Private equity giant KKR & Co. (NYSE: KFN) posted a $1.2 billion loss last year -- compared to pretax net income of $815 million the year before. This is KKR's first loss in at least five years.

Bloomberg pins the blame on a drop-off in leveraged buyout transactions. A $1.4 trillion market in 2006 and 2007, only $212 billion was spent on takeovers last year, which was bound to put a dent in KKR's top and bottom lines.

Citigroup (NYSE: C) has decided to take a chance that most other banks have avoided. It will become more aggressive in making mortgage and consumer loans. According to the AP, "Citigroup plans to use some $36.5 billion of its U.S. government capital infusion for new mortgages, credit card loans and to buy mortgage-backed securities in the coming months."

What Citi is not likely to say is whether the government twisted its arm to get the lending going. There has been criticism from a number of politicians that Citi and other large banks are getting bail-out money but have been keeping that capital to help their balance sheets.

The Blackstone Group L.P.'s (NYSE: BX) stock is down from about $25 to under $10 during the last 52-weeks. No wonder. It does deals like buying Hilton Hotels According to The Wall Street Journal, "The $26 billion leveraged buyout of Hilton Hotels Corp., with its 2,900 hotels and 490,000 rooms throughout the world."

Travel is likely to be way, way down during the recession.

But, the news has broader implications than that. Most LBOs are done with heavy debt, usually borrowed from major banks. Often that debt carries high interest rates to account for risk. In a slowing economy, a lot of that debt will default. Companies which were taken private will end up in Chapter 11, especially those which depend heavily on consumer spending.

That brings the issue around to bank earnings in 2009. While write-offs for mortgage-backed paper may be improving somewhat, a wave of LBO defaults are likely to hit money center banks hard. More losses, more need for capital.

The Treasury may not be done handing out money yet. Another wave of trouble for banks is just around the corner.

Douglas A. McIntyre is an editor at 247wallst.com.

MAJOR PAPERS:

• The Wall Street Journal's "Smartmoney Stock Screen" looks at eight companies whose valuations make them ripe to buy, and they also may be in the sites of corporate buyers. The big eight include Asbury Automotive Group Inc (NYSE: ABG), Crane Company (NYSE: CR), Scholastic Corporation (NASDAQ: SCHL) and The Scotts Miracle-Gro Company (NYSE: SMG).
• The Wall Street Journal's Walter Mossberg said in the "Personal Technology" column that he cannot recommend Apple Inc's (NASDAQ: AAPL) MobileMe, as it has "too many flaws to keep its promises".
• The Wall Street Journal also speculated that the collapse this week of SemGroup LP, which is the parent of SemGroup Energy Partners LP (NASDAQ: SGLP), may have played a role in the 14% drop in crude oil over the past 10 days.
• In a move that could take advantage of the gap in the financing markets, The Goldman Sachs Group Inc (NYSE: GS) raised $10B to invest in loans backing leveraged buyouts. The fund will reportedly buy senior loans, the Financial Times reported.

OTHER PAPERS:

• Former American International Group Inc (NYSE: AIG) chief Hank Greenberg is reportedly in settlement talks with New York Attorney General Andrew Cuomo over charges that Greenberg improperly inflated corporate books to show improved profits, the New York Post said.

Like water-torture, the drip, drip, drip of bad news out of Wall Street keeps coming. According to a report in The Wall Street Journal, Merrill Lynch (NYSE: MER) will report mortgage securities write-offs of another $6 billion to $8 billion, raising the question whether the firm will have to bring in more money by selling shares..

The newspaper reports that "The latest would bring its total since October to more than $30 billion and mean that Merrill reports a third straight quarterly net loss." Merrill compounded its problems by getting further into the CDO markets as 2007 went on.

While some experts believe that the worst is behind big banks and brokerages, that may not be true. The paper based on mortgages still carries risk as the housing market continues to fall.

Statements from Wall Street firms about a near-term recovery is a victory of hope over reason. The truth of the matter is that they have no idea how much more the economy will slide. That raises the question of whether home equity loans, credit card debt, and auto loans will begin to fail at a faster rate. There are securities held by banks based on pools of all of this debt. The value of LBO debt could also continue to drop as business profits are squeezed by a poor economy.

