At this point maybe we should just keep a list of who isn’t buying Lehman Brothers. Earlier this week it was the Koreans and HSBC. Now “sources familiar with the situation” have told Reuters (who broke the story of the Korean Development Bank) that Blackstone and Kohlberg Kravis Roberts are looking to acquire pieces Lehman’s real estate and asset management units.

Blackstone was said by the Financial Times to be out of the running for the asset management unit, so we’re assuming that it’s mainly interested in the real estate group. Has anyone seen Jon Gray, who runs Blackstone’s powerful real estate arm, over at Lehman HQ lately?

Blackstone, KKR eye Lehman assets: sources [Reuters]

If you were hoping that the slowing economy and credit crunch would stymie private equity firms, you’ll be disappointed to here the news that the latest plan from the buyout kings at Blackstone involves buying debt from private equity deals gone bad. Blackstone is raising $1.5 billion to invest in the debt of troubled distressed companies taken private in leveraged buyouts. So far they have a $100 million commitment from that New Jersey state pension fund, that invested $180 million in Lehman Brothers.

In other news, if Wall Street gets anymore Jerstastic we’re going to start covering London instead.
Blackstone’s GSO, Monarch Start Funds to Buy Distressed Debt [Bloomberg]

Blackstone has replaced its chief financial officer with a top executive poached from Merrill Lynch. Laurence Tosi, who has been at Merrill for nine years and most recently was the chief operating officer of its investment banking division, will replace Michael Puglisi, a 14 year Blackstone vet.

The move by Tosi is being read by the cynical in two ways. First, it may be a sign that internal friction among the top executives at Merrill continues. Following the resignation of Stanley O’Neal, who appointed Tosi to his spot, and the rise of John Thain, there was lots of talk of internal wrangling at the bank. Lately the internal situation has quieted as executives adjusted to new leadership. But a high-level defection is sure to re-ignite whispers of internal dissent.

The second cynical read of the move highlights a structural change on Wall Street. As investment banks and brokerages lower leverage and come under deeper regulatory scrutiny, the relative power and profitability of alternative investment houses like Blackstone is sure to rise. Could Tosi’s move be further evidence of the coming decline of traditional investment banks and the ascendancy of the increasingly hybrid Blackstone, which many describe as a budding investment bank disguised as a buyout shop?

Or, you know, may he just wanted a new job and more money. But, as Nick Walker says in one of our favorite movies, “It would be better if it meant something.”

Blackstone appoints new CFO [Reuters]

David Ellis asks who might “fill the hole” in the investment banking world left by the collapse of Bear Stearns. The usual names get bandied about: Blackstone, JC Flowers and Citadel are the top contenders. All three have expanded into areas traditionally dominated by investment banks. And, as Ellis points out, in the not-so-distant past we’ve seen smaller firms—Lehman Brothers, for instance—grow into Wall Street powerhouses.

This kind of speculation is fun but it’s important to remember that the brokerages and investment banks as we know them are largely a child of regulation that split commercial banking and investment banking. Many of those regulations have been reversed, which has helped lead to the consolidation we’ve seen in the past decade or so. What’s more, investment banks may now face even greater regulation—and therefore higher barriers to entry—in the form of new regulations in exchange for access to the Federal Reserve’s borrowing window. New capital requirements and leverage limits could reduce the profitability of investment banking, making it less attractive to new entrants. Ironically, the problems of the investment banks could wind up shoring up their market positions by stifling competition.

Perhaps the best case scenario is a that the coming regulatory schema could allow for a division of investment banks—with some opting for access to the Fed window in exchange for increased regulatory supervision and leverage-lowering capital requirements while others—perhaps up-and-comers like Citadel—opting to operate with more risk, more leverage and less oversight.

Filling the Bear Stearns void [CNN Money]

Steve Schwarzman, the head of private equity giant Blackstone, has found himself in hot water after he made some remarks at his firm’s boondoggle at Florida’s Boca Raton Resort & Club. In an early morning session, Schwarzman was noodling over Blackstone’s failed attempt to buy the mortgage company PHH, a deal that collapsed when Blackstone discovered no one was willing to lend it money for the acquisition, Peter Lattman explains on DealJournal. To illustrate just how radioactive the mortgage industry has become to financial players, Schwarzman decided to exercise his well known penchant for world history.

