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    Business-busting, job-killing corporate takeover scams

    American taxpayers could save billions of dollars every year by changing rules that reward private equity firms with obscene profits from companies they bankrupt with huge debt, James Surowiecki writes in the January 30 issue of The New Yorker.

    Surowiecki cites the example of Wasserstein & Company, which bought “the thriving mail-order fruit retailer Harry and David.” Under Wasserstein’s ownership, the Harry and David firm took out large loans, with which to pay a hundred million dollars to Wasserstein and its investors, plus millions more in management fees. The debt drove the fruit-retailing firm into bankruptcy, thereby defaulting on its debt and pension obligations. “In other words,” Wasserstein not only wiped out a prosperous business but also “failed to meet its obligations to creditors, screwed its workers, and still made a profit,” Surowiecki writes. “That’s not exactly how capitalism is supposed to work.”

    The rules richly reward private equity firms for such psychopathic anti-social behaviour. Profits reaped by business-busting private equity firms and their investors are taxed as capital gains, at rates much lower than income earned by honest work. The interest on the debt that’s not repaid is apparently and inexplicably deductible from otherwise taxable income. And taxpayers are left to pay the pension obligations that were dumped.

    “Private-equity firms are excellent at gaming the rules,” Surowiecki concludes. “Time to change them.”

    We need a northern James Surowiecki to probe the private-equity business here in Canada. Are the rules here just as notorious as in the United States? Have any Canadian businesses been ruined in the manner of the Harry and David firm, by either Canadian or American equity firms? Are Canadian businesses, and their employees, at risk of such legal scams?

    It would be nice to know.


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