If I’ve done this right, this article is free and available for everyone to read. It’s a review of two books, both dealing with private equity and how that business model sucks. The lifeblood out of companies and crushes them and puts millions of people out of work.
I guess there shouldn’t have been a period after “sucks”. Ah well.
Sounds like criminal fraud. Purposely leaving the lenders high and dry is stealing.
Nobody can despise private equity and the damage they do more that I…but what they do is, unfortunately, legal.
Wendy
Yep That is what Bain Capital is well known for.
Andy
Whenever I’m presented with a question on the morality of a tax issue, I ask myself, “What would the Junior Senator from Utah do?”
If you can spend a 20 year career as a corporate asset stripper and collect tens of millions of dollars in tax benefits while screwing middle-class people out of their jobs, pensions and health insurance, and yet be regarded as one of the most moral and patriotic men in America, a middle-class taxpayer getting a $10,000 Obamacare tax credit or an $8,000 refund on a heat pump can feel equally patriotic. Fair is fair.
They made a movie about it.
King of Bain
intercst
And to think, he was the richest person ever to become nominated for president by one of the two major parties.
Not that I like it but it is part of Darwinian evolution. The weak are eaten and die. Would the world be better if weak companies survived?
The Captain
This is what Adam Smith called “rent seeking.” The “Job Creators” aren’t actually creating jobs, or any value from their activities, they are just extracting value from an existing enterprise, without providing any return.
“As soon as the land of any country has all become private property, the landlords reap where they never sowed, and demand a rent."
–Adam Smith
The modern definition of ‘rent seeking’ from Investopedia
The concept of rent seeking was established in 1967 by Gordon Tullock and popularized by Anne Krueger in 1974. It evolved from the studies of Adam Smith, who is often regarded as the father of economics. The concept is based on an economic definition of “rent,” defined as economic wealth obtained through shrewd or potentially manipulative use of resources.
What Is Rent Seeking in Economics, and What Are Some Examples?.
The Captain
Or more importantly unchallenged. The AG in NYC is getting more creative in how he pieces together charges. The bankers would be wiser going after what is obviously criminal intent.
The English like to pretend Smith was the father of econ. Locke was there well before…
He believed the demand for money was constant and that its value was directly related to how much of it was available . Locke also believed that as money came to dominate economic systems, more inequality would result.
So what would you make illegal? Purchasing a company? Selling a corporation you bought? Holding a purchased company for less than five years?
DB2
For starters I would make a “clawback” for any investors who reap large dividends or bonuses in a short time after saddling a company with debt. I’d make it a “5 year rule” or something like that. I don’t havej specific language, but the symptom is obvious to anyone who looks.
Buying a “troubled company” is OK with me, and even if it doesn’t work out, well, that’s life. But buying a troubled company, loading it up with debt, paying out huge management fees, dividends to selected owners, and bonuses - and then cratering the whole thing is a pernicious practice. There must be a way to stop it, or at the very least make it unattractive enough to slow it down. I might have trouble articulating specific parameters, but as the famous saying goes “I know it when I see it.”
How does a company pay dividends to selected owners? If there are 1000 shares, can they pay dividends on only 500 of those shares owned by selected people? This is something that is probably already outlawed. As far as I am aware, all shares are to be considered equal. Oh, and that multiple share class nonsense, I would also outlaw that practice. It is not reasonable that two guys who founded Google can hold under 20% of the company yet exert control as if they still owned >50% of it.
This is perhaps the biggest problem of all. It’s like pornography, you know it when you see it, but you can’t clearly define it in written law. I suspect that any law written would have three major problems, one, it would cover scenarios that it wasn’t meant to cover, two, it would not cover scenarios that it did mean to cover, and three, it would have to be written so vaguely (due to the definitional problem) that all cases would end up in court for protracted lengths of time, and, as almost all business related cases, end up in some sort of compromise after the lawyers have run out of ways to collect more fees.
There is probably something in the current fraud or racketeering statues that could be used for the systematic, with intent, stripping of a company, to the detriment of the other stakeholders.
But “JCs” are no longer prosecuted for concentrating wealth in their own pockets, at the expense of everyone else.
To put what PE does in the context of a submersible: the “JC” pilot would kill the other occupants, so there would be more air for him.
Steve
The best solution is to require the banks that originate the loans to hold the paper. They would become more cautious or go broke.
Jk
I can help with that. I’d make it all part of bankruptcy law.
Any compensation or dividends paid to insiders, or companies controlled by insiders, that is in excess of some threshold per year can get clawed back in bankruptcy and be used to pay creditors.
As to that specific threshold - let’s start $1 million for each insider and I’ll negotiate up from there.
–Peter
By creating “preferred shares” and “common shares”. I don’t know all the intricacies but it can be done.
Not funny story: Grandpa was wealthy for his time. Owned a factory in Michigan that did subcontracting to the Big 3 automakers. Wife (my mother’s mother) died, new wife, then grandpa died. Now the step-mother reorganizes the company, while still allowing my mother’s “shares” to exist, somehow creates different levels of shareholders, reducing my mother’s dividends to zero while hers increased proportionally. Mom still owns part of the enterprise, but it’s essentially meaningless.
Final coda: step-mother remarries, then dies. Her husband, unknown to any of us, walks off with the entire enterprise, none of Grandpa’s heirs see a dime, and the guy bankrupts the company within 3 years. True story.
You mean different classes of shares, some of which may not have voting rights or a different dividend. Preferred shares are another beast, sort of like a bond/stock hybrid.
DB2
That is up there with my mom’s often told story when we were younger. Older couple my parents knew she died. He a few years later remarried. On the honeymoon he died. She got back to the mansion rolled up two Persian rugs one for each of his children. Then she disowned them. She took the entire fortune without a fight.