Requiem for the American Dream & Capitalism?

Requiem for the American Dream & Capitalism?

Merchants have no country.  The mere spot that they stand on does not constitute so strong an attachment as that from which they draw their gains.

-Thomas Jefferson to Horatio G. Spafford, 17 March 1814

By JM Hamilton (10-20-2019)

By now many of us already know the private equity (PE) modus operandi.  The party line is that PE firms save businesses from themselves, rescues them, and after five years, the company is safely returned to the free market.  Perhaps flipped, via IPO, or to another PE firm, or sold to alternative private interests.

PE firms - and their ownership - are merely benevolent actors, looking after the free market economy, as the Goddess above intended.

Of course, nothing could be further from the truth.  PE organizations take companies - the players on the American economy’s stage – and load them up with catastrophic debt.  By leveraging these companies with very little of their own money, PE: front loads profits; use acquired companies’ credit lines as personal cash dispensing machines; often strip companies of assets & land; rack up huge consulting fees, see 2/20; payout unearned dividends – to themselves; often take out derivative bets against the very companies they have acquired and said companies’ bondholders (moral hazard defined); and hyper-leverage returns.  

These PE companies are exceptionally adept at turning financial statements into fairy tales.

And the real result: bankruptcy after bankruptcy.  These names should sound familiar:  Gymboree, Payless, Shopko, and Toys R’ Us.  (Sears, too, was brought down by the PE model, deployed by a hedge fund billionaire.)  The companies that do survive are often rolled up in combination w/ other companies within the same industry.  Leading to – you guessed it – cartel and monopoly.  Every time a retailer goes down, thanks to private equity, Jeff Bezos’ & Walmart’s, respective, empires only grow stronger.

Just in case some may think private equity has had a bit of bad luck, let’s examine Julie Creswell’s (of the NY Times) article, from back in 2009:

A disproportionate number of the companies that were acquired during that (PE) frenzy are now struggling with the enormous debts.  More than half the roughly 220 companies that have defaulted on their debt in some form this year were either owned at one time or are still controlled by private equity firms, according to analysts at S&P.  Among them are household names like Harrah’s Entertainment and Six Flags, the theme park operator.

And when the next crash arrives, we all know that the debt-laden will be the first to enter crisis mode, once again (leading to further industry consolidation).

And who pays:

The American taxpayer.  The taxpayer not only subsidizes PE, via tax shenanigans, like the carried interest loophole, but when PE firms cut labor and wages, the taxpayer picks up the social services as former employees fall out of the labor force.  Once again, private equity proves the reality of American capitalism that profits are privatized, while real and social costs are passed onto the taxpayer (riches for the 1%, while everyone else bears the burden).

The credibility of democracy is damaged.  PE firms engage in whitewash, tapping Washington’s ever revolving door for future talent, and pouring hundreds of millions into lobbying to protect its interests… in essence, buying the government and subverting democracy.  And politicians wonder why the US government - all four branches, including the Fed - increasingly, has a credibility issue.

The consumer also pays. PE run companies are notorious for CAPEX cuts, and stingy in respects customer service and innovation.  And since employees suffer job cuts and lower salaries, this in turn lowers aggregate demand and the tax base (which in turn, adds to our ever-growing national debt).

And the grand enabler in all this: central banks and the Federal Reserve.  Central banks – as often noted by JMH – not only suppress interest rates and engage in MMT/QE for the elite, so as to suppress debt financing or debt service loads for the national debt, but the PE model has now become so ubiquitous (even companies that aren’t owned PE firms are in on the act… here’s a hint, it’s called "financial engineering") that central banks must continue to suppress interest rates to prop up zombie commercial enterprises and debt-laden PE owned companies.

Karl Marx once said religion is the opium of the masses; and I heard Tom Keene state last week - on my favorite news show, Bloomberg Surveillance - that central banks, suppressing interest rates (and via QE), are providing the opioid of the financial system.  Mr. Keene is pro-capitalism and known for astute market observations. 

I’ll afford one more observation, private equity returns are the opioid of the myopic. Private equity is the anti-capitalism, so destructive are its practices to capitalism, democracy, and social cohesion.

Not only do suppressed interest rates allow politicians to continue to finance endless war, tax cuts for the wealthy, and corporate welfare (while establishing a policy of austerity for the citizenry)… but central bank actions keep private equity rolling in cash, as investors – starved for yield – pour hundreds of billions of dollars into PE: bonds; funds; and stocks.  As pointed out by Bloomberg, PE has become the go to alternative investment, versus the stock market.  PE practices are so common place this same article noted there are now 8,000 PE firms.  As a consequence, PE firms have been called & compared to, among other things: barbarians, chop shops, locusts, pirates, robber barons, and JMH, within one writeup, compared PE to the antibiotic resistant super-bug: methicillin-resistant staphylococcus aureus.  

Gee whiz, Wally… you’d think an industry w/ this great a debilitating impact upon the American economy, government, and responsible for the death of the American Dream would draw some regulation and scrutiny?

But nope, Beav, our paid off, crony, Congress hasn’t much to say on the topic, and certainly no regulatory checks & balances - directly aimed at PE - have been passed into law.  Meanwhile, PE is the only industry that routinely pays out $100 million-dollar salaries, consistently… greatly exceeding the payouts of any other US industry (but apparently not to women --- does PE have a misogyny problem?).  Private equity bears significant responsibility for the ever-growing wage & wealthy inequality divide, and arguably, is a direct threat to a stable society.

If an ordinary American stole the identity of another American, or hacked a company's financial information, and liquidated their credit line…. Said criminal would do real time.  However, when PE does it, the executives are deified and feted. 

If a foreign government, systemically, obliterated US companies by draining their credit lines & assets for personal gain, w/ the resulting deleterious impact to the US economy… killing jobs, wages, innovation, and product & service improvement… we'd likely call such bellicose actions a declaration of war.

But for private equity & Washington, it’s just another day of making a killing, while raping what little remains of the American Dream.

And we wonder why a younger generation – and more than a few Republican voters – are so completely turned on by socialism.  Thanks to AI, automation, globalization, and private equity, future generations will have far less opportunity, and much less income, than baby boomers.

PE and greed are killing capitalism, liquidating America, and leaving millions with no alternative but government & socialism for answers. 

If the apogee of neoliberalism is predatory private equity, at some future date, America may reach a tipping point...  where those failed by the PE model significantly exceed a relatively small cadre of thieves at the top of the pyramid.

Such are the ingredients of a revolution…

Copyright JM Hamilton Publishing 2019