Speak like a Throwback

So, I’m uploading my Mozy backup files–estimated time hours and hours and hours–because my computer suffered a case of blue screen of death. Windows 7 totally choked and I had to return it to the factory image.  So,  I’m throwing up a retro speak open thread since I have an alien computer until Mozy does its thing.  This thread is actually related to this NYT’s article:   “Gosh, Who Talks Like That Now? Romney Does”. RomneySpeak is a throwback to the good ol’ days when blacks had to pay poll taxes, count marbles in jars, and take long tests to vote.  It’s a time when it was hard to get birth control and abortion was one of those back alley things.   Yes, folks with Mittens, it’s like a throw back to that good old time when White Men were White Men and the rest of us were under their thumb. Probably why they appear to be his main supporters.

At a campaign stop in Rockford, Ill., not long ago, Mitt Romney sought to convey his feelings for his wife, Ann. “Smitten,” he said.

Not merely in love.

“Yeah, smitten,” he said. “Mitt was smitten.”

It was a classic Mittism, as friends and advisers call the verbal quirks of the Republican presidential candidate. In Romneyspeak, passengers do not get off airplanes, they “disembark.” People do not laugh, they “guffaw.” Criminals do not go to jail, they land in the “big house.” Insults are not hurled, “brickbats” are.

As he seeks the office of commander in chief, Mr. Romney can sometimes seem like an editor in chief, employing a language all his own. It is polite, formal and at times anachronistic, linguistically setting apart a man who frequently struggles to sell himself to the American electorate.

Romney evidently hides out a lot in his little corners of the world where modernity alludes him.

Mr. Romney, 65, has spent four decades inside the corridors of high finance and state politics, where indecorous diction and vulgarisms abound. But he has emerged as if in a rhetorical time capsule from a well-mannered era of soda fountains and AMC Ramblers, someone whose idea of swearing is to let loose with the phrase “H-E-double hockey sticks.”

“He actually said that,” recalled Thomas Finneran, the speaker of the Massachusetts House of Representatives when Mr. Romney was governor. “As in, go to ‘H-E-double hockey sticks.’ I would think to myself, ‘Who talks like that?’ ”

Mr. Romney, quite proudly. In fact, he seems puzzled by the fascination with something as instinctive (and immutable) as how he talks, as if somebody were asking how he breathes

You can tell he’s stuck there by the way he thinks the Soviet Union is still our biggest threat?  Kruscheve any one?

Those around him are so accustomed to his verbal tics that they describe them in shorthand. “Old-timey,” said one aide. “His 1950s language,” explained another. “The Gomer Pyle routine,” said a third.

Asked about his boss’s word preferences, Eric Fehrnstrom, a veteran Romney adviser, responded knowingly: “You mean like ‘gosh, golly, darn’?”

For Democratic strategists, Mr. Romney’s throwback vocabulary feeds into their portrayal of a man ill-equipped for the mores and challenges of the modern age. David Axelrod, a top adviser for an Obama campaign that has adopted “Forward” as its slogan, once quipped that Mr. Romney “must watch ‘Mad Men,’ ” the hit television show set in Manhattan in the 1960s, “and think it’s the evening news.”

His exclamations can sound jarring to the contemporary ear — or charming, depending on whom you ask. Midway into a critique of Mr. Obama’s economic policies a few months ago in Charlotte, N.C., Mr. Romney declared: “They’ve scared the dickens out of banks,” he said. “They’ve scared the dickens out of insurance companies.”

Frankly, the idea of a President Romney and a Vice President Ryan scares the dickens out of me! Talk about revenge of the zombies!

I have to admit to being in Nursery School in 1960 so you’ll have to excuse me if most of what I remember has to do with Captain Kangaroo.  I do know that when I was growing up as the 60s rolled on that I saw the Vietnam War on TV and heard nightly body count and black people in the south being hosed down with fire hoses just for trying to vote.  I remember that I couldn’t even wear pants to school in the middle of a midwestern winter.  I sure as hell don’t want to go back to that.


