A business model

To many people, knowing that Mitt Romney made a lot of money with Bain Capital is all they really need to know.  That means he must have done something that benefited the economy, the nation at large.  But that is only because they do not understand the business model of private equity firms.

So for the benefit of those people, I am going to publish a little history lesson, an object lesson that illustrates very clearly what role private equity plays in the world of business.

Mervyns was founded in 1949 by Mervin G Morris.  At it's peak it employed 30,000 people and had 257 stores.  It was acquired in 1978 by Dayton Hudson (now Target) and sold to the private equity firms Cerberus Capital Management, Sun Capital Partners, and Lubert-Adler in 2004.

At the time of the sale, the Mervyns stores were starting to show their age, Dayton-Hudson had been more interested in growing their Target brand than Mervyns.  But the business was still profitable.  It would have taken some work, but it was nowhere near a lost cause.

What happened?  The short version (the long version is a little more complicated but functionally the same), they sold off the real estate and the stores were compelled to lease it back at double the cost.  They sucked out $400 million in cash for themselves and left the company with $800 million in debt.  That was more than the company could survive.

The company was driven into bankruptcy, and 30,000 people lost their jobs.  But it was successful investment because the money borrowed to buy the company was debt to Mervyns, not to the private equity partners.  They got their money, everyone else got screwed.

This is the sort of capitalism that Mitt Romney represents.  It is the sort of capitalism that those who fund the tea party represent.  Yes, it really is legal.  But does this help or hurt anyone except the very few?  It is legal, but is it moral?  Is this really the sort of nation that we want to be?

Nuclear Power and the free market

There has been a lot of talk about our need to be getting more of our electricity from nuclear power, and of course a lot of people raising concerns in view of what has been happening in Japan.  But for all you free market get the government off our back types, there is one more tiny little gotcha.

A lot of the free market types (except for the tiny percentage that is ultra rich, who are living off your back, and your tax dollars) believe in self reliance.  That means taking responsibility for your actions, and the consequences of those actions.  Sometimes you take risks and you lose, and you suffer those losses.  This is essentially the way the rapidly diminishing middle class lives today.

But when you are talking about nuclear power, there is a different set of rules.  The Price-Anderson Nuclear Industries Indemnity Act limits the liability of the operators and builders of these power plants.  And the government offers loan guarantees for the construction of new ones.  These were part of the Energy Policy Act of 2005, and there has been a proposal by the Obama administration to expand them significantly.

So I pose these questions.

• If they are really safe, and it is the intent of the operators to operate them in a safe manner, then why can they not purchase private insurance.  Why are they unwilling to accept the consequences of their own actions?  
• If the consequences of their actions are limited by law, what is their incentive to not cut corners?  After all, if they screw up, you pay for it, not them
• If nuclear power plants are such a good bet, why cannot the money be found on the private market?

So all of you rugged individualist types, how does the idea of subsidizing a power plant on the other side of the county with your tax dollars sound to you?