6 ms·

If you want to understand what went wrong with America, start with private equity

hospitalJail 3y ago
Lobbying/Bribery seems more egregious than investing. At least investing has some economic forces that cause people to conserve resources and allocate them better than prior. Lobbying/Bribery is just pure corruption. The medical industry is so extravagant because they are among the top lobbyists of all time. Only the entirety of real estate or all US businesses(chamber of commerce) can even compete with merely the American Medical Association or AHA. Heck, combining all of medical and the lobbying is worse than every other industry including all US businesses https://www.opensecrets.org/federal-lobbying/top-spenders?cycle=a https://www.opensecrets.org/federal-lobbying/top-spenders?cy...
- jtode 3y ago
  Private Equity is the most destructive and bad-faith-operating version of investing, in much the same way that Kim Jong Un is the most destructive and bad-faith-operating version of a politician. The capital that one would define as the "investment" is in fact just a viral delivery mechanism, so the parasite can infest the host, devour its innards, and leave its husk to dry up.
- ambicapter 3y ago
  > At least investing has some economic forces that cause people to conserve resources and allocate them better than prior. Not when the money is basically free, e.g. the last decade of money policy. PE has always been around, so why is it hated now? Probably the forces that would normally keep it in check, namely, a cost to capital and a competitive business environment (as opposed to monopolies and natural monopolies all over the place) haven't been present in the last decade.
  - khuey 3y ago
    PE has been hated since at least the 1980s, when capital was very far from free.
    - Veliladon 3y ago
      Yep. When Carl Icahn was doing it they just called it "asset stripping" and "corporate raiding" instead of using the term private equity. Fucker made squillions off the backs of misery for hundreds of thousands of people.
- ARandomerDude 3y ago
  Don’t forget teachers unions and the Dept of Ed. They bleed taxpayers dry because they are “helping the children” and everybody knows a nice teacher who isn’t part of the problem but will be held out as a defense of govt and union corruption.
- LapsangGuzzler 3y ago
  > At least investing has some economic forces that cause people to conserve resources and allocate them better than prior. That's a really whitewashed way of saying "layoffs, benefit reductions, and no more pay raises or bonuses". Far too often, "economic inefficiency" translates to "workers are too highly paid", you see this all time now with companies complaining about a labor shortage while there are tons of people ready to work for respectable wages.
- awaythrow483 3y ago
  Where does the money for all of that lobbying come from? Bribery has and will occur in every society. Lobbying is so bad in the US because certain groups have basically unlimited money
garbagecoder 3y ago
I mostly agree with this. I would say a lot of what is wrong with America is that corporation laws allow this kind of thing. There are other ways. Nobody thinks Germany is an economic backwater and they require, I believe in large companies, for employees to have a role in the management of the company [1]. There are also co-ops like the Mondragon Coop in Spain[2]. Some states have co-op laws but are mostly used by farmers and a few other niche things. Interesting, most professional firms must be managed by their professionals, so law firms are partially "worker owned" too. But I think the German model is probably the best. Equity interests and employee interests can both be short-term, but usually the best way to balance them is with long-term thinking. I'm not sure that would save the world, but I think it would improve the lives of working people. [1] https://en.wikipedia.org/wiki/Codetermination_in_Germany https://en.wikipedia.org/wiki/Codetermination_in_Germany [2] https://en.wikipedia.org/wiki/Mondragon_Corporation https://en.wikipedia.org/wiki/Mondragon_Corporation
- earnesti 3y ago
  What I know about PE firms in Europe, they mostly operate the same way as in the US. There are plenty of PE firms and in general to me it feels like they are more popular here than US actually, as with LP's they are perceived as lower risk. What I don't understand from the article, is how the PE firm is able to shift the debt from the buyer to the firm. That shouldn't be possible in any jurisdiction I know a little bit of, and I highly doubt that it is easy to do in US.
  - coastermug 3y ago
    Leveraged buyouts. I’ve seen them explained like a mortgage, except that doesn’t work in my head either.
    - lazerpants 3y ago
      I am not a PE expert but I will try to explain using the mortgage analogy. This is drastically simplified. The shoehorned part of the analogy is that a bank won't exactly lend as described below. You take out a mortgage for a property you intend to cashflow by posting it on AirBnB. You open an LLC to do so. You put down a fraction of the price of the home, let's say 5-10% and then you do some upgrades, but you borrow against the price of the home for the upgrades, not against your own credit. Now, you start AirBnBing this very nice house out for absolute top dollar. It's nice and people love it, you have great reviews. Every time you get a payment from AirBnB, you take most of the money and move it to your personal bank account as a "management fee" or a "bonus" and you put the smallest amount possible into the mortgage and the second mortgage (the one you used to upgrade the house). Now, as the house gets more use, or you cut costs, say on having the pool cleaned, or on yard maintenance, the house goes down in quality pretty significantly, but your original AirBnB ratings are there and people are willing to pay significant sums so you continue to rake in cash, and you try to avoid maintenance as much as possible. Eventually, the place is a run down heap, and people are leaving terrible reviews, so you stop having bookings/cashflow. Okay, now you just send the keys to the bank and say "it's your problem". They get a rundown house that has barely repaid its mortgage, and you get to keep the cash. The trick is to have moved a lot more cash into your account than you lose in the mortgage down payment. Edit: I should add that PE firms aren't always trying to extract value at the cost of the business (sometimes they absolutely are). However, they are always incentivized to make cash flow and take maximum business risk for potentially even larger payout.
thrawa8387336 3y ago
Nah, many countries have it. If people have a damn it would be a different story but in the US, cheaper is always better. See architecture, food, housing, hotels...

