Privatization Can't Keep Secure Information Private

Security problems persist at Los Alamos National Lab. Several years ago the federal government contracted out management of the lab to a private consortium known as LANS in an effort to address long running security failures.

Guess who spilled national security secrets this time? The people hired to improve security! According to the Associated Press:

"Officials with the contractor that runs Los Alamos National Laboratory sent top-secret data regarding nuclear weapons through open e-mail networks, the latest potentially dangerous security breach to come to light at the birthplace of the atomic bomb. Apparently, open e-mail networks were used by several LANS officials to share classified information relating to the characteristics of nuclear material in nuclear weapons."

The government contracted with LANS in 2005 for management services. The partnership officially began June 1, 2006. The e-mail breach was reported on January 19th, 2007.

A nearly identical partnership just bid successfully to manage Lawrence Livermore National Laboratory. This site recently won the design contest for the modern replacement warhead. Will they do any better keeping nuclear weapon secrets at this site than they did at Los Alamos?

Carlyle Flips Another Government Services Company for Big $

The Carlyle Group announced the sale of U.S. Investigations Service Inc. to another private equity group for $1.5 billion. Providence Equity Partners is acquiring the leading provider of pre-employment screening solutions, the largest provider of security investigations for the federal government, and a global supplier of cleared personnel supporting critical federal programs. Welsh, Carson, Anderson and Stowe also owns a big chunk of USIS and will benefit mightily from the sale.

Did you know USIS used to be a government agency, the office of Federal Investigations? In a similar move to student loan vendor Sallie Mae, privatization turned it into a corporation in the 1996.

So how much did the boys from WCAS and Carlyle make on the deal? In January 2003 WCAS paid $545 million for the company, already partly owned by Carlyle since 1999. Carlyle reinvested $172 million in the transaction. The deal turned many ex-government employees into millionaires.

In four years USIS at least doubled, possibly nearly tripling in value to $1.5 billion. For conservativism I'll call the 2003 buyout at $717 million, the total investment of both WCAS and Carlyle. The private equity underwriters, PEU's made $787 million on their four year investment, nearly $200 million a year. In a move reminiscent of the Gipper, USIS gave 110% return to its investors.

How much will the sellers save in capital gains taxes as their assets were held for more than one year? WCAS and Carlyle save nearly $40 million from this transaction alone. Next time you hear Republicans or Democrats talk about the magic of privatization recall USIS and Sallie Mae.

Individuals, especially rich board members with significant stock holdings make out like bandits from what used to be a government services organization. Then after making millions, they don't share with their original benefactor! Sallie Mae's board members will save nearly $50 million with the Bush tax giveaway.

How much will the President's friend Tom Scully (ex-Medicare chief) make off this deal as a General Partner for Welsh, Carson, Anderson and Stowe? Will he voluntarily pay extra taxes as Tom is intimately aware of Republican efforts to throw people off Medicaid via increased cost sharing and proof of citizenship requirements? I'm not holding my breath.

Next time you hear your Congress person cite the need to throw people off Medicaid, nutrition assistance, or housing help, remember who can more than afford healthcare, a decent meal and fine accomodations. Then vote them out of office.

Who Benefits from Privatization: The Case of Sallie Mae

The Student Loan Marketing Association commonly referred to as Sallie Mae got its start in 1972 as a government sponsored enterprise. It began privatizing in 1997 and completed the process in 2004 when Congress terminated its federal Charter. Republicans held a majority in our nation’s legislature this whole time. President Bush appointed 6 members to the Board when he took office in 2001.

News reports indicate a number of private equity firms are interested in purchasing Sallie Mae. The stock is up over $8 today to $55 per share. Should the deal go through Board members stand to make out like bandits. The board beneficially owns some 17.7 million shares. Board members alone stand to gross nearly $1 billion from the deal.

Assuming the $973 million to be capital gains, how much does the Sallie Mae board save in taxes under the President's lesser taxing of investment profits? The super rich get to pocket nearly $50 million more than they did when they paid 20% capital gains tax.

Does this make you excited about government sloughing off key programs to the private sector for them to be turned around in 3 years and sold to someone else at a huge profit? Oh, and those student loan guarantees given to private lenders by the U.S. government? They don’t go away!

Does it bother you that board members will walk away with millions (in addition to their already substantial annual compensation)? The smallest number of beneficially held shares is 141,000 worth $7.7 million. The largest is over 8 million shares grossing that board member over $440 million.

Sallie Mae along with Citibank just agreed to pay a $2 million fine for corrupt student lending practices. CIT owner of Education Lending Group remains under investigation for its illegal practices while Education Finance Partners just settled for a $2.5 million fine. Seven student loan companies have been under the New York Attorney General’s microscope.

Private equity firms don’t have the same public accountability in reporting investment information to the Securities and Exchange Commission. Does it bother anyone else that a recently fined company will soon enter the shadows of the private equity world?

Yes, another case of Republican privatization where the costs are higher than competing government programs and business goes to politically connected friends who donate huge amounts to election campaigns. The American public should be concerned as education is well on its way, health care is in the Bush administration’s sights and public infrastructure isn’t far behind.