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The Public Good: Reports from the Front Lines (September 27, 2017)

| Written by David Morris | No Comments | Updated on Sep 27, 2017 The content that follows was originally published on the Institute for Local Self-Reliance website at

A selection of recent news stories with an ILSR insight into “The Public Good.”

A Thoroughly Modern Way to Fleece the Customer | Upending the American Definition of Property | Punishing Corporate Criminals | The Hell With the 6th Amendment | Corporate Parasites

A Thoroughly Modern Way to Fleece the Customer

In the beginning there were no fixed prices.  Every transaction involved a negotiation between buyer and seller. Then, in 1861, as Guardian reporter Tim Adams informs us, Philadelphia retailer John Wanamaker introduced price tags along with the slogan, “If everyone was equal before God, then everyone would be equal before price.” Wanamaker’s stated intent was to establish “new, fair and most agreeable relations between the buyer and the seller.”

For the next 150 years fixed pricing became the norm.  Companies determined prices either by pegging them to those of their competitors or by calculating the cost of a good or service and adding a profit, with an occasional white sale or going-out-of-business sale, or discounted day-old bread.

In the 1990s came the Internet and in the 2000s on-line shopping and smart phones.  Prices could be changed remotely and frequently.  Initially businesses changed their prices largely to take advantage of a shortage of supply (e.g. Uber with its surge pricing) or an increased demand (airlines, in essence, auctioning off tickets to last minute customers).

Big data emerged and with it the ability for businesses to know their customers in a most intimate and detailed fashion.  Initially sophisticated algorithms allowed businesses to individualize ads.  Now as they’ve gathered even more of our personal data they’ve begun to individualize prices. As Adams notes, the travel site Orbitz calculated that Apple Mac users would pay 20-30 percent more for hotel rooms than users of other brands of computer and adjusted its pricing accordingly. Jerry Useem in the Atlantic maintains the price of Google’s headphones may depend on how budget-conscious our web buying history reveals.

Electronic price tags may soon allow dynamic pricing in brick and mortar stores.  Such tags are already in stores in France and Germany and parts of Scandinavia.

The Guardian reports that B&Q, the largest home improvement and garden center retailer in the UK and Ireland, has tested electronic price tags that could change the price of an item, based on which customer is looking at it, something it can derive from the Wi-Fi connection to the customer’s mobile phone. Not yet in stores, but that may be just a matter of time.

Dynamic pricing strives to maximize the seller’s profit by raising the average price he receives. Economists believe that is simply good business tactics. The rest of us remain unconvinced.

We don’t like being taken advantage of. More than half the states have anti-scalping laws, a response to brokers buying up thousands of concert tickets, shrinking supply, and allowing them to charge concert goers far more than the face value of the ticket.  Last year Congress got into the act, passing a law that makes it illegal for brokers to use software that bypasses online systems designed to limit the number of tickets an individual can purchase.  But these laws target only a small slice of the retail sector and aren’t vigorously enforced.

We’ve also taken action to stop sellers from taking advantage of a scarcity imposed by natural disasters to charge exorbitant prices to desperate customers. Over 30 states have enacted laws against such price gouging.

But as Ramsi Woodcock, Professor of Legal Studies at Georgia State University observes, those outraged by Delta’s reportedly asking $3,200 for a ticket out of Florida as Hurricane Irma approached should be aware that dynamic pricing enabled Delta to charge the same price to last minute customers two weeks before.

We’ve imposed no limits on dynamic pricing, although we’re nibbling around the edges of imposing some constraints on the sale of our personal data. Woodcock believes dynamic pricing could have anti trust implications. Anti-trust is justified by many as a way to stop or break up monopolies that could artificially raise prices and reduce total consumer welfare.  In a detailed article, Woodcock argues that big data enables “price discrimination (that) extracts more value from consumers than uniform pricing, by tailoring price to the maximum level tolerated by each consumer.” And thus warrants anti-trust enforcement.

Photo Credit: Wikimedia Commons.


