Jonathan Macey

  • Aired:  01/31/12
  •  | Views: 31,959

Yale Law School Professor Jonathan Macey explains why Bain Capital's executives cannot be held accountable for Dade Behring's bankruptcy under their management. (6:25)

>> Jon: WELCOME BACK.

MY GUEST TONIGHT, A PROFESSOR OF CORPORATE LAW, CORPORATE FINANCE AND SECURITIES AT YALE LAW SCHOOL.

PLEASE WELCOME TO THE PROGRAM JONATHAN MACEY.

( CHEERS AND APPLAUSE ) WE MET BACKSTAGE.

NICE TO SEE YOU.

>> NICE TO SEE YOU.

>> Jon: HERE'S WHY I'M SO HAPPY YOU'RE HERE.

YOU ARE A PROFESSOR AT YALE,

WHICH WAS MY CHOSEN-- I WAS GOING TO GO BUT THEY HAVE STANDARDS AT YALE, APPARENTLY.

BUT YOU WROTE AN OP-ED FOR THE "WALL STREET JOURNAL" THAT HAD I

THOUGHT I NEED SOMEONE TO HELP ME, I GET ANGRY ABOUT THE ECONOMY AND ABOUT THE FEELING

THAT I GET THAT THE FINANCIAL SECTOR, WHILE MAKING HONEST MONEY, ONCE THEY ACCRUE MONEY

AND POWER, GENERALLY RIG THE GAME SO THAT THEY CAN CONTINUE A SORT OF INCUMBENCY OF WEALTH.

AND THAT MAKES ME-- I THINK YOU HAVE A SLIGHTLY DIFFERENT VIEWPOINT ON IT.

AND YOU CAN PERHAPS HELP ME NOT TEAR MY HAIR OUT.

>> WELL, COMPANIES LIKE BAIN OR FINANCIAL COMPANIES GENERALLY DO ONE OF TWO THINGS.

THEY INVEST THEIR OWN MONEY,

WHICH NOBODY HAS A PROBLEM WITH; OR THEY INVEST OTHER PEOPLE'S MONEY.

>> Jon: RIGHT.

>> TO GET THE OTHER PEOPLE'S MONEY COLLECTED, THEY HAVE TO MAKE RETURNS FOR THEM.

THEY HAVE TO MAKE PROFITS.

SO IT'S NOT AS THOUGH THESE NOTIONS THAT, YOU KNOW, PRIVATE EQUITY COMPANIES IN GENERAL OR

BAIN IN PARTICULAR ARE OUT THERE RIPPING PEOPLE OFF AND JUST TAKING MANAGEMENT FEES BECAUSE

WHILE MAYBE SOME OF THESE INVESTORS REPORT THE BRIGHTEST KNIVES IN THE DRAWER, THEY'RE

NOT COMPLETE IDIOTS OVER A VERY LONG PERIOD OF TIME.

>> Jon: WELL, I MEAN,

EVEN-- ( LAUGHTER ) THE GUY WHO HANDLES YALE'S

ENDOWMENT--

>> DAVID SWENSON.

>> Jon: DAVID SWENSON.

HE WROTE THAT PEOPLE, UNLESS THEY ARE VERY WELL VERSED IN,

YOU KNOW, THE DAY-TO-DAY AND SOPHISTICATION OF ALL THESE THINGS, SHOULD STAY AWAY FROM

PRIVATE EQUITY.

>> UH-HUH.

>> Jon: DO YOU THINK THAT'S A REASONABLE PIECE OF ADVICE TO GIVE?

I MEAN, IF THAT GUY WHO I WOULD THINK IS PRETTY WELL VERSED-- IF HE'S IN CONTROL OF IT-- IF HE

WROTE SOMETHING LIKE THAT,

SHOULD NORMAL PEOPLE STAY AWAY FROM PRIVATE EQUITY?

>> YES, BUT THAT'S NOT NECESSARILY BAD.

LET ME EXPLAIN WHY.

THERE ARE A LOT OF PRIVATE EQUITY FIRMS.

>> Jon: RIGHT.

>> THE REALLY GOOD ONES WHO MAKE HUGE AMOUNTS OF MONEY, PEOPLE

LIKE ME CAN'T PUT MONEY IN BECAUSE WE DON'T HAVE ENOUGH TO MAKE THEM INTERESTED IN TAKING

THE MONEY, SO THE ONLY ONES,

LIKE THE W.C. FIELDS THINGS, ARE THE ONES WHO AREN'T GOING TO DO SO WELL FOR US.

>> Jon: I THINK YOU JUST MADE MY POINT FOR ME.

>> OH, DEAR.

( LAUGHTER )

( APPLAUSE )

>> Jon: YOU COULDN'T HAVE SAID THAT BETTER IF YOU WERE A CARTOON CHARACTER.

THAT WAS ONE OF THOSE THINGS-- "OH, DEAR." FOR INSTANCE, LET'S TALK ABOUT

PRIVATE EQUITY AND BAIN CAPITAL.

SO THE CARRIED INTEREST.

