By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
Toys R Us will shutter all stores by the end of this month.
I wrote about the role private equity played in killing this venerable 70- year old New Jersey firm when it filed for Chapter 11 bankruptcy protection last September in Toys R Us: Another Private Equity Casualty. So I won’t repeat that sad and sorry tale here (but I will refer interested readers to this earlier post by Yves on the general trend, Private Equity Firms Sued Over Retailer Bankruptcies— and the earlier links included therein).
The purpose of this post is to discuss the consequences of this liquidation for the company’s workers. As Bill Pascrell, a New Jersey Democrat whose Congressional district included the company’s headquarters for 16 years until a 2012 redistricting landed it to another district, wrote in USA Today, Amazon didn’t kill Toys R Us, greedy Wall Street profiteers did it:
The so-called Retail Apocalypse can be attributed to Amazon and Walmart, but this is only part of the story. Another part belongs to private equity, whose methods of leveraging immense debt are wreaking havoc on the retail landscape. Toys R Us is the most recent victim.
In 2005, three Wall Street firms paid more than $6 billion for the company, but only $1.2 billion came from their own pockets; the rest was borrowed.
When Toys R Us was purchased, its new owners tethered that $5 billion of debt plus annual interest payments of $400 million to its neck. Finance executives justify leveraged buyouts by claiming that they allow ailing companies to become leaner and more financially nimble in a way that protects the business and its workers. But how could Toys R Us innovate or change course while weighed down by that anchor?
In practice, these deals favor the equity tycoons who help themselves to enormous bonuses. Simultaneously, their new possessions are left holding debt they cannot pay. An otter cracks open a clam before discarding the shell, and so do these firms: Toys R Us owners reportedly walked away with more than $200 million.
The shell is the American worker. Once private equity squeezes out whatever dividends it can, too often the businesses close. The shuttering of Toys R Us’ more than 800 stores will mean the loss of at least 30,000 jobs, including 1,600 in New Jersey.
Worse yet, Toys R Us notified its workers that their severance plans were being nullified.
Protests and Expostulations
That means that now, more than 30,000 are without severance– even though the company paid out bonuses weeks before it filed for bankruptcy, according to a Saturday report in The Washington Post, ‘How can they walk away with millions and leave workers with zero?’: Toys R Us workers say they deserve severance:
On Friday, more than a dozen workers met with lawmakers in New Jersey, where Toys R Us is based, to push for severance pay. Workers also called for new regulations on leveraged buyouts, as well as windfall taxes that would prevent private-equity firms from running a business into the ground and then walking away with huge sums of money.
In addition to meeting with lawmakers, employees are preparing to file a claim in bankruptcy court next week asking that they be fairly compensated, according to workers’ advocates at the Center for Popular Democracy.
On Friday, three New Jersey Democrats– Pascrell and Senators Cory Booker and Robert Menendez– sent a letter to the heads of Bain Capital, KKR, and Vornado, exhorting them to “do everything in their power to support the thousands of Toys ‘R’ Us workers who will soon lose their jobs as the company closes its doors. ” Fat lot of good this will do, I know.
As the Post notes:
“I have always been proud to work at Toys R Us, but this is not Toys R Us — this is KKR and Bain Capital,” Tracy Auerbach, a store manager in Chandler, Ariz., who has been working at the company for 31 years, said during a news conference on Capitol Hill last month. “This is Wall Street greed. How can they walk away with millions and leave 33,000 workers with zero?”
An excellent question. Permit me to quote two company employees on this issue, as reported by WBGO.org in Toys R Us Employees Protest For Severance Pay.
Let’s hear from 33-year employee Cheryl Claude of South River, New Jersey, who has never worked anywhere else: “I spent every holiday, leaving my kids home for the holidays, Thanksgiving, Christmas, birthdays, everything to be at work and give my one-hundred percent to get nothing is incredible.”
And Shkeanah Best, another company employee laments, ““We’re not receiving anything. Just unemployment and I don’t want to go that route. You don’t know how long it’s going to last. Unemployment doesn’t pay anything. It’s crazy how a big franchise is closing its doors and not offering us anything.”
Over to the Post again:
In the case of Toys R Us, financial filings show that the company was handing over $400 million a year to pay back its debt, often at the expense of turning a profit. Recently, it was burning through $50 million to $100 million in cash each month as it tried to dig its way out, according to court documents filed in March. The retailer also paid $470 million in advisory fees, interest and other payments to Bain Capital, KKR and Vornado since 2005. The firms did not respond to requests for comment.
