THE STUMP MAY 21, 2012
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In further evidence that this city knows what to do with molehills (suggested Trenton-style motto: “what Washington makes, the world re-tweets”), much has already been said and written about Newark superman (and mayor) Cory Booker’s unhelpful criticism of Team Obama’s attacks on Bain Capital, the private equity firm that made Mitt Romney a quarter-billionaire and taught him “how jobs come and how they go.” For those who missed it, Booker declared on Meet The Press: “I have to just say from a very personal level I’m not about to sit here and indict private equity,” he said. He followed this up by seeming to equate the Obama’s campaign’s Bain attacks with the proposed $10 million attack on Rev. Jeremiah Wright: “This kind of stuff is nauseating to me on both sides.”
The Twitter-happy Booker has since followed this up with more YouTube statements and clarifications than we were getting from Charlie Sheen during last year’s meltdown, Team Obama has pushed back pretty hard at him (“In this particular instance he was just wrong,” said David Axelrod), and the Republicans are predictably delirious. Several of my colleagues have offered good commentary on the substance of Booker’s remarks, but I thought I’d add a word about the context of his riff. Many people who think of Booker only as your typical urban liberal (who, for one thing, endorsed gay marriage long before Obama) may be wondering where his defense of private equity is coming from. Well, where it’s coming from is from one side of the rift that I described in this piece: the split between the Obama administration and the hedge fund and private equity managers who, only a few years ago, felt a special bond with Candidate Obama. Many of the same Wall Street types who saw Obama as a new kind of Democrat, a brilliant superstar floating above the hacks (not unlike themselves, floating above the time-serving i-bankers!) saw the Ivy League-educated, magnetic Booker much the same way, and supported him accordingly—Booker’s campaigns for mayor got huge backing from across the river, as his decidedly hackish opponent Sharpe James liked to point out. Well, three years later, Obama has lost many of these supporters, for the reasons I describe in my piece. But Booker—who does not have to worry himself about things like financial reform and the carried interest loophole—has managed to remain in their good graces. He has not had to seriously confront the inherent contradictions that have defined the Wall Street-Democratic alliance of the Bob Rubin/Chuck Schumer era. That is, until now.
And there’s more to the local context than just Booker’s proximity to Wall Street and past support from it. Who is Booker’s main rival, frenemy, or whatever you want to call it, in New Jersey politics? Governor Chris Christie. Their complicated relationship is such that they can shoot self-deprecating videos together, while knowing that they, and their ginormous ambitions, may one day be facing each other across a ballot. And here’s the thing about Chris Christie: The hedge fund and private equity types love him now more than just about any other elected official. It was Wall Street, in the person of billionaire hedge funder Paul Singer and others, that was goading Christie to run for president. As I described in my piece:
Their idol is Chris Christie, the tough guy across the river. Former [Administration] Official A recently met with a major hedge fund executive who was “waxing poetic” about the New Jersey governor. “It’s the great man theory of history,” the former official says. “They believed Obama was a great man, and—lo and behold—Washington is a complicated place, and they blame it all on him, and now they believe it’s going to be a former prosecutor who’s going to solve all their dreams.”
Booker knows this, and knows that it would be tough to win a face-off against Christie if he doesn’t have at least some of the money guys on his side.
A final thought: It is worth noting that, even before this episode, there were some fellow Democratic elected officials who were skeptical of Bookermania. I was meeting not long ago with another African-American mayor of a good-sized city and when I brought up Booker he cocked an eyebrow, harrumphed, and said, “Have him tweet ya.” A similar sentiment is now probably rife in a certain downtown Chicago office.
follow me on Twitter @AlecMacGillis
7 comments
Citizens United opened Pandera's box
- Nusholtz
May 21, 2012 at 8:15pm
Andrew Sullivan posted a great reader comment today about this kind of stuff. This is perfectly legal given our current system and many respectable people can argue that this stuff is good for the economy, but I simply don't see it. We have allowed a financial class to manipulate our economy's long-term health through bullsh*t tax policy. This is a moral issue. Change Congress. Change the laws. Tax these people and regulate the hell out them. http://andrewsullivan.thedailybeast.com/2012/05/the-bain-of-this-campaign.html
- Neurobass8
May 21, 2012 at 9:25pm
Well said by Andrew Sullivan, and educational. And, framing comments about Bain as an attack on "free enterprise" is just silly. Also it misses the point by a mile, which is, there is enterprise and there is the deliberate destruction of viable companies, even entire industries, for the sake of making a quick buck. Americans need to get more sophisticated about how things really work economically. We've been fed a bunch of propaganda: capitalism = free enterprise = democracy; regulations = bad; socialism = STALIN, also of course, Hitler, who was "Left Wing"; and of course, THERE IS NO CLASS IN AMERICA and anybody who says otherwise is Waging Warfare. Please can we grow up over here?