“Trying to buy a mortgage bank in the midst of the subprime crisis was the equivalent of being a noodle salesman in Nagasaki when the atomic bomb went off. Not a lot of noodles left, or even a person, and that’s what happened to us on this deal,” Schwarzman said.

Some are now speculating that this remark could have some serious fallout with Blackstone’s business efforts in Japan. If it does mushroom into a major issue, it could cast a cloud over Blackstone’s many important Japanese connections. Apparently, some of those Japanese types don’t find noodle salesmen appropriate material for homey, jokey anecdotes.

Steve Schwarzman’s Take on the Subprime Mess [DealJournal]

Blackstone closed yesterday below $20. Right this second, it’s at $18.45. I bet a lot of you are saying to yourselves, “Yeah, and? No big d.” That’s because you’re one dimensional thinkers. This is a big d, for four* reasons. 1. Blackstone IPO looks more and more like the physical manifestation of the top tick on the private equity bubble. 2. The Chinese, pissed at buying 8.7 percent of this garbage, now have yet another reason for an arms race with the U.S. 3. It means the follow-up to the bukkake party of IPOs was a bust, and all those yelling “Buy shares on my face! Buy shares on my face!” last spring are now suffering from PCD (that’s Post Coital Depression** to those who, I have no idea why, don’t know). 4. CRAB HANDS, THE GRAPHIC.

Blackstone shares drops below $20 [Reuters]

*The first three don’t really count, I just like the build-up.
**NB: That’s a Hahn-ism you’re reading right there.

Not that I sit around cackling at the idea of middle aged billionaires groveling for money, but, true or false: there’s something mildly amusing about the idea of a man who has pinchers where, anatomically speaking, hands should be, down on his crab hands and knees, begging for some clams?

Steve’s Sorry [NYP]

Hey guess what? Stephen Schwarzman and Henry Kravis might have the same personal net worth, even though Blackstone is worth significantly more than KKR. Who gives a shit? I’m going to go out on a limb and say this guy.

At a conference hosted by the Confederation of British Industry yesterday, a visibly shaking Stephen Schwarzman said that private equity is “a force for good” whose only goal is to help the children. Then he bemoaned the fact that his industry is seen as a “destructive force with a short-term perspective, levering companies and stripping their assets to enrich a few nasty people (like me), who then don’t even pay taxes on all that they get in such an unsavory manner,” just before yelling “good bye, cruel world” and throwing himself off a second-story balcony. (Schwarzman also offered this rave review of himself, courtesy of his own family, on the way down: “My wife and children were not ashamed to have me sit with them at the Thanksgiving table on Thursday.” You know what? Sold. I don’t even know what he’s selling, but sold.)

Stephen Schwarzman Speaks [DealBook]

Stephen Schwarzman threw his son Teddy and new daughter Ellen a lavish Jamaican wedding last weekend blah blah blah $20,000 barbecue blah blah blah$8,500 4-hour fireworks display blah blah blah bought up the entire hotel for a $50,000 flat fee blah blah blah $150,000 open bar blah blah blah $1,000 wedding cake blah blah blah that’s a lot of money for flour, eggs and milk blah blah blah. No. This little gathering was a drop in the bucket compared to the $3 million birthday party Stephen threw himself last year. The subtext here is that Schwarzman is a bad father. The excuse that Blackstone just lost $113.2 million holds no water because we hear Schwarzman has plans to put stone crabs on the endangered species list by the end of the year. (Last complaint, because we’re really not trying to be negative about the whole thing, it’s just happening organically but 4 hours of fireworks? Seriously? That’s like half the workday. Wouldn’t your neck start to hurt? Wouldn’t your ears start to ring? What am I missing here? I’m really asking. Educate me.)

Earlier: Crab Hands Jr. Is Off The Market

Like Pa, Like Son [NYP]

Stephen and Ellen Schwarzman’s son, Edward “Teddy” Schwarzman, was married off Saturday evening to Ellen Maria Zajac, daughter of Ellen and John Zajac. (Ellen DeGeneres performed a couple of sets during cocktail hour and just before the cutting of the cake, and Ellen Barkin sat at table 19. Over dinner, someone mentioned something about Teddy finally fulfilling his life-long dream of marrying a woman with the same name as his favorite actress, Grey’s Anatomy star Ellen Pompeo.) So sad and, yet, kind of meh (call us when Daniel Loeb’s unborn son is no longer available, then we’ll be upset. NB: Carney does not share the indifference. When I’m finished with this, I’ll go try and talk him off the ledge). One DealBreaker spy in attendance for the nuptials reports that “there were fireworks after dessert” and talk that Schwarzman junior had been encouraged to “marry for money,” on account of the family business falling on hard times.

