Private Equity, And Other Euphemisms

They call themselves Private Equity guys now.  Back in the 80’s, we called them Corporate Raiders.  For a while, it sounded cool and rebel-like.  They made making lots of money look really sexy, and thousands of college grads were drawn to this new and exciting field of finance.

They created absolutely nothing of course, save profits for themselves and havoc for nearly everyone else, but the “greed is good” crowd was the “in” crowd.  Mergers and acquisitions were all the rage, and the leveraged buyout was the silver bullet.

The schemes were relatively simple.  The first rule of corporate raiding is: you put in as absolutely little of your own money in as possible.  Borrow a ton of money from banks or investors, and then use that money to buyout the owners of a target company, public or private, at a price that cannot be refused.

Of course, you will need really clever and greedy investment bankers and lawyers to put all of this together.  And the key to this all working is to ensure that everybody involved, from the bankers and lawyers to the union heads and other minority interests, make a tremendous windfall on the deal.

If you throw enough money at everybody involved, no one will stop it happening.  And why would anybody want to stop it happening?  Because the dirty little ingredient in this plan was that the company itself would owe all of this borrowed money, not, I repeat, not the people buying the company.

The company basically took out massive loans, not for a new product line or a new factory, or research and development or to open new markets, but to pay for the new names to be engraved on the owners’ office door.  Ownership change, that’s it.

The raiders got paid huge fees for the deal, and exacted huge salaries for their time.  And their time was spent exclusively on figuring out how to cut all of the costs out of the business, from eliminating any employee benefits to outright layoffs, to closing factories, renegotiating labor contracts and trimming inventory–cutting everywhere they could so as to quickly increase the bottom line.

Then, Phase 2…

Quickly resell the company at a profit reflecting this newly increased bottom line.  The problem was that since these raiders were not in any way financially or emotionally invested in the company, they were not invested to the overall success of the company.  And, the company, now having to service this massive new debt, had little to no maneuvering room or available credit when facing new difficulties and challenges that might arise from regular business cycles, economic hard times or more agile competitors.  For a corporate raider, it was much easier to force non-performing companies into bankruptcy when things went south (as these schemes are generally prone to do).  On to the next deal!

The raiders and bankers got rich, that was the point, and everyone else got forgotten.

It was the 80’s.  There was an actor in the White House.  And his most famous campaign line was “government is the problem.”

Well, America was stupid enough to elect him to the highest government office, and that actor spent the next eight years making that statement a fact.

When his wealthy donors complained that regulations were slowing them down, the actor was given his lines and his donors yelled “Action.”  The actor and his friends deregulated as much as they could get away with.   Wall Street ran wild–until a few of their brightest stars got busted for insider trading and double-dealing, and gave the whole lot a bad rap.

The actor’s deregulation schemes brought us many debacles.  While the Wall Street bankers were raiding and running companies into bankruptcy, and getting all the headlines, the Savings and Loan crisis was brewing.  The S&L crisis was spawned directly from the deregulation of deposit institutions.  Yes, you read that right–deregulation brought us to the brink.

When huge numbers of Savings & Loans started hemorrhaging as a result of making casino-type bets (loans), that they were not qualified to assess or make, the FDIC was so busy paying out depositor claims that it nearly went broke.  Guess what happened next?

The bankers went begging the government for a bailout.  And they got it.  It seems to me that the only thing we can learn from history, is that we don’t learn from history.

Here are the Cliffs Notes…

Regulations are demonized by the banking class, which leads to deregulation by their political servants, which leads to massive abuses of the system, which leads to unmanageable excesses, which leads to crisis, which leads to begging the government for help, which leads to the political servants agreeing to help, which leads to the taxpayer paying for it all.  Rinse, repeat.

To quote Mugatu in the film Zoolander: “Doesn’t anybody notice this?  I feel like I’m taking crazy pills!”

