitation industry.

Prior to Carlyle's annual investor conference, which was held earlier this month in Washington, Conway sent a memo to the heads of his investment funds and the firm's top executives, including co-founders Rubenstein and Daniel A. D'Aniello, chairman Louis V. Gerstner, Jr., senior advisor James H. Hance, Jr., and managing directors Edward J. Mathias and Glenn A. Youngkin.

Here's what he said:

"FROM: William E. Conway, Jr.

"As you know, our annual Investor Conference commences this weekend in Washington. I want to be certain that you continue to understand my views and that we have consistent communications with our limited partners.

"In January, 2008, I sent each of you a brief note (attached) about my view of the global economy and the actions I wanted us to take. Generally, these actions were to intensely manage our portfolio and to invest in a few wonderful deals. These guiding principles remain in effect. If anything, I have grown even more pessimistic about the near term future. My pessimism is a function of the housing crisis, problems with financial institutions, energy prices and an over-stretched consumer. These problems are not confined to the United States. And, I expect the troubles to persist at least through 2009. Hopefully, we are ready."

(It's worth noting that Conway began his January note this way: "If you are not in a panic by now, it is too late..."

He signed off by saying: "P.S. If you are in a state of panic, now is the time to return to calm, and take good care of our investors, portfolio companies and employees.")

By Dan Beyers  |  September 23, 2008; 1:45 PM ET  | Category:  Carlyle Group , Economy Watch , Finance , Value Added
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Comments

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interesting, poignant, and timely interview. I am very much in agreement with Bill Conway's assessment of the Treasury plan, and it appears like Carlyle will be poised to benefit from all the market turmoil and uncertainty going forward.

Posted by: TJD | September 23, 2008 2:11 PM

This is the most insightful take I've read about the Wall Street meltdown. Bill Conway had the foresight to see this coming. I'd love to hear more from him and people like him. It makes me feel a little re-assured that there are (a few) smart people that know what's going on.

Posted by: Interested investor | September 23, 2008 6:27 PM

Tom, thanks again for another very insightful column. I've been very impressed with Carlyle. Have been wondering during this whole meltdown how no one saw this coming. I have to guess that some knew but didn't have the guts or integrity to speak up like Conway. Good too to hear about his confidence in Paulson. I can only hope that someone in Congress has Bill's insight and understanding. Another great story and fascinating profile. Would like to continue to hear his recommendations as this moves along.

Posted by: DVS | September 23, 2008 6:47 PM

I am always amazed at how great minds can be so lucid when they are in the private sector, but that lucidity seems to dissipate the instant they enter the government sector or political office. As a somewhat young person with a fair amount of money in retirement savings, the market, etc., I'm very glad someone has a handle on all this madness. What amazed me most about this article though was that you eat hamburgers, Tom. I just assumed that elite Washington Post business writers subsisted on a diet of lobster and caviar!

Posted by: magsdad | September 23, 2008 8:35 PM

Tom, thank you for this timely and insightful column. I appreciated hearing Mr. Conway’s candid opinions on the Wall Street chaos, the bailout, and Paulson. I think the government, market movers, and everyday Americans could benefit from hearing his thoughts on the current situation.

Posted by: MC | September 24, 2008 10:40 AM

It is not surprising that Conway would think Paulson was the right man for the job, coming from similar backgrounds. But I think the American public which has been reacting so virulently to the various bailout proposals does not view a bailout of Wall Street, proposed by a lame duck administration, and headed by one of the formerly most highly compensated Wall Street executives as particularly objective. The initial request for $700B to be handed to the Treasury Secretary without independent or Congressional oversight or review was an embarrassment.

Equally embarrassing has been the behavior of Congress over the past few days. Instead of treating this as the legitimate crisis that it is, and as they treated 9/11 and Katrina for example, they are treating it like it is a run of the mill budget bill. Meanwhile, all of us modest investors continue to see our retirements go up in smoke. The partisanship and the lack of leadership from the sitting President and the two presidential candidates is woeful. And frankly, the financial markets may well be back in the Spring with their hands out again.

Thanks for an incredibly timely and provocative column.

Posted by: Cooper | September 26, 2008 12:18 PM

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