[Terez]

I don't feel any need to separate; just didn't want to rain on anyone's inn-esque parade. I'm tired though, so I'll have to respond later.

[worry]

I have no doubt Bain will come up again in the context of this thread anyway, I think it's a good addition even if a lot of it went over my head. It's just inextricable from the election IMO.

[Vengeance]

Sorry couldn't resist...

This post has been edited by Vengeance: 31 August 2012 - 06:57 PM

[Terez]

cerveza_fiesta, on 31 August 2012 - 11:52 AM, said:

Terez, on 31 August 2012 - 07:26 AM, said:

It would be interesting, I think, if there was some kind of law preventing 50% control of a company from ending up in the hands of anyone but the non-management and lowest levels of management combined. Does that make me a socialist?

[deleted the bit about bonusing at waffle house]

RE your first question, that model has definitely been shown to work on a small scale. There are many examples of companies where the employees banded together and outright bought the company from the original shareholders. Often it happens when, say, a 100% stake owner of a family run business retires. Employees don't want to see corporate interests come in and ruin their good time, so they purchase and divide up the company shares between them and continue to run the company themselves. At this point the system becomes vulnerable to the typical vulnerabilities of a democracy (eg. outside money) but it has been known to work.

I considered that the typical democratic vulnerabilities would be in play, but I think that we have so little practice at this type of business governing that it's amazing it ever works.

cerveza_fiesta, on 31 August 2012 - 11:52 AM, said:

RE bonusing: As a corporation manager (a very small one) I'm just wading into the mire of bonusing. It's an effective tool when the corp is small to keep good employees around and to make sure that your competent managers don't flake out on you, but even with just a few employees it's extremely difficult to come up with something fair and sustainable. I can see how a corp the size of WH would have a terrible time sorting out a system that was even remotely fair.

I think what they have worked out now is pretty fair for the management because the base salary raised a bit to make up for the loss of other bonuses, and the one bonus they do get is the least easy to abuse. But the ability to abuse it is again in the margin of error, which is unfair not to management but to hourly employees whose wages are stagnant and sometimes even regressing to support that margin of error.

cerveza_fiesta, on 31 August 2012 - 11:52 AM, said:

As for employee stock options, it's still regarded as a pretty "progressive" thing for a corporation to do. Normally they set aside a small pool from among the total corp shares for employees and continue to offer them to new employees until the pool is used up. I know in small corps it's a second effective tool for dedicated employees to gain more stake in the company and feel like they're part of the team...which has positive effects on productivity and all that good stuff. I mean, for my company, we've decided to allow early employees to own up to 1/4 of the total shares, which is a lot, but when you think about the career risk we're asking them to take I think it's a pretty just reward.

I've wondered about the effect of employee share ownership in larger corps where you're buying into such a miniscule piece of such a massive pie that the idea of "ownership" is kind of lost. I guess it's just an easy way to get preferred price on private stock, but when there are so many outside factors deciding how that stock does, there's no way it has the productivity benefits that the same share ownership would have in a small company.

At WH most of the grunts tend to see the stock either as a retirement plan or an emergency savings account. And it's a pretty good retirement plan if you can afford to stay in at 10%, but the stagnant and regressive wages make that impossible for most people, so it ends up being more commonly used as emergency savings with modest interest earnings. This is the easiest way the low-income WH employees to save money because it's withheld from the paycheck like taxes and is therefore never in hand. When you live paycheck to paycheck, it takes a supreme amount of willpower to take your earnings and put a bit away in a savings account, and it's even more difficult to resist dipping into that savings. I hear that recently they've raised the bar for stock buy-in to three years of employment, which seems fairly draconian for WH.

cerveza_fiesta, on 31 August 2012 - 11:52 AM, said:

Terez, on 31 August 2012 - 07:26 AM, said:

cerveza_fiesta, on 30 August 2012 - 07:06 PM, said:

In the case of a friendly takeover, the PE firm just makes an offer which management approves, giving the PE firm controlling stake either through issuance of new shares with aggregate stake of more than 50% or sale of existing shares. At this point the PE can do whatever they want with regards to borrowing, collecting fees, or anything else needed to recoup their investment. After the deal, dissenters are simply replaced. In the case of hostile takeover, management and the board refuse to sell and the PE firm essentially convinces the shareholders to replace the board with a team that will approve the deal. This is accomplished usually with a bit of a PR campaign and by making a very generous offer on shares in the company. Hostile or friendly, the PE firm gets controlling stake and gets to do what they want with the company, its debts and and its assets. The rest flows from there. The only instance where it can't work is where you have a board member that is also a 51% shareholder and refuses to sell. The PE firm, knowing this, wouldn't bother making an offer.

