I got the distinct impression the GameStop people were deliberately trying to throw a monkey wrench in the plans of all those people who were shorting the stock. In part they were trying to stick it to investors who profit from the misery of others. The other part was the lulz.
And completely irrelevant to the thread, but you really should watch the movie, as it’s very entertaining. Of course you have to get past the one-time use of the N word and Dan Aykroyd in blackface.
I think for some of us, and by some of us I mean me, don’t particularly understand how the world of finance work. Let’s take Toys R Us as an example. It was purchased by a private equity firm who saddled it with debt, declared bankruptcy, and someone profited from that. At least that’s how I understood the situation, if I’m wrong please enlighten me. If this was the case, other than the private equity firm, who gained from the demise of Toys R Us? Certainly not the many people Toys R Us employed. As I recall, a lot of toy manufacturers were thrown for a loop because even in the age of Amazon they still relied on Toys R Us as an outlet for their product. Was Toys R Us just an unhealthy company that deserved to die or did the private equity firm take a healthy company and kill it?
Super easy, barely an inconvenience:
- Buy a recognizable mercantile brand
- ‘Strategize’’:
a. Saddle the company with massive amounts of debt to fund ‘expansion’ and ‘revitalization’, and/or
b. Go on a buying spree of acquiring or merging with competitors, suppliers, or completely non-related businesses under the thesis of ‘profit by diversity’ - Pay yourself (a C-suite executive) big annual bonuses and/or negotiate a ‘golden parachute’
- When the money runs out and the company revenues no longer cover debt service, declare Chapter 11
- Spend more money ‘reorganizing’ (e.g. closing stores and firing drones) while still collecting bonuses
- When the end is nigh, search for a scapegoat to take over as CEO/CFO/CSO and demand your severance, claiming that you are leaving “…to spend more time with family,” i.e. the third trophy wife and the single photo-kid you had to cultivate a respectable reputation even though you’ve been snorting coke off of your 23 year old secretary’s chest while going on ‘conference trips’ to Las Vegas and Hilton Head.
- Profit!
Stranger
For my sins, I’ve read history of finance/economics/stocks/banks/etc. books. From them I’ve received a tiny bit of understanding and a great deal of wistful schadenfreude in that I wished the everyone in the business would fall into a vat of angry bees.
What winners in the finance world do spectacularly well is nose out the corners and loopholes that slosh around in the giant ocean of pushing money back and forth. Arbitrage, derivatives, leveraged buyouts, slightly faster fiber cable, slightly faster computers, short selling, insider trading. Whoops. That last one is as illegal as it is common.
What is insider trading? Think of it the way quantum theory looks at a particle, something that does not have an existence until it is observed. Courts in the U.S. have extended the definition consistently for the past few decades until one might assume that making a financial transaction based on any knowledge of anything that the company has not disclosed in a press release is subject to prosecution. Unless one is a member of Congress, of course. They have a nifty loophole that exempts them.
I’m rambling, but insider trading shows that predation in the market is controllable by law and sometimes legislation, but also that predators are always one step ahead, finding new and ever more convoluted pathways to get that edge on everyone else.
You can’t compare a modern sports team to one in the 1980s. Or a modern car. Or a modern computer. Or a modern anything, including industries. Finance, like every other industry, is essentially a great sprawling blob that learns and adapts and changes regularly. Resetting it to some time in the past is not feasible, any more than requiring modern industry to run on Windows 7.
Better regulation would help. Like everyone else I’m in favor of bringing back Glass-Steagall. Heck, just go to Bernie Sanders and Elizabeth Warren and ask for a list. Now work to get that legislation through Congress, and then appoint leaders to the SEC/IRS/FTC/ETC. who would press charges against violators and give them sufficient lawyers and accountants to put together the cases in less than a decade, and ensure that courts are receptive to the changes. And find a way to limit lobbyists who want changes and special privileges and exemptions.
The economy would look very similar to the present one, except that the rich would be a small fraction less rich. Similar to what a properly designed wealth tax would accomplish but a smidgen more real-world.
Just be prepared to accept that within a decade, the smartest minds in the country would find a pack of loopholes and start the process over again.
So I know nothing about Toys R Us, but I worked for a small pharma company that was bought by PE. I was senior enough to present things to the people in the C-Suite (like program updates) but I was not part of the C-Suite. The CEO was the PE shop’s guy, the rest were just those there when they bought the company. The company had seen its best days, but was net-profitable. Here’s how it went down:
They put up $100 million and borrowed $500 million and bought the company
Then they made the debt the company’s. So now THEY were off the hook.
Then they slashed everything, and laid a bunch of people off, and squeezed so much out that they managed to repay the debt in a little over a year,
Note: At this point, a bunch of rich people now own a company free and clear, and mostly made the company pay for them to buy it. Seems a bit parasitic to me.