The Merrill write-down is a sign of one thing and one thing only. Wall Street's numbers could get much worse and there is little reason that the economy will help them get better.

Douglas A. McIntyre is an editor at 247wallst.com.

AMD (NYSE: AMD) has more problems than a dog has fleas. Over the last year, AMD shares have fallen from $18.35 to $6.41. Margins have been cut by competition with larger rival Intel (NASDAQ: INTC). New products have been late to market.

Wall Street firm Caris & Co. thinks it has some solutions. According to Barron's, the firm has issued a research report that "raised several scenarios for what happens to the struggling chip maker from here."

The first suggestion is the most obvious: the company should dump CEO Hector Ruiz. The stock has fallen under his leadership. The company took on billions in debt by buying graphics chip company ATI.

The other two options are to sell the company to a large tech operation like Samsung or do an LBO. AMD does have $5 billion in debt, so going private might be hard.

There is another approach. Sell ATI. It will not bring the over $5 billion that AMD paid, but it would get the balance sheet back in shape. Get rid of Ruiz and bring in a new CEO. There is room for two chip makers in the PC and server markets, but getting into price wars with a company like Intel has to be avoided to whatever extent possible under new management.

Douglas A. McIntyre is an editor at 247wallst.com.

Dow Chemical (NYSE: DOW), a diversified chemical company, is recently up $1.42 to $46.17 after Bloomberg confirmed DOW canceled an analyst meeting. DOW has been the frequent subject of private-equity takeover chatter and the cancellation is refueling the conjecture. DOW call option volume of 27,544 contracts compares to put volume of 5,011 contracts. DOW November option implied volatility of 36 is above a level of 28 from twenty minutes ago, according to Track Data, indicating traders positioning themselves for a higher share price.

W.R. Grace (NYSE: GRA), supplier of specialty chemicals & industrial applications, is recently up $1.12 to $30.06 on unconfirmed LBO chatter. GRA call option volume of 9,562 contracts compares to put volume of 724 contracts. GRA October 30 straddle is at $2.00. GRA November option implied volatility of 61 is above its 26-week average of 51, according to Track Data, suggesting traders are positioning themselves for a higher share price.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

You may think the subprime mortgage mess is huge. Well just around the corner a larger elephant is looming and its impact may be even more devastating than the current credit crisis.

While it sounded like good news when banks sold $30 billion of loans for leveraged buyouts last week -- $26.4 billion of that was for the First Data buyout. That sale came with a big price tag -- banks agreed to sell the debt at 96 cents on the dollar, which means they locked in losses after their fees.

And then there was the problem of what to do with the other 90% of LBO loans in the pipeline.

The Wall Street Journal (subscription required) reported today that Citigroup Inc. (NYSE: C), Credit Suisse Group and J.P. Morgan Chase & Co. (NYSE: JPM) hold $400 billion in debt they promised for financing purchases private equity firms have in the works globally. If they can't sell the debt, they're left holding the bag, which means a lot less money for other loans. If the economy slows as expected and corporate profits weaken, the only way the banks will be able to unload the debt they're holding will be a fire sale on that debt at even deeper discounts then the First Data deal.

Mutual funds have never been known for their willingness to take on management -- opting instead to just sell their shares and move on -- but that may be changing.

According to The Wall Street Journal, some fund managers are gaining a newfound feistiness, particularly when it comes to management-led leveraged buyouts that they believe offer inadequate value to shareholders. The whole idea of a management buyout seems unfair to outside shareholders, almost by definition: the current executives are taking the company private while retaining a large stake, in the hope of creating more value. If they thought shareholders were getting a good deal, why would they do the deal in the first place?

In his excellent book The Battle For the Soul of Capitalism, John Bogle discusses the supine attitude so many mutual funds have had toward corporate governance: In recent years, holding periods have shrunk to the point where few money managers really have a long-term stake in the companies they own. He argues, and I would agree, that the complacency of mutual funds is one of they key factors that has led to the corporate governance disaster that currently exists in American business.

The 13-Ds that mutual funds are filing with increased frequency are a sign of positive change, and hopefully more will come.

Chesapeake Energy Corporation (NYSE: CHK) implied volatility up on gas price movement and expected fund raising.

