California Free Press

How private equity is destroying the labors of love

Private equity is turning every business into a short-term profit center.

by Robert Reich

Aug 17, 2023

 

 

 

 

Friends,

Last week, Paramount announced that it will be selling Simon & Schuster, one of the biggest and most prestigious publishing houses in the United States, to the private-equity firm KKR, for $1.62 billion.

The acquisition vastly increases the influence of financial interests over book publishing.

This worries me because it continues a trend that began years ago — elevating profits above the love of publishing books.

When I published my first book decades ago, the purpose of most publishing houses was to publish books. Publishers made money in order to publish books. They earned enough on their big bestsellers to take chances on unknown authors like me and put out books that delighted small numbers of enthusiastic readers but never showed a profit.

But in more recent years, the major purpose of most book publishers has switched from publishing books to making money.

After KKR takes over Simon & Schuster, this prestigious publishing house won’t be taking risks on unknown authors or putting out wonderful books that appeal to small numbers of enthusiastic readers. It’s going to be a profit center for one of the biggest private equity firms on Wall Street, dedicated exclusively to making money.

The same dynamic has infected other parts of the economy. News organizations once made money in order to report the news. Now, news organizations exist in order to make money.

For years, CBS News was insulated from the commercial side of CBS. This allowed Edward R. Murrow and Walter Cronkite to report what they thought the public needed to know. Today, most network and cable news has to show a profit. It’s been a slippery slope leading to Fox News’s shameless pandering to the lies and bigotry its viewers find entertaining.

Hospitals and health insurers once made money in order to provide health care. Now, hospitals and health insurers provide health care in order to make money.

Blue Cross and Blue Shield began as nonprofits that insured all comers. But as big profit-seeking insurers targeted younger and healthier people, the Blues were left to insure the older and less healthy, which made it impossible for them to continue. They turned to making money. Now, private equity runs hospitals, into the ground.

And so on.

I was reminded of this distinction — between making money in order to provide particular products and services, and providing products or services in order to make money — while watching the magnificent series “The Bear,” now streaming on Hulu.

If you haven’t seen it, I won’t give away the plot except to say that the major characters want to create a great restaurant. Each has a backstory that reveals why this is so important to them.

Making money is the means to achieving their dreams, but they aren’t in it for the money. They’re in it to produce wonderful food, served with perfection. This transcendent goal is central to their own self-worth. It gives each of their lives purpose and meaning.

It’s still possible for businesses to exist in order to produce wonderful goods and services. I know many retailers, small manufacturers, and professionals who do what they do mainly for the love of it. (My father ran a clothing store, and although he worked seven days a week, making money was secondary — enabling him to keep his family afloat and continue to do what he loved.)

But the financialization of the American economy has turned almost all larger businesses into profit centers. Private equity in particular has leached out every other value.

When I ask my former students how they like their work, I often hear the same story. “I like it well enough,” they say, often with a tinge of regret. “But the money people won’t let me do what I’d really love to do.”

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Off the Top of My Head

San Diego On the Way to Solving Homeless Problem

by John Lawrence

With a combination of safe sleeping and safe parking areas and also converting motel rooms into single occupancy units (SROs), San Diego is heading in the right direction for solving the homeless situation. This is combined with an ordinance that prohibits sleeping in public areas including sidewalks. Finally, a workable solution that gets the homeless off the streets, provides them with some amenities including sanitation facilities and makes the streets and city sidewalks safe for pedestrians again. As a tourist destination San Diego can't afford the spectacle of back to back tents crowding city sidewalks, and the provision of amenities in safe sleeping areas or city sponsored SROs makes the homeless at least somewhat better off than they are without any amenities on public sidewalks. The San Diego Union reported:

The properties being considered include three hotels and one apartment building.

One of the hotels is a 62-unit Ramada Inn on Midway Drive, which the Housing Commission agreed to pursue at its May 12 meeting when it unanimously agreed to apply for $18 million in Project Homekey funding. The estimated purchase price would be $11.6 million, equating to about $182,000 a unit, but adding kitchenettes and other upgrades would increase the overall cost to $29.5 million, or $469,000 a unit.

The city also is submitting a joint $4 million application with Wakeland Housing and Development Corp. to purchase a vacant 13-unit apartment building in Ocean Beach. Purchasing the building would cost $4.5 million, but rehabilitation expenses would increase the cost to $6.8 million, bringing the per-unit cost to $525,000.

The other two properties are a 107-unit Extended Stay America Hotel on Murphy Canyon Road for $40.7 million and a 140-unit Extended Stay America Hotel on Mission Valley Road for $52 million.

Essentially the city is taking the responsibility for providing public housing, something that was abandoned during the Reagan administration. The most dramatic cut in domestic spending during the Reagan years was for low-income housing subsidies. Reagan appointed a housing task force dominated by politically connected developers, landlords and bankers. In 1982 the task force released a report that called for “free and deregulated” markets as an alternative to government assistance – advice Reagan followed. In his first year in office Reagan halved the budget for public housing and Section 8 to about $17.5 billion. And for the next few years he sought to eliminate federal housing assistance to the poor altogether.

Public housing was stigmatized due to failed projects like Cabrini-Green. Cabrini–Green was home to 15,000 people, mostly living in mid- and high-rise apartment buildings. Crime and neglect created hostile living conditions for many residents, and "Cabrini–Green" became a metonym for problems associated with public housing in the United States. Now cities like San Diego are forced to take up the fallen banner for public housing under the metonym of  "housing the homeless". The state of California, however, is providing most of the funding.

Other cities have had no problem in providing low cost rental housing. Take Vienna for example, a city which has largely solved the worldwide crisis of soaring rents:

Experts refer to Vienna’s Gemeindebauten as “social housing,” a phrase that captures how the city’s public housing and other limited-profit housing are a widely shared social benefit: The Gemeindebauten welcome the middle class, not just the poor. In Vienna, a whopping 80 percent of residents qualify for public housing, and once you have a contract, it never expires, even if you get richer. Housing experts believe that this approach leads to greater economic diversity within public housing — and better outcomes for the people living in it.

People living in Vienna's social housing pay as little as 3% of their monthly salaries on rent. To boot the availability of low cost public housing keeps costs in the private housing market down.

