"Dividend recap" is a great finance term that more people should know. It is a type of transaction that is common in the private equity world, the world of Mitt Romney's Bain Capital. Basically the idea is that you take control of a company and then make the company borrow money to pay you for, well, whatever. Thanks to the Federal Tax code, the company can charge the government for the interest on this borrowed money and the owner, the lucky recipient of the dividend, is taxed at a 15% rate - less than a fireman or nurse gets taxed on salary. The beautiful thing about dividend recap is that it's often the third loan taken out by the company being looted. The first loan pays for the original acquisition by the "investor". That's how Bain put up $27 million dollars of its own money to buy control of a company called Dade-Behring - with Dade Behring borrowing to finance the rest of the acquisition. That is, Dade-Behring borrowed money so Bain and Goldman-Sachs could buy the company. Then Bain had Dade-Behring borrow a lot more money to acquire other companies and "grow" while cutting expenses by firing workers and reducing benefits. They fired a lot of workers. These made the numbers look good enough to get a third, bigger, loan for the "dividend recap". Bain got $270 million dollars. And then Bain walked away and Dade-Behring went bankrupt. Even Forbes thinks dividend recaps are sleazy.
Here's how it works: When a private equity firm buys a company in a traditional leveraged buyout, it typically uses bank loans to finance much of the purchase price. Since the company being acquired takes out the bank loans, it's the one on the hook for future interest payments -- not the private equity owner. The extra twist comes when, often years later, private equity owners instruct the company to take out even more bank loans. Those proceeds are then funneled to private equity investors in the form of a "dividend," rather than being used for corporate purposes like buying new equipment or hiring new employeesWhy is this legal? In corporate law taking money out of a corporation in a way that causes it to become insolvent or makes it unlikely to be able to pay its debts is called "fraudulent conveyance". But the conservative judges appointed by Presidents Reagan, Bush1 and Bush2 have come up with one inventive interpretation of bankruptcy law after another to protect this type of "job creation". For example, George Bush's cousin, Judge Walker (you know, as in George Walker Bush ) decided that payments made by Enron as it was going out of business to certain investors were legal because of a provision in the bankruptcy code that was clearly intended for something else. So we see here a good example of Republican Free Market Principles: distorted law, government subsidies, and huge insider profits. President Obama has proposed legislation to take away the tax subsidies for this kind of scam, but the GOP House is not interested.