Richard Trumka in the Wall St. Journal:
The Simmons Bedding Company, manufacturer of the famous Beautyrest mattresses, has finally been flipped one time too many. This story carries an important message for financial reform, now under consideration in the U.S. Senate.
Sold seven times in 20 years from one private investment firm to another, last fall the 133-year-old company filed for bankruptcy and laid off 1,000 workers. Simmons is a textbook example of a dangerous trend in which brand-name companies are turned into gambling chips by leveraged buyout (“private equity”) dealmakers. And it’s a prime example of why the Senate must directly challenge private equity’s wealth extraction business model in order to rein in the casino economy.
Private-equity funds are leveraged private pools of capital that benefit from extensive tax subsidies. They are unregulated and shrouded in secrecy, and they extract big profits while the companies, their employees and many of their investors lose. In the Simmons case, the leveraged buyout firm that brought the company to bankruptcy walked away with $77 million in profits on top of hundreds of millions of dollars in special dividends. The Wall Street investment banks that arranged the deals pulled down big money, too. Meanwhile, a thousand employees lost their livelihoods, the company’s bondholders lost more than $500 million, and a value-creating American company was in effect pawned for cash.
Simmons is hardly the exception. Linens ‘n Things, KB Toys and Mervyns are all brand-name companies that went bankrupt because they could not keep up with the debt burdens that resulted from leveraged buyouts. In fact, of the 163 nonfinancial companies that went bankrupt last year, nearly half were backed by leveraged buyout firms.
You can add the Philadelphia Daily News to that number.
Under current law, private investment vehicles—hedge funds, leveraged-buyout and venture-capital funds—function with virtually no oversight. Despite managing trillions of dollars and employing millions of Americans, they operate as a shadow financial system—in secret, free to take on outsized risks, and make huge bets with no outside supervision. Approximately $1 trillion in leveraged buyout loans were issued in 2006 and 2007, the height of the leveraged buyout bubble. In December 2008, the Boston Consulting Group predicted that almost half of companies owned by leveraged buyout firms are likely to default, resulting in massive job losses and further pressure on our fragile economy.
Reform is essential, and transparency would be a good start. The Securities and Exchange Commission must have full access to information about private investment funds and the authority to require them to provide disclosures to investors, prospective investors, trading partners and creditors.
Comprehensive regulation of the shadow financial system is equally necessary to prevent the buildup of systemic risk like that which brought our economy to the brink of financial ruin.
The House of Representatives took some positive steps toward regulating the private-equity industry late last year, but didn’t go far enough. Similarly, the Senate bill put forth by Banking Committee Chairman Chris Dodd falls far short on the regulation of private investment funds.
Meanwhile, more jobs are being lost and workers hurt. When their plans to squeeze employees to gain higher profits fail, private-equity firms often walk away.
In February, Connecticut-based private-equity firm Brynwood Partners shut down the 77-year-old Stella D’Oro bakery in Bronx, New York, after a labor ruling sided with workers protesting a massive pay cut. In the latest example, the private-equity firm that owns clothier Hugo Boss in suburban Cleveland tried to slash wages. When the workers resisted, the firm announced plans to move operations—including its 375 jobs—overseas.
It’s time to bring the shadow financial system into the light of day. It’s time for Congress to stand up to these firms that gamble with working people’s retirement money and insist that they provide the public with full disclosure and essential oversight.
Mr. Trumka is president of the 11.5 million member AFL-CIO.
In Gone With The Wind Rhett Butler said something about there being two kinds of profits: the slow kind that comes from empire building and the quick kind that come from liquidating an empire. I think it was a comment on the house he and Scarlett had built which he felt was clearly funded by the latter kind of money. (Gone With The Wind is the Great American Novel as well as a racist piece of trash.)
Since the 1980s, there has been a lot of liquidation going on. After all, there was a lot of nation building from the 1920s through the 1970s so there were easy pickings and a rich carcass. With low interest rates I’ve even considered a tender offer for controlling interest in Apple. They’ve got $40B in cash right now, so I could pay the bulk if it down within the first 24 hours. If I borrow at 5-6%, I could pay the whole thing out of its cash flow. With Steve Jobs out, there are lots of cuts that could be made. I could make out very well. It mainly depends on the details of their corporate defenses and whether I’d get outbid. See how easy it is? There are lots of other less obvious targets that would require a smaller syndication.
(My guess is that we’ll recognize the recovery when the takeover liquidations, as opposed to bankruptcy liquidations, pick up.)