Friday, January 27, 2012

Private Equity? Where's the equity?

credit: African Safari Pictures
eq·ui·ty  (kw-t)
n. pl. eq·ui·ties
1. The state, quality, or ideal of being just, impartial, and fair.
2. Something that is just, impartial, and fair.
3. Law
a. Justice applied in circumstances covered by law yet influenced by principles of ethics and fairness.
b. A system of jurisprudence supplementing and serving to modify the rigor of common law.
c. An equitable right or claim.
d. Equity of redemption.
4. The residual value of a business or property beyond any mortgage thereon and liability therein.
a. The market value of securities less any debt incurred.
b. Common stock and preferred stock.
6. Funds provided to a business by the sale of stock.

Private equity funds inflict injury on the companies they acquire.

Why? Because private equity funds (launched by private equity firms) finance their buyouts with money borrowed from investors. Then, the purchased company must pay back that debt to investors, plus interest. So, a company finds itself unnecessarily burdened with debt that serves no purpose but to pay off vultures who acquired the company. The payoff to investors -- the borrowed money plus about 8% interest -- imposes drag on the growth of the company: the debt limits opportunity to invest in productivity improvements; to purchase new equipment; to offer healthcare and pensions to employees; to hire more employees. And all of that 8% interest expense -- plus a 2% "management fee" paid to the private equity firm -- is deducted from the company's tax liability, forcing taxpayers to subsidize the profits to investors.

By the above definition, there is no equity -- fairness -- for employees of companies that endure a private equity fund leveraged buyout. Instantly, the company finds itself at a disadvantage relative to its competitors. And if it was not in good shape to begin with, it must then sell off assets or fire employees to pay down its debt. This puts the company at further disadvantage; hurls it into a spiral of diminishing returns. Either way, whether the company was solvent and debt-free prior to the leverage buyout, or on the ropes, after the leveraged buyout, the company is at a disadvantage relative to its competitors due to the unproductive debt imposed on it -- debt that does nothing but pad bank accounts of investors. And taxpayers subsidize all of this bad karma when the company writes off the interest paid to investors.

But the vultures don't care. Through the magic of carried interest (also called, ironically, "performance fees"), private equity fund managers suck their pound of flesh out of the company -- about 20% of the gain in "value" realized by the company as a result of the buyout -- and move on to the next victim. (The value is increased because the vultures cut operating expenses [number of employees, investment in new equipment, etc.], crippling the company in the long-term, but increasing short-term profits.) The private equity fund managers walk away with millions in profit, and pay only 15% long-term capital-gains tax on those profits. The magic of carried interest. But it is not magic. It is more like voodoo. It turns the victims of private equity funds into zombies. Sometimes they recover, sometimes they don't.

Private equity fund managers will argue that their "investment" in the company, and subsequent takeover of its management, allows it to trim away the "fat" and "dead wood" and force the company to focus on its core competency. But most companies don't have all that much fat and dead wood. They do have capital assets and employees. Most are vital to productivity, of course. But these assets and employees are what the fund managers -- and new owners of the company -- will respectively sell off and lay off to repay their investors -- including 8% interest, plus the private equity fund management fee, another couple of percent. And once they've done that, once they meet the "hurdle rate" -- that 8% paid to investors -- they suck out their "performance" fee: usually 20% of the increase in "value" of the company -- remember, this short-term gain in value generally comes at the expense of long-term viability. All told, these buyouts usually yield about 28% return on investment to the private equity firm. That's a lot. In fact, it's astronomical.

The fund managers will tell you they earned that money through diligent application of their hard won expertise and superior intellects; that they must be compensated for their risk; that now the purchased company is "leaner and meaner." But lean and mean are not necessarily good. If the company lacks capital, it can't grow, it can't adapt -- leaner -- and it can't take very good care of its employees -- meaner. So the company contracts, struggles to survive wounds inflicted by the private equity fund attack, and may or may not return to sustainable profitability. But the employees of a leaner, meaner company, the ones that aren't fired, won't be working for the same people or the same company, and they will likely look elsewhere for better opportunities -- if they can find them.

No, don't buy the private equity fund snake oil. It is the worst kind of voodoo, and it only benefits the private equity fund and its investors, and it burdens taxpayers who pick up the tab for those interest expense write offs.

