In his latest BIG newsletter, Matt Stoller (previously) relates the key moments in the history of private equity, from its roots in the notorious "leveraged buyouts" of the 1980s, and explains exactly how the PE con works: successful, productive business are acquired through debt financing, drained of their cash and assets, and then killed, leaving workers unemployed and with their pension funds looted, and with the business's creditors out in the cold.
Private equity's story begins with William Simon, "a mean, nasty, tough bond trader who took no BS from anyone" whose idea of child-rearing was the douse his children with buckets of ice-water to rouse them from bed on weekend mornings. Simon was given senior Treasury appointments under Nixon/Ford, then became America's energy czar during the oil crisis. He was pro-austerity and blocked the bailout of NYC in 1975.
Once out of government service, Simon set about to create a Republican "counter-intelligentsia" to swing the party to the right. He ran the influential far-right think-tank the Olin Foundation, and dispersed money to fund law and economics scholars who were devoted to discrediting the New Deal and the idea of any limits on corporate power, all cloaked in "scientific" rhetoric.
The darlings of this movement — Henry Manne, Milton Friedman, Michael Jenson — promoted the idea of "shareholder capitalism" and the notion that managers have a single duty: to put as much money in the pockets of investors, even at the expense of the business's sustainability or the well-being of its workers. They joined forces with Robert Bork, who had set about discrediting antitrust law, arguing (successfully) that the only time laws against monopolies should be enforced was when monopolists raised prices immediately after attaining their monopolies — everything else was fair game (Bork is a major reason that every industry in the economy is now super-concentrated, with only a handful of major firms).
Simon's policy prescriptions — massive reductions in capital gains taxes, deregulation of trucking, finance and transport, and a move from guaranteed pensions to 401(k)s that only provide in old age if you make the right bets in the stock market — were adopted by Carter and the Democrats, flooding the market with huge amounts of cash to be invested.
That's when the leveraged buyout industry was born. In 1982, Simon convinced Barclays and General Electric to loan him $80m to buy Gibson Greeting Cards from its parent company RCA. Once the company was theirs, they looted its bank account to pay themselves a $900k "special dividend," sold off its real-estate holdings for $4m, and took the company public for $270m, with Simon cashing out $70m from the transaction (Simon's total investment was $330k).
This was the starter pistol for future leveraged buyouts, through which companies like Bain Capital and the Carlyle Group buy multiple companies in the same sector and transmit "winning strategies" between them: new ways to dodge taxes, raise prices, and avoid regulation. PE owners suck any financial cushion out of companies — funds that firms set aside for downturns or R&D — and replace it with "brutal debt schedules." The PE owners benefit massively when this drives up share prices, but take no downsides when the companies fail.
Under PE, companies have emphasized firing workers and replacing them with overseas subcontractors, and amassing "brands, patents and tax loopholes" as their primary assets. PE firms specialize in self-dealing, cutting in the banks and brokers who set up the deals for a share of the upside. A company bought by a private equity firm is ten times more likely to go bankrupt than one with a traditional capital/management structure.
Elizabeth Warren has proposed some commonsense reforms to private equity: making PE investors liable for the debts they load their companies up with (including an obligation to fund workers' pensions); ending special fees and dividends; and reforming bankruptcy and tax laws to force PE companies to operate on the same terms as other businesses. Stoller calls this "reunifying ownership and responsibility": making the people who assume ownership of these productive companies take responsibility for their liabilities, not just their profits.
As Stoller points out, critics of Warren's plan say that this would end private equity investing as we know it ("Unfortunately, Warren’s fixes for these problems… would pretty much guarantee that nobody invests in or lends to private equity firms" — Steven Pearlstein, Washington Post), but of course, that's the whole point.
But centrist Democrats love private equity, as the firms are major political donors, and many's the politician who cycled out of public office and into a cushy job with a PE firm.
Stoller discusses this further in his new book Goliath: The 100-Year War Between Monopoly Power and Democracy.
And though it is not really on stage that often, private equity is an important part of our political debate, though the supporters of private equity in politics are so far quiet. And that is because private equity funds are important vectors for political donations.In the second quarter, Joe Biden, Cory Booker, Pete Buttigieg, and Kamala Harris have all received donations from one or both of the leaders of the country’s top two private-equity firms, Blackstone and the Carlyle Group. Buttigieg received max donations from 11 high-level Blackstone employees, as well as money from Bain Capital and Neuberger Berman. Biden, Booker, and Gillibrand nabbed donations from employees at at least three of the top 15 private-equity firms.
PE funds are job sinecures for out of power elite Democrats and Republicans, a sort of shadow government of financiers who actually do the managing of American corporations while the government futzes around, paralyzed by the corruption PE barons organize.
Why Private Equity Should Not Exist [Matt Soller/Big]
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