Yes, It’s Legalized Gambling

And it reflects ills far more insidious than the current GOP presidential contest.

A Wall Street Journal analysis of Mitt Romney’s days at Bain Capital (1984-1999, the “greed is good” … “Bonfire of the Vanities” … pre-dot-gone era) reminds us that investment banking (and the far-too-often vaunted stock market) is simply a legalized form of gambling:

The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.

[In addition] 22% [17 of the 77] either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested … An additional 8% ran into so much trouble that all of the money Bain invested was lost.

When I asked a friend why investors demand usurious rates of return (ROI) these days, his one-word answer was “greed.” Can it be that simple? I think it’s possible when combined with concentrated markets that allow firms to go after monopoly rents.

We should not underestimate Bain’s influence on Romney’s current fortune: according to the WSJ, his campaign has estimated that Romney earned $190-250 million during that period.

A reminder about just what it is that investment bankers [the people who help companies get financing] do, from none other than Thomas Wolfe via Sherman McCoy’s wife. [Note, this excerpt is from Should WS Execs Get Capital Gains Tax Rate?, written in 2007.]

Darling, Daddy doesn’t build roads or hospitals or anything, really. Daddy just handles the bonds for the people who raise the money.

[...]

See, just imagine that a bond is a slice of cake. Now you didn’t bake that cake, but every time you hand somebody a slice of that cake, a little bit comes off, little crumbs fall off. And you’re allowed to keep those crumbs.

[...]

He passes somebody else’s cake around and picks up the crumbs. But you have to imagine a lot of crumbs. And a great golden cake. And a lot of golden crumbs. And you have to imagine Daddy running around picking up every little golden crumb he can get his hands on. That’s what Daddy does.

My final downer for the day: remember it’s not just WS folks who are getting rich this way. It’s your not-so-average Congress critter. From Throw Them All Out:

• The average American investor underperforms the market.
• The average corporate insider, trading his own company’s stock, beats the market by 7% a year.
• The average hedge fund beats the market by between 7% and 8% a year.
• The average senator beats the market by 12% a year.

[...]

As of 2010, seven of the 10 richest counties in the United States were in the Washington, D.C. area. During the Great Recession of 2008-2009, Washington boasted the best-performing real estate market in the country. What is it that drive’s the D.C.-economy? Not private enterprise, certainly… More than half of the Fortune 1000 companies have an ex-politician or ex-bureaucrat sitting on their corporate boards.