Vulture Capitalism

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romneyeconomics.com covers capitalism american style. The basics are leveraged buyouts as shown by gordon gekko. Buy controlling interest in the company, using the company as collateral borrow, then borrow some more. Pay dividends to the buying partners from the borrowed funds. Set the terms for the loans just like the subprime, very low interest with a balloon due after the buyout partners have exited. The balloon has to be paid by the company, they can't pay without paycuts and healthcare surrender from the employees. They file for bankruptcy, the pensions are now the responsibility of the PBGC [taxpayers]. The community is destroyed, the lives of the employees are destroyed, but it's the american dream.

In the link, click the arrows for the slide show of the romney model.

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douglaslee
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Jul. 31, 2007 4:01 pm

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Read the book "The Buyout of America" by Josh Kosman. It lays out how the old junk bond manahers changed their name to LBO(leverage buyout) and screw companies and employees for their own personal gain. Its shows the difference from venture capitalists who are actually trying to grow a company-not feed off its remains.

lovecraft
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May. 8, 2012 12:06 pm

LBO's morphed into private equity, and bain is just one example. The promise of higher returns gets pension funds to invest their savings, but there is not that much evidence of higher returns. The Nowegian sovereign wealth fund has some high standards for the sector of international equities it invests in, and vuture capitalists, along with predatory capitalists [ie walmart] are off limits. The sad thing about bain is that teacher's pensions assisted in the destruction of the very communities that they taught in, and the property taxes that paid their salary. Bain is basically loan sharking on steroids, and romney will be the loan shark in chief.

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douglaslee
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Quote douglaslee:

romneyeconomics.com covers capitalism american style.

I didn't see anything there. It is a fluff propaganda site.

Quote douglaslee:The basics are leveraged buyouts as shown by gordon gekko. Buy controlling interest in the company, using the company as collateral borrow, then borrow some more. Pay dividends to the buying partners from the borrowed funds. Set the terms for the loans just like the subprime, very low interest with a balloon due after the buyout partners have exited. The balloon has to be paid by the company, they can't pay without paycuts and healthcare surrender from the employees. They file for bankruptcy, the pensions are now the responsibility of the PBGC [taxpayers]. The community is destroyed, the lives of the employees are destroyed, but it's the american dream.

[/quote]

It sounds like criminal behavior, but what bank would lend Vultures money if the money is not paid back? If this is all that Bain did, then the banks must be fools - which I highly doubt.

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Dr. Econ
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Jul. 31, 2007 4:01 pm

The company I work for has gone from one equity company to another. They hold us for about five years and then sell us. The banks are in here all the time, taking inventory and auditing so they can give the owners another loan. The place is falling apart, nothing gets fixed unless it falls completely apart and cannot be used then fixed as cheaply as possible. I'm learning alot about my workplace and things are starting to make sense thanks to this election. Now, if we could only put true Progressives in office.

pacecop
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Jul. 31, 2007 4:01 pm

Dr. Econ, I am surprised by your apparent naivete on this subject. You continue to presume that banks are sound financial institutions of lending wisdom rather than part of the problem. You think the loans have to have integrity when the practice has been to count them as assets and to borrow against them while taking fees for the transactions along the way. In other words, banks had plenty of incentives to do business with the Vultures and to serve them even if it was bad finance. They would be bailed out, but they would also make a ton of money first.

The difference between the vultures and the venture capitalists has been spelled out in several threads. But, if you believe that making money is increasing wealth, you don't think the difference matters. A lot of banks had people working for them who believe in "private equity" as if it were venture capital and who were quite willing to serve them. Many still do, as we see in the amazement on Wall St. that people call them banksters. True believers are worse than thieves who know they are stealing because they know no limits to their ideology.

drc2
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Apr. 26, 2012 12:15 pm

BTW, we also need to include an apology to the Carrion Eater Anti-Defamation League for calling this toxic practice, "Vulture." They clean up a real problem instead of sticking the rest of nature with it. Would that Bain could claim to do anything nearly as useful.

drc2
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Apr. 26, 2012 12:15 pm

The term Vulture was used as a play on Venture Capital. Otherwise, filthy leach capitalist or Vampire Capitalist would be more accurate.

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Phaedrus76
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Sep. 14, 2010 8:21 pm

private-equity update

btw, any earlier propaganda is just the record. Killing a company that is working and making a profit just because you can is the record. The owner of the Marlins after they won the world series claimed he was losing money. He was only earning 8% profit, and because through swindling he could ear 10%, the Marlins were a losing venture. After threatening to move, then the extortion gambit (same one w played with his team), he ended up selling.

