Stripping The Copper Out Of The Economy
November 15, 2017 11:32 AM   Subscribe

“Billions of dollars of this debt comes due in the next few years. “If today is considered a retail apocalypse,” Bloomberg reported, “then what’s coming next could truly be scary.” Eight million American retail workers could see their careers evaporate, not due to technological disruption but a predatory financial scheme. The masters of the universe who devised it, meanwhile, will likely walk away enriched, and policymakers must reckon with how they enabled the carnage.“ - The Cause and Consequences of the Retail Apocalypse - David Dayden for The New Republic.
posted by The Whelk (78 comments total) 57 users marked this as a favorite
 
I blame Uriah Heep.
posted by clavdivs at 11:42 AM on November 15, 2017 [2 favorites]




Sears, once a giant of America’s consumer-led economy, was run into the ground by hedge-fund king Eddie Lampert. In 2005, Lampert, a former Yale roommate of Treasury Secretary Steven Mnuchin, arranged the merger of Sears with discount retailer Kmart, and immediately started shifting revenue to shareholders. He spent $6 billion on stock buybacks to reward investors and prop up the share price.

More important, Lampert personally lent billions to Sears Kmart, increasing corporate debt. As in-store sales lagged, Sears sold off major assets like Craftsman brand tools and Land’s End outdoor equipment to service the loans.


More honest people would call it something else:

It doesn't matter. It's all profit. And then finally, when there's nothing left, when you can't borrow another buck from the bank or buy another case of booze, you bust the joint out. You light a match.
posted by mandolin conspiracy at 11:48 AM on November 15, 2017 [62 favorites]


and policymakers must reckon with how they enabled the carnage.

Must is a strong word. How about instead we cut taxes on really rich people, and they'll be so grateful they'll hire a bunch of radio shack clerks to polish their yachts!
posted by selfnoise at 11:50 AM on November 15, 2017 [16 favorites]


UBI needs to be a major issue during the Democratic Presidential primaries.
posted by Beholder at 11:54 AM on November 15, 2017 [9 favorites]


I don't know why everyone is so worried. We have Certified Business Genius(tm) Donald J Trump as our President and CEO! He'll lead us through this coming recession with his typical aplomb!
posted by tittergrrl at 11:59 AM on November 15, 2017 [4 favorites]


*sips coffee*

this is fine
posted by entropicamericana at 12:04 PM on November 15, 2017 [19 favorites]


Must is a strong word. How about instead we cut taxes on really rich people, and they'll be so grateful they'll hire a bunch of radio shack clerks to polish their yachts!

Oh, hey, here's Gary Cohn realizing in real time that even CEOs don't believe in trickle down economics and aren't willing to commit to hiring more people post tax reform in an anonymous, consequence-free, shooting-the-shit setting.
posted by Copronymus at 12:04 PM on November 15, 2017 [25 favorites]


I understand the impact of these sorts of takeovers but I'm not quite getting it. Maybe someone can help me out.

Business come and go for a variety of reasons, but what is the reason to believe that this debt problem is impacting the absolute number of retail jobs?

Even if the thesis here is true and Sears has pared back so much that it can't compete, I don't know why that would be bad for the retail worker in general. Shouldn't that open up an opportunity for some other retail establishment which would create another job?

Sure, no one buys mattresses at Sears anymore, but MattressFIRM (I always yell the FIRM part), seems to be exploding. Best buy is doing great, and Target is doing respectably well after their Canadian boondoggle.
posted by sp160n at 12:07 PM on November 15, 2017 [4 favorites]


Friendly reminder that 1% of the world's population now controls half the world's wealth.

Totally unrelated, I am offering DIY guillotine workshops.
posted by odinsdream at 12:11 PM on November 15, 2017 [62 favorites]


Mr. McGuire: I just want to say one word to you. Just one word.

Benjamin: Yes, sir.

Mr. McGuire: Are you listening?

Benjamin: Yes, I am.

Mr. McGuire: Plastics. Guillotines.
posted by Existential Dread at 12:14 PM on November 15, 2017 [52 favorites]


Business come and go for a variety of reasons, but what is the reason to believe that this debt problem is impacting the absolute number of retail jobs?

I think, over time, the total number of retail jobs could well bounce back, but that's a lot of new businesses unburdened by the debt of their own acquisition that have to be planned, find space, acquire inventory, and actually hire workers. In the meantime, you have a lot of blighted strip malls and people tightening their belts because of their uncertain job situations. There's also the possibility that this accelerates the move to e-commerce, which are poor replacement jobs, because they have a totally different set of skills, aren't tied to any specific place, and probably need fewer people overall.
posted by Copronymus at 12:17 PM on November 15, 2017 [7 favorites]


This is basically 40 years of economic policy coming home to roost. We stopped giving the middle class pay rises, they can't buy as much, economic output drops. Why did it take 30-something years to hit 2007? Because the rapid expansion of easily available credit. If the middle class couldn't afford it they charged it. That is, until the whole thing exploded.

