Good point

[Yuri Zhivago]

Summers and Andrei Shleifer wrote an essay on the economics of leveraged buyouts (pdf) that is very worth reading now that Mitt Romney is running on the theme that his Bain experience means that he knows how to create jobs.

Summers and Shleifer argued back in 1988 that buyouts are often aimed at “value redistribution” rather than “value creation”; specifically, a lot of the gains to the buyout specialists come from breaking implicit contracts with “workers, suppliers, and other corporate stakeholders.”

They make one especially keen point: if it were really about adding efficiency, why do the same people lead takeovers in many industries, instead of people with specific expertise in each industry doing the job? Their answer is that these specialists are specialists in deal-breaking, not value creation.

Jim Surowiecki has more about how that game is played nowadays, with an especially fruitful discussion of the Harry and David’s case. (Sorry, couldn’t help myself). He also notes that often the result of these manipulations is to put taxpayers on the hook.

Lying Swine Romney, please run on your job creation credentials, please....
http://krugman.blogs.nytimes.com/2012/01/23/breach-of-trust/

 

[GordonGecko]

We owe a big thanks to Newt and Perry for opening up this Pandora's box for Mitt....going to be hard to call it "partisan" and "class warfare" if HIS side started it, isn't it?


Not that they won't try.

 

[Yuri Zhivago]

We owe a big thanks to Newt and Perry for opening up this Pandora's box for Mitt....going to be hard to call it "partisan" and "class warfare" if HIS side started it, isn't it?


Not that they won't try.

Check it out, GG



The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets, deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits. Financial engineering has always been central to leveraged buyouts. In a typical deal, a private-equity firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it or taking it public. The key to this strategy is debt: the model encourages firms to borrow as much as possible, since, just as with a mortgage, the less money you put down, the bigger your potential return on investment. The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust.

Read more http://www.newyorker.com/talk/financial/2012/01/30/120130ta_talk_surowiecki#ixzz1kIHWDlLI

As a result, private-equity firms are increasingly able to profit even if the companies they run go under—an outcome made much likelier by all the extra borrowing—and many companies have been getting picked clean. In 2004, for instance, Wasserstein & Company bought the thriving mail-order fruit retailer Harry and David. The following year, Wasserstein and other investors took out more than a hundred million in dividends, paid for with borrowed money—covering their original investment plus a twenty-three per cent profit—and charged Harry and David millions in “management fees.” Last year, Harry and David defaulted on its debt and dumped its pension obligations. In other words, Wasserstein failed to improve the company’s performance, failed to meet its obligations to creditors, screwed its workers, and still made a profit. That’s not exactly how capitalism is supposed to work.

Read more http://www.newyorker.com/talk/financial/2012/01/30/120130ta_talk_surowiecki#ixzz1kIHv6hXi

As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab; and the money that the dealmakers earn is taxed at a much lower rate than normal income would be, thanks to the so-called “carried interest” loophole. The money that Mitt Romney made when he was at Bain Capital was compensation for his (apparently excellent) work, but, instead of being taxed as income, it was taxed as a capital gain. It’s a very cozy arrangement.

If private-equity firms are as good at remaking companies as they claim, they don’t need tax loopholes to make money. If we capped the deductibility of corporate debt, and closed the carried-interest loophole, it would not prevent private-equity firms from buying companies or improving corporate performance. But it would reduce the incentives for financial gimmickry and save taxpayers billions every year. Private-equity firms are excellent at gaming the rules. Time to change them.

Read more http://www.newyorker.com/talk/financial/2012/01/30/120130ta_talk_surowiecki#ixzz1kII96EDr

 

[GordonGecko]

Ahhh, but as Mitt will tell you...."Greed, for lack of a better word...is good! Greed works!"

 

[OldGaffer]

Ahhh, but as Mitt will tell you...."Greed, for lack of a better word...is good! Greed works!"

Sad when Greed is considered a virtue, and the greatest of virtues at that.