In 2015, before they bought an apartment on the private market, the Schachingers were making about 80,000 euros ($87,000) a year, roughly the income of the average U.S. household in 2021. Eva and Klaus-Peter paid 26 percent and 29 percent in income tax, respectively, but just 4 percent of their pretax income was going toward rent, which is about what the average American household spends on meals eaten out and half a percentage point less than what the average American spends on “entertainment.” Even if the Schachingers got a new contract today on their unit, their monthly payments would be an estimated 542 euros, or only 8 percent of their income. Vienna’s generous supply of social housing helps keep costs down for everyone: In 2021, Viennese living in private housing spent 26 percent of their post-tax income on rent and energy costs, on average, which is only slightly more than the figure for social-housing residents overall (22 percent). Meanwhile, 49 percent of American renters — 21.6 million people — are cost-burdened, paying landlords more than 30 percent of their pretax income, and the percentage can be even higher in expensive cities. In New York City, the median renter household spends a staggering 36 percent of its pretax income on rent.

The article goes on:

Real estate is a place where money literally grows on tree beams. In the last decade, the typical owner of a single-family home acquired nearly $200,000 in appreciation. “Another word for asset appreciation is inflation,” the academics Lisa Adkins, Melinda Cooper and Martijn Konings write in “The Asset Economy,” “an increase in monetary value without any corresponding change in the nature of the good itself or the conditions of its production that would make it scarcer or justify an increased demand for it.” That inflation is creating a treacherous gulch between the housing haves and have-nots. Harvard’s Joint Center for Housing Studies found that, in 2019, the median net worth of U.S. renters was just 2.5 percent of the median net worth of homeowners: $6,270 versus $254,900. Last year, as higher interest rates slowed home sales and caused prices to plateau (and even soften in some overheated cities), the asking price of the median U.S. rental reached $2,000 a month, a record high, according to Redfin. Inflated rent prices line the pockets of landlords while preventing renters from saving for a down payment and ever getting off the treadmill.

Inflation in asset prices, particularly real estate, is causing more people, especially senior citizens, to fall into homelessness. The recent rise in interest rates which supposedly are aimed at curbing inflation have done nothing to bring the cost of housing down. In San Diego county, real estate is still appreciating in value despite the Fed having raised interest rates to highs not seen in recent years. It has done nothing to stop investors and hedge funds that pay cash. I reported previously:

In a deal with the Conrad Prebys Foundation, Blackstone Group, CEO'd by Steven Schwarzman, is buying 5800 rental units in San Diego. According to the San Diego Union, "The deal makes Blackstone one of the biggest real estate holders in San Diego County. It already owns $4.5 billion in assets here — including Legoland and the Hotel del Coronado. The transaction, which also includes Los Angeles-based investment firm TruAmerica as a partner, is expected to close in the next few weeks. The sale of the apartments was praised by Dan Yates, the president of the Conrad Prebys Foundation, who said the portfolio was assembled by Conrad Prebys — a San Diego developer — himself. Yates said the money from the deal will be used for grants primarily in San Diego."

Investors pay cash t buy up cheap rentals, and, therefore, the rise in interest rates doesn't affect them. They don't pay interest. They then give the tenants a 30 or 60 day notice depending on how long they've lived there. Then they refurbish the apartments and rent them out for twice the previous rent. This is the so-called "gentrification" of San Diego neighborhoods. This is why low cost rental units are disappearing just as all the SROs have disappeared. The policies now taking place by the city and county of San Diego to provide converted hotel housing and safe sleeping and parking areas will counteract this trend of higher and higher rents producing more and more homelessness. It's a policy that needs to be continued and increased. It cannot just be a one-off. Eventually, it will put a damper on the private rental market just as it did in Vienna.

Off the Top of My Head

Why the Republican Congress Will Drive the US into Default

by John Lawrence

Simply put it's in their interests to do so. They themselves will profit politically and financially. They will blame Biden for the default, and they will sell short their stock portfolios so that, when the stock market crashes, they will make money. Default doesn't mean that the US will not pay its debts. It means that going forward seniors on social security will not get their monthly checks. Neither will Federal workers or active duty military. However, since the US Treasury still has some money and money coming in from taxes, it will prioritize paying interest on Treasury bonds. So rich people that hold financial obligations of the US government will be paid while everyday average slobs will be left to suffer. This is exactly the type of solution Republicans have always sought. It fits in nicely with their modus operandi: cater to the rich and starve the poor and working class. Millionaires and billionaores will not suffer. Smart people who sell stocks short will not suffer. They will prosper. Financial wizards and private equity corporations will snap up distressed properties like a shark snapping up a school of fish.

The financial obligations of the US, money that has supposedly already been spent, is a misnomer. They represent money that has already been allocated by the previous Democratic controlled Congress. If Republicans had controlled the previous Congress instead, the money would never have been allocated. So it's not money that's already been spent, it's money that's already been allocated. The spending is in the future. The allocation was in the past. If Democrats controlled the present Congress, there would be no problem. Since it's up to the Congress both to allocate spending and to raise the debt limit, there is a whiplash if one party allocates the money and the other party is supposed to preside over the spending of the money. In a sense the Republican Congress is rebelling over the fact that, although they didn't allocate the money, they are supposed to preside over the spending of it.

Now Joe Biden could preempt the Congressional decision not to raise the debt limit by using unconventional but completely legal means, something that has never been done before. The Federal Reserve Act gives the power to print money to the Fed, However, the Coinage Act grants the Secretary of the Treasury rather broad coin seigniorage authority. The debt ceiling could be side stepped by ordering the West Point Mint to coin a 1 oz. $ 1 trillion coin. Treasury can then present the jumbo coin at the NY Fed to buy back $1 trillion in Fed-held debt (the Fed has to accept it, a creditor can’t refuse legal tender paid in to settle a debt). Or I see no reason why the Treasury couldn't simply deposit it in its account at the Fed thereby giving the US government the wherewithal to pay its bills. Esteemed economist Paul Krugman is all for the minting of the trillion dollar coin: "So go ahead, Democrats, and do whatever it takes to get through this. Gimmickry in the defense of sanity — and, in an important sense, democracy — is no vice."

Republicans would have you believe that spending is out of control. No, undertaxation is out of control especially undertaxing the rich. Economic inequality has soared reaching unprecedented new heights not seen even in the Gilded Age. As Joe Biden has proposed, the budget could easily be balanced and the debt paid down by taxing the rich. Republicans would have you believe that raising taxes is a policy that would have to be enforced on everyone including the poor and the middle class, but that, unfortunately for them, is not the case. It is not written in stone that raising taxes would have to apply to everyone. As Bernie Sanders, Elizabeth Warren, AOC and others have pointed out, raising taxes on the rich could not only balance the budget, but could solve the problem of social security shortfalls. Republicans are in the unenviable position of wanting to screw the working class while catering to the rich while holding on to their MAGA supporters, a large portion of whom are the working class.

