TCS Daily


Unions Grasp for Influence Over Private Equity

By Ivan Osorio - October 23, 2007 12:00 AM

Mention the names of certain large corporations, and many people think bad things—from ExxonMobil gouging drivers with high gas prices to Wal-Mart destroying city downtowns by undercutting mom-and-pop shops. Sound familiar? That's because these companies have been targets of "corporate campaigns"—public relations onslaughts designed to damage a company's reputation.

When planning corporate campaigns, unions and activist groups research their target and identify its weaknesses. One key pressure point is a company's need for capital. Because they often have great influence over pension funds, many unions are able to pressure companies by having the funds offer shareholder resolutions at corporate annual meetings.

However, the enactment of the 2002 Sarbanes-Oxley Act, in the wake of the Enron and WorldCom scandals, has had an unintended consequence. To avoid burdensome government regulation, some companies are deciding not to list their shares on American stock exchanges—a trend that is leading to more stock listings in overseas financial centers like London and Hong Kong. In some cases, companies have even de-listed their stock shares in the U.S.

This has created great asset shopping opportunities for private equity firms, which are buying up publicly owned companies. Because they do not trade publicly, private equity firms are not directly exposed to the kinds of shareholder pressure that publicly traded companies face. However, organized labor isn't about to sit idly by and let this development go on unchecked.

Leveraging Pension Funds

The ideological roots of union corporate campaigns can be found in the 1960s left-wing group Students for a Democratic Society (SDS). According to George Washington University political scientist Jarol Manheim, who has studied the history and tactics of corporate campaigns, it was SDS that adopted as a central philosophical principle "a view of the corporation, per se, as the critical actor in contemporary American society and as a target of opportunity to force social change."

To influence corporation to achieve the social change they wanted, SDS student activists began to forge alliances with other groups such as labor unions and religious organizations that had the capacity to pressure corporations. SDS and its allies developed a methodology for conducting research on corporations. Their aim was to identify the weaknesses of a targeted company by identifying key "stakeholders" who could bring pressure to bear on the company—customers, suppliers, financial lending institutions, the media, government regulators and the general public. For publicly traded companies, another key constituency was the firm's shareholders.

Manheim has noted that "on the one hand, while [union membership] has been declining, another base of power has been increasing" through the leveraging of $3 trillion in assets in public employee and multi-employer pension funds run by boards that include union representatives. It is now a standard practice for unions to advance their goals by introducing resolutions at public company shareholder meetings. Typically, the resolutions call on the company to change its corporate governance practices or adopt specific public policy positions.

A key to helping unions leverage these assets was the establishment in 1995 of the AFL-CIO Center for Working Capital. This was the year John Sweeney became president of the federation. Even before heading the AFL-CIO, he led the stridently activist Service Employees International Union (SEIU), which perfected the strategy of the corporate campaign. In his 1995 AFL-CIO inaugural address, Sweeney proclaimed, "We will use old-fashioned mass demonstrations, as well as sophisticated corporate campaigns, to make worker rights the civil rights issue of the 1990s."

Sweeney's strategy got a boost in 1998, when the Securities and Exchange Commission revised its Rule 14a-8 to allow shareholders who meet certain floor criteria to submit resolutions and have them included in the company's proxy materials. Before 1998, companies could exclude proposals that dealt with social issues such as the environment and human rights. But the new SEC rule allowed some social policy resolutions to go before shareholders over management objections. A driving force behind this change was the more than 2,000 letters that shareholder activists sent the SEC.

In 2005, SEIU, the Teamsters, United Food and Commercial Workers, and UNITE-HERE disaffiliated from the AFL-CIO and formed a new federation called Change to Win. Earlier that year, SEIU established SEIU Capital Strategies, an organization with parallel functions to the AFL-CIO Center for Working Capital. Some observers correctly recognized this as a sign that the SEIU would leave the AFL-CIO.

Labor Meets Private Equity

Fittingly, SEIU President Andrew Stern has moved quickly to respond to the rise of private equity. He has met with the heads of some of the largest buyout firms, including David Rubenstein of the Carlyle Group, Stephen Schwarzman of Blackstone and David Bonderman of TPG (formerly Texas Pacific Group). "I've been incredibly impressed," Stern told Wall Street Journal columnist Alan Murray. "Compared to most of my meetings with company CEOs, these men are much more business-like, and have much more understanding of what we are trying to accomplish."