Here's one story (among many) of a colossal failure of a private equity fund buyout (failure for the victim, the fund and its investors got their money, of course). Give it a read, it will deflate the over-inflated rhetoric you've been hearing about the benefits sown by private equity funds:

And then, visit the NY Times Topic: Private Equity
to find out whats going on right now, and see interviews with the self-serving purveyors of doom.

And don't confuse venture capitalists with vulture capitalists -- two very different animals.

Thursday, January 26, 2012

Bacteria, CAFO's and What's For Dinner

I stumbled onto a tweet suggesting I comment on a new FDA ruling prohibiting "extralabel uses of cephalosporin antimicrobial drugs in certain food-producing animals."

The whole ruling sort of struck me as Orwellian absurd.

Here is my comment:

Packing animals into CAFO's and then "curing" their ills with antibiotics -- either as prophylactic or post-infection -- is irresponsible and inhumane. So, it seems pointless to comment on particular "off-label" uses of cephalosporin. Are we arranging deck chairs on the Titanic? End the use of antibiotics in feedlots entirely, and prevent animal infection by attacking the cause, not the symptoms: toxic CAFO's.

Here is the FDA's summary of ruling (FDA-2008-N-0326-0177):

The Food and Drug Administration (FDA, the Agency) is issuing an order prohibiting certain extralabel uses of cephalosporin antimicrobial drugs in certain food-producing animals. We are issuing this order based on evidence that certain extralabel uses of these drugs in these animals will likely cause an adverse event in humans and, therefore, present a risk to the public health.

Here is an excerpt from the ruling:

At this time, FDA is concerned that certain extralabel uses of cephalosporins in food-producing major species are likely to lead to the emergence and dissemination of cephalosporin-resistant strains of foodborne bacterial pathogens. If these drug-resistant bacterial strains infect humans, it is likely that cephalosporins will no longer be effective for treating disease in those people. The Agency is particularly concerned about the extralabel use of cephalosporin drugs that are not approved for use in food-producing major species because very little is known about their microbiological or toxicological effects when used in food-producing animals. Therefore, FDA is issuing an order prohibiting, with limited exceptions, the extralabel use of cephalosporins in food-producing major species because, as discussed in this document, the Agency has determined that such extralabel use likely will cause an adverse event and, therefore, presents a risk to the public health.

Isn't this horse out of the barn, so to speak? Should not the FDA issue a ruling restricting the (inhumane) use of CAFO's? Should they not the ban the sale of toxic meet crawling with bacteria (various bacteria infect a large proportion of what you buy and eat) and saturated with antibiotics?

If you eat meat, try to eat less. And try to buy the stuff that does not pass through CAFO's -- concentrated animal feeding operations.

Submit your comment to the FDA, by March 6, 2012, here:
New Animal Drugs; Cephalosporin Drugs; Extralabel Animal Drug Use; Order of Prohibition

Monday, January 2, 2012

~ Fermi III ~ Impact of A Nuke ~

Fermi II Cooling Towers -- Monroe, MI

Mike Keegan, representing Don't Waste Michigan & the Coalition for a Nuclear Free Great Lakes, makes a convincing argument against nuclear power generally, and Fermi III specifically at the International Roundtable on "Nuclear Threats to the Great Lakes and Transition to Clean Safe Energy" on May 14, 2011, in Dearborn, Michigan (USA)

UPDATE 03-APR-12: The comment period on the Draft Environmental Impact Statement for Fermi III is long passed. Now we wait for the NRC to revise and release the final draft. No doubt, most of the comments will be dismissed as irrelevant, but note below some of the details of how Detroit Edison intends to force ratepayers to finance this thing (in lieu of cheaper alternatives such as distributed renewables, which Detroit Edison no doubt disfavor due to the fact that anyone can own and operate them -- Detroit Edison looses control of the electricity franchise if we choose cheaper, safer alternatives that provide more domestic employment).

The environmental impact statement drafted by the NRC, and eligible for public comment until January 11, 2012: Draft Environmental Impact Statement for Combined License (COL) for Enrico Fermi Unit 3 (NUREG-2105, Volume 1)

Detroit Edison hopes to bless the residents of southeast Michigan with a brand new Economic Simplified Boiling Water Reactor (ESBWR) designed by GE-Hitachi Nuclear Energy Americas, LLC (GEH)

This new reactor will be a fine conduit for ratepayer cash to flow into the pockets of Detroit Edison's executives and shareholders. Or, out of taxpayers' pockets and into the pockets of bankers (via Congressionally-mandated loan guarantees) if Detroit Edison should go bankrupt building this new, unproven design in a field strewn with the corpses of the clanking behemoth's predecessors. And the road to that field is paved with the squandered treasure of American taxpayers.