Upending the American Definition of Property

Land speculation has been one of the most popular American pastimes since before we parted ways with Great Britain. Its impact is especially pernicious in urban areas where finite land, combined with the ability for cities to enact policies (e.g. zoning) or make investments (e.g. parks, highways) that raise the value of land and the incentive for cities to do so because much of their revenue comes from property taxes, makes for a fertile breeding ground for speculation and corruption.

When a neighborhood or a city, for whatever reason, becomes more attractive the price of land, and thus the price of housing rises, sometimes so dramatically, that it displaces existing residents, some of whom have been there for decades.  Most recently, the flight from cities that characterized a post World War II generation, has reversed and a growing number of cities are witnessing a mass in migration, often of people with greater means, roiling local real estate markets and threatening neighborhood instability.

Cities have used various strategies to sustain existing neighborhoods and nurture affordable housing.  Regrettably, states have taken away their most powerful weapon—rent control—leaving only strategies that bribe developers in one form or another to do the right thing. This has proven, on the whole, a costly, largely ineffective and unsustainable approach.

In the 1960s some far reaching thinkers and activists devised a new legal strategy to address the problem, a strategy that upended traditional American concepts of property ownership. The Community Land Trust (CLT) creates a social real estate market that combines a social market in land with a largely private market in housing.

Community land trusts are nonprofit organizations, with a board usually composed of representatives of the public, the local government, and tenants. The trust owns the land and leases it to the homeowner for a designated period, often 99 years.  The homeowner receives a fixed rate of appreciation.  By taking the land out of the market, the CLT lowers the price of housing.  Limiting the proportion of any increased value of the housing that goes to the homeowner, also keeps the housing affordable.

In his 1996 PhD dissertation, Reinventing Real Estate:  The Community Land Trust as a Social Invention in Affordable Housing,  James Meehan examined the birth and evolution of this new real estate vehicle.

Decentralists and commoners Robert Swann and Ralph Borsodi, founders of the International Independence Institute, later renamed the Institute for Community Economics (ICE), developed the concept. It was applied first in rural Georgia to preserve land for African-American farmers.

In 1972 Swann published Community Land Trust: A Guide to a New Model of Land Tenure in America to promote the concept. For the next two decades ICE became its principal advocate and cities became its breeding grounds.

Burlington, Vermont established the first urban CLT.  The city offered fertile territory for introducing the model.  It had the need in the form of a rapidly inflating housing market.  And it had the opportunity in the person of its mayor, Bernie Sanders.

As Jake Blumgart reports in Slate, “When the idea was first presented to his administration and its allies in 1983, Sanders voiced serious reservations. the mayor feared the restrictions on reselling properties would create a form of second-class home ownership. If middle- and upper-class people could build wealth off their houses, why should the working class be limited to shared equity? Sanders’ preferred methods of ensuring housing affordability were rent control—which Burlington voters shot down in a referendum in 1982—and providing direct subsidies to low-income residents who wanted to buy homes.”

Bernie came around and embraced the concept decisively. In 1984 his administration enabled the land trust with a $200,000 seed grant and municipal staff support. The city later made a significant loan from its pension fund to the land trust and raised additional funds from local businesses and federal resources. To provide on-going significant funding, in 1988 the city established The Burlington Housing Trust Fund bankrolled by a small increase in property taxes.

The land trust concept was not universally embraced. “An opposition group upholding property rights organized and picketed the Board of Alderman,” Meehan writes.  “One realtor said, ‘If you believe that one of the most precious rights we, as individuals, have in our country, is the right to own land, a right protected by our Constitution, then you should take a long, hard look at this land trust.’”

Advocates prevailed.

Today, according to Blumgart, the CHT holds about 565 homes in a land trust plus 2,100 rental and cooperative units. Half are within the city of Burlington where they constitute a little less than 8 percent of the city’s housing stock.

In 2006 the Burlington Community Land trust merged with the Lake Champlain Housing Development Corporation to form the Champlain Housing Trust (CHT), which serves three Vermont counties.  In the last two years, CHT has increased its portfolio by purchasing several hotels and apartment buildings and converted them into housing and lodging for the homeless.  Its operating budget is over $10 million.