Now credit card delinquencies are on another uptick, retail sales are abysmal, and we have a complete moron at the helm. 2007 Part 2, Electric Boogaloo is probably not far off.
posted by Talez at 12:18 PM on November 15, 2017 [39 favorites]


sp160n: The problem is that businesses take time to build up. So when someone causes a large retailer to collapse it causes immediate short term job losses. You mentioned Target, and their entry into the Canadian market is instructive. They tried to build a Canadian retail chain in 2 years, and failed utterly; and they started with every possible advantage.

Now it may be that other stores will have to hire more workers as a result of increased sales. However, it's unlikely to be a 1-1 replacement. No retail operation operates at 100% capacity all of the time, so if one retailer collapsing leads to sales picking up elsewhere, it's likely to mean the other retailer's slack is just going to get taken up before new capacity is added.

There's also a downwards ratchet on pay and benefits. Sears Canada went under for example, a huge issue was how it would affect employees with pensions. It's rather unlikely that whatever shows up in its place will feel the need to offer pension plans to retail employees.
posted by Grimgrin at 12:22 PM on November 15, 2017 [10 favorites]


Next year will be 10 years on from 2008. Seems like we're due for the implosion of the not-quite criminal scheme the boys in short pants having been using to rob the economy. This time we'll get'em, I'm sure.
posted by bonehead at 12:23 PM on November 15, 2017 [3 favorites]


Equity is the lifeblood of the economy. Take too much out, and there's nothing for the economy to work on. Concentrating too much in any one area doesn't help either.
posted by ZeusHumms at 12:23 PM on November 15, 2017 [1 favorite]


Does anyone at the top lose out in this? Clearly this is a disaster to the employees of the company, but is there anyone at the top that is getting screwed over in all of this? Or is it set up so it's all benefit to the "owners" and "investors", and all the losses are pushed downwards?
posted by evilangela at 12:25 PM on November 15, 2017 [3 favorites]


This is basically 40 years of economic policy coming home to roost. We stopped giving the middle class pay rises, they can't buy as much, economic output drops. Why did it take 30-something years to hit 2007? Because the rapid expansion of easily available credit. If the middle class couldn't afford it they charged it. That is, until the whole thing exploded.

Yeah, this. People's memory isn't long enough. Like, no, seriously, one company owning a giant fast-food conglomerate and selling beef hamburgers everywhere for $5 MAYBE JUST ISN'T GOING TO WORK. But we've just wished away these concerns, because, it's "worked" for 30 years.
posted by odinsdream at 12:26 PM on November 15, 2017 [6 favorites]


Main Cause Of Retail Apocalypse Isn't Amazon, But Debt

Isn't it both? You've got companies debt-laden from buying out competitors, with tons of expensive real estate, unable to compete against a competitor with a much lower cost structure. Why would I go to Target to buy toilet paper if I can get the same thing dropped on my doorstep for less? Other than clothes and food, I don't really need the touch and feel experience.

What worries me is the second order effects of all these pseudo public spaces evaporating. The mall (to some extent) replaced the town square and downtown as a third place. A shitty third place, but sometimes the only option in many towns. The downtowns have been dead for years. When the mall closes, what's left? Restaurants and grocery stores?
posted by leotrotsky at 12:27 PM on November 15, 2017 [15 favorites]


Fake "town centers" that look like downtown but are actually privately owned by rich property developers who can control who gets to do what there.
posted by Naberius at 12:33 PM on November 15, 2017 [29 favorites]


Fake "town centers" that look like downtown but are actually privately owned by rich property developers who can control who gets to do what there.

No, it's even worse than that, because they can't fill their retail space either. There's a massive hollowing of industrialized countries going on right now, and it doesn't bode well. Look at the abandoned towns of the US or of Spain. If the trend continues, we really will be left with Megacities and Cursed Earth.
posted by leotrotsky at 12:38 PM on November 15, 2017 [10 favorites]


Clicked on the FPP to see if it was Finance.

It's finance.
posted by mikelieman at 12:41 PM on November 15, 2017 [12 favorites]


The U.S. Isn’t Prepared for the Next Recession

I bet the GOP is prepared to name it the Second Obama Recession
posted by thelonius at 12:43 PM on November 15, 2017 [8 favorites]


Full Disclosure. First job: Bradlees employee. Front-end, electronics, home appliances, toys, sporting goods, automotive, and health and beauty aids. United Food And Commercial Union local #1500, IIRC.

