The Nasty Reality of Private Equity Financing

The magic of Private Equity financing or how hedge funds work explained by Robert Reich in 8 Easy Steps.

Are critics of private equity against capitalism. They’re not. They’re against a predatory system created and perpetuated by Wall Street solely to pump its own profits. Here’s what private equity is really about: A firm like Mitt Romney's Bain Capital obtains cheap credit and uses it to acquire a company in a "leveraged buyout." "Leverage" refers to the fact that the company being purchased is forced to pay for about 70 percent of its own acquisition, by taking out loans. Private equity firms typically target profitable, slow-growth market leaders. (Private equity firms presently own companies employing one of every 10 U.S. workers, or 10 million people.)

And that's when the fun starts. Once the buyout is completed, the private equity guys start swinging the meat axe, aggressively cutting costs wherever they can – so that the company can start paying off its new debt – by laying off workers and cutting capital costs. This process often boosts operating profit without a significant hit to the business, but only in the short term; in the long run, the austerity approach makes it difficult for companies to stay competitive, not least because money that would otherwise have been invested in expansion or product development – which might increase revenue down the line – is used to pay off the company's debt.

It takes several years before the impacts of this predatory activity – reduced customer service, inferior products – become fully apparent, but by that time the private equity firm has generally resold the business at a profit and moved on. These leveraged buyouts don't only hurt businesses, workers, and the economy generally – they also short-change taxpayers, via a giant loophole in the tax code that enables companies to deduct loan interest from taxes. The provision was originally intended to encourage borrowing to build new factories, not to finance leveraged buyouts. But, according to Notre Dame Professor Brad Badertscher, private equity-owned companies paid a 22 percent tax rate before being bought, and only 10 percent the year after being acquired. That adds up to a savings of $130 billion in taxes since 2000. Rolling Stone Magazine

Update on ATU Local 1700 Negotiations with Greyhound

Fri, 10/19/2012 - 5:37pm

Positive outlook for an agreement that should reverse the downward spiral Greyhound workers suffered during the company’s long slide.

By President Bruce Hamilton

After six days of negotiations, the signs point forward for Greyhound drivers and other employees, reflecting the intercity bus industry’s recent rebound and management’s big plans. When the company and union return to the table in late October, the issues of foremost importance to members will be the ones we’ll be discussing:

- Fair compensation for all the work we do,
- Ending decades of unfairness for regular run drivers,
- Recovering our work that Greyhound shifted to subcontractors.

The company asked to get an early start on negotiations after Local 1700 members loudly protested the use of non-Greyhound drivers on Greyhound Express schedules. Texas drivers picketed outside terminals in Dallas, Houston, Austin and San Antonio, with support rallies in Phoenix and Los Angeles.

Management decided it had bitten off more than it wanted to chew in late May, after Local 1700 members marched from the Dallas station to corporate headquarters. The company offered to negotiate a larger solution to the erosion of work if the union would stop the high-profile picket lines.

This is our opportunity to raise employment and safety standards in the intercity bus industry with a contract that restores the fairness drivers and mechanics deserve. It won’t be easy, and no one ever gets everything they want in bargaining. But we are resolved to close the loopholes the company uses to deny pay claims, to be paid for all the time we spend at work, and to protect our hard-won health benefits.

Greyhound drivers’ fight for fairness and highway safety will go on after a new contract is signed. Some of the biggest issues we face cannot be solved at the bargaining table. For example, we are part of a small minority of U.S. workers who federal law does not guarantee fairness on the job. Exempting over-the-road drivers from the Fair Labor Standards Act allows Greyhound to get away with what is legally prohibited for most other employers: not paying overtime after 40 hours or paying workers for all the time they spend on the job.

Local 1700 members must remain active politically and hold our elected leaders to their word to stand with working people. Next year, ATU will continue to lobby Congress for highway safety reform that tackles the leading cause of fatal bus accidents – driver fatigue – by including us under the FLSA. ATU1700

The monster in the closet: Income inequality

An illustration of a scary problem haunting Canada -- income inequality. This video is part of NUPGE's 'All Together Now' campaign for public services and tax fairness.