I know that America's "true religions" are business, war, and football (the three not so different), so I shouldn't be surprised if the captains of industry get defensive or hostile over even minor critiques. I guess to them, US capitalism is divine and perfect (well, it's working perfectly for them and the 1% at least). There's no need to tax or regulate or question perfection, right? If so, then why is there even a market for private equity firms like Bain Capital - which exist to help struggling companies improve? Why is 20% of business school learning about how previous firms and leaders messed up, in order to avoid those pitfalls in the future? Nothing is perfect, and we usually find out that things are much more f'ed up than advertised. If we believe in and care about something, we should constantly scrutinize it and hold it to higher standards. We can't just have blind faith and obedience that it will always turn out well. True "lovers of the free market" should want to diligently police it, because greed or scandal could cause dysfunction (i.e. lost wealth/jobs) and erode support for the whole system (we generally don't see this in practice, but we should). Those who pretend that everything is great and rebuke any critics (especially after all we've been through since 2007) are probably hiding something or struggling with their own guilt.
As usual, there's a balance and lots of gray area. We don't have to be labeled as 100% free market disciples or 100% communists, but unfortunately in politics (especially during campaigns), those type of messages carry more traction. The free market is amazing in its potential to create (and destroy) value, and affect millions of lives (for better or worse). Private equity has created and destroyed some American jobs (studies suggest there has been a net job gain vs. similar companies, see link below). It has made some money for investors (not just rich people but also public pensions), though it's unclear whether the gains are better or worse than market averages. It has helped some companies succeed and ruined others (they play a dangerous game with leveraged buyouts and such). But that is business risk - you can't win 'em all, and obviously firms like Bain must have a track record of doing some good, or clients wouldn't agree to fork over a whopping 20% of their profits to them as consulting fees. Voters just have to decide if a private equity exec has the background to be a good president or not (or at least, is he the best choice of the field?). What we do know for sure is people like Romney got mad rich from private equity, especially since they structure their compensation as capital gains for the very low 15% tax rate (like hedge fund managers do). Would a patriot short-change his nation out of millions of revenue like that, even if it was technically legal?
Private equity 101 FYI:
http://www.theatlantic.com/
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I agree that there's room for a more nuanced critique of capitalism, and you don't have to be 100% pro or con. But the critiques being presented by the other GOP hopefuls aren't nuanced and aren't careful: they basically boil down to a kind of ham-fisted populism of "the rich guy got rich and some workers lost their jobs." That's a broad brush that tars most any businessperson, because it's an attack on all forms of creative destruction.
I think the more cutting argument against private equity is that at least some part of their profits come from shifting costs from the business to the government. That is, they use financial engineering to extract money from the taxpayer through government, rather than creating new profit. The template of how a PE firm does this goes like this:
1 - After buying the company, have it issue a big pile of new debt and pay that out as a dividend (i.e. to the PE firm which now owns it). Now some of what used to be the company's profits go into paying interest on the debt. Since interest is not taxed, but profit is taxed at 35% (less deductions, which are huge, of course), this single bit of financial engineering allows you to get the government to subsidize that debt to the tune of 35% in lost tax revenue.
2 - Start breaking the company up into smaller pieces. Sell this as being designed to "make the company more lean and efficient." But you basically strip the company of its assets, paying out the results as dividends (back to the PE firm, helping you recoup your investment). This has the effect of really levering up the company because you've still got a ton of debt, but now a lot fewer assets behind it.
3 - If the company does well (keeps making enough profits to cover the interest on that massive debt), that's great, good work. If not, declare bankruptcy. Since the company now has far fewer assets, your creditors don't have much to go after - they can't come after the dividends you've paid out to yourself. And often in bankruptcy you can pawn off your pension benefits on the Pension Benefit Guaranty Corporation, where the government basically takes on your pension obligations.
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Thanks for the information, J. Certainly I'm not supporting the validity of the GOP rivals' attacks on Romney's business record. I mean, it's hilarious to watch them go after each other, but for the most part their arguments are not supported by much fact as you said (the Wash. Post gave Gingrich's super PAC's anti-Romney video "King of Bain" the lowest score for truthfulness). Still, Romney is billing himself as the only private-sector guy in the field who knows the real economy and how to create jobs, and I call BS.