In 1984, a neighborhood in Boston took the concept and applied it on the community level.  The Dudley Street neighborhood was characterized by burned out and abandoned houses. As Peter Medoff and Holly Sklar note in their path breaking book, Streets of Hope:  The Fall and Rise of an Urban Neighborhood, the Boston Redevelopment Authority maintained that in 1980, “the per capita income of the Dudley Square residents was one of the lowest in the nation, on a par with the poorest counties in Mississippi, or Indian Reservations of the West.”

Led by neighborhood residents, with the support of foundations, the Dudley Street Neighborhood Initiative (DSNI) held a series of meetings in which hundreds of residents hammered out a plan that included job and business development, affordable housing, human service provision, improvements in education, playgrounds and public space, and youth development.  The city adopted DSNI’s plan but its implementation required one more innovation.

The “Dudley Triangle”, a 60-acre area, consisted of city-owned land interlaced with tax-delinquent properties, and vacant private lands. The neighborhood asked the city to grant it the authority to take the parcels, an eminent domain authority that heretofore had only been exercised by governments. In 1988, the Boston Redevelopment Authority granted its request.

The DSNI largely used foundation money to purchase private properties and purchased city-owned land very cheaply.

As Harry Smith, DSNI’s director of sustainable economic development told Blumbart, writing for Next City,  “we never really used the actual power of eminent domain. We used it more as a stick, so if there were absentee owners who weren’t coming to the table and weren’t engaging we could send them a letter and say we are going to exercise the power of eminent domain. That would get their attention.”

According to Dudley Neighbors Inc. the 30 acre Land Trust that today boasts 225 units of affordable housing, a playground, a mini-orchard and community garden, a greenhouse, commercial space and office space.

In 1987 ICE convened the First National Conference.  Meehan reports the gathering included 24 established and developing CLTs.  A year later the number of CLT’s attending doubled.  Blumgart reports that by 1990 the number had reached 120. After a period of stagnation in the 1990s, the number of CLTs increased rapidly, reaching more than 280 today.

Today the member organizations of the National Community Land Trust Network (which in 2017 merged with Cornerstone Partners to become the Grounded Solutions Network) have around 25,000 affordable rental units and 13,000 to 15,000 affordable owner-occupied homes.

The housing collapse in 2008 tested the viability and utility of CLTs.  They passed the test with flying colors.  A 2010 report by the Lincoln Institute of Land Policy, Outperforming the Market used a 2010 survey of CLTs conducted by the National Community Land Trust Network to conclude that those who took out conventional mortgages were over 8 times more likely to be in the process of foreclosure as of the end of 2009 than those with CLT mortgages.  That disparity soared to more than 25 times if the homeowner had a subprime mortgage.  Similar disparities occurred in the comparative rate at which homeowners were delinquent in their payments.

These low rates of foreclosure and delinquencies were a result of the CLT’s stewardship.  In the pre-purchase stage, the non-profit organization protected homeowners from predatory mortgage lenders.  Post purchase it intervened where needed to make mortgage payments current or preclude foreclosure completion by using a variety of strategies: financial counseling, direct grants or loans, arranging the sale and purchase of less expensive unit, and working with homeowners and lenders on permanent loan modifications.

Low-income households enjoy significant economic benefits from home ownership only if they remain homeowners for a number of years.  The Urban Institute, found that 90 percent of low-income households remained homeowners five years after buying a shared equity, CLT home, far exceeding the 50 percent home ownership retention rate the Lincoln Institute reported was the average among conventional market, low-income homeowners in 2010.

For policy makers and city officials the Lincoln Institute’s report had an important message, “ CLT home ownership appears more sustainable than private market options for low-income homeowners”

The use of CLT’s as a strategy for preserving neighborhoods and affordable housing units is still a work in progress. Banks remain wary of financing these units. Blumgart reports that the North Camden (New Jersey) Community Land Trust collapsed in 2007 because local banks would not allow it to refinance its loans after the Great Recession.

Most cities still tax CLT property as if it were conventional property although the National Community Trust Network identifies some states have adopted legislation requiring that CLT property be assessed at a lower value than unrestricted property because of its unusual ownership structure. (e.g Florida, North Carolina, Vermont).

