Why Bain Killed Good Companies and Good Jobs - I Break It Down

[theKed]

38. Every time

a bank loans money, it is, really, creating money. If you want to borrow $10 000, they're not going into the vault, counting out ten grand in $100 bills and checking that out of their vault. You sign the piece of paper, give them a down payment, and presto! $10 000 of debt that didn't exist before now exists. They have to have a small amount of actual currency in the vault, legally, to cover default losses, but that number has gradually diminished to a laughably low percentage over the years (I can't recall the actual amount off the top of my head, something less than 5%).

So you borrow your ten grand, suddenly the bank has a lot more worth. Even if you default on the loan, they still get whatever you paid off before then. If you paid off $5000 of your loan before you, say, lost your job and defaulted on that loan, the bank is still $5000 up from where they started.

In normal circumstances, this is an okay arrangement for the banks. They keep track of credit ratings to make sure they aren't letting too many people that are all but guaranteed to default through the credit gate, keeping that bar low enough to let in as many people as they can without the bank losing money. When you start getting thousands of people defaulting on mortgages, of course, the banks are suddenly in a tight spot because there's hundreds of millions outstanding and, because the required reserve ratio is so low, they don't have the capital to lend more money. Things like the housing bubble collapse happen, sparking waves of banks with no money to lend. But that's a side-topic to where I was going.

Someone like Bain goes in, racks up a few million in debts, plays ball for a while, they bails leaving the battered husk of a company holding the bag. The banks create a few million dollars out of thin air, give it to the company, collect whatever percent the company pays off while still in business. The company collapses after Bain guts it and the banks get first crack at recouping their losses. They take pension funds, they sell off land and chattels, sell everything that isn't nailed down, and call it a day - still up from their starting point financially. And probably with a few million in liquid currency to serve as the seed money for more loans. At a 5% RRR $1 million in currency lets them create $20 million in debt, debt they can pass on to home buyers with decent credit, people buying cars, people that want credit cards - people that, by and large, have little risk of default and with plenty of collateral should they default as well. Companies like Bain rack up billions in debt, and create hundreds of billions the banks can push onto the populace. And they are all too happy to help you get that new 60" flat screen TV on your Visa, that new car you need because you just had another kid, that new house because you just got married and don't want to live in a shitty 1 bedroom apartment anymore. Corporations and banks have breed an incessant need for credit into contemporary consumer society.