Stern's complimentary tone may indicate that private equity CEOs are more willing to play ball with his union than the CEOs of publicly traded companies. But the private equity CEOs may feel they have no choice. Murray notes that Stern operates like Jesse Jackson: "Attack first, then engage—with a hand out for the ultimate payoff."

Stern's union is likely to keep up the pressure on prospective private equity buyers of unionized companies. SEIU maintains a website called BehindtheBuyouts.org, which promises to reveal embarrassing information about private equity executives whom union officials believe might be unsympathetic to union interests.

Stern hopes this pressure will get unions favorable contracts from companies that go private. His interest in private equity intensified during the summer of 2006, when HCA, a hospital corporation that is one of the largest employers of SEIU members, agreed to go private. Stern also was jolted early in 2007, when Blackstone bought out Equity Office Properties, a large employer of janitorial services that employ SEIU members.

Stern realizes that he still has leverage over these companies because they have been bought out by private equity firms that rely on capital from union-dominated pension funds. (Of course, union influence will be reduced to the extent that private equity buyout deals rely on other sources of capital.)

Even when they are not its investors, labor unions have other forms of pressure that they can exert on a private equity firm. One is the tax treatment of private equity buyouts. Currently, top executives at private equity buyout firms can earn hefty payouts of 20 percent of the profits from their funds and their payments are considered "carried interest." They are taxed at the capital-gains tax rate of 15 percent rather than the top personal income rate of 35 percent.

"Therein may lie the makings of a deal," notes the Journal's Alan Murray. "Mr. Stern has suggested the buyout firms could help his cause by, for instance, adopting standards that would encourage the use of unionized janitorial services in buildings. He hasn't said what he wants in return. But one possibility: He eases up on his criticism of their favorable tax treatment." In August, Stern called on Congress to look at what he called "tax dodges" used by private equity firms.

Rearguard Action

In some troubled industries such as steel, airlines and autos—which are hobbled by huge health care and pension legacy costs and ever-increasing foreign competition—unions are struggling to salvage whatever jobs they can.

Last May, DaimlerChrysler announced the sale of its Chrysler division to Cerberus Capital Management, a private equity firm. United Auto Workers president Ronald Gettelfinger, who barely a month earlier had denounced private equity bidders as "strip and flip artists" and vultures "hovering overhead," said that the Cerberus deal was "in the best interest of our membership." He conceded that the union was powerless to stop the deal, so he was determined to make the best of it.

Even under pressure, however, unions can gain significant concessions when negotiating with private equity firms that buy out their employers. For instance, the United Food and Commercial Workers now routinely negotiates language in contracts requiring new supermarket owners to restore wage concessions over the life of the contract.

"If you're a business agent for the textile workers in North Carolina, and your mill is about to move to Mexico, and [private equity mogul] Wilbur Ross shows up, you're going to try to cut a deal with him," Santa Clara University law professor Stephen Diamond told The Washington Post. "You're not going to like it, but you're going to do it."

Indeed, the 850,000-member Steelworkers union has dealt with Wilbur Ross, beginning in 2001 when he started buying bankrupt steel mills. In his bid for LTV Steel, the union agreed to job cuts and reductions in job rules in exchange for the promise of profitability. Ross agreed to give buyouts to departing workers, share profits with workers who stayed and direct some of his gains to a health fund for retirees if LTV became profitable as part of Ross's International Steel Group. Similar deals followed, with Ross acquiring Bethlehem Steel and other steel companies.

On the Bethlehem deal, Steelworkers investment banker Ron Bloom told The Wall Street Journal: "So now we say to Wilbur [Ross] 'OK, we'll support you. We'll shield you from all other bidders... so you can get it real cheap,'" in exchange for Ross putting "real money" into the retiree benefit trust. "You get to put LTV and Bethlehem together—you've now just created by the stroke of a pen the largest steel company in America."

The union also forged an agreement that if Ross cashed out, any new owner would first have to agree to a new labor contract, essentially giving the union veto power over potential bidders. That deal paid off. In 2005 Ross sold his stake in his steel empire for $4.5 billion and a $300 million personal profit, after the new owner, Mittal Steel, met the union's terms.

