Fiscal Cliff

November 29, 2012

Mr. Boehner:  A large majority of us are really disappointed in you and Eric Cantor.

The majority of Americans have no allegiance to Grover Norquist and the Koch brothers.

We want to see our elected officials come to the table with open minds, seeking to do what is correct and right for our country. We don’t much care who your campaign contributors are, or what sorts of issues you are dealing with in your upcoming election campaign.

We do understand that you – as an elected member of Congress – need to run for re-election every 2 years.

That said: you accepted the position of Speaker of the House, which implies that you agreed to rise above the local issues specific to your rural & primarily agricultural district in Ohio and to function as a leader across our very diverse nation.

I think the vast majority of our fellow citizens expect you to be objective, rational and strategic in your words and your actions.

Your recent contention that “No substantive progress has been made in the talks between the White House and the House over the last two weeks” appears to be both confrontational and incendiary.

Incendiary comments certainly do not support the concept of compromise.

Mr. Boehner:  As a citizen, a tax payer and voter in the U.S.A., I can’t vote for you because I don’t live in your Ohio district, but I can say that I am truly disappointed by your callous disregard for the needs, wants and desires of me and the majority of our U.S. neighbors.

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Job Creators?

November 21, 2012

Over the past 18 months, or so, we’ve been deluged with propaganda about “Job Creators” – mostly referring to private equity firms which are prone to swoop in, acquire companies which are ‘undervalued’ and turn them around for a healthy profit (to the private equity partners).

Some years ago, I recall taking an economics course which was anchored around some research conducted by noted M.I.T. economist Lester Thurow which he categorized as “The Zero-Sum Society”.

Thurow had examined a number of scenarios where costs and revenues were shifted between various public sector entities.  One entity would reduce taxes while moving services to another entity.  The service-receiving entity raised taxes to fund the shifted services.  The ultimate result:  a zero-sum outcome to taxpayers.

Today’s news that Hostess Brands – which was acquired out of bankruptcy by the private equity firm Ripplewood Holdings in 2009 – has received approval by the U.S. Bankruptcy Court for the Southern District of New York “for the orderly wind-down of its business and sale of its assets” is certainly not good news for the 18,500 Hostess employees who will soon be unemployed.

All in all, the ‘ripple effect’ of the Hostess Brands bankruptcy will be the closing of 33 bakeries, 565 distribution centers, 5,500 delivery routes, 570 bakery outlet stores, in addition to the loss of those 18,500 jobs.

This is just another example of Thurow’s Zero-Sum Game.  No value added, just a shift of wealth from one group or place to another.

In fairness, Ripplewood enjoys a pretty good reputation among its peers in the private equity sector – where the term ‘vulture capital’ seems to be growing in popularity.

Of course, Ripplewood’s goals generally mirror those of other similar firms:  Buy distressed companies at a fire-sale price; fix the problems; and sell the repurposed firm at a nice profit.

Over its 17 year history, Ripplewood has had some major winners, and it is no stranger to losers, or to the U.S. Bankruptcy Court for the Southern District of New York.

In March 2007, a U.S. investor group led by Ripplewood Holdings acquired Reader’s Digest Association out of bankruptcy for $2.8 Billion, including the assumption of debt.  When the dust settled, the equity investment was $600 Million, leveraged against debt of $2.2 Billion.

In August 2009, just 2 years after the Ripplewood acquisition of Reader’s Digest, the U.S. Bankruptcy Court for the Southern District of New York approved a “new & improved” voluntary bankruptcy of Reader’s Digest which reduced its debt of $2.2 Billion to $550 Million, and erased the entire equity investment from the private equity consortium.

The good news which emerged from the Reader’s Digest saga was that the company was able to continue operations, and effectively, no jobs were lost.

Back to November 2012:  Ripplewood’s initial strategy in the Hostess acquisition revolved around seeking major concessions from the unions which represent the majority of the workforce.

For the most part, Ripplewood did act like a responsible “gentle private equity investor”.

Despite the apparent odds against a rescue and turn around, Ripplewood continued to invest in Hostess to keep it going.  Ripplewood didn’t extract outrageous dividends or lay on more debt, beyond the 80% leverage they saddled the company with initially.

In the first year, at least, Ripplewood charged Hostess some management and consulting fees, although not obscene, generally thought to have been in the millions of dollars.

