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JHB's Journal
JHB's Journal
January 10, 2012

I'd like to thank Mitt Romney for providing focus...

...or rather, being a focus, on revisiting exactly what "go go economics" meant for millions of ordinary people trying to make a decent living.

A focus for highlighting the bait-and-switch rationalizations for giving financial wheeler-dealers an ever-freer hand, and how all the glorious benefits never really pan out for people just trying to get ahead.

A focus for underscoring just how long this happy-face predation has been going on. Just take a look:

LA Times, Tuesday 1/3/2011:

Leveraged buyouts allow investors to purchase businesses with the acquisition funded sometimes by significant amounts of debt. To critics, these leveraged deals can make acquired companies more vulnerable to economic downturns, leading to a greater likelihood of bankruptcy and job cuts. At the same time, the deals sometimes introduce discipline to firms and even whole industries that need it.

Either way, Bain investors typically profited.

That was true in the case of GS Industries, the 10th-biggest Bain investment in the Romney years. Bain formed GSI in the early 1990s by spending $24 million to acquire and merge steel companies with plants in Missouri, South Carolina and other states. Company managers cut jobs and benefits almost immediately. Meanwhile, Bain and other investors received management fees from GSI and a $65-million dividend in the first years after the acquisition, according to interviews with company employees.

In 1999, as economic challenges mounted, GSI sought a federal loan guarantee intended to help steel companies compete internationally. The loan deal was approved, but in 2001, before it could be used, the company went bankrupt, two years after Romney left Bain. More than 700 workers were fired, losing not only their jobs but health insurance, severance and a chunk of their pension benefits. GSI retirees also lost their health insurance and other benefits. Bain partners received about $50 million on their initial investment, a 100% gain.

From the 1992 book America: What Went Wrong by journalists Donald Barlett and James Steele:
In the summer of 1988, a pair of corporate raiders out of Washington, D.C., brothers Steven M. and Mitchell P. Rales, targeted Interco for takeover, offering to buy the company for $64 a share, or $2.4 billion. To fend off the Raleses, Interco's management turned to Wasserstein Perella, which came up with a plan valued at $76 a share. Interco obviously did not have that kind of cash lying around. So the plan called for the company to borrow $2.9 billion. The financial plan was the sort that Wall Street embraced with great enthusiasm. Supporters of corporate restructurings insisted that debt was a positive force, imposing discipline on corporate managers and forcing them to keep a tight rein on costs. Said Michael C. Jensen, a professor at the Harvard Business School, who was one of the academic community's most vocal supporters of corporate restructurings, "The benefits of debt in motivating managers and their organizations to be efficient have largely been ignored."

As it turned out, Interco failed to be a textbook model for the wonders of corporate debt. Instead of encouraging efficiency, it compelled management to make short-term decisions that harmed the long-run interests of the corporation and its employees. Within two weeks of taking on the debt, Interco closed two Florsheim shoe plants-and sold the real estate. Interco announced that the shutdowns would save more than $2 million. That was just enough to pay the interest on the company's new mountain of debt for five days.
It was a model of stability for the town and one of the manufacturing jewels of the International Shoe Company, later Interco, its owner. Because of the factory's efficient work force, whenever Florsheim wanted to experiment with new technology or develop a new shoe, it did so at Hermann. The plant had a long history of good labor relations. And it operated at a profit. So why, then, did Interco choose to close the factory? Listen to Perry D. Lovett, who was city administrator of Hermann when the plant shut down and who discussed the closing with Interco officials: "We talked to the senior vice president who was selling the property and he told me this was a profitable plant and they were pleased with it. The only thing was, this plant and the one in Kentucky they actually owned. The other plants they had, they had leased. The only place they could generate cash was from the plant in Hermann and the one in Kentucky.

"He said it was just a matter that this was one piece of property in which they could generate revenue to pay off the debt. And that was it. That brought it down." In short, a profitable and efficient plant was closed because Interco actually owned-rather than leased-the building and real estate. And the company needed the cash from the sale of the property to help pay down the debt incurred in the restructuring that was supposed to make the company more efficient.