Despite their ability to negotiate such deals, the Steelworkers see these moves as playing defense in a difficult environment. For private equity investors, such deals are part of the cost of doing business. "Labor has found that these investors operate in a brutally, economically rational fashion," AFL-CIO Associate General Counsel Damon Silvers told the Post. "They have financial targets and they have to hit them. If they have to deal with a union to get there, they'll deal with the union."

Steeling for Obstruction

In addition to threatening to push for higher taxes on public equity or block takeovers, unions can get in on the game by inserting themselves into negotiations as "creditors," with workers' lost wages and benefits as their claims.

That strategy worked well when Toronto-based Onex Corp. bought out three failing Boeing factories in 2005. The new owners wanted to cut 1,700 jobs (out of 10,300), eliminate certain work rules, and cut pay by 10 percent. The unions agreed, but in exchange they wanted the employees to get a share of the profits when the spin-off company went public.

The new company, Spirit AeroSystems, rebounded more quickly than expected, winning contracts for the new Boeing 787 as well as from Sikorsky and Airbus. When it went public in November 2006, Spirit employees who had taken the pay cuts each got checks averaging $30,000, plus 1,000 shares of stock worth around $34,000 as of June 2007. Spirit continues to prosper.

The United Steelworkers of America (USWA), hit hard by foreign competition, has sought to strike agreements like the one in the Onex deal, called successorship clauses.

A successorship clause enabled the USWA to block the Brazilian steel giant CSN from acquiring publicly-held steelmaker Wheeling-Pittsburgh. The Steelworkers managed to steer Wheeling-Pittsburgh Corp. away from a bid by CSN and it persuaded Chicago-based upstart Esmark, Inc. to make a bid for the company. Privately-held Esmark promised that there would be no union layoffs. In return, the union agreed not to oppose Esmark efforts to import steel slabs to Wheeling-Pitt mills.

In July 2006, the union and Esmark mounted a proxy fight to oust the entire Wheeling-Pitt board. They succeeded after vigorously lobbying shareholders and adding two union representatives to the board. The Esmark-Wheeling-Pitt deal should be finalized this fall, and is expected to bring $50 million to $200 million in equity into the company. CSN executive Luiz Ernesto Migliora said that while his company remains interested in buying American steel assets, next time, "I would never try anything without going to the union first."

A New Chapter

A new chapter in American economic and labor history is now being written. Unions thought they had found in corporate campaigns a promising new organizing strategy to fix their problem of declining membership. But now they must re-orient that strategy to deal with the rise of private equity firms. Burdened by government regulations, publicly traded companies have strong incentives to accept buyout offers from private equity firms that have demonstrated that they can make companies more profitable.

Labor unions have room to maneuver in this new environment, thanks to their influence over pension funds that provide lots of private equity capital. But private equity firms have other sources of capital, and unions have no access to shareholders in dealing with a privately-held company. But don't count the unions out yet.

Ivan Osorio is Editorial Director at the Competitive Enterprise Institute. A longer version of this article appeared in the October issue of Capital Research Center's Labor Watch.


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41 Comments

Unfair advantage...
Pretty legalities aside these extortion tactics are effective.

Let's remember, however, that anytime a third party such as a Union is able to influence these transactions to favor their own interests (beyond their rights regarding collective bargaining), competition has been restricted and earnings are diverted.

When an "unfair advantage" is created and deployed "might makes right". One could argue that unions are an expression of socialist, anti-capitalist sentiments. But union management engages its strengths just like the most ruthless capitalist players do.

Wealth is created through productive processes that bring together material, labor and overhead. Labor is simply a factor of production. Without capital, union workers have no jobs.

However, if we are able to operate without union labor...then they have no complaints...because, when they can, the unions push their advantages too far and they take too much off the table. This is especially true with mature industries where the corporations already earn razor thin margins.

Introducing resolutions at public shareholder meetings
That sounds un-American-- allowing shareholders to offer their opinions on corporate governance at shareholder meetings. Aren't they just supposed to rubber stamp the agenda offered them, and go home for another year?

