Speaking of “extractive elites,” don’t miss Pete Kotz’s cover story in the Village Voice, Mitt Romney, American Parasite. (I read it in their subsidiary Seattle Weekly.)
It details a whole string of Bain purchases under Romney — thriving companies that were saddled with debt so Romney could extract cash in the form of “profits,” leaving the companies to devolve into bankruptcy and dissolution.
Just one example:
“When Bain Capital took over, it seemed like everything was being neglected in our plant,” says Sanderson. “Nothing was being invested in our plant. We didn’t have the necessary time to maintain our equipment. They had people here that didn’t know what they were doing. It was like they were taking money from us and putting it somewhere else.”
History would prove him correct. While Georgetown was beginning its descent to bankruptcy, Romney was helping himself to the company’s treasury.
Be very clear on this: that is the business model of private equity:
Charlie Hallac, a top deputy to Larry Fink at BlackRock and head of the firm’s analytical arm, BlackRock Solutions, distilled it down with precision: “Of every twenty deals, the large aggressive PE firm expects seventeen of the companies to fail under the added debt. Two have to survive and one has to hit big for the firm to have a fairly strong return on its PE fund. So that’s three out of twenty.”
The whole purpose of the private equity industry is to destroy the kind of mittelstand, long-lived, profitable, specialized, often family-owned and -operated companies that The Economist, Business Week, et al keep touting as the backbone of Germany’s remarkable success and resilience — its very “model of success.” Private equity’s model is to extract the expected future value of those companies in cash, while simultaneously, in most cases, destroying that value.
Is that what they mean by “creative destruction”?
But here’s the question that keeps nagging at me: who lends them the money? Presumably savvy financial-system lenders know that a large percentage of these companies are going to go bankrupt and walk away from their creditors. Why do they lend the money? I’m thinking it must be a principal-agent problem, where the individuals approving the loans make out well, while the companies they work for (and their shareholders, and taxpayers) take the hit.
Cross-posted at Angry Bear.
Comments
7 responses to “Mitt Romney, American Parasite, Destroys America’s Mittelstand”
As to who’s funding this, taxpayers of course! When the US entered World War I, Congress introduced an excess profits tax (actually a very good idea since excess profits are strongly correlated with rent seeking). To minimize double taxation, the existing corporate income tax was given a full interest deduction. Gee, I wonder what happened next?
“When the excess profits tax was repealed in 1921, the full interest deduction was retained as part of the corporate income tax, without any explanation…”
http://www.jstor.org/stable/795548
In retrospect, as President Wilson urged, we should have junked the corporate income tax and kept the excess profits tax.
“The whole purpose of the private equity industry is to destroy the kind of mittelstand, long-lived, profitable, specialized, often family-owned and -operated companies that The Economist, Business Week, et al keep touting as the backbone of Germany’s remarkable success and resilience — its very “model of success.‒
Perhaps its uncharitable to note that Michael Hudson could criticize this piece by saying, “Some might find it significant that the word “banks†never appears in the article.” :o)
“German banks, by contrast, paid out dividends (and expected such dividends from their clients) at only half the rate of British banks, choosing to retain earnings as capital reserves and invest them largely in the stocks of their industrial clients. Viewing these companies as allies rather than merely as customers from whom to make as large a profit as quickly as possible, German bank officials sat on their boards, and helped expand their business…”
http://www.nakedcapitalism.com/2012/01/michael-hudson-banks-weren%E2%80%99t-meant-to-be-like-this.html
@beowulf
I’ve been *wondering* why business interest is deductible.
As you may remember, I’ve been on about eradicating all interest deductions for some time. Encourage equity! (Double entendre fully intentional.)
And why do we make businesses amortize capital and much r&d? It’s an expense! Deduct it from income! Seems like it would encourage real investment using retained earnings, a virtuous situation, and undistorted.
Yeah, that would make a lot of sense, and whatever retained earnings are left over as savings could be treated like REIT income– taxable at entity level unless at least 90% is kicked out as dividends.
That’s also the best way for Congress to repatriate overseas earnings. Pick your poison, pay dividends or pay taxes ( on the shareholder’s tax return, REIT dividends are taxed at ordinary income rate).
For private equity to be the scam that is being claimed, someone has to be failing in their duties as I don’t see anything wrong with the practice is principle. Not only are we talking about the most sophisticated lenders here, the people who buy these companies from the private equity companies are the most sophisticted investors, we are not talking about gullible old ladies being duped here.
To be convinced, I need to see evidence that the bankers and investors were duped, not merely arguments from people who were hurt when the compnay failed, especially if the long term viabilty of the company was already questionable (a steel mill making wire rods going bankrupt is sad, but not particularly surprising).
I would not want to see a situation arise where private equity investors who take risks on declining companies are seen as crooks just because a significant number of their investments will fail.
Pete Kotz, wonder whether he’s aware 🙂 :
http://dict.leo.org/ende?lp=ende&lang=en&searchLoc=0&searchLocRelinked=1&search=Kotze
@beo: “whatever retained earnings are left over as savings could be treated like REIT income– taxable at entity level unless at least 90% is kicked out as dividends”
Not bad, I like the incentive for repatriation. But my preferred for corp taxes is Milton Friedman’s: tax them all like S corps, with earnings taxed annually on shareholders’ returns, whether or not they are distributed. They’re “owners,” right?