Use The Right Tool

My background is very much my father’s hardware store. In the ‘50s and ‘60s, a hardware store sold tools. The job is a lot easier when you use the right tool. Do not take my word for it, ask anyone that works with tools all day. I remember asking my father why he sold so many different weight hammers. Why was not one or two hammers enough. I learned that each hammer has a purpose and each weight makes a difference if you are swing that hammer all day. The bottom line, use the right tool for the job.

A private equity fund is a tool. Private equity funds over the years have provided the seed money for a number of great and vital companies that have grown into international companies. Yes it is important to understand what a private equity fund is.

Yesterday, I received a comment and an article about the use of private equity funds to buy into national banks. While on the surface that idea may sound good, the problem, as I see it, becomes apparent when you realize that the first duty of the private equity fund managers is to the private equity fund investors and not to that which they have invested in. How does that differ from a mutual fund investing in a bank? The big difference is that the mutual fund will never take seats on the board of directors. If the mutual fund does not like the way the bank’s management is running the bank, they can sell their stock in the bank. Depending on the size of their position and the volume of that bank’s stock that is traded every day, the mutual fund can be out of the stock in a matter of minutes or at the most a few days. Not so for a private equity fund. Private equity funds usually take a fairly large position in the equity of the company and as a result would get one or two seats on the board. Those who took seats on the board would have a conflict of interest from the start. Whose interests do they serve first? The bank’s interests, or, as a participant in the private equity fund, as all partners of the private equity fund are usually required to have some of their own skin in the game, the good of the fund? I am no Einstein, but for me, I have a problem with that. The private equity fund partner can not serve two masters at the same time.

If Secretary Geithner caves to the pressures from the private equity fund partners that want this rule change to permit them to invest private equity fund money in national banks, then I think we are in for 40 more years of wondering in the desert. I can not believe that Paul Volcker is sitting at the table where this is being discussed and not raising these same points. Where in the hell is Volcker? Has anyone seen or heard from Paul Volcker in a while? The Obama administration trotted him out there at the beginning and I have not seen or heard from him since.

Bottom line, in my opinion, this is an example of the wrong tool for the job. Private equity fund money should not be going into national banks. Banking, because of its position in the economy, please do not make me write a book about why this is the case, just take my word for it this time, should not be a recipient of private equity money, period.

Stay tuned.