Hahahaha
This is funny given our past discussion today. You see how markets circumvent regulation and government meddling? It is futile and this is the absolute result of government meddling. Yeah, Enron was a shame and was wrong but knee jerk sweeping reforms always result in this type of stuff and I think it is pretty funny. The lesson from Enron? Don't put all your eggs in one basket.

Shareholders can't say anything because they don't exist with private equity firms. It is not that anyone objects to shareholders, as I understand it the reporting requirements of the SO act are onerous and quite burdensome.



Rahhhh I am laughing so hard.

Like Ford and GM
Where the benefits are killing the industry. I don't blame unions 100% as management sold out for these onerous contracts. However, unions never want to give back regardless of how low they sink the company.

"Union management engages its strengths just like the most ruthless capitalist players"
It does not.

Unions behave just like petty tyrant governments.

"One could argue that unions are an expression of socialist, anti-capitalist sentiments."

Well, only because they are.

Labor as a "raw material"...
Karl Marx complained that labor was sold to capitalists (and priced) as a commodity.

However, in the "material, labor and overhead" paradigm labor is unique. Materials dwell on the left side of the Balance Sheet as Inventory assets. And the components of fixed overhead are over there too as Capital Equipment assets.

Labor is a period expense showing up on the Income Statement (and not on the Balance Sheet at all). Human Resources are not booked as assets anywhere.

In one sense, the company is composed of its workers and "people are the company". In fact, in virtually every industry labor costs as a portion of total revenues are far larger than earnings accruing to the capitalistic entity.

Labor actually engages the working capital of the corporation more as its own income-producing vehicle than the owner does!

Nevertheless, organized labor got itself in the "wealth creation" game as a capitalist player itself just like the producers of raw materials, the machine tool shops and the bankers.

Organized labor decided that its "man-hours" were indeed for sale...rather than to see its workers as "partners" within their own companies. A dynamic evolved into an adversarial relationship between management and labor...rather than to move everyone in all companies forward into something more like professional partnerships.

Just like high material costs (including energy) or high interest rates, overpriced labor can cripple a business...especially in industries with thin margins.

But the crude oil players and the commercial bankers do not concern themselves with their impact on the economy...neither do the labor unions.

The health of the economy would be someone else's problem. Someone in government, perhaps. According to the rules, it is their job to take out as much for themselves as they possibly can.

Sometimes the game itself is poorly designed if the players cannot operate in a normal manner without continually disrupting play for a correction (foul shot).

Basketball is like that, too. Stupid game...

True...
Great,

Karl Marx must be happy...(looking down from heaven?) Thanks.

And we also have democracy in America...
We are such suckers! When they found out we would buy into Santa Claus...they just kept stringing us along.

Karl Marx is roasting in hell ...
because one may hope such would be the ultimate fate of men who release unspeakable evil to plague the world.

Besides, I fail to see how the SDS, labor unions, Congress, or the other "stakeholders" in corporate activities are anything more than thugs when they press their stakes with the help of guns and lies. Perhaps if they actually owned something other than the same, they'd create something of value.

Don't forget Jesse Jackson
I am amazed how he has managed to extort money from corporations also.

If I had been CEO of some major corporation he would have had a fight.

unions
Unions are kind of like the old medieval guilds; they restrict access to certain activities, they keep out competition from new entrants, they blackmail employers, etc. They are just another special interests group lobbying to goverment for restrictions on free trade. They are anti-democratic and antij-capitalist.

Not fully thought out
There's nothing in your post that disagrees with anything I've said. Publicly offered companies must put up with the initiatives any shareholders choose to raise. Those are the customary rules of a corporation. They are NOT mandates shoved down their throats by Big Gubmit.

Further, if there were no regulations governing corporate accounting, none of the books would be any more transparent or accurate than Enron's were. Booking future revenues as cash, for instance, while omitting future expenses to give a false picture of health.

And as a result, investors would be properly skeptical of any public offering, and would desert the markets.

When a company buys out its shareholders and goes private, it is no longer subject to those rules. If the accountants cheat and deceive, they only deceive those who have hired them.

So why are you laughing?

Extortion
It would be fun to set up a sting on Jackson & the Rainbow Coalition: (1) Set up a phony angle that would attract Jackson like a buzzard to rotten roadkill, (2) get Jackson on tape shaking down the bad actor for cash money, (3) turn the evidence over to the Feds and file a civil lawsuit naming the entire Rainbow Coalition as defendants, and then (4) shake them down for cash money.

