Wall Street's Version of Flip This House

October 5, 2009 8:58 AM

Wall Street's Version of Flip This House.How private-equity ran Simmons to the ground.
posted by reformedjerk (40 comments total)

Twice after buying Simmons, THL borrowed more. It used $375 million of that money to pay itself a dividend, thus recouping all of the cash it put down, and then some.

Correct me if I'm wrong, but isn't this the exact opposite of investing? The term pillaging comes to mind.
posted by dortmunder at 9:26 AM on October 5, 2009

So the little guys get screwed and the big cheeses get richer. How much longer can this country last operating this way?
posted by Daddy-O at 9:34 AM on October 5, 2009 [1 favorite]

This is one of the central themes of America: What Went Wrong, a 1992 book by Donald Barlett and James B. Steele.
posted by droob at 9:43 AM on October 5, 2009

Correct me if I'm wrong, but isn't this the exact opposite of investing? The term pillaging comes to mind.

well it isn't investing, but it isn't pillaging either. They didn't asset strip to pay themselves the dividend, they borrowed the money - probably from hedge funds/insurance companies.

The story here is not nearly as nefarious as the times makes it sound. The real story should be "Banks, Lenders too sanguine about Mattress prospects - Lend too much money. Now own Mattress factories". For some reason the Times has a huge hard-on for dividend recapitalizations - but its not like the lenders don't know what their money is going to be used for. Indeed its pretty common for loan documents to expressly prohibit this sort of behavior. The credit guys were just too greedy.

All that really happened is that instead of selling Simmons to another private equity firm or a trade buyer - or IPO'ing it, Tommy Lee sold it to the debt holders without the debtholders realizing it. It was big boys on both sides of the aisle on this one. The only people who have any standing at all to complain are the shop floor guys who lost their jobs. The debtholders can cry me a river. Also bankruptcy /=/ liquidation. It just means someone new owns the factories.
posted by JPD at 9:53 AM on October 5, 2009 [3 favorites]

I'm not a fan of private equity in general, but that article wasn't so great.

It looks like Simmons is still operating under chapter 11 bankruptcy, just like the airlines do when their industry faces trouble. It sounds like Simmons tried to expand far too quickly during the housing bubble and is now paying the price, needing to cut employees and costs. The added debt definitely contributes to the pressure on the bottom line, but the author provides no context of how heavy this debt load is, and whether it's worse that the industry standard. There's also no context for the $1.1b pricetag back in 2003 -- who was selling it than and why? Was that because of debt servicing issues as well?

I mean, I'm sure metafilter-types will like it because it gets all bitchy about Evil Private Equity. The article reads like an introduction to the failures of private equity. But it somehow provides a lot of numbers without actually putting any of them in the context of previous owners or competitors. I'm really curious about the troubles Simmons is facing, but now have to go search for the answers on my own.
posted by FuManchu at 9:53 AM on October 5, 2009

How does this business practice differ from a straight up mob-style bust out?
posted by The Straightener at 10:02 AM on October 5, 2009

How does this business practice differ from a straight up mob-style bust out?

because a mob style bust out would involve burning the factories down after you had sold all of the equipment out of it through the back door. Simmons as a company still exists - it is not being liquidiated. The only thing that has happened is that the equity is going to zero - but in real life all it means is that the guys in suits who run the company are changing - because the equity holders already took the equity to zero by borrowing money against the assets, paying it to themselves and then sending the keys to the guys they borrowed money from. The people who screwed up here are the guys who lent the money - but they don't have an excuse - they knew what the financials were when they lent the money.
posted by JPD at 10:12 AM on October 5, 2009

Yeah, I kind of agree with JPD here. This was yet another case of lenders being stupid about who they lent to and feeding into a bubble. Is there any regulatory solution to this kind of stupidity? I know there's not much regulation at all when it comes to private equity, but can some kind of limit be placed on lending straight into a dividend payout? It seems that's the kind of thing we don't want money being borrowed for...
posted by mr_roboto at 10:24 AM on October 5, 2009

