Saturday, November 17, 2012

Hostess Bankruptcy

I guess everybody's heard of Hostess heading toward bankruptcy again by now.

Here's a line in the most recent article:
"But the new private equity backers loaded the company with debt, making it difficult to invest in new equipment. Earlier this year, Hostess had more than $860 million of debt."

Normally it's a line that I'd read right past.  A company coming out of bankruptcy with a lot of debt shouldn't be surprising.  But the thing is this is a theme that I increasingly see - and a theme pointed out by more and more writers that look at these things.  Wall Street (I'm not saying this derogatively - I just don't know what to call it except Wall Street) has evolved so that many of the restructurings of failing companies seem to take advantage of the opportunities to spin out a new company and collect alot of fees, sell more debt to investors - (why your should care:  this includes pension funds, retirement funds) on the premise that it is actually an investment, but in the end the company is loaded down with more debt than it can manage and the company ultimately fails multiple times.  Wall Street gets its fees and everybody else is worse off.

It sounds similar to what happened the mortgage backed securities.  Package up bad loans, and sell them as AAA investment grade.  Make alot of money in the process, but when it all goes under society loses as a whole.  Similar with bonds sold that bankrupted Jefferson county Alabama (Birmingham).

 Now, obviously, if companies are in bankruptcy there's something wrong with the business and changes need to be made, but are the incentives so messed up that Wall Street is incentivized to do deals that have too high of a risk of failure?   Again, it's just a theme I keep seeing.  A recurring theme. 

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