It’s nice that Mitt Romney is getting some scrutiny over his business career, because it’s a good opportunity for the people to learn how private equity works, and how it serves the interest of the 1% at the expense of the 99%. I mean, you’ve got Barack Obama’s Tumblr page posting this quote:
When you’re president, as opposed to the head of a private equity firm, then your job is not simply to maximize profits. Your job is to figure out how everybody in the country has a fair shot… And so if your main argument for how to grow the economy is ‘I knew how to make a lot of money for investors,’ then you’re missing what this job is about.
Which is a lot less of leftist polemic than I’d put it, but pretty decent for the Democrats of today. And we’ve got Andrew Sullivan printing a couple reader emails that actually manage to correctly lay out what the heart of the matter is, and why private equity is pretty much a scam run by the investor class to increase their share of the returns from business. The first:
You take the Cash Cow, paying, say, 30% in taxes, and use various strategies to drive the tax rate to near-zero without killing the cash flow. Then you pocket the 30%, and the investors pay lower capital gains and “carried interest” tax rates on those extracted “tax savings.”
For roughly half of the companies receiving this “operation” will die because of the high debt and other obligations brought on by the Tax Arbitrage strategy. But you, the equity capital firm, get your investment out early. Half of the companies will prosper under this treatment (though not for existing employees who are outsourced or downsized), and you flip those to new owners for huge profits, taxed at capital gains rates.
And the second:
Dividend recapitalization is the most insidious subset of financial engineering - the owners take out a loan backed by the assets of the company and use the proceeds from the loan to write themselves a dividend check of roughly the same amount. The company is again forced to focus all of its attention on servicing this new debt, frequently groaning under the pressure. When it fails in that mission and tumbles into bankruptcy, the private equity backers toss the keys to the creditors and walk away, having already recouped most, if not all (or, in some cases, many multiples of all) of their investment. Loans are, fundamentally, supposed to be used to boost investment in productive enterprises, but in this case, the financial/private equity industry has bastardized that premise to funnel money away from productive uses and straight into their coffers.
I think that not only is this a perfectly fair thing to take Mitt Romney to task for, but it’s also a great excuse for us to look at how the 1% manipulate the system for their own benefit. Something the Democrats always seem to stop short of doing, lest they look like they’re engaging in class war and offend their big money donors.
If you’re the sort that really wants to dig deeper into the matter, Mike Konczal has a great post looking at the issues with private equity discussed above, and how they interact with each other. I hope more people start to make similar arguments. Not only is it good to help keep a cretin like Mitt Romney out of power, but we should start looking at how certain practices in the finance industry affect the rest of us, and what we can do about it. Because you know for damn sure the people who are gaming the system know what they’re doing, and are counting on the rest of us not figuring it out.