Thanks, that’s great information. It pretty much explains that the primary loophole Romney and co. found was cheap, easily available credit. I have some questions though.
How does Bain escape liability in the bankruptcy? Is it like the stuff I hear on the radio where once you declare a business those funds are separate from your personal funds? Was Bain safe because the companies they bought were still declared as separate companies from Bain itself?
Why was credit so readily available even though this appeared to be a pattern for Bain that creditors should have recognized? Or is there some sort of you-scratch-my-back deal going on here?
Have any of the recent financial regulations done anything to prevent this from happening again in the future if the PE firms can get the credit?
Do we have any knowledge of who absorbed the losses from the bankruptcies? Did any of these lenders eventually go under or get bailed out by the government through FDIC or TARP?
Yes, when you use corporation formations, the only thing that a creditor to a corporation can grab are assets inside that corporate formation.
When the assets being protected from a BK filing are your personal assets from creditors to a corporate entity which you wholly own, your accounting and business practices had better be very, very clean. You should run the company as tho your personal assets don’t exist, and that you’re just another employee or customer.
Example: If you take something from the company (eg, you produce widgets and you need two widgets for your own private use), you’d better pay for them and pay market rates for them - ie, just what any other customer would have paid. And your purchase and payment better go through your inventory tracking just as tho it were another sale - and if there is sales tax, you’d better pay that too.
Likewise, the pay the corporation pays you should be in line with what such positions pay for a manager or director or whatever. If you’re using clever accounting to take profits out of the company without paying withholding taxation, you’re opening yourself to lawyers “piercing the corporate veil” if you have a liability judgement or BK creditor come after the company.
Bain and every other PE firm, makes sure that the targets of their purchases are all corporations in their own right. They might not be public companies (ie, available to invest in by the general public), but they are corporations.
Nothing I know of in recent financial legislation will do anything to PE firms other than possibly change accounting issues.