Well here is the video I promised in my previous post, Why Obama Should Be Attacking Casino Capitalism — Both Romney’s Bain and JPMorgan. It’s not quite what I had in mind, but it is darned close.

In the post How Did Mitt Make So Much Money And Pay So Little in Taxes?, Robert Reich says:

Because the magic of private equity reveals a lot about how and why our economic system has become so distorted and lopsided – why all the gains are going to the very top while the rest of us aren’t going anywhere.

The magic of private equity isn’t really magic at all. It’s a magic trick – and it’s played on you and me.

Here is the note I sent to Robert Reich about this video, and how it compares to the video I’d like to see.

I liked the video “How Did Mitt Make So Much Money And Pay So Little in Taxes? “, but I was hoping for a video with just a slightly different emphasis.

This video would show how Mitt Romney takes over failing or nearly failing companies, strips out their assets, and then lets them go bankrupt. It is the same point you made, but I would show a bully forcing his way to the head of the line. He gets in front of the legitimate creditors and steals all the assets. He leaves them nothing when the bankruptcy judge gets to them.

You might even show how this theft from the legitimate creditors forces some of them into bankruptcy, so Romney can ride to the rescue and strip them bare too, the big bully.

I was thinking that Robert Reich would be the perfect person to come up with a demonstration animation to describe vulture capitalism.  I went to his web site to make the suggestion, and came across the interesting post, Why Obama Should Be Attacking Casino Capitalism — Both Romney’s Bain and JPMorgan.

I wish President Obama would draw the obvious connection between Bain Capital and JPMorgan Chase.

That way his so-called “attack” on private equity is neither a personal attack on Mitt Romney nor a generalized attack on American business.

It’s an attack on a particular kind of capitalism that Romney and JPMorgan both practice: Using other peoples’ money to make big bets which, if they go wrong, can wreak havoc on the economy.

It’s the substitution of casino capitalism for real capitalism, the dominance of the betting parlor over the real business of America, financial innovation rather than product innovation.

It’s been terrible for the American economy and for our democracy.

It is nice to know that he is on the same wavelength that I am, or vice-versa.  Independently, I have been writing furiously over the past few days on this very topic, trying to explain these very ideas.

There are hints on his blog that he might even have already made the animation, I seek.  Well, off to check those out.

The Boston Globe has the article, Obama campaign got donations from Bain employees.  This time, I am not going to take The Boston Globe to task for the article.  My complaint is with the Obama administration.

Once again the Obama campaign misses its own point in attacking Romney’s business practices.

“We’re not challenging the virtues of the private equity business, or Romney’s right to run his business as he saw fit, or even his right to run other businesses into the ground while turning a profit for himself and his investors,” Obama campaign spokesman Michael Czin said.

It is not an attack on the virtues of private equity that the ad attacks. It is the particular crimes that Bain has perpetrated in some well documented cases. They buy failing companies to strip out all the assets, such as pension funds, health care funds, and any hard assets that they can sell, and turn these assets into cash which they then pay to themselves. In other words they bully their way to the head of the line in front of the legitimate creditors in order to take the assets and leave only the liabilities.

The legitimate creditors who would receive 50 to 90 cents on the dollar in an ordinary bankruptcy proceeding get nothing after Bain Capital’s interference. Bain Capital walks off with the money that should have gone to the legitimate creditors. Bain Capital drives many of those creditors into bankruptcy, but probably not before Bain strips some of them bare, too.

Talking about all the crimes Bain did not commit does not absolve it of criminal responsibility for the ones it did commit. Even one serious crime in a life full of virtue, which is not Bain’s situation, is enough to land ordinary folk in jail.

It is too bad that the Obama campaign can’t make a straightforward explanation of this important point. I wonder if The Boston Globe can take any notice of what I point out above.

I have posted the above as a comment to the article on The Boston Globe’s web site.

I think that this act of the Obama campaign deserves the following merit badge:

The Daily Ticker on Yahoo his another segment with William Black.  This one is headlined JPMorgan’s “Wild, Crazy Insane Gamble” Puts Global Economy at Risk: Bill Black.