I mean, I guess the equivalent in the home ownership world would be a speculator buying a house in a bubble market, taking out big home equity loans as the bubble builds, and then letting the lenders foreclose when the bubble bursts. But at least in that case the loans are backed by some kind of equity collateral (bubble-generated or not). Here, it looks like the borrowing is done on an insider-handshake basis, with no reference to the real financial status of the company.
posted by mr_roboto at 10:28 AM on October 5, 2009

FTA:

“Simmons has been a cash cow. It’s made a lot of people a lot of money,” said David Perry, executive editor of Furniture/Today. “But there’s a growing question in the industry of how many more times can this be repeated. How much more juice can be squeezed out of the orange?”


That makes me feel sad and a little sick.

I wish Simmons had the right to sue THL to try to recover some money from them. THL basically bought the company, borrowed enough to make a profit for THL at the cost of huge debt for Simmons, and unloaded it. Thats just not right.
posted by ben242 at 10:30 AM on October 5, 2009

Reminds me of the history of Avis Rent A Car, which has traded hands more times than pocket change.
posted by Mo Nickels at 10:39 AM on October 5, 2009

This would be why I'm looking at dropping a couple of grand on a new mattress, right? Not because it costs much to manufacture, not because it's of high value, but because money-grubbing asswipes have a lock on the market and are going to squeeze my oranges until their juice runs dry.

Thanks for that, THL and other douchebags.
posted by five fresh fish at 10:51 AM on October 5, 2009

ben242 I find your view perplexing. Simmons is not a sentient being. It is a pile of assets. It doesn't think. It doesn't get its feeling hurt. It is basically entries on an accounting program. One guy owned it, now someone else owns it. Its not like they raided the pension fund. You could make the argument that the employees suffered as a result of the recaps - but you know what thats an issue with all private equity - good deals and bad deals. The first fund that bought it was probably just as culpable as the last fund in this regard.

The only people who have a beef are the bankers if THL did the recap knowing it meant Simmons would file.
posted by JPD at 10:54 AM on October 5, 2009

“Simmons has been a cash cow. It’s made a lot of people a lot of money,” said David Perry, executive editor of Furniture/Today. “But there’s a growing question in the industry of how many more times can this be repeated. How much more juice can be squeezed out of the orange?”

That makes me feel sad and a little sick.

Me too. Those mixed metaphors are terrible.

::squeezes cash juice out of an orange cow::
posted by Faint of Butt at 10:56 AM on October 5, 2009 [4 favorites]

There are certain similarities between dividend recapitalization and a certain aspect of a bust-out.

Mob-style bust-out:

1) Joe Schmoe turns over control of his business to the mob because he's a degenerate gambler who owes them money.
2) The mob uses Joe Schmoe's good credit to buy a ton of merchandise to be sold on the street, with no intention of paying back the vendors.
3) The mob may also have Joe Schmoe take out new loans from the bank against his business (again using Joe Schmoe's good reputation and credit), say for new construction or improvements; the mob grabs the proceeds of the loans either directly or via construction companies under its control.
4) Once all the vendors and the banks start clamoring for their money, the business goes up in smoke.

Dividend recapitalization:
1) Joe Schmoe sells control of his business to a private equity firm (why? maybe because they hit hard times and need a bailout?).
2) The private equity firm uses the business's assets (and, implicitly, their reputation) to issue a ton of debt. The private equity firm pays itself dividends out of the proceeds of this debt. This is dividend recapitalization.
3) When the business can no longer sustain itself, sell it to someone else (a greater fool perhaps?).

Is dividend recapitalization really that different from step 3) in the mob bust-out? I suppose that the main difference is that the private equity firm allegedly cares about the long-term viability of the business being acquired and isn't just bleeding it dry. But what if it didn't care?
posted by mhum at 10:57 AM on October 5, 2009 [1 favorite]

The difference is when you bust a place out there is nothing left. Simmons is still making mattresses. That is a massive difference. To say a mob bust up is equivalent to a div recap is the same thing as calling the stock market a ponzi scheme.

