July 2, 2012 |
In recent weeks there have been multiple exposés documenting how Mitt
Romney’s private equity firm, Bain Capital, both outsourced jobs and
made a massive profit while bankrupting one of the companies they own.
And just a couple of weeks ago, “Sterling” was how former President
Bill Clinton described the Republican nominee for president’s track
record as a businessman. Clinton was just the latest in a chorus of
high-profile current and former Democratic elected officials who came to
the defense of Romney and private equity in the face of criticism from
outside observers, and most importantly, from President Obama’s
re-election campaign. Just as Romney’s record at private equity
super-power Bain Capital was becoming the central focus of the national
campaign narrative, Newark Mayor Cory Booker, co-chair of the DNC
platform committee, and Massachusetts Governor Deval Patrick, co-chair
of the Obama reelection campaign went on national television to defend
the honor of Romney, Bain Capital and private equity.
In the era of the 99%, these comments were seized on by cable news
hosts and reporters across the country. A “Dems defending big business
and Mitt Romney” story certainly had some “man bites dog” appeal – but
it struck many as downright shocking that prominent Democrats would not
just “bite man,” but in fact “bite THE man,” as their comments undercut
one of Obama’s key attacks and points of contrast with Romney.
While the Obama campaign – and pundits everywhere - may have been
stunned by comments from these normally supportive allies, I wasn’t
surprised at all. Back in 2007, while directing the Service Employees
International Union’s campaign to hold the private equity industry
accountable for their damage to our economy, I learned all too well how
deep the relationship between current and former government officials
and this little-known segment of the financial industry really runs. My
experiences interacting with the titans of this industry were so
eye-opening, I kept a diary of my meetings so I wouldn’t lose any of the
fresh insights and disturbing details of those exchanges.
When Clinton, Booker, Patrick and others defended Bain and Romney, I
was instantly transported back to a 2008 meeting I had with the Private
Equity firm KKR and two of the chief operatives for the industry –
former Speaker of the House and Democratic presidential candidate Dick
Gephardt and former RNC chair and George W. Bush campaign manager Ken
Mehlman. We had been pressing KKR to adopt a social responsibility code
that protected the rights of workers in companies they purchased and
owned, and as part of the campaign had released a series of videos with
Brave New Films that can be found at
warongreed.org.
One of the videos
highlighted that KKR’s Henry Kravis made $51,000 an hour and owned
numerous homes, and contrasted this with the low pay of workers at Toys
'R' Us, HCA and other companies KKR co-owned with Bain Capital. Sitting
in the room watching two former rivals, Mehlman and Gephardt, working
together, throwing aside years of ideological and partisan differences
to defend and represent KKR, was a startling example of Private Equity’s
reach and influence.
The relationship between government, politicians, and private equity is
a non-partisan love affair spanning nations and continents. Until Mitt
Romney’s rise to the national stage, this tryst largely took place out
of the sight of the public, as many elected leaders would exit
government to join the boards or payrolls of some of the world’s largest
PE firms. This is a conflict and confluence of interests that alone
should cause alarm. But Romney and private equity titans aren’t
satisfied with just influencing government. Romney’s bid for the
presidency represents PE’s first attempt at a complete leveraged buyout
of the White House. It’s another turn in the famous revolving door and
might be the greatest unspoken danger of this election.
In a time when Wall Street misdeeds crashed the global economy and
there seems to be a new scandal breaking daily about executive bonuses,
insider trading, and JP Morgan’s billion dollar gambling loses, it is
worth looking at the special role PE plays in the economy and how it
operates. I won’t attempt to summarize the broad analysis that many
people have done, including the recent
New York Times article document how Bain made a profit while bankrupting a company and the
Washington Post
article on Bain outsourcing of jobs to other countries They are just
two of the most recent articles that document how private equity has
destroyed jobs and loaded companies with debt, while stripping them of
assets and bankrupting them, and how PE still wrests huge riches for
itself from those companies. Instead, I want to focus on a few numbers
that tell the story of how the PE business model negatively influences
the larger economy and jeopardizes the economic health of the nation.
A few facts about private equity from 2000 to 2010:
-
$1.7 trillion was spent by Private Equity on leveraged buyouts.
Private Equity companies rolled up a total of a trillion in debt making
these purchases.
-
25 percent of the private equity capital used for these leveraged
buyouts, $283 billion, came from public employee pension fund
investments. While Romney and others in the PE industry have railed
against public employee retirement benefits, they have used the
accumulated capital of those funds to finance their purchasing spree.
-
Six of the ten largest employers in America became owned by Private
Equity firms. Some of these companies, like the private hospital chain
HCA, rely on government reimbursement from Medicaid and Medicare.
-
The companies they bought avoided $250 billion in taxes because of
the deductibility of interest. They borrow 60-90% of the cash needed to
finance purchases. Interest payments are treated like other expenses and
are deducted from earnings, leading to a huge tax break since their
business model is built on running up debt.
-
The individual private equity partners avoided another $10 billion
hiding behind the “carried interest exemption” that lets them pay a 15%
tax rate, far below what most of us are taxed on income.
-
The buyout boom and special tax breaks were key drivers in growing
inequality, as they sucked huge amounts of money from firms they bought
through leveraging up debt, stripping assets and using fancy financial
manipulations like dividend recapitalizations (more on this trick in the
future ) to add more debt and pay themselves extra bonuses.
The PE business model is based on squeezing taxpayers from two ends at
the same time. On the one hand, they avoid hundreds of billions in taxes
through special tax deals only available to the
already-super-rich—severely limiting the resources government has to
address the economic crisis and the priorities of the country. On the
other hand, they feed on taxpayer dollars to finance and fund the
companies they purchase and operate by buying companies like Bain’s HCA
hospital chain, that receive huge Medicaid and Medicare reimbursement,
and using publicly financed public pension funds for capital. While in
the short run, this business model--avoiding taxes and feeding off of
tax dollars--may make PE barons extraordinarily rich,it is an
unsustainable model that in the long run leaves taxpayers holding the
debt bag and the PE guys holding the money bags.
Despite the negative impact on the rest of us, the allure of becoming
part of this global economic elite is so seductive and powerful that it
draws politicians, both Democratic and Republican, to defend private
equity. Politicians know that when they leave the office they can join
the other former heads of state that went to work for private equity
firms upon leaving government--including Clinton, Tony Blair, George H.W
Bush, and John Majors. They can join former Vice President Dan Quayle,
former Senator Tom Daschle, and former Secretary of the Treasury John
Snow, who also went to work for PE, like government officials from
around the globe.
So I wasn’t surprised when current and former politicians defended
private equity. And none of us should be surprised by what Romney and
the PE guys will do, if in addition to controlling six of the ten
largest employers in the country
, they take control of the White
House. The only way to stop them is to become more financially literate
and demystify how these guys really make their riches and the
consequences for the rest of us. Looking more deeply at the PE business
models, their tax breaks, “dividend recapitalizations”, “club deals” and
all the other ways they manipulate markets and disadvantage the rest of
us is critically important if we believe in addressing growing
political and economic inequality, and rebalancing the economy of the
country.
But more importantly, I hope that as we better understand the dangers
of the private equity model, we can figure out how to stop a leveraged
buyout of the White House.
Stephen Lerner is a labor and community organizer and the architect of the Justice for Janitors campaign.
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