All that stuff that was "killed by the net"? The real culprit was hedge funds


#1

Originally published at: https://boingboing.net/2017/12/30/cooccurrence-not-causation.html


#2

They’re going to try to do it to the U.S. government, too. That’s why Donnie Two Scoops was slagging the P.O. on Twitter the other day, and why he reduced Bears Ears.


#3

@doctorow do you realize there are different kinds of funds besides hedge funds?


#4

And all the general public seem to be able to do is watch. Voting doesn’t seem to mater. The rule of money.


#5

Mr O’Shea says he is looking to the first quarter of 2018 to see which “shoes are going to drop next”.

Here’s hoping one of those shoes will be dropping on tRump and the TGOP.


#7

The internet and what it has done to advertising and especially to classifieds creates huge structural problems for newspapers, but long before any of that had truly taken hold, in the late 90s and early 00’s, the newspaper industry was being destroyed by investors - newspapers had enormous operating profits (often 20-40% of revenue) that couldn’t keep up with soaring capital costs, because investors kept on buying them at ever higher valuations, and then extracting every penny they could squeeze to service the resulting debt.


#8

What this article also needs to reference is the particular fact that in the US and UK respectively (not sure about other countries) shareholder value is legally protected to an extreme level. For example, in the UK for everyone for every 100 pounds of profit 70 of it goes back to shareholders (https://www.theguardian.com/commentisfree/2015/jul/26/capitalism-shareholders-greedy-stakeholders-change). It’s a huge problem when you’re a firm that has to grow in terms of retail (wages to keep good workers, money to buy goods people want to buy, etc) when shareholders keep removing the essential funds needed to operate. Frankly, I think there’s a need for laws restricting shareholder value protection to the basics rather than forcing firms to “maximize” value at the detriment of the foundations of the business.

Edit: Also, I think this article and the one I’m referencing are a good argument against capitalism as a whole. Frankly, if a firm isn’t worker owned then it’s going to always be hollowed out by some rentier class somewhere to give another jerk a yacht or whatever.


#9

This is largely a myth:


Firms behave as though they have this fiduciary duty because management is pressurized by boards to do so, but the reality is that there’s very little caselaw or regulation that supports it.

Much like all the sins laid at the feet of “health and safety,” the fairytale that regulators will smack you if you fail to “maximize shareholder value” is a convenient, overblown myth that lets managers blame their worst decisions on an overweening state.


#10

Thanks for the correction, I didn’t know that.


#11

NP! It just makes the whole business of “shareholder value” even more slimy.


#12

Whatever creditors actually hold the most privileged position - stockholders, bankers, vendors, etcetera - it’s pretty clearly the workers who always come last. The company’s obligations and debts to them both formal and informal are just disregarded.


#13

Yes, this needs editing - private equity is NOT a hedge fund. A hedge fund is a much more conservative operation, they are usually just buying shares in companies and using a wide range of investment strategies to attempt to mitigate risk. They want to feed off the growth of existing companies. A private equity firm, meanwhile, will buy a whole company and attempt to run it, sometimes into the ground just so they can sell off its valuable assets (like trademarks).


#14

Hedge funds are investment groups for variety of investment types, but use puts and/calls to hedge their bets. They charge huge fees and are perfect places to park your son in law so he can support your daughter in the style to which she has become accustomed.

Private equity groups focus on buying out companies and extracting the value, usually in the way one extracts value from a fish, killing it, gutting it, filleting it, deep frying it and so on. Now and then it actually operates the firm, as with Dell’s buyout of the company he had founded, but this is usually not the case.

You are, however, absolute right about the financial shenanigans that have damaged so many of those companies that are supposedly being killed by the internet. In good times, they leveraged themselves to take over competitors and grow quickly and cheaply. As things got tighter, they were overextended and had to write down tons of goodwill.

I wrote about this and the newspaper business back in 2009:

This is a problem for all public companies. One is expected to grow and continue to grow. In the old days, owning stock in a company was about dividends, but starting in the 1960s it was more and more about growth potential. If shareholders expect growth instead of cash flow, the companies are encouraged to borrow to grow. Unfortunately, as you note, this eliminates reserves and slack in the system, so when the music stops playing, there are not enough chairs.


#15

There are a whole shit-ton of PetSmarts in convenient distance of my house, but there are no Pets.Com sock puppets with us.

Maybe the explanation is more complex than “hedge funds vs. the Internet”?


#16

This was such a pathetic effort and ignorant post


#17

Next consider: what must be wrong if a whole company can be bought for less than the value of its assets?


#18

As I recall, what they do is a leveraged buyout: you borrow a ton of money from investors, buy a company, then use its credit to get a huge bunch of loans, which you use to pay back your investors. Also selling off any assets the company has, like trademarks, patents, etc. Then you scuttle the company and make off with huge fees.


#19

That still makes no sense. “Borrow money” doesn’t address how you buy a whole company for $X, sell its parts and end up with more than $X. Why wasn’t the company valued more than the sum of its parts to begin with?

Not saying this can’t happen, but the reasons why it can rather contradict the parasite model of finance.


#20

Welcome to bOINGbOING!


#21

It’s because credit allows you to create cash from nothing. I borrow $10; now my net worth is still zero, but I have $10 in cash. The trick here is that the debt belongs to the owned company (e.g. Sears) and not the private equity firm. It seems an abuse of the credit system to me, but it isn’t illegal.

The exact same scam is used by the gangsters in Goodfellas. They find a restaurant owner, run up his credit cards and make off with the goods, leaving him ruined with debt.