What are these phantasmagoric money machines that they call “private-equity firms?” They’re much in the news these days, because a fellow who was a private-equity magnate is presently running for president. Mitt Romney piled up a quarter-billion-dollar personal fortune through his Wall Street equity outfit, Bain Capital, and he now claims that, because of his success in that business, he knows how to “fix” our economy.
Before you cheer that, note that private equity whizzes are all about The Fix — not necessarily a good thing. They operate by borrowing big piles of cash at high interest rates from rich speculators to buy out XYZ Corp. Then, to meet the interest payments owed to the speculators (and to siphon off a financial killing for themselves), the fixers do two things: One, they plunder XYZ’s assets, selling the profitable chunks of the corporation; and two, they severely downsize the XYZ workforce, firing as many workers as possible and demanding deep wage cuts and benefit givebacks from the employees they keep.
It’s a raw redistribution-of-wealth scheme, shifting XYZ’s wage payments from its many workers to a handful of wealthy high-rollers. The process downsizes America’s middle class, while creating no real economic value. Nothing equitable about it.
But the fix also includes a set of very special partners, few of whom are even aware that they’re in on the deal: taxpayers. The private-equity business model is not structured on old-fashioned, free-enterprise principles, but on a skewed system of tax loopholes punched into federal law by these financiers’ lobbyists and the lawmakers who do Wall Street’s bidding.
For example, the equity funds are able to load up on such heavy debt to finance their corporate takeovers only because all of the interest they must pay to speculators for that borrowed money is tax-deductible. In other words, our government directly subsidizes private-equity plundering by covering their huge interest payments.
To add to their fun, many of these tax-code scammers grab such big debt deductions each year that they end up paying zero corporate income taxes, even though they rake in millions in profit.
To put a name to this financial flimflammery, let me tell you a corporate morality tale that I call “The Shame of Shamu.”