Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
Killing the Maximum-Wage Myth - 23rd Apr 14
U.S. Quarterly Economic Review - Optimism at the Fed - 23rd Apr 14
Why Mohamed El-Erian Left Pimco - Video - 23rd Apr 14
QE Is A Fraud Perpetrated By Made Men - 23rd Apr 14
Gold and Miners Outperform Once Again - 23rd Apr 14
G-20 and the US Tell the Bank of Japan to End Quantitative Easing - 23rd Apr 14
How to Get in the Trading Game and Profit - 23rd Apr 14
Fed Follies, U.S. Housing Market Fiasco - 23rd Apr 14
What Will December 31, 2014 Financial Headlines Look Like? - 23rd Apr 14
Why Gasoline Prices are Surging Again - 22nd Apr 14
Cold War 2.0 - 22nd Apr 14
The JIS – Junk Ideology Syndrome - 22nd Apr 14
How to Avoid Losing All Your Money - 22nd Apr 14
Silver Up, Stocks S&P Down - 22nd Apr 14
U.S. Mainstream Media Propaganda Setting the Stage for War With Pakistan - 22nd Apr 14
U.S. Interest Rates are NOT Rising! - 22nd Apr 14
A Crisis vs. the REAL Crisis: Keep Your Eye on the Debt Ball - 22nd Apr 14
Bitcoin Implications of Lack of Price Action - 22nd Apr 14
Japan - The Twilight Of The Rising Sun - 22nd Apr 14
Is This What a Credit Bubble Looks Like? - 22nd Apr 14
The Dark Side Of The Silver Mining Industry - 21st Apr 14
Strong U.S. Dollar Rally Could Pull Rug From Under Gold and Silver - 21st Apr 14
Silver Feeble Rally Fails to Hold Breakout, Falling Back Towards Support - 21st Apr 14
Stock Market Smart Money – All Out or More to Go? - 21st Apr 14
Fast Rising Pump Prices Counterattack - 21st Apr 14
Extreme Climate Change And Life On This Planet - 21st Apr 14
Gold and Silver Stocks Sitting Tight - 21st Apr 14
Stock Market Minor Correction Imminent - 21st Apr 14
Gold and Silver - Counting Blessings and Tender Mercies - 20th Apr 14 - Jesse
The CIA Through The Looking-Glass - 20th Apr 14 - Stephen_Merrill
Gold And Silver - Gann, Cardinal Grand Cross, A Mousetrap, And Wrong Expectations - 20th Apr 14 - Michael Noonan
Nikkei Stock Market - Sell Japan - 20th Apr 14 - WavePatternTraders

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How Mitt Romney's Bain Career Will Inflame the Class Warfare Debate

ElectionOracle / US Presidential Election 2012 Jan 19, 2012 - 06:27 AM GMT

By: Money_Morning

ElectionOracle

Best Financial Markets Analysis ArticleShah Gilani writes: Last Wednesday a Pew Research Center poll revealed that 66% of respondents think class conflict in American society is "strong" to "very strong."

Now that Mitt Romney is increasingly likely to be the Republican challenger to Democrat Barack Obama this November, that same divide is likely to become even more inflamed.


In fact, Romney's career as the CEO of private equity company Bain Capital ensures the class warfare debate will only get uglier.

That's why it's important to understand what private equity companies really do, what role Romney played at Bain, and how class warfare combatants will size each other up.

The Truth Behind Private Equity
Bain Capital is a private equity shop. What you need to know is that "private equity" is a rebranded name. Private equity companies used to be known as leveraged buyout shops.

But, leveraged buyouts (LBOs) have a bad reputation, so the industry -- or club, which it more closely resembles -- began referring to itself as private equity. It's the same as junk bonds being rebranded as "high yield debt."

A leveraged buyout is really nothing more than a financing technique.

Typically, a public company, a division of a public company, or a closely held non-public company is taken "private" by a group of investors who put up some equity to demonstrate they have skin in the game, and who then hypothecate the target company's assets as collateral for debt they pile onto the target company.

Sometimes borrowed money is raised in the junk bond market. Since the acquirers are leveraging the target company's balance sheet by borrowing a lot of money against the company's assets, lenders demand high rates of return knowing the company is being "leveraged."

