Boycotting big business
Private equity firms have become rich at the expense of workers everywhere. It's time to recognise their sins
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* Ian Williams
The sea of faith in the magical efficacy of the market seems to be receding in practice, even if Republicans and New Labour seem to hold the faith with the kind of fervency that only failure can foment.
Today, in cities across the world from New York to London to Bangalore, unionists and others will be demonstrating against Kohlberg, Kravis and Roberts, once the eponymous villains of the best-selling book Barbarians at the Gate.
Spawned at the height of Reaganomics, KKR is to financial engineering what Tamburlaine was to city planning. Most famously with RJR Nabisco, their buyout tactics took companies and squeezed them and their employees dry to pay off the interest on the loans they used to buy up their victims. It was a bit like the old custom of charging witches burnt at the stake for the firewood.
No matter that George Bush Sr rightly called this "voodoo economics" in the media and the chattering classes. Mammon, in his avatar of the market, ruled supreme. Greed was good. Trickle-down worked.
Epitomising the goodness of greed, Other People's Money played to packed houses of yuppie philistines night after night in the Minetta Lane theatre when I first moved to New York. It dramatised the conflict between Larry the Liquidator, the ur-yuppie predator, and Jorgy, the patrician CEO of New England Cable and Wireless, who could stand in for most of Detroit at the moment. Jerry Sterner, the jovial playwright, explained the concept of short selling over drinks. Shorting, now under fire from the US securities and exchange commission, was his metier.
Now, with the world's financial system on the edge of collapse, only kept afloat with massive infusions of government money and fire fighting regulations, there are some serious, if belated, signs of doubt. The real wonder is that it has taken so long. The savings and loan scandal, which brought John McCain to the momentary attention of a docile media, should have been a warning, but it wasn't. I remember asking NBC News' Tom Brokaw at a BBC seminar why the US media did not raise the issue. He admitted their failure and blithely said, "The problem was that no one raised it on the hill." Of course they didn't, I riposted, they all had their hands in the till!
Since then, we have had Long Term Capital Management, Enron, Goldman Sachs and now Fannie Mae and Freddy Mac all going down as a chorus of CEOs sang on the poop deck about how shocking it was that Sarbanes-Oxley mandated them to tell the truth about their operations. In the UK, Northern Rock, Equitable Life, Severn Water and Railtrack all showed what untrammelled greed can do if allowed.
So, what is so pernicious about private equity funds? How shall we count the ways? The investors are the very people who have spent the last few decades getting very, very rich and amassing tax breaks to ensure they get richer, while the income of most Americans has stagnated for those same decades.
They have looted shareholders and employees and pensioners, while at the same time mismanaging American industry into the ground. American CEOs can ignore their shareholders to a degree unthinkable in Europe, which is one reason they have been able to increase their pay even as their companies floundered. By going private, companies are removed almost entirely from the already inadequate scrutiny of regulators and free from disclosure requirements to their shareholders. The funds managers, in the US, can rake off huge profits free of income tax. The finance houses can make fortunes in fees arranging the acquisitions and by inventing increasingly dubious financial instruments.
Adam Smith's "invisible hand" is much quoted. However, he also knew what happened when businesspeople meet behind closed doors.
People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.
They have done so confident that they own the politicians on both sides of Congress, so that except for brief moments they will get what they want in avoiding taxation and regulation. The barbarians are not at the gate. They are inside and running the city.
The demonstrators are right. It is time to call the barbarians to account.
This article was first published on guardian.co.uk on Thursday July 17 2008. It was last updated at 18:33 on July 19 2008.
* guardian.co.uk © Guardian News and Media Limited 2008
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