Some corrections to your other points..
The average Private Equity firm (and THL specifically) don't buy distressed businesses.

As far as reputational stuff goes you've got it backwards. When a PE firm borrows money at one of its portfolio companies it is the PE firm who's reputation is on the line. THL or Blackstone or KKR need to be seen as trustworthy and supportive of their portfolio companies or they'll not be able to get new financings for the next business they decide to buy.
posted by JPD at 11:05 AM on October 5, 2009

I wish Simmons had the right to sue THL to try to recover some money from them. THL basically bought the company, borrowed enough to make a profit for THL at the cost of huge debt for Simmons, and unloaded it.

That doesn't make much sense. Who would sue whom? THL owned Simmons. It's not like Simmons was some sort of independent entity that was wronged; you're anthropomorphizing too much. It's not like one human being shaking down another---corporations don't have feelings.

If you mean that you wish that Simmons' employees, the ones who've gotten laid off, could sue, in theory I might agree with you or at least find the feeling understandable. They got screwed. But a whole lot of people have gotten screwed, in the sense of losing their jobs, in the current recession.

But there's no point in feeling sorry for a corporation itself. Save your emotions for actual people, not for legal fictions. Especially because, if what you seem to want did occur, the people who would recover---the bondholders, probably---are the least deserving in the whole situation. They screwed up and lent out money stupidly, and got taken to the cleaners as a result. Somebody please play them a sad, sad song on the world's smallest violin.

From the article:

"Fueled by easy money, not only from banks but also endowments and pension funds, buyout kings like THL upended the old order on Wall Street. [...] These private investors were able to buy companies like Simmons with borrowed money and put down relatively little of their own cash. Then, not long after, they often borrowed even more money, using the company’s assets as collateral [...] Twice after buying Simmons, THL borrowed more. [...] Investors who bought that debt are getting virtually nothing in the new deal."

Well, boo fucking hoo. Nobody was putting a gun to those investors' heads and making them give THL the money they used to buy Simmons.

If you want to find someone to pillory, it's the investment managers at those pension and hedge funds that bankrolled THL, and put their clients in a position where they ended up holding the bag -- in the form of worthless bonds. They're the ones who deserve to be up against a wall, and its their clients---individuals, members of pension plans, etc.---who deserve to be pulling the trigger.

The PE firms, like house flippers in the residential market, just took the easy money and ran with it. Their actions were totally rational within the context of what the market was doing at the time. It's the funds who gave them the cash in the first place that are deserving of scrutiny, regulation, and perhaps a fair bit of punishment.
posted by Kadin2048 at 11:15 AM on October 5, 2009 [2 favorites]

The difference is when you bust a place out there is nothing left. [...] To say a mob bust up is equivalent to a div recap is the same thing as calling the stock market a ponzi scheme.

Indeed. I clearly overplayed this. I should have been more careful to emphasize that there is only one aspect which might seem reminiscent, namely a larger firm which swoops in and capitalizes on a smaller/weaker business's assets to incur debt which is then mostly paid out to the larger firm. And since this is a perfectly legitimate financial transaction which can be used for good or for ill, it's rather unfair to conflate the two instances.

As far as reputational stuff goes you've got it backwards.

I see. Thanks for the correction. So, is one of the main reasons that a distressed debt financier would not simply to bleed out a company with div recap is that this would harm their reputation and hence their future opportunities?
posted by mhum at 11:17 AM on October 5, 2009

It would be illegal to borrow money you know you can't repay. Indeed one of the ways private equity firms and their bankers were able to back out of deals in the last 18 months was to claim it would be impossible for the business to remain solvent with its mooted post acquisition capital structure.

And yes the banks would not rush to give you credit the next time around. You are also using the term "distressed investor" incorrectly. The distressed guy would have bought the loans Simmons had issued in hopes that in the bankruptcy process (or even better w/o a bankruptcy process) the loans would end up being worth more then what they paid for them. Ironically Distressed guys will do shady things they look a lot like a mob bust out.
posted by JPD at 11:29 AM on October 5, 2009

JPD: Simmons is not a sentient being. It is a pile of assets. It doesn't think. It doesn't get its feeling hurt.

