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Private Equity Purchase of Toys R Us Required Toys R Us to Pay the Full Price of Being Bought – Is that Right?

14 Wednesday Mar 2018

Posted by CricketDiane in America - USA, Banks Banking Bailouts Wall Street Foreclosures Bankruptcies IMF World Bank Federal Reserve US Treasury, Business Methods, Cricket Diane C Sparky Phillips, Economics, Economy, Inventing Solutions For America, Reality-based Analysis, Start a Business - Tech StartUps - Innovation - Entrepreneurship Business Info - Business How To - Business StartUp Financing Capital, US At Home - Domestic Policy

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American Business, American Economy, bad business practices, bankrupting america, bankrupting businesses, Business, business bankruptcies, cricketdiane, debt, investment firms, job losses, large retail bankruptcies, layoffs, leverage, leveraged buyouts, leveraged companies, practices bankrupting american businesses, private equity, private equity buyouts, retail bankruptcies, retailers, toys r us, toys r us bankruptcy, US economics, us investment regulations, Wall Street, wall street regulations

How would it EVER make sense for me as a company to be required to pay the price I’m charging you for buying me? And, pay the interest on that debt you used to buy me as a company – AND pay you management fees for destroying the company I’ve built that you’re charging me the price of buying – from me – so you can own it?

Why wouldn’t the borrowing that was done to buy Toys R Us belong to the private equity firms who bought it?

What happened to Toys R Us?

Apparently, the company was loaded with debt that came from three private equity firms forcing the company to pay for its own purchase by them back in 2005. Bain Capital, KKR and Vornado Trust Realty bought Toys R Us with the promise they would pay off the $2.3 billion in debt that Toys R Us already had at the time. Then, rather than doing that, these private equity firms added the debt they acquired buying the company and added it to what was already owed by the Toys R Us company.

That meant a debt of $7.2 billion has been owed by the company since that time and each year having to pay to roll it over by servicing the debt and never having paid it off.

Toys R Us was paying $400 million a year to simply service the debt plus paying management fees and making payouts to the private equity firms.

So, despite the toy industry seeing increases across the world in sales and the Babies R Us stores of the chain being profitable AND the 15% share of the entire toy market being enjoyed by Toys R Us which is phenomenal across its 1600 stores in 38 countries – it was forced into complete bankruptcy (Chapter 7 Bankruptcy now).

When Toys R Us sold to Bain, KKR and Vornado, 80 percent of its asking price of the $6.6 billion price tag was paid by Toys R Us and not those acquiring the company – which would be illegal in any other context of finance, loans and buying something.

Then, by putting this debt load on the company, it assured that money coming into the company could not be used in a vast array of other ways to upgrade and maintain their stores, increase their online presence, hire more sales people, or even to keep the sales staff they had that were already familiar with their stores and products, among other things.

Effectively, after buying KB toys which had been the second biggest toy retailer in the US, the same private equity group robbed that company of its cash resources to operate as well, even before the Toys R Us brand was bled dry of cash by the same pattern of destructive acquisition.

NYC Harbor Skyline CricketDiane 2017 DSC00709 - 2

From the article –

Romney’s Bain Capital has now plunged two toy retailers into bankruptcy

After buying KB Toys in 2000, Bain and its co-investors had the retailer borrow $85 million to pay the firm and its co-investors a dividend — a move that left the chain, which had been generating steady earnings, strapped for cash as deepening price cuts at Walmart lured more shoppers away from malls.

In that case, Bain’s cash grab left it with a profit on its investment, despite the fact that 86-year-old KB Toys got liquidated in 2008.

https://nypost.com/2017/09/21/bain-capital-has-now-plunged-two-toy-retailers-into-bankruptcy/

It looks like Toys R Us, that was built from 1948 into a mammoth successful and very profitable toy stores, wasn’t bought for $6.6 billion. It was bought for $1.3 billion in equity by the three firms, Bain Capital, Vornado Realty Trust and KKR.

This article said that the fees and interest on the debt from that buyout was costing Toys R Us $470 million a year in service. It also says that the price for the company during the buyout was $7.3 billion. Of which, the private equity firms put up what? Obviously, not cash. I’m going to look that up.

Bain, KKR, Vornado Suffer Wipeout in Toys ‘R’ Us Bankruptcy

The three firms and their co-investors sank $1.3 billion of equity into the takeover of the Wayne, New Jersey-based toy company, financing the rest with debt, according to company filings. The debt included senior loans in which they held a stake.

Partly offsetting the loss is more than $470 million in fees and interest payments that Toys “R” Us awarded the firms over time.

https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy

And from this article, it describes briefly, the typical method involved in these types of buyouts which follow a pattern of destroying the assets of the company’s operations while stealing resources (legally) at every point along the way.

It would be as if I gave someone $3 to own something that cost $2,000 and had someone else responsible for paying the entire amount, and giving me back several thousand dollars for having put up $3 in the first place.

I’d almost bet the $3 they used in the form of $1.3 billion wasn’t even cash or real assets.

Toys R Us and why the retail downturn is all about debt

“Leverage just means you’re using lots of debt,” said Eileen Appelbaum, co-director of the Center for Economic and Policy Research.

If a private equity firm wants to buy a company, it’ll put up a small portion of the money. Then it’ll go to the bank and borrow the rest.

The key? “They put the debt on the company they buy,” Appelbaum said.

In other words, the firms take out these loans, buy a company and then make that company pay the loans back.

https://www.marketplace.org/2018/03/06/business/toys-r-us-and-how-retail-downturn-story-about-debt

**

Since 1978, Toys R Us has been a publicly traded company.

Toys R Us timeline: History of the nation’s top toy chain

https://www.usatoday.com/story/money/business/2018/03/09/toys-r-us-timeline-history-nations-top-toy-chain/409230002/

**

Despite having 15% of toys sales in the marketplace and a heavier shopping season last Christmas with shoppers spending $800 billion during the holiday season, according to FT (see below for article), Toys R Us was facing massive loan payment costs that put it into liquidation status.

**

Toys ‘R’ Us Has 15% of the Toy Market And It’s Still Going Under. Here’s Why.

