Sad, apparent extreme crookedness did in Toys 'R Us

[Aristotle]

The part about workers expecting severance is pointless and not interesting.

‘How can they walk away with millions and leave workers with zero?’: Toys R Us workers say they deserve severance

The interesting part of the article is at the end:

Much of Toys R Us’s troubles, employees say, date to a 2005 leveraged buyout in which its new owners — private-equity firms Kohlberg Kravis Roberts and Bain Capital, and real estate firm Vornado Realty Trust — loaded the company with more than $5 billion in debt. The company filed for bankruptcy last year, citing $7.9 billion in debt against $6.6 billion in assets, and announced in March that it would close all 800 of its U.S. stores.

So the private equity firms bought Toys R Us and it sounds like they loaded it down with debt from other sources.

In the case of Toys R Us, financial filings show that the company was handing over $400 million a year to pay back its debt, often at the expense of turning a profit. Recently, it was burning through $50 million to $100 million in cash each month as it tried to dig its way out, according to court documents filed in March.

But here is the really crooked part:

The retailer also paid $470 million in advisory fees, interest and other payments to Bain Capital, KKR and Vornado since 2005. The firms did not respond to requests for comment.

It sounds like KKR and Bain literally dumped off $5B in debt, and then collected $470m in free money, then declared bankruptcy and move on.

WTF?

[Tartun]

Wow...

[Xywalan]

This is why I laugh when I hear Capitalism Purists spout simplistic principles on how markets work to oppose regulations. There's really no "law" (i.e., truths that hold invariantly) about markets.

What happened to Toys R Us is just one example of a business activity that produced absolutely no value yet it made tons of money for people who engineered it. Did people who did it come up with "a better product", "better service", "more optimized delivery"? No. Are they successful. Hell yes and they will do it again.

[Xywalan]

Oh just to add, if you read the details you realize that Toys R Us was actually making a profit! It's just that it was more profitable to suck up its juices and then throw away the husk than to run a normal business.

[Aristotle]

Oh just to add, if you read the details you realize that Toys R Us was actually making a profit! It's just that it was more profitable to suck up its juices and then throw away the husk than to run a normal business.

Indeed.

This is why pure capitalism is actually terrible, and why intelligent, clever regulation is the main reason the US's version has been mostly successful over the last 200 years. But if we get away from the fact that the regulation part is important, we will fail.

[Sier]

I'm not sure I would call on this as a condemnation of Capitalism. It is, however, an example of the problems in the system.

Capitalism, like any other aspect of government, can be abused, manipulated, and ultimately turned "Evil".

You can have a corrupt/benevolent Democracy.
You can have a corrupt/benevolent Republic.
You can have a corrupt/benevolent Monarchy.
You can have a corrupt/benevolent Socialism.
You can have a corrupt/benevolent Capitalism.
You can have a corrupt/benevolent Free Market.
You can have a corrupt/benevolent Communism.
You can have a corrupt/benevolent Theocracy.
You can have a corrupt/benevolent Absolute Dictatorship.
Etc...etc...etc............

Yes, you can mix some aspects of Socialism, Regulations, Labor Unions, or -whatever- with Capitalism. Certainly. But at the end of the day you are closing the door on some problems and opening the door on others. The real problem is the corrupt individuals who abuse whatever system is in place. It's really just a re-skinned battle of good vs evil in the marketplace. Bad, crappy people should be punished.

I DO agree that there should be some regulations in place to prevent these problems. But when I invoke the term "Regulations" I immediately think of the state of California who has buried its citizens in regulations to the point of absurdity. Point in case: https://www.nytimes.com/2018/05/09/b...lar-power.html . I do think there is a fine line which changes over time due to social need and technology, and it is far beyond my pay grade to even speculate where that line should be.

[Kirzad]

This is why I laugh when I hear Capitalism Purists spout simplistic principles on how markets work to oppose regulations. There's really no "law" (i.e., truths that hold invariantly) about markets.

