2012-05-22 | Filed Under
SteveG's Posts |
I tried explaining this in my previous post
Marissa DeFranco Misses The Mark. I’d like to try to make it even clearer in this post.
Suppose there is a company with $400 million in liabilities and $300
Million in assets. What do you see in such a company? You might say, a
company that will surely go bankrupt if it doesn’t have a huge
offsetting income stream. You certainly wouldn’t invest in such a
company if you had a normal (or is that moral) view as to what
capitalism and business is all about.
Vulture capitalists see something that you do not see. Vulture
capitalists have learned to focus on one thing only, $300 Million in
assets.
Without the vulture capitalists, if the company went bankrupt, the
assets would cover 70 ¢ on the dollar of their liabilities to their
creditors. When a vulture capitalist buys such a company, the idea is
to turn that $300 Million in assets into cash that can be paid out to
the vulture capitalists. Then they let the company follow the path that
it already was on toward bankruptcy. The only difference is that the
vulture capitalist comes away with $300 Million and the creditors come
away with zip, zero, nada.
What do you suppose happens to some of the creditors who considered a
large part of their assets to be the debts that they expected to be
repaid by the company to which they sold their goods and services? Some
of them go bankrupt, too. The vulture capitalist who stripped the
assets of the first company now has inside information, because of the
temporary ownership or management of that company, as to which creditors
of that company to look for as the next victim.
There is nothing magic about a company having a negative net worth
(liabilities greater than assets). The only advantage to such
situations for the vulture capitalist may be that the rest of the world
shuns the company’s stock and it will be cheap to take it over. In
reality, even companies with positive net worth may be more valuable to a
vulture capitalist to strip out the assets than it is to run the
company as an ongoing business.
Clearly, the possibility of a vulture capitalist coming in to strip
the assets of a company is such a frightening possibility, that even
many well run companies hesitate to build up a large surplus of assets.
So even a company that wants to have a well funded pension plan for its
employees, does not dare to do so. Such an asset would be a very
inviting target to the vultures. If a recession or a depression hits,
these well run companies are not in as good a position to weather the
storm as they might have been had they not had to alter their plans to
ward off the vultures in good times.
We have allowed the laws and regulations of this country to fall into
such a state of disrepair and lack of enforcement that the very good
parts of capitalism have been turned up-side-down. The normal
incentives to make a company turn a profit and grow and thus provide
benefits to the economy as a whole as a natural part of its existence,
have been turned into incentives to strip out the assets and leave the
economy without jobs and without productive capacity. Many of the other
countries in the world have followed our silly example in a race to the
bottom of the heap. The fact that multi-national companies have become
more powerful than most nations may play a role in this nearly
universal behavior.
Sharon says to me that you cannot expect politicians who are not
business people themselves or who have not studied business to explain
these intricacies to the voters. I remind her, that I am not a business
person either, but here I am writing this explanation. Why is it that I
can see this so clearly, and yet, in all the years since I have come to
understand this (30 or more), there has been no politician who can get
up on his or her hind legs and tell people what is going on in words
that they can understand?
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