Mitt Romney's private equity record is suddenly the talk of the GOP presidential contest. What do we know about the industry he helped to create?
With Mitt Romney on the march towards the Republican presidential nomination, chances are we're all going to be hearing a lot about the world of private equity for the next 11 months. The GOP frontrunner is already getting tarred by his primary rivals for his time running Bain Capital, where he helped write the playbook on how to buy up companies, rebuild them for maximum value, and flip them for a tidy profit.
Was Romney just running a corporate chop-shop? Or was he pioneering a new way to unlock the worth in American business? Whatever the answer, the blueprint he helped design has been massively influential. In 2007, investors had plunked more than $200 billion into funds like Bain.
Academics have scrutinized the broader economic effects of private equity and what it does to companies, industries, workers, and investors. Here's a brief guide to help you answer the question: Is private equity good or bad for the economy?
Do private equity buyouts hurt workers?
Yes, then no.More workers get fired in the aftermath. Then more get hired.
In the nightmares of unions and Occupiers, a private equity buyout works something like this: A firm run by men wearing Brioni suits snaps up a helpless corporation, fires as many workers as it can, lards their new asset up with debt, and then sells it off for as much profit as possible. The employees suffer. The fat cats make bank.
The reality, as illustrated in a 2011 study from researchers at the University of Chicago, Harvard, and the U.S. Census Bureau, is more complicated. The paper examined what happened to workers at 3,200 companies targeted in private equity acquisitions between 1980 and 2005. Companies did tend to fire more workers in the years after a buyout compared to competitors in their industry. But they also tended to hire more new workers. They also were more likely to sell off divisions or buy up new ones. As a result, companies involved in a private equity deal saw much, much more turnover -- or "job reallocation" as the academics put it -- but only a net decrease in employment of about 1% compared to other businesses.
In other words, it's creative destruction, but chronologically, it works out more like destructive creation. Employees are fired. Then new ones are hired. The chaos and change is undoubtedly brutal for those who get caught up in it, but the stereotype of massive net job losses isn't necessarily accurate.
Do private equity firms drive companies into bankruptcy?
The data isn't complete, but some indicators say no.
Some criticize private equity firms for leaving companies in worse financial shape than when they were purchased. In its recent look at Romney's record regarding 77 companies he worked with at Bain, the Wall Street Journal said that 22% of them filed for bankruptcy reorganization or closed up shop within eight years of the fund's initial investment. However, it's unclear whether those numbers are normal for private equity on the whole.
Steven Kaplan of the University Chicago and Per Stromberg of the Stockholm School of Economics reviewed a sample of more than 17,000 private equity transactions to see how funds exited the deals. Only about 6% ended in either bankruptcy or reorganization, giving them a yearly default rate that was lower overall than the average corporate bond issuer.* That feat was especially impressive, considering that many private equity firms, including Bain, specialize in turning around troubled or risky businesses.
The analysis did not include bankruptcies that occurred after a private equity firm sold off its stake. Does that matter? Depends. You might say a private equity firm can't be held responsible for what happens to a business after they cede control. But these businesses matter to private equity's record if you suspect firms are more likely to offload companies that aren't working out.
Does private equity make the whole economy more efficient?
Possibly. Industries with lots of private equity activity actually see faster growth.
Whether or not private equity helps most businesses, it seems to have a positive effect on the wider business climate. Looking at 20 industries in more than two dozen countries between 1991 and 2007, a research team from the Stockholm School, Harvard, and Columbia University found that industries with private equity activity grew 20% faster than other sectors. After running several mathematical checks, the paper concluded it was unlikely that private equity funds were simply investing in industries that were already primed for faster growth. Rather, they concluded that the lessons from private equity firms taught entire industries to be more efficient.
Do investors make money?
Not as much as you might think. They might be better off putting their money in stocks.
In 2005, The University of Chicago's Kaplan and Antoinette Schoar of MIT looked at whether investors who pour their billions into private equity got their money's worth. The answer: Not so much. Looking at data from 1980 through 2001, the researchers found that, after the managers took out their fees, investors actually made slightly less on private equity deals than they could have by investing in an S&P 500 index fund. Some funds were much more profitable than others. In the big picture, though, stocks won out.
