The Role of Private Equity Firms in the U.S. Economy
http://thedianerehmshow.org/shows/2012-01-12/role-private-equity-firms-us-economy
The GOP is considered to be the party of free enterprise. So it surprised some how ferociously Republican presidential hopefuls attacked rival candidate Mitt Romney for his record at Bain Capital. Newt Gingrich accused Romney of "looting" companies and Rick Perry called him a "vulture capitalist." Romney, the current GOP front-runner, did invite scrutiny with his boast of creating 100,000 jobs through Bain, his private equity firm. It's a figure economists say is almost impossible to tally. Diane and her guests will explore the role private equity firms play in the U.S. economy.
Guests
Eileen Appelbaum
senior economist, the Center for Economic and Policy Research.
Megan McArdle
senior editor, The Atlantic, covering business and economics.
Steven Kaplan
Neubauer Family professor of entrepreneurship and finance, The University of Chicago Booth School of Business.
Comments
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In the United State, the absence of proper regulation coupled with perverse incentives, has allowed private equity firms to engage in highly leveraged activities seeking maximum returns (called profits) in an environment that systematically underprices risk.
To correct this problem, financial consolidation should be discouraged, esoteric investment products curtailed or eliminated, and market stability rather than speculation should be promoted.
In short, we should get back to the business of “manufacturing things” rather than pushing money around to make money. Private equity firms have no interest in businesses that they purchase, they simply want to break them up, get rid of the workers and sell off what is left for profit.
This is the proof which shows that Capitalism is a predatory stage of human evolution that should be banned as quickly as possible. It is a cancer which is devouring the host.
Am I the only one who thinks these posts from TB are nothing but a ruse?
Let us hope this show illustrates the value of private equity firms and the service they provide for a robust economy. Listening to DR the other day with Thomas Frank I have my doubts.
Ruse ~noun
:a trick, stratagem, or artifice.
A ruse as in…. I don’t really believe what I’m writing? Gee, golly gosh, how could anyone despise capitalism that much? It’s just such a wonderful system and anyone who doesn’t believe that it is just such a weirdo and we won’t let him in our club.
Trust me, I dislike capitalism just as much as I claim to.
When I say "ruse" in regards to your posts, I mean that they are hastily prepared rants using the same remixed posts ad nauseam for the desired affect to agitate only. It's clear you speak from closely held beliefs, but it appears they are as shallow as the posts.
I in one way agree with Teece, the issue is the unnatural manipulation of risk vs. reward. But the solution is where we divirge, less regulation and proving that bad business practices lead to failure allow capitalism to succeed. Let the bad ones fail and the good ones will prosper. Bail outs should be for no one, and no company. If you(companies) can't compete in a free market, then you lose and can try it again.
Well, if we only have a profit-less manufacturing economy in the absence of capitalism as TB advocates, my 401k and retirement just went down the crapper. So let's call that Plan B. While no doubt PE firms buy distressed companies and lay off workers, one could argue that job loss was destined to happen at the struggling companies anyhow. Some entrepreneurs rely on PE as the only hope for funding their start-up company, especially with credit so tight these days, so they do in fact lead to job creation. It's just a funding mechanism for businesses.
Private equity is the "Mittens" of Capitalism.
Like the corporate charter these legalese mittens keep the wealthy gamblers from getting burned while they are cooking the books.
They export jobs as well as destroying them.
Maybe we mishear and they actually call themselves "job-craters" as they box our strategic self-sufficiency for shipment.
I have learned to despise capitalism as much as Teece has, from having the job of rescuing its victims. Because of capitalism most Americans are losers.
Sadly, many victims live under such fear and insecurity they continue to tolerate it. People have the power to scrap this injustice today. I'm already working on that.
Private equity can be a polite euphemism for applying capital to buy and breakup existing companies for the purpose of stripping assets. The tax code is used to declare bankruptcy and write off losses by saddling the companies with unsupportable debt. The principals pay themseklves huge fees. The businesses disapppear. The primary objective is to maximize profit. This should be discouraged. Investing capital to create NEW business is another thing.
I believe AIG was the largest insurer of pensions in the US. Were they acting as a private equity firm in the sub prime scandal or just insuring these bad loans?
Is the Carlyle group a private equity firm?
Why is it that we hear so many discussions about capitalism as if this is a component of the US constitution. Its as if Capitalism has become the largest religion in the US. Evangelism, Catholicism, Capitalism, Judaism, Buddhism
Re: debt....the assets and projected earnings of a company secure the debt. The lenders have access to this information and make their decision to lend or not based on it. Same as if a bank lends to a local small business. There's no guarantee the company will succeed and the debt get repaid. That's business, free enterprise. Tax payers don't suffer.
James I clearly know very little about the economy. So is that the stated purpose of private equity firms?
Would the newly formed Consumer Financial Protection Bureau have oversight when it comes to private equity companies?
I agree. The Bain Capitals, Goldman Sachs et al engage in a form of late stage, decadent capitalism which produces nothing but fees for the principals and wreckage of formerly sound businesses.
Re: operating vs real estate companies. Are suggesting that's sinister? Many if not most Fortune 100 companies do not own their real estate assets, even the manufacturers with large plants. It makes better sense for someone else to own and for them to lease. Many hospitals are looking at this same model as a way to strengthen their balance sheets in an environment of restricted access to debt financing.
I guess this is why so little governing is getting done in Washington. The thought-disordered all-or-nothing, black-or white thinking.
Capitalism is but one ingredient in the recipie of our nation's successful functioning. As in any recipie, the devil is in the details of quantity and balance with other ingredients, such as accountabilty and regulation.
