Saturday, September 01, 2012

The Angel of Debt

[Post title shamelessly swiped from Gillian Flynn's mystery novel Dark Places. But it might be fun to repurpose the phrase just for the Mittster. Just sayin'.]

So maybe the next time you need to explain for the umpteenth time to your idiot brother-in-law why his vote for Rmoney is the proverbial equivalent of a chicken voting for Colonel Sanders, you can smack him upside his fool head with this, by way of clarifying what Mittford actually did to "earn" his ginormous pile of pelf:

Here's how Romney would go about "liberating" a company: A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent. When an LBO is done without the consent of the target, it's called a hostile takeover; such thrilling acts of corporate piracy were made legend in the Eighties, most notably the 1988 attack by notorious corporate raiders Kohlberg Kravis Roberts against RJR Nabisco, a deal memorialized in the book Barbarians at the Gate.

Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company's management with lucrative bonuses. Once management is on board, the rest is just math. So if the target company is worth $500 million, Bain might put down $20 million of its own cash, then borrow $350 million from an investment bank to take over a controlling stake.

But here's the catch. When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt.

Now your troubled firm – let's say you make tricycles in Alabama – has been taken over by a bunch of slick Wall Street dudes who kicked in as little as five percent as a down payment. So in addition to whatever problems you had before, Tricycle Inc. now owes Goldman or Citigroup $350 million. With all that new debt service to pay, the company's bottom line is suddenly untenable: You almost have to start firing people immediately just to get your costs down to a manageable level.

"That interest," says Lynn Turner, former chief accountant of the Securities and Exchange Commission, "just sucks the profit out of the company."

Fortunately, the geniuses at Bain who now run the place are there to help tell you whom to fire. And for the service it performs cutting your company's costs to help you pay off the massive debt that it, Bain, saddled your company with in the first place, Bain naturally charges a management fee, typically millions of dollars a year. So Tricycle Inc. now has two gigantic new burdens it never had before Bain Capital stepped into the picture: tens of millions in annual debt service, and millions more in "management fees." Since the initial acquisition of Tricycle Inc. was probably greased by promising the company's upper management lucrative bonuses, all that pain inevitably comes out of just one place: the benefits and payroll of the hourly workforce.

Once all that debt is added, one of two things can happen. The company can fire workers and slash benefits to pay off all its new obligations to Goldman Sachs and Bain, leaving it ripe to be resold by Bain at a huge profit. Or it can go bankrupt – this happens after about seven percent of all private equity buyouts – leaving behind one or more shuttered factory towns. Either way, Bain wins. By power-sucking cash value from even the most rapidly dying firms, private equity raiders like Bain almost always get their cash out before a target goes belly up.

This business model wasn't really "helping," of course – and it wasn't new. Fans of mob movies will recognize what's known as the "bust-out," in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company's credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money. Reduced to their most basic level, the leveraged buyouts engineered by Romney followed exactly the same business model. "It's the bust-out," one Wall Street trader says with a laugh. "That's all it is."

As always, there's more, read the whole thing, yada yada. But that's really the trick -- while Rmoney may have slightly more insight into the workings of the bidness world than the average schmoe, what he really has is what a good arsonist has -- a lack of conscience. Anyone can light a fire, most of us are simply prevented from doing so by a fundamental moral code.

But this is a guy who, with a bunch of his punk prep-school friends, gang-tackled and sheared a fellow student; who, at Stanford, attended counter-demonstrations in support of the Vietnam War -- a war which, it must be noted, Mittford received four deferments, and ultimately went to France to try to talk the frogs into giving up wine. There's no character there.

That's really the kind of human being Willard Romney is. There is a rather perverse, vindictive part of me that sincerely wishes that, were the rest of us insulated from the very real damage he and his equally soulless running mate, that he would win, so that his supporters, and every RNC attendee (especially Clint Eastwood) could feel the full effect of the policies they would put forward.

There would be no more fitting punishment for these jackasses, than to see how bad it could really get, if for no better reason than to appreciate how good they really have it right now. Few things are more annoying than watching a bunch of spoiled, fat, pasty-white assholes rant about how Da Bruvva is keepin' 'em down. May each and every one of them, and their families, get every single thing they so fervidly wish for.


Anonymous said...

from Wikipedia:

LBO may refer to:
Leveraged Buyout
Large Bowel Obstruction

Personally, I think that would make an excellent bumper sticker, accompanied by a picture of Mitt looking constipated...

Anonymous said...

Thanks for the Taibbi summary - I'd heard about it but hadn't read the long form.

Always glad to read your posts when you have time to write them (because you do it so well. Just about the best, imo.)