Live Blog 2: Laughing Joe and Smirking Paul Veep Show

Well, they are really going at it.

Vice President Joe Biden and Rep. Paul D. Ryan of Wisconsin each went immediately on the attack at the opening of their debate on Thursday night, sparring over Libya, Iraq and terrorism.

Responding to a question on the fatal attack last month on the U.S. diplomatic compound in Benghazi, Libya, Biden assailed Republican presidential nominee Mitt Romney on a range of national security matters.

“Whatever mistakes were made will not be made again,” Biden said of the attack in Libya before pivoting to Romney’s support of the war in Iraq.

Biden credited President Obama for ending the Iraq war, saying Romney thought “we should have left 30,000 troops there.” He faulted Romney for objecting early on to Obama’s setting a 2014 deadline for withdrawing U.S. troops from Afghanistan, and for saying he “wouldn’t move heaven and Earth” to capture Osama bin Laden.

Ryan, the Republican nominee for vice president, said he mourned the death of Ambassador J. Christopher Stevensand three other Americans in the Libya attack, then criticized Obama’s response to the attack.

“It took the president two weeks to acknowledge that this was a terrorist attack,” the Wisconsin congressman said.

Ryan said a Romney administration would provide Marines protecting an outpost like the one in Benghazi.

“If we’re hit by terrorists, we’re going to call it for what it is — a terrorist attack,” he said.

Ryan also castigated Obama’s administration for its evolving accounts of the Libya attack. “This is becoming more troubling by the day,” he said.

WAPO says they have “different styles”.

The first 45 minutes showed two men with widely divergent styles: Ryan, the House Budget Committee chairman, was precise and self-contained, marshalling numbers and policy issues.

Biden was looser and more familiar, chuckling in seeming exasperation several times at Ryan’s arguments, and interrupting the Republican in mid-argument. Eventually, Ryan seemed frustrated with a debate in which the two talked over each other.

“Mr. Vice President, I know you’re under a lot of duress to make up for lost ground,” Ryan said. “But I think people would be better served if we didn’t keep interrupting each other.”

One of Ryan’s best early moments came in response to the debate’s first question, about the attack in Benghazi, Libya, that killed the U.S. ambassador and three others. Ryan recounted how the White House’s account of the attack had shifted, and cast it as a signal of a broader problem.

“What we are watching on our TV screens is the unraveling of the Obama foreign policy, which is making…us less safe,” Ryan said.

For Biden, the sharpest moment may have been when he picked up on the theme that President Obama did not touch in the first presidential debate. He recalled a Romney speech that was secretly recorded, in which the Republican candidate described 47 percent of Americans as people who considered themselves primarily victims.

“I’ve had it up to here with this notion that, ‘Forty-seven percent, it’s about time they take some sort of responsibility here,’” Biden said.

What do you think about this assessment?

The Fix ‏@TheFix

For political junkies and decided voters, this is a great debate. For the rest, it’s everything they hate about politics #vpdebate


Soledad Spins the Spinners Again

Tara Wall was put to the Soledad Truth treatment yesterday. She was unable to defend a contradictory set of statements on Israel and Palestine made by Wall yesterday after Romney’s NeoCon speech.

Here’s the basic gist from Alternet.

The exchange over the Israel/Palestine conflict has attracted the most attention, with O’Brien grilling Wall on Romney’s “contradictory positions.”

The topic of the segment wasRomney’s foreign policy speech earlier today at the Virginia Military Institute.

O’Brien first tried to get into the fine points of Romney’s foreign policy, questioning whether Romney was laying out any different options on Iran than President Obama. O’Brien asked three questions about Iran, but Wall was not interested in getting into specifics.

Then O’Brien turned to the Middle East. O’Brien juxtaposed the remarks Romney made at the infamous Florida fundraiser that was secretly taped, and his planned remarks today. In Florida, Romney said that peace with the Palestinians was not an option because the “pathway to peace is almost unthinkable to accomplish”–meaning a Palestinian state is unthinkable.