Then I spent the mid-late 80's in a mall. Nostalgia.
posted by mikelieman at 12:43 PM on November 15, 2017 [1 favorite]


This is a robbery in progress. Private equity firms borrow massively to buy companies, and use corporate cash reserves to pay themselves back. Workers who supply the value to the business see nothing; in fact, to service the debt, companies usually cut staff. When the retailer collapses under the borrowing weight, all workers lose their jobs.

Which is exactly what happened to somewhere I worked a decade or so back. Nicely profitable, high profile, bought by bankers and sold on to PVs for a huge profit (to the banks). The PVs had to pay for it with a giant loan (also benefiting the banks) which they they put onto the books of the purchased company. They extracted management fees, salaries, etc, while the rest of us watched all our profits and more go into debt servicing - no pay rises, no investment in new ideas, no recruitment, as we slowly bled to death. Whereupon the carcass was cut up and sold off in chunks. I don't know what happened to the remaining debt; I imagine it was quietly taken out the back and shot, as as far as I can tell everyone involved was complicit and nobody was interested in actually playing by rules. Once the debt had done its work, I'm sure it was in nobody's interest to keep it around.

At the time it happened, I asked our MD 'why isn't this criminal?'. 'It should be,' he said. The experience hurt him so much that he turned down various job offers in the industry and just did charity and other non-capitalist things. (He was conscientious - the way the system disgusts and excludes people who want to do the right thing is probably an unintended benefit to it...)
posted by Devonian at 12:45 PM on November 15, 2017 [39 favorites]


I guess I need to reread this and the Bloomberg article more closely again.

To me it felt like they said "it's not just Amazon killing retailers, it's also the debt", and then they launched into a discussion of the debt which boiled down to... everyone is betting that Amazon will kill retailers.

Admittedly the debt discussion gave me a mild headache, hence the desire to reread.
posted by floppyroofing at 12:49 PM on November 15, 2017


They also talk about Toys R Us which had been seeing gains in sales, but still ended up filling for bankruptcy due to loan structure.
posted by AlexiaSky at 12:52 PM on November 15, 2017 [3 favorites]




In Canada - and maybe in the U.S., too? - this is also a big part of what's destroying newspapers. Postmedia and a couple of others piled on the debt in order to buy up every Canadian newspaper they could. Servicing that debt has required firing journalists and consolidating newsrooms.

Newspapers aren't as profitable as they were projected to be when those loans were first made, mostly as a result of the Internet, but (debt servicing aside) they're still mostly profitable. Based on what we know now, Postmedia borrowed too much (and paid too much) to buy all those newspapers. But if that debt-driven consolidation spree hadn't happened, and burdened most Canadian newspapers with a load of debt, our print journalism would be in much better financial shape right now.
posted by clawsoon at 1:09 PM on November 15, 2017 [22 favorites]


Don't forget that the CEO of Sears was a libertarian idiot who forced departments to compete against each other. To paraphrase the Vogons: "Bloody useless company. I have no sympathy for them at all."
posted by fifteen schnitzengruben is my limit at 1:13 PM on November 15, 2017 [13 favorites]


Also Sears pretty famously missed the internet revolution until it was well underway. A baffling oversight by a company built on catalogue sales that were still going strong into the late 90s. There probably wasn't a single conventional retailer better placed to take advantage of the revolution and they missed it. It's kind of funny to see Amazon trying to build the kind of store front pickup network that Sears just blew away.
posted by Mitheral at 1:24 PM on November 15, 2017 [32 favorites]


This is an area which could see major improvement with simple legislation. Half of all stock of a public company must belong to the employees, divided equally. If someone wants to pillage and burn the company, then the employees would see some money out of the deal.

If I were running for office, my central theme would be that the economy is morality put into practice.
posted by BeeDo at 1:25 PM on November 15, 2017 [18 favorites]


MattressFIRM (I always yell the FIRM part), seems to be exploding

About MattressFIRM...
posted by COD at 1:40 PM on November 15, 2017 [2 favorites]


> This is an area which could see major improvement with simple legislation. Half of all stock of a public company must belong to the employees, divided equally. If someone wants to pillage and burn the company, then the employees would see some money out of the deal.