So given the fact that Republicans don't care about social security or Medicare recipients, there is a good chance that they will not vote to raise the archaic debt ceiling and force the US into default not on its debt but on its ongoing payments to Federal workers, who they hate anyway, social security recipients, who they will cheerfully throw under the bus and active duty military who as MAGA supporters will cheer them on at their own expense. Meanwhile, Congressional Republicans, private equity corporations and billionaires will short the market and salivate over the cheap assets they will be able to snap up. In other words they will profit from a default.

Blackstone’s Evil Scheme to Profit Off Every American Crisis

 

 

 

How Stephen A. Schwarzman got rich, from More Perfect Union's series The Class Room

 

Narrated by JT Chapman from Second Thought

March 1 2023, from More Perfect Union

In January a massively powerful landlord sued to evict hundreds of tenants across the country. 

The landlord had bought up billions of dollars of real estate when prices were low during the pandemic–taking advantage of the economic downturn that hurt so many. 

And now that eviction moratoriums are lifting, that landlord is starting to kick people out of their homes. 

Here he is at the height of the pandemic.

Stephen A. Schwarzman is the co-founder, chairman, and CEO of Blackstone Group, the world’s largest alternative asset firm with almost a trillion dollars in assets–including real estate.  The firm has made Schwarzman very, very rich. 

And he’s not afraid to flaunt it. 

One example: his 60th birthday party reportedly cost between 3 and 5 million dollars. 

It was hosted by Martin Short. Patti LaBelle sang a song written for Schwarzman. And it was held in an exact replica of Schwarzman’s apartment built for the party.

Here’s the egregious part: Schwarzman’s big bash was in 2007, just as the economy was on the precipice of a disaster caused by people like Schwarzman. 

That same year Blackstone had their IPO, netting Schwarzman hundreds of millions of dollars instantly. 

Sensing a theme here? It’s not just COVID and recession profiteering: 

Major economic downturns and national crises have coincided with hugely profitable milestones for Blackstone… and Stephen Schwarzman

This is The Class Room from More Perfect Union, and today we’re looking at how Stephen A Schwarzman got rich.

Like many great stories of people plundering America, this one starts at Harvard Business School. 

Schwarzman was raised in the suburbs of Philadelphia then went to Yale, where he joined Skull and Bones, the infamous and… kind of corny secret society.

Then to Harvard Business School and then on to the finance world. Schwarzman landed at Lehman Brothers, then a vastly powerful investment bank shortly after getting his MBA. 

At Lehman he worked in mergers and–helping the firm scoop up other businesses–until he eventually oversaw the absorption of Lehman Brothers itself into American Express. 

He left Lehman, and in 1985 started his own firm–Blackstone. He teamed up with his Lehman colleague Peter G. Peterson, former Secretary of Commerce under Nixon.

Despite the founders’ pedigree, they tried to push the scrappy startup image in the press. The New York Times wrote in 1987 that Blackstone “operates out of cramped quarters… where secretaries and bankers share offices and boxes are stacked in the hallways”

Blackstone started as a mergers and acquisitions consulting firm before transitioning into merchant banking and private equity. 

It wasn’t a great time for investing—but Blackstone got lucky: they had finished raising money for their investment firm just days before the crash. 

And it was all part of their strategy. The New York Times pointed it out that year with the headline, “A Big Fund Ready to Capitalize on Hard Times”

In the early profile, published right after Black Monday, Schwarzman’s business partner admitted that their strategy involved taking advantage of economic downturns. 

”There are going to be fascinating opportunities… There’s a good chance the dollar will continue to fall, interest rates over the long term will go up and we will experience slow growth… You raise capital when you can raise it, and then you move in opportunistically and make investments in distressed industries.” 

It’s a business model based on profiting when everyone else loses.

If we fast-forward through 20 years of Blackstone pioneering and perfecting the private equity and leveraged buyout, tearing apart businesses to maximize profit, we get to their IPO–that’s when a company goes from private to public so that anyone can buy shares on the stock market. 

The IPO made Schwarzman 500 million dollars. 

Once again months later, the greed of Schwarzman’s colleagues in finance made this happen

Because the collapse was directly linked to housing millions of working Americans had their homes foreclosed, meaning they were available to buy for cheaper-than-usual rates.

So Blackstone swooped in. According to reporting from the Neighborhood Assistance Corporation of America, “Blackstone was one of the first private equity firms to begin buying foreclosed homes in the wake of the financial crisis, fixing them up and renting them out.”

So as Americans suffered, Blackstone profited three times: their backers and investment companies were directly responsible for the crash, some of those entities got government bailouts, then after everything crashed, they bought up property at rock-bottom prices.

It’s the exact strategy Schwarzman’s business partner outlined in 1987: “you move in opportunistically and make investments in distressed industries.” 

Blackstone was able to buy millions of dollars in cheap housing, which gave a jumpstart to their real estate business. 

Post-recession exploitation was just one big push in Blackstone’s journey towards becoming one of the biggest landlords in America. 

Today, they own nearly 300 billion dollars in real estate. 

Real estate accounts for nearly half of their earnings. Schwarzman called their profiteering on housing “the most remarkable results in our history on virtually every metric.”

But then another downturn: COVID. When the pandemic that killed nearly 7 million people drove down real estate, Blackstone scooped up billions of dollars worth of homes.

And now that eviction moratoriums are starting to lift, Blackstone is kicking tenants out of their homes. And they’re happy about it: the Financial Times reported that on a global call with Blackstone staffers, the head of real estate optimistically shared that they’re allowed to start evicting people again.

They even brag about how inflation lets them jack up rents, gleefully pointing out in this investor document that rent went up more than inflation. 

Blackstone makes money when the rest of us suffer. It’s by their own admission a huge part of their business strategy. 

And Schwarzman fights to keep as much wealth as possible. When the Obama administration almost started taxing people like Schwarzman fairly, he compared them to Nazis.

That’s why he donates so much money to the GOP: they protect his interests. Blackstone earnings reports even say that a Democratic government is bad for their business. 

Blackstone admits they need unfair taxation legislation to make as much money as they do, they write to investors, “If we were taxed as a corporation, our effective tax rate would increase significantly…. it would materially increase our tax liability, which would likely result in a reduction of the value of our common units.”

And meanwhile Schwarzman tries to launder his image by making big donations to some of America’s most iconic institutions, and slapping his name all over their buildings–like at the New York Public Library, Yale, Harvard, and more. 

But like so many like him, Schwarzman will continue to exploit tax law, exploit economic tax returns, and continue to get richer while the rest of us suffer. 

Effective legislation hitting Schwarzman’s main sources of income–like carried interest–would make it harder for his entire industry to profit off working Americans’ losses.

