Resurrecting Democracy

Romney's Private Equity Burden- It's Not Just About Jobs

                                                                        Robert A. Levine   1-19-12

 Mitt Romney’s ascendancy in the Republican presidential sweepstakes has put his career at Bain Capital, a private equity firm, under the microscope, the result of attacks against him from other GOP candidates. Romney’s apparent strength, his business experience, has instead become a possible liability. It would appear to be counter-intuitive to have Republicans assailing private equity firms, a part of the free-market system. But in the heat of political battle, adversaries strike at the perceived weak spots of a front runner, particularly when the polls are unkind to those in the back of the pack.

 Newt Gingrich’s broadsides may partially be payback for the hatchet job Romney’s super-PAC has done on Gingrich. Given the electorate’s concern about unemployment, Gingrich has repeatedly claimed that Bain and Romney were responsible for firing employees while looting companies. Romney was also labeled as a predatory corporate raider by a pro-Gingrich PAC. And Rick Perry called Bain Capital’s business model “vulture capitalism” for destroying jobs. Many Republican Party figures, including Rush Limbaugh, have come to the aid of Romney and private equity, declaring that attacks against him have been divisive and will boost Obama in the general election. But are these attacks fact-based or merely opportunistic?

 Private equity firms buy companies that are in trouble, or at least those they assess as undervalued, believing that by restructuring these companies they will be able to make money. The funds utilized in these purchases are mostly borrowed, usually from private pools of capital that are unregulated by the SEC or any government agency. By leveraging these funds with a small amount of their own capital, the private equity firms are able to lessen their own risks while increasing possible profits from the companies they have bought.

 Once the private equity firm owns and is managing a company, it strips away underperforming assets and excess personnel. This results in job losses and reduced worker benefits for those retained. However, companies previously on precarious ground may be returned to a firm footing, which can lead to job growth in the future. Those businesses that can not be salvaged are closed. Since the private equity firms are not subject to public scrutiny, it is not usually clear whether the jobs created offset those that are lost. One study of thousands of private equity buyouts suggested that about 6% of the workforce were downsized over a five year period. On the other hand, some of these firms that were restored to financial stability were able to expand their businesses and add jobs over time.

 Whether or not job losses occur because of these private equity leveraged buyouts, there are aspects of the way they function that are troubling. Management fees for the private equity firms are taken out of the revenues of the purchased companies, or borrowed and added to the debt of these companies. This can make it more difficult for the businesses to be successful, since more cash is needed to service a high debt load. And even if the companies go under, the private equity firms often make money.

 Another point of contention regarding private equity firms (and hedge funds) is the lowered tax burden for much of the partners’ compensation through so-called “carried interest.” The private equity firms charge 2% for investing people’s money and also extract 20% of any profits. The latter is taxed at a 15% rate as capital gains, instead of the 35% that would be due from ordinary income. Yet unlike capital gains, those who reap the tax benefits do not place any of their own capital at risk to warrant the lower taxes. While the reduced taxes on the “carry” are currently legal due to arcane rules in the tax code, attempts to change the regulations in regard to this issue have failed, having been blocked in the Senate under pressure from private equity lobbyists. Both Republicans and Democrats have been complicit in this action, enhancing the wealth of private equity and hedge fund partners. Over $6 billion annually is lost to federal government coffers because of this tax giveaway. (Mitt Romney has stated that he pays about 15% of his income in taxes.)

 The lack of transparency in these private entities that borrow huge sums of money and are highly leveraged is another problem that has not been addressed. The economic repercussions of one or more of these major firms going under could be considerable.

 

The bottom line is that the emphasis on job losses because of the business models of Bain and other private equity firms may be inappropriate. Rapacious management fees by these firms, unwarranted tax benefits on carried interest and the lack of transparency are much more important concerns. These features will not be corrected until Senators and members of Congress are willing to resist the largesse offered by the firms’ lobbyists. We should not hold our breath waiting.

Resurrecting Democracy

www.robertlevinebooks.com

Motivating and Mobilizing the Moderate Middle

Motivating and Mobilizing the Moderate Middle

                                    Robert A. Levine   12-20-11           

            “A long habit of not thinking a thing wrong, gives it a superficial appearance of being right.”

            Tom Paine, Common Sense           

The government of the United States is being held hostage by extreme elements in America’s two political parties, whose members refuse to compromise on matters of critical importance to the nation.(The grudging year-end passage of some legislation is inconsequential.) Though the Republicans may be more responsible for the inability of Congress to get things done, both parties have contributed to the toxic environment in Washington. This has made it impossible to appropriately address the economic downturn, high unemployment, the budget deficits and national debt, among other issues. And the demonization of adversaries and lack of civility between members of the opposing parties obstructs any dialogue, with an unwillingness to understand the viewpoints on the other side of the aisle. Of course, the longer this stalemate goes on, the more damage will be wrought on the economy, America’s standing in the world and citizens’ psychological state.

