Socialize the Loss

Bloomberg is looking more at the Bain Capital issue.
What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.

What’s less clear is how his skills are relevant to the job of overseeing the U.S. economy, strengthening competitiveness and looking out for the welfare of the general public, especially the middle class.
Oh nonsense, man! Nothing could be more relevant to overseeing the U.S. economy.

Imagine that the country was a corporation, and its shareholders were those entities rich or powerful enough to arrange major campaign contributions.  The workers are those who, well, aren't that rich.  What happens when we suffer severe losses as a corporation?  We socialize the losses.

When things go well, why that's private profit!

I'm surprised you don't get this.  The President's out campaigning on the very point this afternoon.  How many times does he have to explain how economic management works?


bthun said...

//gives the Chinese example Eric mentioned yet another look//

Texan99 said...

Hmm. Equity investors and creditors put up money. If the investment goes bad, equity loses everything before creditors are touched. If it goes bad enough, creditors lose their money, too. If things go well, creditors get back their loan plus interest, while equity investors (once creditors are made whole) get all the excess, even if it's a lot.

So far, a pretty basic description of how subordination of claims and interests is supposed to work in every investment, everywhere, every time.

The authors try to make it sound a little more nefarious by throwing in tax deductions and sad workers. Tax deductions for interest are of no use to an evil capitalist unless he has gains to net them against. They're not like tax credits, where nice Uncle Sam writes him a check just for living. As far as the "workers pay the price" meme goes, well, not even the most pure-hearted socialists have ever figured out a way to ensure that jobs can survive the collapse and destruction of a potentially money-making operation -- though they'd love to see Uncle Sam take on the role of sending a paycheck for life. Bain wasn't exactly coming in to rescue companies that were on track to keep making money and employing all their workers for decades to come. Sometimes it's a question of how much of a hit employment will take, not whether a hit will happen at all.

I'll be darned if I can understand how people think venture capital is supposed to work, or even how the most basic investment of any kind is supposed to work. No wonder CEOs make so much money: basic economics and business math are evidently inaccessible to the greater part of the population.

The evil result that the article is trying to conjure up rhetorically actually applies pretty well to crony scams like Solyndra. Speaking of which, I understand the Republicans are trying to run a bill through the House formally entitled the "No More Solyndras Act." I give them credit for learning something about the PR game.

Grim said...

The evil result that the article is trying to conjure up rhetorically actually applies pretty well to crony scams like Solyndra.