State of The Union 2012

[Teatownclown]

http://financeinternational.info/2012/01/11/robert-reich-the-bain-of-capitalism/

Robert Reich: The Bain of Capitalism

It's one thing to criticize Mitt Romney for being a businessman with the wrong values. It's quite another to accuse him and his former company, Bain Capital, of doing bad things. If what Bain Capital did under Romney was bad for society, the burden shifts to Romney's critics to propose laws that would prevent Bain and other companies from doing such bad things in the future.

Don't hold your breath.

Newt Gingrich says Bain under Romney carried out "clever legal ways to loot a company." Gingrich calls it the "Wall Street model" where "you can basically take out all the money, leaving behind the workers," and charges that "if someone comes in, takes all the money out of your company and then leaves you bankrupt while they go off with millions, that's not traditional capitalism."

Where has Newt been for the last 30 years? Leveraged buyouts became part of traditional capitalism in the 1980s when enterprising financiers began borrowing piles of money, often at high interest rates, to buy up the stock of ongoing companies they believe undervalued. They'd back the loans with the company assets, then typically sell off divisions and slim payrolls, and resell the company to the public at a higher share price — pocketing the gains.

It's a good deal for the financiers (the $ 25 billion buyout of RJR-Nabisco in 1988 netted the partners of Kohlberg, Kravis, and Roberts around $ 70 million each — and most of Mitt Romney's estimated $ 200 million fortune comes from the same maneuvers), but not always for the company or its workers.

Some workers lose their jobs when the company downsizes. Others, when the company, now laden with debt, can't meet its payments to creditors and has to go into bankruptcy. According to the Wall Street Journal, of 77 companies Bain invested in during Romney's tenure there, 22 percent either filed for bankruptcy or closed their doors by end of eighth year after Bain's investment.

But, hey, this is American capitalism — at least as it's been practiced for the past three decades. Is Newt proposing to ban leveraged buyouts? Or limit the amount of debt a company can take on? Or prevent financiers — or even CEOs and management teams — from taking a public company private and then reselling it to the public at a higher price?

None of the above.

Rick Perry criticizes Romney and Bain pushing the quest for profits too far. "There is nothing wrong with being successful and making money," says Perry. "But getting rich off failure and sticking someone else with the bill is indefensible."

Yet getting rich off failure and sticking someone else with the bill is what Wall Street financiers try to do every day. It's called speculation — and at least since the demise of the Glass-Steagall Act, investment bankers have been allowed to gamble with commercial bank deposits, other people's money.

So is Perry proposing to resurrect Glass-Steagall? Not a chance.

Gingrich, Perry, and others are putting particular focus on the people who lost their jobs as a result of Romney's Bain Capital. Gingrich's Super PAC will be running $ 3.5 million of ads featuring emotional interviews with some of them.

But what, exactly, are Romney's opponents proposing to do about layoffs that harm so many people? Millions of Americans have lost their jobs over the last four years — and as a result have often lost their health insurance, their homes, and their savings.

Are Gingrich, Perry, and others proposing to expand health insurance coverage for jobless Americans and their families? All I hear from the Republicans is their determination to repeal the law that President Obama championed — which still leaves millions of Americans uninsured. Do Romney's opponents have plans to keep people in their homes even when they've lost their jobs and can't pay their mortgages? No. Do they propose expanding unemployment insurance? If memory serves, most of them were opposed to the last extension.

I'm all in favor of reforming capitalism, but you'll permit me some skepticism when it comes to criticisms of Bain Capital coming from Romney's Republican opponents. None of these Republican candidates has exactly distinguished himself with new ideas for giving Americans more economic security. To the contrary — until the assault on Romney and Bain Capital — every one of them has been a cheerleader for financial capitalism of the most brutal sort.

The party that has repeatedly saved capitalism from its own excesses and thereby preserved capitalism is the Democratic Party. So the only serious question here is what kind of serious reforms Obama will propose when, assuming Romney becomes the Republican nominee, Obama also criticizes Bain Capitalism.

Robert Reich is the author of Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.

Try harder....

[Conan71]

Wrong again. Warren would be plowing money into potential if he sees some. Problem is the lack of confidence. He doesn't need survival instinct. You'd wake up one morning to see Berkshire bought a company only to say to yourself, "wow, why didn't I see that?"

Bain capitalism is financial capitalism....obviously.

