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Republican presidential hopeful Mitt Romney greets supporters after addressing a primary night victory rally in Manchester, New Hampshire, January 10, 2012.
At DealBook, Andrew Ross Sorkin talks to Paul Levy of JLL Partners and a self-confessed small-fry among the big fish of the private-equity world. As you probably know, in recent weeks, private-equity — the practice of buying struggling companies, usually with debt, taking them private, turning them around, and re-selling them — has taken a drubbing, based on the notion that successful PE guys, like GOP presidential candidate Mitt Romney, are Gordon Gekko-esque in their commitment to greed.
Levy thinks this is terrible. How terrible? It's nearing red-scare levels:
...Mr. Levy has been dismayed that the industry’s heavyweights have not sought to publicly defend their industry in recent days. Private equity came under attack when Mitt Romney’s political rivals put his career at Bain Capital in the spotlight as part of the Republican primary.
“There’s a tinge of McCarthyism here,” Mr. Levy said in an interview. “I think it’s a pretty honorable industry, and I don’t know why people aren’t stepping up and defending the careers that define their lives. That’s a sad thing. What do they fear it will cost them?”
Mr. Levy, who voted for President Obama in 2008, is right. Virtually none of the big names in private equity have spoken up to defend the industry. Over the past several weeks, anytime my colleagues or I have sought comment about attacks on the industry, private equity’s kingpins have declined. (The industry’s lobbying group, the Private Equity Growth Capital Council, has been working behind the scenes to shore up support and plans a more public campaign in the coming weeks, but with none of the leading private equity executives playing a significant role.)
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Mitt Romney has been taking it on the chin from the unlikeliest of places: his fellow Republican candidates, especially Newt Gingrich, have claimed that Romney's time at private-equity firm Bain Capital was all about killing jobs, not creating them. Mitt says he "created" 100,000 jobs. Not so fast, say his detractors.
At the Huffington Post, Robert Lipton explains why this he-said/he-said doesn't entirely make sense:
The reality is both more simple and more complex than all those allegations would have one believe. It is simple because the function of Bain and other private equity funds has no planned relation to job creation or job losses. It is more complex, because the activities of Bain do tell us something about Mitt Romney -- having nothing to do with jobs. Let's look at how Bain and other private equity companies actually operate.
The business goal of private equity companies is to make profits for investors in the equity funds they manage. The greater the profits for the investors, the larger the take of the fund managers, who typically receive a base management fee of about 2 percent plus a portion of the fund profits, generally around 20 percent. If the fund manager is very successful then the manager's participation in profits may run as high as 30 percent, which investors may be prepared to accept just to be able to invest with that manager. We're told that Bain was very successful in creating very high returns on investment for its investors, said to be an astounding 88 percent per year, to the point where it could get 30 percent participation in profits. One tax advantage of the fund mangers is that although their business is to get paid by creating values, unlike other payment for services, which is taxed as ordinary income, their return for their services is treated as capital gain and taxed at the lower capital gains rate.
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The National Debt Clock, a billboard-size digital display showing the increasing US debt, is seen on the corner of Sixth Avenue and West 44th Street on August 1, 2011 in New York City.
Paul Krugman does another one of his simple, straightforward Econ 101 columns in which he helpfully ridicules the idea that we're headed down a debt-paved road to ruin. He zeroes in on the tendency of commentators to compare the finances of families to the finances of governments:
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.
The video is of economist Steve Keen, on the BBC's HARDTalk, laying out his plan to escape what he considers a second Great Depression. It's out there. Way out there. But he also presents a very clear analysis of what went so horribly wrong with the global financial system in the lead-up to the financial crisis. Stick around for the part at about 22:30 when Keen talks about being the "non-orthodox" economist with the "biggest mouth."
The upshot is that Keen wants to use the government's ability to "create" money to relieve private debt. Basically, the bank loaned out money it shouldn't have, so the debtors shouldn't be blamed. But you don't make the debt vanish, you empower the debtor — in fact require him or her — to pay it off. You pointedly don't give the money to the bank on the assumption that it will loan it back out.
Just because markets are up in the U.S., that doesn't mean Europe isn't still basically going to hell. The Eurozone hasn't been granted a reprieve simply because a few prime ministers have been sent packing. Greece still has massive debt. Italy still has massive debt. Spain still has massive debt. This may not end well. At least, it may not end with the euro surviving as a currency.
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