# Private equity profiting from failure **URL:** \ **Category:** Great Debates\ **Created:** [August 12, 2012, 4:02pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274 "2012-08-12T16:02:01Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [August 12, 2012, 4:02pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/1 "2012-08-12T16:02:01Z")
Why are private equity firms allowed to extract dividends from companies that are failing and going into debt largely just to pay investors while employees are left high and dry? ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [August 12, 2012, 4:19pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/2 "2012-08-12T16:19:30Z")
Because they own the companies or a controlling interest in the companies and the employees don’t. Why are you allowed to sell your house for a profit or borrow against the equity you have in it, but don’t have to share it with the guy who just painted it for you and the guy who fixed your fence last year? ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [August 12, 2012, 4:26pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/3 "2012-08-12T16:26:51Z")
If you try to do that with your house, you will not be able to keep profits that are based on loading your house with debt. The creditors will make you pay them back. ---
**Author:** ![Darth\_Panda](https://avatars.discourse-cdn.com/v4/letter/d/ee7513/32.png) [@Darth\_Panda](https://boards.straightdope.com/u/Darth_Panda)\ **Post date:** [August 12, 2012, 4:29pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/4 "2012-08-12T16:29:56Z")
> [@](#): > > A fixed point of corporate law is that shareholders are, and should be, the ones whose interests count in corporate decision-making. This does not imply that shareholders systematically exploit other participants in the firm or otherwise defeat established expectations (notwithstanding the implicit assumption in Joseph Singer and Jacob Ziegel’s papers);1 such strategies are not in the shareholders’ interest because the parties are in a repeated, long-term relationship, in which future cash flows matter. Rather, differences in claim characteristics provide shareholders with the best incentives regarding the long-term effects on the firm of a shortsighted redistribution move: (1) employees and bondholders periodically renegotiate their contracts with corporations as their relations have finite terms whereas common stock investments have no such term limit; and (2) while workers cannot leave their jobs to their heirs, equity claims are transferable and expected to last beyond an individual’s lifetime. What Is the Value of Other Constituency Statutes to Shareholders? > **[What\_Is\_the\_Value\_of\_Other\_Constituency\_Statutes\_to\_Shareholders.pdf](https://openyls.law.yale.edu/bitstream/handle/20.500.13051/1233/What_Is_the_Value_of_Other_Constituency_Statutes_to_Shareholders.pdf?sequence=2&isAllowed=y)** > > 429.58 KB You can read the rest of the article and the discussion of “other constituency” laws, but this is kind of the starting point. ---
**Author:** ![Emtar\_KronJonDerSohn](https://avatars.discourse-cdn.com/v4/letter/e/58956e/32.png) [@Emtar\_KronJonDerSohn](https://boards.straightdope.com/u/Emtar_KronJonDerSohn)\ **Post date:** [August 12, 2012, 4:31pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/5 "2012-08-12T16:31:58Z")
Are you sure? How many people took out $50,000 or $100,000 or more in home equity loans 6 or 7 years ago during the bubble and walked away when prices crashed? In most instances those lenders _could_ come after the borrowers but the reality is that they don’t. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [August 12, 2012, 4:35pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/6 "2012-08-12T16:35:51Z")
If they don’t it’s because they know that the debtors don’t have nay assets to go after. Private equity investors have the money they extracted but are unreachable because they are protected by the corporate veil. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [August 12, 2012, 4:36pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/7 "2012-08-12T16:36:43Z")
> [@Acsenray](#): > > If you try to do that with your house, you will not be able to keep profits that are based on loading your house with debt. The creditors will make you pay them back. No, they won’t because they can’t. They can foreclose on your home, but they can’t make you pay back your mortgage if you walk away. ---
**Author:** ![steronz](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/steronz/32/11765_2.png) [@steronz](https://boards.straightdope.com/u/steronz)\ **Post date:** [August 12, 2012, 4:50pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/8 "2012-08-12T16:50:24Z")
> [@John\_Mace](#): > > No, they won’t because they can’t. They can foreclose on your home, but they can’t make you pay back your mortgage if you walk away. Really? I thought they took the house, sold it, and applied the receipt (minus costs) to your balance. Anything left over they’d come after you for, which is the point where most people declare bankruptcy. Is that not the case? ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [August 12, 2012, 5:03pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/9 "2012-08-12T17:03:52Z")
How is it any different from what the mafia does when they take over a business — extract what they can from creditors and then skip off with the assets, leaving those dependent on the business holding the debt with no way to pay for it. Isn’t this the same kind of fraud? ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [August 12, 2012, 5:12pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/10 "2012-08-12T17:12:12Z")
> [@steronz](#): > > Really? I thought they took the house, sold it, and applied the receipt (minus costs) to your balance. Anything left over they’d come after you for, which is the point where most people declare bankruptcy. Is that not the case? In the US, most home mortgages are [non-recourse loans.](http://en.wikipedia.org/wiki/Non-recourse_debt) ---