Simple legislation! What you're proposing is a direct transfer of ownership of the means of production from the capital-owning class to the working class. This might be "simple" in the sense that it's easy to say. But it's certainly not simple to do, and it's without a doubt far to the left of anything supported by the capitalist Democratic Party — really, it's far to the left of anything supported by Sandersite social democrats as well.
posted by You Can't Tip a Buick at 1:45 PM on November 15, 2017 [41 favorites]


Clawsoon beat me to the Canadian Newspaper thing; apparently their asset manager overlords have wrung all they can out of the PostRags.
posted by Alvy Ampersand at 1:45 PM on November 15, 2017 [3 favorites]


I mean I'm 100% down with the transfer of ownership of the means of production from the capitalists to the workers. But don't pretend that the capitalists will see it as a minor tweak implemented through simple legislation, because it's not a minor tweak implemented through simple legislation. What you are proposing is revolution.
posted by You Can't Tip a Buick at 1:49 PM on November 15, 2017 [25 favorites]


It seems the real solution is to burn all the b-schools to the ground.
posted by Thorzdad at 1:58 PM on November 15, 2017 [22 favorites]


Yeah, I consider myself center-left, but if the Democrats are going to run on "we'll take away the stock bonuses you've received over the years to give to other employees", I'll be voting for whomever is on the other side.
posted by sideshow at 2:02 PM on November 15, 2017


> Yeah, I consider myself center-left, but if the Democrats are going to run on "we'll take away the stock bonuses you've received over the years to give to other employees", I'll be voting for whomever is on the other side.

Wait what? Are you objecting because you think you've got enough stock to end up a net loser in the redistribution of ownership of the means of production from capitalists to workers, or are you objecting because of an abstract, non-self-interested defense of property rights? Cause if it's the former, you're almost certainly wrong unless you are very rich indeed — note that 1% of the population owns over half of all wealth — and if it's the latter, your priorities are weird.
posted by You Can't Tip a Buick at 2:10 PM on November 15, 2017 [37 favorites]


Thats not all, Mitheral. Sears dumped Discover Card, which would have captured all that Sears catalog proto-Amazon online sales. Sears sold out of H&R Block (with online brokerage division ) just before the self-service internet stock brokerage model took off. Sears sold out of Prodigy, just before home internet access became a thing.

In other words, Sears left the party way too early on more than one occasion and missed out. Craftsman, Kenmore, and DieHard will outlive Sears by a mile.
posted by dr_dank at 2:11 PM on November 15, 2017 [9 favorites]


Or, what pastabagel said.
posted by JoeZydeco at 2:13 PM on November 15, 2017 [10 favorites]


That was a very well investigated, clearly reported, highly disturbing piece.
posted by latkes at 2:22 PM on November 15, 2017


Yeah, I consider myself center-left, but if the Democrats are going to run on "we'll take away the stock bonuses you've received over the years to give to other employees", I'll be voting for whomever is on the other side.
This sounds like "I'm for redistribution of wealth unless it's my wealth" to me. Also, I don't think any democrats are running on that, so good news for you, I guess.
posted by dbx at 2:33 PM on November 15, 2017 [32 favorites]


Stock is a fictional construct. You just decide to double the amount of shares. Like all good economic practice you phase it in over 10 years to give people time to adjust while still getting it done. Yes, existing stock drops in value as the number of shares increases. Stock also drops in value for many other reasons detailed in this article. Omlets, Faberge Eggs.
posted by BeeDo at 2:41 PM on November 15, 2017 [1 favorite]


> Stock is a fictional construct. You just decide to double the amount of shares. Like all good economic practice you phase it in over 10 years to give people time to adjust while still getting it done. Yes, existing stock drops in value as the number of shares increases. Stock also drops in value for many other reasons detailed in this article. Omelets, Faberge Eggs.

In other words, a gradual transfer of ownership of the means of production from the capital-owning class to the working class.

You seem to believe that if you expropriate the means of production slowly enough, the capitalists won't notice. Rest assured, though, they'll notice.
posted by You Can't Tip a Buick at 2:48 PM on November 15, 2017 [14 favorites]


and that's where we circle back to the guillotines
posted by edeezy at 3:00 PM on November 15, 2017 [20 favorites]


srsly though, I'm coming off super critical but really I'm on board. We need to develop a set of legislative demands that appear reasonable to most people, but which if implemented would result in the dismantlement of capitalism. This legislative agenda is used to generate and focus popular demand for socialism. Once popular demand reaches a certain level of intensity, the next move is up to capital. If they surrender, we have socialism. And if they don't surrender, we have guillotines.
posted by You Can't Tip a Buick at 3:06 PM on November 15, 2017 [22 favorites]


“If today is considered a retail apocalypse,” Bloomberg reported, “then what’s coming next could truly be scary.”