Yet you speak as though THL has agency. You even speak of its reputation. If Simmons isn't sentient, neither is THL. How does it make sense to defend the actions of one non-sentient entity while taking great pains that the other is only a legal fiction?

JPD: Its not like they raided the pension fund.

Did you read the whole story? In effect, THL was beaten to the punch by a previous PE firm.

JPD: When a PE firm borrows money at one of its portfolio companies it is the PE firm who's reputation is on the line. THL or Blackstone or KKR need to be seen as trustworthy and supportive of their portfolio companies or they'll not be able to get new financings for the next business they decide to buy.

It looks like the reputation THL has earned here is "profitable." I don't see how that's likely to discourage future investors in THL.
posted by Western Infidels at 11:40 AM on October 5, 2009

...taking great pains [to point out] that the other...
posted by Western Infidels at 11:43 AM on October 5, 2009

Yet you speak as though THL has agency. You even speak of its reputation. If Simmons isn't sentient, neither is THL. How does it make sense to defend the actions of one non-sentient entity while taking great pains that the other is only a legal fiction? It isn't sentient. I didn't say that it was. The people who run it (and own it) are, and their collective reputation is what I was referring to. Who is suing the pile of assets at Thomas Lee? Who has standing? If one of the employees wants to sue on some grounds, godspeed. If its one of the banks, godspeed. But what is the entity that is going to sue the equity holders for taking all of their equity out? Do you see the reason why its such a silly idea? Who sues? In theory its the equity holders who would sue, but presently the equity holder is Thomas Lee.

Did you read the whole story? In effect, THL was beaten to the punch by a previous PE firm. And the employees should have sued. Oh wait it was the employees themselves who voted to use the ESOP to buy the business from the prior owners.

THL has earned here is "profitable." I don't see how that's likely to discourage future investors in THL 2. points - in this case its not their reputation with their investors that gets damaged, its their reputation with their lenders that gets hurt- and that is a huge problem. Also I would hardly call their current funds profitable. In fact they have been one of the worst performing of the big funds.
posted by JPD at 11:59 AM on October 5, 2009

Here's the thing: the private equity owners drove the company into bankruptcy but themselves made lots of money on the deal. Most normal people would think that when you own a company that goes into bankruptcy, you lose money on the deal.
posted by deanc at 12:41 PM on October 5, 2009

Simmons is not a sentient being. It is a pile of assets. It doesn't think. It doesn't get its feeling hurt.

tell that to the employees who saw their work, their careers, their pension plans, etc, gutted.
posted by DreamerFi at 12:45 PM on October 5, 2009 [1 favorite]

This has similarities with the Phoenix Four's buy-out of the UK's Rover car manufacturer following which they paid themselves in the region of 40 million GBP before MG Rover collapsed.
posted by NailsTheCat at 1:36 PM on October 5, 2009

This is what happens when the financial industry is allowed to interfere with the real economy. Ugh. You have a real company that makes real products saddled with loans it cannot repay, loans that were not meant to grow the company (the only reason loans should be given to a corporation), but were instead paid to the vampires "running" said company. Now said company can't even operate - due to no fault of the fundamentals of the company. This isn't capitalism anymore.

If you want to make THL out as just a group of guys just playing the game, fine, but at the back end of this are the banks that enabled all this activity now holding these shitpile "assets" - and instead of a) allowing them to fail and nationalizing them and b) reenacting policy to prevent this from happening again, the government, having been captured by wall street, decided to cover their losses in the biggest transfer of wealth in world history. America's middle class is going to fall a rung to pay the bill. And since nothing has changed and this style of banking can only directly damage the economy, we'll see another financial crisis in a year or two. I'm not sure yet if the next one can be papered over the way this one was.
posted by MillMan at 1:49 PM on October 5, 2009 [3 favorites]

