More Private Equity Deals, Another Banking Fiasco

There are still a lot of private equity deals to be closed. They were announced before the current credit disaster. And, many of them are not going to get broken off the way that the Sallie Mae (SLM) deal may have.

According to The Wall Street Journal, large banks are "holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally."

What happens next is obvious. Some of these deal close and the companies falter.. Either the deals were no good to start with or a slow economy hurts the ability of LBOs to make their debt service. The banks eat the write-offs on the unpaid debt.

Banks are selling LBO debt in some of these deals at a big discount. They want the stuff off their books. But, concerned buyers will only take up so much of the inventory. The banks will hold the rest.

It happened in Latin America in the 1980s and it is nothing new for big banks. They lend too much because the initial act of lending makes them money. And, then they eat the fruits of their foolishness when the markets they have created come apart.

It’s the banking business and it hasn’t changed.

Douglas A. McIntyre