I offer the Dead Mall Series as a video sneak preview of retail in the 2020s.
posted by JDC8 at 3:07 PM on November 15, 2017 [1 favorite]


Guillotines for some, tiny shares of the means of production for others.
posted by Meatbomb at 3:12 PM on November 15, 2017 [41 favorites]


Oh, I want it to be noticed, believe me.

I don't actually want to dismantle capitalism, I want to contain it. I want there to be a part of life we recognize as based on kindness and love, and a part based on cut-throat competition. That's why I say 50%: there's a balance struck between the fundamental right to make a living, and the desire to make lots of money. It is the guillotine that I'm trying to avoid, because revolution is messy.

I'd be more eloquent but I'm on my phone. (Or I'd be exactly as eloquent without an excuse, depending.)
posted by BeeDo at 3:16 PM on November 15, 2017 [2 favorites]


> Guillotines for some, tiny shares of the means of production for others.

that's a winning slogan, is what that is. Meatbomb 2020.
posted by You Can't Tip a Buick at 3:16 PM on November 15, 2017 [9 favorites]


*Splits stock of Guillotine Inc.*
posted by Alvy Ampersand at 3:17 PM on November 15, 2017 [6 favorites]


Isn't executive robbing share holders and workers the whole financial deregulation? Investors need some small degree of sophistication to avoid being robbed, some shadow of which financial laws like Glass-Steagall helped ensure.

It's not "everyone .. betting that Amazon will kill retailers" in the short selling sense. It's merely that the Amazon mythology has defeated the retail mythology so investors choose not to be duped again by the same retail executives who just robbed other investors.

America has vastly too many shopping malls anyways, so maybe this will slow deforestation, etc.
posted by jeffburdges at 3:20 PM on November 15, 2017 [3 favorites]


Staying in business requires a nearly impossible balancing act of managing risk at levels somewhere between sensible and what everyone else is doing. If you're too risk adverse, you're not competitive and will definitely fail. The more risk you take on the more potential you have to either do better than your competitors or crash and burn. (The only survivors in this game are the ones lucky enough to be the last ones standing in time to rapidly reduce their risk to sensible levels.) Most competitors in any industry don't understand how risky their behaviour is, whether we're talking debt or any other activity, and so pretty much every sector is very fragile. When you combine that will unprecedented levels of tax avoidance, global economies are grinding to a halt and businesses are flaring out at an increasing pace as their risky behaviour finally catches up with them.

It's not rocket surgery.

The only reason retail looks like the canary in the coal mine is that the vast majority of stuff sold at retail is a want not a need. As rent/interest payments, taxes and rates and food consume all of a worker's income and their credit maxes out how does anyone who sells stuff people don't need think they're going to survive?

As retail dies, the flow on effects will spiral the economy down the drain even faster, and pretty much every political party in power in the western world has demonstrated that it barely knows how to manage the economy during good times. Few if any are up to the task of digging us out of this.
posted by krisjohn at 3:30 PM on November 15, 2017 [4 favorites]


Isn't it both? You've got companies debt-laden from buying out competitors, with tons of expensive real estate, unable to compete against a competitor with a much lower cost structure. Why would I go to Target to buy toilet paper if I can get the same thing dropped on my doorstep for less? Other than clothes and food, I don't really need the touch and feel experience.

Read the article. Toys R Us had increasing profitability. They just couldn't get out from under the artificial debt they were deliberately loaded up with.

Notice in Sears' case they were chopped in half and forced to pay rent to their viable real-estate holding half while the retail side was left with the unmanageable debt and eventual default and shorting of creditors. All while the equity guys holding the profitable parts of the company laugh on their pile of money.

Bad business decisions and practices made them vulnerable to the corporate raiders but the coming bankruptcies and cascading defaults are pretty much all on the private equity raiders deliberate looting.
posted by srboisvert at 3:31 PM on November 15, 2017 [17 favorites]


Cyrtodactylus gordongekkoi is on the Red List but has anyone looked for him in these private equity firms? Seems to be thriving to me.
posted by unliteral at 3:41 PM on November 15, 2017


Does anyone at the top lose out in this?

Lol no

They get to liquidate assets, take a hefty cut of the leftover money, and dole out golden parachutes to their top execs.
posted by ananci at 3:47 PM on November 15, 2017 [2 favorites]


America has vastly too many shopping malls anyways, so maybe this will slow deforestation, etc.

