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Capitalists: Venture vs. Vulture

11:48 am in Economy, Government, Jobs by dakine01

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So there I was, surfing around the intertoobz this morning when I came across this headline at CNN:

Stop vilifying venture capitalists

I have to admit, I was a bit taken aback at the headline as it surely did not reflect anything I had read.

In reading the piece, it starts off in a fairly standard fashion:

From 1984 to 1999, Mitt Romney was in charge at Bain Capital, an investment firm that sought out small and sometimes troubled companies that, with careful management and Bain-provided cash, offered the chance for big profits. Bain, like many venture capital firms, invested in startups with the hope that the profits they made on the successes would outweigh the losses they incurred on the failures.

Venture capital markets are simple things. Two groups of people who want to create new businesses come together. Venture capitalists have money but lack ideas. Entrepreneurs have ideas but lack money. When they get together, they trade and new businesses are born.

Then I realized that the author was not really saying much I could disagree with – other than his implication that Bain Co. was this benign entity only helping entrepreneurs to find the needed funding to bring their ideas to market as wiki defines it.

Today’s Boston Globe addresses this in this article.

Mitt Romney has long called himself a venture capitalist, experience he says helps him understand the economy better than other candidates for president. But he spent much more of his career in leveraged buyouts than in the investments in start-up companies known as venture capital.

Romney’s one true venture deal was Staples Inc., the office supply superstore, two years after he started Bain Capital. He wasn’t the first to discover Staples; another Boston venture firm introduced him to Staples founder Tom Stemberg. But Romney did lead the deal in 1986 in classic fashion – at first investing $650,000 in the start-up, then becoming its chief cheerleader and assisting with strategy to expand the seller of paperclips and pens.

…snip…

With leveraged buyouts, the investment firm purchases a mature company, partially with its money and with debt it transfers to the company. The new owners then usually streamline the business and seek to resell it.

For example, in the same year that Romney invested in Staples, he led the firm in its $200 million acquisition of Accuride, a wheel rim maker that was part of Firestone. Bain put down only $5 million and borrowed the rest, using junk bonds from Drexel Burnham Lambert. Eighteen months later, Bain resold the company and reaped $121 million in its first taste of the big time in the go-go 1980s.

Soon after, Romney steered Bain Capital more toward debt-driven buyouts. There was more money at stake and less risk for Bain than betting on untested technology.

My bold. And there you have it. While maybe starting life as a “venture capital” firm, Bain Co under Romney quickly turned to being Vulture Capitalists using the leveraged buyout.

At this point, I guess I should queue cue the chorus of voices shouting “FREE MARKET! FREE MARKET!”

Point of fact – there is no such thing. The LBO gets to use the debt interest to write down their taxes. By “streamlining” the business, the methods have often included cutting wages and benefits, selling off assets, and dumping pensions onto the taxpayers through the Pension Benefit Guarantee Corp. Dean Baker explains it quite nicely here and here. From the first link:

If private equity firms were successful in making companies more efficient and lowering prices to consumers, then it could lead to more jobs in the economy, even if there were fewer workers directly employed in the firms under its control. (This does not really apply in the current economy, where inefficiency means more workers are employed. This is good in the context of a poorly managed macroeconomy with high unemployment.)

However private equity firms do not profit just by making firms more efficient. Private equity also profits by financial engineering. For example, it is standard practice for private equity firms to load their firms with debt. This means that interest payments, which are tax deductible, are substituted for dividend payments, which are not tax deductible.

Private equity companies also often force firms into bankruptcy to offload debt. This can often include pension obligations, which are then taken over by the Pension Benefit Guarantee Corporation. Insofar as private equity companies are drawing their profit from this sort of financial engineering, it is not providing a benefit to the economy. In fact, it is a direct drain on the productive economy.

So much for the nonexistent “free market.” If a firm has to offload their debts and pensions on the taxpayers, there ain’t a diddly damn thing free about it.

