One big question at the center of the private equity debate is whether firms like Bain Capital intentionally set out to burden the companies they take over with debt -- or whether things just sometimes go sour amid failed turnaround efforts.
Defenders of private equity say that piling up debt is nobody's idea of a good business model. People like David Brooks, who yesterday depicted private equity firms as heroic reformers of a bloated business sector, seem unable to imagine that "vampire capitalism" could yield much of a payday.
But, of course, if we have learned anything over the past few decades, it's exactly the opposite: predatory behavior with no productive purpose often does pay in an era of advanced financial engineering and perverse incentives. The leveraged buyout artists of the 1980s famously discovered this and made vast fortunes. Private equity firms, the rebranded heirs to the LBO movement, have found the same thing and one path to riches, it turns out, is by creating bad debt.
The financial reporter Josh Kosman has documented how this works in great detail in his book on private equity, The Buyout of America. Kosman covered the private equity world up close for years as a writer and editor for Buyouts Newsletter, The Deal, and Mergermarket.com. He had exceptional access to leaders in the private equity world and a ringside seat to numerous private equity deals.
A key point that Kosman makes in his book is that, in fact, it can be quite profitable for private equity firms to drive the companies they take over into debt, regardless of whether those companies then end up bankrupt. By taking over companies and having them borrow a lot of money, private equity firms create a pile of cash, some of which they can direct their own way in the form of management fees and dividends. And because interest on the debt is tax deductible, the consequences of reckless borrowing can be kicked down the line. This is exactly what happened with some of the companies that Bain Capital took over. Bain managed to make a huge return on its investments even in cases where companies failed. Creation of new debt made those profits possible.
David Brooks scoffs that "banks would not be lending money to private equity-owned companies, decade after decade, if those companies weren't generally prosperous and creditworthy." But, again, if we have learned anything in recent decades it is that financial institutions are happy to hand out easy money when well-connected insiders who stand to profit are pushing hard for that cash and somebody else can be left holding the bag. We learned that from the S&L scandal, when banks made billions in bad loans so insiders could profit and taxpayers paid the tab; we learned that from the Long-Term Capital Management meltdown when a bunch of "genuises" lost a fortune in borrowed money and almost wrecked the financial system; we learned it from the Internet bubble, when venture capitalists invested in anything with a .com suffix, cashed out after IPOs, and clueless investors took the hit; and we learned this hard lesson yet again from the real estate bubble.
Borrowing lots of money and incurring bad debts is not how real businesses make money in a normal world. But we don't live in such innocent times. Modern American capitalism is rife with sophisticated financial intermediaries who exploit flaws and complexity in the system, as well as insider connections, to make profits off of predatory behavior -- which brings us back to why the attacks on Bain Capital are both accurate and fair.
When Bain took over GS Technologies, the Kansas City steel firm, it put up $8 million of its own money, according to PolitiFact. The rest was put up by partners. Once it controlled the company, Bain had GS Technologies borrow $125 million by issuing corporate bonds. Bain then had the company pay out $65 million to shareholders -- including a $36 million dividend to Bain. GS Technologies then borrowed another $125 million, much of which was spent on modernizing its operations. Bain also reinvested nearly half of its earlier dividends.
The story gets more complex from there, according to PolitiFact, but the bottom line is this: When GS Technologies finally went bankrupt in 2001 it had $554 million in debt. Bain ultimately invested $24 million and ended up with a $50 million return, according to the Los Angeles Times.
PolitiFact's verdict: The Obama campaign's claim that Bain loaded GS Technologies with debt and hurt the company is "mostly true."
Something similar happened with Ampad, another company Bain took over and another focus of Obama attack ads. As Politico has noted, "The company went into bankruptcy in 2000, holding a debt load of more than $400 million. Bain's return on its $5 million investment was $100 million."
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Robert Reich: The Big-Lie Coup d'Etat
Robert Scheer: Do the Bain Hustle
Robert Reich: Romney's Regressivism
Bill Schneider: Who's the Boss?
If venture capitalists are such robbers, thieves and crooks, how can they stay in business?
Regardless who happens to be running for political office, wouldn't it be the right thing for those with clean hands get rid of the ones bringing such bad PR to the Venture Capital business?
I will VENTURE a GUESS. I suppose that when the election is over, whoever trashed Venture Capitalist, will stop identifying so many bad apples in the trade IF their party WINS.
Is being a CROOK, a THIEF or a SCAM ARTIST wrong ONLY when the opposition is doing it?
The hard(non-Koch) right and left(worker/poor) MUST align to throw off this lecherous drag on our nation and economy.
So who actually get stuck with paying those Debts when a Bain controlled Company goes into Bankruptcy ?
WE THE PEOPLE ?
Well Mitty we are glad to see your rich and we all know in some way every day of our lives we are paying for all those Debts you left in your wake.
While both unions and private equity can serve a useful purpose, neither is a model or answer for healthy capitalism. Given that the current balance is clearly in favor of the owners (the 1% are rapidly increasing the size of their piece of the pie) – the last thing we would need is someone who thinks that private equity’s predatory practices are the model for our future. We need to restore the balance, without going too far.
Money; equity is like energy. When deregulation and tax code extracts it into remotely positioned clouds of untaxed inflation driving, AWAY from commerce and industry, which circulates incomes and generates revenues, DEBT is the ONLY product. Outsourcing IS DANGEROUS INSURANCE fueling the pirating debt machine.
You are the REAL independent.
Restore Glass-Steagall and together we can SHUT DOWN the free markets of FRAUD!
Then goes bankrupt and pays off the bank that loaned Bain money but not the Banks that loaned the Company Money.
That is 3 card montie right ?
Is the money under this nutshell or this one or this one. round and round we go.