But in Virginia, Romney vowed to work for a “democratic, prosperous Palestinian state living side by side in peace and security with the Jewish state of Israel.”

O’Brien asked Wall about these “contradictory” positions. Wall fired back, and said, “the fact is that it’s the president who’s failed.” O’Brien then talked over Wall’s remarks, saying, “Tara, that was an excellent shift, but answer for me about Gov. Romney.”

O’Brien repeatedly tried to get an answer to her question, but it was to no avail. “I’m not going to get into a big foreign policy debate with you here,” said Wall, explaining that foreign policy is not in her purview in the campaign

Wouldn’t it be nice if all the media wouldn’t act like stage props and actually call out campaigns on inconsistencies and lies?

Interestingly enough,Paul Ryan was rude to a reporter in Michigan who was evidently asking unwanted questions about guns and violence. There’s some indication that Ryan actually walked off the interview.

A Michigan ABC affiliate posted video of an animated exchange between Paul Ryan and a local reporter on Monday evening, prompting questions about whether Ryan walked out of the interview.

When it aired, reporter Terry Camp characterized the interview as ending badly, and said Ryan was “not specific in his answers.” Meanwhile, the Ryan campaign said the candidate was asked a “weird question” relating gun violence to tax cuts.

The Ryan campaign said the interview had simply run past its allotted time, but that Ryan didn’t end the interview prematurely. Video of the interview that was posted to YouTube shows an off-camera aide (later identified as Ryan spokesman Michael Steel) calling the interview to a halt while Ryan is standing, still in casual conversation with the reporter while removing his microphone.

“Does the country have a gun problem?” Camp asked Ryan during the interview, held in the library of the Cornerstone School.

“This country has a crime problem,” Ryan responded.

I guess that Republicans expect the “Fox” treatment wherever they go.  Good to know that some reporters keep after them.  I just wish they all would!!


Friday Reads

Good Morning!

I”m finally getting over this sinus infection so I’ve had a chance to actually read a few interesting things.  First up, is yet another one of those folks that insists that baby boomers are parasites.    I really hate generational warfare, don’t you?  However, this one is interesting.  It’s put in terms of a conversation between baby boomer son and ‘greatest generation’ father and the arguments are backed up by interesting anecdotes and statistics. Still, why do have to keep score on who’s screwed up the country more in terms of age groups?

The boomers haven’t been a total disaster, of course. They did indeed blaze huge social and economic trails for women, minorities, and people with disabilities. Those groups have gained rights that, as long as the rest of us remain vigilant, will never be reversed: Young women can grow up to be lawyers or scientists. African-Americans can grow up to be president. Boomers gave us Apple and Microsoft. They made the Star Wars movies. They grew the economy for a bit. Once, for a couple of years in the late 1990s, they balanced the federal budget.

But the numbers on the laptop remind me how fleeting much of that progress was—and how boomers chose short-term gratification when they had opportunities to secure a better future for generations to follow. Classic example: Instead of devoting the budget surpluses of the late ’90s to social programs that desperately needed them, they voted themselves tax cuts in 2001 and 2003, and an expanded Medicare benefit shortly after—a move a Congressional Budget Office study from that era suggests raised the expected tax rate on future generations from 29 percent to 53 percent. They borrowed heavily to cope with the economic sluggishness of the 2000s and, in so doing, inflated a housing bubble that, when it popped, triggered the Great Recession.

Median-income growth has stagnated for women and minorities over the past decade. The typical African-American today has less wealth than his or her parents did, according to Pew. Labor-force participation for women this year hit its lowest level since 1991.

So, the Brits pile on boomers too.  Here’s something from The Economist on “Sponging Boomers” and how that relates to the next crisis.

