Audit Notes: Kim Dotcom and SOPA, Private Equity, Swipe Fees

The Kim Dotcom story is fascinating, and not just because the FBI had to get dozens of cops in New Zealand, backed by choppers, to cut the 6’7, 300 pounder out of a saferoom he’d holed up in inside the $30 million mansion he leased with the tens of millions he made off piracy with his website Megaupload.

But it’s also interesting because of what it says about how the government can police content pirates without laws like SOPA and PIPA. In the wake of this one action, the rest of the file-sharing business is radically changing how it does business.


In the wake of last week’s Megaupload shutdown, some of the biggest names in the market are taking drastic action. During the last 48 hours many sites have completely withdrawn their systems for paying uploaders when their files are shared with others, but one of the most dramatic moves came first from Filesonic and today Fileserve. Both services now forbid people from downloading any files they didn’t upload themselves.

In the wake of the raid, several sites have either shut down or radically altered how people can download from them, no legislation required.

The New Yorker James Surowiecki looks at what’s wrong with the private-equity industry and what it says about U.S. policy. Specifically, the industry makes scads of money by gaming the tax system, which privileges debt over equity and capital over labor:

If private-equity firms are as good at remaking companies as they claim, they don’t need tax loopholes to make money. If we capped the deductibility of corporate debt, and closed the carried-interest loophole, it would not prevent private-equity firms from buying companies or improving corporate performance. But it would reduce the incentives for financial gimmickry and save taxpayers billions every year. Private-equity firms are excellent at gaming the rules. Time to change them.

Here he writes about how PE firms extract value from companies with special dividends:

Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” This allowed them to recoup their initial investment while keeping the same ownership stake. Before 2000, big special dividends were not that common. But between 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

As a result, private-equity firms are increasingly able to profit even if the companies they run go under—an outcome made much likelier by all the extra borrowing—and many companies have been getting picked clean.

Around that time, of course, the Bush tax cuts dramatically lowered capital-gains and dividend tax rates.

— The Wall Street Journal reports on how small banks are benefiting from the swipe fee law, which exempts them, while big banks are getting hammered.

This isn’t helping merchants, particularly in rural states, the Journal reports, but the sputtering it elicits from press favorite Jamie Dimon sure is funny:

The rule is “a gross miscarriage of justice,” J.P. Morgan Chairman and Chief Executive James Dimon said earlier this month.

The nation’s largest bank by assets said the rule cost the New York company $350 million of revenue in the fourth quarter.

This bit, stuffed at the end of the story, seems like it hasn’t gotten enough coverage:

Bankers say interchange rates will likely decline after April 1, when all U.S. banks and credit unions must offer merchants more choices of companies used to process debit-card transactions. That is expected to push interchange fees lower, because rivals of Visa Inc. and MasterCard Inc. usually charge less than the two giants.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,