For Major Investor, Wall Street's Crisis Raises Questions and Opportunities

"First, although I have only had very limited business dealings with him personally (when he was at Goldman), in those dealings, he was tough, but A MAN OF HIS WORD," Conway wrote in the e-mail. "Second, his background at Goldman prepared him (to the extent anyone could be!!) for the tumultuous MARKET CHAOS that we have and will face. Frankly, his market instinct for action may be the right counterbalance to Fed Chairman Bernanke's academic training. Finally, I believe that he is seen as someone who can work in the POLITICAL MIDDLE."

But Conway said an oversight board "is essential."

"Even the right man needs some oversight," Conway said.

Conway and his co-founder at Carlyle, David M. Rubenstein, said they were concerned about conflicts of interest. In particular, financial institutions should not be able to sell bad assets to the Treasury and then turn around and use that capital to buy other bad assets -- and perhaps eventually making a profit from those assets.

"The conflicts ought to be worked out," Conway wrote. "Whoever advises the Treasury in the asset purchase process, should NOT be a participant in the buying and selling (too many conflicts). Frankly, they also ought to let others other than the U.S. Government be buyers in the process (e.g., sovereign wealth, foreign banks, pension funds, etc.) -- better prices, more transparency, more firepower focused on the process."

Both Conway and Rubenstein say there is a role for private equity in the bailout, and that there's money to be made.

"Private equity has a lot of experience buying assets at distressed prices and we expect to see a lot of attractively priced assets," Rubenstein said, adding that with $40 billion in dry powder, Carlyle is ready to do some deals. "It's likely that private equity will be a big investor in this area. It's good that private-equity firms are in good shape and have the resources to buy some of these assets and help the system."

Carlyle is 7.5 percent owned by Mubadala Development, which is owned by the government of Abu Dhabi. Carlyle takes investments from several overseas sovereign wealth funds, as well as from big U.S. pension funds, universities, foundations and wealthy people. The California Public Employees' Retirement System (CalPERS) owns a 5.5 percent stake in the firm.

Conway enjoys near-mythical status as an investor, mostly among current and former Carlyle employees but also among others in private equity. He isn't perfect. Remember the costly implosion earlier this year of Carlyle Capital, an offshore public company that invested in mortgage-related securities?

The firm is looking to hire Wall Street specialists who have been orphaned by the shake-up to pursue opportunities both with the bailout and with other distressed financial properties. They will be on the hunt for the next 18 months, Rubenstein said. "Right now Wall Street is shrinking, a lot of people are leaving their current jobs," he said. "So we might have something for people in this area."

It's difficult to argue with Carlyle's results: 26 percent annual net rates of return for investors. Conway has a novelist's eye for detail when it comes to investing, from the growth of food lines at downscale sandwich shops to the nuances of the home rehabilitation industry.

Prior to Carlyle's annual investor conference, held earlier this month in Washington, Conway sent a memo to the heads of his investment funds and to the firm's top executives, including co-founders Rubenstein and Daniel A. D'Aniello, chairman Louis V. Gerstner Jr., senior adviser James H. Hance Jr., and managing directors Edward J. Mathias and Glenn A. Youngkin.