US has around 29,000 SF of gross settable area per 1,000 people, compared to 2,856 SF/1,000 in the U.K. and 2,691 SF/1,000 in Europe

That’s 10 times the mall space. That just isn’t sustainable.
posted by leotrotsky at 5:10 PM on November 15, 2017 [6 favorites]


This is an area which could see major improvement with simple legislation. Half of all stock of a public company must belong to the employees, divided equally. If someone wants to pillage and burn the company, then the employees would see some money out of the deal.


There are roughly 6000 to 7000 Employee Stock Ownership Plan (ESOP) companies in the US, worth between $1.2 - $1.5 Trillion dollars in market cap. This is a real thing that real companies do. Gore-Tex and Publix are probably the most famous examples. Not only is it fantastic for employees (for the reasons you mentioned and others) but it's also sold to "Fiscal Republican" types as an effective corporate tax dodge. We can do this. Talk to your local retiring-age business owner for the greatest effect.
posted by GetLute at 5:32 PM on November 15, 2017 [17 favorites]


Transferring a percentage of stock to employees does nothing unless the employees: a) always have enough voting shares to maintain control of the company (which is a total non-starter for, I hope, obvious reasons); b) are always acting in their own enlightened self interest; and c) cannot sell or enter into proxy agreements for the stock they own. If any of those three conditions are violated, this kind of "acquire control and strip assets" move will still be possible.

If you want to legislate against this it has to be something along the lines of any debt that's transferred to a company you control, or assets taken out of a company you control, are treated as income to the transferor or transferee respectively. One way to do this would be to require reporting and tracking of the total value of the any sufficiently large company's capital assets and total value of liabilities, where there is a decrease in capital assets, or increase to the liabilities owing to related or associated parties, (you'd also probably need some deeming rules to deal with debt swap arrangements and the like), payments made to related or associated entities greater than the reported net taxable income of the company in that tax year, and less than the total value of the pool are subject to a 30% tax, withholding at source, joint and several liability for all directors.

That'd encourage the preservation of capital, as trying to take money that isn't profits out would trigger ruinous tax implications, without impacting the ability of companies to distribute profits as dividends, and joint and several liability would make it very difficult to avoid the taxes long term. Keeping it limited to larger companies would avoid unduly hammering people running a small business.
posted by Grimgrin at 5:40 PM on November 15, 2017 [8 favorites]


Id been a sears customer for most of my life. A couple of years ago, I bought a new mattress at sears. What followed, instead of a mattress delivery, was several days of possibly the worst customer service interaction I’ve had. Eventually, enraged, I cancelled the order, swore to never do business with sears again, and went to one of the local strip-mall mattress stores and had a perfectly reasonable mattress delivery experience.
posted by rmd1023 at 5:40 PM on November 15, 2017 [6 favorites]


This has been happening globally too. In NZ Whitcoulls got wrecked this way a few years back, but at least got bought out.

There's also NZ/AU's Dick Smith:

https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/
posted by xiw at 6:10 PM on November 15, 2017 [1 favorite]


This smells like bullshit. If these companies were fine but for a bunch of short term debt, lenders would be lining up to refinance them for another few years. Lots of companies rely on perpetual refinancing like that. Some can't get it, and that's usually because they aren't actually creditworthy. The reason no one wants to lend Toys R Us enough money to deal with their debt apocalypse is presumably that they don't actually think things will look much rosier later.

No one should cry a tear for the retail companies drowning in debt. That's what happens when your business model gets phased out. Boo fucking hoo.

As for the employees, yeah, technological and societal change under capitalism can suck. That's a problem with capitalism, not a cause to pity big retail and its treatment at the hand of lenders.
posted by andrewpcone at 6:44 PM on November 15, 2017 [4 favorites]


andrewpcone: " If these companies were fine but for a bunch of short term debt"

I thought the story here is not that the companies were "fine but for a bunch of short-term debt" but more like "fine but for a bunch of debt and the private equity vampires bleeding them dry." I mean, it's one thing if the debt was incurred as part of the normal course of business but, in my layperson's understanding, it seems like in some of these situations, the debts were taken on and structured in order to maximize the PE firm's advantage and not the underlying retail business's health. The last 10-K for Toys R Us even specifically calls this out in their risk factors:
The Sponsors control us and may have conflicts of interest with us.

Investment funds or groups advised by or affiliated with the Sponsors currently control us through their ownership of 98% of our voting common stock. As a result, the Sponsors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders. In addition, the Sponsors may have an interest in pursuing dispositions, acquisitions, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to us as a company.
posted by mhum at 9:04 PM on November 15, 2017 [13 favorites]


"policymakers must reckon"

This is where I know the writer is being disingenuous.

Or stupid.

