Vulture Funds: A New Category in Capitalism
A new capitalism – brutal and conquering – is moving in. It's the capitalism of a new category of vulture funds: private equity funds with the appetite of an ogre that command colossal amounts of capital.
The names of these titans – The Carlyle Group, Kohlberg Kravis Roberts & Co. (KKR), The Blackstone Group, Colony Capital, Apollo Management, Starwood Capital Group, Texas Pacific Group, Wendel, Eurazeo, etc. – remain little known to the general public. And, sheltered by that discretion, they're in the process of taking possession of the global economy. In four years, from 2002 to 2006, the sum raised by these investment funds, which collect the money of banks, insurance companies, pension funds, and the assets of the richest individuals, went from $137 billion to $524 billion. Their financial firepower is phenomenal, exceeding $1.6 trillion. Nothing withstands them. Last year, in the United States, the main private equities firms invested $424 billion in repurchasing companies, and more than $322 billion during just the first semester of 2007, thus taking control of 8,000 companies. Already one American employee out of four – and close to one French employee out of 12 – works for these mastodons.
The phenomenon of these rapacious funds erupted about 15 years ago, but is now on steroids. Thanks to cheap credit and ever more sophisticated financial instruments, that phenomenon has lately taken on a worrying scope. The principle is simple: a club of wealthy investors decides to buy up companies that they then manage privately, far from the stock market and its restrictive rules, and without having to account to fussy, fuddy-duddy shareholders. The idea is to circumvent the very principles of the capitalist ethic by betting on the laws of the jungle only.
Concretely, two specialists explain to us, this is how things go: "To acquire a company worth 100, the fund takes 30 out of its pocket (on average) and borrows 70 from banks, taking advantage of the very low interest rates of the moment. During three or four years, it reorganizes the company with the management in place, rationalizes production, develops activities and captures all or part of the profits to pay the interest... on its own debt. After which, it will resell the company for 200, often to another fund that will do the same thing. Once the borrowed 70 is repaid, the firm has 130 left in its pocket for an initial bet of 30, or a return of over 300 percent on a four-year investment. What could be better?"
And while they personally are earning insane fortunes, the directors of these funds practice, without any squeamishness, the four great principles of corporate "rationalization:" reducing employment, squeezing salaries, increasing the work pace and outsourcing. Encouraged in all that by the public authorities, which, as in France today, dream of "modernizing" their production apparatus. And to the great displeasure of the unions, which call it a nightmare and denounce the end of the social contract.
Some thought that, with globalization, capitalism was finally sated. We see now that its voracity seems limitless. Until when?
Abridged from Le Monde Diplomatique. Translated by Leslie Thatcher.
28 comments on the article “Vulture Funds: A New Category in Capitalism”
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Unanimous
Well, stories about leveraged funds are really a bit too late. Deleveraging sets in for a period of what may look like self-destruction. As it wreaks havoc, Greenspanites may find themselves outnumbered by the more-regulation-more-bureaucracy types.
Unanimous
Well, stories about leveraged funds are really a bit too late. Deleveraging sets in for a period of what may look like self-destruction. As it wreaks havoc, Greenspanites may find themselves outnumbered by the more-regulation-more-bureaucracy types.
Javier
"A new capitalism-–brutal and conquering"
i wasn't aware that there ever was a different form of capitalism
Javier
"A new capitalism-–brutal and conquering"
i wasn't aware that there ever was a different form of capitalism
Joel Myers
While I love this mag for what it talks about with cultural issues and grassroots activism I get pretty flustered by the level of dilettantism and superficiality with which they treat financial and economic issues. I know this particular article wasn't written by anyone at AdBusters, but I think it's fairly representative of the kind of reporting that goes on here in general. Even if this article had been published 3 years ago it would still be dated, and as it stands now what's being reported is hardly different (except in means, i.e. getting around SEC regs with 144A filings, using dark liquidity pools, etc.) from what financiers have been doing for centuries.
I would also note that the article doesn't even begin to try to offer some kind of "solution" to the problem it's sketched out. And to be honest I don't see this superficiality of attention turning around any time soon - i.e., I don't see Adbusters or other similar organizations actually making serious inquiries into economic situations and how they could be improved or combated. I suspect this is for three reasons:
1. The liberal kneejerk reaction to make sweeping rejections of such things as "the world financial system", banking, etc., a moral holdover from Marx;
2. The fact that finance and economics are boring, and hard to glamourize and as such will not be incorporated into a subculture which puts such a priority on "being cool". Reading an Econ textbook is definitely "not cool", and it's obvious most of the writers of these articles are very intent on keeping their street cred intact;
and
3. Most importantly: I think there isn't a serious investigation into the way the financial system functions in the world - and who are the winners and losers of such a system - specifically because many/most of the readers and writers of this magazine (myself included) are direct beneficiaries of these systems, in one way or another. All of us who have been fortunate enough to receive scholarships for college have benefited from the money that has often been reinvested in various funds, including these private equity funds, and every one of us who has gone to college has taken advantage of facilities many of which were funded through such channels as the article described. Any of us who have received grants for art or research projects have received money that has been augmented by investing in these (and the range of other) kinds of funds. The large multi-million dollar projects - for arts centers and websites and films and ipods - for which we middle-class kids are among the primary beneficiaries, all rely heavily on receiving funding from these and other funds to get their projects from ideas to the consumer (us), and as they cut costs, through means including downsizing and outsourcing, we are often the ones that benefit, not the ones that are harmed. Moreover, a lot of us (myself included) grew up and were funded by parents working in the financial sector - in banks, insurance, investment firms, etc. - and while we damn our parents' empty consumerist lifestyle and unfulfilling desk job, we have certainly taken their money.