For some Capitalism (large C) is the god they would sacrifice the rest of us to. Wall Street's manipulation of risk and reward to maximize profits. For most of us, capitalism is simply the way we organize out economy. Main Street building a better mousetrap. But Wall Street has been using its resources to try convince Main Street that their interests are the same. They are not. Wall Street must always exist in the service of Main Street, not the other way around.
Regulatory failure and desupervision have allowed Wall Street to gain control not only of Main Street but of our political process and government as well. Hence our current economic mess, where such high unemployment can still be called "recovery". Wall Street making money is the measure, not the common American through Main Street.
BTW, my 401K is shot, too. But I never thought my retirement was Wall Street's responsibility.
I asked an investment banker once 'I believe in capitalism and see globalization in the long-term as positive economically. But, when companies are sold and the jobs set to other countries, did you ever think about what happens to the employees. What is your responsibility to those people who fall through the cracks?' His response was 'I never thought about that......'. It was really a new idea to him. Later I asked 'what is the responsibility of the private equity & Wall Street to this country and it's citizens when they ship jobs overseas or cut jobs? Why is against capitalism for the private sector & government to develop a National industrial/manufacturing/Research & Development policy so that we are staying competitive with China, Germany, and other countries? Is it smart to let our talent sit around either unemployed or underemployed when we could be employing them in emerging fields ' He had no answer.
This is case where morality and concern about others is business smart.
We are acting dumb when we shift the bulk of money to the top 1% and forget about the needs of the whole.
It is not smart to let the oil, gas and coal industries have huge tax breaks and allowing them to destroy the emerging home-based alternative energy business. That was clearly greed based not in the best interest for the whole. Now, China & Germany has our technology and we're still fighting over 'climate change'. Stupid & immoral.
Taxpayers suffer whenever family-supporting jobs are eliminated.
Kudos: Untethered Capitalism is not Democracy.
Interesting discussion, however there's a glaring point that's been missing. How is private equity a "job creator"? I have experience in corporate America and EVERY time I have seen a private equity firm get involved in a company the first thing they do is lay people off. Their mission is to make the company profitable. If that means automating, outsourcing, polluting, etc... that is what they will do. In fact, if its public, that's what they are legally obliged to do by the SEC.
I fail to see how every candidate, with the exception of Dr. Paul, can say “it’s not the government’s job to create jobs, that’s what the private sector does.” Corporations aren’t interested in creating jobs. If a machine can do what you do more efficiently you’re out. In fact, if the corporation is publicly owned the it is actually illegal for them to put creating jobs ahead of shareholder profit. Watch the “market”. What happens when a company lays people off. The stock goes up. Creating jobs is such a ridiculous statement in and of itself. If we had more sick people we would need more people to take care of them, more drugs, more hospitals, nurses, doctors, medical assistants, etc. That’s “job creation”. And it’s actually happening right now in Florida. Is that what we want? How about pursuing some kind of goal, like I don’t know, feeding people or converting to renewable energy, and see what jobs are needed. Maybe stop measuring our “success” in dollars.
If I understand Stephen correctly, the private equity firms provide much better returns than others so it is perfectly acceptable for enter into various types of scavenger behavior. Further, if this behavior wasn't going to be effective then no one would loan them money in the first place.
By that regard is there any behavior that provides a profitable return that isn't beneficial?
'Private equity is new' ?!?! Now your panel members are just embarrassing themselves. Before regulated financial institutions, before America was a nation, private equity and debt and high leverage and failed ventures all existed. Discuss merchant banking.
One of your guests answered the question if fair tax is paid, and the answer was capital gains tax is paid. This is 15%, and was established in 2003. 15% creates greater leverage to take risks. I have deduced over the years the primary purpose of taking over a company, profitable or not, is tearing it
apart to benefit from a piece of it. The result of the original company is a husk.
If the companies that go under provided a valuable service or product, then a vacum is created in the marketplace and a new company is created to provide that good or service. If on the other hand a company is providing a less valued "product" then the private equity firm will often keep it afloat much longer than the previous owners would have. This means the persons that were not laidoff will be employed longer, and yes certainly some people will be laid off. This is a reality that if a company provides goods and services that are no longer valued then people will be unemployed, or would some of you argue that we should keep these companies afloat, that smacks of corporate wellfare.
Ms Rehm, you have panel members who understand business and financing, and those who've read a study. When has the latter ever been a credible contributer to a topic?
Re: limits on leverage required. (1) woman, listen to man...risk is to lender, not borrower. (2) For practically every real estate project, the financing is 20-30% equity, 70-80% debt. Should we also stop all real estate projects because of this horribly dangerous financing ratio?
Dear Mr. Kaplan.
You think that the banking market is working without regulations...tell that to the millions of people who lost their jobs; the millions of people whose life savings were decimated by the banking crisis while the top bankers/private equity folks walked away with millions/billions in compensation taxed at 15%; tell that to the millions of people whose pensions were lost or greatly reduced while private equity partners and CEO's took money for their pensions at the expense of the workers pensions.
It sounds to me that the equity firms are much like wall street. They move paper around to look like they r doing good. So where r the jobs? All I see is a larger number of one percenters
It sounds to me that the equity firms are much like wall street. They move paper around to look like they r doing good. So where r the jobs? All I see is a larger number of one percenters
It sounds to me that the equity firms are much like wall street. They move paper around to look like they r doing good. So where r the jobs? All I see is a larger number of one percenters
Will the newly formed CFPB have oversight over private equity companies? Did Steve Kaplan say that everything is fine? Does he live on planet 1%?
The strange private equity laws/activities aside: If Mitt wants to run as a solid conservative, isn't he obligated to denounce incursion of debt? Since private equity firms succeed via leverage, how does Mitt claim to have a future of job creation without new debt?