>> RIGHT.

>> Jon: BASICALLY THEY TAKE A COMPANY.

THEY GET 2% FEE.

>> RIGHT.

>> Jon: AS LONG AS THEY HAVE THE COMPANY.

THEY USUALLY HAVE IT FOR FIVE YEARS.

>> RIGHT.

>> Jon: WHATEVER THAT MONEY IS, AND THE PROFIT THEY GET OFF OF THAT, 20%, COMES TO THEM, AND

THEY'RE ONLY CHARGED 15% IN TAXES.

>> RIGHT.

>> Jon: HOW IS THAT LEGAL?

>> WELL, TWO THINGS.

NOB ONE, IT'S-- YOU'RE 98.5% RIGHT.

THERE'S A VERY IMPORTANT 1.5%.

YEAH, THEY GET THIS 20%, BUT THEY ONLY GET THE 20%, JON, IF THEY ARE ABLE TO GENERATE--

USUALLY THE CONTRACT SAYS 8.5% COMPOUND ON THE ENTIRE PORTFOLIO.

>> Jon: HOW DID THEY GET $242 MILLION THAT THEY PULLED OUT OF DADE, AND THEN IT WENT BANKRUPT?

THEY TOOK OUT ANOTHER LOAN ON IT.

THEY USED THAT LOAN TO PAY THEMSELVESES THAT MONEY.

AND THEN THAT MONEY IS TAXED AT 15% INSTEAD OF 35%.

>> RIGHT.

RIGHT.

( LAUGHTER ) WE'RE TALKING ABOUT DIFFERENT THINGS.

I'M TALKING ABOUT WHEN THEY GET TO GET THE 20%, WHICH IS ONLY AFTER THEY RETURN 8.5%.

>> Jon: WHAT IS THE $242 MILLION THEY TOOK OUT FROM THE LOAN.

WAS THAT MANAGEMENT FEES?

>> WHAT THEY OFTEN DO-- NOT ALWAYS-- BUT WHAT HAPPENS IN CERTAIN PRIVATE EQUITY DEALS,

PRIVATE EQUITY FIRMS COME IN AND TAKE COMPANIES OVER, AND THEY WILL PAY THEMSELVES DIVIDENDS,

OR THEY WILL TAKE THE ASSETS AND PLEDGE THEM AS COLLATERAL AND BORROW MONEY.

BUT THEY CAN'T DO THIS IF THE COMPANY'S-- YOU KNOW, WE DO HAVE

A FEW LAWS THAT ARE SENSIBLE.

( LAUGHTER ) ONE OF THEM IS YOU CAN'T-- YOU

CAN'T PAY YOURSELF A DIVIDEND IF YOU KNOW THAT THE COMPANY THAT'S PAYING THE DIVIDEND IS INSOLVENT.

>> Jon: BANKRUPT THE COMPANY.

>> THAT'S CLEARLY ILLEGAL.

( LAUGHTER )

( APPLAUSE )

>> Jon: BUT IT BANKRUPTED THE COMPANY.

TWO YEARS LATER.

>> BUT TWO YEARS LATER, I'M SURE IT CAME AS A HUGE SURPRISE AND DISAPPOINTMENT.

( LAUGHTER )

>> Jon: YOU CAN'T EVEN SAY THIS WITH A STRAIGHT FACE!

( APPLAUSE ).

>> WELL, IF SOMEONE COULD SHOW THAT THE BOARD OF DIRECTORS OF THAT COMPANY KNEW THAT THE

COMPANY WAS BANKRUPT OR WAS GOING TO BECOME BANKRUPT AS A RESULT OF THE DIVIDEND PAYMENT,

THEY'D BE IMPORTANTLY LIABLE --

>> Stephen: WHO HEADS UP THE BOARD OF DIRECTORS?

THE COMPANY THAT BOUGHT THE DADE HEADS UP THE BOARD OF DIRECTORES, DOES IT NOT?

>> BAIN HAS ITS GUYS ON THAT BOARD.

RIGHT.

( LAUGHTER ) AND THOSE GUYS GET SUED

PERSONALLY IF THEY PAY A DIVIDEND WHEN THEY KNEW THE COMPANY WAS GOING TO BE BANKRUPT.

BUT TWO YEARS --

>> Stephen: HOW OFTEN DOES THAT HAPPEN?

>> HOW OFTEN DO THEY GET SUED?

A LOT.

A LOT.

>> Jon: HOW OFTEN DO THEY GET THE MONEY BACK OR DO WHAT THEY DO-- PAY A FINE AND DON'T

ADMIT ANY WRONGDOING AND THE FINE IS ALWAYS LESS THAN THE AMOUNT OF MONEY THEY ALREADY MADE.

>> CAN WELL, THAT DEFINITELY HAPPENS.

>> Jon: WILL YOU STAY HERE?

STAY HERE.

WE'RE GOING TO GO TO COMMERCIAL.

WE'LL THROW IT UP ON THE WEB.

JONATHAN MACEY.

( APPLAUSE

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