Memo to Ripoffs, Swindlers, and Job Destroyers: Philly has a Tax Break for You!!!

Philadelphia now has a tax package in place that supposedly was a major factor in persuading Josh Kopelman to move his venture capital company, “First Round Capital” to Philly. It seems like FRC is a fine company. It funds brand new start-up businesses, and plans to provide incubator space for many of them in its new headquarters in University City. Patrick Kerkstra over at the Inky is crowing over FRC’s move and is all but saying “gotcha” to people like me who questioned the tax breaks that the City is giving them.

Here’s the rub. Those same tax breaks are available to Bain Capital and Mitt Romney (if and when Mr. Empty Suit returns to full-time vulturing with the firm.) They’re also available to similar companies in the private equity industry, one which has over $4 trillion of buying power under its control without any tax help from us. So here’s the question: In order to get a First Round Capital, do we also need to exempt all these other private equity firms and their leaders from business taxes? Here’s the business model for many of them: buy up existing companies with money borrowed on their assets, pay huge management fees, sell off assets, dump workers.

The New Yorker gives an example of how this model played itself out in real life after Bain Capital acquired Armco Steel Company and reorganized it into “GS Industries”:

[W]ithin two years of investing eight million dollars to create GS Industries and take a majority interest, Bain Capital had paid itself a special dividend of $36.1 million, financed by a big issue of debt. . . . G.S.I. subsequently struggled against domestic and foreign competitors. In 1999 it sought a federal loan guarantee, and in 2001 it entered bankruptcy protection. More than seven hundred workers lost their jobs, health insurance, and some of their retirement benefits. A federal agency had to put up $44 million to bail out the company’s pension plan. Even while G.S.I. was fighting for survival, Bain continued to extract management fees from it—about $900,000 a year, according to a recent Los Angeles Times story. “Bain partners think the profits they made are a sign of brilliance,” an official of the steel workers’ union who negotiated with G.S.I. told the paper. “It’s not brilliance. It’s lurking around the corner and mugging somebody.”

Sometimes jobs aren’t destroyed, they’re just sent away:

The next step in many leveraged buyouts is outsourcing—closing plants and selling assets, using the returns to pay back the loans, and then contracting production out to low-wage factories in other countries, usually where repressive governments prevent workers from organizing their own unions. This is precisely what happened when Freescale Semiconductor was taken over in a 2006 leveraged buyout. In the first year after the buyout, Freescale was forced to pay $760 million in interest on the debt it assumed because of the LBO. In 2007, it laid off more than 2000 employees and outsourced a substantial amount of work, including 50 percent of its assembly, packaging, and testing. In the fall of 2007, Freescale announced plans to open a design center in China that would employ 100 engineers.

Most interesting about these stories is the point about that federal agency putting $44 million into GSI while its management was extracting $900,000 a year in fees. It’s interesting because it’s so typical. This industry thrives on government largesse. Indeed, the single largest source of capital to the leveraged buyout industry is government pension funds. Why is that? Well, apparently, it’s because governments are such good marks for the con-men that run the industry. By using a variety of bogus methodologies for calculating their returns, these companies feed the need of public pension managers to report strong growth in their funds. And as we’ve seen with governmental gullibility respecting interest rate swaps, City managers just can’t resist the pitches of anyone approaching them with a deal that seems too good to be true.

So here’s what we have, for the most part, in this industry: ripoffs, swindlers, and job destroyers. (I’m trying to be nice here.)

Now if these companies come to Philly, that doesn’t mean they would destroy Philadelphia jobs. Who knows, they might actually add some management type jobs. But isn’t extending tax breaks to such companies the reverse of socially responsible investing? Do we want to be known as the go-to City for socially irresponsible investing?

Of course it’s easy for the press to make anyone who suggests that we stop subsidizing evil into looking like silly, naïve, navel-gazers. Kerkstra and I had a long chat about how we might survive as a civilization without getting in bed with corporate pillagers before he wrote his piece. But the only comment he published from me was the wistful one in which I suggested that we be leaders in just saying no. That comment was turned into lovely softball to be served up to the City’s Commerce Director, who replied: "We don't get that luxury. We have to be competitive, and this is a baseline requirement for being competitive."

Well, that’s not all I said, Mr. Commerce Director. I noted that we have a Mayor who happens to be the head of the National Conference of Mayors. He’s also a leader in the region, and perhaps a rising star in the national Democratic Party. Couldn’t our Mayor take the lead in proposing that cities and counties stop throwing their money around by engaging in the zero-sum game of corporate bribing? Wouldn’t it be worthwhile to figure out how to use the money that would be saved by all of us just saying no for things that would improve the livability of our towns and cities? That would start a race to the top, instead of the bottom. It would be a race in which no one loses, instead of the one we’re in, in which everyone – except the .000001 % - loses.

But no, the conventional wisdom is that cities are helpless, they must pay and then pay again for companies that rip off everyone, from workers, to cities, to school districts, to pension funds. It’s all pretty shameful, not to mention very, very unimaginative and downright stupid.

Even Kopelman can Pay

I should add that I'm not at all convinced that Kopelman wouldn't have moved his company into the City without the tax breaks if the City had appealed to his better self. Here's Wikipedia's short summary of who Kopelman is:

Kopelman is best known as the founder of Half.com, a fixed price marketplace connecting buyers and sellers of used books, movies and music products. In 2000, Kopelman sold Half.com to EBay for US $350 million.

The man is way beyond rich, but is also recognized as someone with heart, as a philanthropist. Well, the City needs his help far more than he needs ours. I have to think that an appeal could have been made to him on that basis and that it might have worked. Although it may be that running around in the circles he's part of, he'd be treated as a traitor to his class if he even considered it. After all, every day in every way he's hearing from people who say that they built it. How dare anyone ask them to support the leeches in the public sector who never did anything for them at all.

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