... Either way, they need to seriously revaluate their approach to the material, because holy shit talk about a category error.
posted by aramaic at 10:29 PM on November 15, 2017 [3 favorites]


Yeah, I find the article lacking. Somebody is taking a bath on these deals, but I'm not sure it's the employees. Not that the employees are doing well; they're probably fucked either way, PE buyout or not.

But for an LBO to work, you have to find lenders who are willing to put up money. Even if the acquired company's assets are used as collateral, somebody is still taking a risk with a substantial amount of money.

Back in the 80s when LBO-emitted bonds acquired their bad reputation, the scandal was that the shitty LBO paper ("junk bonds") were being sold through various channels to buyers who had no idea of the underlying riskiness of the investment, and that there were bribes being paid to money managers in order to create the market for the bonds, which was needed to go out and execute the LBOs. This enabled deals to go forward which likely never would have otherwise. (In other words, the issue with junk bonds has nearly always been on the 'sell side'.) That doesn't seem to be what's going on here, because if it was... it'd be a hell of a story.

So presumably the bonds are being sold through legitimate channels to people who know what they're buying and the risk they're taking on, not to widows and orphans. It's these buyers, presumably very sophisticated investors (I'd guess hedge funds, mostly), who are enabling the LBOs to take place, and doing so because they think they're going to make, not lose, money on the deal.

It now looks like those buyers are going to end up with a lot of worthless paper, in the cases where the bought-out companies have ended up going bankrupt, but they're the ones who paid their ticket and took their ride. My sympathy is basically zero. Bankruptcy is absolutely the appropriate venue for a situation like that to end up in; Chapter 11 was specifically created to allow companies which end up overburdened by debt to discharge that debt but continue as going concerns, rather than be liquidated for spare parts. So seeing companies in a sector that's generally understood to be lagging go into bankruptcy isn't necessarily a sign of systemic failure. That's "working as designed."

The amount of debt mentioned in the article also should be contextualized against the 2007/08 mortgage crisis before the comparisons go too far: the author talks about $5B in retail debt coming due over six years. By comparison, in 2006 there was something like $500B of subprime loans securitized and dropped onto the market. That's a big difference in systemic risk.
posted by Kadin2048 at 11:33 PM on November 15, 2017 [6 favorites]


These LBOs that eventually bleed a company dry feel like the U.S. Postal Service’s troubles that arose only once Congress made them pre-allocate the money for their employees’ retirement plan. Aside from that one artificial constraint, they’re doing pretty well.
posted by wenestvedt at 3:10 AM on November 16, 2017 [6 favorites]


[derail] I'd like to see some creative uses of abandoned or underused malls... some form of redevelopment that turns them into small communities with residences, assisted-living, schools, daycare, seniors' center, youth center, office space, and shared spaces and facilities like libraries, gyms, workshops/hacker-spaces, art studios, small theatres, and of course still some retail, medical offices etc. sort of like an enclosed village.

Mall owners could be "incentivized" to make this feasible by taxing hard any mall property that is mostly or completely empty. Also, since Google and others want to try out some new urban development ideas (eg Quayside in Toronto), it seems an empty mall would be an ideal canvas for trying such ideas in miniature.

There's going to be a whack of seniors to house in future, and we infest your malls anyway...
posted by Artful Codger at 5:00 AM on November 16, 2017 [4 favorites]


America has vastly too many shopping malls anyways, so maybe this will slow deforestation, etc.

US has around 29,000 SF of gross settable area per 1,000 people, compared to 2,856 SF/1,000 in the U.K. and 2,691 SF/1,000 in Europe

That’s 10 times the mall space. That just isn’t sustainable.


Apples to Oranges.

Most of Europe has geographic and structural factors acting against malls. First there isn't space in their cities. Their density and design precludes large malls. I bet if you changed the numbers from gross footage to number of stores you would see that UK has far more shops than America because they are unable to centralize shopping. When I lived in what was effectively a suburb of Birmingham, UK there were 3 Tescos, 3 Sainsburys, and 2 Cooperatives within 20 minutes walk.

Also their climates are generally more amenable to street shopping. Significant parts of America are too cold for half the year for comfortable high street style shopping. Other parts are far too hot.

Many malls are dying for multitudes of reasons but comparison to Europe doesn't really explain what is happening particularly when Europeans love the malls they do have. Like mob level love. Birmingham's Bullring (the largest mall in Europe at one point) was so crazy busy when I lived there that I avoided it as much as I could.
posted by srboisvert at 6:39 AM on November 16, 2017 [3 favorites]


That's a big difference in systemic risk.

