The Audacity of Profit

by Matt Margolis at 01:01 PM

According to Rep. Marcy Kaptur (D-Ohio), "If you asked any given person on the street in [her] district what a hedge fund is or how a private equity fund operates, chances are that person would not be able to tell you."

"Alarmingly, the same confusion exists within the halls of Congress and at the Securities and Exchange Commission (SEC). Little is known about their potential impact on our overall economy since they go almost completely unregulated. Their mammoth profits earned through corporate takeovers are gaining some attention on the pages of The Wall Street Journal. Their impact is felt in our districts. They take their toll on our constituents and our neighbors. Recently, the private equity firm Cerberus bought Chrysler, whose Jeeps are made in Toledo, Ohio, and the Carlyle Group bought Manor Care, a Toledo-based assisted living company. These distant owners will have a huge impact on our way of life. Yet we do not really know them."

Imagine that? Making a profit! How dare they! So, what does Kaptur propose? Government regulation.

And don't think there isn't political motivation behind this either.

"Without question, hedge fund managers exert phenomenal political power. In 2004, for example, Cerberus founder Stephen Feinberg gave $25,000 to the National Republican Congressional Committee and donated over $100,000 to defeat House Democrats. James Cayne, CEO of Bear Stearns, sent the National Republican Senatorial Committee $10,000." (See The Toledo Tattler for info on who's giving money and gaining influence with Marcy)

And of course, she can't go without attacking at least one Republican presidential candidate for having the audacity to make a profit by taking over struggling companies and turning them around.

"In fact, Mitt Romney made his fortune with Bain Capital, the private equity firm he co-founded. But no matter to which party the fund managers give, the money comes at the expense of working Americans and at the risk of compromising our national security.
And just who does think loses out when failing companies are given a second chance? The people employed there? She fails to mention that companies being taken over would otherwise go out of business."

Should the people of her district all lose their jobs so that bigger companies can't profit?

This is all leading to more Democrat-proposed tax increases. Democrats can't stand it when companies make profits, so instead they want to funnel those profits into the government's coffers. All in the name of "public interest."

No votes yet

And of course, she can't go without attacking at least one Republican presidential candidate for having the audacity to make a profit by taking over struggling companies and turning them around.

A classic example of cherry-picking. The actual quote from the article is this:

The most prominent presidential candidates rely on contributions from these firms, whether it is Hillary Clinton

1. That's awfully low-rent of you, Matt, to cherry-pick your quotes like that.

2. The recent chatter in DC about hedge funds isn't entirely without merit, in my opinion. While my opinions on this particular issue are still a bit soft, my general impression is that it's a problem that huge companies--with enormous impacts on our economy, tax base, and individual communities--are being privatized and thus becoming exempt from many laws governing public companies.

Sarbanes-Oxley, for example, applies to public companies. Imagine an Enron situation. Employees of private companies can still own company stock. So if a hedge fund had bought Enron pre-implosion, the 401k's of their employees would still have been full of Enron shares. They still would've lost every last dime when the company went under. It would've been no less of a tragedy.

Like I said, my opinion is soft on the issue, i haven't given it a lot of thought, but my impression is that being able to remove your company from regulation like this is a bad thing for everybody but those at the top

So IIRC, the debate has been about taxing these entities at a higher rate than they're currently taxed. That would be a decent solution in my opinion. It wouldn't be that heavy-handed (No outright ban is being created) but it would remove some of the existing financial incentives, probably causing fewer of these deals to take place.

There's no reason at this point to believe that private equity firms are at all good for the economy, the nation, the people, or the general philosophies of capitalism.

That's especially true since these are, in basically every case, leveraged buyouts. There's nothing like buying a company with somebody elses money, saddling it with debt to pay back that somebody-else, pocketing a hundred-million yourself, and then crossing your fingers and hoping everything works out right. And when it doesn't (Revco, Federated, etc), well, I hope you lifer employees, communities, suppliers and their employees, etc, don't have too much invested!