Ellen Zajac and Teddy Schwarzman [NYT]

Hey-o, we’re hearing from the Wall Street Journal, Bloomberg, CNN, the New York Times, MarketWatch and Claudia, our Starbucks barista, that Blackstone maybe didn’t have such a good third-quarter? That it maybe recorded a net loss of $113.2 million, or 44 cents per share, compared to a net income of $372.5 million a year earlier? (Voice getting higher pitched) That the loss is being attributed to $802.60 million of non-cash compensation charges and some stuff related to a so-called credit crisis? That Stephen Schwarzman wishes they’d “never gone public”? (Only dogs and people whose ears are trained to register extremely high pitches can hear me at this point) That he can’t even afford imitation crab meat anymore? Yeah? Yeah? (Voice returns to normal) How embarrassing. Doesn’t it suck when you’re a public company and are required by law to disclose your failures for the entire world to see? Merrill Lynch knows what we’re talking about. (A tip for next time: take a cue from Goldman Sachs and just lie.)

Honestly, though, don’t worry about BX and Stephen (and the shareholders who must be thrilled about Blackstone falling 8 percent this morning)—they’re going to be fine. Not just because the exceedingly wealthy always manage to land on their feet, but because they have a plan, and that plan is to do something so crazy and seemingly stupid-sounding that it just might work (or not work, it’s one of these two things). According to president and CEO Hamilton James, Blackstone took a vote between going bowling or believing in subprime, and the latter won. James says that while the “subprime black hole is appearing deeper, darker and scarier than [banks] thought,” the bottom is not far, which is why BX is “starting to go long the subprime market.” Sounds pretty different from what everyone else on the planet is saying/doing, but okay. We have to assume that Schwarzman is doing everything in his power to bring those $4 billion crab claws back into his life, and not just throwing a bunch of bad ideas against the wall and waiting to see what sticks.

Blackstone skids on quarterly loss [CNN Money]
Blackstone posts loss from IPO charges [Reuters]

John Studzinski, senior managing director at Blackstone, worked in soup kitchens as a teenager in Massachusetts, where he also helped start a toll-free number to educate adolescents about sexually transmitted diseases. Today he gives away half of his cash compensation after taxes to the arts, the homeless, and human rights. He’s pledged $10.2 million toward the expansion of the Tate Modern which, considering Blackstone’s stock performance, is quite generous. He’s the vice-chair of Human Rights Watch, and was instrumental in the founding of The Passage, London’s biggest homeless day center where he regularly volunteers. He says it’s “dangerous” to not help those who come to him in need. Without knowing anything else about him, one could make the argument that he’s a pretty selfless, decent human being.

Based on his previous writings about charitable giving, you know Studzinski’s generosity of time and money toward the less fortunate nauseate John Carney. But, quite obviously more importantly, how do you think it makes Studzinski’s boss, Stephen Schwarzman, widely known for his staunch opposition to using his excessive wealth to help others, feel? It’s pretty common knowledge that sucking up to the guy above you on the food chain by pretending to share the same interests is a good way to get that promotion, or to at least ensure the preservation of your current job. (Like this, see—Carney: What are you up to this weekend? Me: Oh, you know, probably just going to head over to the Port Authority, little unprotected sex with trannies here, little intraveous drug usage there. And my regularly scheduled Klan rally on Sunday, of course.) Essentially outright saying that you don’t share his beliefs—and pretty much making the guy look like what some people might call a “cheap bastard”—can’t be good for business.

Blackstone’s Studzinski Gives Millions Nurturing Tomorrow’s Art [Bloomberg]

Blackstone big Steve Schwarzman may have gone into hiding but he’s still the talk of the town. Especially if your plot of land in that town—Greenwich, East Hampton, etc—was bought with private equity tax-advantaged dollars.

“Whenever group of private-equity guys gets together nowadays, the conversation inevitably turns to Steve Schwarzman,” the Economist reports today.

“It was all going so well until Schwarzman went over the top,” one will say. “Yeah, why did he have to hire Rod Stewart to sing at his birthday party?” replies another. “And then make quite so much money in the Blackstone IPO? Now everyone hates us, no one wants to lend to us any more, and Congress wants to tax us to hell and back.”

