The one person I'd like to meet.

Tuesday, 15 January, Year 5 d.Tr. | Author: Mircea Popescu

You know how the Internet is for porn dating, right ? Meeting people of like mind, who share your interests and tastes, with whom to share special moments etcetera.

Well, so here's who I'd like to meet :

But first, a side point. You're possibly aware of what a LBOi is. You're also possibly aware these made most of the fortunes made in the 90s, and they're still a major source of wealth for the top. It's possible however that you don't exactly understand the economic rationale for all this, and possibly wave the entire thing aside as "big town nuttery". If that's the case, allow me to clarify.

Suppose you have a large enough corporation doing something predictable and lucrative. Making shaving razors, pins, car tires - whatever it is, something that won't likely go away soon, or significantly change suddenly. Suppose this company has something like, for the sake of illustration, 4 bn gross revenue on 25 bn worth of total assets.

That 4bn obviously does not go to shareholders. That 4bn goes to : fixed costs (1.7bn), propping up the assetsii (.3 bn) and taxes (2 bn).

That's right : the way the modern socialist state works, some company making 16% on 25 billion walks home with nothing at all. Isn't socialism a great thing ?

Well, the shareholders don't really think so. They would very much like to extract at least a little value out of their significant capital outlay. And because (unlike their income, which is nothing in the eyes of the state), debt costs are tax-deductible, the solution is quite simple : make the company pay about 2 bn in debt servicing.

Thus, if the current capital structure, whereby a number of shareholder chumps pooled 25bn and are currently paid jack shit would be replaced with a new capital structure, in which a number of shareholder champs pooled .1 bn and took out ~40bn worth of debt costing ~2bn a year, the old shareholders could be paid 35bn (that's 140% their initial investment) and there'd still be a nice 5 bn left over to make the champs pretty darned rich.

This is the engine that carried forth the leveraged buyout wave : by cutting the state out of a pie it has no business sticking its dirty fingers into, you create value for the only people that matter (at all) : the shareholders.

Obviously on top of this the acquirers did a number of relatively irrelevant things, such as optimizing the expense structure, which mostly means a. firing people and b. getting out of pointless businesses. As to a, obviously not all people are created equal, and this necessarily means some people are worthless and should be thrown out, economically speaking. People are also social creatures, and quite adept at creating ways and finding means to sidestep that very simple fact, and so most large corporations carry a large chunk of freeloaders (or worse, people that actually cost money through their ineptitude, found especially at the higher levels). These can always be let go, and it's a net benefit : the corporation no longer has to pay for the privilege of being stolen from, and the useless bums getiii the very valuable signal that they're useless bums (something pretty much nobody who actually is one seems to be aware of, strangely enough).

As to b, it's an unfortunate problem of corporations (especially large) that the estimation and regard of managers is related to size rather than efficiency. Because of this, their incentive is to deploy capital to increase size, rather than distribute capital to maintain efficiency. Consequently, any large enough business will consist of one (or a few) hot cores where money is made and a lot (hundreds!) of cold spaces where money is simply lost.iv It's usually trivial to identify these, just sell everything people hype about. If it's regularly in the press it's not a business, it's a scam. That sort of thing (possibly not taken to such excess).

These two add somewhat (though usually insignificantly) to the equation above, and they also present the exceedingly valuable service of the smoke cover : the simple economics of the many economic benefits of kicking the state out of capital allocation can be disguised under an operational cloak.

This effort is overall obviously doomed, not because the state doesn't like it, but because Bitcoin does all this better. Even so, I would like to meet the gal who first figured all of this out, the one person that was plucking at her pubic hair idly in the tub one night when she suddenly realised YOU KNOW WHAT!?!?! DEBT!!!

I think we could have a very nice cup of coffee together.

  1. Leveraged Buyout. []
  2. They need to protect themselves from inflation if nothing else. []
  3. Some for the very first time in their lives, like notably all the 50ish year old idiots who find that "they can not get a job" : yes, you douche, the fact you can't get a job now means you should not have had the job you "lost" in the first place. []
  4. We're not talking about firing the cleaning lady here, in case the socialistoid propaganda is trying to bubble out of you. We're talking about the succesful potato farm which makes 1bn selling good potatoes but then buys a lipstick manufacturer because potatoes just aren't glamourous enough. We're talking about Time Warner spending 1 bn to buy Myspace this year and selling it off for 50 million the next. That sort of thing. []
Category: Actiuni si Optiuni
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4 Responses

  1. Suppose you have a large enough corporation doing something predictable and lucrative. Making shaving razors, pins, car tires - whatever it is, something that won’t likely go away soon, or significantly change suddenly.

    You know, I always wondered how things would be if suddenly an incurable and contagious disease appeared that caused everyone to stop growing hair. Chances of that happening are slim to none, but it'd be fun and the shaving razor industry would go down suddenly.

    Also, what's with you and Myspace anyway?

  2. Mircea Popescu`s avatar
    Mircea Popescu 
    Wednesday, 16 January 2013

    Just a very good example in the very recent past. Because most people can't think without examples and don't remember things that happened "over one hundred years ago".

  3. Sora Daniel`s avatar
    Sora Daniel 
    Wednesday, 3 July 2013

    Good Post! Thank you !

  4. Thx for post!

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