The IRS still cares...
Public companies need to show profits in order to underwrite the value of their equity shares. When the "books are cooked" assets are typically fluffed up to that end.

Alternatively, private companies seek to protect their earnings from the taxman. No need to show profits because there are no dividends to declare. In that case, the CFO is inclined to understate assets or to book reserves into his Liabilities if things are going too well and the company is making too much money to shelter.

You think shareholders get upset when you play tricks with your Income Statement? Try fooling around with the IRS if you want to see the inside of a courtroom in a hurry.

Unions are tribal...
Unions came together to generate the strength of numbers that a culture of group behavior has in its hands...but that individuals do not.

Of course, as a one-dimensional, tribal entity labor unions are limited to selling themselves to capitalists as only one factor of production. Unions occupy a temporary and fragile economic niche in global society.

If they do not evolve in the Post Industrial Society then unions will die. The competitive dynamic is working very hard to marginalize labor unions back into the fringe.

Government intervention
The point is that the government took action and like all systems, there was a reaction and this is the trend to private equity. Personally, I think it is a bad trend but one the politicians, in usual knee jerk fashion, brought on.

I am laughing because your always pontificating the evils of corporations and how labor has to share. Under the move to private equity firms profits will trump labor far faster than public corporations. Venture Capitalist are ruthless.

Unions and the Disinigration of the Industrial Age
Yes, Unions are still stuck in the mindset of traditional production industries. In the past product life cycles were often years or decades and labor enjoyed a certain degree of stability.

Now product life cycles are often months. No union mentality can keep such a pace and labor is often highly skilled augmented with automation.
It is a brave new world and those who refuse to move forward will be left behind.

Roy would call this unfair. I call it reality. Fairness is a myth.

Liberals and Democrats are above the law
You forget, to the left the end always justifies the means.

Any attempt to roast Jackson would result in cries of racism.



tribals
Yeah, but don't forge they won't just die out so easily because they are so entrenched in the gevernement sector. So all those beaurocrats, teachers, municipal guys leaning on their shovels, all those inificiant postal workers, etc. will even expand as government expands into more areas. When we see governments at all levels do into debt they'll try anything, EXCEPT get rid of union employees. Wait a minute, they also wont' get rid of non-union parasites either.

"I call it reality. Fairness is a myth."
So what's your gripe about unions using their stockholder votes again?

Nothing
I wasn't complaining. I was pointing out unions are a anachronism.

Where did you get that idea?
The USA is a Constitutional Republic.

that's your view about unions
But anachronism or not, they have a perfect right to exercise their rights as shareowners and as citizen organizations..

The Union Movement as a business opportunity...
At the time the Union Movement achieved traction there was demand in the society for such a group activity to counter the genuinely ruthless behavior of industrialists.

Clearly, even today, it is in the best interest of the government (as well as the politicians) that powerful business entities should be able to fully exploit (and put to work) all of our income producing resources (including labor) to efficiently create wealth...earnings that might then be taxed.

At the beginning of the United States our Founding Fathers actually owned slaves themselves. The concepts of universal suffrage and civil rights were remote. Business as usual was very rough on direct labor workers. Unions saw an opening.

Entrepreneurs launched unions into the industrial arena as income-producing ventures. As socialist entities Communist economies did not work out...but unions delivered as promised.

Labor organization was, in the end, a capitalistic service industry. Workers needed organization services and a vehicle to deploy the natural strength of their own numbers.

As global civilization evolved during the past 100 years more balanced attitudes regarding the role of "human resources" have emerged in our culture. The tasks assigned by society to Labor Unions have become less urgent.

Unions continue to lay claim to their historical, moral high ground...but their agenda is mostly moot today. Insofar as organized labor actually brought this about...they worked themselves out of a job!

Such operations today are no longer so much involved in doing the important work of collective bargaining. They are mostly engaged in collecting union dues, paying themselves really well and managing immense funds.

It is notable that much Union power deployed today is derivative and strictly capitalistic (financial). Mature industrial companies often generate more earnings managing their financial portfolios than they do operating their primary businesses.