These boomers have lived a charmed life, easily topping previous generations in income earned at every age. The sheer heft of the generation created a demographic dividend: a rise in labour supply, reinforced by a surge in the number of working women. Social change favoured it too. Households became smaller, populated with more earners and fewer children. And boomers enjoyed the distinction of being among the best-educated of American generations at a time when the return on education was soaring.

Yet these gains were one-offs. Retirements will reverse the earlier labour-force surge, and younger generations cannot benefit from more women working. There is room to raise educational levels, but it is harder and less lucrative to improve the lot of disadvantaged students than to establish a university degree as the norm for good ones, as was the case after the war. In short, boomer income growth relied on a number of one-off gains.

Young workers also cannot expect decades of rising asset prices like those that enriched the boomers. Zheng Liu and Mark Spiegel, economists at the Federal Reserve Bank of San Francisco, found in 2011 that movements in the price-earnings ratio of equities closely track changes in the ratio of middle-aged to old workers, meaning that the p/e ratio is likely to fall. Having lived through a spectacular bull market, boomers now sell off assets to finance retirement, putting pressure on equity prices and denying young workers an easy route to wealth. Boomers have weathered the economic crisis reasonably well. Thanks largely to the rapid recovery in stockmarkets, those aged between 53 and 58 saw a net decline in wealth of just 2.8% between 2006 and 2010.

More worrying is that this generation seems to be able to leverage its size into favourable policy. Governments slashed tax rates in the 1980s to revitalise lagging economies, just as boomers approached their prime earning years. The average federal tax rate for a median American household, including income and payroll taxes, dropped from more than 18% in 1981 to just over 11% in 2011. Yet sensible tax reforms left less revenue for the generous benefits boomers have continued to vote themselves, such as a prescription-drug benefit paired with inadequate premiums. Deficits exploded.

Yes. So, all of us should just head to the ice floes.  La-ti-da.

So, here’s my weekly update on interesting historical graves.  Archaeologists believe they have found the tomb of an ancient queen in Guatamala.  A tiny jar has given them some key clues.

Glyphs carved into a tiny alabaster jar have led archaeologists to conclude that the tomb in Guatemala where the jar was found belonged to one of the greatest queens of the Classic Maya civilization, known as Lady K’abel.

“She was not only a queen, but a supreme warlord, and that made her the most powerful person in the kingdom during her lifetime,” David Freidel, an archaeologist at Washington University in St. Louis, said in a report released today. That description would put Lady K’abel in the same class as other ruling women of the ancient world, ranging from the biblical Queen of Sheba to Egypt’sHatshepsut and Cleopatra.

That’s some heady company for Lady K’abel.

Some of the most bizarre comments made by Mitt Romney was his dislike of shipping jobs to China or having China fund our lifestyle as compared to funding their own. It takes brass ones to suggest that he’s not been in favor of shipping jobs to China given this Bain Capital investment in a Chinese factory that is quite shocking.  The word sweatshop is so inadequate.  No wonder he thinks all of us are freeloaders if he thinks this situation constitutes a normal working conditions. Romney discussed the working conditions so he was well aware of where his money was going.

Economist Paul Davidson recently pointed out the truth on AlterNet : “Romney has spent his career offshoring and outsourcing American production processes — and associated jobs — to countries like China where human labor is valued in the market at a very low wage rate.” The sub-human conditions at these production facilities represent things that Americans are strongly opposed to: child abuse, squalor, forced overtime, and peanuts for pay.

Romney’s penchant for bragging about his business activities at fundraisers helps underscore just how vile his brand of capitalism really is. While CEO of Bain, Romney invested in a Chinese sweatshop which he appears to be describing in detail at the very same Boca Raton fundraising event where he made his infamous case that nearly half of all Americans are freeloaders.

A report recently released by the Institute for Global Labor and Human Rights reveals that while Romney was deeply invested at a firm called Global-Tech, low pay and horrific conditions were status quo at its Chinese appliance factory.

Here are some really horrifying details from the same article.

