The Bridge Trolls of American Capitalism

Many wealthy people aren't particularly smart entrepreneurs or businessmen at all

The Fremont Troll, under a bridge in Seattle. (Hat tip: gexydaf)

There’s no mistaking the swagger of the American super-rich. They never fail to let us know they are anything but utterly brilliant, and wealthy because of that fact. Stephen Schwarzman, to take the example of our own billionaire oligarch, throws multi-million-dollar birthday parties for himself, complete with a miniature model of his New York apartment, a huge portrait of himself, and a menagerie of exotic animals. This kind of egotism is practically a given among people with a king’s ransom in their bank accounts.

The striking thing about the truly wealthy among us is how many of them have very little track record in building anything other than their own fortunes. Even more striking, they tell us that in so many words. We simply have to listen, and reflect on what they say, and what they don’t say. Once we do, American capitalism’s leading lights look less titans among men. These people aren’t particularly talented entrepreneurs, businessmen, or even financial engineers. They’re more like a collection of very effective bridge trolls.

Take a look around at the big fortunes that financiers have amassed over the past few decades, and you’ll start to recognize them, the people whose key insight is not how to build a better mousetrap, but how to position themselves at a spot in the economy where others simply must pony up, or go down. The troll extracts his price, and gets rich.

A current darling of the private equity industry is Orlando Bravo, founder of Thoma Bravo. This firm has made a name for itself by purchasing software companies at a time when other private equity maven shied away from acquisitions that did not have real assets — real estate, big inventories, pension funds — that they could exploit. But Bravo, the country’s first Puerto Rico-born billionaire, doesn’t fancy himself a whiz at software. His insight was that business software providers will find it hard to lose clients, even ones facing financial difficulties, because the client can’t even think about making money without software to run the business.

“People have proven that they can conduct business without going to an office, but they can’t do it without software,” [Bravo told The Wall Street Journal]. “Software is everything. It is the business. It’s what makes the business go.” … Thoma Bravo identifies software companies with a loyal customer base but middling profits and transforms them into moneymaking engines by retooling pricing, shutting down unprofitable business lines and adding employees in cheaper labor markets. The firm then guides its companies to use the profits they generate to do add-on acquisitions, snapping up smaller rivals with offerings that they could spend months and millions of dollars trying to replicate.

Notice what is not in this description of how Thoma Bravo has made billions? Not by improving the software it sells, or developing new products, heaven forbid. That’s not what this game is about. From your position at a commercial chokepoint, you buy up potential competitors, cut costs, and watch the cash roll in.

We still don’t know the whole story behind SolarWinds, the Texas-based software company that Russian hackers used as an entree into who-knows-how-many U.S. government servers. (We do know that Thoma Bravo sold shares in the company six days before news of the breach became public.) But one former employee has criticized the CEO for cutting costs in ways that made the hack “inevitable.” Put another way, the Thoma Bravo bridge trolls made their money and stiffed the rest of us, via the U.S. government.

The purchase of physician staffing companies by Schwarzman’s Blackstone is a species of this strategy as well. Blackstone bought up companies that provide staff to emergency rooms, who seldom employ people directly, on the obvious theory that nobody is going to turn down treatment at moments of extreme urgency. Surprise billing (explanation here) was a big bone of contention in Congress, which legislated a mediocre solution last year. Again, it’s an insight about chokepoints, rather than any kind of improvement to the business that has made emergency room staffing a cash cow for Blackstone and a distastes for doctors and patients.

In one sense, the problem of the bridge trolls that I’m describing is a failure of competition policy to do its job, a problem of monopolists run amok. Something is amiss if private equity can simply amass market power to make money. Warren Buffett — a billionaire whose understated swagger draws near-worship from the financial media — uses a similar Middle Earth-style metaphor to describe his approach: the moat. As Buffett put it at the annual meeting of his investment vehicle, Berkshire Hathaway, in 2000:

“[W]e think in terms of that moat and the ability to keep its width and its impossibility of being crossed. We tell our managers we want the moat widened every year.”

In other words, the Buffett version of competition is to hide from it. Don’t buy companies that are buffeted — forgive the pun — by competition. When you find ones that are not, keep the competition at bay. (David Dayen’s pathbreaking article in The Nation in 2018 punctured the Buffett myth most effectively.) I see nothing to worship here.

The moat metaphor conveys the failure of antitrust enforcement and other measures to promote effective competition. But the bridge troll image of the modern American financier caught my fancy because it contradicts everything in the self-image of the likes of Orlando Bravo. He, like the bridge trolls, is uncreative, ugly, and unfair. There’s nothing particularly talented about the bridge troll; he simply occupies a space that people need to cross, and forces them to pay to do it.

And yet, the bridge trolls sneak into our culture in the form of Masters of the Universe or other similarly titanic figures. Why is that? Big piles of money, and the attendant fawning by media and other observers, certainly help. But there’s more at work there.

Somewhere deep down, Americans want to believe that these great fortunes are deserved, since “all men are created equal” and all that, and thus entirely earned. We are slow to admit that we’ve created a system (and it is a creation of humans) that is structured so as to give rise to these great fortunes. This admission opens up all sorts of embarrassing questions about the political nature of these fortunes, and how the money that the rich inject into politics enables and preserves their fantastical wealth.

The bridge trolls benefit from the awkward nature of these questions, getting inside our minds in their own way, convincing us they are creatures of merit, born of a system ordained by Providence. And we have to overcome that mindset if we’re ever going to put the bridge trolls to the sword.