“Something is seriously wrong with this type of economy,” [Menendez] (D-N.J.) said at the Friday event. “How many employees at Bain are now worrying about how they’ll pay for day care? How many employees over at KKR don’t have the cash to fill up their gas tank to go out looking for jobs?”
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Does private equity have any rationale for existence other than the enrichment of the already rich? It reminds of nothing so much as blood sucking insects draining their prey and discarding the husk.
All Complex Ecosystems Have Parasites – Public domain text from Cory Doctorow.
I believe they prefer to regard themselves as wolves, who cull the old, sick and weak members of the herd, leaving the remaining members in a better position, with more resources to divide amongst themselves. The wolfish scavengers get to feast on the steaming entrails, devouring heart, liver and lungs, growing fatter, stronger and more swift.
The rest of us are the scruffy coyotes who skulk on the fringes and slink in when the wolves have departed, to gnaw on the bones and bits of fur.
Wolves display loyalty to their pack. Now a hyena kills, scavenges, cracks the bone to get the marrow leaving only the proverbial rag, bone, and hank of hair. Seems more apt
I’d say the parasite model is a better fit – the private equity firms have a simple model:
* find a company that has significant assets
* buy that company
* make the company borrow the purchase price plus a nice profit
* Try and have the company go public
* Walk away with the profits, leaving the shareholders and the employees to take the losses. (If the acquired company survives, it’s by accident.)
It’s as though the wolves had their prey hunt themselves down.
Or it’s like the wolves forced the prey to commit suicide.
When people make children they can not afford the amount of finite resources is less for everyone. At some point failure teaches a lesson. Today and every day 5000 children and 23000 adults dies due to lack of clean water or food. 4 billion people live on less than $3 a day. There is plenty of opportunity to use your time to make a better world than supporting a toy retail business that fails to make this a better world.
^ neo-malthusian non sequitur^
How do financial predators, savaging the lives of working people, ” make this a better world”?
When Tony Soprano and associates did this kind of thing, it was called a “bust out”.
https://en.wikipedia.org/wiki/Bust_Out
Nailed it!
Excellent comment. How do these private equity debt-leveraged buyouts and corporate stock buybacks that are directly or indirectly funded with debt differ conceptually in any material sense from a “bust-out”?
Definition of a “bust-out” from Wikipedia:
A “bust out” is a common tactic in the organized crime world, wherein a business’ assets and lines of credit are exploited and exhausted to the point of bankruptcy. —Wikipedia.org
I have long advocated for laws requiring that a minimum of 75% of the debt incurred for the purchase of a business remain with the company purchasing the business. Meaning that Bain and KKR could shift only a billion or so of the debt onto Toys R Us while they would remain responsible for over 4 billion of it. And that any refinancing keep that firewall between entities for a minimum of 15 years.
While this would still not really protect employees from losing their pensions and as in this case severance, it would destroy the business model that makes this kind of equity purchase profitable.
One thing I really don’t understand is why anyone loans Bain and/or KKR billions in the first place. Sure they will get some debt service while these predators strip the carcass, but too often they will be left with a bankrupt company. The few exceptions cannot possibly make up for the losses. The list of suckers bear examination, and probable personal winners within those suckers exposed. We well know there is something rotten in our financial industry.
I keep wondering who loans these buyout firms the money when the outcomes are entirely predictable? I suppose banks desperate for origination fees and interest payments see it as win win as they get money up front and interest and when the whole ship goes down maybe they can further recoup funds from real estate.
If you have substantial interests in say, the electronic commerce sector, it may be worth a few billion to accelerate the demise of weaker competitors.
Just another form of industry consolidation.
“I keep wondering who loans these buyout firms the money when the outcomes are entirely predictable?”
I keep hearing the same old question over and over and over again!
Geez — it is ALL heavily interlocked — with the Big Four (Vanguard, BlackRock, State Street and Fidelity) being the majority block shareholders — but who actually is investing through them purposely remains a mystery.
In other words, it is a shell game. So when you see a study which has the Big Four — plus Wellington and Berkshire Hathaway or some other such — also listed say, as the primary bank shareholders, then drilling down one finds that the majority shareholder block of Berkshire and Wellington to be . . . the Big Four!
Anyone who has bothered to spend their valuable time in researching this always discovers this.
The question presumes that there is some sort of actual logical, honest structure, as opposed to the kleptocratic one existing today.
The loans to a significant degree wind up with “credit funds” run by the very same PE firms. And those for years have been perceived within the industry to offer a better risk/return tradeoff than the PE funds themselves.
Junk bond funds run by managers like Fidelity also hold leveraged loans like these buyout loans.
YOU do – but through your pension fund manager…
> . . . One thing I really don’t understand is why anyone loans Bain and/or KKR billions in the first place. . . .