While I am still trying to figure out how it is possible for the LBO group to incur debt for an entity that they are acquiring (don’t you have to actually own something before you can mortgage it?), I’ll close this little rant with this article from today’s Cincinnati Enquirer headlined “Tax breaks for jobs: Half fall short.” A story for another day.

And because I can:

Cross posted from Just A Small Town Country Boy by Richard Taylor

Political Posturing Versus Reality

10:32 am in Uncategorized by dakine01

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This morning (Wednesday, June 22) David Dayen at FDL News reports that the entire Senate Democratic leadership is getting behind a jobs/stimulus push:

The Senate Democratic leadership – all of them, Harry Reid, Chuck Schumer, Dick Durbin, Patty Murray, Debbie Stabenow and Mark Begich – planned a morning press conference today where they will call for job creation measures, or stimulus, to be included in any debt limit deal.

This follows a report from Politico on Sunday:

Fearing the economy may be getting worse, Democrats plan to soon unveil what they’ll call a “Jobs First” agenda — and the stakes are high. A bleak economic outlook, like the May jobs report, could cost Democrats their thin Senate majority and even the White House if they can’t make a strong case to an anxious electorate that their policies will create jobs.

Senate Democrats are now grappling with ways to gain an edge in the economic debate dominated by budget talk. For instance, in an attempt to woo Republicans, Sen. Chuck Schumer (D-N.Y.) and the White House are open to extending a payroll tax break to stimulate the economy, but that has spawned unease from Democratic senators such as Maryland’s Ben Cardin who worry that it would drive up the deficit and unnerve liberals such as Vermont’s Bernie Sanders, who are concerned it would deplete the Social Security trust fund.

While the Politico piece reinforces for me the idea of the Dems actions as just so much posturing, so does this, also from the Dayen piece:

There’s a sense that this is mainly rhetorical. Democrats have seen Republicans obstruct even the most piddling of jobs bills in the Senate. Yesterday the reauthorization of the Economic Development Administration, an old Great Society program, failed to break a filibuster.

This article from today’s Washington Post on Senate Budget Committee Chair Kent Conrad’s claim that $2 trillion in spending cuts is not enough tends to reinforce the believe that it is posturing:

The debt-reduction package emerging in talks between the White House and congressional leaders would not “fundamentally change” the alarming rate of growth in the national debt, the chairman of the Senate Budget Committee said Tuesday.

Sen. Kent Conrad (D-N.D.) said the goal of slicing more than $2 trillion from the federal budget by 2021 falls far short of the savings needed to stabilize borrowing, reenergize the economy and avert the threat of a debt crisis.

As we all know, Conrad is one of the Gang of Six Five Thieves Deficit Hawks who doesn’t quite seem to comprehend that creating jobs would go a long way to addressing those long term deficit problems through increased tax revenues across all aspects of the economy. Even Wall St Journal and Bloomberg/Business Week columnists have come out this week and stated that jobs are the most serious issue of all today. Now, I don’t know of anyone who would perceive that the folks at either of these as being “card carrying members of the professional left” yet both are pointing out the fallacies of the current political discourse.
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Finding a Job Over 50

10:24 am in Economy, Financial Crisis, Government, Jobs, Unemployment by dakine01

As I was checking the various news sites this morning, I came across this article at the Boston Globe:

A number of older job seekers are finding that their age is working against them during this painfully slow recovery. People age 55 and older are unemployed for a year on average — more than two months longer than younger workers, according to the Bureau of Labor Statistics. Some employers are scared away by the higher pay and health care costs that can come with hiring older workers, as well as the perception that an older hire may not be motivated to learn new skills.

…snip…

The US economy added far more jobs than expected last month, according to data released yesterday by the Labor Department, but there are still more than 13 million people out of work. The unemployment rate for workers over age 55 is lower than the overall national average, partly due to the number of people in that age bracket who decide to retire, but those forced out of work before their planned retirement, and who don’t have enough to live on, are putting added strain on the government and the economy.

