Archive for the ‘Capitalism’ Category

I’m no fan of Newt’s attack on Mitt Romney’s Bain Capital experience when there is so much to attack on Mitt’s liberal record in politics. Newt’s attack on Bain Capital can too easily be confused with an attack on capitalism itself. The “King of Bain” documentary Newt’s been airing in South Carolina is so full of distortions that the Washington Post gave the film four Pinnochios.

But let’s look at the substance of the potential problem for Mitt.

When most people think of capitalism they think of Sam Walton, who turned a small-town hardware store in Arkansas into Wal-Mart, or Bill Gates and Steve Jobs who started computer companies in their garage. These men ultimately created enormous companies that created hundreds of thousands of jobs — millions of jobs when you count the ripple effect these companies have throughout the economy.

Almost everyone likes that kind of capitalism.

But what is a “private equity” firm?

That’s a little tougher for the average citizen to follow.

“Private equity” refers to groups of investors.

The mission of a “private equity” firm is to look for companies to buy for the purpose of bringing big returns to its investors.

One category of business they sometime buy is the distressed company.  The company might be in a good business, but the company is just poorly managed — can’t execute. Kind of like the football team that’s has the ball on the other team’s one-yard line, but just can’t find a way to get into the end zone.

The private equity firm buys the business, reorganizes it, cuts costs, perhaps sells off parts of it, and injects in it some much-needed capital so that the business can get back to profitability, or become more profitable than it was.

The private equity firm then usually sells the company it bought for (hopefully) a hefty profit.

That’s the goal. Nothing at all wrong with that.

One of the best known private equity firms is the Blackstone Group.

Private equity helped Dunkin Donuts and Baskin Robbins get back on their feet. Mitt Romney points to Staples, Sports Authority, and Domino’s Pizza as three of his big successes at Bain.

Mitt says his work helped create more than 100,000 new jobs. This figure is disputed. We’ll probably never know the real number.

The political problem for Mitt is that, at Bain, he was not in the business of starting and building new enterprises the old fashioned way — ala Henry Ford, Sam Walton, Bill Gates, and Steve Jobs.

If the private equity firm buys a distressed company, what often happens is it brings new management in, reorganizes the business, finds efficiencies, sometimes lays off employees — because if it did not reorganize the business, the business would fail.   What Bain was doing was forcing a  struggling company to take one step back so it could hopefully take two steps forward later.

A private equity firm serves an essential role in our economy by providing not just capital, but strict analytics, and management expertise.

Unlike government, investors demand results. And that can be brutal.  But it also puts the heat on the business to become more efficient and competitive.

But here’s as big part of what Mitt was doing.

His specialty was turning around distressed companies.

A business that is teetering on the brink of bankruptcy is not likely to be able to secure loans from risk-averse banks. The only other source of capital is investors. Some companies raise capital by going public — that is, by selling shares on the public stock markets.

But that approach is not likely to work for a company teetering near bankruptcy. Your average Joe Citizen investor is not likely to buy stock in a business that, essentially, has failed.

So another option for this business is ”private equity” — finding a small group of sophisticated investors who will see that this business can be profitable with some tweaking here at there.

But these sophisticated “private equity” investors want big returns on their investment — 20 percent a year, or more.

It’s that, or bankruptcy.

A negative portrait of this can certainly be painted very easily: “He loaded up the company with debt to pay investors. Romney and Bain’s investors made lots of money, while lots of workers lost their jobs in the process” (in some cases).

That’s what a “leveraged buyout” can do to a business — load a business up with a lot of debt. This debt is sometimes paid for by selling off assets and laying off workers — scaling back operations, hopefully temporarily.  The leveraged buyout is one of the tools these sophisticated “private equity” investors use to buy a company.

A leveraged buyout (LBO) occurs when an investor acquires a controlling interest in a company’s equity and where much of the purchase is financed through leveraged borrowing. The assets of the acquired company are used as collateral for the borrowed capital, usually along with assets of the acquiring company.