The forces of envy and political rent-extraction had been aiming at private equity for quite some time but there is little doubt that Schwarzman and the Blackstone IPO provided them with a much easier target. It’s always harder to attack abstractions than actual people. One of the Okies of The Grapes of Wrath once asked, “Who can we shoot?” Schwarzman accidentally volunteered his head—or, well, claws—for the rifle scope.

But it’s not just the politicians, labor unions and tax-eaters who have Schwarzman in their scopes. Another special interest group is looking askance at Schwarzman—his own industry. According to the Economist, a popular question among private equity hochos is “Well, what’s Schwarzman going to do to clean up this mess?”

The suggestion of the Economist editors is philanthropy. That’s a popular decision among the super-wealthy but we’re not sure it’s the right one. For starters, we can’t remember a single malefactor of great wealth whose reputation was rescued within his lifetime by charitable donations. Most of those who have made huge donations recently—say, Warren Buffett or Bill Gates—were already hugely popular. Schwarzman is no Buffett.

What’s more, there’s little evidence that huge donations to institutional charities are effective at accomplishing the presumed goals of the charities. Schwarzman may simply be throwing good money after bad if he pumps up the coffers of our giant charity industry. So what’s a down-on-his-luck private equity king, who brags about his own skill as a counter-puncher, to do to rescue his rep?

Saving Steve Schwarzman [Economist.com]

Despite winning the distinction of Worst IPO in the History of IPOs (real title: Worst IPO of the Year), with the BX stock dropping 23% from its initial $31 offer, a cornucopia of Wall Street firms gave the P.E. goliath “buy,” “outperform” or “overweight” ratings today. Citigroup’s Prashant Bhatia wrote that “Blackstone is positioned to generate double-digit earnings growth driven by its superior over-the-cycle investment performance,” and analysts from Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, Credit Suisse, and Bank of America all laid the toothy-smile emoticon on thick, with Lehman Brothers even going so far as to use the lips ‘n mole prostitute face. Some—Reuters’ Jonathan Keehner for one—would like to know how, in spite of the dwindling stock, some stuff going on with the credit markets and the 15 vs. 35 issue, no one thinks Stephen’s Crab Shack by the Sea is a “sell.”

If we were cynical, we’d say it had to do with every “sell” rater being an underwriter on the IPO, and that the “Chinese Wall” provides about as much protection as the rhythm method (more than the “But it’s my birthday” method, less than “If we do it like this, we don’t need condoms, and God will still love us” method). If we were really cynical we’d say: because Blackstone capitalized on the inside information that analysts have no ethics, all of the analysts rating BX are under 5’6”, and maybe B’stone really is buy-worthy. But you’d know better than us. Do tell.

Wall St. rates Blackstone’s stock a (you guessed it) “buy” [Reuters Blog]
Despite analysts’ rave Fortress, Blackstone plunge [Reuters]

Steve Schwarzman is selling state secrets to the Chinese. Is Schwarzman trying to pull a Jack Bauer’s father in last season of 24 (Schwarzman is the only PE fund guru as “tall” as Keifer Sutherland, after all)?

For the low, low price of $540 million dollars, or a nice $23 million a day, the Chinese government has been studying the U.S. buyout market, courtesy of Blackstone’s IPO. The first lesson is an awfully bitter fortune cookie - PE fund IPOs allow shrewd fund partners to cash out while passing impending turmoil onto investors.

China used its increasingly hard to employ $1 trillion “rainy day fund” of foreign exchange holdings to pump money into a 10% stake in Blackstone’s IPO. China bought shares at a 4.5% discount and watched Blackstone’s share price fall 18% in 24 trading days.

China is watching patiently, slowly developing the script for taking the PE reigns from the West, and the script for “Shaolin PE Investing,” starring Stephen Chow.

(Pictured: Some Chinese investors have lost their shirts in the deal, others just have an axe to grind.)