Fifteen percent of U.S. toy revenue. With that kind of market share, Toys ‘R’ Us should be in a comfortable position, not on the ropes.

http://fortune.com/2018/03/09/toys-r-us-bankruptcy-why/

**

How Private Equity Killed Toys “R” Us

The pattern followed by Toys “R” Us is typical in private equity takeovers. Management is bought off: John Eyler, CEO of Toys “R” Us, was compensated $65.3 million upon the buyout’s completion. Employees have no say in the matter. Then come the layoffs, debt transfers and shortsighted asset sales. Funds are earmarked to pay down debts—Toys “R” Us was spending more annually on debt payments than it was on its website and stores—even as cash reserves are depleted.

Before the buyout, Toys R Us had $2.2 billion in reserves. As of 2017, that number is down to $301 million.

http://inthesetimes.com/article/20600/how-private-equity-killed-toys-r-us

**

US retail’s turbulent relationship with private equity 

DECEMBER 29, 2017

FT research shows many of the largest leveraged buyouts in the sector over the past decade have either defaulted, gone bankrupt or are in distress

At least 50 US retailers — including Toys R Us, children’s retailer Gymboree, shoe store Payless and jean maker True Religion — have filed for bankruptcy this year, the most in six years, with analysts describing it as a “day of reckoning”, for companies that rolled over their debt refinancing for years.

Observers warn that the distress is likely to accelerate in 2018 with nearly $6bn in high-yield retail debt set to mature.

The swift unraveling of the toy seller, at $6.9bn the third-largest retail bankruptcy in history, jolted vendors, who are critical to a retailer’s health.

There was some respite for bricks-and-mortar retailers this week with US shoppers spending more than $800bn in the holiday season, a 3.8 per cent rise from last year,

https://www.ft.com/content/17dfa7fe-eaf7-11e7-8713-513b1d7ca85a

**

Looking at the article below, it occurred to me that possibly, the private equity firms own some of the debt made to the companies required to pay for their own buyouts by someone else.

Then the fees for those loans are also being paid to the private equity or investment firms holding them, on top of the management fees and other dividend payments, plus other payouts they’re are finagling from the company.

And, all of it providing a stream of resources to the investment funds that should legally belong to the company for its operation, sustenance, growth and as a prudent cash reserve against changes in the market.

The retail apocalypse is being fueled by private equity firms adding to debt loads

Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it. During a leveraged buyout, the PE firm uses little of its own capital. Much of the money needed to buy the retailer comes from debt the retailer itself has to issue to fund the buyout, which leaves the retailer highly leveraged.

The PE firm then makes the retailer issue even more junk bonds or leveraged loans to fund a special dividend back to the PE firm. Come hell or high water, the PE firm has extracted its money.

Then the PE firm charges the retailer hefty management fees on an ongoing basis.

(etc.)

A lot of times, these PE firms acquire part of the bonds before bankruptcy of their portfolio company for cents on the dollar. For example, Bain Capital bought significant amounts of Gymboree bonds. This gives PE firms more control during the bankruptcy proceedings, and they win again.

Why do institutional investors fund asset-stripping associated with LBOs and special dividends? Some of the answers are in Wall Street’s culture where fee extraction is everything, and one firm helps another. And too, they’re chasing yield in a world where central banks have repressed yield. Which turns out to be a costly chase.

http://www.businessinsider.com/brick-and-mortar-retail-private-equity-debt-financing-lbo-2017-8

**

Sports Authority is Another Loss to Our Country Caused By Leveraged Buyout Nightmare

A number of retailers have suffered this buyout process whereby the company being acquired is forced to pay for itself to be bought out by loading the profit making retailer (or other types of companies) with massive debt and extra costs to pay off cash to those who “bought” it.

But, since when do you or I get to buy something for nothing but a promise of 10% on the cost of it and then enslave the operation to pay off the rest for that purchase while streaming most of its available cash to us in fees and dividends?

From this article describing the process that took apart Sports Authority –

Leveraged buyouts saddle retailers with debts they can’t repay

April 29, 2016

But Englewood-based Sports Authority was loaded with at least $643 million in debt, a hangover from the $1.4 billion leveraged buyout in 2006 by investors led by Leonard Green & Partners.

Sports Authority’s bankruptcy plan initially included closing 140 of its 463 stores. But lawyers for the chain said in court last week that the company now is pursuing liquidation, leaving workers jobless and shopping centers across America anchorless.

(etc.)

In the fast-evolving world of retail, where the one constant is the need for investment, retailers laboring under heavy debt are at a disadvantage.

“Doing it right is very expensive,” said Raya Sokolyanska, an analyst with Moody’s Investor Service in New York. “Limited financial flexibility has been a reason why a lot of these retailers haven’t been able to fight back and position themselves correctly for growth.”

https://www.denverpost.com/2016/04/29/leveraged-buyouts-saddle-retailers-with-debts-they-cant-repay/

**

Private Equity’s Trail of Bankrupt Retailers

October 26, 2017

Private equity firms have been connected to a rash of retail bankruptcies in recent years, including Gymboree, Payless ShoeSource, The Limited Stores, True Religion Apparel, and most recently, Toys “R” Us.

(. . . )

But Toys “R” Us wasn’t pushed into court because of terrible sales — it recorded nearly $1 billion in online sales in 2016, according to a spokesperson, and had earnings before interest, taxes, depreciation, and amortization of $792 million. Rather, the company was struggling to pay down its staggering debt load — for which it could thank its 2005 leveraged buyout. Bain Capital Private Equity and KKR & Co. teamed up with real estate investment trust Vornado Realty Trust to acquire the company for approximately $6.6 billion, including $5.3 billion of debt secured by the company’s assets.

https://www.institutionalinvestor.com/article/b15bvrspw3fq7q/private-equitys-trail-of-bankrupt-retailers

**

Why Private Equity Firms Like Bain Really Are the Worst of Capitalism

May 23, 2012

Here’s what private equity is really about: A firm like Bain obtains cheap credit and uses it to acquire a company in a “leveraged buyout.” “Leverage” refers to the fact that the company being purchased is forced to pay for about 70 percent of its own acquisition, by taking out loans. If this sounds like an odd arrangement, that’s because it is. Imagine a homebuyer purchasing a house and making the bank responsible for repaying its own loan, and you start to get the picture.

