Prince Tells the DJ to Keep Playing His Favorite Song

By Dr. Duru written for One-Twenty

July 11, 2007

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No, not THAT prince. Chuck Prince, CEO of Citigroup, was interviewed in the Financial Times and told the audience that:
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing."

Prince went on to say that we do not think we are yet at the inevitable point that "...liquidity wll go the other way." Prince's brazen confidence flies in the face of a growing cacophony of voices raising concern and alarm at the bulging debt levels being raised to finance the private equity boom and the increasingly shoddy lending standards that have accompanied the frenzy. (For example, see "End of the Private Equity Party?") These kinds of things remind me of just how much I still have to learn about the world of high-powered finance and big money. I would have assumed that when you buy-out a company, insiders get paid and everyone makes out like a bandit. Instead, the company that sells its soul always ends up with more debt on its books than it did before the buy-out. It work to pay that debt down out of its own free cash flows for years to come. I think I am correct about insiders getting paid, but it seems to me the only way the company itself gets ahead in this game is through a new IPO. A few years down the road, the private company comes back to the public markets, hat in hand, perhaps with a new acquisition or two, or a fancy-shmancy new strategy or business model, and repackages everything into a juicy new proposition to get a stock ticker symbol again. The company can then use the IPO cash to pay down the rest of the original debt from the buy-out. A great dance, eh?

It is funny how booms and busts work. As long as the music is playing, all the dancers enjoy the party. And when there are chairs in the middle of the dancefloor, each person is confident that a resting spot will be waiting for him/her when the music stops. Chuck Prince has made it clear that he is going to try to dance in this debt party as close to the end as possible. And the bust? I am sure he will just deal with that when it comes. After all, he indicated he expects the bust to come, so he must have plans for how to deal with it. For the rest of us, when the bust comes, we will insist that we will never dance at the same party again...until the music starts playing all over again.

Be careful out there!

© DR. DURU®, 2007