The Next Crisis Will Not Be Equitable

But it may be private equity.  Private equity firms like Blackstone have used (and continue to use) cheap credit to purchase distressed companies.  The problem is over the next few years, the bill will be due on those purchases -- by some accounts half a trillion dollars -- and that threatens another meltdown in both the financial and the jobs market.  It gets worse, according to author Josh Kosman:

"They're playing with other people's money -- putting 20% down, and company they buy is borrowing 80% -- in that sense, there's already little risk [for the private equity firm]. Apollo doubled its money in two years while driving Linens N' Things into bankruptcy. Most of the risk comes from other investors like state pension funds, some of which are really exposed to private equity investments - Oregon has 22% exposed, California is 14%."  

The biggest leveraged buyout in history -- when PE firms Kohlberg Kravis Roberts and TPG took control of power generator TXU (now called Energy Future Holdings Corp) in 2007 -- is close to the brink due partly to a collapse in natural gas prices. "Their cash flow is negative, they owe $30+ billion," says Kosman. "They won't go bankrupt in next year or two but there is no prayer of that company being able to pay that debt."

Kosman explains that PE firm execs often do well when their companies collapse because most of them earn enough from management fees they charge their investors and the companies to more than cover their losses. Typically, private equity managers rake in 'two and twenty' fees -- two percent of the total amount assets under their management, regardless of performance, and twenty percent of any profits their fund earns.

He also warns that PE firms are trying to profit from the current crisis by buying up distressed assets like banks, mortgage and corporate loans at deep discounts and the US government is seeking them out to help rescue failing banks.

And Kosman takes a tough looks at Bain Capital, the PE firm owned for 11 years by potential 2012 presidential candidate Mitt Romney. He claims that three companies -- Ampad, Dade Behring and GS Industries -- failed after being bought by Bain Capital. In the case of Dade, a lab testing equipment maker, Romney pushed for big cutbacks in the employee pension plan, which saved the company $40 million. The next month, he used that as a basis to borrow $420 million.

A company executive told Krosman that he confronted the CEO about the move, telling him "Well, that'd be like me going out and borrowing the amount of money I make in a year and then trying to pay it off and pay for my house and feed myself and everything else. That doesn't make sense." The CEO responded: "Companies do that all the time." Within two years, the company collapsed.

Kosman is skeptical about Romney's claims that he wasn't aware of some of these events: "That either indicates he doesn't know what's going on at a company which he [owned] 100% of, which is incompetent, or he's lying, which is worse."

Which means the coming private equity meltdown could have an effect on the 2012 primaries, as well as millions of American workers.  Cheery thought, huh?