O.K., but what about this much more virtuous business of swooping in and restoring struggling companies to financial health? Well, that’s not a large part of what private equity firms do, either. In fact, they more typically target profitable, slow-growth market leaders. (Private equity firms presently own companies employing one of every 10 U.S. workers, or 10 million people.)

And that’s when the fun starts. Once the buyout is completed, the private equity guys start swinging the meat axe, aggressively cutting costs wherever they can – so that the company can start paying off its new debt – by laying off workers and cutting capital costs.

This process often boosts operating profit without a significant hit to the business, but only in the short term; in the long run, the austerity approach makes it difficult for companies to stay competitive, not least because money that would otherwise have been invested in expansion or product development – which might increase revenue down the line – is used to pay off the company’s debt.

It takes several years before the impacts of this predatory activity – reduced customer service, inferior products – become fully apparent, but by that time the private equity firm has generally resold the business at a profit and moved on.

https://www.rollingstone.com/politics/news/why-private-equity-firms-like-bain-really-are-the-worst-of-capitalism-20120523

**

The next article reminded me of how much is at stake for vendors, toy manufacturers, shippers, shopping malls and strip mall groups that have used Toys R Us to stock their shelves with products, rent large anchor properties and draw traffic to other stores nearby. All of these will be suffering hits, possibly causing layoffs beyond those being caused directly by the bankruptcy of Toys R Us as it closes 2600 stores.

How $5 billion of debt caught up with Toys ‘R’ Us

 SEPTEMBER 20, 2017

But the company’s ability to kick the can down the road had been exhausted. The bankruptcy filing was the culmination of an unsuccessful seven-month effort by Toys “R” Us to find relief from its $5.2 billion debt pile, according to bankruptcy court filings and people familiar with the deliberations.

The advisers that Toys “R” Us hired to fix its capital structure explored at least two deals with some of its creditors to raise money that would have helped the company stave off bankruptcy before the key holiday shopping season, avoiding a supply chain disruption stemming from vendor fears about repayment, a bankruptcy filing shows.

Once the company realized that it could not secure financing to get through the holiday season, the objective became “let’s get it done as quick as possible so it does not interrupt the holidays,” Toys “R” Us Chief Executive Officer David Brandon told Reuters in an interview. Filing for bankruptcy allowed the company to secure financing to continue to operate its stores.

Given that “we successfully obtained our debtor-in-possession financing today, we can assure our lenders that we are in a good position to accept shipments on a normal basis and they have great assurance they will be paid,” Brandon said.

(etc.)

Like other retailers that own their stores, Toys “R” Us tried last month to tap its vast real estate portfolio to raise money in a sale-leaseback transaction, according to court filings. Sale-leaseback deals allow retailers to raise cash by selling real estate they own and then renting it back from the new owner. (which didn’t work, my note.)

https://www.reuters.com/article/us-toys-r-us-bankruptcy-timeline/how-5-billion-of-debt-caught-up-with-toys-r-us-idUSKCN1BV0FQ

**

More Layoffs for Retailers Already Having Massive Store Closings and Layoffs

Jobs everywhere! Except at stores

January 5, 2018

Record numbers of store closings and a surge in retail bankruptcies, as well as the shift to online shopping, have forced retailers to slash jobs even as other employers scramble to find qualified workers.

The sector lost a total of 66,500 jobs in 2017.

General merchandise stores, the segment that includes department stores, were hit the hardest, losing 90,300 jobs, according to the Friday’s December jobs report from the Labor Department. Clothing stores cut another 28,600 jobs. Drug stores lost 18,400.

(etc.)

So the job losses in the sector are likely to continue said Nicholas. In 2017, 7,000 store closings were announced, a record that was more than triple 2016’s number. And the trend will undoubtedly continue in 2018. Sears Holdings (SHLD), owner of both Sears and Kmart, said Thursday it plans to close more than 100 additional stores.

http://money.cnn.com/2018/01/05/news/economy/retail-job-losses/index.html

**

Retail Apocalypse: 27 Surprising Facts You Didn’t Know

06-2017

According to BLS data, the number of retail openings in February slumped to 541,000, down by 40,000, its worst performance since 2015. (U.S. News)

BLS data also showed retail layoffs and discharges climbed 37% in February and reached a total of 212,000 – its highest level in nearly two years. (U.S. News)

(etc.)

Unlike in 2008, Americans today are shopping more than ever.

While the last spike in retail bankruptcies during the Great Recession was clearly a byproduct of consumer stress, this time around consumers are actually spending more than ever. According to Gallup, February 2017 marked the highest average in consumer spending since 2008, with no signs of slowing.

http://www.careerarc.com/blog/2017/06/retail-apocalypse-layoffs-2017-facts-stats/

**

The US retail industry is hemorrhaging jobs – and it’s hitting women hardest

January 13, 2018

As the retail landscape undergoes a dramatic transformation, analysis finds 129,000 women lost jobs last year while men actually gained positions.

Between November 2016 and November 2017, the sector fired 129,000 women (the largest loss for any industrial sector for either sex) while men gained 109,000 positions, according to an analysis by the Institute for Women’s Policy Research (IWPR). In the whole labour force women gained 985,000 jobs over the year, while men gained 1.08m jobs.

(also from this article – )

Major retailers shut shops across the US last year. A record 6,700 stores shut in 2017, according to Fung Global Retail & Technology, a retail thinktank. Macy’s alone closed 68 stores and shed 10,000 jobs. Drugstore chain Walgreens closed 600 locations.

https://www.theguardian.com/business/2018/jan/13/us-retail-sector-job-losses-hitting-women-hardest-data

**

A comment in this article says a lot of what I’ve been thinking. And, why is it that Bain, KKR and Vornado didn’t have to pay the loan payments they took out to buy Toys R Us? Shouldn’t that debt belong to the buyers, not the company they’ve bought? (This article also lists a number of the retail bankruptcies from 2017, including Radio Shack.)

How Many of 2017’s Retail Bankruptcies Were Caused by Private-Equity’s Greed?

