Month: October 2018

VULTURE CAPITALISM

The term vulture capitalism is used to refer to techniques used to extract profits from companies without regard to the health or survival of the companies. The term has come into widespread use to differentiate these financial strategies from venture capitalism, which refers to funding provided to new and innovative companies that are too small or new to get bank loans or other forms of investment (e.g., from the stock market). Although risky, venture capital investments can have very high returns if the companies become successful.

Vulture capitalists acquire companies in the hope of making profits from them through financial manipulation (aka financial engineering) without regard to the ultimate success of the companies. [1] Sometimes they work to increase the company’s value by aggressively cutting costs and then selling it for a profit. Sometimes they split the company into pieces, hoping they can sell the pieces for more than their purchase price.

Often, vulture capitalists extract profits from companies and then have the companies file for bankruptcy. Due to their aggressive techniques and methods, workers, customers, suppliers, and the communities where a company is based, as well as taxpayers in general, typically end up getting the short end of the stick while the vulture capitalists realize significant financial gains.

Companies that are destroyed – run into bankruptcy – by vulture capitalists are no longer available to consumers, so consumer choice is reduced. This plays into the hands of big corporations, such as Walmart and Amazon, when, for example, vulture capitalists buy supermarket chains and drive them out of business. Consumer choice and competition suffer while vulture capitalists get rich.

Recent examples of vulture capitalism include the bankruptcies of Sears, Toys R Us, the Hostess confectionery company (maker of Twinkies), and seven grocery store chains. Vulture capitalists have also targeted newspapers from the Denver Post and Boston Herald to small community papers. Vulture capitalists typically use hedge funds or private equity funds to raise money for their acquisitions. These funds pool money from large investors and, because they are not open to the public or publicly traded on a stock exchange, they are exempt from most regulations and oversight.

The vulture capitalist business model is an example of hyper-capitalism. It destroys viable companies and hurts our economy. [2] The vulture capital model typically works like this [3]:

  1. Buy all or a controlling share of a company by borrowing most of the money (typically 70%) you pay for it (which is why these acquisitions are called leveraged buyouts (LBOs): the borrowed money leverages the relatively small amount of money the vulture capitalist and/or his fund are spending).
  2. Assign the debt to the acquired company, requiring it to pay all the interest on the large loan. An advantage to this strategy is that interest payments are a deductible business expense for tax purposes. Therefore, the high level of debt and high interest payments reduce what the company must pay in federal and state income taxes.
  3. Sell off the company’s valuable assets such as real estate. Often a company’s real estate (e.g., store sites, factories, operational facilities) is sold to a real estate investment trust (REIT), an investment fund, often run by the venture capitalist, which is eligible for favorable tax schemes. The company typically leases back the facilities from the REIT in what is called a “sale / leaseback” arrangement that requires to company to pay rent for the facilities it used to own.
  4. Pay high levels of dividends to shareholders, including the vulture capitalist and his fund. This often requires the company to take out more loans (i.e., more debt and more interest payments).
  5. Buy back shares of company stock to boost its value for shareholders, including the vulture capitalist and his fund. This often requires the company to take out more loans (i.e., more debt and more interest payments).
  6. Charge the company for expenses and a wide range of fees (e.g., management, transaction, advisory, and monitoring fees) that often add up to millions or tens of millions of dollars a year. In addition, take a share of any profits the company earns.

    Note: Items 2 – 6 all result in mandatory expenses, primarily interest and rent, for the company. These use up most, if not all (sometimes more than all), of the revenue and cash flow the company generates. This reduces the financial stability and resilience of the company, which is further hurt by the removal of assets such as real estate that could serve as a buffer in hard times. The company is strangled by these new expenses and doesn’t have the resources to invest in innovation or other steps that would keep or make it competitive.