**Author:** ![TriPolar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tripolar/32/3008_2.png) [@TriPolar](https://boards.straightdope.com/u/TriPolar)\ **Post date:** [August 12, 2012, 5:21pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/11 "2012-08-12T17:21:29Z")
> [@Acsenray](#): > > Why are private equity firms allowed to extract dividends from companies that are failing and going into debt largely just to pay investors while employees are left high and dry? Because it’s not against the law. ---
**Author:** ![The\_Second\_Stone](https://avatars.discourse-cdn.com/v4/letter/t/bbe5ce/32.png) [@The\_Second\_Stone](https://boards.straightdope.com/u/The_Second_Stone)\ **Post date:** [August 12, 2012, 5:22pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/12 "2012-08-12T17:22:15Z")
The thing is that the people left without their end, namely their pensions, don’t have any money to pursue the decision makers in court, which cost millions of dollars. Unless you sue them to claw back profits made by the managers, they get to keep the money, and the pensioners maybe get cents on the dollar from a government fund, which might have the money to pursue their claims, but whose fixed salary jobs are appointments by politicians who are elected with donations from the very people taking all the value out of the companies. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [August 12, 2012, 5:22pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/13 "2012-08-12T17:22:44Z")
> [@TriPolar](#): > > Because it’s not against the law. Well, that’s what I was getting at with the “allowed” part. Why shouldn’t there be a law prohibiting or curtailing it? ---
**Author:** ![Mekhazzio](https://avatars.discourse-cdn.com/v4/letter/m/b38774/32.png) [@Mekhazzio](https://boards.straightdope.com/u/Mekhazzio)\ **Post date:** [August 12, 2012, 5:33pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/14 "2012-08-12T17:33:52Z")
> [@Acsenray](#): > > Well, that’s what I was getting at with the “allowed” part. Why shouldn’t there be a law prohibiting or curtailing it? Same as most anything else: there’s a lot of money involved, money buys propaganda, and propaganda affects political capabilities. “Regulation” has somehow become a taboo word in a significant portion of the voting public. ---
**Author:** ![TriPolar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tripolar/32/3008_2.png) [@TriPolar](https://boards.straightdope.com/u/TriPolar)\ **Post date:** [August 12, 2012, 5:36pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/15 "2012-08-12T17:36:35Z")
> [@Acsenray](#): > > Well, that’s what I was getting at with the “allowed” part. Why shouldn’t there be a law prohibiting or curtailing it? There should be laws that make this more difficult to do. But it kind of sticks in people’s craws when you suggest that people should not be able to do anything they want with their own property. So from there they ignore the other policies that contribute to this, like taking private profit from public resources. Look up Dilemma of the Commos. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 12, 2012, 7:25pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/16 "2012-08-12T19:25:58Z")
> [@Acsenray](#): > > Why are private equity firms allowed to extract dividends from companies that are failing and going into debt largely just to pay investors while employees are left high and dry? I don’t think anyone has mentioned that _there are laws against dividends or stock repurchases when company profits are inadequate._ For example, [the leveraged buyout of Smith’s Food & Drug Centers, Inc.](http://en.wikisource.org/wiki/Klang_v._Smith%27s_Food_%26_Drug_Centers,_Inc./Opinion_of_the_Court) was contested in court. I don’t know how common such lawsuits are, nor what tricks leveraging capitalists use to squeeze while not violating impairment-of-capital law. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [August 12, 2012, 8:24pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/17 "2012-08-12T20:24:25Z")
I wonder whether the difference in the Smith case was that it was a public company, do there were outside shareholders with standing to bring a breach of fiduciary duty claim. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 12, 2012, 9:49pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/18 "2012-08-12T21:49:21Z")
> [@Acsenray](#): > > Well, that’s what I was getting at with the “allowed” part. Why shouldn’t there be a law prohibiting or curtailing it? They’d argue that this would tend to protect failing companies. There is some truth to that. The thing that bugs me is not that it gets done, but that those who do it claim it is for the good of those who suffer. Anyone who says that is a lying sack of Mitt. ---
**Author:** ![MichaelEmouse](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/michaelemouse/32/101_2.png) [@MichaelEmouse](https://boards.straightdope.com/u/MichaelEmouse)\ **Post date:** [August 12, 2012, 9:57pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/19 "2012-08-12T21:57:45Z")
I was under the impression that shareholders are residual claimants. That is, they get whatever’s left after everyone else who’s owed something by the company has been paid. Is that not the case? If it is, then shareholders getting dividends when employees haven’t yet been paid is illegal. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [August 12, 2012, 11:06pm UTC](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274/20 "2012-08-12T23:06:10Z")
> [@Acsenray](#): > > Why are private equity firms allowed to extract dividends from companies that are failing and going into debt largely just to pay investors while employees are left high and dry? Do you have a specific example? > [@John Mace](#): > > Because they own the companies or a controlling interest in the companies and the employees don’t. > > Why are you allowed to sell your house for a profit or borrow against the equity you have in it, but don’t have to share it with the guy who just painted it for you and the guy who fixed your fence last year? More accurately, why are you allowed to buy that piece of shit house down the street from that deadbeat family, renovate it, then turn a huge profit? [Next page](https://boards.straightdope.com/t/private-equity-profiting-from-failure/631274.md?page=2)