September 20, 2017

Big Wall Street banks are not likely to blow the whistle on asset-stripping scams in the private equity world. They are frequently involved in collecting fees for advising on the LBOs. Then they reap more huge windfalls in fees when they underwrite the bond offerings that load up the company with debt it can’t service on a long term basis.

So the overarching question in all of this is: where is the Securities and Exchange Commission, the so-called cop on the beat that is supposed to be policing the publicly traded corporate bonds involved in these deals?

(and)

In April, Aisha Al-Muslim, a reporter for Newsday, the Long Island, New York newspaper, found the following after an in-depth review of court documents and data from top research firms like S&P Global Market Intelligence:

“…43 large retail or supermarket companies, which owned chains with 10 or more locations, have filed for bankruptcy in the United States since January 2015. The 43 companies controlled 52 brick-and-mortar chains.

“Of those 43 companies, 18 — more than 40 percent — were owned by private equity firms. The remainder were public or private companies or owned by a hedge fund.”

When 40 percent of insolvent large retail companies got this way at the hands of the so-called turnaround experts at private-equity firms while huge amounts of money moved from the coffers of the company to the pockets of the “experts,” it’s time for Federal regulators to get involved.

 

http://wallstreetonparade.com/2017/09/how-many-of-2017s-retail-bankruptcies-were-caused-by-private-equitys-greed/

**

How Private Equity Killed Toys “R” Us

 OCTOBER 10, 2017

Private equity firms bled the company dry to turn a profit, and now mass layoffs are imminent.

Upon closer examination, however, this analysis doesn’t hold up. First, the global toy industry isn’t in decline. In fact, it’s been growing consistently over the past five years. Physical toys may be less popular in the United States than they once were, but internationally—particularly in Asian and Latin American countries—the play business is booming. And most of Toys “R” Us’s profits actually come from its Babies “R” Us affiliate which sells not just toys but also health, safety and educational tools for infant care.

Yet most importantly, this analysis fails to account for how Toys “R” Us wound up so deeply in debt in the first place. In 2005, as the company’s stock was regularly losing value due to mediocre sales, management decided to sell the company in a leveraged buyout to a trio of buyers, real-estate-investment trust Vornado Realty Trust and private equity firms KKR and Bain Capital.

This trio played a critical role in the downfall of Toys “R” Us, through imposing massive debt obligations on the company and requiring it to pay back its debts so that its buyers could turn a profit. Meanwhile, the finances of the company were thrown into disarray and employees were hit with wave after wave of layoffs.

Vornado Realty Trust, KKR and Bain Capital financed 80 percent of the purchase of Toys “R” Us, so while the company sold for $6.6 billion, the trio only contributed $1.3 billion. As part of the purchase agreement, the companies also agreed to take responsibility for all of Toys “R” Us’s long-term debt obligations, which at the time totaled $2.3 billion. Once Toys R Us was taken over, however, the debt Vornado Realty, KKR and Bain used to acquire it was pushed back onto the company, skyrocketing its debt obligations to $7.6 billion.

Toys “R” Us has been paying $400 million a year to service these debts. This money could have been used to lower prices or improve the company’s website—not to mention raising pay to its employees—but instead went to paying off creditors. Last year, the company reported a loss of $29 million. If it weren’t for these debt payments, Toys “R” Us would have run a substantial profit.

http://inthesetimes.com/article/20600/how-private-equity-killed-toys-r-us

**

Romney’s Bain Capital has now plunged two toy retailers into bankruptcy

September 21, 2017

The buyout firm founded by Mitt Romney — which got slammed this week by the Chapter 11 filing of Toys ‘R’ Us — also saw its reputation dinged a dozen years earlier with the shuttering of KB Toys, which at the time had been the nation’s second-biggest retailer.

In both instances, critics say Bain and its private-equity partners left the chains vulnerable by saddling them with heavy debt loads as they took them private, crippling their capacity to compete in brutal price wars that have dogged the industry.

https://nypost.com/2017/09/21/bain-capital-has-now-plunged-two-toy-retailers-into-bankruptcy/

 

**

Leveraged buyout

A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company’s cash flow is the collateral used to secure and repay the borrowed money.

(also – KKR appears in the history of corporate raiding during the 80’s and beyond – plus this, of interest)

The inability to repay debt in an LBO can be caused by initial overpricing of the target firm and/or its assets. Over-optimistic forecasts of the revenues of the target company may also lead to financial distress after acquisition. Some courts have found that in certain situations, LBO debt constitutes a fraudulent transfer under U.S. insolvency law if it is determined to be the cause of the acquired firm’s failure.[33]

The outcome of litigation attacking a leveraged buyout as a fraudulent transfer will generally turn on the financial condition of the target at the time of the transaction – that is, whether the risk of failure was substantial and known at the time of the LBO, or whether subsequent unforeseeable events led to the failure. The analysis historically depended on “dueling” expert witnesses and was notoriously subjective, expensive, and unpredictable. However, courts are increasingly turning toward more objective, market-based measures.[34]

https://en.wikipedia.org/wiki/Leveraged_buyout

**

Private equity

Private equity typically refers to investment funds organized as limited partnerships that are not publicly traded and whose investors are typically large institutional investors, university endowments, or wealthy individuals. Private equity firms are known for their extensive use of debt financing to purchase companies, which they restructure and attempt to resell for a higher value. Debt financing reduces corporate taxation burdens and is one of the principal ways in which private equity firms make business more profitable for investors.[1]

Bloomberg Businessweek has called private equity a rebranding of leveraged-buyout firms after the 1980s. Common investment strategies in private equity include: leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In a typical leveraged-buyout transaction, a private-equity firm buys majority control of an existing or mature firm. This is distinct from a venture-capital or growth-capital investment, in which the investors (typically venture-capital firms or angel investors) invest in young, growing or emerging companies, and rarely obtain majority control.

Private equity is also often grouped into a broader category called private capital, generally used to describe capital supporting any long-term, illiquid investment strategy.

