Decades ago, the mafia had a scam called the “bust-out.” They’d target a small business — the corner store, a machine shop, a soda distributor. After intimidating the owner into handing it over for a pittance, they’d order as much inventory as the suppliers would put on credit. They’d stop paying lenders, max out bank lines, demand customer pre-payments: in short, they’d extract as much cash as possible, as quickly as they could. Then one weekend they’d strip the premises of every last item that might be sold elsewhere — stock, fixtures, furniture, anything — and disappear.
The business was ruined, the owner penniless or bankrupt or worse, and the gang? They’d swept up all the cash … and were ready to do it again.
The comparison is not far-fetched. A private-equity group borrows a vast sum of money, buys a struggling company and squeezes operations as hard as they can. “Rationalizing” can involve layoffs, steep pension cuts, loan defaults, supplier hardball — anything to free up a dollar. When they’re done, the PE investors pay themselves a huge dividend, often financed by more borrowing. Then, like the mafiya, they sell off what’s left and disappear.Now that seems almost quaint. Today, it’s called a workout, not a bust-out, and the operators are private equity firms, not the Cosa Nostra. The amounts involved are hundreds of millions of dollars. And best of all, it’s completely legal.
Defenders, of course, argue that PE saves failing companies, improves efficiency and generally serves the free market’s inherent processes. Evidence is limited; studies have shown that PE-financed restructurings create fewer net jobs than if existing management struggles through on their own, and the companies ultimately fail about as often anyway. The difference is that the PE investors have extracted all the excess value for themselves, leaving behind shrunken, debt-laden businesses in no better shape to face future challenges.
Unlike past eras of plutocratic excess, the immiseration of today’s American worker has not drawn an energetic counter-reaction. A century ago strikers were put down with Federal troops and live ammunition, anarchists bombed Wall Street itself, and union organizers faced thugs armed with iron bars and guns. For whatever reason we don’t see the same kind of violence today. Perhaps the social-support nets, however tattered, are still enough to keep people from total desperation. Perhaps market ideology has triumphed. Perhaps the society we have today is what people really want.
Or maybe the anger just hasn’t bubbled over yet.
The protagonist in “Leverage” is a regular guy, a machine operator whose job is destroyed when his factory is asset-stripped by a PE “investment.” Unlike his fellow ex-workers, however, he decides that things must be made right … and that means confronting the financiers in person.
Check out “Leverage” in Mystery Writers of America Presents Vengeance, now available in bookstores everywhere.
Mike Cooper‘s latest novel CLAWBACK (Viking, March) centers on similar themes of bankster retribution. “Don’t bail them out, TAKE them out” — it’s a good tag line for a thriller, but Mike sincerely hopes it remains fiction.