Saturday, October 20, 2012
Vulture Capitalists
Private Equity Funds
These exist to hunt for public
companies which are performing poorly in the marketplace, buy them out, close
unprofitable operations, layoff employees, recapitalize the companies, and
bring them out public again. In doing, so they keep a majority share in the
companies but recoup their original investment through issue of shares to the
public. Then in due course they will repeat this process with other companies.
The investment banks help them in this process by floating the reshaped
companies go public again. The private equity companies make a killing and the
investment banks get a hefty commission. Ultimately, the gullible retail
investor is the one who is left holding the bag. All this is legal but the
mechanism is heavily geared to benefit the vulture capitalists.
There is another operation which
has been taking place in the last few years which is not very widely known.
When a public company is controlled by one or more private equity funds, the
management adds debt at a decent interest rate to attract funds from debt
investors, especially in the current environment of low interest rates. Then
they use the money raised to pay hefty dividends to the shareholders, the
majority of the distribution going to the private equity investors. This
activity reduces the risk of the private equity owners but saddles the company
with unwanted debt. In due course when things go wrong, the vulture investors
will resort to restructuring the company,
closing certain operations, causing layoffs, and walking away with their
loot. The vicious cycle goes on.
Two recent happenings: BJ’s
wholesale club (controlled by private equity investors) raised $643 million of
debt in order to pay dividends to the owners. Likewise, HCA Holdings Inc., (a
hospital chain operator) raised $2.5 billion in debt this year to pay $2
billion in dividends to the shareholders.
HCA Holdings Inc., was taken private in 2006 and went public in 2011
after some reshaping. Private equity funds Bain Capital and KKR each owns 20%
of the company. They justify the issue of debt citing similar debt-holding by
other companies. But should they issue debt just to pay themselves hefty
dividends? That is the big $64,000 question. Money makes more money---doesn’t
it? In that process when one makes money someone else loses because many times
there is no wealth creation but only reshaping. The losers are past employees,
and new individual shareholders.
Tuesday, October 16, 2012
Koch Brothers want to amass more wealth
The Power of Money over People
The Koch Brothers duo controlling Koch Industries, a private business conglomerate, are running scared about a possible Obama reelection. They are warning their employees (about 50,000) that if Obama is reelected many of them would suffer "consequences' (read it as "layoffs"). This is an implied threat and a coercion that the employees should vote for Romney. Where is democracy in this country? Is it that money-can-buy-the-votes situation prevailing now? I am sure many of the employees would vote the way they feel--not the way the management wants since it is not open voting where your choice is made public. Some employees would, however, believe the admonition and vote Republican. So be it. But what is this country coming to? Money is beating democracy?
The Koch Brothers duo controlling Koch Industries, a private business conglomerate, are running scared about a possible Obama reelection. They are warning their employees (about 50,000) that if Obama is reelected many of them would suffer "consequences' (read it as "layoffs"). This is an implied threat and a coercion that the employees should vote for Romney. Where is democracy in this country? Is it that money-can-buy-the-votes situation prevailing now? I am sure many of the employees would vote the way they feel--not the way the management wants since it is not open voting where your choice is made public. Some employees would, however, believe the admonition and vote Republican. So be it. But what is this country coming to? Money is beating democracy?
The greedy are greedier now!
Are you better off now? YES, of course!
The question posed by candidate Romney “Are you better off now than you were four years ago?” can be answered with a simple “YES”. Let me explain. Most of the working people who have 401k accounts and the retirees who have the rollover accounts saw their “wealth” double now from March 2009 (although they lost lot of their money in Wall Street held before the recession). Look at the Wall Street index numbers. If you left your money in the market in March 2009, it has doubled now. So you heave a sigh of relief that you are not going to the poorhouse. These are the people (either registered Republicans or Democrats) who should decide the outcome of the elections this November. The 47% of the folks cited by Romney did not lose at all in the recent past nor would they gain significantly in the immediate future whoever is elected President. Forget the fatcats who made a killing in the market if they invested in the post-crash market in 2009. If they had $1 billion in March 2009 they have more than $2 billion today. What more do they want?
Those who did not have any investment in 2009 did not gain any nor did they lose any. The Great Recession was brought on due to the excesses and shenanigans from the financial industry. It will take time to recover from those damages. Sure the unemployed folks are hurting. But given time, that situation will change for the better. The natural business cycle will take care of it. The Republicans aren’t going to be able to accelerate that nor will the democrats make it worse. Wait and watch!
The question posed by candidate Romney “Are you better off now than you were four years ago?” can be answered with a simple “YES”. Let me explain. Most of the working people who have 401k accounts and the retirees who have the rollover accounts saw their “wealth” double now from March 2009 (although they lost lot of their money in Wall Street held before the recession). Look at the Wall Street index numbers. If you left your money in the market in March 2009, it has doubled now. So you heave a sigh of relief that you are not going to the poorhouse. These are the people (either registered Republicans or Democrats) who should decide the outcome of the elections this November. The 47% of the folks cited by Romney did not lose at all in the recent past nor would they gain significantly in the immediate future whoever is elected President. Forget the fatcats who made a killing in the market if they invested in the post-crash market in 2009. If they had $1 billion in March 2009 they have more than $2 billion today. What more do they want?