Off the Top of My Head

Is Private Equity Firm, Blackstone Group, Taking Over San Diego's Rental Market?

by John Lawrence

In a deal with the Conrad Prebys Foundation, Blackstone Group, CEO'd by Steven Schwarzman, is buying 5800 rental units in San Diego. According to the San Diego Union, "The deal makes Blackstone one of the biggest real estate holders in San Diego County. It already owns $4.5 billion in assets here — including Legoland and the Hotel del Coronado. The transaction, which also includes Los Angeles-based investment firm TruAmerica as a partner, is expected to close in the next few weeks. The sale of the apartments was praised by Dan Yates, the president of the Conrad Prebys Foundation, who said the portfolio was assembled by Conrad Prebys — a San Diego developer — himself. Yates said the money from the deal will be used for grants primarily in San Diego."

“Conrad Prebys was a sharp businessman who found true joy in the act of giving, and I believe he would be honored to see the result of his life’s work dedicated to continuing his philanthropic legacy,” Yates wrote in an email." Billionaire Conrad Prebys died in 2016 so it's very unlikely he "assembled the deal himself." But, even if he did, and the money will be used for philanthropic grants, Conrad Prebys has his name on half he buildings in San Diego already. It seems that billionaires can't get enough of charitable giving when it gets their names on buildings even though it will probably mean that relatively affordable rental units will become unaffordable after Blackstone Group "fixes them up" and raises the rent and that the true beneficiaries will be the investors in the Blackstone Group. It is to be noted that California sanctions on evictions, put in place during the pandemic, will expire this June 30.

San Diego real estate analyst Gary London said, “To my knowledge, this is the largest real estate transaction in San Diego County history.” So the process goes like this: the tenants in Blackstone's newly acquired rental units will be given 30 day notices to leave so that Blackstone can do badly needed renovations. This is all perfectly legal. There is no need to "evict" unless the tenants refuse to leave even after given proper notice. The Union article goes on,"All the apartments are market-rate but Blackstone says it plans to partner with nonprofit Pacific Housing to provide services for residents, including after-school tutoring, financial literacy classes, and health and wellness initiatives at no cost. It did not address it directly, but the move seems to counteract earlier concern with the foundation’s sale of these holdings." The key word here is "market-rate." This means that once Blackstone puts in its "improvements," they can charge whatever rent they can get even if it's 50% more than what tenants were previously paying. This is how the game is played, and this is why there are fewer and fewer affordable apartments in San Diego. Investors buy up apartments with affordable rents and convert them into apartments at "market-rate." Ironically, Blackstone intends to provide new tenants with "financial literacy classes." Presumably this would mean tutoring them to the advisability of investing in the Blackstone Group. And what were the "earlier concerns with the foundation’s sale of these holdings." Could it be that the newly converted "market-rate" apartments would reduce the stock of affordable rental units in San Diego?

The most pathetic aspect of this deal was this: "A letter was sent to the foundation in early February from San Diego Mayor Todd Gloria, San Diego County Supervisors chair Nathan Fletcher and California Senate President Pro Tem Toni Atkins to urge them to take into account future affordability of the apartments when considering a sale." I'm sure they'll do that even if it means their investors will take a slight hit to their profuts. Get real, politicians! Your letter is a fig leaf and is worse than useless. The letter went on: “A substantial number of these units are home to working individuals and families,” they wrote, “and are some of the limited inventory in the region of non-deed restricted, naturally occurring affordable housing options for San Diegans.” And the most egregious oxymoron of the letter: "non-deed restricted, naturally occurring affordable housing options." There is no such thing as "natyrally occurring affordable housing" at least not when private equity firms like Blackstone see a profit-making opportunity. The fact that they are "non-deed restricted" means that they are fair game. In any event affordable housing is in the eye of the beholder. It means absolutely nothing unless it is deed restricted or publicly owned.

The article concludes with: "The Conrad Prebys Foundation gave more than $71 million to 112 organizations across San Diego County in March to bolster the arts, health care, medical research, animal conservation, education, and the welfare of young people. The biggest grant — $15 million — went to the San Diego Symphony." Of course! The symphony will always profit as long as billionaires want their names on more buildings and symphony programs. Meanwhile working class tenants lose.

Off the Top of My Head

Biden Has Changed the Narrative on Taxes

by John Lawrence

One of the great things that Biden has done is to take the tax issue away from Republicans. Remember when George H R Bush said, "Read my lips. No new taxes." The conventional wisdom at that time was that if taxes were raised, they would be raised on everyone from Joe Six Pack to Warren Buffet. It was also conventional wisdom that tax cuts would apply to everyone from the very rich to the very poor. The American public was not sophisticated enough to know that Republican tax cuts, although they would apply to everyone, were much more favorable to the rich than they were to the poor. Now Joe Biden has completely altered that narrative. In Joe Biden's world tax increases apply only to the rich and tax cuts apply only to the poor. What a major paradigm shift! Biden has repeated his mantra so many times that he wouldn't raise taxes on anyone making less than $400,000 that now that scenario is starting to take hold in the American mind.

It's about time. The American public is starting to wake up to the reality that the very rich pay taxes at a lower rate than a nurse or a teacher or a fireman. If you're a hedge fund manager, you can take advantage of the 'carried interest' loophole to pay less than your fair share. As economic inequality has soared in the era of easy money, the very rich could take advantage of all sorts of games to make themselves even richer while most working people are living paycheck to paycheck. One way to restore some measure of equality is to increase taxes on the rich while cutting them on the poor. This idea was unheard of even a few years ago. Republicans rue the day when it was heard of thanks to Joe Biden, Elizabeth Warren and Bernie Sanders among others. Another way to restore some semblance of equality would be to tax wealth in addition to taxing income. People with assets, say, more than $50 million should pay a tax on their wealth while middle class and poor should be given help to start creating wealth for themselves. That would probably be something to do with home ownership since this is the way most middle class people have been able to create wealth for themselves.

However, it is becoming increasingly difficult for people of modest means to create wealth through home ownership because real estate prices have gone through the roof. It has become increasingly difficult for young people to come up with a down payment for a house, much less to make their monthly mortgage payments. The net result is that more and more people are forced into the situation of never owning property and being life time renters. This is the plan as private equity and hedge fund managers have accessed easy low interest money to buy up real estate and then rent it out so that the typical middle income young family is now renting a home from a hedge fund. NBC News reports: "The lack of supply of single-family homes has pushed up housing prices in many markets across the country — but would-be homebuyers find they are being outbid not just by other home seekers, but also by hedge funds." Hedge funds like the Blackstone group come in with all cash offers which are more attractive to sellers than the terms that average Joes and Janes can come up with. The Real Deal reports:

"Blackstone Group is planning to buy about 5,800 apartment units in San Diego for more than $1 billion.

