The Blackstone IPO

Investors, market analysts, traders and all other interested parties should note June 22, 2007 on their calendars. This is the day the Blackstone IPO hit the market. (See TheStreet.com’s analysis of the deal.)

This is no ordinary IPO. Blackstone is one of the premier private equity companies and the Blackstone principals are masters of value -- they buy cheap and sell dear. They buy companies that are “under performing” for various reasons, "add value" by introducing operational efficiencies and technology, shutting down or selling unprofitable operations, outsourcing, off shoring, and offloading pension and health care obligations. These activities greatly increase the cash flow to the bottom line and to the shareholders, in this case the Blackstone principals and their investors. But that is not the end of the game. Increased profit and cash flow is very nice, but the big bucks are made when the transaction is completed.

Private equity companies complete the transaction and realize their profit by creating a "liquidity event." This is either the sale of a portfolio company to another company, or the sale of the portfolio company through an IPO -- at a multiple of earnings. In this case Blackstone chose to offer shares in itself rather than offering the individual portfolio companies or the funds they manage. The fact that Blackstone has seen fit to do an IPO signals that the principals believe they have maximized the value of their portfolio and want to start cashing in. They are selling dear, and would not be selling if they thought their stock was anything other than dear.

If the Blackstone principals believe that they have realized the bulk of the value from their portfolio, that would indicate that valuations in general are at a peak...and it also sends a signal to the dozens of other private equity companies which will now be looking for a liquidity event as well. In fact KKR, another legendary private equity group, has also announced its intention to offer an IPO. Others will surely follow. This new supply of stock will put pressure on the market, a turnabout from the steady disappearance of stock caused by the buying up and privatizing of public companies during the buyout boom of recent years.

The private equity boom has been fueled by cheap money. Blackstone and other private equity companies, and public corporations as well, have been able to finance their acquisitions by selling junk bonds at very low cost. That source of money is now starting to get more expensive as lenders have suddenly realized that they are taking more risk than they are getting paid for. This will also start a trend toward issuance of stock rather than debt as stock values are high and debt is now getting more expensive. So from various sources we will see an increased supply of stock coming to market.

General liquidity and cycles indicate that the top is not upon us quite yet, but it is clearly time to be more selective and more cautious in the stock market. Historically we will be able to look back upon the Blackstone IPO as a demarcation point and the beginning of the end of this bull market.

Bloomberg on Partisanship

Michael Bloomberg's comments as he announced his departure from the Republican Party highlight our most pressing need. As he put it;

"The politics of partisanship and the resulting inaction and excuses have paralyzed decision-making, primarily at the federal level, and the big issues of the day are not being addressed, leaving our future in jeopardy."

Bloomberg was speaking at "Ceasefire! Bridging the Political Divide," the inaugural event for the Annenberg School for Communication's recently established Center on Communication Leadership. Let's hope this message takes root.

Process Matters

In 1994 and '96 I ran for Congress against one of the few elected officials who would not take PAC money, Rep. Jim Leach of Iowa. He was honorable in his service to a degree not often seen these days. By refusing to take money from vested interests he was able to maintain his independence. He looked to the common good and the interests of his constituents, voting his beliefs and his conscience after sober consideration of the issues. This high standard earned him the enmity of the rabid partisans who took control of his party in the '90's and who proceeded to marginalize him during his last years in the House. Rep. Leach finally lost his seat in the '06 election after 30 years of distinguished and exemplary service.

Jim Leach lamented the mean-spiritedness that arrived in Washington with the culture war in the ‘80’s, and which has been ratcheting upwards ever since. One of the things he liked to say during his campaigning was that "process is as important as product," meaning that our political campaigns should focus honestly and respectfully on the issues, and not engage in personal attacks and misrepresentations of the positions one’s opponents. His response to attacks made on him was to address the substance of the issue raised, if there were one, and to reiterate his position that campaign rhetoric should focus on the issues and not on personal attacks.

Throughout his career Jim never engaged in the character assassination, attack ads and appeals to base emotion which have become standard procedure in our political campaigns. Instead, he ran on his own moderate record, promising more of the same, and engaged in honest and respectful debate on the issues of the day. When in Washington he rejected the vicious partisanship that overtook the House during his tenure. He held to his high principles, consistently voted his conscience and worked in a genuinely bi-partisan way.

Process matters and it does directly affect the quality of the product we get. This is a general truism, and it is nowhere more pertinent than in our political process. If we want better government, we need thoughtful, honorable, respectful and wise people in government who will naturally conduct a better process. Throughout his career Jim Leach embodied these traits, practiced an enlightened political process, and upheld the highest values of public service. He has provided us with a role model for future candidates.

How to Unleash Our System

The all out partisan warfare that our political process has become does not serve anyone well. Those in power are stymied in their efforts; those out of power find the power of government used mercilessly against them. The cost of pursuing office has become so great that our representatives spend most of their time fundraising and become obligated to their financial backers. Anyone who does manage to rise in this environment has certainly compromised themselves to do so. And the nation is denied the services of a great many capable people who desire to serve but refuse to compromise themselves.

Worst of all, the very real and pressing issues we face are left twisting in the wind as vested interests deploy their political militias to kill off any efforts that might gore their oxes. Health care was an obvious issue twenty years ago and nothing has been done in all that time. Energy has been an obvious issue for thirty five years and nothing has been done. Even those issues that are dealt with end up being such a cobbled together mess of compromises that they create more problems than they solve. Medicare and education are two obvious examples. This is not an inherent trait of government solutions, as some might like to frame it. It is the consequence of a degraded political process that cannot accomplish its natural function.