(and)

Leveraged buyout, LBO or Buyout refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage.[1][4] The companies involved in these transactions are typically mature and generate operating cash flows.[5]

Private equity firms view target companies as either Platform companies which have sufficient scale and a successful business model to act as a stand-alone entity, or as add-on or tuck-in acquisitions, which would include companies with insufficient scale or other deficits.[6][7]

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition. To do this, the financial sponsor will raise acquisition debt which ultimately looks to the cash flows of the acquisition target to make interest and principal payments.[1][8]Acquisition debt in an LBO is often non-recourse to the financial sponsor and has no claim on other investments managed by the financial sponsor. Therefore, an LBO transaction’s financial structure is particularly attractive to a fund’s limited partners, allowing them the benefits of leverage but greatly limiting the degree of recourse of that leverage. This kind of financing structure leverage benefits an LBO’s financial sponsor in two ways: (1) the investor itself only needs to provide a fraction of the capital for the acquisition, and (2) the returns to the investor will be enhanced (as long as the return on assets exceeds the cost of the debt).[9]

As a percentage of the purchase price for a leverage buyout target, the amount of debt used to finance a transaction varies according to the financial condition and history of the acquisition target, market conditions, the willingness of lenders to extend credit (both to the LBO’s financial sponsors and the company to be acquired) as well as the interest costs and the ability of the company to cover those costs. Historically the debt portion of a LBO will range from 60%–90% of the purchase price, although during certain periods the debt ratio can be higher or lower than the historical averages.[10] Between 2000–2005 debt averaged between 59.4% and 67.9% of total purchase price for LBOs in the United States.[11]

Simple example of leveraged buyout

A private equity fund say for example, ABC Capital II, borrows $9bn from a bank (or other lender). To this it adds $2bn of equity – money from its own partners and from limited partners (pension funds, rich individuals, etc.). With this $11bn it buys all the shares of an underperforming company, XYZ Industrial (after due diligence, i.e. checking the books). It replaces the senior management in XYZ Industrial, and they set out to streamline it. The workforce is reduced, some assets are sold off, etc. The objective is to increase the value of the company for an early sale.

The stock market is experiencing a bull market, and XYZ Industrial is sold two years after the buy-out for $13bn, yielding a profit of $2bn. The original loan can now be paid off with interest of, say, $0.5bn. The remaining profit of $1.5bn is shared among the partners. Taxation of such gains is at capital gains rates.

Note that part of that profit results from turning the company around, and part results from the general increase in share prices in a buoyant stock market, the latter often being the greater component.[12]

Notes:

  • The lenders (the people who put up the $9bn in the example) can insure against default by syndicating the loan to spread the risk, or by buying credit default swaps(CDSs) or selling collateralised debt obligations (CDOs) from/to other institutions (although this is no business of the private equity firm).
  • Often the loan/equity ($11bn above) is not paid off after sale but left on the books of the company (XYZ Industrial) for it to pay off over time. This can be advantageous since the interest is typically offsettable against the profits of the company, thus reducing, or even eliminating, tax.
  • Most buyout deals are much smaller; the global average purchase in 2013 was $89m, for example.[13]
  • The target company (XYZ Industrials here) does not have to be floated on the stockmarket; indeed most buyout exits are not IPOs.
  • Buy-out operations can go wrong and in such cases the loss is increased by leverage, just as the profit is if all goes well.

(etc.)

The application of the Freedom of Information Act (FOIA) in certain states in the United States has made certain performance data more readily available. Specifically, FOIA has required certain public agencies to disclose private equity performance data directly on their websites.[97]

In the United Kingdom, the second largest market for private equity, more data has become available since the 2007 publication of the David Walker Guidelines for Disclosure and Transparency in Private Equity.[98]

 

https://en.wikipedia.org/wiki/Private_equity
**
How would it EVER make sense for me as a company to be required to pay the price I’m charging you for buying me?
And, pay the interest on that debt you used to buy me as a company – AND pay you management fees for destroying the company I’ve built that you’re charging me the price of buying – from me – so you can own it?
In what world does any of that make sense as anything but theft and embezzlement whether legal or not?
Can you imagine what it would take to start a company today and garner 15% of the toy market? And yet, here is a company that already has that which is being decimated by a very corrupt business practice of Wall Street investment firms – to the detriment of America.
– cricketdiane, 03-10-2018
**

 

NYC Harbor Skyline CricketDiane 2017 DSC00709 - 1

 

 

 

 

 

 

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A Real Solution to the Global and US economic crisis – Creation of jobs, wealth, prosperity and to restore our economic foundations

20 Tuesday Jan 2009

Posted by CricketDiane in Cricket Diane C Sparky Phillips

≈ 2 Comments

Tags

banking, big business, Business, Create Jobs for America, credit crunch crisis, credit default swaps, credit derivatives, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, currency values, employment, Federal Reserve, financial crisis, financial derivatives, foreclosures, Freedom of Thought, global economic crisis, global economic gridlock, investment banking, investments, job losses, jobs, Labor, Main Street, Money, mortgage backed securities, prosperity, stop foreclosures, unemployment, US Congress, US currency, US dollar, US economic crisis, US Economy, US Government, US government policy, US Senate, US Treasury, Wall Street, wealth

Jan 21, 09

When the million plus wealthiest citizens of the United States hire 40 individual Americans each at $50,000 a piece per year, there will be no unemployment problem in America. They have the ability and means to start businesses, to take on the task of employment for America and they have enjoyed the fruits of capitalist bounty without bounds.

That is the solution that will work and work quickly.

As well, if every company in America adds 20% more to their workforce at $50,000 each a year – again, there will no longer be a problem of unemployment and foreclosures in America. And, if we do both plus what our government has suggested to add jobs, then the global economy and America’s will be quickly restored.

Couldn’t we all do that now? We need 40 million jobs added to America and this solves the problem, restores our economy and makes prosperity work.