From 2007 to 2009, the number of 63-year-olds filing early for Social Security jumped by nearly 20 percent, according to the Center for Labor Market Studies at Northeastern University. Among 62-year-olds, it was up 42 percent. Not only are those people collecting less money, they’re also not paying taxes on employment income and are more likely to apply for other government aid, said director Andrew Sum.

Now, I’m nearly 59 years old (next month), and as I read the article, the stories being told are quite familiar. And not just the stories of excuses offered by employers why the applicant was not acceptable, but the recommendations the “experts” make for the older worker to overcome. Employers can’t legally come straight out and claim our age is why we’re not even getting interviews, much less job offers but I and everyone in my age group who is un or underemployed know the signs.
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President Obama’s Jobs Commission – Outsourcers and Masters of the Universe

10:19 am in Economy, Financial Crisis, Jobs, Unemployment by dakine01

President Obama has named the members of his “Council on Jobs and Competitiveness” headed by GE CEO Jeffrey Immelt. Emptywheel took a whack at Immelt and his outsourcing to China last month here. Obviously Immelt knows how to create jobs, just not so sure he knows how to create jobs in the USA that can allow the US unemployed to earn a living wage.

And really, that is my biggest complaint over all with the “Council” appointed by President Obama. There are two, count’em, two, persons representing workers on this council, Richard Trumka, president of the AFL-CIO and Joseph T. Hansen, president of the United Food and Commercial Workers Union. Besides Trumka and Hansen, the other non-CEOs on the Council are Laura D’Andrea Tyson, President Clinton’s Economic Adviser and John Doerr, senior partner with Kleiner Perkins Caufield & Byers, a Silicon Valley venture capital firm. Neither Tyson nor Doerr can be said to be particularly sympathetic or empathetic to workers, much less the 25 to 30 million un and underemployed.

The rest of the members represent the CEOs of the world:
Richard Parsons, Chairman of Citigroup
Kenneth Chenault, CEO of American Express
Roger Ferguson, CEO of TIAA-CREF and a former vice chairman of the Federal Reserve
Robert Wolf, Chairman of UBS America
Mark Gallogly, managing partner of Centerbridge Partners
Paul Otellini, CEO of Intel Corp
Steve Case, Co-founder of AOL
Sheryl Sandberg, chief operating officer of Facebook
Ellen Kullman, CEO of DuPont
Antonio Perez, chairman and chief executive of Eastman Kodak Co
Lewis “Lew” Hay III, chief executive of NextEra Energy Inc
Gary Kelly, board chairman of Southwest Airlines
A.G. Lafley, former board chairman, Procter & Gamble
Darlene Miller, chief executive of Permac Industries
Matt Rose, chief executive of Burlington Northern Santa Fe
Penny Pritzker, chairman and chief executive of Pritzker Realty Group
Brian L. Roberts, chief executive of Comcast Corp. and board chairman of NBCUniversal
Monica C. Lozano, publisher and chief executive of La Opinion, the U.S.’s largest Spanish newspaper

Now a quick check of der google and my own basic knowledge, it looks like out of the twenty-three members there are two labor reps, six financial services reps (including Immelt), two media, three “technology,” eight variants on consumer/traditional industries/travel/realty, one academic, and one legal.

Eastman Kodak was one of the first firms to outsource IT work. GE outsourced to China as emptywheel discussed above. Procter & Gamble has outsourced their facilities management. DuPont loves them some China almost as much as GE does. So does Intel. And American Express. And TIAA-CREF, though it seems they prefer India. Citigroup also loves India. Permac Industries offers “Outsourcing Management” services.

These are the people that President Obama wants to advise him on how to get the economy going again and generate jobs? The Masters of the Universe who destroyed the economy in the first place, helped along by the titans of industry who sent millions of jobs away?

There’s no wonder the Census Bureau was so happy with the available work pool this year. Mr. President, you need to hear the voices of real people who have dealt with real concerns and real problems in this economy, not more blather from the people who created the problems.

And because I can:

Cross posted from Just A Small Town Country Boy