Bipartisan Support for Romney's Business Past Should Scare Us All
Continued from previous page
In a time when Wall Street misdeeds crashed the global economy and there seems to be a new scandal breaking daily about executive bonuses, insider trading, and JP Morgan’s billion dollar gambling loses, it is worth looking at the special role PE plays in the economy and how it operates. I won’t attempt to summarize the broad analysis that many people have done, including the recent New York Times article document how Bain made a profit while bankrupting a company and the Washington Post article on Bain outsourcing of jobs to other countries They are just two of the most recent articles that document how private equity has destroyed jobs and loaded companies with debt, while stripping them of assets and bankrupting them, and how PE still wrests huge riches for itself from those companies. Instead, I want to focus on a few numbers that tell the story of how the PE business model negatively influences the larger economy and jeopardizes the economic health of the nation.
A few facts about private equity from 2000 to 2010:
$1.7 trillion was spent by Private Equity on leveraged buyouts. Private Equity companies rolled up a total of a trillion in debt making these purchases.
25 percent of the private equity capital used for these leveraged buyouts, $283 billion, came from public employee pension fund investments. While Romney and others in the PE industry have railed against public employee retirement benefits, they have used the accumulated capital of those funds to finance their purchasing spree.
Six of the ten largest employers in America became owned by Private Equity firms. Some of these companies, like the private hospital chain HCA, rely on government reimbursement from Medicaid and Medicare.
The companies they bought avoided $250 billion in taxes because of the deductibility of interest. They borrow 60-90% of the cash needed to finance purchases. Interest payments are treated like other expenses and are deducted from earnings, leading to a huge tax break since their business model is built on running up debt.
The individual private equity partners avoided another $10 billion hiding behind the “carried interest exemption” that lets them pay a 15% tax rate, far below what most of us are taxed on income.
The buyout boom and special tax breaks were key drivers in growing inequality, as they sucked huge amounts of money from firms they bought through leveraging up debt, stripping assets and using fancy financial manipulations like dividend recapitalizations (more on this trick in the future ) to add more debt and pay themselves extra bonuses.
The PE business model is based on squeezing taxpayers from two ends at the same time. On the one hand, they avoid hundreds of billions in taxes through special tax deals only available to the already-super-rich—severely limiting the resources government has to address the economic crisis and the priorities of the country. On the other hand, they feed on taxpayer dollars to finance and fund the companies they purchase and operate by buying companies like Bain’s HCA hospital chain, that receive huge Medicaid and Medicare reimbursement, and using publicly financed public pension funds for capital. While in the short run, this business model--avoiding taxes and feeding off of tax dollars--may make PE barons extraordinarily rich,it is an unsustainable model that in the long run leaves taxpayers holding the debt bag and the PE guys holding the money bags.
Despite the negative impact on the rest of us, the allure of becoming part of this global economic elite is so seductive and powerful that it draws politicians, both Democratic and Republican, to defend private equity. Politicians know that when they leave the office they can join the other former heads of state that went to work for private equity firms upon leaving government--including Clinton, Tony Blair, George H.W Bush, and John Majors. They can join former Vice President Dan Quayle, former Senator Tom Daschle, and former Secretary of the Treasury John Snow, who also went to work for PE, like government officials from around the globe.