Wednesday, November 28, 2018

Mid-week reading links

Anand Giridharadas's twitter feed points to several very powerful pieces

1. From the man himself on the dubious Amazon HQ2 saga,
When combined with existing incentives, Amazon might receive three billion dollars in breaks in New York alone, the equivalent of every city resident Venmoing $348 to Bezos... It was the game-show quality of this bidding, the spectre of cash-starved governments begging to give money to a billionaire, that left some critics fuming. Richard Florida, the urban-studies theorist, told me that Amazon’s HQ2 competition “captures the zeitgeist of early 21st century American late capitalism.” He added, “The very idea that a trillion-dollar company run by the world’s richest man could run an American Idol auction on more than two hundred thirty cities across the United States (and Canada and Mexico) to extract data on sites and on incentives, and pick up a handy three billion dollars of taxpayer money in the process, is a sad statement of extreme corporate power in our time.”


...there is an opportunity cost to luring the world’s richest man by letting him free-ride on the public services that other New Yorkers must pay for—whether it’s the failing subway system, the troubled and segregated school system, or... critical renovations at public-housing complexes like Queensbridge, the largest in the United States, which will soon be down the street from Amazon’s New York headquarters... There is also the particular question of why Bezos, of all people, needs to play this way. After the announcement, David Heinemeier Hansson, the founder of the software firm Basecamp, published an open letter to Bezos, who is one of his investors... He urged Bezos to consider shaping his legacy “into something more than the man who killed retail, extracted the greatest loot from its HQ cities, and who expanded the most monopoly holdings the fastest.”
This captures the essence of it all, especially given Bezos's recent decision to become a philanthropist, 
Build a company from the ground up. Do whatever it takes to survive and grow, regardless of the consequences for your customers and workers. Consolidate a monopoly if you can, first in one arena, then in multiple. Use that power, that leverage, to exact concessions from governments, so that you pay even fewer taxes and grow even faster, even bigger. And then, with the wealth that was accumulated by underpaying workers, by avoiding taxes, by lobbying against regulations, by amassing uncompetitive levels of market power—then, with that wealth, you give back. You make a difference. You become a philanthropist, a lover of mankind. You salve by philanthropic moonlight the wounds you may have cut by operational daylight. You solve the very problems you have helped to cause.
2. Almost exemplifying this trend among America's richest is this Washington Post investigation on Carlyle Group, which has spawned some of the largest philanthropists and donors like David Rubenstein,
Under the ownership of the Carlyle Group, one of the richest private-equity firms in the world, the ManorCare nursing-home chain struggled financially until it filed for bankruptcy in March. During the five years preceding the bankruptcy, the second-largest nursing-home chain in the United States exposed its roughly 25,000 patients to increasing health risks... The number of health-code violations found at the chain each year rose 26 percent between 2013 and 2017, according to a Post review of 230 of the chain’s retirement homes. Over that period, the yearly number of health-code violations at company nursing homes rose from 1,584 to almost 2,000. The number of citations increased for, among other things, neither preventing nor treating bed sores; medication errors; not providing proper care for people who need special services such as injections, colostomies and prostheses; and not assisting patients with eating and personal hygiene.


Counting only the more serious violations, those categorized as “potential for more than minimal harm,” “immediate jeopardy” and “actual harm,”... the number of HCR ManorCare violations rose 29 percent in the years before the bankruptcy filing. The rise in health-code violations at the chain began after Carlyle and investors completed a 2011 financial deal that extracted $1.3 billion from the company for investors but also saddled the chain with what proved to be untenable financial obligations, according to interviews and financial documents. Under the terms of the deal, HCR ManorCare sold nearly all of the real estate in its nursing-home empire and then agreed to pay rent to the new owners. Taking the money out of ManorCare constrained company finances. Shortly after the maneuver, the company announced hundreds of layoffs. In a little over a year, some nursing homes were not making enough to pay rent. Over the next several years, cost-cutting programs followed... the number of violations at HCR ManorCare homes rose about three times faster than at other U.S. nursing homes.
On the business model and trends,
The firms profit by pooling money from investors, borrowing even more, and then using that money to buy, revamp and sell off companies. Their methods are geared toward generating returns for investors within a matter of years, and this has led to criticism that they merely plunder company assets while neglecting employees and customers. During and after the recession, as returns became scarce, private-equity investors began to explore industries they had once overlooked, and some invested in businesses that largely cater to the poor: payday lenders, nursing homes, bail bond providers, low-income homes for rental and prison phone services...
In December 2007, it bought HCR ManorCare for $6.1 billion plus fees and expenses. Most of the purchase price was borrowed money — about $4.8 billion — and Carlyle put up $1.3 billion... From the start, Carlyle’s acquisition of HCR ManorCare made the company’s finances more risky because the purchase burdened it with billions in long-term debt. But in April 2011, Carlyle made another critical move at HCR ManorCare, one that would enrich investors and imperil the financial footing of the chain.