From April 1998 through August 2000, Romney and his Brookside Capital Partners Fund, a Bain affiliate, poured around $23 million into the Global-Tech sweatshop in Dongguan, China. Among the details outlined in the report were the following:

  • Factory workers made 24 cents an hour in 1998 and less than $2 a day. Wages in Global-Tech were less than 2 percent of U.S. wages.
  • As CEO, Romney appears to have been uninterested in calling for improvements at the facility. Today, the sweatshop is still a horror where starvation wages prevail and workers’ rights are nonexistent. Overcrowded, filthy dormitories; rotten food; routine 15- to 16-hour shifts; and backbreaking 105- to 112-hour, seven-day workweeks are the norm.
  • The appliance factory has 800 student “interns” — 16-years-olds forced to work repetitive, exhausting 15- to 16-hour shifts on assembly lines with no overtime pay.

There’s a story in Vanity Fair on Jamie Dimon that’s also an eye-opener.

… Dimon’s sanguinity is somewhat belied by the formidable lobbying machine that he’s built in Washington. JPMorgan’s shop is much bigger than that of other banks, and it is chock-full of politically connected former congressional staffers. The firm has become known for the regularity with which its top people show up in Washington.

Dimon has put himself front, center, and uncensored in the debate about tougher oversight. He’s lambasted regulators for failing to recognize that, while some companies were “too big to fail,” others were “ports in the storm,” and for making “hundreds of rules, many of which are uncoordinated and inconsistent with each other.”

Part of the explanation is purely pragmatic: Dimon is trying to preserve his firm’s profits—and maybe the firm itself. But it’s hard not to hear something more emotional when you listen to Dimon. “This country would be flying if we had gotten stuff right and all worked together, but we haven’t,” he says. He frequently says that banks and bankers are being “scapegoated” for their role in the crisis, and he is full of righteous indignation. He often invokes Abraham Lincoln: “I’m a Democrat, and I tell Democrats and Republicans, you guys are busy simplifying and scapegoating—well, Abe Lincoln wouldn’t do it.” He says he’s heard the story of a young officer telling Lincoln during the Civil War, “We’re going to win because God is on our side.” Lincoln responded, “Son, let’s hope that we’re on God’s side.”

I watched Amy Goodman on Democracy Now after the end of the Debates.  She did a great segment on the difficulty of getting outsider candidates into the presidential debate.  You may want to watch it if you get a chance.

President Obama made a good point in late 2011, when he told “60 Minutes,” “Don’t judge me against the Almighty; judge me against the alternative.” If only the public had a full range of alternatives against which to judge. In fact, most people do. They just don’t know it. The reason they don’t know it is because the media don’t report on third-party politics or campaigns. These campaigns also lack the funds to purchase television airtime, or to compete against the Democratic and Republican campaign fundraising juggernauts. This leads to less diversity of voices, and far fewer alternatives on the ballot.

It hasn’t always been this way. In 1980, the League of Women Voters ran the debates, and independent presidential candidate John B. Anderson was allowed to participate (President Jimmy Carter opposed his participation and boycotted the event). In 1992, billionaire Ross Perot used his personal funds to overcome the media blockade of his presidential campaign. His successful debate performance temporarily propelled him ahead of both Bill Clinton and George H.W. Bush in the polls.

Since then, no third-party candidate has been allowed into the presidential debates. The debates are run by the Commission on Presidential Debates, an organization described by George Farah, founder and executive director of Open Debates, as “a private corporation financed by Anheuser-Busch and other major companies, that was created by the Republican and Democratic parties to seize control of the presidential debates from the League of Women Voters.”

Farah told me that in 1988, “you have the Michael Dukakis and the George Bush campaigns drafting the first-ever 12-page secret debate contract. They gave it to the League of Women Voters and said please implement this. The League said, Are you kidding me? We are not going to implement a secret contract that dictates the terms of the format. Instead, they release the contract to the public and they held a press conference accusing the candidates of ‘perpetrating a fraud on the American people’ and refusing to be ‘an accessory to the hoodwinking of the American people.’”