Michael Gross, a founding partner of the private equity firm Apollo Management LP who is now at a hedge fund, recently asked a group of business students at Northwestern University this question: In three years’ time, what might the private equity and airline industries have in common? His answer: From day one, neither will have ever made a return for its investors.

It’s hard to imagine another industry that has suffered quite the unmasking that private equity has. Hedge funds underwent a calamity, but their basic business of buying and selling stock still works in a leaner world. The business of providing investment advice and making trades—the meat and potatoes of investment banking—will exist even if no independent investment bank does.

But private equity firms are another matter. Once, they purported to be in the business of buying troubled companies and turning them around. They contended that they could manage the companies better away from the public glare of shareholders. That pretense was dropped during the boom earlier this decade. When private equity shops took over companies like the Texas utility TXU Corp. or the casino operator Harrah’s Entertainment Inc., which was bought by Apollo, it was clear that these were thriving enterprises, not troubled at all. The private equity firms were simply engaged in “financial engineering,” a then-admiring euphemism for a simple conceit: loading up fine companies with massive amounts of debt in the hopes of flipping them to new owners at some point down the road.

When money was loose and leverage was king, private equity firms thrived. No more. In the wreckage of the bust, they have been revealed as hapless corporate stewards and gullible investors. The competition for the highest-profile debacle is stiff. Cerberus Capital Management hasn’t been able to manage Chrysler LLC or GMAC LLC. The private equity firm TPG leaped into buying a stake in Washington Mutual far too early and saw its investment wiped out. Stephen Schwarzman took his company public only to see its stock collapse. Apollo has faced one disaster after another. It lost money on Linens ’n Things when the retailer went bankrupt, and Harrah’s is struggling. Apollo’s Realogy Corp., a real estate brokerage that controls Century 21 and Coldwell Banker, is in the ICU. And Apollo has been knee-deep in litigation with chemical maker Huntsman Corp. and Carl Icahn.

Add to that the reality that private equity firms generally don’t make their money by choosing good investments. They make it on an amazing Technicolor array of fees: management fees, deal completion fees, consulting fees, performance fees, special events fees, fees of every kind and stripe. Chalk it up to yet another racket of the
bubble years.

So it would be natural to assume that private equity is in trouble. Yet, in one of the richer ironies of the Great Recession, private equity firms are poised to flourish. They’ve raised money for new funds and locked it in before investors have had a chance to fully realize how disappointing the returns will be on the last ones. Capital is king now, and many private equity firms have enough money for 10 years.

Read more: http://www.portfolio.com/views/columns/wall-street/2009/02/11/Analysis-of-Private-Equity-Business#ixzz1vdahvdJu

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douglaslee
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another snippet

Finding the SuckersFor years, the academic research has revealed private equity’s pretense: After fees, private equity firms as a whole don’t beat the market. University of Chicago scholar Steven Kaplan studied the industry’s returns and in a 2005 paper reported that over a period of about three decades, the average private equity firm’s annual return was no better than that of Standard & Poor’s 500-stock index. Since then, he has asserted that private equity returns often appear inflated because of some flaws in the way in which they are compared with the broader market. Kaplan points out, for example, that Blackstone Group LP’s annual 26 percent return from 2002 through 2006 looked heroic against the S&P 500’s 6 percent. But if you lop just a year off the comparison and use Blackstone’s performance from 2003 through 2006, the results look much less impressive because the S&P returned 20 percent annually during those years.

Read more: http://www.portfolio.com/views/columns/wall-street/2009/02/11/Analysis-of-Private-Equity-Business#ixzz1vdcA1zVF

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douglaslee
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Then for fluff

NPR Does Fluff Piece for Private EquityFriday, 13 January 2012 05:19

A Morning Edition segment today told listeners (sorry, no link yet) that "there's no doubt that private equity firms create value," which it then justified by referring to the high returns earned by those who invest in private equity (PE) companies. This is WRONG!!!!!!!!!!!!

First, it is not at all clear that those who invest in PE funds (not the PE partners themselves) do beat the stock market when a full accounting is done. Recent research shows that net of fees, private equity investors (pension funds and university endowments) would have been better off buying the S&P 500.

Furthermore, even if the PE investors did come out ahead, this does not mean it created value. Investors in Bernie Madoff's fund, who got out, made money too, but Bernie Madoff did not create value.

Much of what private equity does is financial engineering. For example, it is standard to load up the companies they purchase with debt. The resulting interest payments are tax deductible. This increases profitability but creates no value for the economy. It simply transfers money from taxpayers to the private equity company.