After these notorious chapters in recent history, the Raiders needed a PR makeover.  Some years down the road, they adopted Private Equity as a new name.  A nice, innocuous sounding name–but make no mistake, it’s the same game: attach themselves symbiotically to healthy organisms, derive all of the benefits (insert: profits) without taking any of the risk.  This “You win, I win…You lose, I still win” mantra was the preferred business model of one of our current presidential candidates.

He never started a company in the garage; he never tinkered with a better mousetrap; he never beat the pavement hawking his new product (with the prominent exception of his “Mormon mission” years, when he was hawking the Church’s “Jesus is from another planet” beliefs–to very little success).  And most importantly, he never started a company from scratch and nurtured it along with his own money, and credit cards, and financial future on the line.

He co-founded Bain Capital as an offshoot of Bain & Co. (where he worked) with ample funding and a client list ready-made for success.  His “co-founding” was more like heading up a new division (with prepackaged and prequalified rich clients as investors).  Not exactly Henry Ford, Bill Gates or Steve Jobs.

With all the bad press our current financial crisis is getting these days, and the recent unpleasant commercials showing the folks kicked to the curb in Bain & Capital’s march toward profits, it should come as no surprise that a little re-branding is again being cooked up, and the Private Equity guys are now kicking around ideas to re-name their industry.

One that seems to be making the rounds is “Growth Capital.” Can anybody say–lipstick on a pig?

All of the above matters why?  Well, here’s why: What can a guy who makes his profits by sucking the life from upstanding American companies, and then takes those very same profits and puts them in a bank in Switzerland–what can that guy teach my son?

If he simply reinvested those profits in America, it would have some redeeming value.  But no, his profits are safely tucked away in fortress Switzerland, far away from being at risk in this great country of ours.  Every dollar deposited in Switzerland, is a dollar not being used to “create jobs” for people here at home.  And that is the problem with Mitt and the 1%; they hoard the great majority of their wealth.

Since they can only buy so many houses and cars and boats and planes, and they can only eat so much food or buy so many clothes, at some point, they start hoarding.  And then they compete with the rest of the 1% to see who can hoard the most!  This is shameful when juxtaposed against the new, young breed of American entrepreneurs.  Those Silicon Valley guys who take their gains and go right back to the drawing board, reinvesting in new ideas, taking a chance on their colleagues’ startups, building the technologies of the future with their own, hard-earned profits.

Take Elon Musk, the guy who started PayPal and sold it to eBay for a ton of money.  He turned around and put his gains on the line with Tesla Motors, an innovative electric car company.  His new company, which incidentally employs hundreds of people, has had ups and downs, and has walked the financial ledge for most of the time its been in business.  But every time his company neared the edge, he reached again into his own pocket, even drawing on his last million, just to keep the dream alive.

Today, his Tesla Sedan is ready to launch.  It is a beautiful machine, but its success is by no means guaranteed.  I know that guy could teach my son a lot. Incidentally, the rest of his fortune, he invested into his other dream project.  Another company that has also been on the brink over the last several years, just one failed test flight away from bankruptcy and financial ruin.  You may have read about it recently in the papers, when it became the first private company to successfully launch a rocket to shuttle supplies for NASA up to the International Space Station.  That guy is a job creator, and a risk taker, and a visionary and a believer in America, and exactly the opposite of Mitt Romney.

Mitt couldn’t shine this guy’s shoes.

I hope the Private Equity guys, the Growth Capital guys, or whatever they decide to call themselves in the future, stay far away from him!

Obviously, I’m way off topic; I guess I would never have thought to write all of this if Mitt had just kept his damn profit here in the US, working and recycling it, and putting it at risk by taking a chance on the American worker or the American engineer or the American dreamer.  But that would require breaking Private Equity’s rule number one: “put as absolutely little of your own money at risk.”

And we’re all American dreamers if we think he’s going to break rule number one!

Be Sociable, Share!
This entry was posted in Hot Topics and tagged , , , , , , , , , , , . Bookmark the permalink.

