I’ve said it before but it bears repeating: Mitt Romney, Mittens as I like to call him, represents everything that’s wrong with our modern day financialized economy.
However, Mittens, who recently spoke out against the “socialist agenda” of the Democratic presidential candidates while touting himself as a different kind of Republican, appears shameless about his contributions.
Mitten’s, as you might remember, made his fortune in the Private Equity (PE) business working for Bain Capital.
PE harkens back to the robber baron days, where financiers deploy unregulated dark-pools of money to make fortunes buying, restructuring and selling companies. They typically seek to recoup gains through dividend pay-outs or later sales of the companies to strategic acquirers or back to the public markets through initial public offerings.
What’s become apparent is that private equity is also a neoliberal-economic/political movement whose goal has been to financialize the American economy to the detriment of the vast majority of Americans who work for a living. In the process private equity has transformed corporations from institutions that utilize workers and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and abandon the rest. Like much of our political economy, the ideas behind it were developed in the early 1970s, blueprinted presciently by the Powell Memo. The key takeaway from this transformation is that it encouraged the wholesale looting of our economy for the benefit of PE firms and ultimately Wall Street.
The takeover of Toys “R” Us offers a good example of how PE goes about looting a company that it has acquired. Bain Capital, KKR, and Vornado Realty Trust bought the public company in 2005, loading it up with debt. By 2007, though Toys “R” Us was still an immensely popular toy store, the company was spending 97% of its operating profit on debt service. Bain, KKR, and Vornado were technically the ‘owners’ of Toys “R” Us, but they were not liable for any of the debts of the company, or the pensions. Periodically, Toys “R” Us would pay fees to Bain and company, roughly $500 million in total. The toy store stopped innovating, stopped taking care of its stores, and cut costs as aggressively as possible so it could continue the payout. In 2017, the company finally went under, liquidating its stores and firing all of its workers without severance. A lot of people assume Amazon or Walmart killed Toys “R” Us, but it was selling massive numbers of toys until the very end. What destroyed the company was private equity, and public policies that allowed the divorcing of ownership from responsibility.
The ownership of corporations by private equity also creates perverse incentives across industries. For instance, if a certain kind of price gouging strategy works in a pharmaceutical company, a PE firm can replicate the strategy, buying up other companies and engaging in monopoly pricing. We can observe this phenomenon in the Military/Industrial/Complex, where Transdigm embodies this role, buying up aerospace spare parts makers with pricing power and jacking up prices, in effect spreading corrupt contracting arbitrage against the Pentagon much more rapidly than it would have spread otherwise.
Indeed, PE firms appear to be the living, breathing embodiment of Gresham’s law, where “bad money drives out good.”
Yet, this is the value we celebrate in America, where financial looters are feted on TV and elected to national positions of power. It’s hardly an accident that we find ourselves in a bad place.
Every economy is a planned one. Our choice going forward is between an extractive economy managed by private equity and Wall Street looters or a productive economy managed by we-the-people through our elected officials.
Update: Both parties are beholden to finance.
“The DNC Doesn’t Want a Climate Debate for a Reason” [Jacobin]. “While tech money is important, . Obviously, most of these firms want to be able to continue to invest in fossil fuels as well as in companies looting the Amazon. Such companies are run by — and depend on the continued existence of — the very rich, our planet’s biggest liability. (Not only do they create immense pollution through private jets and multiple homes, the rich also support such lifestyles through immensely planet-ravaging investments.) The finance class does not want to hear plain talk about solutions to climate change; in many cases, they are getting rich from destroying the planet and do not wish to stop doing this. That’s probably why DNC head Tom Perez called the idea of a climate debate ‘dangerous.’ The DNC also seems to be trying to avoid two likely outcomes of a climate debate: Joe Biden looking bad and Bernie Sanders looking good.”