Typically, a leveraged buyout uses a combination of debt instruments from banks and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the risk involved. If the company subsequently defaults on its debts, the LBO transaction will often be challenged by creditors or a bankruptcy trustee under a theory of fraudulent transfer.

This is Mitt’s political problem — which Newt, Perry, and Obama are now exploiting.

But it gets more complicated than this for Mitt.

The way a private equity firm itself makes money for itself is to charge its investors a fee for its services — in addition, usually, to having a stake in the “portfolio of companies” its acquiring.

So Romney and Bain Capital would earn their fees regardless of whether their business acquisitions actually made money for their investors, or not — that is, regardless of whether the businesses they acquired succeeded or failed.

That’s how Mitt can still make tens of millions of dollars from failed investments — from companies he acquired for his investors that later went bankrupt . . . because of the fees he charged his “private equity” investors.

All this is perfectly legal and ethical.

But this method of making money is certainly a bit complicated to explain to voters in a 30 second sound bite — especially to those who no longer have jobs and who are struggling in this tough economy.

That’s Mitt’s big political problem.

It doesn’t help Mitt when he explains there are both successes and failures in what he does. This will strike many voters as more akin to casino gambling than building a real business Sam Walton-style

Now he has Republicans like Newt Gingrich and Rick Perry out there saying they are for “venture capitalism,” not “vulture capitalism.”

This is also Obama’s line of attack.

Never mind that “private equity” is also largely responsible for the tech boom.

Private equity groups  helped finance Google, eBay, Amazon and most other major new companies created in the past 25 years.

Remember Michael Milkin back in the 1980s?

Michael Milkin went to jail mostly because the judge in the case, Ms Kimba Wood, did not understand “junk bonds” (which he invented, in part by finding loopholes to exploit in the securities law). Judge Kimba Wood literally said she was putting Milkin in jail because he had “shown a pattern of skirting the law” and finding ways around the law. No one could really say what laws he had actually broken. Something just doesn’t look right here, was in essence what Judge Kimba Wood said.

Judge Kimba Wood even went so far as to say that what made Milken’s “junk bond” enterprise so especially heinous was that the laws he supposedly broke were “undetectable.”

Huh?

Michael Milkin’s “junk bonds” invention accomplished a lot of good for the U.S. economy — allowed the creation of companies like Amazon, Yahoo, and built much of the high-tech sector that was so key to explosive economic growth for the U.S. economy in the 1980s and 90s.

George Gilder in his excellent book, Telecosm, wrote that

“Milken was a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken . . . and others took the vast sums trapped in old-line businesses and put them back into the markets.”

Mitt Romney has a bit of the Michael Milkin problem here. Much of what he did at Bain is not so easy to explain . . . so that even an airhead like a Judge Kimba Wood can understand it.

Newt Gingrich and Rick Perry, instead of teaching their audience about capitalism, are now participating in spreading ignorance of how a modern economy works — apparently on purpose. Newt and Perry know better. But they are putting their political campaigns ahead of what they know is good for the country — ahead of what they know is sound economics.

Why attack Mitt on one of the few good things he’s done, one of the few conservative things? That being his tenure at Bain Capital, where he appears to have accomplished quite a lot of good.

Why not attack Mitt on his liberal record as Governor of Massachusetts?

That would seem to make much more sense in a Republican primary situation.

Does Newt really thing the primary purpose of a business is creating jobs?

Of course he doesn’t.  He knows better — which makes his Obamaesque populist demagoguery on Bain Capital all the more disappointing.

The primary purpose of a business is not to create jobs; it’s to create a profit . . . because, without profit, there are no jobs. Without profit, there’s no money.

Jobs are a nice byproduct of profit. Workers exist to make more profits for the shareholders. When a worker ceases to be profitable, that worker is fired or laid off. Businesses are not charities.