But the fees make all the difference. Private equity firms are known to regularly take a 20% cut of profits. Lo and behold, once the researchers accounted for fees, private equity thoroughly outperformed stocks. Apparently, quite a lot of value winds up with the private equity guys, themselves.
*There was a big gap in the data, however. The research sample marked the outcome of 11% of the private equity deals as "unknown." As
Kaplan and Stromberg noted, there might have been more bankruptcies
lurking within that group of unknowns. A previous study found
that 23% of the large private equity transactions that took public
companies private during the 1980s ended in bankruptcy.
To many white Trump voters, the problem wasn’t her economic stance, but the larger vision—a multi-ethnic social democracy—that it was a part of.
Perhaps the clearest takeaway from the November election for many liberals is that Hillary Clinton lost because she ignored the working class.
In the days after her shocking loss, Democrats complained that Clinton had no jobs agenda. A widely shared essay in The Nationblamed Clinton's "neoliberalism" for abandoning the voters who swung the election. “I come from the white working class,” Bernie Sanders said on CBS This Morning, “and I am deeply humiliated that the Democratic Party cannot talk to where I came from.”
But here is the troubling reality for civically minded liberals looking to justify their preferred strategies: Hillary Clinton talked about the working class, middle class jobs, and the dignity of work constantly. And she still lost.
Trump's election has reopened questions that have long seemed settled in America—including the acceptability of open discrimination against minority groups.
When Stephen Bannon called his website, Breitbart, the “platform for the alt-right” this summer, he was referring to a movement that promotes white nationalism and argues that the strength of the United States is tied to its ethnic European roots. Its members mostly stick to trolling online, but much of what they do isn’t original or new: Their taunts often involve vicious anti-Semitism. They make it clear that Jews are not included in their vision of a perfect, white, ethno-state.
On the opposite side of American politics, many progressive groups are preparing to mount a rebellion against Donald Trump. They see solidarity among racial minorities as their goal, and largely blame Trump’s election on racism and white supremacy. Three-quarters of American Jews voted against Trump, and many support this progressive vision. Some members of these groups, though, have singled out particular Jews for their collusion with oppressive power—criticisms which range from inflammatory condemnations of Israel to full-on conspiracies about global Jewish media and banking cabals.
A Chinese scholar argues that the U.S. shouldn’t touch Taiwan—just like China wouldn’t back separatists in Texas or Hawaii.
Shortly after news broke of Donald Trump’s phone call with the head of Taiwan—the first direct communication between American and Taiwanese leaders in 37 years—one of the leading Chinese scholars of U.S.-China relations offered a stunning proposal: If the U.S. president-elect took similar actions as president, the Chinese government should suspend the world’s most important (and precarious) partnership. “I would close our embassy in Washington and withdraw our diplomats,” said Shen Dingli, a professor at Fudan University in Shanghai. “I would be perfectly happy to end the relationship.”
What made the recommendation especially notable was that, just days earlier, Shen had been arguing that Trump’s victory was good for China—much better than the election of Hillary Clinton would have been. So what was it about the Taiwan call that had so quickly soured Shen on Trump? Where did he now think the U.S.-China relationship was headed, and what might that mean for the wider world?
The HBO drama’s finale hinted at a dark, meta message.
This post contains spoilers for the season finale of Westworld.
In 2013, a widely cited study published in Science suggested that reading literature increases a person ability to understand other peoples’ emotions. In 2016, another study seemed to debunk it, finding the original study’s results irreplicable and its resulting media coverage way too broad. “Reading Literature Won’t Give You Superpowers,” went The Atlantic’s headline from last week about the reversal.
It might seem laughable in the first place for anyone to think literature bestows superpowers. But that’s actually one of the more abiding beliefs of popular culture, and the question of whether stories improve the soul and mind—and better humanity more broadly—remains eternally in dispute. It’s a question that HBO’s Westworld has riffed on for 10 episodes, with the popular drama’s finale last night suggesting a cynical take on the social value of storytelling.
A professor of cognitive science argues that the world is nothing like the one we experience through our senses.
As we go about our daily lives, we tend to assume that our perceptions—sights, sounds, textures, tastes—are an accurate portrayal of the real world. Sure, when we stop and think about it—or when we find ourselves fooled by a perceptual illusion—we realize with a jolt that what we perceive is never the world directly, but rather our brain’s best guess at what that world is like, a kind of internal simulation of an external reality. Still, we bank on the fact that our simulation is a reasonably decent one. If it wasn’t, wouldn’t evolution have weeded us out by now? The true reality might be forever beyond our reach, but surely our senses give us at least an inkling of what it’s really like.