Pension funds shooting for the investment stars. Ironic, eh. Often public sector pension funds that depend on profitable tax paying companies to cover the bill, hand money to Pirate Equity which ends up destroying those companies, which never pays a penny of tax again.
Notice the pattern. Billions of dollars are destroyed and countless lives ruined so that the looters walk away with hundreds of millions, almost tax free to boot.
Who’s next. From Wolf Street a short while ago, Petsmart.
Pension fund managers have no skin in the game so they can be bribed with hookers and blow. Great ROI, better even than political donations.
>I have long advocated for laws
It makes me wonder – does this sort of thing happen in Europe? Japan? Maybe they have laws, but the US elite, both sides, is so full of navel-gazers that we never find out.
umm… where do you think we learned how to do this?
It’s all about the fees!!! Banks collect a lot of money, as do lawyers, and not to mention the PE firms themselves, when advising on mega deals. Nobody, and I mean nobody, wants to kill a big buyout deal, no matter how crazy the deal. That’s the genius of PE, everyone sucks from the fee tit. Always follow the money! By the way, the losers are the pension funds, the workers the pension represent, and the rest of society.
“One thing I really don’t understand is why anyone loans Bain and/or KKR billions in the first place. Sure they will get some debt service while these predators strip the carcass, but too often they will be left with a bankrupt company. ”
Um, Yves has covered the buyside extensively via Calpers.
Ah, a well chosen example of the stench of the private winners in the rotted financial industry I mentioned. The investors are complicit or dupes, those on the inside are highly compensated while the dupes get left holding the bag. In this example the biggest dupes being the pensioners whose retirement is being managed by Calipers, while well paid advisors rake it in by setting them up.
Is it just me that finds the sight, or the sound, of all those Democrats tut-tut’ing earnestly but, surprise-surprise, completely ineffectually unbearably offensive?
I didn’t know for example, taking but one at random, Cory Booker from a sack of potatoes. It took a couple of minutes to check out his execrable record. He’s a real piece of class, isn’t he? The embodiment of everything that’s wrong with the Democratic Party establishment.
But, with all the same predictability (only with a tad more unpleasantness) of my mother-in-law’s cat throwing up on the rug after I bribed her to come back in the house with too many cheesey treats, here he is, urging those ghastly sorts in Private Equity to please not be so ‘orrible to the plebs ‘cos then some people might, oh, I don’t know, expect the Democrats to Do Something About It.
And they keep wondering Trump won?
Precisely. The Democrats can be counted on to be on the right side of the PR battle while doing absolutely next to nothing to help the poor folks expected to vote for them. The democrats know why they lost to Trump, they just don’t plan to kill the golden goose in order to do anything about it.
So, vote to reelect Trump to make the Democrats honest?
makes note not to use cheesey treats to bribe cats.
Doesn’t matter. Cats will throw up anyway and the throw up will just be a different color.
Clive.
Is the above similar to what was once described as asset stripping ? I remember it was once quite the thing for the likes of Tiny Rowlands in the UK. I suppose that it is also different in some senses to that which happened with HMV & Carillion, but it does appear to lead to the same result.
@Eustache De Saint Pierre
June 3, 2018 at 9:01 am
——
Yes, it is.
Asset stripping is one of the ways that the owners extract value from the companies.
One of their favorite asset strips for companies who own the real estate under their stores is to sell all the real estate to a separate company (usually owned by the PE principals) and lease it back to the company. Invariably the rents are higher than the mortgage payments, if any, that the company was paying previously. And, in most cases, the proceeds to the company for selling their real estate are used to pay massive dividends to the PE owners.
Another trick is to sell the land under the stores to local government, and make the rent less than warranted by the sale price. The lever, or stick, is to threaten local politicians with pulling employment out of the region and blaming them. The carrot is to assure them no one will understand how a low rent for a high sale price represents a cost to the taxpayer, and they’re right, opportunity cost is very hard to explain to voters.
And so brave private enterprise is subsidised by supposedly useless government, not so Randian when you look into the details.
And knowing all these tricks, we still haven’t begun to scratch the surface yet . . .
Sears!
Asset stripping is not the same as loading up with debt. A company has two components to its value, book value and good will.
Book value is the fire sale price of all actual assets owned by the company, which is why you need to record every physical investment you make (and depreciate it on a schedule, so you know when to replace worn out old equipment). It’s a rock bottom value of the company unaffected by its viability as a business.
Good will is a technical term for all the intangibles that make the company valuable because it’s doing something the market has a demand for. It depends on market sentiment. Book value plus good will equals market value.
