NEW YORK: The bloom came off the Blackstone Groups rose last week as the share price of this celebrated private equity firm fell below its June 21 offering price of $31. Investors have some nerve to dump Blackstones shares - dont they know who Steve Schwarzman is?

He is mighty deal maker atop Blackstone - the man of the moment in le tout New York, whose already sizable fortune was augmented by his $7.7 billion stake in newly public Blackstone shares.

Blackstone declined to comment about its faltering stock - it closed on Friday at $29.27 - and it may still rally, of course. But its downward drift seems part of a shift in investor sentiment - away from risk - that looks anything but temporary.

This mood change was visible across Wall Street last week. In the corporate bond market, investors risk aversion was evident when at least eight companies decided to postpone or pull their planned sales of securities.

One example was Kia Motors, the South Korean carmaker, which canceled a $500 million bond sale. Another was U.S. Foodservice, a unit of Royal Ahold, the Dutch supermarket company. It postponed a planned sale of $650 million of senior notes on Wednesday; the securities were intended to finance a proposed buyout of the company by two other private equity titans, Kohlberg Kravis Roberts and Clayton Dubilier Rice.

Risk aversion is also showing up in the derivatives market, where the issuance of collateralized debt obligations is slowing. Last year, issuance of collateralized debt obligations - which include commercial and residential mortgages, corporate loans and small-business loans - approached $500 billion, up from $235 billion in 2005, according to Thomson Financial. But that flood is subsiding: global issuance of these pools of debt securities came in at around $46 billion in June, well down from the $62 billion issued in March.

The mortgage market, meanwhile, continues to reel.

Last week, Carlyle Group, a big private equity firm, reduced by 25 percent the size of a fund backed by mortgage securities that it plans to offer to investors. The firm also cut the offerings projected price.

A retrenchment on risk is not surprising, given that the anything-goes mentality among investors has lasted for the past three years. The mortgage markets woes were the first to tip the balance, but corporate bonds, stocks and private equity will also feel the effects of a pullback in risk-taking.

“Until now we were in a period where risk was underpriced,” said Nouriel Roubini, a professor of economics at New York Universitys Stern School of Business and chairman of Roubini Global Economics.

“Debt was so cheap that anybody could take a semiprofitable company private and leverage it. Now the price of this is going to be more expensive.

“There are some $200 billion of LBOs in the pipeline,” he added.

“I think some of them might not be done or they will be done at a higher cost.”

There is - as there always is - a historical parallel here. Go back to the late 1980s and you will see another easy-money era when a real estate bubble and takeover mania was fueled by the issuance of risky securities, in that case junk bonds. Back then, the firm at the center of the profits - and later, the plunge - was Drexel Burnham Lambert.

Michael Milken, its brilliant bond impresario, figured out how to raise money for companies that investors had previously shunned (the corporate version of subprime mortgages).

Savings and loan institutions, using insured deposits, were the manic lenders 20 years ago. Commercial real estate development and multifamily housing projects were the favored investments. When that party ended, the United States taxpayer had to foot the bailout bill.

It cost $140 billion.

Back then, as now, the public watched with dismay as big players in the takeover game pocketed enormous sums. (Remember Milkens $500 million payday? It was in 1987.) The takeover titans gains were especially distasteful when viewed against mass firings at companies that had been taken over in leveraged buyouts financed by junk bonds.

Today we have subprime mortgages being financed by hedge funds, pension funds, insurance companies and other institutional investors.

But these same investors have also been lax in their lending to corporations issuing debt, often at the behest of private equity managers who hope to take those companies private.

“In both the LBO market and collateralized loan markets there are practices that are the equivalent of the reckless lending in subprime mortgages,” Roubini said. “Subprime people will say it was a niche problem. Thats nonsense.” And the correction of those freewheeling ways has only just begun.

POLICE have arrested five people following two botched terror attacks in London and Glasgow.

The arrests came after police linked the attacks in Glasgow on Saturday with the two failed car bomb attempts in London last Friday.

Last night the government increased the security level from “severe” to “critical” - the higest possible level, suggesting more attacks are expected.