– cricketdiane, 01-21-09, USA

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Poverty and Wealth in the US – bailout of millionaires – blame of the poor and workers – US injustice, inequality and inexcusable corruption – 2008

08 Wednesday Oct 2008

Posted by CricketDiane in Uncategorized

≈ Leave a comment

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bailouts, banking, Capitalism, credit default swaps, Cricket Diane C Sparky Phillips, cricketdiane, economic crisis, economic inequality, Economics, Economy, Federal Reserve, financial derivatives, financials, Global Economy, International Concerns, job losses, Macro-economic analysis 2008, macro-economic future forecasting, poverty, Principles of Economics, stock market, unemployment, US Congress, US dollar, US economic crisis, US Government, US government bailout, US government policy, US Treasury, Wall Street, Wall Street bailout

http://en.wikipedia.org/wiki/Household_income_in_the_United_States

Household Income – and I noticed that a woman with a doctorate makes a couple thousand less a year on average than any man with a bachelors’ degree. And in the professional category – a woman makes half what men make at the same jobs.

http://www.huduser.org/datasets/il/il07/index.html

Datasets by US State of low income, very low income, extremely low income limits

State Map of Median Income and Income Limits

To view all Section 8 Income Limits and Median Family Incomes for a specific State, in pdf format, go to the map below and click on that State.

http://en.wikipedia.org/wiki/Poverty_in_the_United_States

Poverty in the United States is cyclical in nature with roughly 12% to 16% living below the federal poverty line at any given point in time, and roughly 40% falling below the poverty line at some time within a 10 year time span.[2] Most Americans (58.5%) will spend at least one year below the poverty line at some point between ages 25 and 75.[3] While there remains some controversy over whether the official poverty threshold over- or understates poverty, the United States has some of the highest absolute and relative pre- and post-transfer poverty rates in the developed world.[4][5] Overall, the U.S. ranks 12th on the Human Development Index.[6]

Those under the age of 18 were the most likely to be impoverished. In 2006 the poverty rate for minors in the United States was the highest in the industrialized world, with 21.9% of all minors and 30% of African American minors living below the poverty threshold.[7] Moreover, the standard of living for those in the bottom 10% was lower in the U.S. than other developed nations except the United Kingdom

The “absolute poverty line” is the threshold below which families or individuals are considered to be lacking the resources to meet the basic needs for healthy living; having insufficient income to provide the food, shelter and clothing needed to preserve health.

The Census Bureau issues the poverty thresholds, which are generally used for statistical purposes—for example, to estimate the number of people in poverty nationwide each year and classify them by type of residence, race, and other social, economic, and demographic characteristics. The Department of Health and Human Services issues the poverty guidelines for administrative purposes—for instance, to determine whether a person or family is eligible for assistance through various federal programs.[12]

The newly formed United States Office of Economic Opportunity adopted the lower of the Orshansky poverty thresholds for statistical, planning, and budgetary purposes in May 1965.

The Bureau of the Budget (now the Office of Management and Budget) adopted Orshansky’s definition for statistical use in all Executive departments in 1965. The measure gave a range of income cutoffs, or thresholds, adjusted for factors such as family size, sex of the family head, number of children under 18 years old, and farm or non-farm residence. The economy food plan (the least costly of four nutritionally adequate food plans designed by the Department of Agriculture) was at the core of this definition of poverty.[13]

The Department of Agriculture found that families of three or more persons spent about one third of their after-tax income on food.

Two changes were made to the poverty definition in 1969. Thresholds for non-farm families were tied to annual changes in the Consumer Price Index (CPI) rather than changes in the cost of the economy food plan. Farm thresholds were raised from 70 to 85% of the non-farm levels.

In 1981, further changes were made to the poverty definition. Separate thresholds for “farm” and “female-householder” families were eliminated. The largest family size category became “nine persons or more.”[13]

Apart from these changes, the U.S. government’s approach to measuring poverty has remained static for the past forty years.

The official poverty rate in the U.S. increased for four consecutive years, from a 26-year low of 11.3% in 2000 to 12.7% in 2004, then declined somewhat to 12.3% in 2006. This means that 36.5 million people (approx 1 in 8 Americans) were below the official poverty thresholds in 2006,

Another way of looking at poverty is in relative terms. “Relative poverty” can be defined as having significantly less access to income and wealth than other members of society. Therefore, the relative poverty rate can directly be linked to income inequality. When the standard of living among those in more financially advantageous positions rises while that of those considered poor stagnates, the relative poverty rate will reflect such growing income inequality and increase.

***

By European standards the official (relative) poverty rate in the United States would be significantly higher than it is by the U.S. measure. A research paper from the OECD calculates the relative poverty rate for the United States at 16% for 50% median of disposable income and nearly 24% for 60% of median disposable income[18]

***

The United Nations Development Programme, uses the human poverty index in order to assess the development with regards to poverty among OECD countries. The index takes the likelihood of a child not surviving to age 60, functional illiteracy rate, long-term unemployment and the population living on less than 50% of the median national income into account. While the United States has one of the second lowest long-term unemployment rates in the developed world, it has the highest percentage of children who are not likely to live to age 60 and persons living on less than 50% of the national median income and the third highest percentage of adults lacking functional literacy skills.

http://en.wikipedia.org/wiki/Poverty_in_the_United_States

http://en.wikipedia.org/wiki/Lowest-income_counties_in_the_United_States

***

Info from DataQuick on California foreclosures through June 33, 2008

Mortgage servicers recorded 121,341 “notices of default” during the April-through-June period. That was up 6.6 percent from a revised 113,809 for this year’s first quarter, and up 124.9 percent from 53,943 in second-quarter 2007, according to DataQuick Information Systems.

There are 8.4 million houses and condos in the state, DataQuick reported.

Foreclosure resales have emerged as a significant market factor, accounting for 40.0 percent of all California resale activity last quarter. A year ago it was 5.4 percent. Foreclosure resales vary significantly by area, from 3.0 percent in San Francisco County to 75.1 percent in Merced County.

http://www.dqnews.com/News/California/CA-Foreclosures/RRFor080722.aspx

Source: DataQuick Information Systems

Media calls: Andrew LePage (916)456-7157 or John Karevoll (909)867-9534

***

http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

The overall median income for all 155 million persons over the age of 15 who worked with earnings in 2005 was $28,567.[6]

Personal income is a measure utilized by the United States government, particularly the Department of Commerce, to determine the income of individuals. It is most often only applied to those who are either above the age of 15, 18, or 25 and are considered to be members of the labor force.

[ . . .]