It can happen that good will goes negative, perhaps temporarily, making the market value less than the book value. Asset strippers argue that the best thing you can do then is sell the stuff off. Workers, and perhaps sentimental owners, argue that you should have faith and pull through the hard times.
The film Pretty Woman has a plot about a company in danger of asset strippers persuading the shareholders to destroy the company and sell its assets off.
Could one call it ” value stripping”, then? Or ” good will” stripping?
>” Asset stripping is not the same as loading up with debt.”
They certainly seem related.
>”A company has two components to its value, book value and good will.”
How about debt carrying capacity? “[G]ood will” seems too vague to be referred to in “technical” terms and seems to supply a haze of cover to what seems to be really going on, i.e., fraudulent conveyance as mentioned by commenter’s below.
Except from THE BUBBLE AND BEYOND by Michael Hudson—on fraud[ulent] conveyance…
“…The aim is to keep debts within the ability to pay, by placing an obligation on bankers and other creditors to make viable loans rather than covert property grabs. This principle has two major implications for today’s debt-strapped economies. It was cited in the 1980s as a defense against corporate raiders buying out stockholders with high-interest “junk” bonds. Victims of debt-leveraged buyouts claimed that there was no way that the loan could have been expected to be paid in the normal course of business and subject to existing employee contracts without selling off assets and, as noted above, downgrading their pension contracts with employees. The aim was to loot the company and leave it a bankrupt shell. The best-known recent case is the suit brought by Chicago Tribune employees against the real estate magnate Sam Zell who drove the company bankrupt and emptied out the Employee Stock Ownership Plan to pay his creditors. About half such ESOPs typically end up in bankruptcy through such financial sleight of hand…
…The basic principle of Fraudulent Conveyance is that loans which cannot be paid under normal conditions were made irresponsibly at best, and with predatory intentions at worst. In either case they should be written down. The ethical principle is that the debtor suffers less than the creditor, especially in a world where international credit is now created electronically on computer keyboards — while repayment of such credit polarizes and impoverishes debtor economies…”
Market value is what the assets could be sold for. Generally, market value will not necessarily have anything to do with goodwill or book value. Goodwill and book value are accounting concepts. Goodwill gives you an accounting entry to book for acquisition amounts above the purchased company’s book value. Until you sell a company, “goodwill” doesn’t exist – note that good will is amortized by the purchasing company. Book value is generally acquisition cost less depreciation.
And Robert Menendez had been recently sanitized by the Trump administration’s justice department.
From wikipedia:
“In 2015, Menendez was indicted on federal corruption charges in the United States District Court for the District of New Jersey, related to alleged favors he did for Florida ophthalmologist Salomon Melgen and gifts he received from him, including campaign donations and private flights. Melgen was charged as well. Menendez has pleaded not guilty to all charges. His trial ended in a hung jury and a mistrial on November 16, 2017. On January 31, 2018, the Justice Department announced they were dropping all charges against Menendez.”
The Democrats realize they want to curry favor with PE, hence the showboating display of outrage from politicians such as Booker and Menendez. And the failure did not effect only New Jersey, as Toys ‘R Us is a nationwide chain with employees all over the country, so the lack of other outraged Democrats speaks volumes.
I don’t believe PE will be reformed by legislators. The reform may come when companies are forced to pre-fund pension plans, pre-fund severance plans, and retire all current debt when a PE buyout is attempted.
Unfortunately, I suspect companies are much like America’s democracy, with a core group of senior people who will do well with financial machinations.
This could imply the Democrats only care about the “optics” of the Toys ‘R Us failure while it is in the news.
Good background with a catchy phrase
https://www.blackagendareport.com/cory-booker-corporate-hooker
Cory Booker is all about “pilot programs” that might benefit constituents and “studies”regarding the price of prescription drugs, but no, we shouldn’t allow imports of meds from Canada. Etc, etc
And meanwhile….look who he is patting on the back.
More about multiterm tut-tutter and serial grifter Bob Menendez’s sanitation mentioned in comments below. Protected from being primaried.
https://theintercept.com/2018/06/04/democrats-set-to-re-nominate-sen-bob-menendez-after-preventing-challengers-showing-how-calcified-the-party-is/
Of course the first director who is prosecuted for insolvent trading would fix this problem for another 20 years. Maybe Corey would like to call for a criminal investigation?
Or maybe not.
Oh, most definitely not.
Here’s Booker defending PE in 2012, when Romney was getting criticism for his role at Bain: “I have to just say, from a very personal level, I’m not about to sit here and indict private equity… enough is enough. Stop attacking private equity.”
He then added the nonsequitur and misdirection of also calling for a stop to attacks on Reverend Jeremiah Wright (who had fallen off the media radar years before), so as to maintain his bogus facade of bi-partisan “decency.”