Police cordon off and search a house in Houston, near Glasgow. Picture: EPA

This morning, Prime Minister, Gordon Brown said: “It is clear that we are dealing, in general terms, with people who are associated with al-Qaeda.

He added: “It’s obvious that we have a group of people - not just in this country, but round the world - who are prepared at any time to inflict what they want to be maximum damage on civilians, irrespective of the religion of these people who are killed or maimed are to be.”

Lord Stevens, Mr Brown’s new terrorism adviser, said the attacks signalled a “major escalation in the war being waged on us by Islamic terrorists”.

He added: “It is clear a loose but deadly network of interlinked operational cells has developed.”

Last Friday, two cars containing petrol, gas cylinders and nails were discovered outside the Tiger Tiger club in London’s Haymarket, but the devices failed to detonate.

On Saturday, a 4×4 vehicle was driven at the main terminal of Glasgow International Airport and set on fire.

Police have confirmed that five people have been arrested so far in relation to the attacks.

A police officer stands at the end of a street in Liverpool following a raid on an address in the city. Picture: EPA

Counter-terrorism police made the arrests hours after Strathclyde police confirmed they were linking the attack in Glasgow with events in London.

Two people were arrested at Glasgow International Airport yesterday.

One had suffered severe burns and was transported to Paisley’s Alexandra Hospital where he is said to be in a critical condition.

The hospital was evacuated shortly after the suspect arrived for treatment following the discovery of a “suspect device” strapped to his body, which was later discovered to be harmless.

Police are now searching houses in Neuk Crescent in the village of Houston, near Glasgow in connection with the incident.

A further two arrests were made later on the M6 near Sandbach in Cheshire.

Eyewitness Peter Whitehead said traffic had been brought to a halt on the motorway as police made the arrests.

He said: “They [police] forced a car onto the hard shoulder and got the occupants out and as far as I could see arrested them.”

British police officers stand outside a house in the Toxteth area of Liverpool.

A fifth arrest was made in Liverpool.

Scotland Yard confirmed that a 26-year-old man has been arrested and two properties in the Liverpool area are currently being searched by police.

Home Secretary Jacqui Smith held a meeting of the government’s emergency committee today to discuss the terror attacks in Glasgow and London.

Following the meeting, Ms Smith issued a statement urging the British people to remain vigilant and report any suspicious events to the police

She said: “We won’t, as the British people, be intimidated or let anyone stop us getting on with our lives.”

Khurshid Ahmed, Chair of the British Muslim Forum condemned the attempted attacks and urged the Muslim community to help police in their investgation.

He said: “We take the heightened security level extremely seriously and urge all of our communities to remain calm, be extra vigilant and report anything suspicious to the authorities.

“It is the duty of every British citizen to assist the police in safeguarding national security and ensuring the safety of all our citizens.”

Scotland Yard’s anti-terror chief, Deputy Assistant Commissioner Peter Clarke, has travelled to Strathclyde in the wake of the attack on Glasgow Airport.

Passengers join the long queue as they wait to check in for holiday flights at Glasgow Airport. Picture: EPA

Mr Clarke is head of the Metropolitan Police’s Counter Terrorism Command which was formed last year from both the Anti-Terrorist Branch and Special Branch.

He has overseen the handling of several major plots and attacks on the capital, including the July 7 London bombings and fertiliser bomb plot.

Police have been increasing patrols and security for events in London over the weekend, including the Concert for Diana at Wembley Stadium on Sunday.

Glasgow airport is slowly re-opening and flights from Rolando and Ibiza have arrived.

Traffic tailed back along the M8 today as travellers attempted to reach the airport to catch their delayed flights.

Hundreds of people had to queue outside the main terminal awaiting check-in amid a heavy police presence.

Many arrived to find that their luggage had been lost following the evacuation of the airport yesterday.

A number of other UK airports have stepped up security, including Edinburgh, Newcastle, Birmingham, Manchester and Blackpool.

Security has also been tightened at airports across the US.

Chris Yates, aviation security analyst for Jane’s Airport Review believes armed police will become a regular sight at both airport and train stations in response to the attack in Glasgow.

