Brothern
TheSilverNoble
Link
The article is definitely biased, but that doesn't necessarily mean it's wrong. It sounds pretty damning, but I admit I don't know a whole lot about that sort of investing. So is this as bad as it seems, or is does it blow things out of proportion.
No, it completely blows things out of proportion. It's hard to beginning defending it too, because you have to have the academic and business background to understand what Bain does what it does and for what purposes.
The best analogy I can think of is flipping a house. You buy an old, worn house for $100K with a leaky roof, broken plumbing and atrocious landscaping. You may be able to live in the house, but the living conditions are still terrible. What Romney does is take out a loan to buy the house, fix the roof, tear out the plumbing and re-do the landscaping. He then sells the house for $250K, because the condition of the house has been improved.
Business are like that house. A lot of people believe every single company that exists is actually a $2M McMansions. They aren't. Businesses may even be
profitable (livable) but they still can have poor management, ineffective resource allocations, insensible capital structures, and etc. that is damaging the company and wasting time, resources and human capital. Flipping the house is "creative destruction" - by ripping out the roof or reforming the company's resource allocation, you are strengthening the company.
The disconnect comes from the workers, who do not have the insight into the larger business. No one tells them that their employer is a shitty broken company. Employees may not realize their division is the leaky sink or broken pipe that's dragging down the company. Unfortunate as it may be, that has to be fixed in order for the company to grow or become more prosperous. This article is the equivalent of a person hugging and sobbing over the broken sink and blaming Romney for fixing it.
Yeah. It's harsh. It's cruel. But on a large scale, we
need to do it as a society. Economic and social progress will not occur if all of our resources are being ineffectually used and our companies are digging one hole to fill another. Yeah, you have to feel bad for the manufacturing plant that laid off it's employees, but it's killing economic development by wasting resources.
What brothern says could, and should, be true. but its not, not in every case, anyway. If capital was tied to real wealth, then sure, only increasing the real value of an asset would yield profits. But we have the fed.
I love the treatment, by the way, of "creative destruction" in the article as if it were some sort of unnacceptably predatory practice and not a naturally ocurring, and thoroughly necesary, ocurrence in a market economy. James Buchanan should be required reading. for everyone.
But what is true is that the model of rapid liquidization and short-term profit seeking is very dangerous, and part of the reason for the economic crisis.
I, personally, blame the fed. Well, also Economics and Business faculties in universities around the globe, but mostly the fed.
See, if a firm like Bain didnt have an easy source of immediate capital lending out at below interest rates, they would actually have to take care of their investments. If a company that they bought was profitable and solvent, it would become a source of capital for later operations, and thus killing the golden goose to sell it for parts would be a ridiculous idea.
But Bain can always borrow at ridiculously low interest rates, because The Fed exists and is willing and able to lend them a limitless amount of money at interest rates that are such that, when taking inflation into acount, they are actually paying Bain to borrow. Thus, rapid liquidization and selling off all means of production becomes the name of the game. Bain doesnt need access to real capital, it just acquires a property that they see as more valuable to liquidate in the short run than a means of production that can grant them acess to a steady flow of capital in the long run. Again, econ faculties, "in the long run we're all dead" and such.
Plus, the fact that executives are rewarded by shareholders and boards based on quarterly performances ( ever wonder how the kochs got so rich? they kept the company to themselves and disposed of the whole quarterly evaluation for executives nonsense). So, Bain borrows money to buy a company, tears it aparts and sells it off for millions, pays back less than what the fed lent it, and gets to report the entire sale as a profit. Why? cuz they dont need to keep the cash around as operating capital, as the fed tap keeps flowing.
So everyone has a lot more
money, sure, but what you actually have is the destruction of the means of production of actual wealth. More money chasing less wealth means inflation, and everyone thinks theyre getting richer, but theyre really just riding a bubble. The bubble pops, everything goes to s**t, and business mayors everywhere are left scratching their heads, not understanding that money doesnt make anyone rich. Actual wealth, as in real goods and services with real value created by real demand and real marginal utility, make you rich.