Observers contend that one of Ripplewood’s major blunders in their turnaround strategy with Hostess was to increase management compensation while it was seeking to constrain overall employee compensation and benefits. The Union representing the majority of Hostess employees zeroed in on huge increases in executive compensation (i.e. CEO went from $750,000 to $2,550,000) while the company was playing hardball with the union seeking major concessions, particularly in the area of pension and benefits.

All things considered, the timing of Ripplewood’s acquisition possibly was the final straw.  In 2009, we were in the midst of one of the worst recessions in U.S. history; commodity costs were very volatile; competitors with lower fixed and variable costs were consolidating; and Hostess was highly impacted by the cumulative effects of collective bargaining agreements.

At the end of the day, Hostess employees will lose their jobs; communities where Hostess facilities are located will lose both tax revenue and the multiplier effect of employee spending; equity will be destroyed; debt will be written down; unsecured creditors will be left holding the bag; but someone will profit significantly from the sale of the Hostess brand to a new private equity fund.

If mapped out very carefully, the effects of the zero-sum game generally look very much like the effects which resulted from the collective works of Robin Hood or Blackbeard the Pirate:  A zero value-added, zero-sum game where some get the spoils, some are left destitute.

Job creators?  Not so much…..

I vaguely remember the tale of Faust, a successful scholar who increasingly became bored with his daily life.  In the story, Faust made a deal with Mephistopheles, the agent for Satan, exchanging his soul for access to greater knowledge, pleasures of the flesh and many other previously unattainable treasures.

Since its origin in the 16th century, Faust’s tale has been used as the base for many written, film and musical works.  The meaning of the word and name has been reinterpreted through the ages.  Faust — and the adjective Faustian — is frequently used to describe an arrangement where an ambitious person surrenders moral integrity in order to achieve power and success: the proverbial “deal with the Devil“.

Back in the day, it was generally thought that the person who had made a pact with Satan also promised to kill children or consecrate them to the Devil at the moment of birth; have sexual relations with demons; and sometimes produce children from their trysts with the succubus.

Here we are – late November 2012 — well on our way into the 21st century.  What relevance could the Faustian story have today?

Satan is watching very closely as we approach the Fiscal Cliff.  Satan knows the House Republicans virtually all signed the “Taxpayer Protection Pledge” with Americans for Tax Reform.

Grover Norquist (a.k.a. Mephistopheles) frequently appears – out of nowhere – to remind these elected officials of their pact (pledge) which commits legislators and candidates for office to oppose tax increases.  At the House level, signers pledge to:

(1)    Oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

(2)    Oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

I wondered, “…who is this Grover Norquist, and how is it that he has control over so many of our elected officials?”

I looked him up.  Popular sources tell us that he was born in the mid 1950’s in Sharon, PA, grew up in Weston, MA; earned both undergraduate and graduate degrees at Harvard – just a typical American citizen.

However, recent information about his background reveals that Mr. Norquist was actually born in 1561 in the Swedish province of Halsingland.  His family was ostracized as a result of religious and political unrest, and the family was forced to move to Germany in 1567, where they were settled into temporary quarters in the City of Hamburg, ultimately permanently relocated in 1568 to Nuremberg in southern Germany.  Nuremberg was the location of Faust’s story, putting Grover Norquist in very close proximity to both Faust and to the real dark side, Mephistopheles himself.

More alarming:  There seems to be little to no information available about Grover Norquist from 1568 to 1956, leaving a great deal of question about his activities over that almost 400 year gap.

Whether or not he is a direct agent of Satan, Grover Norquist’s power over a majority of elected officials ought to raise our interest.

Instead, our Congress, our FBI and our CIA seem to be singularly focused on a retired general who slipped into bed with a beautiful and intelligent woman.

I didn’t vote for Grover Norquist.  Best I know, none of us voted for Grover Norquist.  Why are we letting him commandeer the strings which control the elected officials who are supposed to guide our nation to optimum outcomes?

Shouldn’t we all be enraged that Grover Norquist – who, at best is a 16th century Faustian character – has somehow taken over the moral compass of America?

Shouldn’t we be worried that some of our highly ambitious elected officials in Washington may have signed a “deal with the Devil” where they surrendered their moral integrity in order to achieve power and success?

Shouldn’t we be worried that the elected officials who made their pact with Satan also promised to kill children or consecrate them to the Devil at the moment of birth; have sexual relations with demons; and sometimes produce children from their trysts with the succubus?