Mitt needs to find a way to say this in a way that makes him sound more like Sam Walton and less like Gordon Gekko.

CNS NEWS: In a speech delivered at Osawatomie High School in Osawatomie, Kansas, on Tuesday, President Barack Obama argued that while a limited government that preserves free markets “speaks to our rugged individualism” as Americans, such a system “doesn’t work” and “has never worked” and that Americans must look to a more activist government that taxes more, spends more and regulates more if they want to preserve the middle class.

“‘[T]here is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. ‘The market will take care of everything,’ they tell us,” said Obama. “If we just cut more regulations and cut more taxes–especially for the wealthy–our economy will grow stronger.

“Sure, they say, there will be winners and losers,” Obama continued. “But if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And, they argue, even if prosperity doesn’t trickle down, well, that’s the price of liberty.

“Now, it’s a simple theory,” said Obama. “And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked.

“It didn’t work when it was tried in the decade before the Great Depression,” said Obama. “It’s not what led to the incredible postwar booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.

“Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history,” said Obama. “And what did it get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class==things like education and infrastructure, science and technology, Medicare and Social Security.

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Here’s Alex Baldwin actually making quite a bit of sense

CNS NEWS: While mingling with protestors at the Occupy Wall Street demonstration in lower Manhattan, actor and outspoken liberal Alec Baldwin explained the importance to consumers of entrepreneur Steve Jobs and added, “I think capitalism is worthwhile.”

At the event, Baldwin was approached by people with “Wearechange,” who asked him about abolishing the Federal Reserve. Baldwin said he did not know whether that would be a negative or a positive but said, “You have to have capital markets in this country.”

“You cannot not have strong capital markets in this country or the country is going to go down the tubes,” he said. “I think most people want change in this country but they don’t want the country to go down the tubes. They don’t want the country to become England.”

Baldwin then gave the example of Apple computer founder Steve Jobs, who studied the large IBM computers and decided to work on making a computer much smaller and that would fit on a person’s lap.

“I think that’s important,” said Baldwin. “I think capitalism is worthwhile. And capitalism demands the flow of money. So, I think we need to have that. … I do not want capital markets dismantled.”

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JOHN STEELE GORDON-WASHINGTON POST: This past week, President Obama tried to sell his new “millionaires’ tax” to the Rust Belt. “What’s great about this country is our belief that anyone can make it,” he said in Cincinnati on Thursday, praising “the idea that any one of us can open a business or have an idea that could make us millionaires.” But who are the millionaires Obama is talking about? And will a tax on them help the economy? Let’s examine a few presumptions about the man with the monocle on the Monopoly board.

1. Millionaires are rich.

Being rich has gotten more expensive. A $1 million fortune was unusual in the early 19th century. The word “millionaire” wasn’t even coined until 1827 by novelist (and future British prime minister) Benjamin Disraeli. In 1845, Moses Y. Beach, editor of the New York Sun, published a small pamphlet called “Wealth and Biography of the Wealthy Citizens of New York City.” The price of admission to Beach’s list, which was wildly popular, was a mere $100,000.

By the time the first Forbes 400 list of the richest people in America was published in 1982, the smallest fortune featured was $75 million. There has been so much wealth creation in the past 30 years — much of it thanks to the microprocessor behind modern-day fortunes such as Dell, Microsoft and Bloomberg — that only billionaires are on the list. Today, $1 million in the bank generates only about $50,000 per year in interest. That isn’t chump change, but it’s roughly equal to the 2010 median household income.

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POLITICO: Texas Gov. Rick Perry may have forgotten a thing or two about the Al Gore presidential campaign he helped lead in 1988.

In an interview with an Iowa radio station on Monday, the Republican presidential contender explained his role as the Gore campaign’s Texas chairman by saying that “this was Al Gore before he invented the Internet and got to be Mr. Global Warming.”