"The New York-based private equity and investment firm has agreed to purchase 66 complexes across the city from the Conrad Prebys Foundation, according to the San Diego Union-Tribune. It also plans to make $100 million in improvements to the properties.

"With the deal, Blackstone will own 6,700 units in the Southern California city. It already owns $4.5 billion of assets in the city, including the Legoland theme park and the historic Hotel del Coronado.

"“We look forward to ensuring that these properties continue to provide the community with a high-quality rental option at a good value,” Blackstone Real Estate’s global co-head, Kathleen McCarthy told the Union-Tribune.""

According to the San Diego Union, "The deal makes Blackstone one of the biggest real estate holders in San Diego County." The writing on the wall is that, if you want to own a home, you have to move out of San Diego where the median home price is $855,000. For instance the median home price in Indianapolis is $229,900.

The Neoliberal Looting of America

from the New York Times:

The private equity industry, which has led to more than 1.3 million job losses over the last decade, reveals the truth about free markets.

By Mehrsa Baradaran

Ms. Baradaran is the author of “The Color of Money: Black Banks and the Racial Wealth Gap.”

July 2, 2020

George Etheredge for The New York Times

“It’s hard to separate what’s good for the United States and what’s good for Bank of America,” said its former chief executive, Ken Lewis, in 2009. That was hardly true at the time, but the current crisis has revealed that the health of the finance industry and stock market is completely disconnected from the actual financial health of the American people. As inequality, unemployment and evictions climb, the Dow Jones surges right alongside them — one line compounding suffering, the other compounding returns for investors.

One reason is that an ideological coup quietly transformed our society over the last 50 years, raising the fortunes of the financial economy — and its agents like private equity firms — at the expense of the real economy experienced by most Americans.

The roots of this intellectual takeover can be traced to a backlash against socialism in Cold War Europe. The Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, denouncing governments that chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — was especially potent because it disguised itself as a neutral statement of economics rather than just another theory. Only unfettered markets, the theory argued, could ensure justice and freedom because only the profit motive could dispassionately pick winners and losers based on their contribution to the economy.

Neoliberalism leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization of public functions including schools, pensions and infrastructure. The governing logic held that corporations could do just about everything better than the government could. The result, as President Ronald Reagan said, was to unleash “the magic of the marketplace.”

The magic of the market did in fact turn everything into gold — for wealthy investors. Neoliberalism led to deregulation in every sector, a winner-take-all, debt-fueled market and a growing cultural acceptance of purely profit-driven corporate managers. These conditions were a perfect breeding ground for the private equity industry, then known as “leveraged buyout” firms. Such firms took advantage of the new market for high-yield debt (better known as junk bonds) to buy and break up American conglomerates, capturing unprecedented wealth in fewer hands. The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic.

Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. Private equity touches practically every sector, from housing to health care to retail. In pursuit of maximum returns, such firms have squeezed businesses for every last drop of profit, cutting jobs, pensions and salaries where possible. The debt-laden buyouts privatize gains when they work, and socialize losses when they don’t, driving previously healthy firms to bankruptcy and leaving many others permanently hobbled. The list of private equity’s victims has grown even longer in the past year, adding J. Crew, Toys ‘R’ Us, Hertz and more.

In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation. Beyond the companies directly controlled by private equity, the threat of being the next takeover target has most likely led other companies to pre-emptively cut wages and jobs to avoid being the weakest prey. Amid the outbreak of street protests in June, a satirical headline in The Onion put it best: “Protesters Criticized for Looting Businesses Without Forming Private Equity Firm First.” Yet the private equity takeover is not technically looting because it has been made perfectly legal, and even encouraged, by policymakers.

According to industry experts, 2019 was one of the most successful years for private equity to date, with $919 billion in funds raised. The private equity executives themselves can also garner tremendous riches. Their standard fee structure involves collecting around 2 percent of the investor money they manage annually, and then 20 percent of any profits above an agreed-upon level. This lucrative arrangement also lets them tap into the very favorable “carried interest” tax loophole, allowing them to pay much lower capital gains tax rates on their earnings, rather than normal income taxes like most people.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. The passage of time has debunked another such myth: that deregulating industries would generate more vibrant competition and benefit consumers. Unregulated market competition actually led to market consolidation instead. Would-be monopolies squeezed competitors, accrued political power, lobbied for even more deregulation and ultimately drove out any rivals, leading inexorably to entrenched political power. Instead of a thriving market of small-firm competition, free market ideology led to a few big winners dominating the rest.

 

 

 

 

 

 

 

 

Off the Top of My Head

#GreenNewDeal + #BlackLivesMatter = #TheWayForward

Affirmative Action for Blacks, Latinx and Native Americans in a Green New Deal

by John Lawrence, June 29, 2020

Living with the COBID pandemic could be the new normal. Assurances of a vaccine by the end of the year might be meaningless. Here's why: for many viruses including HIV, Ebola, malaria and tuberculosis there are no vaccines available despite years of study and years of effort to develop one. It took 100 years from the first polio epidemic in the US until a vaccine wiped out polio. Just as the Trump administration misled the American people in minimizing the effects of COBID including that things would normalize after we "flattened the curve" and giving dates by which we could "open up", they misled us by raising expectations that a vaccine would be available by the end of the year. Read the book, "Spillover", if you want authoritative scientific information about viruses and how long vaccine development takes if ever.

So, if the pandemic is something we have to live with indefinitely which could well be the case, the economy, in the way it existed before the pandemic, would never be coming back. So how do we create a new economy which works for the American people which, arguably, it was not working before the pandemic despite quasi full employment. Number 1: we refund the CDC and WHO which are the major institutions dealing with viruses and pandemics. Trump tried to defund CDC, and he did defund WHO in the midst of the pandemic. Politifact reported: "As for funding, there’s no question that the Trump administration sought to cut key CDC budget categories. But thanks to Congress, that funding was restored and even increased in bills that Trump ultimately signed." He had better luck and actually did defund WHO.

The biggest thing that could be done to minimize the bad outcomes for this and future pandemics is to get rid of Donald Trump as President of the US. A Democratic President would refund the CDC and WHO. The second thing would be to take a page out of FDR's book by reinstituting the Reconstruction Finance Corporation (RFC) which financed the New Deal including many infrastructure projects. In fact the Federal Reserve could finance a #GreenNewDeal without even tweaking the law. With the Special Purpose Vehicles (SPVs) it is now resorting to, it is financing debt relief not only for banks but for hedge funds, private equity funds, bankrupt corporations and even rich individuals. It is taking trillions on its balance sheet with quantitative easing. The SPVs require deal making with the Treasury Department. It would be a very small step for the Fed using a SPV to fund a Green New Deal. The US is about $4 trillion in arrears on infrastructure rebuilding and development. Instead of just bailing out bankrupt institutions the Fed could take a more positive role and actually fund productive development. By the way the RFC actually made money on repayment of loans and user fees as opposed to the Fed which just swallows US debt.

