Traffic accidents and fatalities: around where I live, in New England, the increase is almost all due to one thing: drivers distracted by mobile devices and fiddling with their car controls. Maybe many are working from their cars.
Sheryl Sandberg: it was she who pioneered, not so much targeted advertising, but the "data exhaust" model of sweeping up the data you leave behind on the Internet and selling it. This was the key innovation at Google that she later took to Facebook.
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Where does one start with private equity (PE)? It might be, in parts, a Ponzi scheme. But that's not the real problem.
While leveraged buyouts (LBOs) have been around since the 1960s and became famous through a series of one-offs in the 1980s, PE as an industry started in the late 1990s, at the same time as the cottage industry of share buybacks. Both were and are driven by the Fed's generational policy of artificially low interest rates, which has encouraged everyone to lever up. This policy has produced an economy far more indebted than 30 or 50 years ago. It's also greatly inflated wealth inequality, because people who already have assets can borrow to buy more assets and drive up their prices.
Like many share buyback programs, PE often loads up target companies with lots of debt. The long-term effect is to shift the capital structure of the economy away from equity (ownership) to debt. In many cases, the debt burden is onerous, and the companies are forced to slash operations and jobs, selling off pieces to stay afloat. The PE firms make most or all of the money from these deals, although management is often brought into the deals to benefit and undercut any resistance to outside takeover.
The industry as a whole is parasitic, without a doubt. The easiest way to see this is just to ask what would happen if interest rates went back to a reasonable level, say, the short-term rates around or somewhat above the rate of inflation. Most PE business models would immediately go up in smoke. They're built on "borrow short at very low rates, invest long and hope for a large return." Money is made on that difference (spread). But short-term borrowing means that PE companies, like the risky mortgage investors of the 2000s, have to keep rolling over their short-term funding debt every week or month or whatever. It's quite fragile to a crisis. Making it more fragile is the fact that the long-term assets being invested in are often not that liquid; that is, it would be hard to find a buyer, at a reasonable price, in a pinch, when the PE or leveraged target firm needs to quickly sell assets to raise cash.
The share buyback industry got started about the same time (late 90s), for similar reasons and with similar effects. Some companies reduce their outstanding stock shares by repurchasing those shares with cash from operations. That may be a good use of the free cash. But the big poster children in this industry (Boeing, GE) rebuy their shares by issuing corporate bonds (that is, borrowing from the bondholders), directly replacing equity with debt. If someone else buys shares in such a company, they're unwittingly buying into a company where much of its capital value has been diminished by all the debt it's taken on. This happens because management are shareholders and effectively control the company treasury. If management is issued shares (as became popular in the late 1970s), it stands to benefit by selling back its personal shares to the company. Issuing shares to management worked as a way to discipline management for about 20 years. By the late 90s though, with artificially low interest rates, management had learned to game this policy.
The overall effect both activities is a kind of slow-motion looting of the capital structure of the economy, with someone else holding the debt that paid for deals that made immediate cash-out money for the PE or otherwise leveraged firms. (It's like a highly burdensome home equity loan, cashing out on the value of the house. But in the case of PE, the immediate beneficiaries of the cash-out are often not those carrying the debt burden.)
Biden: "perhaps unwittingly" ha! :-)
Traffic accidents and fatalities: around where I live, in New England, the increase is almost all due to one thing: drivers distracted by mobile devices and fiddling with their car controls. Maybe many are working from their cars.
Sheryl Sandberg: it was she who pioneered, not so much targeted advertising, but the "data exhaust" model of sweeping up the data you leave behind on the Internet and selling it. This was the key innovation at Google that she later took to Facebook.
---
Where does one start with private equity (PE)? It might be, in parts, a Ponzi scheme. But that's not the real problem.
While leveraged buyouts (LBOs) have been around since the 1960s and became famous through a series of one-offs in the 1980s, PE as an industry started in the late 1990s, at the same time as the cottage industry of share buybacks. Both were and are driven by the Fed's generational policy of artificially low interest rates, which has encouraged everyone to lever up. This policy has produced an economy far more indebted than 30 or 50 years ago. It's also greatly inflated wealth inequality, because people who already have assets can borrow to buy more assets and drive up their prices.
Like many share buyback programs, PE often loads up target companies with lots of debt. The long-term effect is to shift the capital structure of the economy away from equity (ownership) to debt. In many cases, the debt burden is onerous, and the companies are forced to slash operations and jobs, selling off pieces to stay afloat. The PE firms make most or all of the money from these deals, although management is often brought into the deals to benefit and undercut any resistance to outside takeover.
The industry as a whole is parasitic, without a doubt. The easiest way to see this is just to ask what would happen if interest rates went back to a reasonable level, say, the short-term rates around or somewhat above the rate of inflation. Most PE business models would immediately go up in smoke. They're built on "borrow short at very low rates, invest long and hope for a large return." Money is made on that difference (spread). But short-term borrowing means that PE companies, like the risky mortgage investors of the 2000s, have to keep rolling over their short-term funding debt every week or month or whatever. It's quite fragile to a crisis. Making it more fragile is the fact that the long-term assets being invested in are often not that liquid; that is, it would be hard to find a buyer, at a reasonable price, in a pinch, when the PE or leveraged target firm needs to quickly sell assets to raise cash.
The share buyback industry got started about the same time (late 90s), for similar reasons and with similar effects. Some companies reduce their outstanding stock shares by repurchasing those shares with cash from operations. That may be a good use of the free cash. But the big poster children in this industry (Boeing, GE) rebuy their shares by issuing corporate bonds (that is, borrowing from the bondholders), directly replacing equity with debt. If someone else buys shares in such a company, they're unwittingly buying into a company where much of its capital value has been diminished by all the debt it's taken on. This happens because management are shareholders and effectively control the company treasury. If management is issued shares (as became popular in the late 1970s), it stands to benefit by selling back its personal shares to the company. Issuing shares to management worked as a way to discipline management for about 20 years. By the late 90s though, with artificially low interest rates, management had learned to game this policy.
The overall effect both activities is a kind of slow-motion looting of the capital structure of the economy, with someone else holding the debt that paid for deals that made immediate cash-out money for the PE or otherwise leveraged firms. (It's like a highly burdensome home equity loan, cashing out on the value of the house. But in the case of PE, the immediate beneficiaries of the cash-out are often not those carrying the debt burden.)