More importantly, Black notes JPMorgan is betting on “derivatives of derivatives” and is by far the largest player in the market for the CDX Investment Grade 9 and CDX High Yield 11, the derivatives underlying the trade that earned Bruno Michel Iksil the nickname ‘the London Whale.’

“They didn’t just gamble, this was a wild, crazy insane gamble,” says Black, who calls JPMorgan “the world’s largest gambling operation in financial derivatives” in his latest blog at New Economic Perspectives.

To be sure, a $2 billion loss is just 0.1% of JPMorgan’s assets, as of March 31. JPMorgan has suspended its share buyback program and would appear to have ample resources to cover the losses, even if they were to double or triple or even quadruple.

But that’s not the point, according to Black.

“We don’t want any federal insured entity…to be speculating in financial derivatives. That’s just nuts,” he says. “It’s really disastrous when you’re talking about an institution like JPMorgan. It will sooner or later have a really bad year…when it has the really bad year, we will all end up having to bail them out or having another global crisis.”

Given its size and outsized bets on credit derivatives, “JPMorgan poses a clear and present danger to the global economy,” according to Black.

I don’t suppose William Black could have put it in any more stark terms than that last sentence above, emphasis added by me.

The Daily Ticker on Yahoo has the story and interview headlined Greece Is Tearing Europe Apart Politically, Socially and Economically: William Black.

I think the headline is slightly off in that it might give you the impression that William Black thinks Greece is at fault here.  More to his point is the remark:

“Austerity…is an inconceivably awful policy,” Black says. The European periphery nations are suffering great depressions — not recessions – he notes, and the region’s best and brightest are emigrating from Europe because of high unemployment and economic uncertainty.

One thing about William Black, a former senior financial regulator and author of the book The Best Way to Rob a Bank is to Own One, he doesn’t mince words.

Perhaps trying to run a country more like a successful business sounds like an appealing prospect.  Well you are off on the wrong track already.  I tricked you by inserting the word “successful” in there.  It all depends on what the meaning of success is.

Perhaps in your utopian world, a successful business makes a product or sells a service that people want and need.  It finds out how to sell the product or service at a low enough price that the customers are willing to pay it and yet at a high enough price for the business to make a profit and fund its growth.  The business keeps its debt within bounds so that it can continue in business for a long time and it can weather the ups and downs of its markets and the economy.  It also pays a dividend to its shareholders, and it pays its managers and other employees well.  It even manages to pay its fair share of taxes.

Wouldn’t it be great to live in a country run that way?  Maybe it would, but there is another way to define a successful business.  This can be called the Reagan/Bush/Bush/Romney plan.

In the RBBR plan, you form a Vulture Capital firm.  It finds well run companies that are fiscally sound, but are currently undervalued by the stock market.  Of course this works just as well finding companies that are not so well run, but the stock market undervalues them even taking into account their poor management.  (In a non-RBBR world, this would be sort of like buying a fixer-upper house that costs less than its intrinsic value to you.  In the RBBR world, this is like buying a building whose copper plumbing is worth more than the cost of the building to you even if the plumber is still owed money for those pipes.)

Companies usually have liabilities and assets that are of roughly the same magnitude in size.  This means that their net worth, whether positive or negative, is much smaller than the size of their assets alone.  In other words, some, or all, or more than all of their assets are offset by liabilities.

In the RBBR plan, you turn all the companies assets into cash and pay them out to the RBBR owners and or managers.  Never mind that there are creditors and employees that have prior claims on these assets.  What they can’t get their hands on will never hurt you as owner/manager.  The RBBRers get stinking rich and the rest are left to ask, “What happened to my life savings and income?”  By the RBBR definition, the RBBRers have run a successful company.  Just look at how rich they are.  Isn’t that the very definition of success?

When they have piled up enough money so that they and their descendants can live in the lap of luxury for generations, they philanthropically turn  from their business success to turn their attention to politics and running a country according to this prescription.  Maybe they can do for the country what they have done for their business.