Read the article again. The business is still operating. Bankruptcy is not equal to shutting down.
posted by JPD at 2:10 PM on October 5, 2009

and your point b) is what the times should be spending its time writing about. This story is just obsfucating the real disaster right now. The degree to which NOTHING IS CHANGING.
posted by JPD at 2:12 PM on October 5, 2009 [1 favorite]

ben242 I find your view perplexing. Simmons is not a sentient being. It is a pile of assets. It doesn't think. It doesn't get its feeling hurt. It is basically entries on an accounting program. One guy owned it, now someone else owns it. Its not like they raided the pension fund. You could make the argument that the employees suffered as a result of the recaps - but you know what thats an issue with all private equity - good deals and bad deals. The first fund that bought it was probably just as culpable as the last fund in this regard.

The only people who have a beef are the bankers if THL did the recap knowing it meant Simmons would file.
posted by JPD at 10:54 AM on October 5 [+] [!]

As DreamerFi pointed out, the legal entity "Simmons" was damaged in a way that caused direct harm to employees, bondholders, and stockholders. By acting in a high-risk way that harmed the company Simmons, THL harmed the stakeholders in Simmons. Its not that I think they're evil or malicious toward Simmons; I just think that their desire to make money exceeded their interest in keeping the company operating in a sustainable, profitable manner. Its saddening that THL execs were perfectly comfortable destroying Simmons in order to make a profit.


"I wish Simmons had the right to sue THL to try to recover some money from them. THL basically bought the company, borrowed enough to make a profit for THL at the cost of huge debt for Simmons, and unloaded it."

That doesn't make much sense. Who would sue whom? THL owned Simmons. It's not like Simmons was some sort of independent entity that was wronged; you're anthropomorphizing too much. It's not like one human being shaking down another---corporations don't have feelings.

If you mean that you wish that Simmons' employees, the ones who've gotten laid off, could sue, in theory I might agree with you or at least find the feeling understandable. They got screwed. But a whole lot of people have gotten screwed, in the sense of losing their jobs, in the current recession.

But there's no point in feeling sorry for a corporation itself. Save your emotions for actual people, not for legal fictions. Especially because, if what you seem to want did occur, the people who would recover---the bondholders, probably---are the least deserving in the whole situation. They screwed up and lent out money stupidly, and got taken to the cleaners as a result. Somebody please play them a sad, sad song on the world's smallest violin.
[snip]
posted by Kadin2048 at 11:15 AM on October 5 [+] [!]

I meant that people who held a stake in the sustainable operation of Simmons -- employees, bondholders, and stockholders -- were damaged by the actions of THL, and that some sort of recourse would sure be nice. Or, preferable, government regulation to prevent the same thing from happening again.

You answered your own question there. I wasn't anthromorphizing the company; I was recognizing the humans behind it. Those bondholders lent money to the company with the expectation that the owners of the company would continue to keep it a profitable enterprise. Did THL acquire Simmons in bad faith, maybe? Doesn't seem like its beyond the realm of possibility.

Whats your story, anyway? Why are you such a hard ass? I'm referring specifically to the "world's smallest violin" comment.
posted by ben242 at 2:51 PM on October 5, 2009 [1 favorite]

When I become king, my regulatory plan for buyouts will be:

1) Anyone who doesn't work for the company but will make money from the buyout will be placed in a line. Any officer of the company who will make money from the buyout will also be placed in the line.
2) Any employee who can demonstrate that his/her livelihood will be harmed by the proposed buyout will be allowed to administer a groin kick to any two of the people in that line.

Fewer buyouts, more gruntled employees. Plus it will amuse the king.
posted by joaquim at 2:57 PM on October 5, 2009 [1 favorite]

Metafilter never fails to show me new things to be furious about.

JPD: "well it isn't investing, but it isn't pillaging either. They didn't asset strip to pay themselves the dividend, they borrowed the money - probably from hedge funds/insurance companies."

That isn't just evil done to those companies. It's taking money out of the loan market, that could otherwise gone to a deserving borrower.