The borrowed money is then used to pay shareholders, or as is more often the case, to pay off the "mezzanine" lenders who float enough cash for the acquirers to buy the company initially, and whose short-term loans are paid off from the issuance of junk bonds.

Not all the debt is junk. Sometimes debt issues are better quality. It's all a matter of how much leverage is necessary to make the deal happen and to make it profitable for the acquirers.

Once the target is acquired it's up to management, which often includes existing executives who are part of the buyout team, to streamline the company and make it profitable.

Loaded Down With Debt
Since the target company is now buried in debt, expenses are cut as judiciously and quickly as possible.

For instance, maybe the acquired company has too many corporate jets that are a balance sheet drag. Or, maybe they have too many employees that add to expenses.

Usually it means laying off workers, which is what gave leveraged buyouts their bad reputation.

But, that's not all that creates controversy. LBO shops charge the target company all kinds of fees.

There are investment banking fees for doing the deal, financing fees for leveraging the company, and other fees that go directly to the LBO shop.

Sometimes, the company takes on even more debt to pay a dividend to its new owners. That's a way for the LBO shop to get its equity back quickly. So much for skin in the game.

The LBO shops also pay themselves a 2% management fee out of the capital that their backers, investors like pension funds, endowments and high net worth individuals put into them so they can scour the planet for target companies to leverage up and buy.

And, they take at least 20% of the profits they make, too. It's a nice club to be a member of.

But while leveraged buyouts are the bread and butter of private equity shops, they can also dabble in venture capital financing of start-ups and other capital raising and financing opportunities.

Mitt Romney's Bain Capital Problem
Mitt Romney was a founder of Bain Capital, which grew out of Boston-based global management and consulting giant Bain & Co. He ran the LBO shop from 1984 to 1999.

Romney was very successful running Bain Capital and amassed an estimated fortune of over $250 million.

Needless to say, as Romney gets closer to becoming the Republican nominee, his role at Bain and his claim to have created 100,000 jobs are going to be heavily scrutinized.

Now personally, I'm not against leveraged buyouts.

However, I do think it's fair game to question LBOs that end up turning to bankruptcy protection to shed themselves of their pensions (which are often taken over by the taxpayer funded Pension Benefit Guaranty Corporation) so they can re-emerge under the guise of becoming streamlined companies.

This class warfare debate will find fertile ground in the rich rewards bestowed upon LBO kings who claim to create jobs while simultaneously eradicating others through creative destruction.

In the real world, c reative destruction is just part of the natural and organic birth and death cycle of businesses.

But to claim that layering mountains of debt on the shoulders of companies (companies are people too, you know) to pay private equity companies fat fees so they can generate generous returns for themselves and their investors (many of whom are public sector pension plans) seems inordinately lopsided and more destructive than creative.

Not only will Romney be cast in that dark light, he's also going to have to face the added knock that private equity managers' earnings from their operations isn't ordinary income (obviously not based on how many mega-millionaires and billionaires there are in the PE club), but are taxed at the much lower capital gains rate.

Private equity guys are bankers. So, Romney will be the poster child for everything bad that bankers have been blamed for since time immemorial. Not that he's going to be the first or last banker ever to run for the presidency of the United States.

But, given the politically charged atmosphere in Washington and around America, drawing class warfare lines to make the case for political candidates will be front and center this year.

So far, President Obama and the Democrats haven't had to weigh-in for the fight. Republican candidates are doing a good job on their own bashing each other's capitalist credentials and throwing stones from inside their glass house to the dismay of traditionally stalwart pro-business Grand Old Party regulars.

According to the Pew poll, 55% of Republican respondents, 68% of Independent respondents and 73% of Democrat respondents think class conflicts are strong, or very strong.

You can expect that these political lines will only darken as Romney emerges.
[Editor's Note: If you're fed up with the rampant corruption, double-dealing, and protection of Wall Street by Washington (at the expense of the taxpayers on America's Main Street), then you need to read Shah Gilani's Wall Street Insights & Indictments newsletter. As a retired hedge-fund manager, Gilani is a former Wall Street insider who knows where all the bodies are buried. But unlike most insiders, he's not afraid to tell you where they are. He's also got some pretty good ideas how to fix this mess - and how to protect yourself until the cleanup takes place. Please click here to find out more. The newsletter is free.]

Source http://moneymorning.com/2012/01/19/...

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014