Those who did not have any investment in 2009 did not gain any nor did they lose any. The Great Recession was brought on due to the excesses and shenanigans from the financial industry. It will take time to recover from those damages. Sure the unemployed folks are hurting. But given time, that situation will change for the better. The natural business cycle will take care of it. The Republicans aren’t going to be able to accelerate that nor will the democrats make it worse. Wait and watch!
Monday, May 21, 2012
CEO Compensation
There is a huge disconnect between corporate performance for the shareholders and the compensation given to the management team, especially the CEO. During 2011, 301 CEOs took home $3.9 billion averaging $10 million a piece.. The CEO of Citigroup Vikram Pandit took home a whopping $43 million in 2011 while the stock price fell 44% in 2011 and over the last four and a half years of his watch the stock price fell more than 95%. Of course many of the problems haunting Citigroup were inherited by him. Citigroup shares were selling at $480 (on a reverse split basis) 5 years ago which are now worth $26 each. Under these circumstances is such a high compensation for the CEO warranted? What is the board which sanctions such huge pay packages thinking in justifying such a remuneration for a failing CEO? The problem is that the shareholders who actually own the company are an amorphous lot helpless in having a say in how to run the company. There are vested interests, short term traders, vulture capitalists and others who make money trading the stock in the short term and they vote in favor of the management proposals. Otherwise how can one justify 80-90% of shares voting in favor of the compensation given to the CEOs? What about the long term investor who has lost 80-90% of his investment over several years?
The chief investment officer of JP Morgan who "retired" recently in response to $2 billion trading/hedging loss had a compensation of $15.5 million in 2011 ($31.4 million in 2 years) while her boss James Dimon cleared $23 million. Should these two not make restitution to the shareholders for losing $2 billion in a blink?
These are just the tip of the iceberg that is waiting to crash a titanic. Any amount of vociferous opposition to such greed on Wall Street does not seem to affect the practices of the corporate boards. They are acting like Louis XV of France who said "apres moi le deluge" (after me the deluge). These corporate titans want to grab as much money as possible during their stay at the top whether they make money or lose money for the shareholders. Is there another financial meltdown in the offing? Who knows?
There are so many other corporations who have lost 50 to 96 % of shareholders' investment over the last 10 years or so. Some examples: Alcatel-Lucent, Bank of America, Cisco, Citigroup, Dell, GE, Hewlett-Packard, Interactive Brokers, International Paper, LSI logic, Lilly, Merck, Pfizer, Sears, and many other companies. The list goes on and on. All the while the failed CEOs are raking in millions of dollars in remuneration year after year. This is capitalism of the worst kind.
Will the "Occupy Wall Street" movement have any effect on such injustice? It appears not.
But something tells me that we are not heading to a better future. Prior to the French Revolution in the 19th century such extravagance on the part of a few was very evident.
Friday, May 11, 2012
Yahoo! CEO's resume blunder
Regarding the activist investor Dan Loeb’s digging the resume misstatement of Scott Thompson Yahoo’s former CEO, it does not matter what Loeb's intentions were and it does not matter what his ruse was to get to overhaul the Yahoo board. The first point is too many resume padders are out there in the management ranks. All they want to do is to get ahead by passing others to the head of the line to land the top job. Secondly if Loeb is looking for short to medium term gain so be it. Who is not looking for short term gains in Wall Street? The so-called “investors” in Wall Street are all traders who make the quickest buck. There are no more long-term investors except the individuals who buy stock on their own. The CEOs write their job contracts to get salary, bonus, stock options, and stock awards amounting to several millions of dollars per year and then work to manipulate the results. Many CEOs are drawing mega millions in compensation even though their company stock has into the nether world. One example: GE. When Jeff Immelt took over the helm more than 10 years ago the stock price was in the 40s. Look at the stock price now (18). In these 10 years can someone total the entire compensation that Jeff Immelt pulled and can anyone justify his loot of shareholders’ investment vis-a-vis the GE stock price under his watch? There are umpteen other cases like GE. I am fed up with the corporate greed at the top while their performance is abysmal. How is it going on like this? Where is pay for performance slogan now? We need more Loebs to shake up the corporate boards and to rein in the compensation balloon.
Thursday, March 08, 2012
Influence Peddling
From the dawn of humanity it has been the norm that a few individuals who have money and power got to have their say on society and government. Many times they were in the seats of power while other times they remained outside the portals of government but controlled the operations. They managed to place the figureheads in the seats of power and functioned behind the scenes to run the government according to their wishes.
It is not any different now. The elected officials in many countries act contrary to the will of the people who elected them despite making promises to look after their interests. They get elected by appealing to the voters but the money that they use as a means to get elected is provided by vested interests. Once they get elected they steer legislation not according to the wishes of the people who elected them but according to the dictates of the lobbyists who contributed financially to their election. Thus the lobbyists become the de facto power. This cycle continues forever. The interdependence of the elected officials and the lobbyists gets stronger as time goes by. If by chance the people defeat an incumbent and elect an outsider the lobbyists go after them and get them into their fold by enticing them with money.
