Republican presidential candidate Mitt Romney was once CEO of a company, that New York Post reporter John Kosman explains to BTR, utilized predatory private equity techniques to dismantle companies only for short term profits. BTR’s Jakob Schnaidt argues this sort of cheating (also seen in college essay writing services and the profit scheme of The Huffington Post) only makes the rich richer and the poor poorer in America. Photo by Gage Skidmore.
Not so long ago in our nation’s ambiguously puritanical history, the prospect of going to hell scared the bejesus out of cheaters, gamblers, and thieves back when the future meant something to people. We had a kind of fearful, guilty respect for the law and when we faltered, the guilt was unbearable and we had to make up for it (they tell me the word is ‘repent’).
The classic American folk song, “God’s Gonna Cut You Down,” which was delicately modernized by Moby for his commercial wunder-album Play and covered recently by Johnny Cash in 2003, is the gospel equivalent of a cease-and-desist issued with a wry gaze toward the hubristic.
Somewhere down the line, though, the state mismanaged its sense of justice and started chucking people in jail who needed more help than punishment, and the self-interested legislators rewarded the real cheaters, thieves and gamblers with laws that coincide with their bad behavior.
Cheating, or the act of circumventing a system’s imposed regulations to gain a competitive edge, has turned into a concept of relativity these days. No longer is there a commandment we care much to subscribe to (no matter how much we apply it to others), because our modern lives are too complex to conflate with the black and whites of religious doctrine. So in a world market that has been liberalized and deregulated, room for religious zeal concerning the old guidelines of acceptable behavior is increasingly miniscule. This is where the moral dilemma of cheating is derived: the socioeconomic division of cheating from the bottom to move up, and cheating from the top to stay on top.
Perceptions of status and expectations for the self have been discovered by at least one study to be big contributors to the likelihood of cheating, shedding further light on the culture of narcissism. To perceive the world as an antagonistic force pushing against one’s efforts to succeed is to set oneself up for the possibilities of cheating. Due to the institutionalized social injustices in America, exploiting weaknesses in a system that favors the rich and assumes culpability of the poor for their very condition may not be fair in the grand scheme of things, but it pales in comparison to the moral flexibility occurring at the top of the socioeconomic food chain.
The ‘No Child Left Behind’ program’s myopic attempt to invigorate underperforming public schools forced many teachers such as those in the Atlanta public system to cheat on their students’ exams to stay employed. Normally, this number-fudging tactic is traditionally associated (as demonstrated on The Wire, season 4) on the part of political incumbents vying for reelection. As far teachers who play by the rules, their students often end up suffering by being tracked early on in a system that largely forsakes those who were not born into favorable conditions.
Jacob Duchaine of Writer Tank, a writing website that offers essay services to college and graduate students in exchange for money, told me in our interview that he was able to look the other way about his services because he thought it necessary to his condition.
“I’m willing to sell some portion of my time and work here, early in my career, to the highest bidder for money like anyone coming from the lower classes (middle and lower together) because I live in a capitalist society that demands I have money right off the bat if I’m to be considered worth feeding or giving medical attention to.”
In more innocent times when global markets weren’t freed up and American businesses had to pay significant excise taxes to ship their labor overseas, finding any old job for a decent wage was not so intolerable. The Huffington Post, who had just been bought by AOL for $350 million, has gotten considerable flack for their refusal to pay writers. By asking contributors to submit design specs for their political website, they further fueled the fire. Their defense, via HuffPo spokesman Mario Ruiz, falls on the same slap-in-the-face bullshit you hear regarding the value of internships: writers are glad to submit articles for free because they “want to be heard by the largest possible audience and understand the value that that kind of visibility can bring.”
Somebody please break me off a piece of that Kit-Kat bar.
Another supplier of college essays we contacted said he has “written hundreds of essays for [his] clients” whom he charges $15 per page for college and graduate level work. Like some sleazy criminal lawyer, he pointed to his “Ivy League education” as evidence of his ability. Needless to say, this underground essay writing market is huge.
Cheating outside the bounds of the school system, however, implies a certain understanding of the legal risk attached to criminal behavior. Weighing the pros and cons of running a criminal organization requires the need for a front company where one can bleed money and pay taxes without having the IRS sniffing around. But what happens when cheaters operate within the bounds of the law in a brazen disregard for whatever honesty or national pride remaining in American business (who am I kidding)?
