The Corner

Learning the Hard Way in Maine

Joe Sudbay, guest-hosting Michelangelo Signorile’s left-wing talk-radio program on Sirius Progress (yes, yes, for my sins) today interviewed reporter Whit Richardson of the Maine Press Herald, who performed a public service with his very interesting report on the shenanigans surrounding of the Maine’s state-run economic-development programs.

The short version is that a private-equity firm in New Hampshire and some of its business partners helped Maine to set up a program under which the state would subsidize certain investments—in this case, a mill belonging to the Great Northern Paper Company—through tax credits and payment of certain lenders’ fees. The private-equity firm, Cate Street Capital, made a $40 million “investment” in Great Northern, the overwhelming majority of which ($32 million) took the form of an overnight loan that was used to finance the purchase of the mill’s equipment by a Cate Street subsidiary from another Cate Street subsidiary. The tax credits are scaled to the total size of the investment, so Cate Street and its associates were able to secure some $16 million in tax credits for what really amounted to an $8 million investment but looked like a $40 million investment.

Sudbay and the nice progressives who called into the program pronounced themselves shocked and surprised by this. They must not get out much—this is exactly how these programs almost always turn out. It’s like nobody has seen The Music Man, or even The Simpsons spoof of it.

Richardson suggested that part of the problem may be Maine’s “citizen legislature,” whose members might not have understood the details of the program they were creating, which is a very nice way of saying that state governments are generally not full of the brightest folks.

When some lobbyists for a business interest—any interest group, really—come to the state capitol and tell you that they have a tremendous new idea that will create jobs-jobs-jobs-jobs-jobs, grow the tax base and get voters off the backs of citizen-legislators, listen carefully to see if the next sentence is: “All you have to do is to give us a tremendous amount of money.”

As the poker players say: If you don’t know who the sucker at the table is . . .

Perhaps Maine’s legislators were thinking to themselves: “Financiers and their lobbyists are well-known for their selflessness and their sense of public duty—surely they would not lead us astray!”

If so, they should stop thinking that.

Maine legislators put millions of dollars into a deal that they did not understand. The fact that the politicians did not understand the deal is no doubt a big part of why their participation was sought in the first place—that and their ability to extract “investments” out of the public at gunpoint. Warren Buffett often advises investors to stay away from businesses they do not understand, which is fairly obvious and intelligent advice. How much of your own money would you put into a company without understanding its business model? Now, how much of somebody else’s money would you put in, if you thought that there might be some jobs for your constituents in it and some votes for you?

This is entirely legal, by the way. But you’ll notice that it is structurally identical to the “Spanish prisoner” con, the most common modern form of which is the Nigerian advance-fee spam scam: Put a little money up front at no real risk to yourself and reap much larger returns than you could by putting that money to any legitimate end. Politicians are not immune from avarice, even if the promised profit does not always come in the form of money in their pockets. Self-interest is self-interest, be it political or financial, and it is a fact of life.

“I just need to hold your wallet so I know I can trust you . . .” (Relevant proverb here.)

If you are in government, keep this simple guidance is mind: The fact that a business is asking you for an investment is the reason that you shouldn’t give it to them. When businesses turn to the public sector for financing, that means that the investment has been turned down and passed over by everybody interested in making money, or even in simply getting paid back. If everyone putting his own capital at risk has taken a pass on the project, what makes you think that you are going to do well in the deal? Businesses approach government for “investments” because they know that government is not looking for a return in the conventional sense and that people are less cautious with other people’s money than with their own.

You can probably guess how this went: After buying themselves $16 million worth of tax credits at 50 cents on the dollar and directing a few million dollars in fees to friendly bankers, the paper mill’s purported investors shut the place down, laying off 200 people and leaving local businesses with $20 million in unpaid bills.

In other words, Solyndra among the pines.

How many times do we need to watch Casablanca before we figure out that Ilsa is going to get on the plane every single time?

But here is a bet: Within 90 days if not 90 minutes, some well-intentioned progressive is going to suggest doing exactly the same thing in another industry or under another program. They’ll call it “investing in the future.”

Politics is politics and investment is investment and that’s that. When a politician claims to be “investing,” he is engaged in politics, not investment. And when businesses partner up with politicians? That’s not politics—that’s an investment.

Can’t tell the difference, you don’t have any business handling anybody else’s money.



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