We’ve sold our Country to Private Equity, entering into a Mephistophelian Bargain? Follow my reasoning:
1.Equity owns or manages more then $6 Trillion , that’s 40% of the National Budget
2. Private Equity is highly leveraged, it is OPM( other people’s money) on steroids. “The Economist 5/31/14 American Finance “Risk On”, states that these entities are funding buyouts, despite the risk of lowering the credit rating of the combined entity produced and pushing corporate debt to 10% while revenues remain 2-5% Annually.
3.In addition: after creating the market for Mortgage Backed Securities, some firms are now in a position to benefit from the foreclosed houses that have come to market as a direct result of the Fannie and Freddie debacle and the 2008 crash. That’s why we have a Nation of renters!
4. Income to the Equity Firm is derived from fees. It may be carried forward for 10 yrs. It may be parked off shore. These fees are not taxed as ordinary income.
5. 25 managers of equity firms and hedge funds made over $21 billion + last year, non taxable as ordinary income
6.How does Corporate buyout work? An Equity company takes a once profitable company Public, spins it off and then the emerging entity may have to pay negotiated contracted fees back to the Equity Company for the 10 yr time negotiated period required or longer. The new Corporation is now left “starved for cash”.
7. Non of these transactions are regulated: That’s why it’s called “Shadow Banking”!
8. Why would a profitable Corporation pay a 20% fee to an Equity Co rather then pay taxes to the US government. Proposed answer: upper management makes a fortune in Cash. Then nobody worries about the outcome of the original Corporation or it’s employees.
It’s a payday for everyone at the top and nothing for ” We the People”. It’s no wonder we manufacture very little, our Corporate Tax structure encourages oversees investment and outsourcing of jobs. Politics drives this inequity through unequal influence of Politicians. Someone has to pay the IRS and the Middle Class has become the “chosen people”. Is it time to bring equality back into the system? Is it time to think about policy for the “greater good”?
According to Joseph Stiglitz, the economist, 20million people are without jobs in this country. If they were employed, they would spend. There would be a demand for goods and services. Makes sense to re look at our policies and readjust our priorities. Remember “the Bell Curve”, we may want to look again at that “vast middle”? I think it would be good for this Country!
Is it any wonder that Equity Firms are Lobbying to maintain the status Quo? One doesn’t have to wonder, the payback is enormous. They produce nothing and earn high fees. It’s a win win for them. The result is ” bad business” and ” risky business” for the American Economy. Will this become another ” house of cards”, if there is a reversal in the marketplace ? Will we be worse off then 2008?
Caveat emptor, the Equity firms are tied to institutional investors and pension funds, what happens to their worth when the market corrects? We know from past experience nothing goes straight up. Also, we know from past experience, that unless and until the market has a gut wrenching moment that solidifies past gains, the Bull Market is unsustainable.
That day will come. Then as Buffett used to say, ” we’ll know who is swimming naked in the water”.