  7. With the company under financial stress, extract concessions from workers (e.g., cutting their pay and benefits) telling them that this is necessary to avoid shutting the company down or filing for bankruptcy. Similarly, extract price cuts from suppliers.
  8. Sell the company or file for bankruptcy. Filing for bankruptcy voids union contracts and responsibility to pay past and present workers the pensions and retirement benefits they were promised – and earned. (Note: The federal government and we as taxpayers often end up paying some or all of earned pension benefits after a bankruptcy through the Pension Benefit Guaranty Corporation.)

The mainstream (corporate) media and vulture capitalists typically and inaccurately report that the bankruptcies were due to factors such as greedy unions and a changing business environment. However, other companies in the same industries survive, some very successfully and some with difficulty.

In my next posts, I will share specific examples of how the vulture capitalism model has played out and then identify policy changes that would rein in vulture capitalists.

[1]      Wikipedia, retrieved 10/24/18, “Vulture capitalist,” https://en.wikipedia.org/wiki/Vulture_capitalist

[2]      Kuttner, R., 10/16/18, “It was vulture capitalism that killed Sears,” The American Prospect (http://prospect.org/article/it-was-vulture-capitalism-killed-sears)

[3]      Appelbaum, E., & Batt, R., Fall 2018, “Private equity pillage: Grocery stores and workers at risk,” The American Prospect (https://read.nxtbook.com/tap/theamericanprospect/theamericanprospectfall2018/private_equity_pillage_grocer.html)

WHY WE NEED A POLITICAL REVOLUTION

Bill Moyers – one of the most savvy and respected commentators on US politics and society over the last 40+ years – just published an interview with the author of a book Moyers describes as the best political book of the year. [1] The author is Ben Fountain and the book is Beautiful Country Burn Again.

Fountain, an acclaimed novelist, was hired by The Guardian (a respected British daily newspaper with a US edition) to cover the 2016 US presidential race. His reflections on and analysis of the current US political environment are poignant and very relevant to this fall’s election.

Fountain found that millions of Americans are experiencing significant confusion, frustration, and anger. Working and middle-class people are finding it harder and harder to make ends meet and, therefore, are feeling more and more beleaguered. Their financial and psychological security has been undermined by the shredding of the social contract of the 1950s – 1970s, which promised that if they worked hard and played by the rules, they would have a secure middle class life. They are working harder than ever but, nonetheless, are falling further behind in their efforts to have a decent life, provide for their children, and have a secure retirement. Meanwhile, they see the wealthy doing better and better, getting richer and richer.

Fountain states that this is “not a situation that can be sustained long-term in a genuine democracy.” (p. 3 of the interview transcript). The tremendous increase in the inequality in income and wealth over the last 40 years has led many Americans to have a “basic, pervasive sense that the system is not fair.” (p. 4) Given this legitimate sense of grievance among the millions living economically precarious lives, the declaration by candidate Trump, Senators Bernie Sanders and Elizabeth Warren, and others that “The system is rigged” resonated strongly.

These beleaguered, aggrieved Americans are resentful and looking for an explanation for why they are experiencing such hard times. This makes them vulnerable to false narratives and scapegoating from politicians. This resentment is exacerbated by the fact that for many white Americans their position of power and privilege has been (rightfully) challenged over the last 50 years. The uncomfortable truths of the racism of America have presented “a challenge to some people’s identity and sense of personal integrity.” (p. 4)

Trump was a master at playing on this resentment, vulnerability, and discomfort. He gave many white Americans “psychological, emotional affirmation as an antidote for all the anxiety, all the resentment they’d been feeling.” (p. 5) Despite the obvious contradictions of Trump’s wealth, New York background, and anti-worker business practices, he provided easy-to-digest explanations and solutions for beleaguered white, working people (especially men). Fountain describes this as the “classic con man dynamic” that shows “how easily we’re taken in when we’re hearing what we want to hear … [which has] more to do with emotion and raw attraction than anything that might be called rational thought.” (p. 7)

Fountain says that the gullibility of the American public is in part due to what he calls the “Fantasy Industrial Complex.” The public believes in the possibility of the fantasy lifestyle we see in the advertisements and commercial propaganda that bombard us day and night from our screens in movies, TV, celebrity news, and social media. The cumulative effect is that this “numbs us out and dumbs us down.” (p. 8) As a result, “it takes a supreme effort of will on the individual’s part to distinguish advertising and propaganda from facts,” (p. 8) lies from truth, and fantasy from reality.