CHK is the largest independent and third largest overall producer of natural gas in the U.S. Bloomberg reports Natural Gas Futures are up .88% to 5.63. CHK has a market cap of $15 billion with long-term debt of $8.3 billion. CHK announced on 8/8/07 a $500 million issuance of convertible senior notes (convertible debts increases volatility). CHK filed to sell EUR $525 million in senior notes on 11/27/06. CHK filed to sell $792 million in senior notes on 12/1/06. CHK filed to sell 30 million shares in a secondary on 12/7/06. CHK October option implied volatility of 33 was above its 26-week average of 28 according to Track Data, suggesting larger price risk.

Kimberly-Clark Corporation (NYSE: KMB) implied volatility flat; KMB has low debt to equity ratio.

1.3 billion people, nearly a quarter of the world's population, use KMB brands every day. KMB is recently down 98 cents to $68.42. KMB has a market cap of $29 billion with long term debt of $3 billion. KMB reported 2006 revenue of $16.7 billion. KMB has been frequently mentioned as an LBO candidate in 2006. KMB option implied volatility of 18 was near its 26-week average according to Track Data, suggesting non-directional risks.

Daily options update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Bloomberg News reports that JPMorgan Chase & Co. (NYSE: JPM) will take a $1.4 billion charge for leveraged buy out (LBO) loans gone sour. The good news is that the charge represents only 3.4% of its LBO loans outstanding.

Interestingly enough, relative exposure to LBO loans does not seem to correlate with loss of stock market value in 2007. Here's the list of the eight biggest LBO lenders ranked by their LBO loans coupled with the percent decline in their stock market value since their 2007 highs (excluding Deutsche Bank and Credit Suisse):

• JPMorgan: $40.76 billion, -11.5%
• The Goldman Sachs Group, Inc. (NYSE: GS): $31.88 billion, -25%
• Deutsche Bank : $27.27 billion
• Credit Suisse: $27.16 billion
• Lehman Brothers Holdings, Inc. (NYSE: LEH): $21.73 billion, -32%
• Morgan Stanley (NYSE: MS): $20.08 billion, -30%
• Bank of America Corp. (NYSE: BAC): $17.84 billion, -4%
• Merrill Lynch & Co. (NYSE: MER): $16.12 billion, -22%

With the potential for great riches, private equity has become a magnet for top-notch executives.

Take a look at TPG (Texas Pacific Group). Today, the firm announced that it has hired Kevin Rollins as a Senior Advisor.

Of course, his latest gig was as president and CEO of Dell Inc. (NASDAQ: DELL), where he spent 11 years. Before this, he was a partner and director at Bain & Co., a firm that has made lots of money providing strategic advice to private equity firms. In fact, the firm spun out Bain Capital in the 1980s, which has emerged as one of the largest private equity firms in the world.

As a Senior Advisor, Rollins will be kind of like a Bain consultant. Although, if there is a company that needs a veteran CEO, he may go back to being an operator.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

There is no holiday break for the rumor mill as word of many a company's activity is bantered about.



BUILD-A-BEAR WORKSHOP INC (NYSE: BBW)

As the stock shot up 14% the other day, it was revealed that the warm and fuzzy big bear hired Lehman Brothers to "explore strategic alternatives." Some analysts think an LBO is what will happen, and range the valuation at from $34 to $36. Very recently the company reduced its second quarter per share profit expectations to 7 cents to 10 cents, down from 15 cents to 19 cents, because of slow sales at stores that have been opened for at least a year. Here's a bear to be bullish on.


COUNTRYWIDE FINANCIAL CORPORATION (NYSE: CFC)

It's troubled times for the nation's largest mortgage lender. Earlier in the week the shares began to fall when it was revealed that they may be a part of a government investigation into subprime loans. It certainly doesn't help that three former company executives pleaded guilty to conducting insider trading in shares of Countrywide. The heat is on.


THE STEAK N SHAKE COMPANY (NYSE: SNS)

Two Texas investment groups, HBK Investments and Lone Star Funds, who between them own about 9.5% of the company, are said to be interested in digesting the whole dang thing. The 490 restaurant chain that has operations in 20 states just saw their most recent quarterly profit drop 30% from the previous year, as same store sales fell 4.7%. Gentlemen that they are though, they'll only pursue the sizzle if the board cooks it up with them.



