The inequity of private equity hustlers
What are these phantasmagoric money machines that they call “private equity firms?” They’re much in the news these days, because a fellow who was a private equity magnate is presently running for president. Mitt Romney piled up a quarter-billion-dollar personal fortune through his Wall Street equity outfit, Bain Capital, and he now claims that, because of his success in that business, he knows how to “fix” our economy.
Before you clear that, note that private equity whizzes are all about The Fix – not necessarily a good thing. They operate by borrowing big piles of cash at high interest rates from rich speculators to buy out XYZ Corp. Then, to meet the interest payments owed to the speculators (and to siphon off a financial killing for themselves), the fixers do two things: One, they plunder XYZ’s assets, selling the profitable chunks of the corporation; and two, they severely downsize the XYZ workforce, firing as many workers as possible and demanding deep wage cuts and benefit givebacks from the employees they keep.
It’s a raw redistribution-of-wealth scheme, shifting XYZ’s wage payments from its many workers to a handful of wealthy high-rollers. The process downsizes America’s middle class, while creating no real economic value. Nothing equitable about it.
But the fix also includes a set of very special partners, few of whom are even aware that they’re in on the deal: taxpayers. The private equity business model is not structured on old-fashioned, free-enterprise principles, but on a skewed system of tax loopholes punched into federal law by these financiers’ lobbyists and the lawmakers who do Wall Street’s bidding.
For example, the equity funds are able to load up on such heavy debt to finance their corporate takeovers only because all of the interest they must pay to speculators for that borrowed money is tax deductible.
To put a name to this financial flimflammery, let me tell you a corporate morality tale that I call “The Shame of Shamu.”
Actually, Shamu is not the cause of the shame. After all, that’s just the generic name given to the killer whales kept in captivity as the star attraction at all three theme parks operated by SeaWorld, Inc. The shame belongs to the corporation, which not only profits from its exploitation of the whales, but also manages to dodge paying even a penny in national or state income taxes. Based in Orlando, Fla., this sprawling entertainment conglomerate pocketed record profits of $380 million last year but paid zero taxes on it.
This is because SeaWorld is owned by Blackstone Group, a multibillion-dollar private equity giant that specializes in acrobatic accounting and spectacular twistings of our tax laws.
For example, Blackstone structured its 2009 takeover of SeaWorld so that it could immediately begin grabbing tax deductions under the law’s convoluted depreciation rules. Also, the Wall Street group paid 60 percent of the $2.5 billion purchase price with high-level-interest loans from wealthy speculators – yes, that makes the huge interest payments on that debt totally deductible from Blackstone’s tax bill.
Thus – Shazam Shamu! – this bit of Wall Street hocus-pocus lets SeaWorld pull big profits out of its hat, while the taxes owed by SeaWorld’s private equity owner – poof! – disappear.
Jim Hightower is a national radio commentator, columnist and author.