They may find the following politico/economic situation from which to rescue us. The previous administration has left the country with nearly balanced liability payments and income.  The income comes from taxes and also from payments into pension benefit and health care benefit plans.  Let’s call these Social Security and Medicare.  On the payments and debt side, there is the cost of providing infrastructure such as roads, bridges, education, police, and fire protection that any ongoing business, er government, needs to pay for.  Then there are the payments to the people who are now ready to collect on their Social Security and Medicare benefits that they paid for.

However, these clever RBBR politicians, who learned their business from Harvard Business School (what snobs), see all those assets going to waste, when they could be used to weigh down their own pockets.  So they convince the people that they (and supposedly you) know how to spend these assets better than the government does.  Who cares if other people have prior claims to these assets.  If they can strip them from the government and pay them out mostly to themselves with a few crumbs to you, what are the people with the prior claims going to do?  Are they going to go to the police (called the SEC, the Justice Department, and other regulatory agencies)?  Even if those agencies are now run by honest politicians when the voters wake up that their bank has been robbed, what are these agencies going to do?  The money is already gone.

The job creators (called robbers in any normal use of the language) are too big to fail even if you could claw some of their ill gotten gains back.  Better to take your lumps, call it a lesson you won’t soon forget (well at least not for 50 years), and try to repair the damage these people did using whatever resources they may have left you.  Asking the RBBRers to contribute anything to help would just be unfair.

I am just applying the principles described in Vulture Capitalism Explained to running a government.

Maybe the title of this post should have been “How A Bully Would Run a Country Like His Business”.  Almost reminds you of Teddy Roosevelt and his “bully pulpit”, but I don’t think that is what Roosevelt had in mind.  Or maybe I am wrong about Teddy Roosevelt of the “Speak softly, but carry a big stick.”

Market Watch has an article Obama spending binge never happened based on data from the Office of Management and Budget (OMB), the Congressional Budget office (CBO) and Haver Analytics.

As would-be president Mitt Romney tells it: “I will lead us out of this debt and spending inferno.”

Almost everyone believes that Obama has presided over a massive increase in federal spending, an “inferno” of spending that threatens our jobs, our businesses and our children’s future. Even Democrats seem to think it’s true.

But it didn’t happen. Although there was a big stimulus bill under Obama, federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.

Thanks to Tangelia Sinclair-Moore for posting the link to this article on her Facebook page. As she pointed out Market Watch is an outlet of The Wall Street Journal.

I made the following comment on her post:

It is funny how stuff like this can appear in the news sections of Wall Street Journal outlets, and yet on the editorial page they will still say the things that have been debunked by their own news.

One might consider it to be quite damaging news that Obama who claimed to want to rescue the economy did not manage to increase spending enough to do the job. The only thing I can think of in his defense is to say that despite all the pressure from the wrong-headed Republicans and blue dog Democarats, he at least managed to prevent a decline in spending. That would have been a disaster on Herbert Hooverian dimensions.

I tried explaining this in my previous post Marissa DeFranco Misses The Mark.  I’d like to try to make it even clearer in this post.

Suppose there is a company with $400 million in liabilities and $300 Million in assets.  What do you see in such a company?  You might say, a company that will surely go bankrupt if it doesn’t have a huge offsetting income stream.  You certainly wouldn’t invest in such a company if you had a normal (or is that moral) view as to what capitalism and business is all about.

Vulture capitalists see something that you do not see. Vulture capitalists have learned to focus on one thing only, $300 Million in assets.

Without the vulture capitalists, if the company went bankrupt, the assets would cover 70 ¢ on the dollar of their liabilities to their creditors.  When a vulture capitalist buys such a company, the idea is to turn that $300 Million in assets into cash that can be paid out to the vulture capitalists.  Then they let the company follow the path that it already was on toward bankruptcy.  The only difference is that the vulture capitalist comes away with $300 Million and the creditors come away with zip, zero, nada.

What do you suppose happens to some of the creditors who considered a large part of their assets to be the debts that they expected to be repaid by the company to which they sold their goods and services?  Some of them go bankrupt, too.  The vulture capitalist who stripped the assets of the first company now has inside information, because of the temporary ownership or management of that company, as to which creditors of that company to look for as the next victim.