I am totally naive about PE (though my intro finance course starts next weekend haha), so I am shocked that the technique you described is their meal ticket. It reminds me of the free conferencing calling loophole (http://www.linkedin.com/
I just can't believe that the client companies' boards would approve large dividend payouts early into their relationships with PE firms, especially when it's financed by new debt or fire-sales on their assets. Is it stipulated in the contract or something? These firms are struggling, hence the need to hire bloodsuckers like Bain, so they should retain every cent of earnings to invest for future profitability. BP suspended dividends after the Gulf disaster (probably anticipating big write-offs for fines and suits), and I think the big banks did too (or at least severely decreased payments) during the financial crisis. How can the PE clients' justify otherwise? Maybe there is some truth in the accusations that PE firms "loot" their clients?
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PE isn't consulting. They come up with financing (either raising it as equity or by issuing debt), and then use that money to take over a targeted public company - that can be hostile or not, but basically they buy enough shares on the open market, then negotiate with the board to sell the remaining shares to the PE firm, taking the public company private. At that point the target company doesn't have an independent board anymore - the PE firm owns the company outright. And since the PE firm owns all the shares, the dividend is just a cash transfer - the dividend goes to the owners of the shares, which is 100% the PE firm. There are laws about asset stripping, because it reduces the assets available to the creditors in bankruptcy - but these things are complicated, and there's enough wiggle room that if you've got smart folks you can find holes to get through.
That's not to say this is the only way PE firms make money. Often they do help firms become more agile and so on. But they can do both. Maybe the most cutting argument you can make against PE is to ask: Without the regulatory arbitrage, without the effective government subsidy, would PE be profitable on its own? Is PE just a form of government-subsidized welfare for the rich? Is Mitt Romney just a welfare queen riding around in a G5? ;)
I'm not sure if you've seen Dean Baker's book "The End of Loser Liberalism" (http://www.cepr.net/index.
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Thx, J. Yeah my bad on the naivete - as you said PE firms engage in leveraged buyouts and hostile takeovers. They're not angels of mercy that poor souls call on.
Thanks for the book rec too, you are da man. The free market ruse by wealthy conservatives is like public enemy #1 to me, and I'm glad at least a few people are analyzing and writing about it. Not only do the rich strike down most efforts to redistribute for the less fortunate, but they pervert the markets and laws to actually funnel money upwards. Unfortunately, their propaganda is generally persuasive due to civilization's bad track record with tyrannical gov't and taxation (and America's narrative of rebellion against those things). Add to that The American Dream of rags to riches, and the horrible history of central planning/communist governments in the 20th Century, and you have all the public bias/support you need to maintain the status quo and resist efforts for economic reforms. Only temporary outliers like the financial crisis and Occupy Wall Street bring these issues to the forefront (but remember how little press and political endorsement OWS was getting at first?). So fairer taxation and more regulation are tough sells, especially in a down economy with the conservatives reciting the usual lines about killing jobs, socialism, lazy black people, etc.
Though gradually more people are seeing through the BS and realizing that they'll never reach the top 1% with the way things are going. If you can't join 'em, beat 'em? And I mean physically beat them, with medieval weapons. :)
What would a truly free American market look like though? Probably more oligopolies and monopolies in some industries?
Thanks for the book rec too, you are da man. The free market ruse by wealthy conservatives is like public enemy #1 to me, and I'm glad at least a few people are analyzing and writing about it. Not only do the rich strike down most efforts to redistribute for the less fortunate, but they pervert the markets and laws to actually funnel money upwards. Unfortunately, their propaganda is generally persuasive due to civilization's bad track record with tyrannical gov't and taxation (and America's narrative of rebellion against those things). Add to that The American Dream of rags to riches, and the horrible history of central planning/communist governments in the 20th Century, and you have all the public bias/support you need to maintain the status quo and resist efforts for economic reforms. Only temporary outliers like the financial crisis and Occupy Wall Street bring these issues to the forefront (but remember how little press and political endorsement OWS was getting at first?). So fairer taxation and more regulation are tough sells, especially in a down economy with the conservatives reciting the usual lines about killing jobs, socialism, lazy black people, etc.
Though gradually more people are seeing through the BS and realizing that they'll never reach the top 1% with the way things are going. If you can't join 'em, beat 'em? And I mean physically beat them, with medieval weapons. :)
What would a truly free American market look like though? Probably more oligopolies and monopolies in some industries?
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