The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis

[marmar]

The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, by Josh Kosman
Posted by Polly Cleveland | Aug 10, 2010 |


On vacation in Colorado, we drive through the Littleton shopping mall. There it is, a two-story building, black and empty behind its glass facade. Mervyn’s Department Store. Founded in 1949, Mervyn’s grew to a chain of 189 stores in 10 Western states. But in 2008, Mervyn’s went bankrupt , laying off 18,000 employees without severance or vacation pay. Just an ordinary casualty of the recession? Hardly.

In The Buyout of America Josh Kosman introduces us to the private equity or PE firms. They are a major force behind what Barry Lynn called “the economics of destruction.”

The players:

PE firms. You haven’t heard of most of them, and they like to keep it that way. A few better-known ones are the Carlyle Group, Goldman Sachs, Kohlberg Kravis Roberts, and the Blackstone Group. They are the descendants of the notorious leveraged buyout operators of the 1970s.

Target corporations. These are typically midsize to largish corporations, steadily profitable but not exciting. Often, like hospital chains, they are not especially well-managed.

Investors. These are mostly pension funds, desperate for higher returns to compensate for prior underinvestment. They include public pension funds, like the giant California Public Employees Retirement System.

Banks. These are mostly the big banks, like JP Morgan Chase or Citicorp, eager for loans that they can “securitize” and sell off.

Purchasers of securitized loans. These are also mostly pension funds, seeking super-safe passive investments for the bulk of their portfolios.

US federal and state taxpayers.

The game:

Step one. A PE firm lines up investors, who typically commit to supply funds over a period of up to 10 years. The PE firm promises spectacular returns.

Step two. The PE firm bids for a target corporation. It may put up 5% of the bid while its investors supply the rest. For the balance of the purchase price, some 70% to 80% of the total, it arranges a huge bank loan, which it puts on the target’s books. The target essentially assumes the debt to buy itself out. Under terms of the deal, the target may pay interest only on the loan for five or six years, before the principal becomes due.

Step three. Because interest on the loan is deductible, federal and state taxpayers pick up a big piece of the loan interest, 35% federal, plus whatever state tax piggybacks on the federal. ..........(more)

The complete piece is at: http://dollarsandsense.org/blog/2010/08/the-buyout-of-america-how-private-equity-will-cause-the-next-great-credit-crisis-by-josh-kosman.html

[aquart]

1. Every billionaire gets his own road to maintain.

Like, say, every inch of Route 66 or I95. Mere millionaires get to pay for keeping the streetlights lit in the suburbs and small towns.

They want to privatize the nation? Make it a civic obligation.

[Tuesday Afternoon]

2. K&R

[WinkyDink]

3. The Mafia, in better suits. And I do mean this quite literally.