While interest in CLTs continues to grow, community groups are increasingly fighting the clock.  When the Dudley Street Initiative was born, land in that part of Boston could be had for a song.  Now its price is escalating rapidly. In 2015, the nascent Chinatown Community Land Trust was thwarted in its first attempt at acquisition when it came short in a bidding war with a developer.  Undaunted, this past March, an alliance of a dozen local neighborhood groups formed the Metro Boston Community Land Trust.

While the increase in property values in parts of Detroit and Buffalo and other cities challenges the growth of CLTs, it also instills a sense of urgency.  Many neighborhoods have to experience gentrification, but they know it may be coming.

Regrettably, cities have yet to invested significantly in CLTs despite the considerable evidence of their value not only to their members and low-income neighborhoods but also to the city as a whole.   Reducing foreclosures benefits neighbors and the city alike. Foreclosed properties significantly diminish nearby housing values. Depreciation leaves remaining homeowners vulnerable to foreclosure and the neighborhood to increased crime.

Foreclosures also impose costs on municipalities.  The costs of administrative fees attendant to foreclosure, demolition of vacant properties, declining property taxes can run into the tens of thousands of dollars per house.

Given the increasingly urgent nature of the problem, and the increased capacity of CLTs to expand, activists are asking cities to raise the bar.  In Baltimore, for example, which leads the nation in evictions while holding 30,000 vacant homes, a coalition has proposed a $40 million investment in CLTs. Mayor Catherine Pugh has endorsed the proposal.

Vermont remains the pacesetter. In June the state’s legislature enabled the issuance of up to $35 million in revenue bonds, the largest housing investment in Vermont’s history. The resources are dedicated to housing that is permanently affordable.

Vermont’s population is just about the same size as Baltimore’s.


Punishing Corporate Criminals

Corporations, like people, commit crimes but unlike people they do not face jail time if caught.  The chances their executives will face prison time for their corporation’s malfeasance is vanishingly small.

The penalty for corporate crime is almost always financial.  So far the evidence is that financial penalties have not effectively deterred corporate misconduct is manifest.

As I’ve written before, a New York Times analysis of enforcement actions during 1995-2010 found at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach.  Forbes reports that Pfizer paid $152 million in 2008; $49 million a few months later; a record-setting $2.3 billion in 2009 and $14.5 million in 2010. Each time it legally promised to adhere to federal law in the future.  Each time it broke that promise.

A recent comprehensive study concludes, “(t)he evidence fails to show a consistent deterrent effect of punitive sanctions…”

The sad truth is that corporate crime pays.  In 2006, Morgan Stanley entered into a complex swap agreement with the New York electricity provider KeySpan that enabled the two companies to push up the price of electricity.  The Times reported the total cost to New Yorkers of this collusion came to $300 million.  Morgan Stanley was paid $21.6 million for handling the swap agreement.  The financial penalty imposed on Morgan Stanley came to $4.8 million.

Could a financial penalty ever effectively deter corporate crime?  In theory, yes, but only if there were a high degree of certainty the crime would be detected and the penalty would truly severe.

But the federal government has too few resources, and even in the best of times, insufficient motivation, to successful prosecute corporate criminals. Thus the financial settlements. Adding insult to injury, enforcement authorities often fail to even collect fines they’ve imposed. As Benjamin van Rooij and Adam Fine, of the University of California Irvine have noted, collection rates have been well below 50 percent across different enforcement agencies, with the Department of Justice collecting only 4 percent of the penalties imposed.

Not surprisingly, the Trump Administration is proving far more lenient to corporate offenders. In its first six months, the Wall Street Journal reports, “[p]enalties levied against firms and individuals by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Financial Industry Regulatory Authority…were down nearly two-thirds compared with the first half of 2016.”

One might inquire, isn’t a multi-billion dollar fine a deterrent?  Not for global corporations, for whom it is simply an unwelcome inconvenience, a cost of doing business, like bribing officials in other countries.  Purdue Economics Professors John M. Connor and C. Gustav Helmers examined the market impact of over 280 private international cartels from 1990 to 2005 and the fines imposed on them by various governments. They estimated these criminal conspiracies in restraint of trade raised prices by $260-$550 billion.  The median overcharge was about 25 percent of affected commerce.