This is not a singular discussion of Berkshire nor Bain.  I'm quite well read on Buffett and his investment strategies.  

[Conan71]

The chart clearly shows that large profits don't create job growth in proportion no matter whether the economy is in recession or expansion. Profits are correlated with job growth, as is investment, but they are nowhere near the same magnitude. Purely from a fiscal standpoint, reducing capital gains rates to stimulate corporate profit is not the way to create jobs.

FRED is easy to use, you might want to give it a try.

Nathan, what happens to those profits when they are not reinvested in a business?

[Teatownclown]

This is not a singular discussion of Berkshire nor Bain.  I'm quite well read on Buffett and his investment strategies.  

Nathan, what happens to those profits when they are not reinvested in a business?

Those profits most often go to the top officials in the company. Or, as contributions to a PAC or a candidate who furthers the fight against labor. Sometimes, they increase divies...those are the well run companies...

Fooled me on that Buffet line above. You're just not trying today....

[nathanm]

Nathan, what happens to those profits when they are not reinvested in a business?

Whatever it is, the multiplier is clearly low. My default assumption would be speculation, but I can't prove it.

Apropos of nothing (other than an attempt to find the answer to the above question), this is sort of interesting:



What caused the massive growth in corporate profit?

Edited to add: Since about 2000, there has been a strong correlation with the S&P 500. It seems that before 2000, there was speculation on business. After the ensuing recession, it seems speculation was by business. Not the strongest evidence, though.

[Conan71]

Those profits most often go to the top officials in the company. Or, as contributions to a PAC or a candidate who furthers the fight against labor. Sometimes, they increase divies...those are the well run companies...

Fooled me on that Buffet line above. You're just not trying today....

Buffet line?  I like what you did there, but I quit eating at Luby's years ago.  I still like the line at the Y.

[Teatownclown]

What caused the massive growth in corporate profit?

Easy money!

[Conan71]

Whatever it is, the multiplier is clearly low. My default assumption would be speculation, but I can't prove it.

Apropos of nothing (other than an attempt to find the answer to the above question), this is sort of interesting:



What caused the massive growth in corporate profit?

Profits get taken as dividends and get spent on luxury items, travel, or other passive investments like speculation as you suggested.  Money is never static unless it's being hoarded and even then it's usually on "loan" for some sort of return.

[nathanm]

Easy money!

Shifts in the money supply are not anywhere near the same magnitude as those in either the S&P 500 index or corporate profits. There appears to be little correlation, at least for nonfinancial business.

[nathanm]

Profits get taken as dividends and get spent on luxury items, travel, or other passive investments like speculation as you suggested.  Money is never static unless it's being hoarded and even then it's usually on "loan" for some sort of return.

Are they buying all the stuff from China and investing in Chinese companies or something? The very high profits don't seem to bring up employment much.

[Teatownclown]

Shifts in the money supply are not anywhere near the same magnitude as those in either the S&P 500 index or corporate profits. There appears to be little correlation, at least for nonfinancial business.

I was speaking about the ability to loan to those who could not afford to pay it back....

[AquaMan]

Extremely frustrating to watch you guys at work. Gas when your posts are challenged you throw them off as so much chaff.  "Stuff happens"? "Good chart. We'll talk about it sometime."? It makes you look arrogant and cultist. Maybe you are and don't care. You play with others badly.

Anyway, sorry I got suckered in. I know better. The SOTU was fabulous. These posts...not so much.

[heironymouspasparagus]

If that's what TTC was trying to claim, TTC is wrong. Investment clearly can and does create jobs. If it didn't, the economy would never work. However, past a certain point, larger investment appears to only create larger corporate profits. I presume, but do not have the data at hand to support the presumption, that is because much of the so-called investment is actually speculation in the stock market.

Not what TTC is saying - it is Conan trying to deflect.

[Conan71]

Not what TTC is saying - it is Conan trying to deflect.

You are so hard-wired against anything I've got to say, I don't think you have a clue what we are talking about here.

[heironymouspasparagus]

This is not a singular discussion of Berkshire nor Bain.  I'm quite well read on Buffett and his investment strategies.  

Then you know he has never bought a company with the intent to disassemble, sell off the parts, and then write himself a big bonus check to celebrate the raping and pillaging of yet another company.

He is a Capitalist and builder/supporter of Capitalism along the line of what Peter Drucker wrote about.