The Democratic and Republican parties wrested control of the debates from the League of Women Voters, and have controlled them since.

So, I love Japanese woodcut prints and had quite a collection of them prior to the divorce.   Fortunately, older daughter has been ensuring they don’t disappear to E-bay and into her step mother’s casino fund.  The one above is called Beauty and Violence.  I wanted to end with a really interesting and inspiring story about the elderly in Japan.  Japan has an extremely large population of long-lived seniors.  This story is about them and their participation in athletics. Notice that Japan is not promoting the ice floes like Paul Ryan and a lot of Republican leaders even though Japan’s debt is substantially more worrisome than ours.

Saddled with record public debt, Japan is promoting social interaction to curb the cost of caring for the 32 percent its people older than 60 — the highest proportion globally. By 2050, one in five people worldwide will be over 60, from one in nine now, according to the United Nations. Japan’s approach may help other countries also facing rising numbers of elderly.

“It enables them to participate quite actively in community life,” said Babatunde Osotimehin, secretary general of the UN’s Population Fund, which is leading UN efforts on aging. People with strong social networks “will probably not fall ill as frequently,” he said in an interview in Tokyo, where the UN released a report on aging this week.

Japan’s Ministry of Health, Labor and Welfare released policies on health and aging that focus on strengthening seniors’ community involvement in July, a shift from previous approaches that centered only on individual behavior.

Finding cost-effective ways to promote healthy aging will be critical for countries trying to reconcile rising welfare costs and a shrinking tax base. By 2050, 42 percent of Japan’s population will be at least 60 years old, according to Global AgeWatch.

Read on about Japan’s 10 point plan for Healthy Aging. It includes subsidizing exercise for seniors and rewarding them for doing civic and group activities with coupons.

In Tokyo’s Suginami ward, where Doi lives, authorities award points in the form of stickers to seniors who participate in government-approved activities from picking up litter, to attending health and sporting events, to cultural activities. Each point has a value of 50 yen (64 cents) and can be exchanged for grocery coupons. The Suginami local government has allocated 80 million yen for the project this year, according to its website.

“People who are disadvantaged socially and economically have more health problems,” the health ministry in Tokyo said in July.

Each year since 1988, the ministry has hosted the “Nenrinpic” carnival in which seniors compete at a national level in sports such as tennis, petanque and croquet. Doi’s petanque team has represented Tokyo five times, been a finalist three times and won the championship in 1999, she said.

Health clubs are benefiting from a growing enthusiasm for exercise among seniors. Koshidaka Holdings Co., which operates 1,200 women-only fitness centers in Japan, says 50- and 60-year- olds make up more than 60 percent of its 500,000 members.

“The core customers have never really exercised in their adult life before, so they feel the benefits from an easy, 30- minutes of weight training,” Hiroshi Koshidaka, the company’s president, said in an interview. “Many come three times a week, feel improvement, make friends, encourage others to join, and stop people from quitting.”

The purpose of the plan is to end the isolation that many seniors feel and support them in a healthy, connected life style.  Wow.  Imagine that.

So, I’ve gone way past my usual length and MABlue always gives me a hard time about that so, I’ll leave the rest of the day’s news reporting to you.  What’s on your reading and blogging list today?


The Bane of Bain

I have to write about this.  The recent media hoopla surrounding Cory Booker’s comments about Bain Capital just put me over the top.  I guess it’s just an occupational hazard with me. I teach this stuff. I study this stuff. I know the difference between venture capital, capital angels, and corporate raiders.  I’m wondering how many politicians actually grok this.  Oddly enough, Romney’s Republican primary rivals knew the difference before they were forced to tow the Romney line.  I did watch Newt Gingrich last night on Piers Morgan (only because Lama was here and it was on)  and he doesn’t seem to be able to fully embrace the Bain Mission.The best Gingrich could say was it was a better job than any thing Obama has done. He said something obligatory about Obama raiding the tax payer’s funds.   Gingrich still knows what Romney did is not from the positive ledger side of equity capital firms.

