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Andrew Dittmer: Eileen Appelbaum and Rosemary Batt on How Private Equity Really Works

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Yves here. Naked Capitalism contributor Andrew Dittmer, perhaps best known for his series on libertarianism (see Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and his responses to reader comments) has returned from his overlong hiatus to interview the authors of the highly respected new book, Private Equity at Work.

Eileen Appelbaum and Rosemary Batt have produced a comprehensive, meticulously researched, scrupulously fairminded, and therefore even more devastating assessment of how the private equity industry operates, including its deal and tax structuring methods, its impact on employment, and whether its returns are all they are purported to be. Their work was reviewed in the New York Review of Books; we also discussed it in this post.

Earlier this year, Andrew spoke with Appelbaum and Batt, and the first part of their discussion covers the problematic relationship between private equity funds (general partners) and their investors (limited partners) and how private equity affects other businesses.

In some cases, Appelbaum and Batt bending over backwards to be evenhanded. For instance, they attribute the explosion in CEO pay not to the leveraged buyouts industry (private equity before it was rebranded in the 1990s) but to an article by Michael Jensen in the Harvard Business Review that argued for paying CEOs like entrepreneurs. While narrowly true that the Jensen article was the proximate cause of the shift in big corporate pay models, having lived through the 1980s and the way that LBOs captured the attention of the business press, it is hard to imagine Jensens thesis being taken seriously in the absence of the LBO boom. The maximize shareholder value theory of corporate governance was first presented in a Milton Friedman New York Times op-ed in 1970 and had not gotten traction with the mainstream. It was the wave of takeovers of overly-diversified conglomerates in the 1980s and the easy profits garnered by breaking them up and selling off the pieces that seemed to prove the idea that too many CEOs didnt have the right incentives to run their businesses well (and in fact, its also true that the business press of the 1970s decried American management as hidebound and much less good at working with labor than the Japanese or Germans). But as weve seen since then, equity-linked pay has produced rampant short-termism and facilitated looting by executives. Even if the old pay model was problematic, its replacement has performed even worse, save for the CEOs themselves.

By Andrew Dittmer, who recently finished his PhD in mathematics at Harvard and is currently continuing work on his thesis topic as well as teaching undergraduates. He also taught mathematics at a local elementary school. Andrew enjoys explaining the recent history of the financial sector to a popular audience

Interactions of General Partners (GPs) with Limited Partners (LPs)

Eileen Appelbaum: Rose and I did a briefing at the AFL for the investment group. We had investment people from both union confederations who are concerned about the fact pension funds are putting so much money into private equity. They told us that they had never been able to see a limited partner agreement until Yves Smith published them. The pension fund people are so afraid of losing the opportunity to invest in PE. Some general partner could cut them off for having shared the limited partner agreement. Unbelievable.

Andrew Dittmer: In general, LPs seem to have a pretty submissive attitude toward GPs. Where do you think this attitude comes from?

Rosemary Batt: One cause is the difference in information and power. Many pension funds dont have the resources to hire managers who are sophisticated in their knowledge of private equity firms. They dont have the resources to do due diligence to the extent they would like to, so they need to rely on the PE fund, essentially deferring to them in what they say.

Eileen Appelbaum: I think that there is a reluctance to question this information or to share it with other knowledgeable people they are afraid that if they do, they will not be allowed to invest in the fund because the general partners will turn them away.

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Andrew Dittmer: Eileen Appelbaum and Rosemary Batt on How Private Equity Really Works

Anti-terror measures will make us the extremists we fear

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Theresa May is pushing a terrorism bill through parliament which will place a legal duty on universities to ban radical speakers. Photograph: Handout/Reuters

In the 1860s when the Austrian ambassador complained to the home secretary, Sir George Grey, about Karl Marx and other revolutionaries, he received a brief and dismissive reply: Under our laws, mere discussion of regicide, so long as it does not concern the Queen of England and so long as there is no definite plan, does not constitute sufficient grounds for the arrest of the conspirators.

Not quite what the current home secretary would have replied, I suspect. Theresa May is rushing yet another terrorism bill through parliament. This will place a legal duty on universities to ban radical speakers mere discussion in the words of her Liberal predecessor, who probably also took a more favourable view of being labelled radical.

Fifty years ago Malcolm X came to speak in Oxford, an episode now recalled to stir the sentimental memories of the universitys alumni. Today, of course, he would never have made it to Oxford; the UK Border Agency would have turned him back at Heathrow. After all even the very silly, but vile, Julien Blanc, the seducers guru, has been banned.