As one example, we might say that American car companies are in the business of designing and building automobiles...however, they lose money on each such unit. They actually keep the doors open with their financing groups, by leveraging the capital goods already on their balance sheets and through buying and selling their own shares of stock.

Similarly, labor unions no longer enjoy significant demand for their services here in the American economy. Of course, they once did very well and they made a great business out of opportunities to organize workers.

Now they hold tenaciously onto what they have already built up...their portfolio of contracts and their mountains of money. This gives them a certain stubborn inertia due to their raw mass rather than any actual business momentum or market velocity.

Organized Labor is just another mature business with slow growth and conservative tendencies.

There's another reason
I've heard of companies going private again because of the burden of all that paperwork. But don't you think a greater contributing factor is the accumulation of huge wads of profit in the hands of some successful investors?

That stuff has to find a home somewhere. And mortgage backed securities somehow have lost their luster. Besides, real capitalists need the swagger that comes from owning the whole caboodle, not just some pieces of paper they can't control.

Bring those cries of racism on!
Cash money is always green (unless it's not USD). If that's what you're angling for, then racism is nothing more than a card to play from your hand, red or black regardless.

But that isn't what they do.
*

Then what do they do that's objectionable?
* is not a comment.

Looking Backward
“American wages are higher than wages in other countries because the capital invested per head of the worker is greater and the plants are thereby in the position to use the most efficient tools and machines. What is called the American way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than other nations. The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modern equipment, are therefore producing much less per man hour and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.” ~ Ludwig von Mises, 1962

An employer entity cannot afford to lose its needed workers. Employers that lower wages are not cruel, and employers that raise wages are not kind. They are responding to demand. And supply.

I have previously, some months ago, talked about Wegman's supermarkets, which are a Northeast Coast phenomenon. They make Fortune magazine's Top 100 Companies to Work For list every year, and a couple of years ago were #1. Keep in mind, that list is put together using 75% employee input. Nobody makes the list if their employees don't love them.

Wegman's will not hire anyone from the supermarket labor union. Wegman's employees don't care, although the labor union is pissed as hell.

Why don't Wegman's employees care about this?

Because Wegman's pays BETTER than the labor unions would allow and provides SUPERIOR benefits to what the labor unions would "negotiate" for. The Wegman's company motto is: the customer comes second; the employee comes first.

While the Wegman family does indeed seem to be kind-hearted, they do not maintain their business philosophy based on their kindness. Rather, they are as successful as they are because they realize a basic business principle: happy employees are top-producing employees, and top-producing employees are the core factor to pleasing customers and making them repeat customers.

Without repeat customers and referrals, no business can last.

By the way, Wegman's routinely puts its competitors out of business whenever it builds a new store. The company offers the best prices along with the best array of choices (I know; I used to personally shop there when I was in the East). The stores maintain very nice restaurants in which one can eat the very excellent foods prepared on site. The company buys from local producers whenever possible and makes very significant charitable donations, especially to local "soup kitchens". Their books are so well kept that they never finance a new store (and their new stores are mammoth). They pay CASH.

No labor unions necessary, noo government regulations necessary, for Wegman's to conduct business this way.

They are just one example.

"Organizing workers" to make voices heard is, yes indeed, a Constitutional right and I think it is beyond question that it has and has had a powerful effect. But "labor unions"? Their powers are nothing but mythology--which Forest rightly points out are now leveraged to the gains of their big bosses.

Wages rise and working conditions improve as, like a force of nature, the capitalist marketplace manifests increases in capital accumulation, the furthering of technological progress, and the expansion of profitable endeavors.

They exist.
*

Secure extortionist, top-dollar wages for sitting around on their arses, too.
*

And they forgot to clear this with you. The nerve!
Send them a postcard: I'm sure they'll disband when they hear you disapprove.

That's only because you hadn't made your feelings clear
Now that you have, I'm sure everyone will happily go back to subminimum wage, no benefits.

I agree, it is compliance with so that drives this.
Compliance is the big issue.

The mortgage industry is guilty of the crime of easy credit loaning money to those who had no business borrowing all blessed by the government. Greed supplanted common snese.