STILL FLYING AROUND


WENDY'S INTERNATIONAL INC (NYSE: WEN)

They say they may want to sell the company, and the latest firm to gobble up shares is Tudor Investment, purchasing a 6.1% stake.


TD AMERITRADE HOLDING CORPORATION (NASDAQ: AMTD)

Jana Partners and S.A.C. Capital Advisors, who have about an 8.4% combined ownership of AMTD, are keeping the pressure on for the firm to partner up with another brokerage firm, and have now formalized their demands.



BUZZ


DJO INCORPORATED (NYSE: DJO): MMI Investments purchased 9.4% of the company's shares. When they buy in, they usually see the company acquired...Pride International Inc (NYSE: PDE): Spin off of foreign assets, or a possible takeover, has attracted interest...Legg Mason Inc (NYSE: LM): Pershing Square Capital, whose activist leader William Ackman has tried to push around McDonald's Corporation (NYSE: MCD) and Wendy's, has taken a 1.5% share of the company.

CV THERAPEUTICS INC (NASDAQ: CVTX)

For sale? Seems so. The bio-pharmaceutical company hired investment bankers to check it out and just like that, the stock jumped 6%. But sell to who? Some say a bigger competitor. At what price? $18 a share is about right. One report says that the CEO would absolutely jump at $20 a share. Added pressure to make a move has come from Third Point, who made their point to do something as they acquired a 10% stake in May.


MARSH & MCLENNAN COMPANIES INC (NYSE: MMC)

Since January there has been interest in buying this worldwide professional services company. Management is taking the tact of listening to some of the interested LBO parties, but has not said it wants to sell, nor has it hired a team of advisers to help think it through. Bids could be made in the mid-$30s, but management might be expecting something the $40 range. Which means there is interest to sell, but at a higher price, equal to a premium over their $18B market cap. Blackstone and KKR are said to be among the interested. A sale of some assets may first be necessary to make it all happen.


WENDY'S INTERNATIONAL (NYSE: WEN)

The company chairman, James V. Pickett, speaks: "While a sale remains only one of the alternatives under consideration, we believe it merits more thorough examination." And, I'll have a square hamburger on a round bun, please.



STILL FLYING AROUND


KRISPY KREME DOUGHNUTS INC (NYSE: KKD)

But will they trade oil for donut batter? Mohamed Abdulmohsin Al Kharafi & Sons of Kuwait are buying up the stock like crazy. The shares are rising fast, and a purchase could finally happen. Or, could there be big expansion outside the U.S. of A.?


NETFLIX INC (NASDAQ: NFLX), AMAZON.COM INC (NASDAQ: AMZN)

It's not getting any easier for Netflix. Blockbuster Inc (NYSE: BBI) is making life miserable by price undercutting. Now Netflix will have to top that. Will Amazon now make it's move?



BUZZ


Tyson Foods Inc (NYSE: TSN): The shares are up on heavy trading, but many balk at talk of a sale or buyout... Harley-Davidson Inc (NYSE: HOG): Stock price moving on up may be due to takeover talk.

Scott Black of Delphi Management mentioned in this weekend's Barron's that the spread between investment grade debt and Treasuries is just 83 basis points, the tightest in nine years.

Black went on to say that the private equity boom is not too different from the leverage buyout boom from 1980.

However, there are some differences between today and the 1980's. The debt level used in the corporate-raider-buyout boom of Perlman, Peltz, May et al was substantially higher than today. Ten percent was often the maximum equity put down. Today, equity contributions average 20% to 25% and in some cases have been in the 30% area.

The other difference is that as multiples have expanded, the equity contribution has also gone up. This is due to both more experienced PE fund managers, many of whom began their careers in the 1980s, and also operating managers of these companies are requiring a larger equity component. The guys left operating these businesses do not want to be stuck with unmanageable balance sheets.

But Black's comments are worth noting. While private-equity deal structures are more conservative, banks are opening the lending spigot. The excess in this market appears more on the lending side then the deal structure side. Both the private equity funds and operating managers have remained disciplined so far.