As a result 15.8% of households have six figure incomes, even though only 5.63% of Americans had incomes exceeding $100,000. The following chart shows the income distribution among all 191,884,000 individuals aged 25 or higher as recorded by the United States Census Bureau. All numbers are given in 1000s.[7]

Charts from the US Commerce Department

***

http://en.wikipedia.org/wiki/Economy_of_the_United_States

The economy of the United States is the largest national economy in the world.[7] Its gross domestic product (GDP) was estimated as $13.8 trillion in 2007.

*****

They just spent that much bailing out the financial services and their gambling habits over the course of this year, if the inclusion of all bailout funding is added up – they spent more than that. One night, the Fed floated $690 billion into the international community – is that backed up by anything?

(my notes – just a thought) – Cricket Diane C Sparky Phillips, 10-07-08, USA

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US economic crisis – Commerce Department indicators sites – although not very realistic projections given the circumstances – can’t they correct to the reality?

07 Tuesday Oct 2008

Posted by CricketDiane in Uncategorized

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bailouts for Wall Street, banking, Capitalism, consumer based economy, consumerism, counterfeit currencies, counterfeit securities, credit crunch crisis, credit default swaps, Cricket Diane C Sparky Phillips, cricketdiane, deleveraging, devalutation of the dollar, Economics, Economy, employment, executive compensation, Federal Reserve, financial derivatives, foreclosures, fraud, global economic crisis, Global Economy, Intelligence, International Concerns, investment banking, job losses, Labor, living in the USA, Macro-economic analysis 2008, macro-economic future forecasting, Principles of Economics, Reality-based Analysis, Securities and Exchange Commission, solvency, Statistical Analysis, stock market, unemployment, US Congress, US currency, US dollar, US dollar value, US economic crisis, US Economy, US Government, US government bailouts, US government corruption, US government policy, US Treasury, USA, Wall Street

Economic Indicators

Economic Indicators.gov is brought to you by the Economics and Statistics Administration at the U.S. Department of Commerce. Our mission is to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau.

Advance Monthly Sales for Retail and Food Services |  Advance Report on Durable Goods |  Construction Put in Place | Gross Domestic Product |  Manufacturer’s Shipments, Inventories, and Orders |  Manufacturing and Trade: Inventories and Orders |  Manufacturing and Trade: Inventories and Sales |  Monthly Wholesale Trade |  New Residential Construction |  New Residential Sales |  Personal Income and Outlays | Quarterly Services | Quarterly Financial Report | Retail E-Commerce Sales |  U.S. International Trade in Goods and Services |  U.S. International Transactions

https://www.esa.doc.gov/ei.cfm

Percent Change in Retail and Food Services Sales

Percent Change in Retail and Food Services Sales

http://www.census.gov/marts/www/retail.html

The Advance Monthly Retail Sales for Retail and Food Services for September is scheduled to be released October 15, 2008 at 8:30 a.m. EDT.

For information, visit the Census Bureau’s Web site at <http://www.census.gov/retail>. This report is also available the day of issue through the Department of Commerce’s STAT-USA (202-482-1986).

* The 90 percent confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different than zero.

FOR IMMEDIATE RELEASEFRIDAY, SEPTEMBER 12, 2008, AT 8:30 A.M. EDT
Timothy Winters/ Aneta Lukasik                                                                                                                                                                                            CB08-132
Service Sector Statistics Division
(301) 763-2713

August 2008

                                PERSONAL INCOME AND OUTLAYS:  AUGUST 2008

Personal income increased $61.5 billion, or 0.5 percent, and disposable personal income (DPI)
decreased $93.3 billion, or 0.9 percent, in August, according to the Bureau of Economic Analysis.

                                        2008
                                        Apr.            May             June            July            Aug.
                                                       (Percent change from preceding month)
Personal income, current dollars        0.3             1.9             0.1            -0.6             0.5
Disposable personal income:
 Current dollars                        0.4             5.7            -1.8            -0.8            -0.9
 Chained (2000) dollars                 0.2             5.3            -2.5            -1.5            -0.9
Personal consumption expenditures:
 Current dollars                        0.3             0.7             0.5             0.1             0.0
 Chained (2000) dollars                 0.1             0.2            -0.2            -0.5             0.0

Proprietors' income decreased $8.7 billion in August, in contrast to an increase of $4.6 billion in
July.  Farm proprietors' income decreased $6.1 billion, compared with a decrease of $2.3 billion.
Nonfarm proprietors' income decreased $2.6 billion, in contrast to an increase of $6.9 billion.

- (My note) 
Some of these numbers whose increases are described on this page are now known to have decreased.

http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

**
http://www.stat-usa.gov/
  • Job Openings and Labor Turnover (posted October 7, 2008).

home.stat-usa.gov • Economics & Statistics Administration • U.S. Department of Commerce
1-800-STAT-USA • 202-482-1986 • statmail@doc.gov


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Destroying the American Dream by process of elimination and socialism as policy by US government and Treasury – Congress representing no one in America

07 Tuesday Oct 2008

Posted by CricketDiane in Uncategorized

≈ Leave a comment

Tags

aristocracy, bailouts, banking, Capitalism, Chicago Mercantile group, CME Group Trading, consumer based economy, consumerism, corruption, corruption and abuse of authority, counterfeit currencies, counterfeit securities, crash of American economy, credit crisis, credit crunch, credit default swaps, Cricket Diane C Sparky Phillips, cricketdiane, Democracy, economic crisis, Economics, Economy, Federal Reserve, financial derivative instruments, financial derivatives, fraud, Global Economy, Great Depression of 2009, illuminat, Intelligence, International Concerns, investment banking, job losses, life in USA, Macro-economic analysis 2008, macro-economic future forecasting, poverty, Securities and Exchange Commission, socialism, stock market, unemployment, US aristocracy, US bailouts, US Congress, US currency, US dollar, US economic crisis, US Government, US government policy, US Treasury, USA, Wall Street, Wall Street traders

The US government bailouts and handling of the current economic crisis – (including Congress, Treasury and White House team) –
I’m not sure there is anything good about it. The US government is trying to insulate the bad financial products from the good assets in the marketplace so that hopefully no more companies or banks will fail. It might work, but might not.