There is nothing magic about a company having a negative net worth (liabilities greater than assets).  The only advantage to such situations for the vulture capitalist may be that the rest of the world shuns the company’s stock and it will be cheap to take it over.  In reality, even companies with positive net worth may be more valuable to a vulture capitalist to strip out the assets than it is to run the company as an ongoing business.

Clearly, the possibility of  a vulture capitalist coming in to strip the assets of a company is such a frightening possibility, that even many well run companies hesitate to build up a large surplus of assets.  So even a company that wants to have a well funded pension plan for its employees, does not dare to do so.  Such an asset would be a very inviting target to the vultures.  If a recession or a depression hits, these well run companies are not in as good a position to weather the storm as they might have been had they not had to alter their plans to ward off the vultures in good times.

We have allowed the laws and regulations of this country to fall into such a state of disrepair and lack of enforcement that the very good parts of capitalism have been turned up-side-down.  The normal incentives to make a company turn a profit and grow and thus provide benefits to the economy as a whole as a natural part of its existence, have been turned into incentives to strip out the assets and leave the economy without jobs and without productive capacity.  Many of the other countries in the world have followed our silly example in a race to the bottom of the heap.  The fact that multi-national companies have become more powerful than most nations may play a role in this nearly universal behavior.

Sharon says to me that you cannot expect politicians who are not business people themselves or who have not studied business to explain these intricacies to the voters.  I remind her, that I am not a business person either, but here I am writing this explanation.  Why is it that I can see this so clearly, and yet, in all the years since I have come to understand this (30 or more), there has been no politician who can get up on his or her hind legs and tell people what is going on in words that they can understand?

Aside from the fact that NECN stupidly labels this video as Will gay marriage be an anchor for President Obama?, Marissa DeFranco gave a very disappointing performance on the key issue of vulture capitalism.

It is not, as the Republican said, a matter of some companies fail and some succeed. It is a matter of vulture capitalists like Bain raiding corporate pension funds, retiree health care funds, plundering the company assets, loading up the company in debt, and then walking away with hundreds of millions of dollars in profits. The employees are far worse off after the Bain “rescue” than if Bain had not stepped in and had let the company fail. Whatever profits Bain made were stolen from the employees, the company, and the new creditors that Bain enticed into lending more money. When you borrow money with no intention of repaying it, that is called fraud if little people like us do it to a bank. When wealthy people like Romney and company do it, it is called capitalism at its finest.

There is also nothing wrong with labor unions investing their pension funds in venture capital which funds the creation of new companies. This is a far cry from vulture capitalists that raid corporations of whatever assets they have not withstanding the fact that these companies already have more liabilities than assets. The fact that Bain may have done both kinds of activities does not absolve them from the part of their activities which should be illegal.

How could Marissa DeFranco fail to make this very important point?

I am afraid that the rabble rouser in Marissa DeFranco has lost the battle for dominance with the publicity and fame seeking Marissa DeFranco.

This reminds me of Marissa DeFranco’s former disdain for Democrats who make a very weak case for their own most important issues.

Inspired by a pin on Marissa DeFranco’s web site

Nation Of Change headlines the comment New French President: My Real Enemy is the World of Finance.

However the real meat of the interview by Democracy Now with William Black is Black’s answer:

And Obama needs to go back to what he originally proposed, which was brilliant. It was a Republican idea: revenue sharing. We all knew that the states and localities, unlike the federal government, cannot run significant deficits, and that there was going to be a financial holocaust that was going to reduce vital services and throw hundreds of thousands of public workers out of work when they were most needed and exacerbate the great recession and dramatically slow the recovery. So, the recovery bill that—the stimulus bill that President Obama proposed had that provision. The Blue Dog Democrats, the conservative Democrats, and the Republicans got together to kill that. And unfortunately, the Obama administration didn’t fight for it.

Here’s what we know. The Wall Street Journal just ran an op-ed saying, don’t allow the federal government to help the states. That tells you that’s what they’re scared of. It would be economically brilliant, it would be politically brilliant, to bring back the revenue sharing provisions, which are, after all, a Republican idea, and make the Republicans make the call that they want a financial holocaust throughout America, and they want us to slip back into a recession.