Blackstone share slump costs China $540 million [MarketWatch via Deal Journal]

Let’s see what two guys (Kurt Andersen and a friend, who asked requested his name be withheld) had to say about the matter:

* Guy New York contributor Kurt Andersen knows who works around private equity “snarls” when he says the name “Steve,” and “blames the current anti-private-equity spasm not on whiny anti-business liberals, but on Steve Schwarzman”

* “The fucking birthday party” (attribution to same “guy”)

* “Where no one gave a toast, by the way, not one” (same party, same guy)

* “We’re where we are right now because of the unbelievable egos of guys running the private-equity firms like Blackstone. They put big targets on their backs by what I consider stupid actions like throwing these big parties.” (same party, different guy—head of the National Venture Capital Association)

* “Ostentatious, churlish, megalomaniacal, tone-deaf—and a hypocritical dissembler to boot.” (Andersen, in cahoots with “guy”)

It is often said that in his early days, the rapid ascent of Steve Schwarzman was attributable to the fact that due to his stature, Schwarzman was able to provide “support” to his superiors without resorting to ankle holding. This worked wonders for his endurance and longevity on most projects, and lessened the long term wear and tear of a financial career (the difference between the Emmitt Smiths and the Earl Campbells of the financial world). After all these years, Schwarzman’s ankles remain virtually unscathed (pictured).

While many full-sized people can endure ankle holding for a year or two, its effects on posture and well-being act as a barrier to career progress. It is no secret that he who controls the path to safe and effective ankle holding controls the financial industry, which is why Blackstone is quietly amassing the “largest non-operative orthopedic-rehabilitation company in the world.”

The Blackstone portfolio company ReAble Therapeutics agreed to buy DJO for $1.6 billion. DJO specializes in post-surgery pain therapy and leg/ankle braces. Blackstone bought Encore Medical Corp in 2006 and changed the company’s name to ReAble, embodying the hope the given to perma-hunched associates. Along with last year’s acquisition of Aircast, ReAble’s purchase of DJO forms an entity that offers an unprecedented number of safe ways to go deep into the Blackstone night.

Blackstone endorsed the DJO acquisition based on the recent paper “Influence of passive or active holding ankle position on pelvic floor muscle strength in Blackstone associates” that demonstrates the positive effects of extended ankle-holding, primarily on the Pelvic Floor Muscle, or PFM.

Here’s a summary of the study, from an abstract of the paper:

Method: Blackstone associates participated in testing of PFM strength changes in different ankle positions. PFM strength was measured by an intravaginal probe with surface electromyographic (EMG) electrodes. Each subject was asked to perform the PFM contractions while assuming a series of nine positions (e.g. - DCF, Cost of Capital Analysis, Deal Sourcing, Diligence) during which EMG recordings of the PFM were made.

Results: Greater PFM activity occurred in active holding ankle positions than passive holding ankle positions.

Conclusions: An upright standing posture that includes active holding ankle positions effectively facilitates PFM strength through muscles co-activation and synergy. Thus, we can apply active ankle positions in PFM training to enhance the effect of exercise in future.

Blackstone’s ReAble to Acquire DJO for $1.6 Billion [Bloomberg]

The Blackstone Group’s $26 billion bid for Hilton Hotels has certainly ignited speculation about whether another big hotel chain—perhaps Hilton rival Marriot or Starwood—might also get taken out by private equity or whether some group might try to roll-up smaller companies to take advantage of economies of scale and branding.

Supposedly, everyone’s all excited about the hotel business now! Private equity’s here! Chuck Prince is still willing to lend money to keep the music playing! Let’s get this party started! Hot!

All too often the smaller, human-scale stories of the deals get left in the dust while everyone keeps talking about earnings multiples and leverage-to-ebitda ratios. And the story we want to tell is a story of the friendship of two very special young women. A friendship that was torn apart but now, it seems, has been repaired by the healing forces of private equity.

We’re talking, of course, about Lindsay Lohan and Paris Hilton. According to the website Gossip Girls, the “longtime rivalry” between the two favorites of the gossip pages “is over.” It seems that the stint in jail has Hilton rethinking her feuds. But, perhaps more importantly, Hilton has apparently been in good spirits since news of the Blackstone bid broke. A friend of Hilton’s tells the girls that “she’s got to be in a good mood after the Blackstone Group bought the Hilton Hotels, boosting her inheritance.”

Apparently the renewed friendship became public when Hilton attended a birthday party for Lohan on July 3. Somewhere out in St. Tropez, Blackstone chief Steve Schwarzman can breathe the sea air and relax with the ease of a man who knows he has restored a friendship that had long been torn asunder.

Paris Hilton’s Frienaissance With Lindsay Lohan [The Gossip Girls]