Malcolm X would probably have fared better in his homeland. The United States remains a nation of laws girded by a constitution, despite police shootings and protest riots. Sadly the United Kingdom is rapidly becoming a nation of ministerial discretion and direction, ever wider administrative powers that would probably have more than satisfied the 19th-century Prussian and Austrian bureaucrats who were so worried about Marx.

Under Mays new legislation, universities will have to follow the guidance issued by the Home Office. If they fail to follow it, the home secretary will be able to issue them with directions. Far from being regarded as institutions in which the most vigorous (and contested) debates should be encouraged, higher education institutions are now to be treated as fertile ground for the radicalisation of gullible students by supporters of extremism.

This is not the first time the government has introduced legislation to require universities to ban extremist speakers, although paradoxically the first political intervention back in the 1980s was to stop universities, and student unions, banning rightwing speakers, extremists of another ilk.

But this initial, and rather one-sided, libertarianism was quickly succeeded by more authoritarian interventions. Until now, the centrepiece has been the Prevent strategy, begun under Labour and revamped by the current government.

The 2011 white paper asserted the governments absolute commitment to defending freedom of speech. But, in the very next sentence, it argued that preventing terrorism meant that extremist (but non-violent) views had to be challenged by the administrative measures it then outlined. We have travelled a long road from Greys reply to the ambassador.

There is so much wrong with the new legislation. The key terms such as radicalisation, extremism and terrorism will be defined by politicians who are advised by securitocrats, cowed by tabloid-inflamed public opinion and influenced by electoral advantage.

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Anti-terror measures will make us the extremists we fear

Morning Star :: Only a boycott will stop Amazons persistent abuse of its workforce

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It doesnt want to pay its taxes, it doesnt want to pay a living wage, it doesnt want to pay publishers, distributors or authors its time to act, says JIM JEPPS

Today has become known as Black Friday, an import from the US, where the pre-Christmas shopping frenzy reaches peak stupidity. Things have got so frantic in the US that in last two years running two people were shot in separate incidents over wide-screen TVs, parking spaces and for their rights to spend like an enraged bull.

Large corporations use the day to focus US attention on filling their coffers to the extent that advertising for goods and services becomes indistinguishable from down-the-line propaganda for capitalist consumerism.

Ever the more level-headed neighbours in Canada responded in 1992 with an activists annual Buy Nothing Day where they advocate taking a day off rampant consumerism and perhaps reassessing how happy our possessions really make us anyway.

So indistinguishable from big politics has Black Friday become that this week in Ferguson pastor Jamal Bryant, who was arrested last month for protesting against police violence, has declared a total boycott this weekend. He said: If a white officer kills a child he is still worthy to work? Black children matter. Black lives matter ... our generation stand because they refuse to roll over ... marching is good, praying is necessary (but) we need a clear economic agenda ... this Friday will be Black and Blue Friday, on this coming Thanksgiving black people will not be marching to stores, but marching against injustice.

The pastor declared: Lets shut it down. We are standing with the workers of Walmart at thousands of stores across the country who will not be working because they deserve a liveable wage. We declare war on poverty, we declare war on injustice and we declare war on anybody who does not respect black children. We are going to keep our money to ourselves until the red, white and blue salutes the black in this country.

In Britain most of us who encounter Black Friday do so via Amazon, which artificially ramps up sales as as it tries to get us to do our Christmas shopping entirely through them. As its near monopoly strengthens it is threatening the very existence of independent stores particularly book shops. Its estimated that one book store closes a week and thats a trend that will continue unless we resist it.

Some booksellers in Britain are hitting back against tax-avoiding Amazon with a cheeky Black and Red Friday, calling on people to boycott the online retailer this Christmas.

Nik Gorecki of the Alliance of Radical Booksellers (ARB) and left bookshop Housmans said: The public is waking up to the bad business practices of Amazon and a new boycott Amazon campaign this year has been gaining real momentum. This year the Alliance of Radical Booksellers is asking you to help spread the word about the alternatives to Amazon and support the alternative by way of your local radical bookshops.

As Uli Lenart, of Bloomsburys Gays the Word bookshop says: In spite of the complex and powerful dominance of multinational corporations the secret to society safeguarding our independent, local booksellers and businesses is really quite simple. Support them by spending in them even if it is just once a year at Christmas and they will continue to flourish and provide a humane and heartfelt local community service.

