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.”
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!