I do not know about swagger. My goal is a comfortable retirement, funding my kids education and knowing I lived a moral and just life. I am a capitalist in the truest sense. This does not mean I don't think anything goes. I play by the rules 100%.


Never said they don't
I think they served a purpose. I also think that time has passed.

They have no reality in market based economics.
Why are car companies hurting right now?

They have "reality" in all advanced industrial countries. Maybe you need a reality check.
>Why are car companies hurting right now?
As a first approximation, because the US doesn't have a single payer health plan. The negotiations and problems are over health benefits, which cost much, much more in the US than anywhere else. Please look into this and see how much you can blame on unions. Note that car companies US firms are competing with are unionized too.

I'm sure you think you have a point
Why not try making it, instead of just posting oracular sayings from on high?

Couple of things
You describe yourself as a typical investor, in some sense like I am (I also like a secure retirement). But actually I was describing venture capitalists in the private equity market. You and I wouldn't be players there until we got to maybe the fifty million mark. At that stage, most people start thinking beyond mere profit (they can already buy anything they want, and are growing bored). They now want power and influence. They want to buy and control whole companies.

And so the Great Game goes.

2. I have a slightly different take on this:

"The mortgage industry is guilty of the crime of easy credit loaning money to those who had no business borrowing all blessed by the government."

Having spent a career in real estate, I found that lenders are one group of capitalists who get to write their own rules. Borrowers generally enjoy nearly zero in the way of legal protections. And the current crisis came about because of another kind of borrower abuse: deceptive advertising.

Most people are qualified for a loan at some level. If houses only cost $50K, lots more people could qualify.

The people now getting into trouble qualified easily for their low introductory offers-- fabulous interest rates that made it possible for more people to afford homes priced at higher nominal sales prices. Win-win, right? All homes appreciated, while more families could afford them.

And they kept up their payments just fine. Hundreds of thousands of families moved into their brand new homes, fuelling an admirable boom in the construction industry. So, now let's call it a win-win-win.

Then at the close of the introductory term these interest rates ratcheted up, increasing monthly payments typically by fifty percent. Everyone was tapped out with their existing payment load in support of an American lifestyle (car, furniture, credit cards) and just couldn't afford the new rates. So they began to default.

One can get all righteous about their overextending themselves. But I think just blaming the consumer is beside the point. The customers' real sin was not to be cynical, and look more closely at the terms they were signing on to. Many actually believed the rates on a VRM (variable rate mortgage) might even go DOWN. Not realizing, of course, that if the rates were likely to do that they'd never have been offered a VRM.

And the lenders also sinned gravely. They thought they could make a bundle through devious greed. And they found their customers just couldn't afford it. So instead of gaining riches beyond the wildest dreams of avarice, what they were ending up with was used bricks.

Solution: more and more of these lenders in trouble are renegotiating the loans back down again, to the point where the customers can still afford to pay. The lenders get a modest return. The homeowners get to keep the house. It's again a win-win.

"Blessed by the government"
This is only the tiniest of quibbles. You say "The mortgage industry is guilty of the crime of easy credit loaning money to those who had no business borrowing all blessed by the government."

And in fact, whenever things don't go quite right there is always the temptation to say the problem was government regulation. But these loans occurred almost exclusively in unregulated markets. And the reason the lenders got in trouble was that there were no rules constraining their activities.

Here's a really good explanation of what went down. But be careful. It was written by The Devil himself! :)

http://www.commondreams.org/archive/2007/10/26/4820/

And let me just add...
Your example of a company that puts its employees first as a competitive advantage approaches my own position that a company is actually "composed of the people who work there with a common purpose".

A formal partnership of such people (including the executive managers) might "be the company" itself rather than to individually sell themselves into the role of "human resources" hired by some third party, corporate entity.

I think that such partnerships might be very competitive in many industries that are currently dominated by traditional corporations.

Whether private or public the owners of a company have an opportunity to treat employees well if this seems to make good business sense...but they enjoy the option to treat their workers poorly, often without much recourse, if that seems more profitable.

Even unions can only address such matters after the damage has already been done. This potential for abuse (with an adversarial relationship between management and labor) is built into the corporate structure.

Self-serving misbehavior by owners and managers will always occur under this model. It is inevitable. Just as fouls must occur on the basketball court. Poor (game) design.

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