What’s kind of crazy is that author’s book was predicting that the next great credit crisis will come from these private equity-owned firms (which 10% of the U.S. workforce works for). They supposedly got a reprieve because of the quantitative easing going on, but they could start defaulting on a mass scale at some point just like we’re seeing with the mortgage crisis. They are over-leveraged due to the private equity method of making them take out debt so the PE firm can extract dividends and fees. If the time comes that they cannot refinance their debt, they won’t survive. It would be seriously ironic if when that happened, we had as president the very man that pioneered the private equity model, “buyout baron” Mitt Romney. It would be like having Chris Dodd and Barney Frank as President and V.P. during the mortgage crisis.
It is similar to the mortgage crisis in another respect. The mortgage firms pushed loans on people who couldn’t afford them for 2 reasons, so they could extract fees for themselves, and because the government was implicitly backing those loans through Fannie and Freddie. The same kind of moral and economic hazard exists with the private equity firms. The PE firm is at little to no risk of losing money because the system pays for the bankrupty of their acquired firm and they don’t have to pay anything. Yet they are encouraged to put more and more firms into that position due to how easy it is to extract those fees for easy money. Supposedly their ability to do this has slowed down some due to credit tightening, but still 10% of the workforce is employed under this private equity model.
It all,Bain, looks like a scheme based on the tax code to me.I read your entire link and it was very revealing.Unless there is a huge counter to it I'm still with Newt.
Thanks again for some really good input I have not seen before.
Leverage is always the key to financial health or financial crash. Thanks for your clear explanations of how PE firms “play the game.”
The dotcom bubble didn’t cripple the country because most of the profits that were lost were not physical assets like a house or a car or a factory; they were stock market losses by millions of investors. Portfolios took the hit. People continued to live and work as before they had invested.
It is very different when banks/FannieFreddie/Congress “gave” millions of people an actual house to shelter them.