1. Deafheaven | Sunbather
Droning a drowsy syncopated tune: a blog about politics, current events and music.
1. Deafheaven | Sunbather
Much has been already said and written about Newark, NJ mayor Cory Booker’s comments on Meet the Press this past weekend, and I don’t think there’s more that I can add. In the meantime, Andrew Sullivan posted a few reader comments on Monday in response to Bookergate, and one comment in particular presented an excellent summary of private equity and noted the difficulty Democrats have explaining what the complex investment strategy entails and why it matters. Excuse the huge block quote, but it’s definitely worth a read:
I have to take exception with your reader who argued that neither side gets the private equity story right. In reality, the left’s story is generally correct, though incomplete, while the right gets the story wrong because, well, it has to. In addition, a completely accurate telling of the story would include the terms “financial engineering” and “dividend recapitalization.”
Financial engineering is the alchemy that drives the entire private equity industry – by rejiggering a company’s capital structure, a private equity firm purports to “create value” that previously didn’t exist. Like all other forms of alchemy, if it actually happened that simply, it might not be a bad thing. Unfortunately, the processes that create that value for the private equity firm – levering the company’s balance sheet with borrowed money, reducing headcount, cutting costs and, yes, tax arbitrage – tend to whipsaw a company by depriving it of any margin of error (because it has to spend its cash flow on interest payments) while also diverting resources away from future profit-maximizing initiatives (because all of its cash is being spent on interest payments).
This is the legendary “discipline” that private equity apologists cite in these conversations, but there is very little focus on making the business, as the business, run better. Instead, the focus is on freeing up enough cash to service the debt and return cash to the new owners. The end result tends to be a less ambitious company with a far smaller footprint (employees, plants, etc.) and a reorientation away from investment in the future growth of the business and toward like as a “cash cow.” This is the case even when private equity “works.”
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 have worked around the private equity industry for nearly a decade, and I have never met anyone in it who can tell me with a straight face what productive ends the dividend recap serves (like your other reader, I do not consider tax arbitrage “productive”).
All of this (including the cash cow and tax arbitrage concepts) is complicated stuff that requires a familiarity with finance that not many voters possess, which is why the left has such a hard time explaining what is really going on and instead leaves itself open to charges of demagoguery by focusing on the human cost of Bain’s investments and follow-on decisions. That’s unfortunate, but it does not render false the left’s substantive critiques on the topic, regardless of what Cory Booker and Harold Ford say.
The right, on the other hand, can’t possibly reckon honestly with the pros and cons of private equity, because to do so would be an admission that it consists mainly of financial parlor tricks that benefit a small group of wealthy individuals at the expense of virtually everyone else. They know how that would play with the voters, and so they obfuscate at best, lie at worst and proclaim “class warfare” at every turn.
The Romney campaign hasn’t been urgent in defining private equity and Romney’s tenure at Bain for the public (besides saying he created x amount of jobs), because they really don’t have to be.
Here are ten of my favorite songs of the year. They’re listed in no particular order with a brief explanation accompanying each track. Follow me on tumblr for more music throughout the year. Enjoy.
Martin Longman of Booman Tribune wrote a post yesterday called “Why There is No War on Mormons,” and in it, he explains how the left responds to disputes with religious groups, particularly Mormons:
Mormons are a conservative lot and, for a lot of reasons, they’re a natural fit for the Republican Party. We shouldn’t forget, though, that the most powerful Mormon in the country is Senate Majority Leader Harry Reid, a Democrat. When it comes to politics, I don’t like to critique people’s religious beliefs. Ask me what I think of a particular religion in a private setting and I’ll tell you, but I don’t want to try to score political points by running down someone’s private faith. I understand that a lot of Democrats (e.g., some in the gay community) feel like the Mormons are trying to oppress them and are very willing to fight back with tough language. I sympathize. I do. But even Democrats who fight back against Mormons do so with mockery and snark, not with incitement to fear. Even when Howie Klein, in the above cited piece, cites some history to show that the Mormons have been interested in winning the White House ever since Joseph Smith ran for the White House, he doesn’t say “egads, the Mormons are all out to get you and turn this country into a theocracy.” Yeah, Joseph Smith wanted to do that, but that doesn’t mean that Mitt Romney and Jon Huntsman have the same intention. Nor does it mean that Harry Reid will switch parties to support a fellow Mormon’s presidential campaign.
There’s not a “war” on Mormonism for a few reasons. Most American conservatives have no clue what Mormons believe. Also, there’s a reason the Florida Family Association hasn’t called for advertisers to dump TLC’s Sister Wives as they have All-American Muslim, a show on the same network: the family depicted on Sister Wives still fits the white, heterosexual family mold. What All-American Muslim has done successfully is highlighted a national concerted effort to marginalize Muslims here in the US. No matter how normal or ordinarily they’re depicted on television, conservative groups will still protest the program. No matter how quietly and privately they worship, conservative groups will still protest their right to build new places of worship. No matter how lawfully or peacefully they live their lives, many conservatives will still claim they aren’t doing “enough” to curtail religious extremism. The Republican party nominating Mitt Romney, a Mormon, won’t be a step towards religious tolerance on the right if it’s done merely in response to someone they believe is of questionable religious affiliation or a straight up covert Muslim. Because as the response (and lack thereof) to All-American Muslim and Sister Wives shows, it’s not what’s on the inside that matters.