If no vaccine is found for COBID in a timely manner, the whole economy should be restructured because many businesses are not coming back. Many including Herz, J. Crew, Neiman Marcus and Chesapeake Oil have already filed for bankruptcy. A Green New Deal could take up the slack reducing the GDP from 70% consumerism to 50% which would be in line with the EU consumption component of GDP while increasing government investment by 20%. That would represent a full employment economy but it would be reoriented from consumption to building green infrastructure.

Minority hiring for a Green New Deal could be along the lines of affirmative action with African Americans, Latinx and Native Americans being hired first. This would go a long way to reduce inequality in America while being a form of reparations in light of the fact that slave labor built much of this country and Jim Crow redlining was responsible for the fact that black families have not been able to accumulate wealth at the same rate as white families. #BlackLivesMatter plus a #GreenNewDeal could help to restore the balance while at the same time creating a full employment economy.

Off the Top of My Head

The Federal Reserve's Role is to Bail Out Wall Street, Not the American People

by John Lawrence, March 21, 2020

The purpose of the Federal Reserve is to bail out the banks, not to bail out you. During the Great Recession of 2008, the Fed gave trillions to the banks. The average Joe that couldn't pay his mortgage lost his home to foreclosure. Banks only keep a portion of their money as reserves. They create loans out of thin air. If someone can't make payments on a loan, the bank will foreclose. If the loan is secured by property, that property will become the bank's property. If at the same time more people want to take their deposits out of the bank than the bank has in reserves, the bank is in trouble. That's where the Federal Reserve comes in. It floods the bank with liquidity meaning the cash to pay out to the bank's customers who want their money back. At the same time the Fed may take the bank's non performing loans onto its balance sheet. No one cares if the Fed has a bunch of non performing loans on its balance sheet. They can just stay there ad infinitum.

What happened during the Great Recession was that, thanks to financial instruments called derivatives, banks were liable for a lot more money than simple mortgages and other retail loans. They had committed to covering bets like interest rate swaps or collateralized debt obligations (CDOs) without understanding the liabilities they had agreed to. Derivatives represent gambles. A hedge fund will bet that an underlying security will go up or go down. When they win their bets, as they did in 2008, mainly due to foreclosures, it is similar to a run on the bank only a lot more money is at stake. Certain banks and financial institutions did not have the money to pay off the bet. So the Fed stepped in and paid off the bet for them. This was how the financial crisis was resolved. All the gamblers were made whole by the Federal Reserve. All the bets were paid off and very few financial institutions had to go out of business. Lehman Brothers was one institution that did go bankrupt and was liquidated.

The Fed can control how much money is sloshing around in the economy by raising or lowering the prime interest rate. That's the interest rate a bank pays to borrow money. The bank then charges the average Joe a lot higher interest rate, and they make money on the spread. Obviously, the Fed doesn't want the retail banks to make foolish loans that won't be paid back because then it will have to bail out the banks that made such loans. However, this is exactly what led to the 2008 financial crisis. The banks were making "liar loans" base on stated income. A waitress could go into the bank and just state her income was $125,000. a year. There was no checking. She was given a mortgage to buy a house. Then, when she couldn't make the payments on the house, the bank foreclosed. When the bank couldn't resell the house and get its money back, the bank's reserves were diminished and finally it couldn't meet its obligations. That's when the Fed stepped in with more liquidity. The Fed just created money out of thin air the same way the banks created money for loans, and flooded the banking system with it.

Average people lost their homes and their jobs, but investors and gamblers who had bet that the economy would collapse were paid off. This is the solution that Obama oversaw that was created by his protege Tim Geithner, Obama's Secretary of the Treasury. Now the question might be asked why the gamblers who had bet that the economy would fail were paid in full because the Federal Reserve created the money out of thin air to pay them while there was no money created to bail out the American people who had lost their homes and their jobs. Why was their no money created to alleviate the suffering? That's because that's not the Fed's job. The Fed's job is to bail out the banks. Hedge fund manager John Paulson made an estimated $2.5 billion during the crisis by betting against the housing market.

It doesn't take a genius to see that the US might have better spent its money by more widely distributing the trillions that the Fed created rather than paying off a hedge fund manager to the tune of a couple billion dollars, but again that's not the Fed's job. It should have been Obama's job to step in and demand that investor/gamblers not be paid, and that the Fed's trillions of dollars that it created go to the average John and Jayne that lost everything. But that's not how things work in the US capitalist economy. The Fed is not beholden to the American people. It's only beholden to the banks, and even there, it can decide which ones it wants to fail (Lehman Bros.) and which ones it wants to bail out (every other bank).

The trillions of dollars created by the Federal Reserve in its Quantitative Easing (QE) program go directly into the hands of investors meaning rich people. This does not "trickle down" to the American public. So it's no mystery why economic inequality is increasing, why the rich are getting richer and the poor are getting poorer. Much is made about how the Federal Reserve is "independent" from the Federal government. That's because it is a privately owned, wholly owned subsidiary of the big banks. It is literally owned by Wall Street and it's only beholden to Wall Street. It only serves the American public in the sense that it keeps the financial system operating smoothly supposedly.

Consider the alternative. A public bank, one beholden to the American people or its representatives, would have been able to direct the money flow at least partially to the direct alleviation of suffering of the American people during a recession or a depression. The Reconstruction Finance Corporation served the role during the Great Depression of getting money directly to state and local governments and to the American people. It supported banks as well, but the monies also flowed directly into the economy without having to take the form of loans created by the Wall Street banks. It was more hands on in bailing out certain industries.

A public bank, such as exists in North Dakota, can make loans directly to people and small businesses. It doesn't deal in fancy derivatives and is accountable not to the banking system but to the people in general. In North Dakota's case it's accountable to the people of North Dakota to whom it returns its profits. The Central Bank of the United States could be a public bank on the national level which would replace the Federal Reserve with the mandate of supporting the American people directly as well as the banking structure. It would not deal in derivatives which only benefit hedge funds and drive inequality.

The coronavirus could induce another Great Depression depending on how long it lasts. However, don't expect the Federal Reserve to protect the American people although it will protect Wall Street. No investor/gambler need fear losing their money. In fact the John Paulsons of the world, who have probably already taken out fantastic bets that the economy will go down, stand to make billions supplied of course by the Federal Reserve which will create the money out of thin air. This sloshing around of money will be scooped up by the billionaire class. Then the Federal government will come through on the fiscal side to supply aid of some sort to the American people while adding all this money to the national debt.

