What do predatory lending and private equity restructuring have in common. In both cases, value created by the work and savings of individuals was transferred by financial sleight of hand into the pockets of the 1%. Net worth on corporate balance sheets created over many years by the joint efforts of labor and management was stripped out and pocketed by firms like Bain when companies were restructured and loaded down with debt. The equity removed from corporate balance sheets then wound up in the pockets of a few and debt-laden companies were left to flounder and/or go bankrupt.
On a smaller individual scale, but with many more individuals involved, large lenders made predatory loans to financially naive borrowers who trusted that lenders were honest and spoke the truth. In both cases, it was members of the 1%, represented by Wall Street banks and private equity firms who benefited from fleecing those who worked and saved. Savings earned by the sweat of the brow by millions of individuals paying normal tax rates, found their way to the 1% who then paid especially low tax rates on unearned income.
Let me try to make my point more clearly with a typical and fictitious individual, Joe Smith. Joe was employed for 30+ years by one company in Michigan that was restructured by a private equity firm. Joe was laid off with 500 other individuals flooding the local job market. Joe lost his healthcare insurance which he replaced with COBRA for himself and his wife at a combined cost of $850 month. He had planned to work to age 65 to maximize his pension and his Social Security. Since jobs were nonexistent for a person his age, age discrimination is widespread although illegal, he decided to take early Social Security at a 20% reduction and to wait until age 65 to collect his pension, no choice available there.
Then 3 years later when Joe was 63, his former employer declared bankruptcy and notified Joe that his pension would not be paid. Joe was having difficulty making ends meet so he decided to mortgage his home. The home loan broker loaded up the loan with points and unneeded insurance to maximize his commission. Joe received a lump sum payment, but was saddled with a 20-year loan that he could not afford, that would not be paid off until Joe was 84. Four years later as inflation and unpaid medical bills started to mount, Joe started to look for work at age 68. All the work Joe put into his job and the savings into his home had mostly disappeared into the hands and pockets of the 1%.
- Why Romney’s background in private equity matters (politico.com)
- Behind Romney’s Bain retirement deal (politicalticker.blogs.cnn.com)
- How many companies did Romney and his company Bain Capital, a private equity firm break? (bonjupatten.com)
- Fact or fiction? Romney’s private equity past (finance.fortune.cnn.com)