In a Flood of Cash, Somebody's Going Under

It's the happiest of New Years on Wall Street, which is positively awash in money. No, I'm not talking about the jaw-dropping eight-digit bonuses at Goldman Sachs or the even bigger (albeit unpublicized) paydays for big hitters at some hedge funds and private-equity houses. Rather, I'm talking about the money sloshing around the Street chasing deals.

You can see this money if you read recent filings involving the biggest leveraged buyout in history: the pending $36 billion takeover of Equity Office Properties Trust, a big commercial property owner, by investors assembled by the Blackstone Group buyout firm.

There's such hunger to put money to work that three financial institutions -- Goldman Sachs, Bear Stearns and Bank of America -- have agreed not only to lend almost $30 billion to the Equity Office LBO, but also to invest more of their own cash in the deal than the $3.2 billion that Blackstone has committed.

The three firms are putting up $3.5 billion of "bridge equity" to get the deal done. What's bridge equity? Good question. It's a steroidal version of the short-term bridge loan you take out when you have to close on the purchase of a new house before you've finished selling your old one.

The difference is that bridge equity in buyouts involving lots of borrowed money -- what financial types call "leverage" -- is a higher-risk, higher-reward game than lending you money on a house.

The idea is that Blackstone will quickly round up investors to replace Goldman, Bear and BofA, who've agreed to lend the LBO either $29.6 billion or 82.5 percent of its out-of-pocket costs, whichever is less.

If things go well, the lenders will get a fee of maybe $35 million for putting their $3.5 billion at risk. (An aside: I think their major incentive isn't that fee, it's getting the LBO done and having a nice chunk of debt they can carve into securities and sell to investors.) But should something go wrong, the lenders could lose lots of money and lots of face.

I'm certainly not saying this deal won't work -- Blackstone is a smart outfit. But for those of us who worry about financial excesses, bridge equity sets off alarm bells because it means buyers and lenders are taking larger-than-normal risks.

I don't know how much bridge equity exists, but bridge deals apparently started a few years ago and are spreading rapidly. It's one thing if a handful of big-time players do this type of thing. But you can see the day coming when small-time players do this, too -- and that's when you know that wretched excess is upon us.

Blackstone, Equity Office and the lenders all declined to comment, citing Securities and Exchange Commission rules about not discussing pending deals. So I'm relying on my reading of various documents, supplemented by background discussions with people who would talk about the deal only if I agreed not to identify them.

Blackstone needed this bridge because that was the only way it could get a deal done with Sam Zell, Equity Office's founder. Zell, a tough, funny, profane guy who calls himself the Grave Dancer, had been talking with various suitors since at least November 2005, but nothing had come of it.

When Blackstone came sniffing around four months ago, Zell pushed for a quick decision with minimal weaseling-out possibilities. He got a deal with fewer than normal opportunities for Blackstone to bail. Even if the financing somehow falls through or there's a "material adverse change" in the stock or real estate markets, Blackstone's on the hook.