I heard Marcy Kaptur speak this Spring. She's an incredibly nice woman, but didn't strike me as overly intelligent. Her understanding of trade, markets, and currency were pretty basic, and it showed.

She's a Rust Belt politician through and through. She believes that labor is always fighting against "the man" and that there is always someone out to get the "little guy." She's an economic protectionist. Of course this is the attitude that gets her elected, but it's also the attitude that has led to the economic depression of this region.

She believes that labor is always fighting against "the man" and that there is always someone out to get the "little guy."

Labor is always fighting against big business interests. I think most people would agree with that. Even those of us with just a "basic" understanding of economics.

but it's also the attitude that has led to the economic depression of this region.

Really? It's not because Ohio was mainly a manufacturing state, dealing with trade practices that force American workers to compete with foreign slave labor, and reward corporations that outsource jobs and infrastructure?

She's an economic protectionist

As long as she's trying to protect American jobs, God bless her. trying to "protect" American jobs she is actually increasing unemployment and causing unneeded suffering of the poor and middle class.

BTW...Shane, I didn't cherry-pick those quotes, I merely posted someone eleses blog to stimulate conversation.

Matt Holdridge
The Toledo Tattler

According to Rep. Marcy Kaptur (D-Ohio), "If you asked any given person on the street in [her] district what a hedge fund is or how a private equity fund operates, chances are that person would not be able to tell you."

I don't actually know anyone who couldn't tell you about private equity or hedge funds in Toledo. Does this lady know her voter base? This is insulting.

If you're here to tell me it's my fault - you're right. I meant to do it. It was alot of fun. That's why I have this happy smile on my face.

It doesn't make something bad just because the"Average Joe" doesn't know or understand what they are. How many "Average Joes" know what the Joint Photographic Experts Group is and what significant aspect of their life is impacted by it, or what a Raster/Vector is? Does it make these things inherently unjust?

Matt Holdridge
The Toledo Tattler

I don

Old South End Broadway

providing the full quote.

being sensitive to things like this, I think that some may consider "ties" and "links" to be less of an issue than "made his fortune"...

Of course, everyone cherry-picks, which is why it's nice to have the complete comments, so each of us can decide on our own...

...ShaneH. I, too, have not firmed up my thoughts on the issue, either. However, I'm struck by a couple of things you say and would appreciate clarification...

Did I understand that you seem to be leaning against private ownership of companies?

You say that it appears many companies are looking to leave public ownership and go to private ownership so they can avoid regulation. That seems to me to indicate that such companies find the regulations so 'onerous' that they're looking for ways to avoid it. (I've heard lots of complaints about how S-O had so many unintended consequences and huge costs for compliance...but new government regulations are like that - Congress hears about a problem, creates a law to 'deal' with the problem and, amongst the fine print and implementation, has consequences and costs that are unexpected.)

I guess I'm wondering ... if an 'unintended' consequence of S-O is the privatization of public firms, wouldn't a review or amendment of S-O be under consideration? More likely, though, Congress will try to 'fix' this 'new problem' and we'll continue the cycle of new problem/new law/unintended problem/new law/etc...

And then you suggest that higher taxation of such earnings is probably okay since it isn't an outright ban. But if the higher taxation doesn't produce the desire result (not sure what Congress's goal is at this time...but that's another issue), is an outright ban something that you'd support?

I think that there are probably lots of 'good and bad' results of leveraged buyouts ... I'm sure that both successes and failures can be found.

Actually, I think she's voted against most of the trade deals that have caused Ohio to lose jobs.

Her quote is:
"If you asked any given person on the street in [her] district what a hedge fund is or how a private equity fund operates, chances are that person would not be able to tell you."

Isn't she just saying the average Joe isn't knowledage about the difference between the funds? Walk through Westfield Shopping Center or a summer festival today and randomly ask people. I'll bet maybe 10% could tell you.