Venture capitalists are wonders to be hold and represent the best of the best.  These guys take on tremendous amounts of risk and usually bring a lot of business acumen to a start up firm.  Frequently, start up firms are high tech and ran by nerdy scientists who are great in labs and on computers.  They known nothing of financing, bringing products to market, or monetizing an investment.  This is a true partnership of great minds and money.  This is not what Mitt Romney did when he was CEO of Bain Capital.  Romney’s firm could’ve been a contender in the angel category except that’s not what he did either.  Warren Buffet has been an angel investor many times. Romney’s firm basically ran like a pack of hyenas to a company that was struggling and used the law to extract its life force.

Ralph B reminded me of several articles that have been out there written by financial economist wonks like me explaining why Romney never got a hero’s welcome in the past and should not get a pass right now.  Putting corporate raiders into the same pile as the rest of equity capital firms is like saying cancer is just basically another cell that exists in your body.

Here’s three excellent points by Konczal on why Romney isn’t an angel or a venture capital hero.  Romney’s firm played the sociopathological side of the equity capital game. They were serial killers.

1. Tax/regulatory loopholes. I did an interview with Josh Kosman, author of The Buyout of America, where he argued that the whole point of the enterprise is to game tax law loopholes. Private equity “saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.”

A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code.

That’s one thing in an industry with large and predictable cash flows. But after those low-hanging fruits were picked, as Kosman explained, “firms are taken over in very volatile industries. And they are taking on debts where they have to pay 15 times their cash flow over seven years — they are way over-levered.”

This critique has power as far as it goes. But let’s combine it with another issue.

2. Risk-shifting among parts of the firm. Traditional “creative destruction” is about putting rivals out of business with better products and techniques. Leveraged buyouts and private equity are about something different, something that exists within a single firm. This is often described as putting new techniques into place, firing people and divisions that are not performing, and generally making the firm more efficient.

The critique here is that, instead of making the firm more efficient, it often simply shifts the risks into different places. As Peter Róna, head of the IBJ Schroder Bank & Trust in New York, described it in 1989:

The very foundation of the LBO is the current actual distribution of hypothetical future cash flows. If the hypothesis (including the author’s net present value discounted at the relevant cost of capital) tums out to be wrong, the shareholders have the cash and everyone else is left with a carcass. “Creating shareholder value” and “unlocking billions” consists of shifting the risk of future uncertainty to others, namely, the corporation and its current creditors, customers, and employees…

The notion that underleveraging a corporation can cause problems is neither new nor unfounded. What is new is the assertion that shareholders shouid set the proper leverage because, motivated by maximizing the return on their investment, they will ensure efficiency of all factors of production. This hypothesis requires much more rigorous proof than Jensen’s episodic arguments… although Jensen denies it, the maximization of shareholder returns must take place, at least in part, at someone else’s expense.

Shareholders gain, but at the expense of other stakeholders in the firm. This isn’t the normal winner/loser dynamic, where some suffer in the short-term to do what’s best for the long-term. Here the long-term suffers to create short-term winners. Once again, this issue becomes problematic when combined with another critique.

3. Dividend looting. The theory behind private equity, as Róna caught above, is that it requires shareholders to be the proper and most efficient group to set the leverage ratio. But what if, instead of setting leverage for the long term to make the firm more efficient, shareholders simply use additional debt to pay themselves, regardless of the health of the firm? As Josh Kosman put it:

If you look at the dividends stuff that private equity firms do, and Bain is one of the worst offenders, if you increase the short-term earnings of a company you then use those new earnings to borrow more money. That money goes right back to the private equity firm in dividends, making it quite a quick profit. More importantly, most companies can’t handle that debt load twice. Just as they are in a position to reduce debt, they are getting hit with maximum leverage again. It’s very hard for companies to take that hit twice…

The initial private equity model was that you would make money by reselling your company or taking it public, not by levering it a second time…Right after this goes on for a few years, you’ve starved your firm of human and operating capital. Five years later, when the private equity leaves, the company will collapse — you can’t starve a company for that long. This is what the history of private equity shows.

