Thursday, October 8, 2009

One perswon's private property is another person's unemployment

Many people believe that it is free enterprise – the single-minded pursuit of private profit-- that makes our country great, that gives us a high standard of living.
But along comes the Simmons Mattress company forced into bankruptcy by several private equity firms. A sad story that shows that pursuit of private profit is often ruinous for workers and owners both.
For 133 years Simmons has made exceptional mattresses. In the 1990s it was bought out by a private equity firm. These are private financial firms that buy out a business mostly with borrowed money. The equity firm borrows money to buy a company. Once it owns the company, it borrows large sums against the company's assets and uses that money to pay of its own debts. The company purchased ends up paying off the debt incurred by the equity firm.
The private equity firm buys a company in the hope of being able to sell it fairly quickly and at a higher price. It therefore tries to improve the profitability of the firm. Sometimes that involves appointing new management and making them more efficient – a clear benefit. Sometimes it involves firing employees, closing plants that are unionized and moving production to plants that are not. The company becomes more profitable but its workforce loses a lot of money. The company becomes more profitable at the expense of its workers. The private equity firm makes a whole lot of money; the executives of the company may also profit handsomely. Unionized workers lose their jobs and are replaced by non-unionized, poorly paid women and men.
This is what happened at Simmons. Bought and sold several times by private equity firms since the 1990s, being forced to take on new debt with each sale, losing its established and unionized workforce, the company is finally forced into bankruptcy. Several private equity firms have profited handsomely. Some of the executives received generous pay, free memberships in country clubs and captains for their private yachts paid for by their company. The workers received pink slips.
A number of financial institutions profited handsomely. A much larger number of ordinary loyal Simmons employees were left confronting serious financial crises. After having worked for Simmons for 20 or more years, now in their 40s or 50s, they were facing a bleak future.
A number of other financial institutions also suffer. When Simmons goes bankrupt, its debtors loose. A company goes into bankruptcy in order to make a deal with the people it owes money to. It emerges from bankruptcy when it has managed to persuade its debtors to settle for less than the total money owed them. When private equity firms make a bundle by pushing a company like Simmons into bankruptcy they earn their profits at the expense of other investors.
Imagine you invent a better mousetrap. Motivated by the desire for private profit you produce and sell that mousetrap and-- lucky for you – you make a lot of money. You also create jobs. As time goes on, still wanting more money, you streamline your operation, improve your product, lower your price. Perhaps you do that by making production more efficient. But perhaps you do it by moving production to Thailand. Your American workers are now unemployed. The pursuit of private profit for you did not profit them.
Private Equity firms and other financial institutions do not produce any goods. They buy and sell businesses that do. Sometimes they make a profit by improving the business; sometimes, as in the case of Simmons, they make a profit by running the company into the ground. Its all the same to them as long as they get theirs.
The next time you would agree that private enterprise is an unmixed blessing, think of the workers at Simmons, or the American workers who produce your better mousetrap before you moved your factory offshore.