- Sophia
May 21, 2012 at 10:02pm
Welcome neurobass. The last comment on his later post basically captured all of what I wanted to say and had the benefit of being written by someone who legitimately knows what he's talking about (http://andrewsullivan.thedailybeast.com/2012/05/the-bain-of-this-campaign-ctd.html): I have to take exception with your reader who argued that neither side gets the private equity story right. In reality, the left's story is generally correct, though incomplete, while the right gets the story wrong because, well, it has to. In addition, a completely accurate telling of the story would include the terms "financial engineering" and "dividend recapitalization." Financial engineering is the alchemy that drives the entire private equity industry - by rejiggering a company’s capital structure, a private equity firm purports to "create value" that previously didn’t exist. Like all other forms of alchemy, if it actually happened that simply, it might not be a bad thing. Unfortunately, the processes that create that value for the private equity firm - levering the company’s balance sheet with borrowed money, reducing headcount, cutting costs and, yes, tax arbitrage - tend to whipsaw a company by depriving it of any margin of error (because it has to spend its cash flow on interest payments) while also diverting resources away from future profit-maximizing initiatives (because all of its cash is being spent on interest payments). This is the legendary "discipline" that private equity apologists cite in these conversations, but there is very little focus on making the business, as the business, run better. Instead, the focus is on freeing up enough cash to service the debt and return cash to the new owners. The end result tends to be a less ambitious company with a far smaller footprint (employees, plants, etc.) and a reorientation away from investment in the future growth of the business and toward like as a "cash cow." This is the case even when private equity "works." Dividend recapitalization is the most insidious subset of financial engineering - the owners take out a loan backed by the assets of the company and use the proceeds from the loan to write themselves a dividend check of roughly the same amount. The company is again forced to focus all of its attention on servicing this new debt, frequently groaning under the pressure. When it fails in that mission and tumbles into bankruptcy, the private equity backers toss the keys to the creditors and walk away, having already recouped most, if not all (or, in some cases, many multiples of all) of their investment. Loans are, fundamentally, supposed to be used to boost investment in productive enterprises, but in this case, the financial/private equity industry has bastardized that premise to funnel money away from productive uses and straight into their coffers. I have worked around the private equity industry for nearly a decade, and I have never met anyone in it who can tell me with a straight face what productive ends the dividend recap serves (like your other reader, I do not consider tax arbitrage "productive"). All of this (including the cash cow and tax arbitrage concepts) is complicated stuff that requires a familiarity with finance that not many voters possess, which is why the left has such a hard time explaining what is really going on and instead leaves itself open to charges of demagoguery by focusing on the human cost of Bain’s investments and follow-on decisions. That’s unfortunate, but it does not render false the left’s substantive critiques on the topic, regardless of what Cory Booker and Harold Ford say. The right, on the other hand, can’t possibly reckon honestly with the pros and cons of private equity, because to do so would be an admission that it consists mainly of financial parlor tricks that benefit a small group of wealthy individuals at the expense of virtually everyone else. They know how that would play with the voters, and so they obfuscate at best, lie at worst and proclaim "class warfare" at every turn.
- chaitless
May 21, 2012 at 11:04pm
Good heavens. Do they want to privately equitize the US?
- Sophia
May 22, 2012 at 1:25pm
Ugh.
- miceelf
May 22, 2012 at 1:36pm
Actually, yes, Sophia. And I'm hoping the ads continue on heavy rotation. There are far too many dangling loopholes that these guys exploit to reduce corporate tax payments, make jobs much less secure, shift jobs overseas, and drive American firms bankrupt. Private equity as a class of investment does not outperform the market by much, so in another sense, they are fleecing pension funds of elderly and middle class Americans (which pay hefty management fees that help negate any market-beating edge) even as they make it more precarious to be a retiree or middle-class worker. It's toxic and it's about time someone tore them a new one. As to the private equitization of the US: note that when firms get the Bain treatment, workers soak up unemployment, disability, and need to be bailed out by the citizen-funded Pension Benefit Guarantee Corporation. But Bain makes bank, no matter how well or poorly the company does. That, of course, is what Sarah Palin called crony capitalism. It's the same privatize the profits, socialize the losses, heads I win, tails I win template we saw in 2008 when it came to the TARP and bailout of the big banks. Not only is it fair game for Obama to exploit, it would be political malpractice if he didn't use it as a wedge to separate the wheat from the chaff. Here, the wheat are everyone from liberal Dems to moderate Republicans who don't like how their party sold out their economic interests and aren't reminded often enough of this fact. And the chaff are the Republican partisans who will pull the lever anyway. I'm hopeful that this line of attack (as well as the rescue of GM with real costs for all involved but benefits to the entire country--the way you're supposed to do a bailout) will keep the Rust Belt in play and possibly shift it to 'lean Democratic'. Heck, maybe it will help offset the gay marriage losses Democrats are taking in NC and in Congressional races in Blue Dog territory.
- chaitless
May 22, 2012 at 9:55pm