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How did Mitt Romney get so obscenely rich?

How did Mitt Romney get so obscenely rich?

(2:51) The magic of private equity in eight easy steps. American political economist Robert Reich explains how Mitt Romney made so much money, ($21 million in 2010 alone) and paid such a low rate of tax (13.9 percent) with his private equity company, Bain Capital.

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Guest: (2073 days ago)
NZT-48....
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NZT-48....
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Guest: Setting the record straight (2072 days ago)
Latest comment: Why let some facts get in the way of good sensationalist propaganda. This video is probably one of the most misrepresentative videos I have seen for a while. Step 1 - Incorrect. It is almost universally the case that Private Equity partners do risk their own money. Most investors obligate the PE partners to invest typically at least 2% of the total fund amount. This can be a very material amount of money Step 2 - Correct, but the use of the word "squeeze" is deliberately provocative. Private Equity firms work in many different ways often investing in research and development, new plant and machinery for manufacturing firms or even funding expansion overseas. Very rarely do they just look to "squeeze" extra profit out of a company showing flat growth. Step 3 - A total cliche. Does anyone really believe that a PE firm cut staff unless there was clear inefficiency or costs were demonstrably too high? Why destroy value in a business you have just invested in? In the UK at least it is almost impossible to cut benefits due to TUPE regulations, so again, a cheap shot. Step 4 - Absolute nonsense. Interest payments are a cost to the business and therefore reduce profits. What he actually means is that the interest cost reduces tax paid. But only in the same way that if you increased the cost base of the business it would reduce tax paid. This wouldn't even result in a reduction of tax to the government as the income generated by the lending bank would be taxable. I say again, absolute nonsense Step 5 - A total non point. Any company if it has free cash may choose to make a dividend to shareholders. If this happens to cover and payback the initial investment then it simply reflects a business that is performing well (probably due to the investment provided by the PE firm in the first place). You can't pay a "special dividend" unless the cash is available. Step 6 - Yes. And the point is? If the company has become more valuable you can sell it for a higher value. A truism Step 7 - They actually "pocket" 20% of the profit on the sale (i.e. if buy for £10m and sell for £12m they make 20% of the £2m). This is the investors reward to the PE partners for generating a good return (and buy the way, on average, a considerably higher return that can be achieved in almost any other type investment). If no profit is made, or even if a hurdle isn't reached (i.e. an 8% pa return for investors) then the PE partners get nothing. They only get paid for performance Step 8 - This is about the only part of this video that has some merit. Although not true about having not risked their own capital the 20% "carried interest" is not necessarily directly linked to the investment made and so there could be an argument to say that it should not be taxed at the capital gains rate. It is incredibly frustrating how private equity is represented in the media as some evil force that is out to rape and pillage the average worker. Sure there are some bad eggs, but that is true of any industry. The vast majority of private equity is providing crucial investment to help small and medium sized businesses to grow and create jobs. My firm alone has created over a 1,000 jobs in the Uk over the last 5-6 years. In the UK more than a quarter of all businesses are funded by Private Equity of some kind, so to perpetuate ridiculous and damaging myths such as this is frankly reprehensible and not in the best interest of anyone, and certainly not the workforce that this video is trying to dupe.
ReplyVote up (119)down (98)
Original comment
Latest comment: Why let some facts get in the way of good sensationalist propaganda. This video is probably one of the most misrepresentative videos I have seen for a while. Step 1 - Incorrect. It is almost universally the case that Private Equity partners do risk their own money. Most investors obligate the PE partners to invest typically at least 2% of the total fund amount. This can be a very material amount of money Step 2 - Correct, but the use of the word "squeeze" is deliberately provocative. Private Equity firms work in many different ways often investing in research and development, new plant and machinery for manufacturing firms or even funding expansion overseas. Very rarely do they just look to "squeeze" extra profit out of a company showing flat growth. Step 3 - A total cliche. Does anyone really believe that a PE firm cut staff unless there was clear inefficiency or costs were demonstrably too high? Why destroy value in a business you have just invested in? In the UK at least it is almost impossible to cut benefits due to TUPE regulations, so again, a cheap shot. Step 4 - Absolute nonsense. Interest payments are a cost to the business and therefore reduce profits. What he actually means is that the interest cost reduces tax paid. But only in the same way that if you increased the cost base of the business it would reduce tax paid. This wouldn't even result in a reduction of tax to the government as the income generated by the lending bank would be taxable. I say again, absolute nonsense Step 5 - A total non point. Any company if it has free cash may choose to make a dividend to shareholders. If this happens to cover and payback the initial investment then it simply reflects a business that is performing well (probably due to the investment provided by the PE firm in the first place). You can't pay a "special dividend" unless the cash is available. Step 6 - Yes. And the point is? If the company has become more valuable you can sell it for a higher value. A truism Step 7 - They actually "pocket" 20% of the profit on the sale (i.e. if buy for £10m and sell for £12m they make 20% of the £2m). This is the investors reward to the PE partners for generating a good return (and buy the way, on average, a considerably higher return that can be achieved in almost any other type investment). If no profit is made, or even if a hurdle isn't reached (i.e. an 8% pa return for investors) then the PE partners get nothing. They only get paid for performance Step 8 - This is about the only part of this video that has some merit. Although not true about having not risked their own capital the 20% "carried interest" is not necessarily directly linked to the investment made and so there could be an argument to say that it should not be taxed at the capital gains rate. It is incredibly frustrating how private equity is represented in the media as some evil force that is out to rape and pillage the average worker. Sure there are some bad eggs, but that is true of any industry. The vast majority of private equity is providing crucial investment to help small and medium sized businesses to grow and create jobs. My firm alone has created over a 1,000 jobs in the Uk over the last 5-6 years. In the UK more than a quarter of all businesses are funded by Private Equity of some kind, so to perpetuate ridiculous and damaging myths such as this is frankly reprehensible and not in the best interest of anyone, and certainly not the workforce that this video is trying to dupe.
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cengland0 cengland0 (2073 days ago)
It amazes me how many people don't understand interest and tax deductions. Let's say, for example, you pay $1000 in interest. You do get to deduct that from your income when filing taxes (if it's interest from certain categories). That DOES NOT mean you get your $1000 back in a tax return. So, when this guy says that causes them to make even more profit, he is absolutely wrong. Some idiots actually prefer to pay interest on their homes so they can take that as a tax deduction. Sure you can do that but you still are paying more in interest than you get back in your taxes -- duh!
ReplyVote up (117)down (96)
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It amazes me how many people don't understand interest and tax deductions. Let's say, for example, you pay $1000 in interest. You do get to deduct that from your income when filing taxes (if it's interest from certain categories). That DOES NOT mean you get your $1000 back in a tax return. So, when this guy says that causes them to make even more profit, he is absolutely wrong. Some idiots actually prefer to pay interest on their homes so they can take that as a tax deduction. Sure you can do that but you still are paying more in interest than you get back in your taxes -- duh!
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Guest: (2073 days ago)
So how does someone make 20 million per year then? Just by working really hard?
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So how does someone make 20 million per year then? Just by working really hard?
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Guest: morgues (2073 days ago)
**** Yeah! you're really clever you are.
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**** Yeah! you're really clever you are.
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