When combined with the insipid tone (sometimes crying on cue!) in which he delivers every speech ( to say nothing of his working with Chris Christie to destroy/privatize the Newark public schools, etc.), the man is truly both despicable and insufferable.
Thank you both – so basically looting.
But legal. All nice and legal.
Speaking of insufferable, Booker was also classmates and friends with Rachel Maddow at Stanford.
Don’t be surprised if you see MSDNC touting him.
#PepperidgeFarmRemembers
Surrogate for Obama Denounces Anti-Romney Ad
$470 million spread out from 2005 to 2018 doesn’t seem that much in itself to have killed the company. That is about $3 million a month when they are talking about burning through $50 to $100 million a month to dig themselves out. (Whatever exactly that means.) Where else did the PE companies extract wealth? It sounds like the $3 million a month was the tail.
How much did the companies make directly / indirectly through / at the time of the buyout and bond issue?
Article also mentions interest payments of 400 million on 5 billion debt as a result of LBO.
The Post quote at the end of the article says explicitly that the company was paying 400 million USD a year in debt repayment. So, 2005 to 2017 is twelve years of payments. Assume, humour me here, eh, the same repayment plan the whole time, and we get a grand total of $4,800,000,000 USD. Nearly five billion paid to the banks, with more payments to go. This doesn’t include ‘Management Fees’ to the Vultures. So, the 50 to 100 million a month might be hyperbole, but not by much.
I am asking what the PE companies got out / are getting out of this deal. The bond holders aren’t the PE company are they? So all that interest is not relevant to the PE companies. The $470 million is and that is the management fees to the PE companies isn’t it?
I am wondering what else the PE companies got having worked as having worked along side them in the past, that return $470 million return over 12 or 13 years seems low.
Check the reporting and archives at Wolf Street. He’s been on these stories for a long time now.
https://www.marketwatch.com/story/yes-sears-is-likely-to-collapse-but-eddie-lampert-will-be-just-fine-2018-05-30
It is impossible to determine. They take tons of hidden fees directly from the portfolio companies. Some are so bogus that professor Ludovic Phalippou described one, the monitoring fee, as “money for nothing.” Others amount to double dipping, as in charging the company for financing fees when they hire third parties and pay them fees at pretty much the same level to do the actual work.
What killed Toys R Us was an op co/prop co deal. Retailers typically owned their own real estate since retail is a cyclical business and they didn’t want to be paying rent during bad times.
The owners sold the Toys R Us real estate and then leased it back to the company at an inflated price. The sale proceeds of the RE went into the PE pockets.
Those lease payments were effectively additional leverage, on top of the actual borrowings against the operating company.
http://www.businessinsider.com/kkr-tries-to-fool-investors-with-toys-r-us-ipo-2011-3
See here for more detail about the op co/prop co model:
https://www.nakedcapitalism.com/2016/10/cerberus-uses-private-equity-looting-strategy-to-scandal-ridden-steward-health-care-hospitals.html
https://www.nakedcapitalism.com/2014/12/eileen-appelbaum-rosemary-batt-explain-private-equity-tricks-put-companies-risk.html
https://www.nakedcapitalism.com/2017/07/private-equity-firms-sued-retailer-distress-bankruptcies.html
Not surprising that those employees lost their severance pay. Those equity firms took the lot and would leave nothing behind as a matter of procedure. As an aside, I was just thinking about the similarities between equity firms and Silicon Valley tech firms.
When you think about it, equity firms look for large companies with thousands of staff and stores everywhere. They then hijack this company, suck it dry of every possible dollar, and cut it loose to sink with all their employees.
Silicon Valley tech firms on the other hand look for entire industries with hundreds of thousand of workers, or even millions of workers, with locations everywhere. They then seek to deliberately put all those workers out of business by breaking laws and using software and ultra-low paid workers to replace them while taking a cut of any money that they can.
Same type of methodology but it is all a matter of scale here.
In reference to the Democrat nomenklaturas’ attack of the vapours; the Dems had better be wary. If they don’t do something soon of a substantive nature, they risk losing everything. Once popular reputation is lost, as Iago described, all is lost for a long time. Popular trust is hard to build.
If the Libertarians were true to their purported ideology, they would see this trend as a direct threat and do something of a sanguinary nature about it. That ‘they’ do not is a sign of the insincerity at the root of their public personae.
> That ‘they’ do not is a sign of the insincerity at the root of their public personae.
The other day I learned the true meaning and implication of the word “venal” as referenced by the most venal of all, James Buchanan and his Koch “gravy train” funded Venality Finishing School teachings.
