NPR Labels Wilbur Ross, Trump Commerce Pick, a “Leader” in Private Equity. Great. It’s a Value Destroying, Rapacious Con Game.

This is a piece I wrote on “private equity” in 2014. Hearing Trump’s choice for Commerce Secretary, Wilbur Ross, described on NPR as a leader of the private equity industry, prompted me to repost it.


The implosion of the junk bond market in the early 1990s, along with a number of high profile LBO failures – Federated Department Stores, Macys, Revco, and of course, the deal dubbed “the Burning Bed,” Ohio Mattress – made the term “leveraged buyout” somewhat unsavory. Then, in one of the most successful rebrandings in financial history, dealmakers thought up a new moniker and since then have operated under the accurate if unwieldy name “private equity.”

But the blush was soon off the rose. Buyout shops hit an even worse rough patch during the financial crisis, when some of the biggest LBOs of all time – Tribune, Harrah’s Entertainment, Station Casinos, Realogy – went toes up and the high yield market cratered again.

European politicians came to refer to buyout shops as “locusts,” and private equity in the US unfortunately became associated in the public mind with the hapless Blackstone boss, Steve Schwarzman, who compared a proposal to change the tax treatment of funds like his to the Nazi invasion of Poland. By 2008, private equity was once again a pejorative term .

Today, it’s almost a smear. Regulators are publicly calling the industry to the carpet for dodgy and fraudulent practices. News outlets smell blood. On May 21, the Wall Street Journal reported that the iconic LBO shop KKR appeared to be holding on to millions of dollars that should have gone to investors in one of its funds. This comes a couple months after an SEC official, Drew Bowden, released the scathing results of the agency’s investigation into private equity practices (hat tip Naked Capitalism).

Bowden said, “Some of the most common deficiencies we see in private equity in the area of fees and expenses occur in firm’s use of consultants, also known as ‘Operating Partners,’ whom advisers promote as providing their portfolio companies with consulting services or other assistance that the portfolio companies could not independently afford.”

Yves Smith of Naked Capitalism goes on to write, “If anything, Bowden’s boss Mary Jo White had been more pointed in the section of her Congressional testimony at the end of April.”

White said, “Some of the common deficiencies from the examinations of these advisers that the staff has identified included: misallocating fees and expenses; charging improper fees to portfolio companies or the funds they manage; disclosing fee monitoring inadequately; and using bogus service providers to charge false fees in order to kick back part of the fee to the adviser.”

Ouch. Somewhere a bunch of guys in blue shirts with white collars and red ties must be putting their heads together to devise a new name for their business. They might consider “public disgrace” or even “private machinations.” In any case, to paraphrase an old saw, the third name’s a charm.

The Future of an Illusion: Playing Trump’s Infrastructure Giveaway

Will Donald Trump’s proposed corporate trough slopping prompt Apple boss Tim Cook to send minions out to fill Cupertino’s potholes? The logic seems, well, crabbed. At least as much as the concept behind the Orange-o-Crat’s scheme to get tech giants to repatriate the squillions they hold overseas to dodge taxes. This is being sold as an infrastructure measure. It’s not. But it’s a short-term buying opportunity for stock punters.

See, it has been tried before. The optimistically named Homeland Investment Act of 2004 gave corporate tax dodgers a break if they brought their cash home and invested it in plants and jobs. They brought it home… some $230 billion. But they didn’t invest it. They paid 92% out to shareholders.

Expect something similar. Today it’s vanishingly unlikely that the cash that Apple, Alphabet (Google) and others would spirit back under Trump’s 10% incentive rate would be productively invested. Despite Fed boss Yellen’s Hamlet-on-the-Potomac routine over raising rates, cash for investment purposes remains cheap. Any productive investment opportunities can be financed with debt, which remains far cheaper than equity for sound companies.

Analysts say Apple could use the cash to reduce its float by 20%. That would drive its stock through the roof, and flatter the earnings per share figures used to calculate the compensation of Cook and others in its C Suite. 

They, and those with shares in the tech giants, will do well.That should be consolation enough for the tens of millions of taxpayers left with a ballooning deficit and nothing to show for it.

Trump Could Hold Key to Fermi’s UFO Paradox

Forget illegal aliens. The Trump ascent could explain why we’re not overrun by extraterrestrials.

In two months Donald Trump will gain the ability to singlehandedly destroy the human race. The US nuclear arsenal has the power to render the planet uninhabitable. In his public statements during the campaign, Trump expressed a willingness to use such weapons, more so than any president in the post-war era. He might therefore hold the answer to a paradox first posited by the inventor of the first nuclear reactor, Enrico Fermi, who asked why, given the overwhelming likelihood of there being extraterrestrial life, we’ve got no evidence for it.

Fermi summed up his paradox with the question, “Where is everybody?” The question arose from the Drake equation, which estimates the number of habitable worlds in the universe – assumptions that astrophysicists have increased tenfold in recent months.

At the time, scientists conservatively estimated that there were 100 billion billion habitable planets in the universe, or about 100 habitable planets for every grain of sand on Earth. Since our Sun is relatively young, at least some of these other planets should have generated civilizations billions of years older than our own, capable of space exploration. Those within our galaxy would have ample time to get to our neck of the woods, despite the distances involved.

Hence, Fermi’s question – why is there no credible evidence of extraterrestrial life?

One theory – the “eraser” idea – is that civilizations capable of deep space travel are inevitably also capable of destroying themselves, and all civilizations end up doing so, one way or another.

Pretty grim thought. Trump’s ascent won’t necessarily prove nor disprove it – if we’re lucky. Let’s hope Fermi’s question remains paradoxical for another four years.