Fountain states that both of our political parties have lost their way. Trump, with the help and acquiescence of many others, has taken the Republican Party’s “politics of paranoia and racism, cultural resentment, xenophobia, misogyny and all the rest” to new extremes. The Democrats, during the 1990s with leadership from the Clintons, maintained their commitment to civil rights and diversity, including based on sexual orientation, but abandoned their commitment to workers, the poor, and Main Street for financial support from Wall Street and the wealthy. They stopped making the case for the important roles of government in maintaining a safety net and regulating business and the economy. As a result, the economic security of working and middle-class people collapsed, while income and wealth inequality skyrocketed.

The political power of the wealthy has been super-charged by changes in laws governing the financing of our political campaigns. Unlimited amounts of money can now be spent on campaigns and the sources of much of it may be kept secret. Without wealth, everyday citizens are left speechless in our elections and, therefore, underrepresented in the halls of government. The big campaign spenders have unprecedented access to and influence on policy makers, resulting in policy outcomes they favor and that benefit them further.

Democracy is overwhelmed by the hyper-capitalism in the US today with its great concentrations of wealth and power, both in our economy and in our political system and government. This is the result of the deregulation of business and the economy over the last 40 years, which has been supported by both political parties. The big corporations and the capitalists will overreach if they are unregulated and unrestrained. The 2008 crash demonstrated this again, as the savings and loan crash of the 1980s had, along with the dot com bubble crash and the crash that led to the Great Depression. Today, the system is indeed rigged, and the result is plutocracy – where the wealthy elites rule.

The American identity, and the exceptionalism of the US that the right-wing asserts, are based on democracy and the foundational principles of equality and representative government that is responsive to all the people. This is not the America we have today. Citizens can’t be equal with corporate CEOs and wealthy investors if they can’t earn enough to support a family and don’t have time to devote to public civic and political responsibilities, often because they are working multiple jobs or long hours.

Fountain concludes that “corporate power and concentrations of wealth have such a hold over our economic system that for the country to wrest some of that power from them, it can’t be incremental. It will take a political revolution.” (p. 12) The New Deal, responding to the 1929 financial crash and the Great Depression, was, in fact, a bloodless political revolution. It saved capitalism from itself, building the regulatory infrastructure that we relied on with great success for 50 years. It also built the physical infrastructure of sewers and water mains, parks, libraries, public buildings, the power grid, and many of the roads and bridges that we rely on to this day. We take all this largely for granted today, forgetting about the trauma that triggered it and the public sector response that turned the country around and built the foundation for the future.

Fountain notes that the American commitment to and understanding of the importance of public civic, political, and physical infrastructure “has been stunted the last 40 years by a very aggressive sales program on behalf of free-market fundamentalism and hard-core capitalism.” (p. 13) The subtitle of his book, Democracy, Rebellion, and Revolution, highlights his belief that we need a political revolution to save our democracy – and to save capitalism from itself.

You can be part of the political revolution:

  • By being an informed voter in this fall’s election, and
  • By encouraging and helping everyone you know to also be an informed voter this fall.

As I’ve written about previously, voter participation in the US is dismally low and higher voter turnout will produce different election and policy results. This is how the political revolution must happen.

[1]      Moyers, B., 10/12/18, “The bold bravery of ‘Beautiful Country Burn Again’”, Common Dreams (https://www.commondreams.org/views/2018/10/12/bold-bravery-beautiful-country-burn-again)