A fine of about 25 percent of revenue would repay the financial damage done.  But that’s assuming wrongdoing is caught every time.  The Economist suggests that catching one in three violations would constitute a good track record for regulators. That would translate into a fine of 75 percent of revenue simply to compensate for the total global damage and it would be even higher if punitive damages were imposed. The study found actual fines ranged between 1.4 percent and 4.9 percent.

In the waning days of the Obama Administration, the federal government took steps to impose a much higher penalty on serial corporate offenders, threatening them with the potential loss of billions of dollars in government contracts.

In doing so they relied on a 2013 report by Democrats on the Senate Health, Education, Labor and Pensions Committee that found “58 of the 200 largest penalties for violations of the health and safety standards, or the largest back pay awards, were assessed against large government contractors …”

“Forty-nine (of these) federal contractors amassed a startling 1,776 separate enforcement actions in six years,” the report continued. “These 49 companies, which received $81 billion in federal contracts in fiscal year 2012 alone, were assessed a total of $196 million in penalties for neglecting to pay workers earned wages or failing to uphold safe working conditions.”

In 2014, Obama issued an Executive Order requiring government contractors to report violations covering 14 workplace protections, although in typically liberal haste-adverse fashion the Order was only implemented on October 1, 2016.  Four months later Trump countermanded the Order.

If the federal government will not step in to hold corporations responsible, states and localities must do so.  The hundreds of billions of dollars states and localities spend collectively on contracts could prove a potent weapon to combat corporate criminality.

If states and localities do step up to the plate they will be immeasurably benefited by the years of painstaking data gathering done by the Corporate Research Project, an affiliate of Good Jobs First. Several years ago the Project launched the Violation Tracker, the first easily searchable database on corporate misconduct.  This includes violations of consumer protection, environmental, wage and labor, health and safety laws.  It covers price fixing and bribery and cases brought by 43 federal regulatory agencies and the Justice Department.  This September Project staff nearly doubled the size of the database to 300,000 entries detailing more than $394 billion in fines and settlements going back to 2000.

Photo Credit: Good Jobs First.


The Hell With the 6th Amendment

In 1963, the U.S. Supreme Court ruled that a right to an attorney is Constitutionally mandated by the 6th Amendment. Writing for a unanimous court, Justice Hugo Black declared, any person “who is too poor to hire a lawyer cannot be assured a fair trial unless counsel is provided for him.” “Lawyers in criminal courts are necessities, not luxuries,” he announced. The Court ordered every state to provide lawyer for accused felons.  Over the following years the right was extended to anybody facing the possibility of detention.

Anyone familiar with cop shows knows one outcome of the 1963 decision.   Miranda warning that advises those apprehended, “You have the right to an attorney. If you cannot afford an attorney, one will be appointed for you.”

States have rarely, if ever, willingly financially supported the rights of poor people of color to an adequate defense. In the decades following the Court decision, after the country began arresting and incarcerating people at a rate unprecedented in any nation with an independent judiciary, public defender budgets stagnated even while the number of cases they had to handle soared.

As John Oliver explained in a recent typically hard hitting commentary, 60 to 90 percent of criminal defendants need publicly funded attorneys, depending on the jurisdiction.  The system is collapsing under its growing caseload. Today in Fresno, California each public defender annually must represent a staggering 1000 clients.  State guidelines recommend a maximum caseload of 150.

The lack of public defenders results in some detainees end up staying in jail waiting for attorneys for longer than the potential sentences for the crimes of which they were accused.

The backload of cases sometimes only allows public defenders minutes on each case.  One result is that 90-95 percent of criminal defendants “cop a plea”, pleading guilty in return for a reduced sentence even they are innocent.

In Louisiana, the Guardian reports, the backlog has become so bad that in the 16th judicial district, up to 50 poor defendants are convicted and sentenced all at once, for major felonies while the single public defender representing all of them struggles to present any of the fact sand arguments in their separate cases.

In an attempt to make ends meet, the beleaguered public defender office in New Orleans resorted to a crowd funding appeal.  Thanks to its appeal being publicized by John Oliver, it met its $50,000 goal.