A result: THL was guaranteed a profit regardless of how Simmons performed. It did not matter that the company was left owing far more than it was worth, just as many people profited from the mortgage business while many homeowners found themselves underwater.

The next time someone tells you that line that business types feed people to get them off their back when they do something scuzzy, "A business only exists to make money," please remember this little story. THL had no interest in mattresses at all. Financial monkeying is nearly always more profitable than actually making stuff, so only fools make stuff. In fact, the ability to make mattresses was harmed by it.

The ultimate result is that the prices for manufactured goods rises until the money that can be made by making stuff becomes competitive with the money that can be gained by extracting the value from the manufacturer and dumping it. Meaning we all pay more, maybe much more, for the things we need to live.

[...] said Scott A. Schoen, a co-president of the firm who sat on Simmons’s board [...] “We are clearly disappointed in the outcome of this investment. Make no bones about it.”

A statement so dripping in disingenuousness it makes me want to set up a femur factory. Do they teach this pap in business school?
posted by JHarris at 3:57 PM on October 5, 2009

We are allowing people who magically pull money from equations devalue our currency by increasing the amount of money without also increasing the amount of value represented by that money.

When you mine the earth, raise a cow, or build a house, you are adding value to the nation. When you invent new mining technology, study the bovine, or design a custom home, you are in the end participating in those primary resource activities: you are participating in adding value to the nation.

But with Wall Street, we mostly seem to have adding money as the primary activity.

THL made itself a huge amount of money by misrepresenting what they had. They extracted more value than was there. They lined their pockets quite nicely with money that they simply imagined into existence. The effect goes all the way to the top: the misrepresented value of their investment caused more money to be printed.

You know there's no way in hell that the Wall Street Elite are worth hundreds of billions of dollars. There's no fucking way they add that much value to the nation, let alone the world. They are parasites who are telling financial and mathematical fairy tales, and the dollar printing presses buy into it.

Caution: This message is powered by massive ignorance and misplaced outrage.
posted by five fresh fish at 5:30 PM on October 5, 2009

ben242 - to clarify something you keep saying - that THL damaged the shareholders - they were the shareholders. And he bondholders should have known what they were getting into. The only victims were the workers. Which of course sucks - but the point of this article wasn't the job losses - the Times doesn't seem to have moral qualms with that so much anymore.

Blaming Private Equity is a waste of time. Yes its a dumb business, and yes 99% of the time they add no value, and I have no idea why they get compensated the way they do...but my biggest issue is why the fuck the NY Times had this as a page one story today when there are some many other things their business reporters could be telling people about - things that my co-workers and I sit around and wonder how possibly these things are allowed to continue. Where is the outrage over TARP being repaid at face value when the real economic value is a multiple of that. Where is the outrage over Fannie and Freddie being nationalized for political reasons. Where is the outrage that 18 months into this crisis regulatory reform is going no where? There are so many other things to be pissed off about that they never talk about - instead its manufactured outrage at the people they went to college with but who make 10x what they do. Hell if you really have a hard-on for these guys why not just start campaigning against the tax advantages on carried interest? So many other more important things then this.
posted by JPD at 7:22 PM on October 5, 2009 [2 favorites]

From peHub, an industry blog: Five More Bankrupt Companies That Earned Their Private Equity Backers a Return

Their initial take: My gut feeling – and that’s all it can be at this point – is that private equity pros aren’t chastened. If banks again become willing to lard up portfolio companies, then PE pros will provide the slathering sticks.

Note that it really is the banks and lenders enabling all of this. I haven't been around long enough, but one of the commenters there says that lenders never used to agree to dividend recaps. The banks and lenders knew that THL was going to pocket their fee, as the article stated it was clear in their offering. It was the time of easy money, so they didn't care.

Anyone have anything that proves that the layoffs are due to the debt load instead of the result of an earlier aggressive overexpansion?
posted by FuManchu at 1:28 AM on October 6, 2009

> Whats your story, anyway? Why are you such a hard ass?

