The Stir Problem and a Penal Solution

Our nation’s prison-overpopulation problem is getting worse, especially in California, where they have too many cons and no death penalty. The Supreme Court has mandated reduction of con concentration by whatever means possible. One bright idea — to farm out the whole mess to the Vatican, profiting from its crime-and-punishment expertise — met with a landslide of favorable response, but that was only a talk show poll.

Besides, most respondents tended to be alternative people, tree-huggers and their communist ilk. Disappointingly, few cheers came from our sort of chaps, which leads us to conclude that in free-enterprise America, a better answer must lie elsewhere, in the area of smaller government, more private initiative and the natural avarice that Americans flesh is heir to.

In fact, the pro solution (dealing with the cons) already exists in the stir-for-profit sector, the corporate maximization of the American tradition, an economic sub-culture already dotted with several sizable corporate entities, which, because of the opening paragraph above, is demonstrably a growth industry. According to one hedge-fund manager who preferred not to be fingered, the key to the industry’s explosive growth potential – apart from its unique incentive of attracting REITs (real estate investment trusts) – is the fact that 50% of all gross revenue comes from the Federal Government. Even small government can pay big bucks to entrepreneurial pros to take care of cons. It’s a win-win deal, except for the losers, and they don’t have anything to say about it.

Moreover, if one leading corrections corporation is an example, executive staffing is a turnkey snap, as the financial writers say. A company we’ll call Conco, Inc, based in Leavenworth, Kansas, boasts a CEO and two vice-presidents all of whom were formerly prison guards or aspiring wardens. Screws, it’s evident, make the best stewards, corporation-wise. As in most sectors, the key is in the management, next to the government cash flow.

The corporate mission is simple. Private, but preferably public companies, in return for a fee, house federal, state and local prisoners, so far in 20 States and the District of Columbia. It’s a bigger fiat than 47 of our States. It exceeds already the total of the 20 establishments operated by Immigration and Customs enforcement. From sea to shining sea.

But bigger prospects are in the mix. This is the land of the free, man. Not free cons, perhaps, but free entrepreneurial screws. The potential is there for winning the approval of investors.

The REITs idea is the real winner. Of the several companies already in the business, the average price/earnings ratio is around 12:1. That ballpark figure could double, the bottom-line results could escalate, with private prison managers converting to real estate investment trusts, which, under current SEC regulations, allow, in fact require, the payment of at least 90% of all otherwise taxable income to shareholders, rather than to big government. REITs operating as free-enterprise prisons could save millions in taxes.

Hedge funds have already become sizable investors in correctional companies, anticipating their conversion to future REITs. It’s a better deal than being a shareholder in the Vatican Bank, now restricted to the guys in gold dresses.

There are cons as well as pros. First, of course, is the dangerously high current prison population of 1.6 million yardbirds currently alarming everybody, right up to the Republican-biased Supreme Court, which of course opposes any further growth in anything paid for by government, except of course for the Supreme Court itself. The likelihood, going forward, as the financial writers say, is that there will somehow be fewer prisoners. But countering this, enterprising private enterprise correction companies can maximize the per-prisoner tab from the current $85-a-day ponied up by the Federal Bureau of Prisons to more perhaps in the neighborhood of what California lays out (because of higher real estate, lifestyle and the evils of overcrowding), or about $140.

Prison numbers tend to flat-line or decline during recessions and depressions. Partly because of increased early releases to save on budgets, partly because in hard times, most criminals in society find it harder to make a buck, and therefore tend to rely on regular work, where available. If the current slowdown persists, prison numbers may continue in their topical decline. And the growing numbers may tend to favor Obama, offsetting the failure in straight job growth.

On the other hand, free enterprisers are traditionally more adept at cost-cutting measures and profit maximization than public service johnnies, which bodes well for private sector profitability. The availability of prison beds is a large determinant of per-con profitability. It created the drastic situation in California, whereby gymnasiums, recreation halls and even basketball courts were pressed into service as dormitories which was instrumental in the supreme court decision to mandate a reduction in California’s prison population.

Bed-count tends to be a lesser problem in private-enterprise prisons. Innovative solutions are always being devised by knowledgeable screws now serving as venture capitalists and operating executives in the private sector.

One innovative plan being tried out in one of Conco’s establishments is a conjugal-relations initiative, which seeks to replace the traditional gang-rape culture with a more user-friendly system, (called “one-on-one,” or “conjugal cons” by the inmates) whereby the conjugal relations set-up can potentially reduce bed count by half. Federally-run prisons have been slow to recognize the potential in such an initiative, constrained in some cases by religious or social bias.

But the REITs idea is potentially the most attractive incentive for investors, both hedge fund and institutional professionals and tax-averse retail buyers. As the twin growth of corporate for-profit companies and those opting to go the real estate investment trust route takes place, we’ll be killing two jailbirds with one stone.

Crime doesn’t pay? Tell it to the SEC.

Bill Annett writes four newsletters: The Canadian Shield, American Logo, Beating the Street, and The Oyster World. He can be reached at: Read other articles by Bill.