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Morning Star :: Only a boycott will stop Amazons persistent abuse of its workforce

If youre pining for the good old days amid todays turmoil, youre fooling yourself

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Oct. 1, 2014 5:15 p.m.

When President Obama recently said the world is safer and less violent than its ever been, the usual knee-jerk antagonists mocked him.

But Fox News pundit John Stossel, whose uber-libertarianism often rubs me the wrong way, SAYS Obama got it right:

Americans now face beheadings, gang warfare, Ebola, ISIS and a new war in Syria. Its natural to assume that the world has gotten more dangerous. But it hasnt.

People believe that crime has gotten worse. But over the past two decades, murder and robbery in the U.S. are down by more than half, and rape by a third, even as complaints about rape culture grow louder.

Terrorism is a threat. But deaths from war are a fraction of what they were half a century ago, when we fought World War II and the Korean War, and Chairman Mao murdered millions. Despite todays wars in Iraq, Syria, etc., last decade saw the fewest deaths from war since record keeping began.

(Snip)

We wax nostalgic about the past, but the past was much nastier than today. Fifty years ago, most Americans my age were already dead.

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If youre pining for the good old days amid todays turmoil, youre fooling yourself

Newly elected Cresent Hardy on his Tea Party conservatism, pragmatic libertarianism

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L.E. Baskow

Congressman-elect Cresent Hardy thanks supporters as Republicans gather to celebrate election victories, Tuesday, Nov. 4, 2014, at Red RockResort.

By Amber Phillips (contact)

Thursday, Nov. 20, 2014 | 1:37 p.m.

Washington

Seated in the posh lobby of the Capitol Hill Hotel just blocks away from the U.S. Capitol on Tuesday, Cresent Hardy was tired, but excited.

Nevada's newest member of Congress was in the middle of a whirlwind seven days of orientation, learning what it takes to be a federal lawmaker. He'd collected stacks of paper listing guidelines for ethics, rules for overseas trips and strict security procedures for his office computers. He needs to hire staff for his tiny, fourth-floor congressional office and is collecting resumes for his team back in Nevada.

But above all else, Hardy is focused on how he can use his blend of Tea Party conservatism and pragmatic libertarianism to lift government's burden on Nevadans.

"On conservative measures, you won't find anybody more conservative than I am," said Hardy, a former Assemblyman who won a surprise election Nov. 4 to represent central Nevada and North Las Vegas. "I'm about as far right as you can get on the issues."

"But I'm a realist," he added, explaining he'll work with whoever shares his views.

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Newly elected Cresent Hardy on his Tea Party conservatism, pragmatic libertarianism

Iain Bankss Culture lives on

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The place we might hope to get to after weve dealt with all our stupidities Iain Banks on the Culture stories. Photograph: Murdo MacLeod for the Guardian

If the death of Iain Banks last summer left a giant, Culture-shaped hole in your life, it is really worth sampling these hugely detailed and lengthy interviews with the late, great man. Conducted by Jude Roberts for her PhD in 2010, the interviews have just been published by the excellent speculative fiction magazine Strange Horizons, as part of a funding drive that has raised more than $15,000 (9,500) to pay for the magazines 15th year of publication.

The full, strident, and often playful answers he gives here are entirely characteristic of his writing and persona more generally, says Roberts; and its true, many of Bankss answers are a joy.

Many critics and reviewers have claimed that the Culture represents the American Libertarian ideal. Given that this is clearly not the case, how do you characterise the politics of the Culture? asks Roberts. Really? I had no idea, replies Banks. Lets be clear: unless I have profoundly misunderstood its position, I pretty much despise American Libertarianism. Have these people seriously looked at the problems of the world and thought, Hmm, what we need here is a bit more selfishness? I beg to differ.

We also learn that Banks started work on a Culture-English dictionary. I was doing it as a laugh, as a sort of tiny hobby, for a brief while. It was quite fun working out how much information you could pack into a nonary grid but it was always going to be too big a job, and it all felt rather arbitrary, just pulling phonemes out of the air and deciding, Right, thats what General Contact Unit is in Marain (something like Wukoorth Sapoot-Jeerd, if memory serves).

And that the Culture stories are me at my most didactic, though its largely hidden under all the funny names, action, and general bluster. The Culture represents the place we might hope to get to after weve dealt with all our stupidities. Maybe. I have said before, and will doubtless say again, that maybe we that is, homo sapiens are just too determinedly stupid and aggressive to have any hope of becoming like the Culture, unless we somehow find and isolate/destroy the genes that code for xenophobia, should they exist.