 Can the status quo be changed to allow government to start functioning again? The answer is yes, if the moderate middle can be mobilized, since partisans in the Republican and Democratic parties appear incapable of working together in the nation’s interest. Mobilizing the moderate middle sounds like an advertisement from a fitness center, suggesting an exercise program to help reduce an unwanted bulge around people’s mid-sections. However, the moderate middle is also a large bulge in the nation’s electorate, mostly inert, men and women who tend to be a bit lazy and apathetic from a political standpoint. Well, America needs them to get off their butts and be involved in the political process to help get the country back on track.

 Various polls in the last two decades have estimated that self-described moderates comprise 35% to 43% of the populace. (However, many of those who call themselves conservatives are actually moderate on many issues and label themselves conservative because it is currently in favor.) There is little question that moderate Republicans, centrist Democrats and independents (the moderate middle) have the power to decide national, statewide and many local elections if they play an active role. But how can they be motivated to become involved.

At present, disgust with the nation’s political parties is almost palpable. Most of the moderate middle certainly realizes that America is in trouble and that neither the Republicans nor Democrats are providing solutions. If moderates believe that their participation in the political process can be meaningful and that they can make a difference in turning the country around, they will be more willing become engaged.

A cause the moderate middle could rally around is a centrist third party dedicated to ethical conduct, transparency and pragmatism. Not tied to rigid ideology nor connected to special interests, this party would take a practical approach to the nation’s problems. Funding for the party could be obtained from small donors over the Internet, rather than from special interests, and it could be organized through the Internet as well. Soccer moms, college students, retired seniors, minorities and the general population could all find common ground in bringing this new entity to fruition. And the enthusiasm of the party’s supporters would have a multiplier effect as they convinced new people to join, all knowing they were participating in the transformation of America’s political system. No Labels and Americans Elect are a start in the right direction, recognizing the frustration of the moderate middle in being able to alter the political dynamic. But these two organizations do not go far enough to bring about change.

There is nothing in the Constitution or Federalist Papers that mandates two parties for America. The current duopoly of power has failed the nation and it is time for a centrist third party to restore effective government. The power to change things lies in the hands of a motivated moderate middle that participates in the political process.

Resurrecting Democracy

www.robertlevinebooks.com

Who Speaks Up For The Middle-Class?

                    Robert A. Levine  10-19-11

        In America, who speaks up for the middle-class? What group or groups defends the interests of the majority of the populace as the economy falters, jobs disappear, and the government programs that provide them peace of mind, such as Medicare and Social Security, are under attack. The rich and the poor have their advocates in and out of government, but ordinary citizens have no strong voice articulating their needs. Every power center in and out of government claims to represent middle-class interests, but even a cursory analysis shows that this isn’t so.

            Wages are stagnant or decreasing. Workers have to pay more in co-pays and deductibles for health insurance and contribute more to pension plans and 401Ks. Middle-class families pay a greater percentage of their incomes in taxes than the wealthiest Americans. In 2010, CEOs at major corporations earned more than 343 times the income of average workers. (In 1980, it was forty-two times.) A recent article in the New York Times noted that the 400 wealthiest Americans were worth more in total than the bottom 150 million. And the top 1 percent had more in assets than the bottom 90 percent.

            Given America’s precarious economy and the degree of inequality, where are the advocates for changes that would benefit the middle-class? The Republicans main concerns are the budget deficits and national debt rather than how to put Americans back to work. And they refuse to consider raising taxes on the most affluent to fund a job plan. They are more attuned to the needs of the oil, pharmaceutical and financial industries than to those of ordinary citizens. The Democrats don’t want to raise taxes on hedge fund managers and private equity executives, allowing much of their income to be taxed at capital gains rates of 15% instead of 35%, costing the government billions in revenue. (Is it a coincidence that Democratic leaders receive large campaign contributions from these sources.) And the Democrats have been unable to devise plans that would alleviate the mortgage crisis, heeding the objections of the banks instead of providing relief for suffering homeowners.

            Government agencies originally created to protect consumers and promote the public interest have also not been looking out for the middle-class. The SEC (Securities and Exchange Commission) has been more protective of the financial firms for which they have oversight than of the small investor. The Federal Housing Finance Agency didn’t do its job monitoring lenders prior to the recession, allowing mortgages that were doomed to fail damage the economy. And the bank regulatory agencies and the Federal Reserve have been more interested in assisting the banks than in helping consumers. There’s also the FCC, FDA and the Federal Trade Commission, all safeguarding special interests over American citizens. And of course, the Minerals Management Service did not really manage BP and the oil drillers in the Gulf of Mexico.

            Partisanship and/or corruption currently drives government policy in virtually every area, with the special interests and lobbyists in control rather than the voters. The middle-class desperately needs a white knight to ride to its rescue and change the way the government functions; an organization that will serve the public interest instead of the special interests. It is not an unattainable fantasy. Salvation can be found by establishing a centrist third party whose elected officials refuse to take money from the special interests and instead opt to raise funds from small donors over the Internet. This party’s guiding principle in governing will be pragmatism rather than partisanship, with no constraints imposed by ideological dogma. A centrist third party can be successful if enough citizens see it as a credible alternative and are willing to lend it their time and money.

www.robertlevinebooks.com

Resurrecting Democracy