A 2013 report by the National Juvenile Defenders Council cited by the lawsuit found that 60 percent of state’s young defendants come before its courts without legal counsel. Since 2014 Missouri’s public defender program has lost 30 staff members to funding cuts yet their case load has increased by 12 percent to more than 82,000 cases a year.

A frustrated and angry Michael Barrett, director o f the Missouri Public Defender Office tells the Intercept,  “poor persons in this state, including poor children, are being pushed through the criminal justice system, fined excessively, and deprived of their liberty.”

Public defenders in Missouri are funded entirely by the state.  After Barrett delivered a well-documented report on the dismal, unconstitutional situation the state legislature appropriated an additional $3.47 million.  In the Atlantic, Dylan Walsh describes what came next,

“Persuaded by the case, Missouri’s General Assembly approved a $3.47 million funding increase for Barrett’s office. But Governor Jay Nixon vetoed the legislation when it arrived on his desk. When the legislature overrode his veto, Nixon used executive authority to simply withhold the money. The next fiscal year, he reduced the budget of the public defender’s office by—exactly—$3.47 million. Then he signed off on $4 million in State Fairground improvements, $52 million for a new state park, and $998 million for a new football stadium.”

In Missouri the public defender office can draft attorneys if needed. In 2016 Barrett exercised that authority to compel Nixon to represent a 50-year old indigent white man.  “Given the extraordinary circumstances that compel me to entertain any and all avenues for relief, “ he explained to the citizens of Missouri,” it strikes me that I should begin with the one attorney in the state who not only created this problem, but is in a unique position to address it.”  Within days a state court ruled he lacked the authority to draft a sitting Governor.

Some states have systems that willfully or not, encourage defenders not to represent their clients best interests. Utah’s public defenders are entirely funded at the county level. All but 2 counties contract with outside attorneys who are paid a fixed fee per case.  That gives them a perverse financial incentive to minimize the time they spent on each case.

Louisiana uniquely funds the majority of indigent defense costs through fines and court fees. Local revenues constitute almost 70 percent of the system’s budget, the bulk generated from traffic tickets. Anyone found guilty is assessed an additional court fee. Defendants who can’t pay the fees, which can be more than $350, can be jailed for contempt of court.   Dylan Walsh writes, “for public defenders, reliance on these court fees places them in the questionable position of drawing a salary from the guilt of those they represent; defendants who are found innocent pay no court costs.”

The catastrophic nature of the public defender system has generated numerous lawsuits.  The ACLU has sued the city of New Orleans and the state of Louisiana for “indefinite denial of counsel”, along with the states of California, Michigan, Montana, Idaho, Washington and Missouri.

Some suits have borne fruit.  A legal challenge by the ACLU in Idaho ultimately led the state to increase aid to its counties’ public defender offices by $5.4 million.

A lawsuit against the state of New York filed in 2007 ultimately resulted in the state legislature agreeing to pay 100 percent of public defender office’s expenses through 2023, a cost estimated at $460-480 million. Governor Andrew Cuomo vetoed the bill.  The legislature revised it to halve the state payment to $250 million to the counties.  Cuomo signed the revised bill in April 2017.

Jennifer Early, Professor of Sociology at the University of Arizona proposes another source of funds that would generate a more positive feedback loop: civil forfeitures.  Police have the right to seize property they believe was involved in a crime, even if they don’t actually charge the owner of the property with a crime!  The proceeds from these seizures, which nationally run into the billions of dollars a year, largely go to local law enforcement bodies.  Not surprisingly, this has led law enforcement bodies to be more than zealous in seizing private property. Public outrage has convinced some states to shift the revenues to the general budget. Professor Early argues that these funds should be used, at least in part, to support public defenders.  This would curb the perverse incentive the police now have to expand seizures while funding attorneys who can keep their actions in check.

I hope Ms. Early’s proposal gains traction.


Corporate Parasites

In the 1980s, leveraged buyouts became financial engineering’s newest invention.  Corporate raiders would use the assets of the target corporation to collateralize the debt required to take it over.  The resulting large debt payments burdened the target business. Some went bankrupt.  But Wall Street firms made a handsome profit by extracting hundreds of millions of dollars in cash from the business in management and other fees.