To take a simple example, suppose a public company (let's call it Gingrich Inc.), has $1 billion a year in profits. If Gingrich Inc. paid taxes at the full 35 percent rate (fat chance), it would have $650 million [thanks Robert] a year to either keep as retained earnings or to pay out as dividends to its shareholders.

Now suppose that a PE company (we'll call it Romney Capital) steps in. The current price to earnings ratio in the stock market is around 14, so Gingrich Inc. would have a pre-takeover market value of approximately $9.2 billion (14*$650 million). Romney Capital then arranges for Gingrich Inc. to borrow $6 billion which it pays out as a dividend to itself. This means that the Romney Capital has just gotten back almost two-thirds of its investment.

Suppose that Gingrich Inc. pays 5 percent interest on its debt (closer to the 5.20 Baa rate than the 3.80 Aaa rate). This means that before tax profit falls by $300 million. This leaves Gingrich Inc. with $700 million in before tax profit. Deducting the 35 percent tax, Gingrich Inc. now has $455 million a year to distribute to Romney Capital, 70 percent as much as before ($455 million/$700 million) even though Romney Capital has already recovered two-thirds of what it paid for Gingrich Inc.. In this case, the benefit to the Romney Capital came at the expense of taxpayers, not through the creation of value.

Now suppose that the Romney Capital arranges to sell off some of Gingrich Inc.'s assets, such as real estate or a highly profitable subsidiary, and then uses the proceeds to make a payment to the Romney Capital rather than leaving the money under the control of Gingrich Inc. Such sales may allow Romney Capital to recoup the rest of its investment and possibly more. Gingrich Inc. is then left as a highly indebted company with few assets.

In this story, Romney Capital may have earned a substantial profit on a limited investment (it recouped most of its money almost immediately when it loaded Gingrich Inc. with debt), without doing anything to improve the operation of Gingrich Inc. If Gingrich Inc. manages to stay in business and generate profits, then this will increase the return. Romney Capital may be able to resell the company and treat the whole sale price as profit.

On the other hand, if Gingrich Inc. goes bankrupt, this will primarily be a problem for creditors, since Romney Capital has already gotten its investment back. In effect, Romney Capital might have secured large gains entirely by financial engineering, while creating no value whatsoever.

The sort of asset stripping described here, which harms creditors by taking away potential collateral for their loans, violates the law. However it is extremely difficult to prevent, especially with private equity companies that have to make few public disclosures. If Gingrich Inc. were to fall into bankruptcy, this is the sort of thing that would likely be contested in the bankruptcy proceedings. Of course the resources used in fighting out this sort of legal battle are a pure waste from an economic perspective.

Anyhow, these are the sorts of issues that are raised with private equity. It is flat out untrue to say, as NPR does:

"Here's what private equity firms like Bain Capital do: First, they go out and find a few large investors — usually pension funds, university endowments and possibly wealthy individuals. Then, says Ohio State professor Steven Davidoff, they take that money, borrow a lot more, and buy companies — usually companies that are in trouble or undervalued.

'They buy them in hopes that they can increase the value of the companies and sell them at a fantastic profit,' Davidoff says."

Private equity companies absolutely do not have to increase the value of a company to make a profit. They can end up making a profit on their investment even if they take the company into bankruptcy and leave it much worse off than it was before the takeover.

Fluff is calling PE vital.

The criminal behaviour IS there

The sort of asset stripping described here, which harms creditors by taking away potential collateral for their loans, violates the law. However it is extremely difficult to prevent, especially with private equity companies that have to make few public disclosures
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douglaslee
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Jul. 31, 2007 4:01 pm

Good show on Tuesday the 22nd pointing out the difference between venture capital and private equity groups. However, angel investors are not the same as venture captalists. Angel investors come along after you've gone the friends and family route with a business concept and provides seed money at a nominal interest rate usually on the basis of something that stirs the passion of the angel investor. It could probably be compared to micro-capital financing by calling it mini-capital. The angels tend to be private individuals or funding groups, not institutions.

Venture capitalists come in after the initial seed stages when the proof of concept is there and company officers have been appointed. After a company succeeds enough to get the concept commercialized and is past the early incubator phase, they may seek out a venture capital firm who reviews many prospects at a rate of progress called "deal flow" in order to select maybe 2% of their prospects to offer financing to. They construct financing in the form of tiers or rounds that roll into one another as the company matures and generates cash or equity from its product or service. The biggest difference from angels is that the VC firms will demand a pretty large share of earnings and often a controlling interest like 51%. Many startups may balk at giving up this much control. The VCs used to be considered the sharks because of this control, but their work looks fairly benign compared to what we see with some of the PEG groups and Bain Capital in particular.