Substitute venality for insincerity in your sentence, and I think we get close to the truth. Insincerity implies they are capable of sincerity. They are not.
Good point, but since I do not have inside information on ‘their’ agendas, the basic ones, not the “for publication” ones, I chose an ambivalent adjective, ‘insincerity,’ to suggest a state of mind, not necessarily the particular objects of the program.
‘Venality’ would do well as a descriptor, and so would ‘Self Righteousness.’
Libertarianism is about the money, the whole money, and nothing but the money.
Always was. Always will be.
Yves, Jerri-Lynn
can you (or anyone else) refresh my memory as to the evolution (judicial rewriting) of fraudulent conveyance law over the last 10-15 years. From my direct experience in airline bankruptcy cases, there was a point when this law was taken seriously; over time much less so. Wouldn’t the traditional interpretation applied in cases like this? Were explicit carve-outs/loopholes established for private equity?
Here’s a place to start: https://www.law360.com/articles/13702/the-potential-applicability-of-fraudulent-transfer-law-to-contemporary-business-transactions
My torts professor in law school said there was one hard and fast rule in that subject: “widows and orphans always win.” I’m guessing the bankruptcy and corporations profs of today would agree that there’s another hard and fast rule: “corporate interests always win.” The interesting and fee-generating issues come when corporations are mauling other corporations, when I would say the “law of tonnage” applies…
The problem is bankruptcy is a specialized area of the bar, so I can’t help much.
However, my understanding is that there is a huge difference between the way fraudulent conveyance works for individuals versus businesses. And I have to believe this isn’t a matter of statue or the different sections of the BK code that individuals v. corps use. I suspect it has to do entirely that individuals who file for BK by definition are very broke and in no position to fight the creditors much, while debtors in BK often have very rich investors in the corp and so can fight and have thus gotten much better precedents over time.
If you are an individual, any borrowing you do in the 6 months before you go BK will be scrutinized as probable fraudulent conveyance, particularly if on credit cards.
By contrast, private equity types pull cash and fees out of companies up to when they file, yet the creditors hardly ever contest it. One case written up in Appelbaum and Batt’s book, Private Equity at Work, involving Sun Capital, gives an idea why. Sun was able to drag the process out for many years, forcing the creditors to spend lots of legal $. They wound up settling for way less than seemed adequate.
Sounds very much like what Eddie Lampert is doing to Sears. Sears is slipping into bankruptcy but Eddie Lampert will come out whole.
https://www.marketwatch.com/story/yes-sears-is-likely-to-collapse-but-eddie-lampert-will-be-just-fine-2018-05-30?siteid=nwhwk
Here in the Beehive State we have a personal connection to this story. Mittens, formerly of Bain Capital, where he made his fortune, is running to be senator of our fair state. The corporate media here has studiously avoided discussing how Mittens and Bain loaded companies up with debt, then walked away with millions. Matt Taibbi has the best account of Mittens vile behavior–“Greed and Debt: The True Story of Mitt Romney and Bain Capital: How the GOP presidential candidate and his private equity firm staged an epic wealth grab, destroyed jobs – and stuck others with the bill.”
another good one on Bain from the Village Voice:
https://www.villagevoice.com/2012/04/18/mitt-romney-american-parasite/
rommney learns from the best.
http://archive.boston.com/business/articles/2012/06/24/the_story_behind_mitt_romneys_work_with_michael_milken_it_was_fun_while_it_lasted/
camelotkidd: The first I learned about Mittens and Bain was in the David Stockman book “The Great Deformation.” He tore Mittens to shreds. He also apologized profusely for his own past VC work along the same same lines, but much smaller. He described loading the companies with so much debt they could not recover.
I found the link to your cited article.
https://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829
And Democrats are seriously considering running Deval Patrick/Bain Capital 2020!?!
Yeah… there’s a winner.
The post indicates that PE vampire squids are killing workers, not just the ones with Toys R Us but across the board. Does the question of self-defense not arise, here? “Stand your ground?”
First they took our jobs. Then our homes. Then our children’s toys (Toys R Us). And now they’re eyeing our pets (PetSmart). How far will we allow them to push us before we push back? Read Edward Bellamy (“Looking Backward” and “Equality”) and think big, as big as a social order that exists only to promote the welfare of people (and all living things). The Preamble to our DOI has never spoken with greater clarity than right now. It’s time for the citizens to reclaim their country by whatever means are necessary. We are many; they are few.
http://cepr.net/publications/reports/primer-on-private-equity
http://cepr.net/video/latest/book-talk-private-equity-at-work-when-wall-street-manages-main-street
“Private equity firms have long been at the center of public debates on the impact of the financial sector on Main Street companies. Are these firms financial innovators that save failing businesses or financial predators that bankrupt otherwise healthy companies and destroy jobs? The first comprehensive examination of this topic, Private Equity at Work provides a detailed yet accessible guide to this controversial business model. Noted labor experts Eileen Appelbaum and Rosemary Batt carefully evaluate the evidence–including original case studies and interviews, legal documents, bankruptcy proceedings, media coverage, and existing academic scholarship–to demonstrate that while private equity firms have had some positive effects on the operations and growth of small and mid-sized companies, the interventions of private equity more often than not lead to significant negative consequences for many businesses and workers.”