What happened to Toys R Us is just one example of a business activity that produced absolutely no value yet it made tons of money for people who engineered it. Did people who did it come up with "a better product", "better service", "more optimized delivery"? No. Are they successful. Hell yes and they will do it again.

There's two issues presented in this article:

1) Workers lost jobs because of corporate actions and they think they should have severance pay.

2) Regulations and Bankruptcy laws that were utilized, effectively.

The problem here isn't capitalism, but corporatism, that was enabled because of regulations and laws that enabled such behavior.

First - the workers, unless it was a part of their agreement upon being hired, don't deserve anything bu the paycheck and fringe benefits they were promised. Unless they were promised a severance package upon termination, they have already been compensated fairly for their time and energy.

Second - It is the excess of regulations, and protections by way of those regulations, that allowed a company to hijack another company, transfer all debt to it, and then, as it is a separate entity to the first, allow the loss of that company to absolve all debts by the first. This is a perfect example of where a lack of regulations is getting blamed for the blatant manipulation of regulations. If KKR&Bain Cap. had not had a protection by those very regulations, that allowed them the transfer of accountability to an unrelated party , then this could not have happened.

Regulations are needed in business - but blaming a lack of regulations for the protections that regulations permitted, that were utilized, effectively, and most likely in accordance with the law, is just self-delusion.

Who are the wronged parties in this? Who is hurt by this? Is KKR&Bain Cap? Is it the workers? Companies that KKR&Bain Cap were in debt to? What is the problem with all of this?

You have a company that was able to shuffle debt, declare bankruptcy and then continue being a company - Working as intended.
You have employees that were compensated fairly at an hourly rate for their time and energy - Working as intended.
You have companies that were owed money that, through legal protections granted to KKR&Bain Cap were allowed to go unpaid. <--- Only victim in this scenario

Is it a bad thing that employees have to go find new jobs? Sure. But they aren't owed anything. A job is not guaranteed for life.

It is literally the regulations at fault here, and the exploitation of those regulations.

[Qenton]

You have a company that was able to shuffle debt, declare bankruptcy and then continue being a company - Working as intended.

I understand what you were trying to say, and hell, to a certain point I agree with you. But then there's this comment.

The fix to this is:

You have a company that has a shit-ton of debt. That has controlling interest in another company completely unrelated to that debt. They offload that debt onto the other company, file bankruptcy for that company, close the company, and then continue being a company with far less debt at the cost of the other company.

But. As you say. Working as intended. Moral of the story? Don't let someone else have controlling interest in your company.

And the severance is complete bullshit, and the article is ass if they are trying to make the case that those people for some reason were "owed" severance. If it isn't in your contract, you're fucked.

In the wise words of Childish Gambino: "This is America."

[Kirzad]

I understand what you were trying to say, and hell, to a certain point I agree with you. But then there's this comment.

The fix to this is:

You have a company that has a shit-ton of debt. That has controlling interest in another company completely unrelated to that debt. They offload that debt onto the other company, file bankruptcy for that company, close the company, and then continue being a company with far less debt at the cost of the other company.

But. As you say. Working as intended.

Pretty much.

I still don't understand the mindset of: Government has made possible this thing that I disagree with, so the only solution is to DOUBLE DOWN ON GOVERNMENT INVOLVEMENT! That'll fix the problem.

I mean, I honestly can't think of a more perfect example of declaring the problem the solution than this - it is literally the result of regulations, granted in a tangential field (Bankruptcy law), that permitted it, but it was that over-reaching hand of government that puts in place the capacity to pull it off.

[Zatick]

I'm not an expert on this, but my understanding of a leveraged buyout is that a significant amount of borrowed money is used to purchase the company. The cashflow of the purchased company is used as collateral.

The way I read this is that the 5 billion in debt was not one company transferring pre-existing debt to an aquisition, it was that the 5 billion was borrowed and being a leveraged buyout Toys 'R Us was paying it back. They couldn't so they went under... (which is often the case in leveraged buyouts).