Romney is an awesome businessman
He took investors $$$ and made them more $$$
worked hard and did it the honest way - no government handouts/bailouts
The USA would be all the better if Romney took over
plus Romney does not support radical islam like obama does
What he did for thousands of dollars, Bain did for millions...repetitively. This isn't genius and it isn't new. It's simply what can be done in the absence of oversight or morality.
The trick was to keep one or two cards you never used and had about $3,500 limit on then after the Bankruptzy you were good to go with creidt again.
In 6 month the Bankruptxy was over and it showed someone was allowing you credit again so everyone would throw you a card again.
But for 3 years they had to be careful and not get behind on my payments.
Hey if you were not smart enough, they said, to buy everything you needed with the First $100,000 bankruptcy then your were stupid. Now this was Republicans telling me this like it was an insiders joke on the Credit Industry back in the 80's.
Spewing opinions on a subject you know so little about is striking. You obviously have an agenda and do no seek to understand how private equity functions. Instead you promote a personal agenda. Having spent the last 25+ years building companies, I have become intimately familiar with private equity. I will never be in politics because of the vile behavior of people who have agendas. I have started no less than a dozen companies have invested in over 70 companies. Have all been a success, no. Have the companies created tens of thousands of jobs, yes. The Oliver Stone version of private equity is no different that casting every politician as a crook. It happens but the use of outliers to mislead people is the currency of the political class.
Answer: State intervention.
Solution: More state intervention?
No. The state protects corporate management and shareholders from lawsuits through limited liability. The state bails out the "too big to fail" in various ways, sometimes directly, sometimes indirectly (such as by hiking tariffs, such as they recently did to protect the solar industry, or previously did with sugar to make HFCS more common).
The financial sector of the economy is screwed up precisely because it's the sector with the most state intervention. It starts from the Fed, continues with the FDIC and then there is the ratings cartel created by the SEC through it's NRSRO designation and the regulations based upon that.
There is a pyramid of bad law adding up to create these perverse incentives that people wisened to the system can follow and those who aren't can't.
Before the Fed there was a banking cartel that it was formed to support, and the state has had favoritism towards banks for a long time by suspending payments in cash whenever there were panics. Big banks have always been shielded by the state. The banks help out the government in return by buying it's junk bonds that are paid for by taxation (if they have the will) or more debt (if they don't). Everyone not "in on it" is impoverished by this cycle as those who follow the money and know when to get out or are big enough to get a bailout get rich.
You know what I like best about this scenario? The one in which I double my wealth? I like best the fact that you asked me to do it...
I oppose initiating force against another party whether it's done by a state or an individual. But only the state claims the right to do it. Everyone recognizes the individual has no such right. The "ridiculous" nature of the example you gave is exactly my point. No one would respect you doing what you just said. Neither should they accept it when the state does anything like it.
Misdirected anger is the footsoldier of despots. They are conned to destroy their own protections, and attack fellow citizens. They attack what they tout as the true way to freedom.
The government is designed to be OUR government. Not an independent entity operating in interests of non-citizens. The blather "about the state" is contrived and set out by the very remotely positioned interest that want to exploit and pirate further, NOT the citizens, or even Ameriacan business nterests.
Do you not want your government to regulate? YOUR Fed would NOT be an intl banker front.
Do you believe that investment banking institution should be able to plunder, deregulated because surely people will figure it our someday and steer away? Independents lost my allegiance when they signed themselves over to UNTAXED intl banker, racketeers weilding tens and tens of trillions in untaxed equity to create an Fed and outsource/inflation DEBT MACHINE.
Independents=faithfully subjugated
Lets look at any of the despots in recent history. Not a one of them in any capacity followed a free market program or was particularly fond of classical liberals. There is and was not one despot you can name that praises people like Ludwig von Mises, Murray Rothbard, Albert Jay Nock, Lysander Spooner, or that has in any way employed their advice at all. You would have to be completely ignorant to come up with such a ridiculous statement.
On the other hand, when such despots have come into power they have done so by appealing to all kinds of the same BS that Keynesians and Democratic or Republican politicians follow. Look at Venezuela which is now a wreck thanks to price controls and all kinds of nonsense implemented in the name of helping the people and harming the corrupt business. This isn't to say business can't be corrupt, far from it, but that you can't make them less corrupt by looking for more state control. If that worked, the Soviet state would have had no corruption whatsoever.
The state is far too inept to regulate anything without the input of the businesses it's regulating. Maybe someday you'll learn about regulatory capture, but that would require you to think outside the box that your 3rd grade teacher informed you was the proper way to think of the role of government.
The facts are that whenever private equity shows up on your company's doorstep there will be jobs lost, benefits lost, debts increased for workers and money made for investors. Investors always win because workers never become owners. If workers were owners of capital & their own production (labor) the whole system would work better for all. But no one wants to talk about that because when workers own the business they call it socialism even though, as a group, the workers are all capitalists. Go figure.
The Solyndra loan guarantee was a multi-year process that the Bush Administration launched in 2007.
The Bush team tried to conditionally approve the Solyndra loan just before President Obama took office.
The loan comprises just 1.3% of DOE’s overall loan portfolio. To date, Solyndra is the only loan that’s known to be troubled.
But the headline makes it seem like the White House had decided to give $535 million to a company after an auditor had said it was financially troubled.
ooops...
The funding was approved because so much money had been spent on it .
Guess they could have gotten a Telephone Service Center that Republicans like to Fund with Public Money all over the USA.
He cut retirees pay by $400 a month. then dumped the whole plan on the Federal Government .
Remember Bush signed in to law that Company in 2004 only had to fund retirement funds at 15% level Republicans lowered the required funding of retorement plans twice from 45% to 25% then to 15 % -- that is the same as destorying all retirement funds across the USA.