Perhaps the situation most squarely rests on our subtle sensing that it's not in our interest to know what's going on. We don't want to know about the necessary but sometimes very corrupt system that feeds and supports us. If we did, the more objective of us would quickly notice that we ourselves are just as embroiled (and thus just as indicted, if we're choosing to indict anyone) as the D-bag hedge-fund managers we rail against, in perpetuating and validating the system as it is. We do not ask hard questions. And while we superficially glance with a stern rebuke toward financial system in one direction, we reach out our hand in the other and take the money the system has afforded us.
So, for all us liberal dreamer kids reading this, in the words of Chernyshevsky and Lenin, a question: what is to be done?
Joel Myers
While I love this mag for what it talks about with cultural issues and grassroots activism I get pretty flustered by the level of dilettantism and superficiality with which they treat financial and economic issues. I know this particular article wasn't written by anyone at AdBusters, but I think it's fairly representative of the kind of reporting that goes on here in general. Even if this article had been published 3 years ago it would still be dated, and as it stands now what's being reported is hardly different (except in means, i.e. getting around SEC regs with 144A filings, using dark liquidity pools, etc.) from what financiers have been doing for centuries.
I would also note that the article doesn't even begin to try to offer some kind of "solution" to the problem it's sketched out. And to be honest I don't see this superficiality of attention turning around any time soon - i.e., I don't see Adbusters or other similar organizations actually making serious inquiries into economic situations and how they could be improved or combated. I suspect this is for three reasons:
1. The liberal kneejerk reaction to make sweeping rejections of such things as "the world financial system", banking, etc., a moral holdover from Marx;
2. The fact that finance and economics are boring, and hard to glamourize and as such will not be incorporated into a subculture which puts such a priority on "being cool". Reading an Econ textbook is definitely "not cool", and it's obvious most of the writers of these articles are very intent on keeping their street cred intact;
and
3. Most importantly: I think there isn't a serious investigation into the way the financial system functions in the world - and who are the winners and losers of such a system - specifically because many/most of the readers and writers of this magazine (myself included) are direct beneficiaries of these systems, in one way or another. All of us who have been fortunate enough to receive scholarships for college have benefited from the money that has often been reinvested in various funds, including these private equity funds, and every one of us who has gone to college has taken advantage of facilities many of which were funded through such channels as the article described. Any of us who have received grants for art or research projects have received money that has been augmented by investing in these (and the range of other) kinds of funds. The large multi-million dollar projects - for arts centers and websites and films and ipods - for which we middle-class kids are among the primary beneficiaries, all rely heavily on receiving funding from these and other funds to get their projects from ideas to the consumer (us), and as they cut costs, through means including downsizing and outsourcing, we are often the ones that benefit, not the ones that are harmed. Moreover, a lot of us (myself included) grew up and were funded by parents working in the financial sector - in banks, insurance, investment firms, etc. - and while we damn our parents' empty consumerist lifestyle and unfulfilling desk job, we have certainly taken their money.
Perhaps the situation most squarely rests on our subtle sensing that it's not in our interest to know what's going on. We don't want to know about the necessary but sometimes very corrupt system that feeds and supports us. If we did, the more objective of us would quickly notice that we ourselves are just as embroiled (and thus just as indicted, if we're choosing to indict anyone) as the D-bag hedge-fund managers we rail against, in perpetuating and validating the system as it is. We do not ask hard questions. And while we superficially glance with a stern rebuke toward financial system in one direction, we reach out our hand in the other and take the money the system has afforded us.
So, for all us liberal dreamer kids reading this, in the words of Chernyshevsky and Lenin, a question: what is to be done?
Anonymous
Whatever is to be done, it won't be done until the middle classes collapse. Things are going to get a hell of a lot worse before they get better. Certainly, there should be more serious, mainstream discussion with regard to the pitfalls of free-market capitalism, but there just won't be enough of a demand for it until enough people undergo an extended period of economic hardship. Pun intended.
Anonymous
Whatever is to be done, it won't be done until the middle classes collapse. Things are going to get a hell of a lot worse before they get better. Certainly, there should be more serious, mainstream discussion with regard to the pitfalls of free-market capitalism, but there just won't be enough of a demand for it until enough people undergo an extended period of economic hardship. Pun intended.
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