the weary blues

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. 

If you follow politics to any degree, I’m sure you’ve heard all about presidential candidate Mitt Romney’s infamous $10,000 bet during a televised debate this past weekend. As illustrated in the video above, many if not most reporters and pundits agree that this was a pretty unfortunate move by the normally uber-disciplined Romney. But why? The Washington Monthly‘s Steve Benen pretty much sums up the conventional take on the issue:

As a political story, Mitt Romney’s offer of a $10,000 bet on Saturday night has a lot going for it. The story reinforces allegations that Romney is out of touch and unable to relate to middle-class anxieties; it comes at an awful time for Romney as Newt Gingrich surges; and perhaps best of all for the media, “Willard’s Wager” is amusing and easy to understand.

This follows in line with what’s said in the video above. The Washington Post‘s Greg Sargent goes further:

While the $10,000 moment is politically problematic and revealing in some ways, it doesn’t really deserve to rise to the level of national narrative. What’s more deserving of a national storyline about Romney is his serial dishonesty, his willingness to say and do anything to win. […]

More broadly, political reporters and commentators are always tempted to seize on such moments as the $10,000 bet as defining of a candidate’s character. But this moment is ultimately almost as trivial as was John Edwards’ $400 haircut…. This broader pattern [of dishonesty] is what deserves the status of national narrative about Romney’s character, not some throwaway line about a bet.

While both make valid points, I feel there’s more to this story. More specifically, this incident could be put towards better use besides merely being a passing jab at Romney. The defining issue of the presidential election will ultimately be the economy and whether Americans support Obama’s continued push for infrastructure stimulus and consumer protection or the Republican candidate’s push for deregulation and austerity measures. “Willard’s Wager” highlights this choice.

Romney’s $10,000 bet illustrates why our fiscal policy shouldn’t be centered around fickle millionaires and billionaires like him. A future of deregulation that leaves the economy and consumers vulnerable and measures that cut programs targeted for the middle class would only further the gap between the have and have nots, and that is much more relevant to what’s at stake in next year’s election than how out of touch Romney is. It’s also a winning argument politically and at the heart of why Romney’s bet should be an eye-opener for Progressives.

The Republican ticket wants to put the fate of the economy in the hands of those who can afford to make five-figure wagers like Romney. And as long as our economy’s success is primarily dependent upon a rich person’s capricious discretion, like whether to invest in jobs or make silly bets on national television, inequality will remain and the middle class will continue to rot away.

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In case you haven’t heard, yet another woman has come forward today detailing inappropriate, sexual advances from Republican Presidential hopeful Herman Cain. What makes this particular allegation more significant is it came with a public appearance from the victim[1] and the fact that the allegation itself sounds more like sexual assault than mere harassment.

I admit when Cain first announced he was running for the Republican nomination, I assumed he’d be a no-name candidate vying for a fraction of a percentage point. His lack of command of the facts and outrageous, often nonexistent policy stances made him appear as someone looking for a regular seat on Fox News than legitimately attempting to be President one day. Six months later, he’s matching presumed frontrunner Mitt Romney in the polls. Unfortunately for him, the new accusations have an opportunity to not only derail his Presidential hopes (which isn’t hard to do), they could also damage his public image enough to repel Fox and other conservative outlets, hurting potentially lucrative post-election opportunities.

Earlier this year, Cain’s unreleased gospel album entitled Sunday Morning[2] leaked online. It was recorded in the 1990s, which is ironically in the same time period as the allegations are said to have taken place. This wouldn’t be the first time a politician’s put forth such a public display of personal spirituality and morality only to couple it with inappropriate, contradicting actions behind the scenes (especially in the ’90s). Included on it is “I Must Tell Jesus” (above, mp3) which features a swaying piano and baseline carrying a baritone Cain singing about being over-burdened and seeking compassion.

I wonder what Cain’s telling Jesus these days. So far, he’s told everyone else conflicting accounts of the alleged events masked in baseless cries of racism. So far, he’s shown no compassion for the burdened victims (or women in general, considering his stances on women’s reproductive rights). Better yet, what did Cain tell Jesus when confronted with an urge to approach the alleged victims? Ironically, Cain left off a verse from the century old song which contained a few lines addressing that very issue:

…What must I do when worldliness calls me? What must I do when tempted to sin?…

If the answer was to put those events behind him and run for President anyway, he should seek better advice.

1. Lots of the victim-blaming thus far stupidly revolves around the anonymity of other accusers. [↩]
2. Album cover designed by me. I was bored. [↩]

Paul Waldman has an interesting post up today about how new ideas are treated and incorporated into policy on the left and right. He writes:

Are Republican politicians just more interested in ideas? Not exactly. What they’re interested in is big, sweeping ideas. Not technocratic fixes, not proposals for a new agency, but ideas that upend the bases of how we think about politics and what we consider reasonable and insane. Democrats, not so much.

He makes some valid points, and I highly recommend reading his post. However, I feel he didn’t quite hit the nail on the head. The difference between the right and left aren’t the size and scope of ideas. What’s different is a disconnect between the idea makers and policy makers on the left.

Conservative thinkers, while quite fond of big, sweeping (and wrong) ideas, are much more pragmatic, and they tune ideas specifically for the politics at the time. During the Bush years, conservative thinkers were still writing in support of decreasing debt and the size of government. Yet were the same people also publicly criticizing Bush for drastically increasing both? Largely, no. The right is much more willing to look past old ideas and adopt new ones to push an agenda. While noble, the left simply isn’t.

Just look at the reaction to the President’s upcoming jobs speech. If this were a Republican president, Republicans would be out in full force with talking points and showing a willingness to hear and support whatever ideas the President would offer. Despite being set up specifically to present (what I hope are) large, sweeping ideas for job creation, the left largely views next week’s speech as useless. While it’s true that the Republican-controlled House will likely block every measure the President presents, the left’s reaction to the event only further discourages Democratic policy makers from incorporating new ideas.

Imagine if liberal writers and pundits grasped onto one idea the President presents next week (of which they agreed with) and pushed it publicly in unison. We’d have a better chance of controlling the discussion in Washington and perhaps implementing that idea down the line. Yet, liberal writers would rather talk about ideas the President didn’t present or how pushing the speech back a day made the President look weak. Another example is the public option. Because of conservative Senate Democrats, it had no chance of passing. Yet the reaction on the left hasn’t been to further articulate the benefits of a public option in hopes that the public or press catches on. It’s blaming the President for somehow not persuading Dems to vote for it.

The big ideas are present on the left, but they’re being held back by a base more concerned with purity than political expediency and an opposition party willing to evolve its own ideas to win.