Chronicles of Casino Capitalism: Kicking Off a Series

In the past few days several disparate themes have seemed to take on a connected shape. Or maybe I'm just tired. Still, I am thinking of:

  • Discussions over the past two weeks about why the world's dominant nation has such a uneven, shaky, and too-often run-down infrastructure;
  • Discussions over the past few days about why it's so hard even to call a taxi in the imperial capital of that same dominant nation;
  • News early this week that another once-proud stalwart of American advanced-technology manufacturing, now bankrupt, is being taken over by Chinese investors;
  • News this week about Mitt Romney's "awkward years" at Bain: the period between 1999 and 2002, when he was theoretically no longer involved in management or decisions at Bain Capital but was still listed as its CEO and as its 100% owner (Part of a 2001 Bain SEC filing below);

"Bain Capital Partners VI, L.P., a Delaware limited partnership ("Bain Partners VI") is the sole general partner of Fund VI and Coinvestment Fund. Bain Capital Investors VI, Inc., a Delaware corporation ("Bain Investors VI"), is the sole general partner of Bain Partners VI. Mr. W. Mitt Romney is the sole shareholder, sole director, Chief Executive Officer and President of Bain Investors VI and thus is the controlling person of Bain Investors VI."

  • A corruscatingly wonderful novel I've just finished, Other People's Money by Justin Cartwright (at the recommendation of one of my sons -- having adult children is great), which opens with this quote from John Maynard Keynes in The General Theory
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

With all that as prelude, let's dip into the email bag. There are countless very interesting infrastructure messages I'll get to shortly. But let me start with this one, from a former employee of the Hawker Beechcraft Corporation of Wichita, which is about to be owned by Superior Aircraft of Beijing. I initially presented this story for what it showed about the strengths and weaknesses of China's economy. The reader says we should consider what it shows about America.

Here's the background to his message, which is long but worth reading. In 2007, Goldman Sachs and Onex Corporation formed the Hawker Beechcraft Corporation from aircraft facilities they had bought from Raytheon. The company got very heavily loaded up with debt; it laid off hundreds of workers; two months ago it went into bankruptcy; this week a sale to Chinese purchasers was announced. The reader takes up the story from there:

The pending sale of HBC highlights an interesting situation.  Will the US courts allow the buyer to avoid paying their pension obligations and shift that burden to the American tax payer so the new Chinese company can be more profitable?  Reportedly none of the buyers are willing to fund the shortfall in the pension plan.

Since the original bond holders have already lost their investment and the new hedge funds have spent pennies on the dollar to become the debtors in possession, what will their profits be from this short term investment?  Will their profits be maximized at the expense of the American tax payer by working to shift that burden to the PBGC [Pension Benefit Guaranty Corporation, a federal agency] so that more of the purchase price goes to them?...

Who will watch out for these groups?  Will it be the current management team that wants to negotiate the best and lowest cost overhead so they can look good?  Will it be the current team that more than likely will get some kind of bonus package for engineering the sale, or at least will receive a hefty incentive package linked to future earnings?... The only hope will be a creditors committee of responsible people and a bankruptcy judge that can see through the maneuvers and stand up for the workers, retirees, and the American taxpayer....

If you look at the finances of the company pre recession and put reasonable growth and profit figures as compared to others in the industry, the only way HBC could have survived [after all the debt taken on following the Goldman/Onex takeover] is by Goldman/Onex flipping the company.  They would not have been in a position to make the upcoming debt payments even with a normal economy.  Internally, they did not ever make plans to make those payments. 

If you and I buy a house that way, the banks would say we defrauded them.  The only difference is the people who will take the biggest hit are the employees.  The other investors move on to the next possible home run.  Pre bankruptcy HBC never said that the pensions were a drag on the company.  It was only the debt, as soon as they got rid of that, then came the pensions.  The pension plan was fully funded at the time of the sale in 2007 and was 98% in 2009.... 

Skating on the pension plans and making the American tax payer pay is just not right...The courts and lawyers will just work out a deal that favors the hedge funds and the current management team and leave everyone else in the wake.

More to come.

Update One of the hedge funds to which the over-leveraged Hawker Beechcraft owes money is Sankaty Advisors, a name that may ring a bell. So there could me more than merely a thematic connection among some of the items above.