This sort of reminds me of selling credit default swaps without actually having to have the capital to back them up. But really, it's worse. At least with a credit default swap you're actually legally obligated to pay for defaults if they occur; with this you get to take out a loan, pocket half the money, and stick the entire bill with a struggling business. It's insane; like I said, little in the article was actually new to me, but I think before I was convinced that I just didn't understand it properly and it couldn't possibly be as bad as it seemed. Now I'm going to have to search for WSJ-type articles defending private equity and see if anyone has any sensical arguments because when it's that insane I start worrying that maybe I'm in an echo chamber or something. I think that the distinction that maybe Taibbi could have harped on more is the distinction between 'the business' and 'the management', because one suffers the consequences and the other does not, really.

Your assessment is exactly correct in my view. The only difference between the PE firm and the company is their borrowing power. The PE firm has access to 50 million while the company can only access 30 million. Either way the company gets saddled with it...it's what comes after that's important. How much do they charge the company in fees? How much do those fees subtract from the bottom line? How many people do you have to fire to service the debt over the payback term?

I was discussing this with a friend on Facebook, and it occurred to me that PE vulture capitalism in the US (and presumably also in Canada, etc.) is really similar to what we see happening globally between huge corporations and entire nations. The corporations come in to a weak or struggling nation with the assistance of the WTO/IMF/World Bank, enforce 'free market' or 'austerity' conditions favorable to the corporations, make huge deals with unaccountable politicians (or replace unwilling politicians with friendlier ones), rape the country's natural resources for profit, and stick the country itself with the massive debt for building infrastructure etc. It's basically the same thing, isn't it?

PS—And it's also partially the cause of the US debt, the massive move toward privatization and sweetheart deals for certain contractors, running up trillions of debt to pay for those contractors' own bonuses etc. The only difference is that sometimes they prey on private sector companies and sometimes they prey on public assets.

cerveza_fiesta, on 31 August 2012 - 11:52 AM, said:

Terez, on 31 August 2012 - 07:26 AM, said:

So (and maybe I missed this somewhere) where does Bain fall on the ethics continuum? Taibbi pointed out that they didn't really have impressive returns...does that mean that they were more ethical or less? It seems like being less ethical would make them more money. I think I need to reread the article; I'm forgetting a lot of what he said.

Maybe ethical was the wrong word to choose. It's more about whose interest they're acting in, and from whose perspective the ethics are evaluated.

It's not necessarily a bad thing that PE would become involved and ideally the PE firm would always act in the best interest of the company after taking it over so that they can grow and make a bunch of cash over time. This also serves the the best interest of the greater economy, grunt workers, and everybody else involved. I stayed away from characterizing Bain as one or the other because they sit on both ends of that ethics spectrum. In a basic sense they have both helped to grow companies (something libs are unwilling to admit) and have acted to destroy companies (something conservatives are happy to gloss over).

If you think about business ethics spectrum from the perspective of a PE firm manager the shades of grey shift a lot. The manager of the PE firm is ethically bound to maximize profits for his own shareholders by whatever means at his disposal. Often the best way to do that is to shut down a company using the aforementioned distasteful tactics and basically operating under the "money now" > "money later" concept. It is a low risk way for the manager to fulfill his duty to the PE firm's shareholders, and he can rest easy in the knowledge that he has done nothing wrong. If the same manager judges that there are greater profits to be made in allowing the company to continue operations - enough to justify the risk - then he has again acted in a such a way that his ethical obligation is fulfilled. The only way for the manager to violate his ethics is to *not* act to maximize profits when the opportunity presents itself.

Well in that case, the ethical burden falls on the shareholder in a way. Which is part of a much huger problem that I'd rather not delve into, i.e. how to get the general population to take responsibility for its own actions, what laws can influence, what they can't, etc.

cerveza_fiesta, on 31 August 2012 - 11:52 AM, said:

And that, I realize, is the critical difference between the Mitt Romneys and the Joe Bluecollars of the world. In Romney's view, he doesn't *need* to care whether a taken-over company succeeds or fails. He has done the ethical thing no matter what! In Joe Bluecollar's view, Romney and Bain are a giant company-devouring monster that exists to make itself richer at the expense of all else. It's inconceivable to Joe B. that Romney could show such careless disregard for the livelihood of so many hundreds of people...but its all a matter of perspective in the end....