Off the Top of My Head

Pirate Equity Firms Destroy Good Paying Jobs While Making Wall Street Investors Rich

by John Lawrence, August 8, 2019

How it works: Fund managers with Wall Street connections can borrow unlimited sums of money to buy out all the shares of some company, usually a retail company like Toys R Us. They then strip the company of its assets and load it up with debt. They then take the company into bankruptcy firing all the employees. Result: millions of good paying middle class jobs are eliminated. Fund managers and their investors become rich.

From United for Respect:

Debbie Mizen lives in Youngstown, Ohio, and began working at Toys “R” Us in 1987. She was a single mother when she started working and was able to care for her three children on her modest salary. Debbie was an assistant manager for the last 12 years of her career, although she knew she was earning less than male supervisors in the same position. In June 2018, she lost a job she loved when Toys “R” Us liquidated and closed over 800 stores across the country. Debbie found out that her store was closing on same day as her mother’s funeral and was devastated. Since her store closed, she has faced unemployment. When her unemployment checks ran out, she had to take a job in a grocery store collecting grocery deliveries for customers while earning half of what she did at Toys “R” Us. She is turning 67 this year.

Pirate Equity is ruining millions of lives, making fund managers rich and driving (among other factors) the economic divide between the 1% and the 99%. In the last decade pirate equity has led to 1.3 million job losses - mainly in retail jobs. 10 out of the 14 largest retail chain bankruptcies since 2012 were at private equity-acquired chains. Then the Wall Street executives use the carried interest loophole and offshore bank accounts to escape from paying taxes. A wave of high-profile retail bankruptcies in the last few years — including household names like RadioShack, Toys “R” Us, Sports Authority, Payless ShoeSource, Sears, and Kmart — have impacted retailers owned by Wall Street.

Hostess Twinkies is another example of a company that was taken over by pirate equity which then fired thousands of workers. I delved into this in a 2012 article in the San Diego Free Press (Twinkies’ Twisted Tale: Junk Food Devoured By Junk Bonds):

All the late night talk shows laughed it up over the supposed demise of Twinkies, Ho Hos, Ding Dongs, Wonder Bread etc as the news came out that Hostess Brands was going bankrupt. But delve beneath the surface and you will find something more akin to a Shakespearean tragedy than talk show banter.

It’s a tale involving two unions, one private equity fund, two hedge funds and a whole cast of former CEOs. There is sacrifice, greed and betrayal. 18,000 workers will be losing their jobs while some vulture capitalists will be walking away with millions. Another vulture capitalist will itself have been devoured in the process.

The simple fact is that the financialization of the US has led to a total disrespect for workers and workers' rights. Workers have been turned into serfs, their jobs turned into playthings for the rich with unlimited capital at their disposal. And we're all supposed to accept this because this is the inevitable outcome of capitalism. Well, not so fast there. Other countries practice a variant of capitalism (jee whiz, you mean there's more than one?) that does not exploit workers, but instead creates meaningful jobs for workers. Well, let's see what could those countries be? Well certainly, some of the European countries look out for their workers, Germany, for example. Unions are strong and workers sit on corporate boards, have a say in the running of the company.

No, it is the American variant of capitalism, not capitalism itself, that has run amok. American capitalism is destroying jobs; it has already destroyed most of the unions which were the countervailing force to the narcissistic and solipsistic demands of the capital markets.

The New York Times wrote:

Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry, according to a joint study that The Times conducted with Equilar, a board and executive data provider. The study covered thousands of publicly traded companies; privately held corporations do not report such data.

On average, the heads of private equity firms earn about 10 times as much as the heads of banks. Take Stephen Schwarzman of the Blackstone Group for example. Last year he earned $799,838,742. Then in second place was Leon Black of Apollo Global Management. He earned $799,838,742. Part of his earnings, no doubt, came from his sale of Hostess Twinkies.

And then there is Mitt Romney, a Presidential candidate no less, who exploited workers with his company Bain Capital. Rolling Stone reported (Greed and Debt: The True Story of Mitt Romney and Bain Capital): "How the GOP presidential candidate and his private equity firm staged an epic wealth grab, destroyed jobs – and stuck others with the bill"

And this is where we get to the hypocrisy at the heart of Mitt Romney. Everyone knows that he is fantastically rich, having scored great success, the legend goes, as a “turnaround specialist,” a shrewd financial operator who revived moribund companies as a high-priced consultant for a storied Wall Street private equity firm. But what most voters don’t know is the way Mitt Romney actually made his fortune: by borrowing vast sums of money that other people were forced to pay back. This is the plain, stark reality that has somehow eluded America’s top political journalists for two consecutive presidential campaigns: Mitt Romney is one of the greatest and most irresponsible debt creators of all time. In the past few decades, in fact, Romney has piled more debt onto more unsuspecting companies, written more gigantic checks that other people have to cover, than perhaps all but a handful of people on planet Earth.

By making debt the centerpiece of his campaign, Romney was making a calculated bluff of historic dimensions – placing a massive all-in bet on the rank incompetence of the American press corps. The result has been a brilliant comedy: A man makes a $250 million fortune loading up companies with debt and then extracting million-dollar fees from those same companies, in exchange for the generous service of telling them who needs to be fired in order to finance the debt payments he saddled them with in the first place. That same man then runs for president riding an image of children roasting on flames of debt, choosing as his running mate perhaps the only politician in America more pompous and self-righteous on the subject of the evils of borrowed money than the candidate himself. If Romney pulls off this whopper, you’ll have to tip your hat to him: No one in history has ever successfully run for president riding this big of a lie. It’s almost enough to make you think he really is qualified for the White House.

But the sheer incompetence of the press corps is nothing compared with the total ignorance of the American people when it comes to electing a President. Example #1: Donald Trump, a bloviating, pompous, bait-and-switch, snake oil salesman that the American people elected instead of a competent, experienced, somewhat boring diplomat. So maybe the American people deserve what they get. The Republicans certainly think so. If they can lie their way into positions of power and delude the American people as to their true motives, well, in their mind, that proves that they really do deserve all the riches they can accumulate by any means necessary. Elizabeth Warren to the rescue?

Off the Top of My Head

The American Economy is Not That Great Except for the Rich

by John Lawrence, July 17, 2018

Thanks to the financialization of the economy, rising GDP doesn't mean that more money is going into workers' pockets. When a private equity fund strips a company and sells off the parts, GDP goes up because that economic activity is added into GDP. In 2012,Hostess Products, the makers of Twinkies, filed for bankruptcy under the private equity firm Ripplewood Holdings, and some 8000 workers lost their jobs. Hostess has bounced back and forth among multiple private equity companies with the result that executives of those companies have gotten rich and workers have lost their jobs. In every case the shenanigans of private equity firms and hedge funds have caused GDP to rise, but the only financial gains have gone to the very rich and not to the average worker. Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry.

