Category Archives: Private equity

Steve Rattner, Card Carrying Member of Top 1%, Tells Us We Should Lie Back and Enjoy Much Lower Wages Resulting From Globalization

A corollary to Upton Sinclair’s famous saying, “It is difficult to get a man to understand something if his salary depends on his not understanding it” is “People promote ideas that help them secure or preserve a privileged position on the totem pole.”

A glaring example of these observations came in an op ed in the Sunday New York Times by Steve Rattner, former Lazard mergers & acquisition partner, later head of the private equity firm, Quadrangle Partners. He is best known as the chief negotiator in the auto bailouts (and he was criticized for not involving any auto industry experts). He paid $10 million to settle a kickbacks investigation and agreed not to work for a public pension fund in any role for five years. I happened to see Rattner on a panel at a Financial Times conference earlier this week and he elaborated on some of the themes in this piece, “Let’s Admit It: Globalization Has Losers,” which reader Brett asked me to debunk line by line. I’ll spare you and focus just on the most critical and bald-facedly dishonest bits.

The Decline of Manufacturing in America: A Case Study

One frequent and frustrating line that often crops up in the comments section of this blog is that American labor has no hope, it should just accept Chinese wages, since price is all that matters. That line of thinking is wrongheaded on multiple levels. It assumes direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost (and increased coordination costs of much more expensive managers are a significant offset to any cost savings achieved by using cheaper factory workers in faraway locations). It also assumes cost is the only way to compete, when that is naive on an input as well as a product level. How do these “labor cost is destiny” advocates explain the continued success of export powerhouse Germany? Finally, the offshoring,/outsourcing vogue ignores the riskiness and lower flexibility of extended supply chains.

This argument is sorely misguided because it serves to exculpate diseased, greedy, and incompetent American managers and executives. In the overwhelming majority of places where I lived in my childhood, a manufacturing plant was the biggest employer in the community. And when I went to business school, manufacturing was still seen as important. Indeed, the rise of Germany and Japan was then seen as a due to sclerotic American management not being able to keep up with their innovations in product design and factory management.

But if you were to ask most people, they’d now blame the fall of American manufacturing on our workers, which serves to shift focus from the top of the food chain at a time when they’ve managed to greatly widen the gap between their pay and that of the folks reporting to them.

Let me give you an all too typical example of how American management has contributed to the demise of our industrial competitiveness, namely, the former Mead Corporation paper mill in Escanaba, Michigan, which is now part of NewPage, owned by Cerberus.

Summer Rerun – The Empire Continues to Strike Back: Team Obama Propaganda Campaign Reaches Fever Pitch

Readers new to this site may be unfamiliar with our summer reruns, in which we reprise vintage NC posts that we think have stood the test of time pretty well.

We’ve done these more or less in chronological order (our last one was our post on the unveiling of the TARP), but we decided to skip ahead to one in 2010 because it focuses on a crucial bit of history that is too often overlooked, and were were reminded of it by a very good Frank Rich piece in New York Magazine on Obama’s failure to bring bankers to account.

Even Rich’s solid piece treats Obama more kindly that he should be. He depicts the President as too easily won over by “the best and the brightest) in the guise of folks like Robert Rubin and his protege Timothy Geithner.

We think this characterization is far too charitable. Obama had a window in time in which he could have acted, decisively, to rein the financial services in, and he and his aides chose to let it pass and throw their lot in with the banksters. That fatal decision has severely constrained their freedom of action, as we explain below.

Wisconsin’s Walker Joins Government Asset Giveaway Club (and is Rahm Soon to Follow?)

Mike Konczal (thanks to ed at ginandtacos) reported earlier today on the latest release of a movie coming to states and cities all over the US, namely the sale of state and local government assets to alleviate pressures on strained budgets.

For those new to this concept, the term of art is the anodyne “infrastructure sales” and the company that more or less invented this lucrative business is Macquarie Bank of Australia (known down under as “the millionaires factory”), although US firms clearly intend to exploit the once in a lifetime opportunity presented by widespread state and municipal budget distress and downgrades.

The problem, of course, is that these deals put important public resources paid for by taxes (or even worse, financed by bonds and thus potentially not even yet fully paid for) in the hands of private investors. They then earn their returns by charging user fees of various sorts. The public must rely on the new owners for reinvestment and maintenance, and depending on how the deal is negotiated, may have ceded control as far as fee increases are concerned. This is tantamount to selling the family china only to have to rent it back in order to eat dinner.