It emerges that Banks doesnt think much of work by Michel Foucault, Jacques Derrida, or Emanuel Levinas (or any other continental philosophers). The little Ive read I mostly didnt understand, and the little I understood of the little Ive read seemed to consist either of rather banal points made difficult to understand by deliberately opaque and obstructive language (this might have been the translation, though I doubt it), or just plain nonsense. Or it could be Im just not up to the mark intellectually, of course.

Theres more so much more. Its got me itching to crack open my old copy of Consider Phlebas, and start the whole thing all over again. Although, is my favourite Culture novel The Player of Games? Decisions, decisions.

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Iain Bankss Culture lives on

The meme-ification of Ayn Rand: How the grumpy author became an Internet superstar

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Ayn Randis not afeministicon, but it speaks volumes about theInternetthat some are implicitly characterizing her that way, so much so that shes even become a ubiquitous force on thememecircuit.

Last week, Maureen OConnor ofThe Cutwrotea piece about a popular shirt called the Unstoppable Muscle Tee, which features the quote: The question isnt who is going to let me, its who is going to stop me.

AsThe Quote Investigatordetermined, this was actually a distortion of a well-known passage from one of Rands better-known novels, The Fountainhead:

Do you mean to tell me that youre thinking seriously of building that way, when and if you are an architect?

Yes.

My dear fellow, who will let you?

Thats not the point. The point is, who will stop me?

Ironically, Rand not only isnt responsible for this trendy girl power mantra, but was actually an avowed enemy of feminism. AsThe Atlas Society explains in theirarticleabout feminism in the philosophy of Objectivism (Rands main ideological legacy), Randians may have supported certain political and social freedoms for womenthe right to have an abortion, the ability to rise to the head of business based on individual meritbut they subscribed fiercely to cultural gender biases. Referring to herself as a male chauvinist, Rand argued that sexually healthy women should feel a sense of hero worship for the men in their life, expressed disgust at the idea that any woman would want to be president, and deplored progressive identity-basedactivistmovements as inherently collectivist in nature.

How did Rand get so big on the Internet, which has become a popular place for progressive memory? A Pew Researchstudyfrom 2005 discovered that: the percentage of both men and women who go online increases with the amount of household income, and while both genders are equally likely to engage in heavy Internet use, white men statistically outnumber white women. This is important because Rand, despite iconoclasticeschewingideological labels herself, is especially popular amonglibertarians, who are attracted to her pro-business, anti-government, and avowedly individualistic ideology. Self-identified libertarians and libertarian-minded conservatives, in turn, were found by a Pew Researchstudyfrom 2011 to be disproportionately white, male, and affluent. Indeed, the sub-sect of the conservative movement that Pew determined was most likely to identify with the libertarian label were so-calledBusiness Conservatives,who are the only group in which a majority (67 percent) believes the economic system is fair to most Americans rather than unfairly tilted in favor of the powerful. They are also very favorably inclined toward the potential presidential candidacy ofRep. Paul Ryan(79 percent), who is well-known within the Beltway as anadmirerof Rands work (oncetellingThe Weekly Standardthat I give outAtlas Shrugged[by Ayn Rand] as Christmas presents, and I make all my interns read it.).

Rands fans, in other words, are one of the most visible forces on the Internet, and ideally situated to distribute her ideology. Rands online popularity is the result of this fortuitous intersection of power and interests among frequent Internet users. If one date can be established as the turning point for the flourishing of Internet libertarianism, it would most likely be May 16, 2007, when footage of formerRep. Ron Paulssharp non-interventionist rebuttalto Rudy Giuliani in that nights Republican presidential debate became a viral hit. Ron Pauls place in the ideological/cultural milieu that encompasses Randism is undeniable, as evidenced byexposeson their joint influence on college campuses and Pauls upcomingcameoin the movieAtlas Shrugged: Part 3. During his 2008 and 2012 presidential campaigns, Paulattractedconsiderableattentionfor his remarkable ability to raise money through the Internet, and to this day he continues to root his cause in cyberspace through a titularonline political opinion channelwhile his son,Sen. Rand Paul, has made no secret of his hope to tap into his fathers base for his own likely presidential campaign in 2016. Even though the Pauls dont share Rands views onmany issues, the self-identified libertarians that infused energy and cash into their national campaigns are part of the same Internet phenomenon as the growth of Randism.