The biggest difficulty I have with all this political back and forth is that Republicans and Democrats will take money from Wall Street as political donations without really looking at the individual or the firm.  Some private equity firms are value-added.  Others basically remove value from the US economy. Romney falls into the looter baron role.  However, Booker and Obama have both taken political donations from all breeds of these guys. So, they may not have closed down the companies or bootstrapped Yahoo, but they’ve been in on the spoils.

Again, let’s look at what some of Romney’s Republican rivals said.

1. “The idea that you’ve got private equity companies that come in and take companies apart so they can make profits and have people lose their jobs, that’s not what the Republican Party’s about.” — Rick Perry [New York Times, 1/12/12]

2. “The Bain model is to go in at a very low price, borrow an immense amount of money, pay Bain an immense amount of money and leave. I’ll let you decide if that’s really good capitalism. I think that’s exploitation.” — Newt Gingrich [New York Times, 1/17/12]

3. “Instead of trying to work with them to try to find a way to keep the jobs and to get them back on their feet, it’s all about how much money can we make, how quick can we make it, and then get out of town and find the next carcass to feed upon” — Rick Perry [National Journal, 1/10/12]

4. “We find it pretty hard to justify rich people figuring out clever legal ways to loot a company, leaving behind 1,700 families without a job.” — Newt Gingrich [Globe and Mail, 1/9/12]

5. “Now, I have no doubt Mitt Romney was worried about pink slips — whether he was going to have enough of them to hand out because his company, Bain Capital, of all the jobs that they killed” — Rick Perry [New York Times, 1/9/12]

Even the media doesn’t know a damn thing about the variants of equity capital firms. ABC appears to be joining FOX news in spreading stupid tropes and canards.

Private-equity firms aren’t supposed to create jobs; they’re supposed to make money for their investors, which to a large extent include pension funds and university endowments. The companies in which they invest are sometimes on the brink of failure to begin with, and are likely to go bankrupt without outside help. These risky investments often include making decisions like cutting costs and jobs.

But in the little-understood world of private equity, Obama has seized upon a basic formula — Romney and Bain plus companies equals some lost jobs and millions for Romney — to argue that he’s unfit for the Oval Office.

Defending the Bain ad, Obama spokesman Ben LaBolt said the campaign isn’t “questioning the purpose of the private-equity business as a whole.”

“Why did Romney and his partners succeed even if the company failed?” LaBolt asked rhetorically on a conference call.

Probably because private-equity firms don’t necessarily rise and fall with the companies in which they invest. Finance experts explained that faced with a decision over bankruptcy, those firms are obligated to protect their investors, not the workers at the company. Pumping more money into a company that has shown signs of failure isn’t as smart a move business-wise as cutting losses to save investors money.

Actually, angels and venture capitalists do exactly all of that and make money if they do it right.   The above description is just whacked. I’d drum a student out of my corporate finance class that tried to offer this up.  But, the media can print just about any old thing it wants to and get away with it.  Most private equity firms are NOT corporate raiders. There are even funds that do project financing that help Governments build things like dams, highways and universities.  Gordan Gecko’s way of business is not the life blood of the private equity market.  They can provide seed money, start-up money, expansion and development money and a lot of money that isn’t based on gutting existing businesses. Some specialize in transfers of power from a sole owner who is retiring to a new group of owners.  Most don’t drain the firms of capital when they leave either.  Romney was a pirate not some kind of private enterprise swashbuckler.

Enuf said.

Okay, so that’s my lecture\rant for the day.  I’m going back to grading papers now.  That is all.