Re:New law lets you defer capital gains taxes by investing i...
by AnthonyMouse on Friday October 19, 2018 @11:06AM
(#18257178)
> The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs.
Except that their strategy had nothing to do with tax write offs.
In theory what they were doing is borrowing money to buy an ailing company and turn it around, and as long as they succeeded they could have serviced the debt.
What they actually did was fail to turn the company around while charging it hundreds of millions in consulting fees, until it finally collapsed.
The way things were set up, if they succeeded in turning the company around, they would get the profit in excess of the interest. If they failed, they still get all their consulting fees and the lenders are stuck trying to recover their loan principal in bankruptcy.
That situation creates terrible incentives. Either they can be lazy and just collect consulting fees for doing nothing, or they can take big risks with house money and cash in if it pays off or walk away if it doesn't. The people who lent them the money were nuts. They would have been better off buying the company for themselves.
Except that their strategy had nothing to do with tax write offs.
In theory what they were doing is borrowing money to buy an ailing company and turn it around, and as long as they succeeded they could have serviced the debt.
What they actually did was fail to turn the company around while charging it hundreds of millions in consulting fees, until it finally collapsed.
The way things were set up, if they succeeded in turning the company around, they would get the profit in excess of the interest. If they failed, they still get all their consulting fees and the lenders are stuck trying to recover their loan principal in bankruptcy.
That situation creates terrible incentives. Either they can be lazy and just collect consulting fees for doing nothing, or they can take big risks with house money and cash in if it pays off or walk away if it doesn't. The people who lent them the money were nuts. They would have been better off buying the company for themselves.