Our system is capable of dealing with the issues we face and all the issues we will face in the future, but in order to do so it needs to be freed from the constraints that prevent it from functioning as it was meant to. There are several things that we can insist on that will unleash the natural vitality and creativity of our system:

1. Eliminate all money from politics except personal donations up to a limit of $5,000. No soft money, no PAC money, equal limits on committee and party donations.
   
2. Break up all media conglomerates and require an editorial firewall between entertainment and news divisions.
3. Require all media outlets to provide equal time to all qualified candidates for two months prior to general elections.
4. Ban personal attack ads and deliberate misrepresentations of public policy issues, and provide for injunctive relief, for six months prior to a general election.
5. Ban private lobbying and gifts to government officials beyond meals or other incidentals. All lobbying done in public forums.
   

The solution to the problem is ultimately in the hands of we the people. As long as we tolerate the situation it will continue, because there are vested interests that benefit in the short run from the status quo and are willing to spend the money it takes to maintain the status quo. Once we the people decide that this is no longer tolerable, it will stop.

Christians Who Wage War

From the beginning, the most steadfast supporters of the war in Iraq have been people who identify themselves as Christians. This is a marvel to me. It was Jesus after all who gave up his own life without a fight, and forbade Peter to defend him, saying "He who lives by the sword dies by the sword." It was Jesus who taught "Behold, I send you forth as sheep among the wolves," and "Blessed are the peacemakers for they shall be called the children of God."

Those who consider themselves Christians should give some attention to the actual teachings of the Master and less to those who teach in his name. I have seen and heard in public forums numerous perversions of Jesus' teachings using selected quotes taken out of context to justify this war. No honest reading of the teachings of Jesus can justify war on any account, much less an invasion of a foreign land. True Christians, those who follow the teachings of Jesus, would be the last to support any war.

We live in a time of political depravity, when public values and the general behaviour and aspirations of humanity are in decay. Kali yuga they call it in India. So it is no surprise in such a time that demagogues pervert the teachings and very purpose of religion to justify their lust for power, vengeance and war. Those of us who desire a more just world can do little on the macro scale, but we can hold up the truth for others to see, and perhaps by so doing inspire others to do the same. In time a critical mass will be reached and things will begin to change for the better on the macro scale.

Public Office is a Sacred Trust

The power to determine our lives is the property of each individual in society. In order to more effectively organize our common affairs, we give that power in trust to our representatives in government to formulate and administer government policies that will uphold our best interests and that of the common good.

When an elected or appointed government official accepts graft in any form, including PAC money, or otherwise sells the benefit of public policy to any individual or group or promotes the interests of any such individual or group to the detriment of his constituents or the common good, that representative has violated the sacred trust that he holds from his constituents.

Government officials such as Mr. Jefferson from Louisiana who betray their trust for money are the obvious ones. But ideologues and partisans such as Mr. Libby who do the same for their cause are no less guilty. They expropriate the power of government, given by the people in trust for the common good, to promote the interests of their financial backers and their partisan supporters. This should be considered the most egregious of all possible offenses for a government official and cause for great shame and ostracism. But looking out at the political field in 2007, it's hard to identify anyone who has not betrayed their trust in one way or another. So it is no wonder that in this environment Mr. Libby and his backers feel that he is the victim, or that Mr. Jefferson also claims to be a victim.

It is always darkest before the dawn, so we can hold out hope that we will somehow find our way out of depravity to a more enlightened political process and government. There are many elements in the formula for enlightened government, such as a general commitment to truth, service and mutual respect, but the first and biggest obstacle to real progress is the utterly corrosive influence of big money in political campaigns. For those who want to make a contribution to the greater good, there is no more pressing issue than this one.

Scooter Libby and Public Values

The sentencing of Scooter Libby provides an excellent study in the condition of our political process and the values of our political class. A large number of letters were received by the presiding judge urging leniency for Mr. Libby. These letters were by and large from senior Republican officials and other prominent Republicans. The general thrust of their argument was that Scooter was a good guy and an outstanding public servant. At the same time Mr. Libby's attorney made the argument that his transgressions were minor and not deserving of prison time. This argument was also heard in a loud chorus from Republican partisans outside the courtroom. Even our President and Vice President issued statements of sadness and regret for the conviction of this "fine man." The implication of this outpouring of sympathy being that he has been the victim of an injustice. Remarkably, many of these voices were the very same ones that savagely attacked Bill Clinton for his lies under oath.

Nowhere on the Republican side was there heard the lamentation that Scooter had disgraced his Republican brethren. Not heard was consignment of Scooter to his just fate for his crimes and more importantly for failing to uphold the honor required of a public servant, or for his poor example to the general public of blatant dishonesty by a high public official. These things were only heard from the Democrats. Of course if Mr. Libby was a Democrat the players would have simply reversed field.

The object lesson of this spectacle is that the values of our political elite have become severely degraded. Speaking the truth is not considered a requirement in public life today. Promoting partisan advantage takes priority and is valued over truthfulness and all other considerations. This does not go unnoticed by the general public or by young people, who are acutely aware of hypocrisy, take note of how our leaders actually behave regardless of what they say, and model their own behavior accordingly.

This is just one facet of a political culture steeped in non-truth. We cannot hope to come to grips with the large and increasingly intractable problems of our complex society while our political process is is in such a degraded state. Our leaders demonstrate daily that they are willing to lie, cheat, violate the law whenever it suits them and generally do whatever it takes to gain partisan advantage and excuse themselves and their fellow partisans for all such behaviour while condemning their opponents for same. How can we expect the general public to respect the law and strive for the high road when they see their leaders consistently taking the low road?

Politics doesn't have to be like this. Our political process is in such disrepair because we the people tolerate it. If we demanded honor, candor and service to the greater good from our public servants we would get it.