For their second act, the company took out as much debt as it could, and paid that debt as a “special dividend” to the owners. I do not recall the dollar amount, but it was in the hundred-million or more range. So now, they’ve indebted the company, made themselves a pile, taken zero risk… Of course, they would say they improved the efficiency of the organization, but I don’t think leaking roofs due to deferred maintenance (not a made up example) is “more efficient”
And over the next few years they would just collect any spare revenue and any disposable assets (for instance, we had about 100 acres in the Boston area that was for a future expansion; sold and paid as dividend)
So now, we had cut most of the programs that might have built us a future, we were not taking care of the place, the layoffs meant that certain things (including compliance) weren’t getting done, the facilities were falling apart. It was terrible, and they had ruined the company. After a couple of years I was depressed at what they had done and left. Things continued to get worse, according to friends, until eventually the corpse was sold.
It was definitely parasitic.
I don’t want to make this post too long, but I will say that PE shop was into “extraction.” I did Biz Dev for a PE shop that was into “building,” and it was a very different experience (though, the investors STILL made plenty)
This sort of asset-stripping happened at Red Lobster as well.
In July 2014, Red Lobster sold premium real estate underneath 500 of its stores to generate $1.5 billion. The money went the private-equity firm Golden Gate Capital to finance its purchase of the chain, which it paid $2.1 billion in May 2014. Red Lobster’s press release.
Red Lobster had to pay rent on stores, totaling $200 million a year or approximately 10% of its revenue by 2023.
In 2020, Golden Gate exited Red Lobster and sold it to Thai Union Group, a Bangkok-based investor group that owns a bunch of seafood brands and was a supplier to Red Lobster for 30 years.
One of the claims was that Thai Union Group forced Red Lobster to purchase their shrimp and much higher than market prices, ultimately at the expense of Red Lobster’s bottom line.
I’d say the reverse - people call something parasitic without explaining why it is. And, if it is, and they know why it is, then they should have specific ideas about how to stop the bad aspects and (or at least what the bad aspects are so those more familiar with the ins-and-outs could try to develop methods to address the problem). Instead it seems to be a bit of starting with the idea that it’s bad (refusing to hear otherwise) and you (not OP) only accept the answer that of course things would be better if the unspecified elements that you perceive as bad were removed in some unspecified way and that shrinking it would only remove bad parts, not good and would only be good for everyone else. OP about advantages and disadvantages, but no one wants to hear bout disadvantages.
The headline and first post don’t say make it better, they said make it smaller.
There are certainly bad aspects, but without specification on how the sector shrinks, we have no idea if it ends up better or worse and certainly not in what way.
Have you ever actually worked at a bank? I think people who don’t know much about banking and finance outside of books and movies think it’s all a bunch of coked-up cowboys screaming, making big trades, and eating sushi out in the Hamptons. Most people don’t understand how actually complex, regulated, and often tediously boring the financial services can actually be.
In my mind, insider trading, while problematic, is not as big a problem as the agency problems and examples of asset-stripping by PE firms described up thread.
It is certainly one of the few financial crimes, along with outright fraudulent accounting, where the culprit is likely to do real time (albeit in a ‘white collar prison’ that isn’t exactly a country club but also isn’t a hell-hole) if caught. However, they often still get to keep some portion of severance unless the company vigorously contests the payments through a “faithless servant” law or are forced to make significant restitution.
Stranger
It certainly can be those things.
It can also be a way to move risks unseen into stuff that is then sold to people who do not recognize the true risk and hence underprice taking it on. Meanwhile the party doing the re-arranging extracts that delta for themselves.
A standard booster maxim is “Move risk to those most able to bear it” while the underlying truth often seems to be “Move risk to those least aware of what they are buying.”
And that’s why proper regulation is very important.
That becomes a bit of a straw man contention when the reaction to any prudential regulation is simply to move the action overseas or come up with a different way around the regs.
It may in fact be that overweening greed (as opposed to healthy self-interest) is simply a force that government cannot suppress.
IMO it’s more a matter that regulations are too little too late and often enforced more in the breach. If indeed the SEC is gutted later this year we’ll certianly see what de facto un-regulated finance does to a country.
I’ll point out that on paper, both Chinese and Russian citizens have many constitutional rights. It’s the enforcement that’s lacking; not the high-sounding words on paper.
Back when Fortune magazine carried true journalism, they continually pounded the ratings services like Moody’s after the crash of 2008. Instead of rating the junk bonds as BBB or even C they frequently rated them as A or even A+, as safe as can be imagined. Without that assurance, those millions of bad mortgages could never be rolled together - or with a veneer of good ones - to be sold to suckers. Why? Because they competed with one another for business. True ratings would drive the bonds elsewhere. Could they all have refused to comply? In another world.
Afterward, they got no sanctions, not even a meaningful slap on the wrist. So the SEC added more regulations. Big deal. Regulations are meaningless without enforcement, as you noted.
Stranger
Lack of international regulations is indeed a huge problem. The most obvious example is something like Ireland becoming a tax haven. We need better coordination between international financial institutions.
Janet Yellen tried to implement a global minimum 15% corporate tax rate. Republicans in Congress did not approve it.
I’ve mentioned it before, but relevant here. Piketty, in his book on capital, has a chapter on what a wealth tax would look like in his ideal world. One of the base requirements is that regulations be the same worldwide and transparency is total. We - the world - have not taken more than the tiniest baby steps toward this utopia.
As long as there is a single kleptocratic or deeply corrupt regime on Earth, we won’t get there.
If it’s a single regime, or even a small handful, the rest of the world can sanction them into oblivion.