“Control fraud.” – Bill Black
I used to work in subprime. The standing joke among top execs at our shop was “the best things in life are FEE!“
Oooooh!
Shakespeare was right: “One may smile and smile and be a villain.”
(We’re glad you escaped the sub-prime dungeons.)
Thanks. I was there for five years. We made successive record profits every year I was there. I had to leave, I took a 23% pay cut to go back into healthcare analytics. It was just too shady.
Model laws could be written for restricting or outlawing PE and LBO behavior and practices.
Laws or rules about the tax-status of money borrowed and interest paid on PE LBOs could be changed to disincent such behavior.
Such model laws and rule changes could be advocated and run on by Real Democrats and Real Democrat nomination-seekers. Fake Democrat nominees could be embarassed by their non-acceptance and non-support of such model laws and rule changes.
Sometimes a change-in-language makes a change-in-thinking possible. Could one borrow the word “bust-out” from the mafia and apply it to PE behavior? Could we speak of Leveraged Bust Outs? Could we use the phrase Leveraged Bust Out over and over enough to where the letters LBO might come to automatically stand for Leveraged Bust Out?
Also, would it make sense to start speaking of Real Democrats and Fake Democrats? And Real Democrat and Fake Democrat? We could speak of Sanders and etc. as being the Real Democrat Party and Pelosi and Obama and Clinton and such as being the Fake Democrat Party. I think I will start using such language wherever I can fit it in. It seems too good to me to suggest just once and then give up on it.
Something I have never understood about LBO. If you have to leverage a purchase, doesn’t that say the actual value of the company is that which the Private Equity firms put up rather than total leveraged amount? In this case, the $1.2 billion that they brought to the table.
Yes, and PE firms like those involved in this deal, use monies from pension funds, teachers, police, fire, etc. So all those self-righteous pensioners can share in the blame for financing the deals put together by these crooks, so that the pensions can almost meet their outlandish returns on investment.
Yah, the PENSIONERS of course are to blame. The assembly line worker or the guy who cleans your sewer or runs the equipment that brings you safe drinking water mskes those investment and looting decision, right? Jeebus.
What is it, pension envy that so many of us mopes apparently have? Way less than 30% of retiring/disabled workers have any kind of pension, and if they are lucky they get Social Security checks from the account into which they have paid, most of them, all their working lives.
So the conditioned reflex we have now is “If I don’t get a defined benefit pension, you mopes like me dang well better not get one too.” Don’t focus on the root problems, slash at you neighbor on the slippery slope to “Just die.”
I guess that’s the best we mopes can expect — all of us dragging all of us over the cliff.
Or the guy who worked for Toys-R-Us or a hundred other companies. It is not only the Romney’s of the world. There is much hypocrisy. The last pensions, will be public works, you list water workers, I choose to emphasize others. There is a reason there are fewer and fewer defined pension programs, and the two are connected. But let’s keep only blaming the proper people.
Funny how so many people have been conditioned to believe that others deserve less, and not that they deserve more.
Yah, the PENSIONERS of course are to blame. The assembly line worker or the guy who cleans your sewer or runs the equipment that brings you safe drinking water mskes those investment and looting decision, right? Jeebus.
What is it, pension envy that so many of us mopes apparently have? Way less than 30% of retiring/disabled workers have any kind of pension, and if they are lucky they get Social Security checks from the account into which they have paid, most of them, all their working lives.
So the conditioned reflex we have now is “If I don’t get a defined benefit pension, you mopes like me dang well better not get one too.” Don’t focus on the root problems, slash at you neighbor on the slippery slope to “Just die.”
Romney and his fellow vampires and tapeworms just love it that we are so well trained.
I guess that’s the best we mopes can expect — all of us dragging all of us over the cliff.
More interesting will be if NJ politicians can turn this into an election issue. That’ll tell us how much ‘real’ people care
I don’t really understand the severance pay question. As an engineer working in consulting, I have worked my entire career where the most I would expect in severance pay in a layoff would be about 4 weeks (when I worked at a company for many years) but wouldn’t count on more than two weeks plus vacation time payout. Two weeks is the customary notice that employees give the firms before they depart, so it is quid pro quo.