Remember, that book is from before Clinton, and the pattern was already underway. Excerpts from the book can be read at:

Authors' site at:

And more fun facts from the past:
You gotta love prospectuses. In a bullshit-saturated media culture, they’re full of harsh truths. Truths that few take seriously, though: when you’re buying securities, you just want to believe. In that spirit, let’s dig into the prospectus for the Blackstone IPO. [Note: this article was based on a preliminary version of the prospectus; the link is to the final version, in which the blanks were filled in.] On the bright side, we learn that it’s been a rather successful enterprise. It comprises several lines of business, among them a private equity arm, a hedge fund that invests in other hedge funds, a real estate collection, a couple of mutual funds, and a fund that invests in “distressed securities” (stocks and bonds of troubled companies), which sum to $88 billion under management. The private equity fund, a $33 billion hoard established in 1987, has returned an average of 31% a year—23% after the partners took their cut, or nearly a third of the profits. (Several of the other funds have much less impressive returns, in the 8–12% range. But oh! the management fees!!)

While 23% is still a little over twice what the stock market returned over the period, Blackstone used a lot of borrowed money. If you’d borrowed half the money you had invested in the stock market, a legal and reasonably prudent thing to do, then your returns would be close to what Blackstone’s outside investors got. The real juice in this game is for the partners. Oh, and they’re going to take almost $4 billion of the IPO’s proceeds for themselves. They’ll also hold considerable blocks of the new Blackstone stock, but considering all they’ve taken out of the firm already, they’ll be sitting a lot prettier than the new public shareholders.

After going public, Blackstone will keep some cut of the profits—a presumably large cut, but there’s no number in the prospectus. Stockholders “will have only limited voting rights and will have no right to elect our general partner or its directors, which will be elected by our founders.”

Blackstone confesses to a long and scary set of risks: the financial markets could turn ugly; going public could drive away the talent responsible for all those years of splendid returns; lifting the veil of secrecy that comes with going public could ruin the magic; Congress or the regulators could come crashing down (e.g., they pay taxes on fee income at the favorable capital gains rate, which makes little sense to anyone not earning the fees); outside investors could demand their money back, which could leave Blackstone high and dry; losses could wipe the firm out completely and then some; shareholders have no recourse if the management team screws up; the inner circle has interests different from the shareholders, and reserves the right to think only of itself; an unspecified share of the proceeds of the stock offering will go into the pockets of the founders, and won’t be available for the business; shareholders could have to pay taxes on Blackstone’s income even though it didn’t distribute any of it as cash to shareholders.

Doug Henwood, Left Business Observer #115, May 2007

and from today:
What a Wall Street company like Bain Capital does is buy companies and then move very quickly to turn a short-term profit on them. This occasionally means changing the executive team or adding real value to their operations so that they start to grow and make more money that way, which is fine. But because they are looking for a short-term profit, and because what they know how to do is manipulate the finances of companies to maximize that short-term profit, what most often happens is that they sell off pieces of the company to the highest bidder, or they merge the company with other businesses, or they do mass outsourcing and layoffs to slash labor costs, or they manipulate the debt and utilize tax loopholes to maximize their short-term profit and then dump the company, or maybe they do some combination of all these options. The problem is that not only do none of these things actually create jobs, but they definitively, actively do destroy jobs. Giving tax breaks for this kind of financial manipulation and speculation that destroys jobs is terrible public policy. And giving the Presidency to someone who made hundreds of millions of dollars doing it, someone who clearly and openly enjoyed it, would be a disaster.


In story after story, the same formula is repeated over and over again: after wondrous boasts of forthcoming prosperity, the wheeler-dealers at the top make out royally, investors do well (when they're not left holding the bag, that is), and everyone outside that top tier, who are just trying to have a normal life, get squeezed, screwed, and sent scrambling. All so that the already wealthy want to get more wealthy. It's a hell of a lot easier and safer (investment-wise) than actually innovating.

Or to put it in terms "pro-business" people understand: there's a mismatch of incentives between financial players and benefits for the real economy.

So thanks, Mitt. Now go away.

January 4, 2012

So when do the teabaggers start complaining about stolen elections...

...by the national Republican party?

...with absolutely no sense of irony.

I'm thinking in 5, 4, 3, 2....

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