Word: debts
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Dates: during 2000-2009
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...problem. In his new book, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, Kosman argues that private-equity firms not only pillage the companies they buy, but also put the broader economy at risk by making those companies take on copious amounts of debt. TIME's Barbara Kiviat spoke with Kosman about where he thinks the industry is headed...
...think it will get? The opinions on this shift, but the Boston Consulting Group in late 2008 predicted that about 50% of the companies bought in leveraged buyouts would default on their debt. If half default, and they fire about half of their workers - not the most aggressive estimate - then you're talking about 1.9 million unemployed...
...about? Unfortunately, private-equity firms infiltrated almost every industry - industrials, consumer goods, retail, hospitals, utilities - so a leveraged-buyout bust will be very widespread. TXU, which is now called Energy Future Holdings, one of the largest utilities in Texas, faces huge problems. They probably won't default on their debt until 2013, but at this point, and this is according to ratings agencies, it looks like they have very little chance of paying their debt. The range is from a huge utility like that to HCA, the largest hospital chain in the country...
...much. One of the main points of the book is to show how private equity and leveraged buyouts don't work, and even if the credit crisis I'm predicting doesn't happen - even if the economy recovers and some of the companies can refinance and push their debt off - the core practice is still destructive. Many of these companies will fall apart anyway. In the 1980s, when Michael Milken was funding buyouts, 52% of the biggest 25 companies acquired ended up going bankrupt. I did a study of the 1990s, ideal economic times, and with...
Another proximate cause were new loosey-goosey borrowing rules (if they can be called that) that allowed the likes of Bear Stearns and Lehman to pile $30 of debt onto each $1 of capital. The chief executives of these firms argued vociferously for the right to greater leverage and vociferously against regulating derivatives because, they claimed, unfettered markets were more efficient. Yes, it was the unfettered use of leverage and derivatives that destroyed their companies and wreaked havoc on the rest...