On June 3, 2012, Joshua Holland writes on AlterNet.org:
“The simple reality that has been totally obscured in most of the coverage of what has been reduced to a ‘political flap,’ is that finance is what’s known as an ‘intermediary good’ – it doesn’t produce anything directly. It can — and does — stimulate the larger economy. But the financial sector can also extract wealth from the real economy, at a cost.
“Perhaps the media, like much of the American public, doesn’t understand what LBO artists like Romney really do. Here’s a quick refresher.
“Venture capital deals represent a very basic free-market transaction. Investors put money into a company at its early stages in exchange for a share of the company. If the start-up doesn’t pan out, the investors lose their stake; if it grows and matures, they make a healthy profit. In venture capital deals, investors only make a profit when the company they put their cash into does well.
“Leveraged buy-outs are a different creature entirely. LBO firms also deal with risky companies – usually those struggling to stay afloat – but they don’t actually take on much risk themselves as they structure the deals so that they profit whether the target company becomes healthy and grows, or collapses, often under the weight of debt piled onto it by the private equity firm itself.
“Here’s how the deal works. The leveraged buy-out firm will put down a fraction of the cost of buying an ailing company. The balance of the transaction is borrowed, but the debt goes onto the books of the target company, not the private equity firm – the struggling company basically finances the lion’s share of its own sale.
“The target company’s debt payments then increase significantly, and that debt service is written off, reducing its tax burden a great deal. This subsidy increases short-term revenues (at the expense of long-term debt) and that, in turn, is paid out to the firm’s investors along with a fat stream of management fees that Romney and his partners skimmed off the top.”
In this well-organized and presented MoveOn.org YouTube video published on May 11, 2012, Chancellor Professor of Public Policy at the University of California, Berkeley Robert Reich explains how exactly Mitt Romney got so obscenely rich.