Until the deadline on January 11, 2012,  you have the opportunity to post your comments on the above draft environmental impact study. I encourage all to do so -- read a chapter or two, and pick a favorite topic to sound off on.

Fermi II
photo: Nuclear News / What the physics?

Here are my remarks:

Comment on:
Draft Environmental Impact
Statement for Combined License (COL)
for Enrico Fermi Unit 3

Draft Report for Comment
U.S. Nuclear Regulatory Commission

Office of New Reactors
Washington, DC 20555-0001

Regulatory Office
Permit Evaluation, Eastern Branch
U.S. Army Engineer District, Detroit
U.S. Army Corps of Engineers
Detroit, MI 48226

I am opposed to the construction and operation of Fermi III. I have restricted my comments to Chapters 6-8 (document: sr2105v1-chp6-chp8.pdf).

The premise of the the NRC's environmental impact statement is to assess the environmental effects of building, and operating Fermi III (for up to 60 years). If it were true that the construction and operation of Fermi III were essential to the well-being of Southeast Michigan's residents, then the conclusions drawn by the NRC review team might seem plausible, even reasonable. But Fermi III is not an essential future element of Southeast Michigan's electricity supply, and thus any environmental impact of Fermi III, not to mention negative economic impact, is detrimental to the well-being of Southeast Michigan's residents.

The residents of Southeast Michigan would be better off from an environmental perspective, health-perspective, and economic perspective if Fermi III were never built. The cost of nuclear power is exorbitant, cost overruns of several multiples are standard, construction delays are endemic, and fuel costs are unpredictable, and waste disposal costs are unknown. It will take decades for ratepayers to repay the loans for Fermi III.

Alternatively, Detroit Edison could invest in efficiency gains and distributed renewable energy, and instead of burdening ratepayers and the environment of Southeast Michigan, benefit ratepayers with long-term, well-paid jobs and clean, non-toxic, terrorism-proof energy, and protect their environment from the inevitable and potentially catastrophic environmental impact Fermi III will impose. Yet, rather than doing well by doing good, Detroit Edison would build an overpriced, toxic, national health and security risk in our backyard, which in the event of catastrophic failure, will force the permanent evacuation of Monroe, the Detroit and Toledo metro areas, and render Lake Erie permanently toxic.

Risk permanent evacuation (hundreds of years, at least). Why? Not to provide us with essential electricity, because it has been shown in California and other states that demand for the foreseeable future can be met with efficiency improvements and distributed renewables at lower cost and better reliability (,

No, Detroit Edison is not building Fermi III to provide Southeast Michigan with an inexpensive, reliable source of energy -- nuclear power is anything but that -- they are building Fermi III to provide their shareholders with profit. There are two reasons nuclear power offers a good return to shareholders -- neither of which has anything to do with the economis of nuclear power. The first reason is that taxpayers are compelled by law to guarantee necessary construction loans ($4 or $5 billion dollars) in the event Detroit Edison defaults, thus indemnifying Detroit Edison's shareholders and executives against loss. The second reason why Fermi III benefits shareholders and executives is that while electric utilities are currently de-regulated and subject to competition, utilities can petition the state to allow them to add surcharges to their published rates to recoup "power supply"  costs (via Michigan Power Supply Cost Recovery (PSCR) plans submitted each year for state approval, the 2011 plan can be found here:; PSCR is defined here:, In the future, these surcharges will be used to cover the cost of building and operating Fermi III without impacting Detroit Edison's bottom line or their published, "competitive" rates (which if these surcharges were included in their published rates, their rates would no longer be competitive -- so much for free-markets and de-regulation). Thus, all of the revenue derived from the sale of Fermi III electricity represents profit to shareholders and executives.

Improved efficiency and distributed renewables, while cheaper and healthier to ratepayers, would most likely be sold by companies other than Detroit Edison in a true free-market, and therefore are less desirable options to Detroit Edison executives and shareholders. Also, efficiency improvements and renewables create more jobs. But these jobs will most likely be provided by companies other than Detroit Edison, which surely offers Detroit Edison's executives and shareholders no benefit. On the other hand, Fermi III is capital intensive, meaning it costs a lot to build, but creates few long-term jobs. This is undoubtedly preferable to Detroit Edison shareholders and executives, as it easier to manage money and add surcharges to customers' bills than it is to manage employees, especially unionized employees fanned out across the state implementing efficiency improvements and distributed renewables, which ultimately cut revenue to Detroit Edision. And that last point is very important to keep in mind when contemplating why Detroit Edison prefers big, toxic, expensive, capital-intensive generating plants over small, distributed, clean, cheap, job-intensive efficiency and distributed renewables -- Detroit Edison will be subject to real competition in the sale of efficiency and renewables, and likely will fail in a true free-market arena.  Thus ratepayers get stuck with a toxic behemoth they don't need, but must pay for.