By the way I'm not a finance guy, just an industrial consultant who occasionally is around buyout or expansion situations, and I've listened to various panels of VC types. A few times my group has been invited in by PEG groups to propose operational improvement plans with which to dress up the financial statements and projections.

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krvince
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Jul. 31, 2007 4:01 pm

Would thecompanyhave gone under any way? These vultures much like their real life counterparts are getting food ( profit) from the death of something. They didn't kill it theyjust ate the corpse

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CollegeConservative
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May. 4, 2012 2:22 pm

CC, if you are willing for some continuing education as a lifelong learner, you would listen to the many stories of people working for historically profitable and value adding businesses which were sucked dry of asset value and loaded up with debt by these predators. I have stipulated elsewhere that vultures get a bad rap by the term, and that this is typiical conman fraud, not the noble act of stripping carrion and preparing the bones for internment.

The pr of equity firms pretends that they help strugglilng businesses and bring capital efficiency by eliminating waste. Not so. They are not missionaries or corporate health caregivers. When you hear the terms, "leveraged buyout" or "junk bonds," you know that this is not honest finance coming to the rescue of value adding businesses. Equity capital neither rescues struggling businesses nor does it give a decent burial to a failure. It takes advantage of its financial power to make money for itself without any conscience.

Even were we talking about the Misecordia of Hospice and Burial, we would expect to see care for the pensions of the loyal and honest workers and the creditors. It would be a charity, not a chance to grap gramma's retirement funds.

drc2
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Apr. 26, 2012 12:15 pm

Why is it that people are having such difficult time in distinguishing/separting venture capitalists VCs and LBO/Equity fund group/vulture capitalists.

VCs: may actively seek new startup biz or more likely approached by a startup looking for a funding they can't obtain from a bank. VC's review biz plan, may reject the proposal or if interested may do due dillegence and if they still like what they see, give a financial proposal to the startup. Financing may come from the VC's or combination of VC's and from their "friends". If the startup fails, VCs and partners/"friends" lose money. Success rate is pretty small <5% 5 years down road.

Equity fund: looks for undervalued and underperforming companies. Example is Sequoia group tried to buyout Talbot (womens apparel company). Then they would inject money, replace mgmt to turnaround the company. Sell the company once its back on its feet. Well that is noble idea.Sequoia failed on its bid back in December 2011 and again in May of 2012.

Sometimes, its different. There was a red wood supplier in Northern California. It's management practiced sustainable forestry and refused to cut the red wood to meet total demand. they owned huge tract of red wood forest but from a biz point of view, it was under utilized and profit not maximized. A group did a hostile take over using equity fund (borrowed) and disregarded sustainable forestry to cut down the red wood to meet the financial obligation. Maximizing profit on short term. They paid back their loans, paid themselves handsomely for increasing profit and sold the company...

Then there are those like Chainsaw Al (Al Dunlop) who went into Scotts paper, Sunbeam... I don't know who is worse, Neutron Jack, Chainsaw Al, Junkbond king M. Millkin (sp), Romney and Bain Capital to name a few.

a friend of mine is a VC, also have a former co-worker who is a well known Quant. They are very nice people. I don't know of any in equity fund group/LBOs

smilingcat
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Sep. 23, 2010 9:14 am
Quote drc2:

Dr. Econ, I am surprised by your apparent naivete on this subject. You continue to presume that banks are sound financial institutions of lending wisdom rather than part of the problem. You think the loans have to have integrity when the practice has been to count them as assets and to borrow against them while taking fees for the transactions along the way. In other words, banks had plenty of incentives to do business with the Vultures and to serve them even if it was bad finance. They would be bailed out, but they would also make a ton of money first.

You are saying a bank would knowingly make a bad loan - knowing it was probably not going to be repaid?

I am surprised by your naivete. Do you have any evidence of this?

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Dr. Econ
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Jul. 31, 2007 4:01 pm

The new bond holders don't have to be banks. Corporate bonds are floated on the open market. Trump still gets gullible buyers even after 3 or 4 bankruptcies reducing the yield from the sucker bonds promised rate of 9% down to 3%. The vultures also screw the bond holders and the stockholders through misrepresented financials before they sell and skate. Tracking the civil cases brought against bain and similar ilk finds fraud, but when settled out of court after 10 years of litigation, you have no caim of guilt, and 10 years of interest free cash to screw the new marks.

One other thing, most of the bankruptcy judges favor the looters, not the vendors or the employees. These judges are of the federalist ilk, or Powell Memo creed. Bankruptcy can take 3 or 4 years, add that to the civil litigation of 10 years, and you get 13 years of good luck for the evil ones.