Employees have been disposable assets that can be released “at will” for many years. We actually have to sign papers that state we understand that we are “at will” employees. However, that also means we are free to up and leave at any time with no non-compete clauses hanging over our heads, so we can go to work for a competitor the next day. Severance packages for technical and management staff often come with limitations like that. We just have to not take trade secrets and confidential information with us and watch out for client conflicts of interest.
We are reasonably well compensated and pretty much everybody in our business knows what the free market salaries look like. The companies have to offer decent benefits packages, including retirement savings plans that are paid into each year in order to get good employees. I haven’t heard of an engineering firm offering anything like a pension since before I started working decades ago.
So effectively the books are closed on us each year once the savings plan contributions are made by the companies with no residual future costs, like pension plans, hanging out there. Our retirement savings are portable and go with with us with only money that hasn’t vested staying behind. It is a two-way street where each year we assess if we want to stay at the company while the company evaluates if they still want us. Our job security is our ability to get a new job at the same or better pay. If you can’t do that, then the firm likely also knows that and the inevitable consequences will usually arrive. It is pretty Darwinian, but it means there are few surprises.
This is where American labor management has been for a solid three decades now. Why would Toys R Us be any different?
Sears is likely to follow soon. The good news is that biggest shareholder, Eddie Lampert, will do just fine while everybody else takes hits. The epitome of modern capitalism. As CEO of the entire economy, Trump is probably trying to figure out how to get a similar deal.
https://www.marketwatch.com/story/yes-sears-is-likely-to-collapse-but-eddie-lampert-will-be-just-fine-2018-05-30
They should have clawbacks related to any monitoring fees and equity recaps when these things occur to help the employees. Disgusting that hundreds of millions were able to be stripped out of the company even after the initial buyout.
Dylan Ratigan was right; the business of America is extraction. When these are the most lucrative opportunities for smart well connected people, can we be surprised that our country is consuming itself from the inside out? And when the husk has been stripped bare, is that when the whole thing collapses, taking down what’s left of the middle classes and feeding their meagre assets into the same insatiable maw?
Zero sum games inevitably end up at zero. I’m not a professional or an insider so forgive me if I’m asking a simplistic question when I wonder what the end result looks like.
To JTMcphee: Yes the pensioners ARE to blame. These days pensioners are almost invaribly unionized public employees who vote for their leadership and the contracts that their leadership negotiate. They are every bit as complicit as the union leaders and politicians who make the deals. Of course the third party to these negotiations, the taxpayer, is denied any meaningful role in these negotiations except as the chump to clean up the mess once the party is over. The pensioners validate contracts that are nearly impossible to fullfill, then cry foul when their benefits are in doubt and demand that the taxpayer bails them out. THey suffer from the same disease as the union leaders and the politicians: GREED! Nothing wrong with it, just do not paint the pensioners as innocent babes in the wasteland.
Back to the main subject, I am a ex-toysrus employee, I quit two weeks ago after working for the company for ten years. For years I have debated and argued with other employees about when the party would be over. When the ipo failed it was hard to find anyone who sincerely thought the company would have any chance to survive. It was just a mater of time.
severance packages were the carrot to try to keep employees from walking out. My original store was in the first wave of closings which ended in April. The liquidation of the store lasted for three months, and about two weeks prior to closing the cancelation of the severance was announced. Of course no actual severance packages were ever offered or discussed, and I did not see them as anything more than an empty promise to keep employees from jumping ship. When my original store closed, I moved back home to take care of my 87 year old mother. There is a toysrus location here as well, and I transfered to that store for a couple extra months of employment. Could only take about three weeks before quiting. It is very difficult to work through these liquidations and i could not take it any more. Once again severance was proposed for the second, final wave of store closings and I told anyone that would listen that it was all bs.
Toysrus is also offering “completion” bonuses for upper store mangement if they stay until the store is closed, which I would qualify for. The bonus is based on a percentage of liquidation sales volume of the store and your salary. I am supposed to receive the bonus for my original store liquidation and could have received the bonus at the second location if I would have stayed. I doubt i will receive anything.
Makes my blood boil. I self describe as a conservative free enterprise kind of guy. If one of these screwed employees burned the vultures capitalists’ firm to the ground I might hang/nullify the jury, were I on it. When this kinda thing happens in China the workers riot and occupy the factory.
“When the law becones a ruse lawlessness becomes legimitate.” – unknown.
BTW David Stockman wrote on this very subject years ago in “The Great Deformation.”
Thanks for the great comment Rock Steady.