Posted on

Regulation needed to stop hedge fund vultures

More regulation is needed to prevent hedge funds from destroying otherwise healthy companies in the search for a quick buck.

Wisconsin-based retailer Kohl’s department store is the latest corporation facing an attack aimed solely at lining the pockets of hedge fund investors and which, if unchecked, could end up costing Wisconsin jobs and lost tax revenue.

As has been reported in the Milwaukee Journal-Sentinel and elsewhere, the hedge fund Macellum Advisors is attempting to undermine the boards of directors of both Kohls and Michiganbased grocery store company Spartan-Nash into schemes to sell their physical building locations to outside real estate investors and then lease them back.

What this does is show the gain from the sales as a large spike in the income on the company’s books which helps boost prices for the stock and potentially leads to a special dividend to stockholders. While these impacts would fatten the pockets of the hedge funds that own large blocks of stock, it would also set up the corporation to put the cost of the rent on its books as an ongoing obligation.

On a personal financial level this would be like selling your home to someone and then paying them rent to keep living there. Since the person who buys it wants to see a return on their investment, rental prices will be higher.

This becomes a major issue when there is a down period in the business cycle. Faced with increased expenses due to the rent obligations and not having the value of the properties to leverage in lean times, the company would be less able to weather a financial storm without closing stores. This inevitability leads to the downward spiral that has impacted once-mighty retail giants in recent decades.

On the local level, this directly impacts communities through job cuts and loss of local sales tax revenue, not to mention decreased shopping opportunities. Long-term the blight caused by empty big box stores brings down commercial property values across an entire region. In addition, given the amount of public investment in retail development, when stores are shuttered, homeowners have to pick up the tab for the unpaid infrastructure costs.

By this time, companies like Macellum are long gone, having sold off their interests in the companies like proverbial rats leaving a sinking ship.

This sort of business practice is an all too common example of the dark side of deregulation. That is the side that hurts workers, consumers and local taxpayers with the excuse of grabbing a quick buck. They are also not confined to billion-dollar companies but have been used to depress entire industry segments, such as has occurred with the corporate buy-up of once independent newspapers and gutting them so that they are cookie cutter zombies under once proud mastheads.

State and federal regulatory bodies must work to end these kind of practices and prevent otherwise healthy businesses and industries from being flushed down the drain so that fat cats can get even fatter.