Subscribe to this blog's feedIf you haven't seen it already, read this in the FT. Columnist Tony Jackson, after defending the private equity industry against charges of job-cutting ("not necessarily harmful" is his rather entertaining judgement) and opacity, turns on its use of credit default swaps.
it is perfectly possible for private equity to load a company with excess debt, then strip the cash out as a dividend. If this is done on a big enough scale, the fund can profit handsomely even if the company goes bust.
In previous cycles, there was an obvious safeguard against this: the banks would not lend more than a company could bear. But that has all changed with the advent of credit derivatives.
Today, a bank can grant a leveraged loan with impunity, since it can offload the credit risk...
Does this happen? Well, that's a bit less certain - certainly CDS are cheap at present, and there's reason to think that a crash is on the way. (See MS's Richard Berner and the pessimistic Nouriel Roubini, for example.) As for the role of private equity and debt-stripping - maybe that's worth looking into...
