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Private equity is one of the most hostile anti-business social trends in American history. It is a set of financier-led attacks on the ability of Americans to trade with one another. So let's define it.
Modern PE was born in the 1980s by former Nixon Treasury Secretary, William Simon. Simon bought Gibson greeting cards in 1981 with only $330k of his own cash down. He sold it in 18 months and made $70M. Wall Street's mouth collectively watered. How. The. Fuck. Did. He. Do. That?
The answer was simple, no different than what Brandeis discussed 70 years earlier. He borrowed against the assets of the company, sold off the company's assets, and paid himself handsomely. It was a form of looting. If you had access to Other People's Money, you could do it.
In the 1980s, what Simon did was systemized into a business called leveraged buy-outs. It was renamed 'private equity' because the name leveraged buy-out because so toxic. KKR was the big one, but there were others. Now there are lots of shops targeting every kind of company.
PE is, put simply, the use of other people's money in unregulated pools to buy and restructure corporations for profit. You can make money by either making the company work better, but that's hard and boring. It's easier to make big bucks by looting. Layoffs are one model.
There are incentives that encourage the PE model. You used to be able to write off borrowing costs. That ended with the Trump tax cut. But you still have a lower tax rate for PE 'income' known as the carried interest loophole. We subsidize destroying of businesses.
You can also make money by controlling the company, having the company borrow a ton of cash, and paying that cash to yourself. Or to consulting firms you control. And remember, you bought it with borrowed money. So none of the risk is borne by the person in control.
The money used by PE is pension fund money, but these pension funds have little access to info on fees charged by PE and the contracts are often secret. @yvessmith has been exposing how CALPERS is suckered into these arrangements. They are using OUR money to wreck OUR companies.
There are an endless number of scams, most oriented around self-dealing and monopoly power to spreading horrible business practices throughout the economy. One PE company I heard of bought a pharma biz and tried to extend patents by patenting an FDA warning label!
We have to figure out how to eliminate the evil looting of PE while retaining the ability to invest in productive expansion of businesses. We need changes to tax laws, much higher marginal tax rates, and more assertive antitrust. Bring back state-level anti-takeover statutes.
This is going to have to be done industry by industry. It's probably a good idea to have much stronger barriers to moving IP and medical facilities in mergers. Martin Shkreli for instance was essentially a PE guy profiting by extorting sick people. That's common.
We probably need straightforward caps on media ownership acquired via merger. You can build a chain if you build it, but not if you buy it. We also need far more assertive rules forcing PE companies to disclose fees charged to investors and public rules on pensions.
If you want more information, read @EileenAppelbaum's Private Equity at Work, check out @yvessmith's reporting on the PE industry, and pay attention to @davidsirota's reporting on pensions. This is a multi-trillion scam. It's horrific. russellsage.org/publications/p…
Fundamentally American business has been gangster-ized and turned into a giant extortion machine. We need aggressive attacks on executive and financier self-dealing. As one financier put it, 'if there's no conflict there's no interest.' That's the legal framework we must end.
One politician who did good work on PE is mathematician @DanielBiss in Illinois. nakedcapitalism.com/2016/05/tough-…