Now when it comes to which slant of media is discussing the issue, it's very easy for leftmedia to speak from Joe's perspective and demonize Romney and Bain. It's an argument that every worker in America can relate to. It's much harder for rightmedia to argue the opposite perspective because the majority of media consumers are not sophisticated investment firm executives. It almost makes me think the republican party might actually be as naive as they seem in their discussion of the issue, since the party leadership (and funding block) is made up of exactly those types of executives. With the collective republican back-patting over Romney's record at Bain, the man always seems outright baffled why any in the media (or on the left) would use that same record against him. It might not actually be a front...maybe he really doesn't get why people think it's a bad thing to gut the country's manufacturing sector for personal gain. Maybe he's so insulated from the opposite ethical perspective that he actually thinks he's doing the right thing all the time!

I dunno. The whole thing makes my head spin sometimes.

That is, to me, one of the key points of the great economic divide, and this is something that came up on MSNBC in the convention coverage: the word 'success' is often conflated with monetary success because money is the only standardized method of keeping score. What makes a high school teacher less successful than someone like Mitt Romney? Only the sports mentality, dollars=points, that drives Western economic policy in general. And growth dependence.

This post has been edited by Terez: 01 September 2012 - 07:07 AM

[Terez]

worrywort, on 31 August 2012 - 06:52 PM, said:

I have no doubt Bain will come up again in the context of this thread anyway, I think it's a good addition even if a lot of it went over my head. It's just inextricable from the election IMO.

That surprises me because you are one of the more intelligent folk around here. And it bothers me, not because things don't also go over my head frequently, but because it's part of the larger narrative that convinces American voters that this stuff is too complex for us to understand. It's not. If you haven't read it already, I highly recommend Taibbi's latest book Griftopia; it wasn't my first finance book by far but in retrospect I wish it had been. He has a way of putting this stuff in terms that the average person can understand, partly because he really is an average intelligent person, like me or like you, and he took it upon himself after the crash in 2008 to start paying attention because he realized that we could no longer make the excuse of not understanding finance; there is too much at stake.

[worry]

Hey, I never claimed nor exhibited intelligence in any way, shape, or form! Quit assigning me homework!

Meanwhile, someone counted up all the outright lies documented in Mitt's Mendacity, and it totals (at least) 533 in 30 weeks:
http://www.patheos.c...documents-them/

[Terez]

worrywort, on 01 September 2012 - 10:48 PM, said:

Hey, I never claimed nor exhibited intelligence in any way, shape, or form! Quit assigning me homework!

It's not homework; it's just a damn good book.

Another Bain article:

http://www.rollingst...romney-20120829

[Gnaw]

worrywort, on 01 September 2012 - 10:48 PM, said:

Hey, I never claimed nor exhibited intelligence in any way, shape, or form! Quit assigning me homework!

Bah. I read a LOT more on this site than I ever comment on. Whether you consider it 'intelligent' or not, your comments on a wide variety of subjects are thoughtful and often approach the subject from a vector that I, at least, find intriguing and insightful. The thread on the Pussy Riot verdict is an excellent example.


Terez: i'm currently reading John Bogle's "The Clash of the Cultures: Investment vs. Speculation". He's making much sense and I am probably going to end up retreading several finance/economics books with a new view.

[Terez]

Ooh, I've been looking for good books on speculation. I will have to add that to the wishlist.

[Gnaw]

Terez, on 02 September 2012 - 05:57 PM, said:

Ooh, I've been looking for good books on speculation. I will have to add that to the wishlist.

And I'm going to get the Tabbi book.
One I've read that appears to be a good companion to Taibbi's is The Big Short: Inside the Doomsday Machine by Michael Lewis.
Lewis focuses on the (very) few who saw what was coming and made 10s and 100s of millions by betting huge that it was all going to come apart.
Edit to add: Bogle is a strict value investor. The "speculation" in the title refers to his belief that virtually all fund managers are speculators rather than investors these days.

This post has been edited by Gnaw: 02 September 2012 - 06:12 PM

[Terez]

I'm hoping that one will arrive Tuesday (tomorrow being Labor Day). It was delayed by Isaac.