Writer and New York Post reporter Josh Kosman spoke to me about a particularly destructive instance of permissible cheating occurring in the private sector of financial management and investment firms, specifically private equity, which he refers to in his book The Buyout of America as a “legal shell game.”
Private equity firms buy large companies through what is called a leveraged buyout. By putting down 30-40 percent of the purchase price themselves and forcing the company they bought out to take out a loan on itself (shaking your head yet?), a private equity firm ends up paying for nothing and guaranteeing a payoff or at the very least a nominal loss.
Imagine being hired by someone who promises to pay you a third of your salary with his money, while the other two thirds you have to borrow from a bank. He says you’ll rake in the dough even though the skills he’s teaching you are quite unique and might not be applicable to any other industry. Sounds like a reasonable deal, considering the payoff, right? After a few years of living the life, your boss fires you because he’s gotten all that he needed from you, and he bails with tons of money you made for him while you sit there with so much debt even your mother won’t tell you she loves you anymore. In a nutshell, that’s what predatory private equity firms are doing to vulnerable companies.
Once the loan is secured, the predatory firm begins cutting company costs in areas like customer service, research and development, and staffing. As a result, product innovation for the bought-out company halts and short-term profits skyrocket, but long-term company viability decreases and staying afloat in a sea of more financially-equipped competitors presents an almost impossible task of survival. Some private equity firms do good business and give their companies enough funds to compete, but most PE firms do not buy companies that are equipped to deal with leveraged buyouts.
“I talked to some owners who had sold to private equity firms,” Kosman said, “and what I kept hearing over and over again was that they see the dollar signs, they see they’ll be rich, and they don’t look very hard. I think the bankers they are working with don’t know or don’t tell them what’s going to happen next.”
The corner-cutting is a two-way street just as in the essay writing services, as companies that are seemingly doing well enough get greedy, see the potential for giant returns under private equity management, and pull the trigger without doing any due diligence into their buyer’s history.
However, the balance of power between buyer and seller isn’t so clear when it comes to private equity firms, who in the 1970s budded from a tax loophole whereby private firms like themselves could file profits as capital gains rather than standard income. This meant they were giving about 15% for capital gains tax as opposed to the median 25-35% income tax rate.
They hacked the system; because a leveraged buyout (LBO) is one that depends on outside investors and debt maturation to finance, so the PE firms get a lot from just about nothing (in other words, the cheater’s capital gain). The interest tax deduction in question was originally designed to encourage companies to invest in research and development and other forward-thinking business moves, an honest piece of legislation exploited by a few less-than honest firm managers.
“Generally I would say they are predatory,” Kosman says, “finagling the system or warping the system to their benefit and not the way it’s designed.”
A great example of a predatory equity firm is Bain Capital, a firm that current Republican presidential candidate Mitt Romney was the ruthless CEO of from 1984 until 2001. Between the years of 1987 – 1995, Romney made $575 million off five companies, all of which are now nonexistent largely due to the predatory tactics of private equity.
If the Mittwit does end up being the GOP frontrunner, Kosman says, the media will naturally gravitate closer to the specific business moves Romney made at Bain.
“He turned [companies] into broken properties. People may start asking the good questions: how did he do this; who would condone this?”
In the financial sector, private equity firms have an established reputation for being predatory, but the understanding is usually that companies being bought out have assessed the risk and decided to continue with buyout proceedings anyway.
Unfortunately, the climate of American business and achievement in general is one that rewards short-term gain strategies, forcing the culture to cast a suspicious glance at any sign of the long-term. The quick, high-returns process of leveraged buyouts for short-term capital has successfully been institutionalized. Considering one of our presidential candidates has seemingly skirted by public scrutiny on multiple levels of business thuggery leads the more reasonable among us to heartily conclude, yet again, that President Obama is being outwitted by a gang of thieves on the corporate payroll.
Returning to “God’s Gonna Cut You Down,” a song that promises retribution to those who proudly cheat the system and blame human nature, it’s hard to let go of the feeling on November 5th, 2008 when Obama won the election. It was a day I sincerely believed he was going to spend the next four years dropping the hammer of justice on all the cheaters looting our country of democracy.
“Go tell that lonesome liar
Go tell that midnight rider
Tell the gamblin’, ramblin’ backslider
Tell them God’s gonna cut ’em down”
So far, no such luck.
Written by: Jakob Schnaidt
1. Kosman, Josh The Buyout of America Penguin Group (USA) 2009