JPD is not being "a hard ass," JPD is providing much-needed context to this overheated story. JPD is perfectly correct about what the Times should be covering (and getting people mad about) instead. I am deeply grateful for JPD's level-headed, patient, and informative comments in this thread.
posted by languagehat at 6:26 AM on October 6, 2009

"ben242 - to clarify something you keep saying - that THL damaged the shareholders - they were the shareholders. And he bondholders should have known what they were getting into. The only victims were the workers. Which of course sucks - but the point of this article wasn't the job losses - the Times doesn't seem to have moral qualms with that so much anymore. "

I referred to the "stakeholders," not the "shareholders." I meant to include creditors, employees, suppliers, stock and bond holders, even the localities in which the factories and offices operated. There's a larger ecosystem of people that get hurt when stuff like this happens, and its not like we're in a booming economy thats going to reabsorb the unemployed workers, or compensate the levels of government for lost tax revenue.
posted by ben242 at 9:13 AM on October 6, 2009 [1 favorite]

> Whats your story, anyway? Why are you such a hard ass?

JPD is not being "a hard ass," JPD is providing much-needed context to this overheated story. JPD is perfectly correct about what the Times should be covering (and getting people mad about) instead. I am deeply grateful for JPD's level-headed, patient, and informative comments in this thread.
posted by languagehat at 6:26 AM on October 6 [+] [!]

Thats cool and all, but the "hard ass" I was talking to was Kadin2048.
posted by ben242 at 9:19 AM on October 6, 2009

It is well past time that we insist corporations care about STAKEHOLDERS in the broad send described by ben242.

THL's actions impacted a helluva lot more people than just the workers at the plant. And in the end, while certain people at THL lined their wallets quite nicely, the dollar value of their shady dealings is less than the value lost to society and the nation.
posted by five fresh fish at 10:00 AM on October 6, 2009

> Thats cool and all, but the "hard ass" I was talking to was Kadin2048.

Oops—sorry 'bout that!
posted by languagehat at 6:27 AM on October 7, 2009

ben242: "Whats your story, anyway? Why are you such a hard ass? I'm referring specifically to the "world's smallest violin" comment."

Because the bondholders should have known what they were getting into. It's not like what THL did is totally unheard of in the PE world; if they'd been smart, the lenders would have refused to give THL/Simmons a dime unless dividend recapitalization was prohibited, or THL was locked-in some other way. But they didn't do that, and THL took the obvious out, and left the bondholders with Simmons.

I have no sympathy for the bondholders there. Collectively, they made a loan (by buying bonds) with pretty questionable terms, THL took them up on those terms (or lack of restrictions), and as a result they ended up owning a mattress company. If that wasn't an outcome they were okay with, then maybe they should have thought of that ahead of time.

I do have a lot of sympathy for the employees at Simmons, people working on the factory floor who were just doing their jobs and making mattresses while all of this crap was going on. That any of them are going to be adversely affected by all this shenanigans is a tragedy, which they did nothing to deserve. I never meant to imply anything else.

But a bunch of PE folks extracting a few million bucks from credulous investors who should have done their homework better? Can't really get worked up about it. The only thing that stops it from being a classic fools-and-money story is that much of the money loaned by the fools wasn't actually theirs, but rather entrusted to them on behalf of many others. Those people—pensioners, people with managed investment plans, whoever they may be—have cause to be pretty annoyed. But that's a separate issue from the PE/LBO angle.

There's been a lot of bad lending going around during the past few years; I think that it probably contributed more than just about any other single factor to the meltdown. If lenders had been more careful and thrown the cash around with a little less abandon, there might have been fewer cases like Simmons, and fewer houses sitting underwater at 200% LTV or with "Bank Owned" signs on the lawn.

My annoyance was due to the way the NYT article was written: it seems to be far too much a sob piece for the bondholders, and they're the ones most deserving of contempt as far as I can see. They made their bed and now they're getting to sleep in it—good thing they own a mattress company.
posted by Kadin2048 at 11:32 PM on October 8, 2009