Wednesday, October 07, 2009

Private Equity - The Plunder Of Society Continues

"Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame and danger that their acts would otherwise involve. But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to the other persons to whom it doesn't belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime." -- Frederic Bastiat

One of our consistent perspectives on here has involved the mess that is private equity. That included our critical commentary when the mainstream media and Wall Street was glorifying it before the collapse.

Private equity is a net subtractor of capital in the American economy. In other words, its existence weakens the American economy. That's not an opinion. That is a fact. And it is only because we now have enormous banking cartels that private equity has been able to grow to become such a predator in the economy as it relies on the mega banks for much of their financing leverage to play their destructive games. In fact, the same leverage we see on the balance sheet of collapsing Wall Street firms used to play similarly destructive games with derivatives, mortgage backed securities, stocks, bonds, commodities and other schemes contributing to the destruction of our economy. In an economy of community banking or public banking designed to support commerce and the common good, private equity would not exist or would be such a small player in the economy that it would be irrelevant in its impact. Remember, we have remarked there is a plausible argument to be made that private equity will essentially disappear along with the financial bubble anyway. If nothing else, it will never return to the glory days of the last few decades. Never is a long time.

That means many employed in private equity will need to get a real job in the real economy. That's very good news because many very talented people work in this essentially worthless field. (It's ironic in the video at the link below how our hallowed business schools glorified private equity.)

As an aside, a topic we have discussed often - the fact that Treasury is trying to encourage private equity to invest in distressed assets with its public-private partnership scheme is morally bankrupt. To allow private equity to acquire distressed assets essentially created by corruption which private equity was complicit in creating in the first place is the same dynamic we saw in the late 1980s financial disaster.

We don't like private equity on this blog. The wealth of its senior partners is a mirage. It is wealth transfer created at society's expense as opposed to a legitimate capital producing enterprise. "At expense" often involves plunder or worse. Frankly, were I writing the rules, private equity, aka cronyism, would be regulated out of the economy. In other words, they would no longer gain access to any loans from the Federally-insured banking system (taxpayer backed) to conduct their business. What happened at Simmons and countless other deals involving trillions of dollars of debt was created by destabilizing our savings institutions, our banks. Since government appears unwilling to address these problems, the market is going to do it for them. And that outcome will be substantially more violent.

Is it really a surprise that major private equity firms are littered with former mega corporation CEOs and former politicians? The same CEOs who decided to pay themselves 500x the average American's salary and award themselves ungodly compensation packages at the expense of society. The same politicians who deregulated our financial system so that private equity could even exist. So that it could destroy corporations such as Simmons and countless others who have yet to feel the wrath perpetuated by private equity. This is all part of the same cabal of elitists plundering our society's wealth.
posted by TimingLogic at 7:02 AM