Balkinization  

Wednesday, June 16, 2010

Kosman's The Buyout of America

Frank Pasquale


As lawmakers squabble over the "carried interest" tax rate, it's nice to find an accessible overview of some of the economic activity they're discussing. I recently read Josh Kosman's book The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, and I highly recommend it to our readers. Kosman unravels the complex financial maneuvers behind marquee private equity firms which bought "more than three thousand American companies from 2000-2008." He describes in detail how they resist transparency (164) and "hurt their businesses competitively, limit their growth, cut jobs without reinvesting the savings, and generate mediocre returns" (195). The recipe for high earnings is simple: the firms "get large fees up front and are largely divorced from their results if their transactions fail" (195).



Like Kwak and Johnson's account in 13 Bankers, Kosman offers a political economy account of private equity's favored treatment by government. As he notes,

[F]our of the past eight Treasury Secretaries joined the PE industry . . . . and they have significant influence in Washington. President Bill Clinton, and both President Bushes, have also advised PE firms or worked for their companies. . . . KKR retained former Democratic House majority leader Richard Gephardt as a lobbyist and hired former RNC chairman Kenneth Mehlman as head of global public affairs. (196)


Having analyzed a wide array of buyouts, Kosman concludes that "PE firms manage their businesses to satisfy short-term greed, not for long-term survival" (51). It's precisely this mentality that FDIC Chair Sheila Bair indicted in her testimony before the FCIC:

[W]hile the establishment of emergency backstops to contain financial crises can help to limit damage to the wider economy in the short-run, without needed reforms these policies will promote financial activity and risk-taking at the expense of other sectors of the economy. Corporate sector practices [have] had the effect of distorting of decision-making away from long-term profitability and stability and toward short-term gains with insufficient regard for risk. . . .Meaningful reform of these practices will be essential to promote better long-term decision-making in the U.S. corporate sector.


We can only hope that members of Congress keep both Bair's and Kosman's insights in mind. Congratulations to Kosman for authoring a compelling and well-researched analysis of one of the most troubling engines of inequality in the US. And on one final, personal note--I deeply appreciate Kosman's dedication of the book to "the millions of Americans working for private-equity-owned companies." My father was one of these workers--he lost his job as an assistant manager at an Oklahoma store owned by Safeway after KKR took over the chain. This was not a fun time for the Pasquale family, and it's refreshing to see journalists like Kosman put the human costs of "creative destruction" front and center in their books.


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