Questioning Goldman’s “Market Making” Defense

The notion underlying the Volcker rule is that too big to fail institutions have a government backstop and therefore their activities should be restricted to the types of intermediation that support the real economy. The taxpayer has no reason to fund “heads I win, tails you lose” wagers. Various firms, most notably “doing God’s work” Goldman, has tried to play up the social value of its role, whenever possible wrapping its conflict-of-interest ridden trading activities in the mantle of “market making”.

A big problem in taking about market making versus position trading is that, Goldman piety to the contrary, the two are closely linked. Even though all the major dealer banks created proprietary trading operations to allow top traders to speculate with the house’s capital, plenty of positioning also takes place on dealing desks. While dealers are obligated to make a price to customer (well, in theory, it’s amazing how many quit taking calls in turbulent markets), they are shading their prices in light of how they feel about holding more or less exposure at that time. And the dealing desks, just like the prop traders, are seeking to maximize the value of their inventories over time.

A Goldman discussion of risk management presented yesterday (hat tip reader Michael T) gives reason to question that much has changed on Wall Street regarding the role of position taking, now taxpayer supported, in firm profits.

Mirabile Dictu: The Treasury Flexes Some Muscle on the Volcker Rule?

As readers know, this blog has LOOONG been a critic of the Treasury Department’s stance towards big dealer banks, both in the Paulson era and from the very get-go of Geithner’s tenure. So on those all-too-rare occasions when Treasury seems willing to meddle in a real way with the “heads we win, tails you lose” arrangement the financial services industry has managed to devise with broader society, it’s important to applaud those efforts.

Admittedly, it is premature to declare victory, but the fact that Treasury is even taking a serious stance on the so-called Volcker rule is a surprise.

Ireland About to Give Another Sop to the Banks, a Bad Assets Fire Sale?

Reader Swedish Lex, who was involved in the famed and generally well regarded Swedish banking industry cleanup of the early 1990s, read an innocuous-sounding Financial Times story the same way I did. Not only are the banks who lent recklessly to Ireland’s overheated property sector being shielded from most of the consequences of their stupidity […]

Mirabile Dictu: SEC Finally Going After Business of Selling Inside Information

Yours truly has complained off and on over the years about “consulting” and “research” firms whose entire business model revolves around the procurement and sale of inside information. These companies solicit consultants, who in the vast majority of cases are employees of major corporations, to provide insight into what is going on at their employer’s […]

G20 Proposes Fig Leaf Regulatory Regime for Biggest Banks

The latest idea out of the G20, that of creating an international regulatory structure for the biggest international banks, sounds like progress but I doubt it will prove to be. Some regulators took note of the dangers posed by globe-spanning financial behemoths prior to the crisis. The Bank of England, in its April 2007 Financial […]

Hands, burnt fingers, and American mortgages

Terry Guy Hands has lost his lawsuit against Citigroup, wherein he accused Citigroup of defrauding his private equity group, Terra Firma Capital Partners, by lying about the number of competing bidders during the auction of the record company EMI, for which Terra Firma paid $6.8 Billion. This was one of those top-of the market deals […]

Ohio Attorney General Guts Bank “Just Submit New Affidavits” Plan

We have pointed out several times that banks were being awfully optimistic in assuming that they could simply replace improper “robo signed” affidavits with ones that were done correctly. The submission of a phony affidavit is a fraud on the court. The lawyers involved are subject to sanctions and judges could reject the filing, forcing […]

EU Effectively Forces Securitization Reforms on the US

Wow, the EU is increasingly taking steps to force foreign, meaning US and UK firms, to play by its rules or not have access to its investors. The first salvo occurred over private equity funds and hedge funds, where the EU will limit its investors to funds located in the EU, and is also limiting […]

NYT Story on Wall Street’s Fallout with Obama Misses the Dead Bodies

Andrew Ross Sorkin has a rather curious piece up today at the New York Times in that it purports to explain why the banking industry is up in arms about Obama, yet buries and/or omits some key issues. It’s pretty well known that big financial firms have been throwing their weight around, no doubt encouraged […]