The reason on a larger scale that it is causing bankruptcies at a very basic level is because the ways it has been done, it is like borrowing money from a bookie to play a bet. That works find, if the bet wins.

But, when it doesn’t and the money isn’t available to pay the borrowed money back plus the play on the bet – there is a “constrained relationship” with the bookie. Or, in other words – that bookie gets real short tempered and will collect one way or another.

A lot of really big companies and banks, and well-respected businesses were making very large bets on borrowed money and then took another bet to insure against the first bet until after awhile, the debts had to paid. Apparently, there weren’t enough real moneys to pay them, nor to continue to play in this game.

The other thing that might make sense – while most of it doesn’t make sense – is that for every one dollar that these companies and banks actually had, they were allowed to borrow twelve dollars or as much as forty dollars against it. Now, who gets to do that? This has been common practice.

This has caused many Americans to be out of work, lose their homes and has forced them into bankruptcy because when the companies where they worked started trying to make themselves look profitable, they laid off people to do it.

The fact is, many companies and banks still went bankrupt also when it was discovered that they didn’t have the money to pay off the debts called due, were no longer profitable or solvent and couldn’t get any money for things they owned.

Among the investment bankers there were a set of “assets” that weren’t any more than a contract for a bet that some homeowner somewhere would pay off their mortgage. These companies has bought huge packages of mortgages that were sold together as a lot. Then they paid someone else to insure the package for how much would be owed if some of these mortgages didn’t get paid off, which hedged the bet.

sounds like betting on football sort of, doesn’t it – except in the billions and trillions of dollars. And a lot more risky.

I think, if they had stopped at that point and not gone into the next round of stupidity – well, maybe it would be different. But, since many investment houses could borrow $40 for every $1 of assets, they did (using these packages as dollars of assets) – which converted the packaged “bets” and “insurance” to hedge the bets – into cash which they used to do some more of the same game.

It looks like after a time, there were stacks and stacks of what was being valued as if the bets had been won and that, on accounting records, appeared like the cash value of all the mortgages in the package added together (like they were the total value of what could eventually be paid off, if the homeowner made good.)

Well, if your money’s no good – you’re not going to pay off a bookie with it and that is exactly what happened. There was a piece of paper for somebody’s house in Tulsa or somewhere mortgaged for $300,000 principle plus interest with a homeowner in foreclosure. Then, that isn’t the same as $300,000 cash any longer. And, the property probably couldn’t bring more than $15,000 auction off in foreclosure.

It seems complicated, but really it isn’t. If I tell you that something is worth a certain amount and it isn’t – that is a lie. But, when businesses, assets, stocks and things like that are treated this way – it is way more than a lie. And, it means that it sure can’t be used to make good on debts as if it is cash money or a building or equipment or anything of value.

This is why so many companies are on quicksand right now and the plan offered by Secretary Paulson of the Treasury is being used to buy up the worthless things that the whole bunch of them had been using like money, when it wasn’t and they didn’t have anything real to back it up.

Obviously, everything is pretty close to the vest in the business and corporate world. So, with everybody holding these bets they couldn’t pay off and borrowed moneys they couldn’t pay back, after awhile nobody wanted to loan any of them any money to play with anymore. Who would?

The President’s advisors and the Treasury Dept. think this bailout and buyout of everybody’s bets on the table will allow them to all trust each other enough to start lending real money and paying back real money again. And, hopefully, to make real profits again. This probably would’ve worked a lot better, if other countries hadn’t been conned into buying these bets too. There’s no telling if the bailout will work to get this done or not.

By the way, the falling of the economy doesn’t absolutely cause bankruptcies. It can contribute but essentially that is up to the flexibility of the participants, whether in a household or in a business. It isn’t an absolute. And, in our day and time, bankruptcy is used sometimes as a process in which to regroup, consolidate resources, protect some opportunities and then go at things again.

But, just as in a hand of poker, it isn’t always right to hold the cards and bet on them. It isn’t always a winning hand to throw them in until the four aces or royal flush comes along to play them. It is all in how its done.

– cricketdiane

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US LABOR DEPT Unemployment – Jobs Lost Data for April 2008 are “Fudged”

16 Friday May 2008

Posted by CricketDiane in ancient sea, Apples and Oranges, Artist, Benjamin Franklin, Business Methods, Civil Rights, Creating Solutions for America, Cricket D, cricket diane, Cricket Diane C Phillips, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, crickethousestudeios, CricketHouseStudios, Democracy, diane c phillips, Economics, Economy, New Boston Tea Party Actions, Principles of Economics, Sovereignty of the People, Sparky Phillips, Uncategorized, USA -1

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Tags

job losses, Labor department, recession 2008, statistical lies, unemployment, US Labor Statistics

http://www.bls.gov/news.release/pdf/empsit.pdf

Quote from the US Labor Department Document 2008 – describing their “best guess” estimations.

“Does the establishment survey account for employment from new businesses?
Yes; monthly establishment survey estimates include an adjustment to account for the net employment
change generated by business births and deaths. The adjustment comes from an econometric model that
forecasts the monthly net jobs impact of business births and deaths based on the actual past values of the net impact that can be observed with a lag from the Quarterly Census of Employment and Wages. The
establishment survey uses modeling rather than sampling for this purpose because the survey is not immediately
able to bring new businesses into the sample. There is an unavoidable lag between the birth of a new
firm and its appearance on the sampling frame and availability for selection. BLS adds new businesses to the
survey twice a year.

It seems pretty obvious that each day in April 2008, we were told on every news outlet about businesses which were each laying-off 4,000, or more employees. Each day we were shown businesses that were closing the doors on branches, stores and sometimes going bankrupt entirely. By my estimation, the unemployment rate for the U.S. has to actually be much higher than 5% and for April, the number of jobs lost would’ve actually been somewhere over 85,000 – not 20,000.

Somewhere in our government, these statistics are being doctored, altered and manipulated. Why is it against the law for me to lie to Congress or to our government but for some reason it is perfectly okay for our government agencies in these official capacities to lie and to doctor statistics to suit their own agendas?

Written by Cricket Diane C “Sparky” Phillips, May 16, 2008

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