Carlyle took HCR ManorCare’s vast real estate empire — the hundreds of nursing homes and assisted living facilities as well as the land underneath — and sold it to HCP, a real estate investment company. HCR ManorCare then had to pay rent to HCP for the use of the nursing homes. This kind of deal, known as a sale-leaseback, is a common tactic of private-equity firms, and it generated financial benefits for Carlyle and its investors. Carlyle got $6.1 billion from the sale, an amount that roughly matched the price that the private-equity firm had paid to buy the company just four years prior. With that money, Carlyle paid off billions in debt that it racked up buying HCR ManorCare... Crucially for Carlyle and its investors, the deal allowed them to recover the $1.3 billion in equity they put into the deal.
Carlyle made money from its investment in other ways, too. It took at least $80 million from the HCR ManorCare venture in the form of various fees, according to interviews and financial documents. Most of that was a “transaction fee,” which is money Carlyle receives when it buys a company, typically 1 percent of the purchase. The $6.1 billion ManorCare purchase yielded Carlyle $61 million, Carlyle officials confirmed. That money was distributed to Carlyle and its investors. In addition, Carlyle receives annual “advisory fees” from the companies that it purchases — essentially, Carlyle pays itself to manage the companies it owns. At ManorCare, those fees averaged about $3 million a year from 2007 to 2015, or about $27 million, according to documents and interviews. That money was also distributed to Carlyle and its investors. Finally, there was one other person who made a lot of money despite the company’s financial woes. After the bankruptcy, longtime chief executive Paul Ormond was awarded $117 million under a deferred compensation agreement...
The real estate deal... meant that HCR ManorCare had to make massive rent payments to its new landlord, and these, according to the company’s accounting, raised the company’s long-term financial obligations to $6 billion. The rent HCR ManorCare was obliged to pay — to occupy the nursing homes it had once owned — amounted to $472 million annually, according to legal filings. The rent was set to escalate at 3.5 percent a year, and according to the lease, HCR ManorCare also had to pay for property taxes, insurance and upkeep at the homes.
3. David Leonhardt lays bare the case for revival of an anti-trust movement in the US. 
This consolidation of business concentration data by Open Markets Institute is awesome!

This from Louis Brandeis, the US Supreme Court Justice, is very apt,
“We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”
4. Finally, FT has an article which sums up the problems with modern financialisation-based capitalism with the illustrative example of GE, the 126 year-old company, whose share price is back to its 1994 level,
There are five key lessons. The first is that debt always catches up with you. While GE has long had strategic problems, its immediate troubles are around a credit crunch. In the boom days, GE used a top credit rating to raise debt to fund its global manufacturing operations and GE Capital arm. This year, when its credit rating was downgraded, borrowing costs went up and a negative spiral began, with investors selling off both the company’s stock and its bonds... GE would not have these problems today if it had not done so many share buybacks in the good times. This is the second lesson. Companies have carried out record amounts of share buybacks in recent years, frequently at the top of the market — moves that are often much more about getting another quarter or two of share price increases to enrich top executives than changing any real business story on the ground. Lesson three is to be careful of growth through acquisition. Over several decades, GE became so large and complex that it could not manage its own business model — witness the company becoming a “too big to fail” bank in the Welch era, a problem his successor Jeff Immelt had to deal with by spinning off the Capital division. Too many companies today, including big tech groups, are growing by acquiring, not innovating. Streamlining is not a bad idea, but the sale of GE’s lending division also exposed lesson four: financial engineering is not the same as real engineering. Once GE Capital, which could be used to hide myriad accounting high jinks, was spun off, the depth of trouble at the company became clearer. After a decade of easy money, it is a fair bet that there are corporate numbers games waiting to be discovered at many companies. The final lesson is that the nature of the economy has fundamentally changed in recent decades from industrial to digital... Companies that cannot make the transition from an economy based on tangibles to one based on intangibles are likely to face the same fate as the once-mighty GE.

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