18 Responses to Private Equity, And Other Euphemisms

  1. Johnny Gray says:

    For starters, let me just say, it’s refreshing to read a writer who allows himself to explore the complexity of the issue, instead of gunning for 200 words or less. I’m tired of pithy fucking bullshit being passed-off as a New York Times worthy op-ed.

    Currently, I’m reading The Big Short, by Michael Lewis, the guy who wrote Liars Poker and Moneyball. He does exactly what you do, Mister Ross: break down complex issues surrounding the financial markets so we can have a meaningful debate about what the hell happened in 2008.

    But it takes words, lots and lots of words, and patience, lots and lots of patience, to get to a place where there’s enough understanding of the context to realize there was a Coup d’État when they overturned The Glass-Steagall Act.

    Today’s crooks are more cunning. They don’t use guns and small pox on blankets. Instead, they use brief cases and the impossible dangle of being able to live “The American Dream.”

    Guess what? You can’t. You won’t. You’re not exceptional. And neither is America. The sooner you realize how lucky you are, not to be exceptional, the sooner we can get down to what life is really about: farting around and helping those who are coming up beneath us to hit their potential, again and again and again.

    There was a passage in The Big Short I read this afternoon, over lunch. Thought I’d share a section in the book about my hero, Eisman, in closing.

    “Danny would join Lippmann and the other bond people at the craps table, and Eisman would go to to bed. That craps was the game of choice of the bond trader was interesting, though. Craps offered the player the illusion of control – after all, he rolled the dice – and a surface that masked its deeper idiocy. For some reason, when these people are playing it they actually believe they have the power to make the dice work…”

  2. Todd says:

    First, dude, can you give me a cliff note version of that book you wrote.

    Second, Johnny Gray is obviously the long winded author patting himself on the back, in another long winded rant. If this is a joke on the reader, it is funny.

  3. Babs says:

    I voted for President Clinton-Twice. He did 2 things I will never understand. Glass-Steagall and Nafta. Mr. Ross, you make complex issues understandable, and I thank you. All our friends (?) on the other side who really vote against themselves should have to read this. Maybe then we could really have semi-intelligent discourse!

  4. ROY says:

    It’s hard to know what to feel about all of this. We do need “Job Creators.” Sometimes I feel like it’s easier to begrudge Governor Romney for his success, by focusing on the kinds of things most of us will never have, like an elevator for our cars. But he earned it, through hard work, creativity and discipline. Plenty of rich kids blow all their money, when they treat it like they won the lottery instead of respecting the opportunity afforded to them. Personally, I feel Governor Romney has proven himself to be worthy of inheriting the white house from the American People. In the end, no one “owns” the white house. It’s the people’s house. I am very interested to see how these two incredibly bright, interesting, thoughtful men handle the election of 2012.

  5. Gregor says:

    This has become Reality TV, “Tussle For The White House, 2012.” Unfortunately, we’re too easily distracted by God, sex, who was raised with too much money to know what it’s like for the rest of us and whose birth certificate is approved by Trump.

    As long as this blog was, and it was loooooooong, I think it underscores the need for a more complex debate in 2012. There are bankers who still haven’t gone to jail. There are AIG Executives who still haven’t answered for the bonuses they took after accepting bailouts. As a country, we still haven’t answered to the international community for our use of enhanced interrogation techniques (AKA Fucking Torture).

    These are complex issues, worthy of robust debate. Instead, it’s become a ratings war to see which good looking candidate is the most popular with women, instead of who’s the most qualified to level with The American People, end the wars, and take-on the gift of being asked to make the call on the most difficult decisions facing our nation in the next 4-years.

    Great writing, Mister Ross.

  6. Edith K. says:

    This is interesting. But I’d like to see you take the same argument and flip it, for the sake of taking a look at what Governor Romney accomplished, instead of taking the easy path by vilifying Private Equity Guys. President Clinton acknowledged Governor Romney’s professional career was “sterling.” Just saying it would be interesting to hear what you have to say from a positive perspective, seeing as everyone, these days, is in a rush to control the narrative.