You call out the $5B in retail debt but you don't account for what happens to the real estate investors (individual owners, funds, trusts, etc) that have debt associated with the malls and storefronts that are soon to be empty. There's a bunch of other risk leveraged against the continued success of the retail sector. A crash in commercial real estate could be very broadly damaging to the economy.
posted by fedward at 7:04 AM on November 16, 2017 [1 favorite]


I work in a former retail mall that's been converted to a "town center" ie a social services hub. We have Social Security, a school, a large health clinic, dialysis center, library, drug treatment program, etc, along with some low end retail and a CVS. Clustering the services is very smart but it's also very slummy, in the sense that all the services for people in poverty are clustered here, effectively keeping those residents in the poor part of town and containing nothing that draws the middle class here. Physically the space is horrible. It's a sixties or seventies era windowless box that is definitely terrible for the students, old people and workers who spend our time there. It's also an island surrounded by a massive parking lot, with no outside seating and lots of potential for pedestrians to get hit by cars, especially the dozens of seniors and folks with disabilities lining up in the street for the food bank giveaway across the street who have to cross back without a cross walk to catch the bus home after.

I wish the mall I'm in would be razed. I've come to think just as all new market rate housing development should be forced to include low income units, low income building should also include market rate. Income segregation, which in the US at least it's also racial segregation, is a cancer. I wish a developer would re build our mall to serve a mix of social service providers and middle class retail like Target, halve the parking, add outdoor space and shuttles to BART, and top the whole thing with a couple hundred units of housing, some market rate some low income and senior....

I don't know what made me just indulge in that wild fantasy but I guess I'm saying old, unused malls are not pleasant.
posted by latkes at 7:28 AM on November 16, 2017 [17 favorites]



Most of Europe has geographic and structural factors acting against malls. First there isn't space in their cities. Their density and design precludes large malls


The laws of physics and the properties of construction materials are the same in Europe as they are here.

Europe does have Ikeas, and Tescos, and hypermarches.

It's true that European policy did not subsidize greenfield construction of big box stores, so they're not about to learn that those things are not sustainable. But we are.

Because those stores are not built to last. They are big flat boxes with roofs that can barely hold off the snow, and eventually stops doing it. And yes, this is something that contributes to the retail apocalypse, even by the original definition of that word. We are about to havea revalation about the financial sustainability fo how we do retail.
posted by ocschwar at 7:31 AM on November 16, 2017 [3 favorites]


Not only is it fantastic for employees (for the reasons you mentioned and others) but it's also sold to "Fiscal Republican" types as an effective corporate tax dodge.

The problem is that they aren't enough of a tax dodge. The primary benefit only applies to C corporations, but very few businesses are C corporations. You can talk to your local retiring business person, but it doesn't really help an S corporation owner. For an S corp owner looking to sell, the options are usually (1) get paid now by a private equity company or competitor; or (2) get paid over 7-10 years by employees and take the risk that the company won't go under during that time period. That's a tough sell unless they were going to sell to employees anyways.

Does anyone at the top lose out in this?

If all goes well, they'll be the only ones that lose out. Toys R Us will go into bankruptcy, shed its debt (ie, those at the top that owned stock lose everything, those that owned debt lose most or all), and come out of bankruptcy a healthy company with employees intact.
posted by jpe at 8:53 AM on November 16, 2017


I have concerns that this creeping disease is spreading outside of retail. Today it was announced that a major player in my industry (Motorsport Aftermarket Group) is filing Chapter 11 in order to eliminate $300M in debt via an equity swap. Of course, they're saying "Oh ho, it's business as usual!" but it really never is again, is it?
posted by workerant at 1:32 PM on November 16, 2017


By comparison, in 2006 there was something like $500B of subprime loans securitized and dropped onto the market.

I'm still not sure we should have bailed any of them out...

My sympathy is basically zero.
posted by one4themoment at 2:09 PM on November 16, 2017


I liked going to the mall
posted by thelonius at 2:31 PM on November 16, 2017 [3 favorites]


Say Hello to $3 Trillion in Forgotten Debt
New accounting rules called IFRS 16 will force companies to include operating lease commitments as part of their reported debt and assets. Heavy lease users in the retail, telecoms, energy and airline sectors will probably be most affected. IFRS 16 will cause debt to balloon. In some cases, it'll be ugly
posted by the man of twists and turns at 10:55 AM on November 17, 2017 [5 favorites]


I still want the DIY-StarTrek future where nobody buys nearly as much because they can download free 3d models for the parts, prints them on some nearby 3d printer, and assembles them from IKEA-like plans.. and ideally recycle the plastic directly into new shit.
posted by jeffburdges at 9:30 AM on November 23, 2017


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