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The meme-ification of Ayn Rand: How the grumpy author became an Internet superstar

Rotenberg 17: 51 shades of gray

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The fallout from the ill-conceived, poorly construed and seemingly never-ending war on terror has been decisive. Americans now hold an aversion to large-scale ground troop intervention, especially in the Middle East. According to a recent CNN poll, less than 40 percent of Americans favor sending ground troops back into Iraq to battle the Islamic State. However, 75 percent think it is likely or somewhat likely that combat troops are going to be sent into Iraq or Syria.

I have conflicting views on what policy action the U.S. government should seek. The libertarian ideologue within me does not believe in this form of formal, governmental intervention. However, I will endeavor to explain three beliefs. First, not all interventions are created equal. Second, the Islamic States systemic human rights violations and commitment to ideological repression are a travesty that is impossible to ignore. Third, I think intervention might be justified, based on limited-government principles.

As demonstrated by the Vietnam and Iraq wars, intervention can do more harm than good. The fervent anti-Communism that shrouded President Lyndon Johnsons geopolitical decision-making created conditions where Johnson felt that intervention was not only inevitable, but required.

Furthermore, President George W. Bushs assertion regarding the existence of weapons of mass destruction in Iraq proved to be largely false. In fact, Saddam Hussein did not have modern large stockpiles, as the Bush administration contended. U.S. troops did find these weapons, but they were remnants of long-abandoned programs, built in close collaboration with the West, the New York Times reported. It appears that in these two interventions, data was misconstrued and the decision to intervene was ill-conceived.

According to the Huffington Post, a video has emerged that has a suspected Islamic State fighter describing how he sold Yazidi girls, belonging to an Iraqi minority group, into the slave trade. According to representatives of the Yazidi community, 7,000 Yazidi girls have been kidnapped. On Mount Sinjar, where the Islamic State has surrounded more than 10,000 Yazidis, ISIS forces are taking over Yazidi villages near the mountain one after another, killing the men and selling the women and children into the slave trade, the Daily Beast reported. The Yazidis have also been forced to convert or be killed, Mona Siddiqui wrote in an opinions column for the Guardian this summer.

The Islamic States intentions are expansionary and oppressive and go further than other regimes to violate basic human liberties. In Jason Brennans book Libertarianism: What Everyone Needs to Know, he describes libertarianism as an ideology that promotes radical tolerance. The Islamic State promotes radical intolerance. According to an Australian government report that cited Islamic State public statements, the Islamic State promotes sectarian violence and targets those who do not agree with its interpretations as infidels and apostates.

Therefore, I believe one can justify a more forceful intervention on some form of libertarian grounds. Libertarians, or classical liberals, share a strong belief in the right to enter into consensual contracts and the right to live free from coercion. Libertarian economist Milton Friedman describes the role of government in his book Capitalism and Freedom as a forum for determining the rules of the game and as an umpire to interpret and enforce the rules decided on.

Iraqs constitution affirms individual rights. For instance, Article 23 of the Iraqi constitution affirms that personal property is protected and no property may be taken away except for the purposes of public benefit. Furthermore, Article 7 states that no entity or program, under any name, may adopt racism, terrorism (and) the calling of others infidels in Iraq.

Under the Islamic States rule, Iraq will be unable to act as an arbiter of these fundamental freedoms and aggressions that are clearly being committed. Though former Prime Minister Nouri al-Maliki took sectarian positions, the aspirations of the Iraqi government in the 2000s were based on liberal values of liberty and freedom. Therefore, if the Iraqi government needs assistance to facilitate its primary function as an arbiter and protector of rights, why cant external governments help it restore its duty? Is there not a moral duty to enter into a contract with the Iraqi government to help it try to restore some commitment to liberal values?

The answers to both of these questions are incredibly unclear. One could argue that an unequivocal ground troop invasion could lead to a restoration of a government founded on liberal principles and restore the nature of government as an umpire through the vehicle of a contract between the Iraqi and American governments. But if the recent history of American intervention is any indication (think Somalia and Iraq), a lack of consequential understanding of the region married with lack of substantial support within Iraq could lead to a futile enterprise that actually does more harm than good. Thus, based on this libertarian framework there is a justification for intervening to fight the Islamic State.

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Rotenberg 17: 51 shades of gray


  1. Libertarianism