  7. Vince says:

    In 08 Obama and his team surprised the right wing bro- con machine. He flanked them and caught them off guard with an amazing strategy. Instead of continue with that momentum and run them over and completely capture the golden flag, he stopped and went back to the old play book. They regrouped. They reorganized. He is way too vulnerable.

  8. Annie H. says:

    We weren’t caught off guard, Vince. We were swept-up, like the rest of the world. Even those of us who voted for Senator McCain couldn’t help but marvel at the campaign of then Senator Obama.

    I voted for Senator McCain because I’ve been around long enough to know the difference between campaigning and governing. I learned the hard way when I saw the difference between JFK and LBJ. One was eloquent, the other effective. One captured the imagination, the other captured equality by signing Civil Rights into law.

    I think Governor Romney will make a better president. That doesn’t mean President Obama won’t find his voice again, and prove to be a gifted campaigner. But he doesn’t know how to work the levers of power, like LBJ.

    I feel for The Left. You wanted to believe his audacity would “…run them over and completely capture the golden flag.” Here’s all I have to say about that: HaHaHaHaHaHaHa.

  9. Vince says:

    Annie, you are justified to laugh at the liberals. We believed in that “hopie change thing” and we got a right winged republican in office. Just shows you how the two party system is faux. Romney might have made a better president, back when he had some conviction. He’s over-sold out his soul to get the golden ticket. He’s gone crazy and will never be repairable; you know, like when you repair a broken robot.

    In summation, we are all screwed. Unless you are in the big leagues, accept it. Get drunk. Have a poor persons party. Eat at your local restaurant owned by a giant corporation and have some fun. What does all this really matter. It doesn’t anymore.

    The big players don’t really have a party, they have money and power. Both parties are in the bed trying to suck their cock, fighting for the cum shot. Middle America just keeps getting it in the ass.

  10. B Frank says:

    It’s nice to read a posting that deals with the past. I always try to do that in my blogs because, in my opinion, there is no better way to predict the future. In the past lies the facts and behavior that will dictate future behavior and results. All of the readers of this blog should read a very accurate analysis of a type of investment that is very, very investor friendly and not very company friendly. It is a job killer and is not the kind of credential we should look for in our presidential candidate.
    A good credential would be a candidate that spent 4 years learning how to govern a nation at the brink of depression loosing jobs and too far in debt to spend its way out.

  11. Andy says:

    Some venture capital companies are good. Sometimes a business is outdated and needs a prick to fire half the workers
    sell off some assets and retool and become a competitive enterprise. Romney was that prick. Sometimes you need a GIANT prick to step in and clean house. Anyone who’s ever lost a business think about this: What if Prick Romney would have come in fired half your employees completely changed the vision you had for your company hired new management BUT two years later you had a profitable business instead of bankruptcy? Would you be mad at Mitt or wanting to suck his prick? Sometimes the world needs pricks. Greg the United States answers to NO ONE about interrogation or anything else, EVER!

    • B Frank says:

      Rocket Science! What you described is the brutality of capitalism. When this great corporate leader turns a profit, and leaves half the work force behind, who picks-up the pieces for them and provides opportunity? That would be a democracy with a leader of the people, by the people, and for the prople. With a leader, not a corporate raider. Get the difference? The repubs believe “every man for himself.” That’s why our middle class is shrinking.

  12. Vince says:

    Andy, you’re an idiot. Don’t try and explain complex business practices. Stick to what you know. Nothing. You are good at that.

  13. Andy says:

    Vince you’re a phony out of touch with reality shithouse swindler. Stick to what your good at you worthless ambulance chaser.

  14. Vince says:

    Happy fathers’ day to all. We are all from fathers, are fathers, have many fathers and/or are fathers to many.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>