The Congress in the United States is held in very low esteem by the general population (just 10% approval rating!). Despite such low rating the re-election rate of incumbents is very high (more than 60%). Apparently each constituency is made to feel that their congressman is noble. A few congressmen go to jail, a few others manage to resign "honorably" with hefty pensions, and a few others fight all charges of impropriety using their influence among their colleagues (den of thieves). All of them enjoy great privileges and benefits while in office and enjoy hefty pension benefits when they leave office (even after serving one or two terms).
Of all the many irritants that one faces with the functioning of the government one that is relevant to the tax season is worth mentioning here. The IRS of the US government wants every taxpayer to file the tax return electronically and coaxes tax software outfits to provide free service to certain segments of the population in terms of low income, military families, or senior citizens. It is working currently for those who take advantage of such facility. But still it has not reached those who are in need. Many folks pay tax preparers exorbitant fees to prepare and file their tax returns. To convert those who prepare and file paper returns on their own, IRS has now service on the web whereby taxpayers can download forms, fill them in, and file them electronically for free---which is the way it should be.
Now take the state of North Carolina. They too have a website where you can download a fillable form. But can the taxpayer file the return electronically? NO! The taxpayer has to fill it in, print it on paper and mail the paper return. Waste of paper and postage! Are they favoring paper makers? Are they favoring the postal department? Are they not doing a disservice to the taxpayer and the environment that way? If you can fill the forms electronically why can't you file it electronically? The reason for such prohibition is two-fold. One is they want to keep the paper pushers in the government offices gainfully employed (albeit at a very slow grinding pace) and the other is to help the tax preparing companies stay/flourish in business. Why? Because the tax preparers contribute to the election of the legislators. Even those tax software companies which comply with the Federal requirement to prepare and efile returns for free (for certain segments of the population) charge you to efile the state returns even though that requires only minimal further effort.
The irony here is that while you cannot file the tax return electronically the government will accept the tax payments electronically by debiting your bank account. What do you call this strategy----devious and vile?
The needs of the citizens have been submerged under the greed of the politicians. Who will rectify this situation?
It is not any different now. The elected officials in many countries act contrary to the will of the people who elected them despite making promises to look after their interests. They get elected by appealing to the voters but the money that they use as a means to get elected is provided by vested interests. Once they get elected they steer legislation not according to the wishes of the people who elected them but according to the dictates of the lobbyists who contributed financially to their election. Thus the lobbyists become the de facto power. This cycle continues forever. The interdependence of the elected officials and the lobbyists gets stronger as time goes by. If by chance the people defeat an incumbent and elect an outsider the lobbyists go after them and get them into their fold by enticing them with money.
The Congress in the United States is held in very low esteem by the general population (just 10% approval rating!). Despite such low rating the re-election rate of incumbents is very high (more than 60%). Apparently each constituency is made to feel that their congressman is noble. A few congressmen go to jail, a few others manage to resign "honorably" with hefty pensions, and a few others fight all charges of impropriety using their influence among their colleagues (den of thieves). All of them enjoy great privileges and benefits while in office and enjoy hefty pension benefits when they leave office (even after serving one or two terms).
Of all the many irritants that one faces with the functioning of the government one that is relevant to the tax season is worth mentioning here. The IRS of the US government wants every taxpayer to file the tax return electronically and coaxes tax software outfits to provide free service to certain segments of the population in terms of low income, military families, or senior citizens. It is working currently for those who take advantage of such facility. But still it has not reached those who are in need. Many folks pay tax preparers exorbitant fees to prepare and file their tax returns. To convert those who prepare and file paper returns on their own, IRS has now service on the web whereby taxpayers can download forms, fill them in, and file them electronically for free---which is the way it should be.
Now take the state of North Carolina. They too have a website where you can download a fillable form. But can the taxpayer file the return electronically? NO! The taxpayer has to fill it in, print it on paper and mail the paper return. Waste of paper and postage! Are they favoring paper makers? Are they favoring the postal department? Are they not doing a disservice to the taxpayer and the environment that way? If you can fill the forms electronically why can't you file it electronically? The reason for such prohibition is two-fold. One is they want to keep the paper pushers in the government offices gainfully employed (albeit at a very slow grinding pace) and the other is to help the tax preparing companies stay/flourish in business. Why? Because the tax preparers contribute to the election of the legislators. Even those tax software companies which comply with the Federal requirement to prepare and efile returns for free (for certain segments of the population) charge you to efile the state returns even though that requires only minimal further effort.
The irony here is that while you cannot file the tax return electronically the government will accept the tax payments electronically by debiting your bank account. What do you call this strategy----devious and vile?
The needs of the citizens have been submerged under the greed of the politicians. Who will rectify this situation?
Labels: election, influence peddling, lobbyists, politicians
