TraderMark

Private Equity, Business Flipping and Asymmetrical Outcomes

Alfredo, first stop destroying savers of this country to provide "cheap money" so these transactions can be done without regard to costs.

from the article:

"The mind-set was, since the money was practically free, why not leverage the company to the maximum?"

That will stop the leverage from the entire system reaching a point where the Fed needs to come in YET again to save the system via even more easy money.

This is why failure is necessary and too big to fail can not be allowed to continue. Only when failure is an option for even the biggest players will there actually be oversight. Right now the cost of funding for our biggest financial firms is going to be like Fannie and freddie for decades - a massive inherent advantage which will serve to only punish smaller and medium sized players who are not sucking on government's teat (implied).

The investment banks for example used to be private players who used their own money for MOST of the stuff they do. Then they have transformed to public, lobbyied Congress (Hank Paulson at the fore) to get rid of the leverage limitations, and basically use other people's money for their gambles. When it goes wrong - horribly wrong - now we are 100% sure (before we were 95% sure) the government will use taxpayers money to backstop it.

So a huge part of the solution is common sense - don't let them take this sort of leverage, don't backstop them, and don't let them ever get to the size that 1 going under destroys the world's financial system, etc. We'll never reach extreme levels in any 1 company if that was the framework. And then those taking risks with the money would actually have risk controls in place. PE is just a feeder off the i-bank system. Complete parallels with different labels.


On Oct 07 11:31 PM Alfredo Martinez wrote:

> The New York Times article was great, and I agree what Private Equity
> firms are doing is often times incredibly destructive. The problem
> is, what do you do about it?
>
> At the end of the day, these are voluntary transactions by two parties
> that want to make an exchange. When PE buys the company and sells
> the debt, it's completely voluntary for both the buyer and seller.
>
>
> I'm all for free-market solutions to curbing this abuse, but it's
> very difficult to effectively regulate. My guess is PE excess will
> be reigned in simply because many investors have become much more
> cautious.

Private Equity, Business Flipping and Asymmetrical Outcomes

No, but a system where bad outcomes actually sting financiers and not just the rest of the system would be a good place to start.


On Oct 07 03:08 PM Tony Petroski wrote:

> Mr. Mark wrote:
>
> "So here is the story in simple terms, and yes I am simplifying for
> the hard core capitalists out there who defend our beautiful system."
>
>
> Thank you Mr. Mark.
>
> I love these rants. Keep it up, although for time purposes and for
> my fellow capitalists, you could condense the articles and simplify
> them a little more.
>
> The thing is, I agree with 90% of what you write, except for the
> bottom line, the conclusion of the story, in which you write...<br/>
>
> No wait. There was no conclusion, just a rant.
>
> Now helping you out, wouldn't the conclusion be: Put Obama's Tsars
> in charge and that will fix everything?

Private Equity, Business Flipping and Asymmetrical Outcomes

Anything I put into quotes has a facetious nature. i.e. I put free market capitalism in quotes because that is the dogmatic retort of anyone who is benefiting from the system (fewer and fewer people) - they resort to sound bites that sound patriotic! We certainly do not have that here - trust me I know. But most of the population still somehow believes it to be true.

Same comment with unwashed masses - if you read me for a long time, I have a lot of sarcasm. I call us peons, I call us peasants, I call us a lot of names because thats how i think the "0.2%" think of us.


On Oct 07 10:16 AM optionsgirl wrote:

> You have written a tremendously accurate and astute op ed, TraderMark.
> I do have a couple of bones to pick, though.
> 1. I dispute you calling the actions of these carnivores "American
> free market capitalism". It is a corrupted, perverted system, but
> it barely resembles a capitalist system.
> 2. I would also like to dispute your labeling of the "unwashed masses".
> You think the workers of these companies don't know what is going
> on? Or that the general population doesn't, either? They know they
> are the victims of massive thievery and fraud. They are simply powerless
> to stop it.
>
> With so many "safeguards" put into place, you'd think it wouldn't
> be necessary to give the SEC (and Fed) more powers, which they clamor
> for a crave. They seek more power for its own sake. The SEC already
> has the power to stop the looting, and state attorneys general already
> have the power to prosecute fraud.
> I believe those bond holders and stock holders have been criminally
> defrauded, and so has the public at large.
> We must remember that the purpose of all carnivores is to feast off
> the carcasses of the weaker. They are shooting fish in a barrel.
>
> Again, kudos for a well-crafted cogent article.

Private Equity, Business Flipping and Asymmetrical Outcomes

epeon, many companies they buy are NOT PUBLIC. Not a good explanation. The idea most of the time is to try to either sell it to another firm once they do their "magic" or "IPO" it... only then does it turn public.

Mostly they look for high cash flow - then they know they can layer it with debt since banks (with cheap money from the Fed) are happy to toss it in any direction.


On Oct 07 10:15 AM epeon wrote:

> Let me play the devil's advocate here. Many of the companies that
> were bought out by PE were bought out on the cheap because their
> stock price was low. It was low because the management of said companies
> never properly rewarded their stockholders. These companies were
> run as private little fiefdoms by the management and the stockholders
> were, at best, an afterthought. Consequently, the stock's value
> languished. This made them cheap and an easy buyout target. PE
> then raped them.
>
> Was PE wrong? Sure. But,these companies made themselves such easy
> targets by allowing their stock price to be very low in relation
> to their value. I guess what I am saying is that there is wrong
> on both sides of that buyout.

Private Equity, Business Flipping and Asymmetrical Outcomes

agree. I just don't want any defender of the system to put the tag "free market capitalism" on anything we have here. They use that as a rallying call as if its a Bald Eagle. We have crony capitalism, socialism for the elite.


On Oct 07 09:17 AM John Galt wrote:

> Mark -
>
> The root of the Austrian school of economics ( you know the guys
> that predicted the crash), is the belief that the FED hands out cheap
> money... CREATES a bubble, and now they are putting out the fire
> with your dollar bills.
>
> The Austrian "Free Market" Capitalist school of thought says the
> Fed is *responsible* for the problem, and that this quasi government
> agency is NOT free market.
>
> Then you start to get into thoughts about the opportunity cost of
> doing the "wrong" and unproductive things due to false inscentives
> created by the fed.
>
> For example, you are wasting capital &amp; labor building a high
> rise commerical real estate building that you *think* will be profitable
> when in reality it won't be...
>
> Building house after house sunny Phoenix that people keep buying
> with watered down fed dollars &amp; interest rates (but can't really
> afford)...
>
> It isn't just the bad choice to build the building, but think where
> those workers and that money could have been used otherwise. You
> are losing time, possibility and potential as well as losing money
> on those individual projects.
>
> The loss isn't just the loss on particular investments, you have
> to also consider the loss in opportunity costs.