The Fed's policy of holding interest rates at zero has caused massive inflation in the real estate and stock markets, but this is not reported as inflation due to the way inflation is computed. Here too this rapid increase in home prices has made the GDP increase while pricing many average people out of the real estate market. Advantage: the rich. Disadvantage: everybody else. The American economy which seems to be in good shape with its various economic indicators like GDP, has mainly benefited the rich while seemingly benefiting everyone. But while economic indicators are all positive, the results are a further divide between the rich and the poor with the rich reaping all the gains of an economy in which the gains and increases go mainly to them.

Medium reported:

Adjusted for inflation, the US economy has more than doubled in real terms since 1975.

How much of that growth has gone to the average person? According to many economists, the answer is none or close to none.

In a recent gloomy study of the American economy, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman find that between 1980 and today, almost none of the gains from economic growth accrued to the bottom half of the population. They write, “Looking first at income before taxes and transfers, income stagnated for bottom 50% earners: for this group, average pre-tax income was $16,000 in 1980 — expressed in 2014 dollars, using the national income deflator — and still is $16,200 in 2014.”¹ Piketty, Saez, and Zucman also found that incomes of the top 1% tripled over the same time period.

New York Times columnist David Leonhardt, reacting to this work, concluded “the very affluent, and only the very affluent, have received significant raises in recent decades.”

So the world's largest economy is essentially a bifurcated economy with the rich racking up phenomenal gains while the poor and middle class stagnate. However, some in the middle class are still doing OK. They are mainly the ones who bought stocks and real estate 20 or more years ago. Those stocks and real estate have inflated due to the Fed's interest rate policies. The other middle class group that has prospered are those who have benefited from a transfer of wealth from the previous generation. Those who have inherited neither stocks nor real estate and have had to start from zero are in the worst shape because they are likely to be the ones that have acquired student loan debt to get an education that purportedly would gain them a toe hold in the middle class. But that toe hold has slipped and they have ended up with no real estate (they can't afford a mortgage because of the student loan debt they have to pay off) nor have they been able to acquire stocks at greatly inflated prices.

The intergenerational transfer of wealth has exacerbated the wealth gap between white and black families. The Atlantic reported:

A forthcoming study from Meschede and Joanna Taylor, also a researcher at Brandeis, in the American Journal of Economics and Sociology, makes the point clearly. Building on a 2017 study of theirs that examined wealth accumulation among college graduates—as well as “intergenerational financial transfers,” like when a parent helps a recent college grad out with rent or, say, gives her $1,000 a month to spend on whatever she pleases—the two looked specifically at how family inheritances, which are usually larger and tend to come all at once, factor into building and maintaining wealth.

The two researchers focused specifically on inheritances among families where at least one parent has a college degree. They looked at families like this in order to test the notion that higher education is a great equalizer.

The differences that they found between black and white families were stark. “Among college-educated black families, about 13 percent get an inheritance of more than $10,000, as opposed to about 41 percent of white, college-educated families,” Taylor said in a release announcing the new research. More specifically, white families that receive such an inheritance receive, on average, more than $150,000 from the previous generation, whereas that figure is less than $40,000 for black families.

So far from being an equalizer between black and white families, a college education has only indebted black families on average even more. In other words they are worse off with a college education than they would have been without one. A college education for many blacks and poor whites has only been a debt trap, a debt trap that follows them to retirement where their social security is snatched away from them for repayment of their student loan debt.

So Donald Trump will probably fool a lot of voters who will be sold the bill of goods that the economy is doing great. They will wonder why that is not so for them, but will have to chalk it up to their own failings. Meanwhile, Bernie Sanders, Elizabeth Warren and others will have to try and explain a more nuanced picture - that the economy is doing very well for the rich but not for those at the lower end of the economic spectrum. Again people will probably not have the mental aptitude to grasp that distinction and will probably vote against their own interests.

Off the Top of My Head

Toys R Us Bankruptcy Caused by Hedge Fun Leveraged Buyout

by John Lawrence

It's the same old game plan for private equity firms Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners. They acquired the publicly traded shares of Toys R Us in a leveraged buyout during the LBO boom in 2005 in a deal valued at $6.6 billion. They funded the acquisition in large part by loading up the company with debt — hence “leveraged buyout.” Remember Mitt Romney and Bain Capital?

First the PE firm borrows the money to buy out the publicly traded shares. Then they load the company - in this case - Toys R Us with the debt. Get the Bait and Switch going on here? The PE firms borrow the money, but they are not the ones that have to pay it back. It's the company they take over that's turned into the debtor. The PE firms pay themselves handsomely out of the borrowed money. The only losers here are the employees of Toys R Us.

Wolfstreet.com reported:

So here’s what the three PE firms did to Toys R Us: they stripped out cash and loaded the company up with debt. And these are the results: At the end of its fiscal year 2004, the last full year before the buyout, Toys R Us had $2.2 billion in cash, cash equivalents, and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt has surged 126%, from $2.3 billion to $5.2 billion.

This table shows the astounding results of asset stripping and overleveraging. It takes a lot of expertise and Wall Street connivance to pull this off. So whatever happens to Toys R Us, the PE firms already extracted their wild profits:

So what if then Toys R Us goes under. The PE executives already have their money. That's what a "leveraged buyout" is all about. This is exactly the same thing that happened to Hostess brands, the makers of Twinkies. Check out my article, "How Twinkies Made a Few Billionaires Richer While Thousands Lost Jobs" I wrote in February of this year. 18,000 Hostess workers lost their jobs in that LBO. The pension fund was stripped. Here's what I said:

Twinkies have been around since the 1920s. They are as American as, well, apple pie. But Twinkies parent company, Hostess, was more akin to a pinata for the rich and their penchant for financial engineering. Hostess had been bought and sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings, had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands’ union workers agreed to pay cuts and made contract concessions in exchange for equity.

The same thing that happened with Twinkies is happening to Toys R Us. The last part of the game plan didn't work however. The attempt to take Toys R Us public which would have netted the PE firms even more money failed. Investor money was not going to flow in enriching KKR, Vornado and Bain even more leaving the "public" with a turkey on its hands that would eventually go bankrupt anyway. Instead TRU went bankrupt on the PE firms' watch and now will be "restructured' which is another name for screwing the employees in order to enrich PE firms. Capitalism sucks!

And you know what? There was not a mention of the role of PE firms in the Toys R Us bankruptcy in the discussion on the NBC evening news last night. The mainstream media don't want you to know about the dirty little secrets of capitalism or global warming.