Leveraged buyouts have been rebranded as private equity investments.  The name has changed.  The cannibalization of corporations is the same —

Pam and Russ Martens report that since January 2015, 43 large retail or supermarket companies have filed for bankruptcy.  Private equity firms owned eighteen or 40 percent of them. Meanwhile, according to Nabila Ahmed and Sridhar Natarajan in Bloomberg Markets, since 2013 private equity firms have extracted more than $90 billion in debt-funded payouts. Since 2012, these firms have generated 14 percent annualized returns after fees, double the 7.4 percent returns on high yield bonds in about the same period.

In late September the 69-year old retailer, Toys R Us filed for Chapter 11 bankruptcy, the second largest US retail bankruptcy ever.  Wolf Richter notes that at the end of fiscal year 2004, the last full year before its private equity buyout, Toys R US had $2.2 billion in cash, cash equivalents and short term investments, By the first quarter of 2017 that had shrunk to just $301 million.  Over the same period, long-term debt surged from $2.3 billion to $5.2 billion.

Richter observes that over the same period the annual revenues of Toys R Us remained essentially flat at just over $11 billion. Since 2013 overall toy sales have been growing by a compound annual rate of 5 percent.  Toys R Us certainly faced significant challenges from companies like Amazon and a changed retail environment. But it might well have had the flexibility to adjust to changing market conditions without the burden of hundreds of millions of dollars in debt payments that put it at a competitive disadvantage to less highly leveraged competitors. (Instructively, smaller, independent toy stores never attracted corporate raiders, continue to cater to their customers, not Wall Street, are not burdened by massive debts and are doing fine.)

In October 2012 Payless experienced a leveraged buyout that increased its debt from about $125 million to about $400 million.  Within two years the Martens write sponsors siphoned over $400 million out of the company.  In 2017, Payless declared bankruptcy.

Early in 2017, 102 year-old discount retailer Gordmans Stores filed for bankruptcy less than 4 years after Sun Capital borrowed money to pay itself a special dividend.

In 2008, four years after, private equity firms bought Mervyn’s from Target Corporation the chain was forced to shut its 175 locations and shed 18,000 jobs. Its workers and suppliers and dozens of small to towns on the West Coast suffered grievously. The private equity firms did not.  They paid themselves $200 million in special dividends from borrowed money. Mervin Morris, 96, who founded the chain in 1949 sadly recalled, the stores “couldn’t sustain the additional debt they put on.”  “They were after the dollars and evidently came out well,” he observed and added, “They broke my heart.”

Eileen Applebaum and Rosemary Batt, authors of the landmark book Private Equity at Work: When Wall Street Manages Main Street describe the way one private equity firm cannibalized the ice cream chain Friendly’s.  As Bob Kuttner summarizes in a 2014 review of their book, “First it loaded the company with debt, then paid itself special dividends, then laid off workers, and ultimately took Friendly’s into bankruptcy. But then ‘a second Sun Capital affiliate announced its intention to acquire the restaurant chain. A third Sun Capital unit came forward to provide a loan to finance the chain’s operations while it was in bankruptcy.’ Such maneuvers enabled Sun to strip assets from the operating company and shed debts including pension obligations—yet retain control.”

Even a leveraged buyout many would consider successful in that a failing firm survived, when the cost-benefit analysis goes deeper, may be viewed with considerable skepticism.

Wilbur Ross, who after a stint as a bankruptcy specialist at Rothschild Inc. set up his own private equity firm, WL Ross & Co acquired several bankrupt steel companies in 2002 and 2003, paying $90 million in cash and assuming $235 million in debt. One condition of the purchases was that health coverage for retirees would be eliminated and pension liabilities shifted to the federal Pension Benefit Guaranty Corporation where workers would receive substantially lower benefits.   When Ross cashed out in 2005, Appelbaum and Batt note, “his three year investment netted him $4.5 billion—just equal to what retirees lost in their health and pension plans.”

Wilbur Ross is now Secretary of Commerce.

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