Lobbying/Bribery seems more egregious than investing. At least investing has some economic forces that cause people to conserve resources and allocate them better than prior. Lobbying/Bribery is just pure corruption. The medical industry is so extravagant because they are among the top lobbyists of all time. Only the entirety of real estate or all US businesses(chamber of commerce) can even compete with merely the American Medical Association or AHA. Heck, combining all of medical and the lobbying is worse than every other industry including all US businesses https://www.opensecrets.org/federal-lobbying/top-spenders?cycle=a https://www.opensecrets.org/federal-lobbying/top-spenders?cy...

jtode 3y ago
Private Equity is the most destructive and bad-faith-operating version of investing, in much the same way that Kim Jong Un is the most destructive and bad-faith-operating version of a politician. The capital that one would define as the "investment" is in fact just a viral delivery mechanism, so the parasite can infest the host, devour its innards, and leave its husk to dry up.
ambicapter 3y ago
> At least investing has some economic forces that cause people to conserve resources and allocate them better than prior. Not when the money is basically free, e.g. the last decade of money policy. PE has always been around, so why is it hated now? Probably the forces that would normally keep it in check, namely, a cost to capital and a competitive business environment (as opposed to monopolies and natural monopolies all over the place) haven't been present in the last decade.
- khuey 3y ago
  PE has been hated since at least the 1980s, when capital was very far from free.
  - Veliladon 3y ago
    Yep. When Carl Icahn was doing it they just called it "asset stripping" and "corporate raiding" instead of using the term private equity. Fucker made squillions off the backs of misery for hundreds of thousands of people.
ARandomerDude 3y ago
Don’t forget teachers unions and the Dept of Ed. They bleed taxpayers dry because they are “helping the children” and everybody knows a nice teacher who isn’t part of the problem but will be held out as a defense of govt and union corruption.
LapsangGuzzler 3y ago
> At least investing has some economic forces that cause people to conserve resources and allocate them better than prior. That's a really whitewashed way of saying "layoffs, benefit reductions, and no more pay raises or bonuses". Far too often, "economic inefficiency" translates to "workers are too highly paid", you see this all time now with companies complaining about a labor shortage while there are tons of people ready to work for respectable wages.
awaythrow483 3y ago
Where does the money for all of that lobbying come from? Bribery has and will occur in every society. Lobbying is so bad in the US because certain groups have basically unlimited money

garbagecoder 3y ago

I mostly agree with this. I would say a lot of what is wrong with America is that corporation laws allow this kind of thing. There are other ways. Nobody thinks Germany is an economic backwater and they require, I believe in large companies, for employees to have a role in the management of the company [1]. There are also co-ops like the Mondragon Coop in Spain[2]. Some states have co-op laws but are mostly used by farmers and a few other niche things. Interesting, most professional firms must be managed by their professionals, so law firms are partially "worker owned" too. But I think the German model is probably the best. Equity interests and employee interests can both be short-term, but usually the best way to balance them is with long-term thinking. I'm not sure that would save the world, but I think it would improve the lives of working people. [1] https://en.wikipedia.org/wiki/Codetermination_in_Germany https://en.wikipedia.org/wiki/Codetermination_in_Germany [2] https://en.wikipedia.org/wiki/Mondragon_Corporation https://en.wikipedia.org/wiki/Mondragon_Corporation

earnesti 3y ago
What I know about PE firms in Europe, they mostly operate the same way as in the US. There are plenty of PE firms and in general to me it feels like they are more popular here than US actually, as with LP's they are perceived as lower risk. What I don't understand from the article, is how the PE firm is able to shift the debt from the buyer to the firm. That shouldn't be possible in any jurisdiction I know a little bit of, and I highly doubt that it is easy to do in US.
- coastermug 3y ago
  Leveraged buyouts. I’ve seen them explained like a mortgage, except that doesn’t work in my head either.
  - lazerpants 3y ago
    I am not a PE expert but I will try to explain using the mortgage analogy. This is drastically simplified. The shoehorned part of the analogy is that a bank won't exactly lend as described below. You take out a mortgage for a property you intend to cashflow by posting it on AirBnB. You open an LLC to do so. You put down a fraction of the price of the home, let's say 5-10% and then you do some upgrades, but you borrow against the price of the home for the upgrades, not against your own credit. Now, you start AirBnBing this very nice house out for absolute top dollar. It's nice and people love it, you have great reviews. Every time you get a payment from AirBnB, you take most of the money and move it to your personal bank account as a "management fee" or a "bonus" and you put the smallest amount possible into the mortgage and the second mortgage (the one you used to upgrade the house). Now, as the house gets more use, or you cut costs, say on having the pool cleaned, or on yard maintenance, the house goes down in quality pretty significantly, but your original AirBnB ratings are there and people are willing to pay significant sums so you continue to rake in cash, and you try to avoid maintenance as much as possible. Eventually, the place is a run down heap, and people are leaving terrible reviews, so you stop having bookings/cashflow. Okay, now you just send the keys to the bank and say "it's your problem". They get a rundown house that has barely repaid its mortgage, and you get to keep the cash. The trick is to have moved a lot more cash into your account than you lose in the mortgage down payment. Edit: I should add that PE firms aren't always trying to extract value at the cost of the business (sometimes they absolutely are). However, they are always incentivized to make cash flow and take maximum business risk for potentially even larger payout.

thrawa8387336 3y ago

Nah, many countries have it. If people have a damn it would be a different story but in the US, cheaper is always better. See architecture, food, housing, hotels...