But in fact, global warming was already a significant theme for Gore in 1987 and 1988 — long before his activism led to several books, a Nobel Prize and a part in an Academy Award-winning film. It was also well before the right gave him the “Mr. Ozone” nickname and talk radio heaped endless mockery on the future vice president.

Gore, then a young Tennessee senator trying to break out in a crowded Democratic field, mentioned the warming planet as one of his priorities for his presidential campaign in April 1987, according to news coverage at the time.

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In other words, liberalism is more destructive to a city than an atomic bomb.

Now Obama and the Left are fighting hard to do for all of America what liberals have done to places like Detroit and Washington, DC (another hell hole). Chicago has lost more than 200,000 residents in the last 10 years, more than 1,000,000 people since the mid-1950s. Chicago, too, is going the way of Detroit.

Obama and the Left seem to think businesses have no other option than to remain in the U.S.

Wrong.

Corporation after corporation, business after business, are moving operations to countries where the labor is cheaper, taxes lower and where business is not vilified by the political leadership — places like, well, Communist China.

CAROLINE BAUM-BLOOMBERG: The president’s efforts, including his capitulation on an extension of the Bush tax cuts for all Americans, have paid off. His approval rating jumped to 49.8 percent this month, up from 45.6 percent at the time of the election, according to the Real Clear Politics average.

So is this just a public relations gambit designed to win back independents and assuage business concerns to ensure money and votes in 2012?

Of course it is. The real question is will there be any follow-through?

A careful reading of Obama’s words suggests he’s still stuck in a central-planning mindset. Obama introduces each new appointee as someone who knows how to “grow the economy” and create jobs. The president has been pressing his economic team to come up with job-creating ideas “that excite me,” according to Peter Baker’s cover story in the New York Times Magazine on Sunday.

Conflict of Interest

Clearly the 3.5 million jobs “created or saved” by Christy Romer’s econometric model (Romer was chairman of the president’s Council of Economic Advisers until September) didn’t convince anyone. Now Obama wants real jobs, more than the 1.3 million private-sector positions created in 2010, to buy him real votes.

Of course, Obama could have elevated Richard Trumka, president of the AFL-CIO, from his economic advisory committee to the top spot instead of Immelt, who has regular business before the administration and received a $16.1 billion Federal Reserve bailout in 2008. But why create the appearance of conflict of interest?

Obama doesn’t need any more advisers to tell him the U.S.’s 35 percent corporate tax rate, among the highest in the world, puts the nation at a competitive disadvantage. Or that taxing overseas profits when they’re repatriated to the U.S. doesn’t encourage businesses to bring that money home and invest here.

Bureaucratic Suicide

On the regulatory front, Obama’s intention to submit all federal rules and regulations to a cost-benefit analysis sounds nice, but what bureaucrat has ever declared himself redundant and written himself out of a job?

It reminds me of a joke about the tourist who goes to visit the Agriculture Department. As he’s walking down a long, empty hallway, he hears the sound of crying coming from an office. The tourist peaks his head in and asks the employee, sobbing at his desk, “What’s the matter?”

“My farmer died,” the employee replied.

The Department of Agriculture, like any government agency, never willingly cedes a part of its fiefdom.

In the 1700s, the U.S. was an agrarian nation with 90 percent of workers engaged in farming, according to Veronique de Rugy, senior research fellow at George Mason University’s Mercatus Center in Arlington, Virginia. Today the U.S. economy has highly productive agribusinesses employing less than 2 percent of all (legal) workers. Yet “the federal government continues to subsidize agriculture,” de Rugy said. “Spending for the Department of Agriculture in real terms went from $95 billion in 2000 to $142 billion in 2010.”

Double Talk

Obama’s major legislative initiatives — health care and financial reform — left it to regulators to write the rules necessary to implement the laws. To order a review of federal regulations in the face of so many to-be-written laws is talking out of both sides of your mouth.

So nice try, Mr. Obama. You’ll have to do better than executive orders and executive appointments to convince us you have the wherewithal of a business executive.

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