Yesterday on Fresh Air (a daily public radio show) Terry Gross interviewed Joshua Kosman, the author of a new book called The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis. While his hypothesis about how private equity is about to cause the next great credit crisis much in the same way the housing and mortgage crisis came about is an interesting one, what I mainly found interesting was his explanation of how private equity firms worked.

In b-school, private equity and venture capital are probably two of the sexiest areas that almost everyone wants to work in (and the sooner the better…this alone should give you a good idea of the profile of a typical b-school student). Private equity and venture capital represent power and money all in one — investing lots of (other people’s) money, choosing who gets it, and making lots of money for yourself in the process. Actually, I never really understood why you’d hire anyone who didn’t have a successful track record as an entrepreneur to work in these areas.

Up until I heard the interview, I had always assumed private equity firms were expert investors who excelled at identifying underperforming businesses that could be turned around, purchased them, used their business expertise to make them better, and sold them later on for a nice profit once the turnaround had been completed.

As Kosman explains, private equity firms in many cases use leveraged buy-outs (LBOs) to purchase companies, making them profitable mainly by squeezing or cutting down assets, focusing on short-term profitability and saddling them with so much debt in the process that they have little likelihood of surviving (and which could lead to a huge credit crisis if these firms all collapse in unison). LBOs were infamous for their boom and bust in the 1980s, and Kosman seems to be suggesting that something like it may soon occur again.

I admit I was somewhat skeptical of Kosman’s point of view about both the crisis and how private equity firms often destroy value because he comes across as fairly one-sided, but a series of videos on how private equity firms work put out by the New York Times seems to support his views. The video entitled “Getting Paid to Do Deals” in particular goes into more detail than Kosman does on why private equity deals get done the way they do. The saddest part is how many of the employees of these companies being bought by private equity are negatively impacted without realizing or understanding what’s going on.

I don’t think this is new, but it’s still worth taking 5 min. to watch and definitely will make you smile :)

The org behind this is called the Playing for Change Foundation and its goal is to build and connect music/art schools around the world. Pretty inspiring.

Today was garbage day, and we awoke this morning to find that our entire bin of can and glass recyclables had been stolen. I’d heard about this happening around the Bay area but this is the first time we’d seen it in our neighborhood. The paper and cardboard bin had been left full.

We called Allied Waste to request a new recyclables bin. As soon as I mentioned what happened, they responded knowingly with “We’ll drop off a new bin for you. What’s your address?” No account number or anything needed. According to the representative, this is really prevalent now because of the downturn in the economy. Wow. They said they were working with the police department to crack down, but since people tended to operate either late at night or very early in the morning, and the vehicles used don’t have license plates, there isn’t a whole lot they can do about it.

I guess to make enough money (even though it’d be tax-free), you’d have to steal recyclables en masse. Recycling centers in California apparently pay $0.05 per less-than-24-oz. container. I don’t particularly care if people take my recyclables (especially if they really need the money), but it’d be nice if they could leave the bin.

On the other hand, maybe we should just start bringing our own recyclables to the local recycle center.

If you still don’t know how the current financial crisis happened, there’s an excellent explanation making email rounds in a few Latin countries. Unfortunately, it seems it’s available only in Spanish. It’s such a good piece, though, that I’m offering a basic English translation below. (Edit (11/19/2008): The translation is of the version I received. If someone knows of an English version that probably does a better technical translation than mine, please feel free to let me know.)

It doesn’t seem to have an obvious author, though the Word Doc I received lists an “ojimenezr” at the “Caja Costarricense de Seguros Social – C.C.S.S.” under “Properties”. If that’s indeed the author, I hope s/he’s ok with me using it on my blog. A commenter (thank you Alvaro!) provided me with the author and a link to the original piece. The author is Mr. Leopoldo Abadia, a 75-year old ex-professor at IESE. According to an article about “La Crisis Ninja” in El Mundo, he wrote the piece one afternoon in January and the thing went viral (at least in Spanish-speaking countries). His blog called La Crisis Ninja contains a link to the original piece, which he regularly updates. As such, please note that Mr. Abadia has updated his piece significantly since then (last edit looks like it was done on 11/6/2008), so my translation is of an older version. However, I believe it still does an excellent job of explaining the basics leading up to the financial crisis and in that sense is not out-of-date. Despite having heard of CDOs and followed articles in the Economist, I had no real idea how everything was connected together until I read this document.

Here it is:

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And now we take a break from finance to mention something newsworthy from another interest of mine. I’m really late to the game on this one (darnit!!), but there’s been a naked-eye visible comet in the skies for the past few weeks. Comet McNaught (C/2006 P1), the brightest comet in 40 years, should be visible to many viewers worldwide, but especially in the Southern Hemisphere this week, where it will appear for about 30 minutes after local sunset. Just the usual word of warning when looking at objects close to the Sun: protect your eyes, and never look directly into the Sun!

I remember when Comet Hale-Bopp was visible to the naked eye back in 1995 — that was a pretty spectacular show, even under the oft-cloudy skies of Seattle where I was living at the time. I’m still going to see if I can find any glimpse of McNaught today, but the show might be over for most of the Northern Hemisphere as the comet rounds the Sun.

For those who’ve missed it, here’s a link to a gallery of nine pages of recent Comet McNaught photos.