He said: “There is not an awful lot else that can be done as airports, by their very nature, are public buildings.

“The public need to have access to go on holiday or go on business. We can’t lock down the system to the extent we make it too difficult for people to travel.

“The knock on consequences of that could harm the economy and drive the public away from taking flights.”

Investors are hoping the coming week brings some answers to the question of whether an improving U.S. economy unleashes inflationary forces, and one place to look will be in the June payrolls data.

At the same time, the potential for defaults in subprime loans to spill over to the general economy remains a concern. Nervousness over the availability of financing for buyouts prompted investors to sell banks’ and brokers’ shares on Friday, which helped cut short a morning rally.

In the holiday-shortened week, the most significant data, the June payrolls report, comes on Friday. U.S. financial markets will be closed on Wednesday, July 4, for the Independence Day holiday.

A month earlier, investors were cheered by news that nonfarm payrolls grew by 157,000 in May. According to the median forecast in a Reuters poll of economists, nonfarm payrolls added 120,000 jobs in June.

Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, expects the June non-farm payrolls to show growth of 120,000 to 130,000 jobs.

“I think the economy is still chugging along and the consumer is in pretty decent shape,” Dwyer said. He says that with decent economic fundamentals, no recent announcements of major layoffs, and signs that manufacturing is picking up, the payrolls report should be at or a little better than the consensus.

Other data during the week includes a pair of reports from the Institute for Supply Management. The group has a report on manufacturing activity in June coming on Monday, and another on the services sector due on Thursday.

The Reuters survey forecasts that ISM’s June index of national factory activity will be unchanged at 55.0.

The ISM services index is expected to decline to 58.0 from 59.7 in May.

Al Kugel, chief investment strategist at Atlantic Trust in Chicago, noted that some recent data from regional Federal Reserve banks has been good. He said he expects the ISM data to be strong.

“People need some new information to become more bullish and the ISM could be the trigger,” he said.

ROBUST SECOND QUARTER

The U.S. stock market turned in a strong performance for the second quarter, but lately seemed to hit a wall as bond yields climbed above 5.0 percent and problems surfaced at certain hedge funds that held investments in subprime loans.

For the second quarter, the Dow jumped 8.5 percent, the S&P 500 rose 5.8 percent and the Nasdaq gained 7.5 percent.

After losing ground on Friday, the Dow Jones industrial average () finished the week up 0.4 percent, the Standard & Poor’s 500 Index () inched up 0.05 percent and the Nasdaq Composite Index () gained 0.6 percent.

In the week ahead, Tuesday will bring its fair share of numbers. A government report on May factory orders is due that day, along with reports from manufacturers on car and truck sales in June.

After a lull next week, S&P 500 companies’ earnings begin to trickle out the following week and then the quarterly deluge begins later in July.

Bob Millen, co-portfolio manager of The Jensen Portfolio, a $2.3 billion mutual fund, notes that S&P 500 earnings growth is down significantly from the double-digit readings of a year ago. He says price-to-earnings multiples are unlikely to expand, and he argues that companies generating significant revenue from outside the United States are the best bets now.

SUBPRIME MORASS

Referring to the problems in subprime debt, which have devastated some hedge funds that made heavy bets in the sector, RiverSource Investments chief market strategist David Joy said he believes that “it’s the primary preoccupation of equity investors and that is going to continue next week.

“The issue is: ‘Does it result in a tightening of lending standards that could spill over into a general credit tightening?’ That’s the biggest concern.”

News of a probe into two Bear Stearns Cos. () hedge funds heavily invested in subprime mortgages added to investors’ worries on Friday that the potential fallout could spread throughout the banking industry. One company, privately held Bombardier Recreational Products, was forced to postpone a bank loan. And another company, ServiceMaster (), delayed pricing of a $1.15 billion high-yield bond offering until Monday afternoon.

As for the week’s statistics, Joy said he will be watching the average hourly earnings figure that is included with the payrolls data, as well as the data on prices paid in the ISM reports.

“Our view is that inflationary pressures are probably going to increase in the second half of the year” but at a modest rate as the U.S. economy picks up steam, Joy said.