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Do private equity firms go too far?

Jeremy Hobson Jan 13, 2012

Jeremy Hobson: The plan John was just talking about is a fitting end to a week, in which the whole idea of downsizing came under the microscope. Not downsizing in the public sector, but in the private sector. I’m talking about the attacks on Republican presidential frontrunner Mitt Romney’s time at Bain Capital, a private equity firm that made its money by taking over companies and cutting costs — often in a painful way.

Chris Low is chief economist with FTN Financial. He’s with us live from New York as he is every Friday. Good morning, Chris.

Chris Low: Good morning.

Hobson: I want to start with a clip from an anti-Romney video that is running in South Carolina this week, with very sad stories of people who were laid off from companies taken over by Bain while Romney was in charge.

Ad: Their livelihoods was there. They were making a good wage. And this company comes in and they knocked it all the way. They knocked their wages down. They take their jobs away. And then eventually, they close the plant.

All right, so Chris, a very sad story from a woman who was laid off. And I want to ask you: are the things that private equity firms like Bain do necessary in our economy, or is this needless cruelty?

Low: Yeah, this is sort of the nature of the business cycle. It’s what economists call “creative destruction” — and I guess that’s why we get called “dismal scientists.” It’s the ugly side of markets, which is that capital often ends up in places where it cannot earn a return, and we go through a process of ultimately having to cut those areas back. It is painful, it is ugly — but by freeing up the capital, it can be put to work in other places — hopefully creating jobs elsewhere.

Hobson: I think the other thing that people get so angry about, though, when they hear about these kinds of things is that as these private equity firms are shutting down businesses, often the people in charge of them are making hundreds of millions of dollars.

Low: That’s right. And I think there’s two things to think about there. One of them is that the investors in that company, ultimately, if the company’s not profitable — and it’s not profitable forever — the company’s going to go out of business. They’ll be no return on investment.

They’re willing to pay a lot to someone who can come in and turn that around. Whether it’s too much — you know, that’s something the voters have to decide. Whether the right cuts are made or it’s fair, I think we’re going to have a long discussion about this, as long as Romney’s the frontrunner.

Hobson: Chris Low, chief economist with FTN Financial, thanks so much.

Low: Thank you.

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