Tax Analysts Blog

The Buyout of America

Posted on Nov 17, 2009

In the late 1980s Ways and Means Chairman Dan Rostenkowsi proposed a bill that would limit tax deductions for interest on debt to finance corporate takeovers. That bill died when the market crash of 1987 scared Congress away from any get-tough policies on Wall Street. But scandal and overreaching eventually brought buyout kings KKR and Drexel Lambert to their knees anyway.

By 2000 the industry depicted in the 1990 classic Barbarians at the Gate had changed its image. They were now private equity funds instead of "LBO firms" who sold high-yield debt instead of "junks bonds." But in Joshua Kosman's new book The Buyout of America they are still the bad guys. They take over well-managed companies from financially-unsophisticated owners. The victimized firms are forced to cut jobs, cut quality, and raise prices. To pay for their acquisitions, private equity firms load up the their targets with momentous amounts of debt which they sell to pension funds after packaging the debt into collateralized loan obligations, CLOs.

Those CLOs have a lot of the unsettling characteristics of the CMO (collateralized mortgage obligations) that got us into the current mess. The only difference is that CLO investors' day of reckoning is in 2012 when balloon payments of the principal are due. (You can listen to Terry Gross of "Fresh Air" interview Kosman here.)

According to Kosman: "The whole industry was started in order to take advantage of tax loopholes. It was not about, and never has been about, building strong, healthy companies."

Hmmm? Where have I heard that before? Oh, yeah, from my brilliant colleague Lee Sheppard who described private equity funds as "heavily leveraged tax-haven partnerships hellbent on beating any kind of tax in the home countries of the funds, the investors, and the target businesses." (Quoted in Tax Notes, March 26, 2007, p. 1211).

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