[Terez]

re: your edit, I'm interested in the distinction, but I'm also very interested in how speculation affects prices and market volatility.

[Gnaw]

Terez, on 02 September 2012 - 06:18 PM, said:

re: your edit, I'm interested in the distinction, but I'm also very interested in how speculation affects prices and market volatility.

Bogle answers that in fully depressing detail. For example, one fund with $2 billion in assets that executed $100 billion in trades in a single year. The managers made fees off every trade but the fund itself only showed a 3% yield for the year. Before the 1.25% annual 'management fee'.
And just to tie that to the actual thread topic, one of Bogle's points is that, with a single exception, all fund management companies have zero interest in any sort of regulation that would hold money managers to any fiduciary duty to the actual investors in their funds. Not that either Obama or Romney have ever discussed such regulation.

[Terez]

Well, hasn't Obama at least tried to enforce position limits?

[Vengeance]

Terez, on 03 September 2012 - 03:49 AM, said:

Well, hasn't Obama at least tried to enforce position limits?

Huh???

[Terez]

Enforce was the wrong word. I meant that there was some effort to put position limits into law to keep certain powerful speculators from cornering any given market; I forget where I read that but it was recently, and it was one of those 'tried and failed' things IIRC.

[Vengeance]

Terez, on 05 September 2012 - 12:40 AM, said:

Enforce was the wrong word. I meant that there was some effort to put position limits into law to keep certain powerful speculators from cornering any given market; I forget where I read that but it was recently, and it was one of those 'tried and failed' things IIRC.

Terez,

I would really like to know where you got the idea that certain "powerful speculators" where ever trying to corner a given market. Having worked on trading floors for 15 years I have never seen anyone even come close to cornering a market. I have worked for companies that controlled 6% of all of the SP500 options who was 60% of the open outcry liquidity in the SP500 and we were a far cry from being able to corner a market. Cornering a market means that a person controls so much inventory that they are able dictate which direction the market is going to go and that no one else is able to force you to do anything. The last time that someone tried to corner a market was in the late 1970's. Bunker Huntmade a attempt to corner the silver market.

Owning a position in any type of market requires a lot of capital in today's markets. Even using massive amounts of leverage it would be next to impossible achieve. After all in order to corner a market there has to be another side and that other side is going to want the market to move in the opposite direction as you.

[Terez]

I'm sure I misunderstood it greatly, and it will make more sense when I find it. I just read something yesterday about a Japanese fund trying to corner the copper market not so long ago, but I've already forgotten where I read it. Taibbi has written about the various opaquities of the oil market, and how for example certain SWFs might have partnerships to deliberately drive up oil prices (without hoarding a drop), but I still don't understand how that works exactly.

[Vengeance]

Terez, on 05 September 2012 - 01:36 AM, said:

I'm sure I misunderstood it greatly, and it will make more sense when I find it. I just read something yesterday about a Japanese fund trying to corner the copper market not so long ago, but I've already forgotten where I read it. Taibbi has written about the various opaquities of the oil market, and how for example certain SWFs might have partnerships to deliberately drive up oil prices (without hoarding a drop), but I still don't understand how that works exactly.

The oil market is something else entirely it is controlled by a self acclaimed cartel which meets every so often to determine the amount of out put that is needed to keep the price of gas at the level that they want.


A big problem with someone trying to corner the market in commodities is that with the globalization of todays markets there is a ton of people who have access to more. So what if someone purchases 5 million tons of copper. There are mines in auzzie that have more and if the price goes up then they will turn more out to take advantage diluting what the value of the person holding 5 million tons. When information took days to get from one point to another then cornering was a possibility. Now I just don't see it. China controls the current majority of rare earth mining right now. However with the Chinese governments decision to cut back on what is allowed on the open market other locations are investing more in reaching there reserves of rare earth ores. There are mining companies that own hundreds of mines but aren't operating them because the price of the ore isn't high enough to warrant the expense of removing them. As soon as the price goes up enough then those mines go active. SSRI (Silver Standard Resources Inc) comes to mind.

Anyway I think that we have gone way off topic.

[worry]

Deval Patrick was indeed awesome, but then Martin O'Malley was kinda wack, at least in comparison. He just talks funny and it was not very moving. Mrs. Obama is gonna be strong though.

This post has been edited by worrywort: 05 September 2012 - 02:09 AM