Remember The Good Old Days Of LBOs?


Remember the good old days of leveraged buyouts (LBOs)?  

You know, buy control of a company by using a pile of debt, firing a lot of employees, and selling some hard assets.  Then, use the cash flow to pay capital providers of the transaction through principal payments, interest, and special dividends.  In the medium- and long-term, this behavior tends to destroy (read: bankrupt) companies due to reasons such as not adequately investing in maintenance and human capital and necessary SG&A.

Now, apply the old LBO model to a sovereign nation and what do you get?  [Well, besides the decline and fall of the Roman Empire.] You get a lot of debt, misallocation of taxpayer dollars to things like subsidies (corn, sugar, etc.), excessive global military presence, and lack of infrastructure maintenance.  

That said, an article titled “Life in the Slow Lane” by The Economist (April 30, 2011) indicates a red flag of not maintaining one’s infrastructure.  I suppose this is another data point that complements our blog from March 2011 titled “Remember the Off-Balance Sheet Shenanigans of Enron?”

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    MR. ISAACSON: Does that mean more stimulus?
    DR. SUMMERS: Well, you can call it that. That’s one part of it. It is crazy if you think about it, that we have schools across this country where we tell our kids that education is the most important thing in the world, but we ask them to study in classrooms where the paint is chipping off the walls.
    We can borrow money to invest in fixing that, at 2.8 percent. Twenty percent of the people in the country who are doing construction are unemployed, and we’re not trying to do something about that, when we have a major demand problem? It just doesn’t make any sense.
    We have infrastructure in this country — I mean you can argue whether we need a new high speed rail system or whether we don’t need a new high speed rail system. But I don’t know what the argument is for letting bridges collapse. I don’t know what the argument is.

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