Now, obviously there are many places in town where qualified financial experts could explain the difference to anyone who didn't know.

For what it's worth, I agree entirely. That's a terribly stupid argument. "It's bad because I'm ignorant." Dumb.

But what makes you believe that leveraged buyouts are GOOD for the country, economy, employees, etc? Not only are you getting to pick whether or not you're regulated, you are saddling the company with debt (somebody has to buy back those outstanding shares) with the (dubious) reasoning that by removing the company from public scrutiny you can build a healthier company that's able to reverse it's downward spiral (because a leveraged buyouts only occur if the stock is low enough), repay this added debt **, and not screw over the employees and communities that created all the value in the company.

** The general principle is that the debt is carried on the books but irrelevant b/c it's secured by the value of the company. That the debt would be at least canceled out by a potential future IPO.

I have 2 issues with that:
1. The debt load effects the value of the company (which is supposed to be what's securing the debt). It could affect bond ratings, interest payments could affect liquidity, etc.
2. The wall street meet-earnings-today-tomorrow-forever culture can be unhealthy for a company. But there's nothing to say that even if the debt doesn't sink the company that it'll ever be able to be recouped in a future IPO.

Just some thoughts. This is a complicated animal. Fact is that nobody here can understand every aspect of this equation. It's not about making a profit, Matt. Really. But I have a perhaps old-fashioned belief that profits should be a side-effect of creating VALUE. A company should be a machine that, as input, accepts the labor of a human and mixes it with raw materials and as output creates profit.

Private equity today does none of that. It puts-up, what, 10% of the cash to buy a struggling company, pays the other 90% by loading the company with debt, and, oh yeah, adding a couple points to that to cover their fees. They say they turn a company around, that they fix it. All they really do is make it more valuable as a company so they can flip it for a couple hundred mil.

So, if Cerberus uses this new situation to gut the UAW contract and reduce total worker compensation from the $70 odd dollars per hour they're making now down to, say, $50. Well, that's going to make Chrysler more valuable as a company. But is it going to be a positive thing for the employees, community, country, economy, etc? i don't know...

Capitalism is old. Private Equity and leveraged buyouts are new. Why just assume that they're a POSITIVE force in Capitalism?

I'm not against private ownership of ANYTHING.

But todays multi-nationals are so influential that they defy most definitions of "private property."

And as a software developer, I've seen first hand the effects of Sarbanes-Oxley as it has a lot to do with data retention & auditing policies. And in the interest of a fair assessment: I've probably been more successful in the past 2 years because of the law than I would've been otherwise. It's hard to say for sure, it's about the opportunity costs of taking the SO-related contracts I've taken, but my gut feeling is that yes, I've profited from it.

Still, though, I would encourage a provision that the SEC/FTC (or at least the Congress) gets latitude to adjust provisions of the law on a regular, mandated basis. Regulation is a moving target. The law should recognize that.

So, in that spirit, if we have companies that are being able to avert regulation by privatizing themselves, we need to adjust the regulation to compensate. Maybe it should be based on size of some sort, regardless of status as a public company. Or any company that does business in more than one state? Something like that.

Maybe SO isn't the answer. God knows I don't agree with much of what the Republican controlled congress accomplished.

And forgive me for scattering my thoughts around, but I also think that business, for the most part, has it pretty-good in this country. In the 50's, I read recently, businesses paid 50% of the federal taxes in this country. It's minuscule now.

And if somebody is so worried about uncompetitive costs on American business, they should look first at one of the largest expenses any business has: Heath Care. We started promoting with tax code employer-provided healthcare only since the 1940s. It's not as if it's some ingrained Founding-Fathers American Way. And our businesses are having to pick up this expense while virtually NONE of their overseas competitors are.

So yes, twisting back around to the point, I don't think companies removing themselves from regulation at their own will is a good thing for the country.

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