The election is over, but the president-elect is demonstrating he hopes to dominate Washington the same way he dominated his campaign rivals: by taking the case to his loyal movement of supporters.
CINCINNATI—The campaign never ended, and maybe it never will.
So there was Donald Trump a few days ago, doing what he had always done—the thing he knew how to do—the thing that got him here and made him president-elect: standing on a stage, surrounded by the people who couldn’t get enough of him, letting them have what they wanted.
Trump was here, he told them, to say thank you to the people of Ohio. “We won the state by almost 10 points, which they say is totally unheard of!” he said. And then, just as he had during the campaign, he couldn’t resist taking aim at one of his critics, the Ohio governor, John Kasich, who opposed Trump throughout the election and voted for John McCain for president instead.
In two high-profile trials—those of Officers Michael Slager and Ray Tensing—juries declined to hold cops accountable for taking the lives of civilians.
How could the trial have ended in anything but a conviction?
On April 4, 2015, the 50-year-old black motorist was pulled over in North Charleston, South Carolina, to address a broken brake light—a matter that inanely requires citizens to submit to impromptu interactions with armed agents of the state, despite the risk roadside stops pose to the safety of motorists and police officers.
The motorist, Walter Scott, unlawfully fled on foot from his 1991 Mercedes. Then Officer Michael Slager, who executed the traffic stop, pursued him on foot, drew his weapon, and shot the unarmed man in the back as he ran away. A passerby captured what appeared to be a murder on his mobile phone camera, thought about erasing it for fear of his own safety, but decided to come forward after details of the video contradicted the police report that the officer in the case filed.
Confronting racism can be crucial, even when it’s not persuasive.
In the brushfire wars since Donald Trump won the presidency, skirmishes over how to speak to his coalition of voters have consumed liberals. Leading the vanguard in those conversations is a collection of writers and thinkers of otherwise divergent views, united by the painful process of reexamining identity politics, social norms, and—most urgently—how to address racism in an election clearly influenced by it. Though earnest and perhaps necessary, their emphasis on the civil persuasion of denizens of "middle America" effectively coddles white people. It mistakes civility for the only suitable tool of discourse, and persuasion as its only end.
This exploration of how to best win over white Americans to the liberal project is exemplified by reactions to Hillary Clinton’s placing many of Donald Trump’s supporters in a “basket of deplorables.” The debate about whether to classify these voters as racist or bigoted for supporting a candidate who constantly evinced views and policies many believe to be bigoted is still raging. As Dara Lind at Vox expertly notes, Clinton’s comments themselves were inartful precisely because they seemed focused solely on “overt” manifestations of racism, like Klan hoods and slurs. That focus ignores the ways in which white supremacy and patriarchy can function as systems of oppression, tends to forgive the more refined and subtle racism of elites, and may ultimately lead to a definition of racism in which no one is actually racist and yet discrimination remains ubiquitous.
Firefighters have now found 36 bodies inside the artist collective where dozens of people lived together.
Rescue workers say 36 people were killed in Oakland, California, in a fire that torched an artist-collective warehouse known locally as the “Ghost Ship.” It may take weeks to identify everyone killed, because the flames have charred some bodies so badly they’ll have to be identified through dental records. The Alameda County Sheriff’s Office has also opened a criminal investigation into what caused the fire. So far, it’s thought to have been an accident—the result of too many people in a place with rampant building-code violations. But already some of the artistic community’s frustration seems aimed at both the warehouse’s artistic leader as well as the Bay Area’s unaffordable rent.
The fire started Friday during a late-night rave being held at the warehouse, home to a couple dozen artists. The blaze grew so quickly that flames and smoke trapped many of the people inside, and forced some to leap out of the second-floor windows. Since firefighters extinguished the flames early Saturday morning, rescue workers have methodically removed bits of ash and debris, putting them in dump trucks to be taken to an offsite location, where they can be sorted and checked in case they contain human remains. It is one of the worst U.S. fires in recent memory, bringing to mind the 2003 blaze in West Warwick, Rhode Island, that killed 100 people at a nightclub called the Station.