And make no mistake, Fermi III is toxic. The NRC environmental impact statement makes this clear: look at the list of toxic emissions enumerated in Table 6-1. The NRC often makes comparisons of these emissions to background levels of these toxins, or the quantity of toxins emitted by coal-fired plants of equal capacity to Fermi III. But those are irrational comparisons. It is like a drunk saying, "Well, I'm already drunk, so what's the difference if I have one more drink?" or a gambler saying, "Well, I'm already broke, so why not play another hand." The point is, these emissions are bad, and more of them makes things worse, and more people and ecosystems dead, even if by comparison to deadlier coal-fired plants, Fermi III emits less. We are already drunk with toxins, so what's the harm in adding a little more? We are already environmentally impoverished, so what's the harm in taking another gamble? Well, if we absolutely needed this electricity, if we had no other choice, maybe the NRC's comparisons and conclusions would be valid. But we do not need the power that Fermi III will provide ( Further, if we did need the electricity, we derive more bang for the buck -- power-wise, job-wise, and safe-wise -- if we choose other alternatives, namely end-use efficiency improvements and distributed renewables (see Amory Lovins:, End use efficiency improvements and renewables will also help prevent catastrophic global warming because they can be implemented quickly using existing technology. Fermi III -- or any new nuclear power plant -- will do nothing to prevent catastrophic climate change because they take too long to build and will come on line too late to do any good -- the catastrophic climate change will already be upon us when Fermi III comes on line (if it ever does) with overpriced, unneeded electricity from unproven technology.

Once we stipulate that the power Fermi III will provide is unnecessary -- and it is -- then it becomes eminently clear that any environmental impact from Fermi III is unacceptable -- it is unacceptable to throw away acres of essential wetlands, unacceptable to pollute our air and groundwater with radionuclides and other shorter-lived toxins (via mining, processing, plant operation, and waste disposal); unacceptable to draw billions of gallons of water from Lake Erie and kill millions of adult fish, fish eggs, and larvae; amphibian adults, eggs, and larvae; adult insects, insect eggs and larvae that go with that intake water, along with the wildlife that depend on these animals and insects; unacceptable to dump billions of BTU's of heat into the air and water, and tons of atmosphere-heating water vapor from cooling towers. These environmental impacts are not now and never will be benign. ( And there are always longs lists of unintended consequences that come after the fact -- and are irreparable -- when we pollute and tweak environmental systems the way Fermi III will (in conjuction with Fermi II and other thermal power plants along the western shore of Lake Erie). And for no good reason. We don't need the power Fermi III will provide -- we can get electricity elsewhere for less cost, with more and better jobs, and with with catastrophic global warming mitigation. (

On a personal note, I want to remind the NRC review team that they, to quote a character in the TV drama, The West Wing, "are supposed to be the good guys -- act like it." I know there are a lot of smart, caring, well-meaning folks on the NRC review team. I know that you don't want to turn the Detroit metro area into an uninhabitable wasteland. I also know that many on the NRC team would be willing to concede that not everyone in opposition to this thing is a radical, misinformed, tree-hugging, hippie who wants to send us all back to the Dark Ages. But you folks work for the taxpayers, not the nuclear power industry, and even if you hope one day to work for the nuclear power industry where the pay might be better and respect more forthcoming, you must also be willing to concede the possibility of cognitive capture on the part of at least some of the folks at the NRC. There are better options to nuclear power, I am sure of that, and I am a decent, well-meaning, tree-hugging, hippie -- at least according to some (my wife included). Give alternative views a chance. Consider that the industry might be going in the wrong direction. And remember it is your job to keep the industry from taking the rest of us with them when they do go in the wrong direction.

Thanks for your efforts! You have my respect and admiration for doing a difficult job in the absence of sufficient praise and appreciation.


photo: 25 mi radiation plume from Fermi II courtesy: Nuke Times