Those bonds can be securitized the same way subprime loans were, too.

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douglaslee
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Jul. 31, 2007 4:01 pm

Obama took 7500freon Bain employees shouldn't he give back that tainted money.

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CollegeConservative
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May. 4, 2012 2:22 pm

minor correction to my post. Talbot was in talks with Sycamore group not Seqouia Capital.

smilingcat
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Sep. 23, 2010 9:14 am

I'm surprised at your naivete. If a bank is going to securitize a loan and sell it off to some sucker-they just collect their fees and commissions and make a bad loan. Want evidence-how about 2000-2008? It helps when the rating agencies collect their fees and declare that crap doesn't stink. And what price have Moody's and S&P paid for their rating fraud?

lovecraft
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May. 8, 2012 12:06 pm

I believe this is sometimes done, but it can't be done all the time because no one would loan Bain if they thought they were never going to repay the loan.

The article you mention does not mention this.

Dr. Econ's picture
Dr. Econ
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Jul. 31, 2007 4:01 pm
Quote Dr. Econ:

I didn't see anything there. It is a fluff propaganda site.

I will admit that it is propaganda, but it is not fluff. It does contain hard data with attributions. It is a useful site if one wants to see the bad things that Bain did. If one wants a balanced account, you will need to dig a little further.

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olenzekm
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Oct. 26, 2010 11:01 am

douglaslee has it exactly right. Bain's MO is first of all, to convince the top management of the target company that they are going to make a potful of money. It's a pretty easy sale. Then the debt transfer begins. As dl points out, the loan doesn't have to come from a bank. Bain has plenty of rich friends.

The money from the Bain principles is easily recovered as the target company is loaded with debt as Romney and his cronies who are now principles in the company, pay themselves management and/or consultant fees equalling their original investment.

http://www.newyorker.com/talk/financial/2012/01/30/120130ta_talk_surowiecki

This link simply explains the mechanics of how it's done. Would a reasonable person assume this practice to be illegal? I think so.

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Combad57
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May. 29, 2012 12:50 pm
Quote olenzekm:
Quote Dr. Econ:

I didn't see anything there. It is a fluff propaganda site.

I will admit that it is propaganda, but it is not fluff. It does contain hard data with attributions. It is a useful site if one wants to see the bad things that Bain did. If one wants a balanced account, you will need to dig a little further.

It would be a lot easier to read if they just wrote it like an article. I didn't even see it was set up with scrolling menus. So, they listed 4 companies. Out of how many? Hundreds? It seems to me that is how a vulture capitalist could function - they build up a reputation, and then have mistakes every so often.

The problem with vulture capital is not debt. It's that they simply do things more aggressively than all companies - fire off the employess and move things overseas. They do this because they violated the historical sense of trust between the stock market, labor and capital.

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Dr. Econ
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Jul. 31, 2007 4:01 pm

Check out the graphic novel, "UPGRADE" on Amazon for free download. Set in the future, it gives a chilling vision of a corporate controlled world, where every aspect of life is moderated by industry, capitalism gone wild. It goes to a creepy extreme where new products are forced on the public through manditory "upgrades". It's satire, both funny and freaky, but so much of it rings true.

The world could really end up this way if industry is left unchecked.

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practical
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Jun. 22, 2012 5:47 am

This is what is wrong with Romney:

http://www.washingtonpost.com/business/economy/romneys-bain-capital-inve...

Not vulture capital. Just plain simply outsourcing.

Dr. Econ's picture
Dr. Econ
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Jul. 31, 2007 4:01 pm

Either way, LBO's and paying yourself handsomly and have the company holding the empty bag is not a good thing.

Outsourcing within a country might be arguable. In case of outsourcing within US, one could say that the subcontractor (the person outsourced to) may have better experience than yourself or you just have too much work and need to off load.

Outsourced to foregin country might be arguable if you can truly prove that we do not have the means of producing the item. This may come to pass if China decides to shutoff the exportation of rare earth metals. Some of the metals are now selling over $2,000/kilo. Rare earth metals needed for iPhone, iPad, flat screen TV, (any electronic for that matter) and EV to name a few product that would be affected. Allowed exportation of rare earth metal from China has gone from around 30,000 tonne to about 18,000 tonne in last few years. And its continually going down. Precious metal not withstanding.

Outsourcing, going off shore to reduce cost well, we can talk for days and weeks.

What Mitten is doing is bad on both counts. LBO's for personal gain without really helping the company out or its employees. Outsourcing to reduce employment in this country and to drive down the wages here in US. Nothing good about it no matter how you slice and dice.

smilingcat
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Sep. 23, 2010 9:14 am

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