The national debate over private equity so far has hinged on the question of whether experience in the field qualifies Mitt Romney, the former Bain Capital executive, for the presidency. But a more vexing, and largely unanswered, question lies just beneath the surface: How is it, exactly, that an investment company can make millions even as the company it’s ostensibly trying to turn around goes bust?
For that answer, the HuffPost turned to what may seem like a less-than-reliable source: Tony Soprano.
“The investors profit, it turns out, not despite the failure of the company, but in fact because of it.
“In the organized crime world, the business practice is known as a bust out. A group of investors –– in Soprano’s case, an entire family –– looks for companies that have a strong underlying business but are in distress thanks to heavy debt burdens. The investors then take over the company. In the mob’s case, the family presents the business with a very high-interest loan –– an offer which, under the financial circumstances, is difficult to refuse –– and effectively takes control of the company with the threat of physical violence. Private equity investors, by contrast, buy control of the company’s board by purchasing the firm’s stock. But for both private equity firms and the mafia, investors use their control of the firm to take on more debt, while at the same time cutting costs by laying off workers.
“Cash from the loans and cost savings are funneled back to the investors. This looting continues until the company can’t pay its debts. When it finally collapses, the company files for bankruptcy to extinguish the debt — but private equity investors, as well as mobsters, get to keep the gains they’ve already reaped.”
Mark Galeotti, one of the leading experts in transnational organized crime, said it’s a familiar tactic above ground and below it. “It’s one of the classic tactics of organized crime,” Galeotti, a New York University professor, told HuffPost. “You exploit it as far as you can and when you have essentially squeezed every possible bit of value out of it, you burn it. In organized crime’s case, I mean that literally, whereas with private equity, it’s planned bankruptcy. But essentially you dispose of it in as convenient a way as possible, and then you walk away.”
The difference between a “Sopranos”-style buyout and one executed by Bain Capital, Galeotti said, has to do with the mob’s willingness to use illicit capital and unregulated violence to accomplish its goal. “Private equity firms, in the main, while there are exceptions, basically operate within the letter of the law, if not the spirit. What they do is legal. It can’t be challenged in the courts even if it runs against, sort of, the notion of the social contract,” Galeotti said. “Whereas organized crime, if they have to kill someone, or if they have to use dirty money to do it, they’ll do it. So it’s the methodology that is different. But if you actually think about, Well, what are they doing? How are they doing it? And what’s the end result? There, it’s strikingly similar.”
Also see http://www.youtube.com/watch?v=rodifJlis2c&feature=youtu.be
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.
http://www.youtube.com/watch?v=rodifJlis2c
We need, as a society, the assurance that as a corporate employer grows or is restructured, it builds ownership into its employees. All of them! When people are in a position to earn the wages of their capital as well as the wages of their labor, their company is in a position to be more competitive through lower labor costs and increased technological innovation, while achieving higher employee incomes through the employee’ capital (stock dividends).
Once this goal becomes the national political focus we will see an unbelievable discussion of workable plans to realize the GOAL of broadened private, individual ownership of the productive capital assets of our business corporations. Remember that planning begins with a vision and a goal. This is not rocket science but it does require national leadership. Implementation requires amending a few laws that basically authorize the transactions that will broaden productive capital ownership paid for with the future earnings (future savings) of the capital investment. Allowing such transactions will provide incentives for profitable opportunities to employ unused capacity and promote stable economic growth, with the ancillary benefit of creating “real” job growth.
