Private Inequity Iniquity

 “These Are the Plunderers – How Private Equity Runs – and Wrecks – America” by Gretchen Morgenson, 2023

This is a series of detailed stories about the ruin private 'equity' firms create when they purchase a medical chain, an insurance company, become a landlord for thousands, buy a newspaper, a hotel or casino, a retail chain or trailer parks. The main culprits are Blackstone Group, Kohlberg Kravis Roberts, the Carlyle Group and Apollo Global Management, the latter being the worst and the focus of most of these stories. The author is a lover of capitalism and has no understanding 'why' capitalism might produce such monstrosities, but believes the solution is 'more regulation' actually applied and better taxation. Where have we heard this before? These investment outfits merge, lay-off workers, move production, load companies with debt, increase fees, severely reduce quality, merge entities, cut benefits, increase work-load, pollute and sell the company for a quick profit. They'll even shut down a company just to sell their real-estate! So if your company is bought or owned by a misnamed private 'equity' firm, look out! The 'equity' is for the owners and investors, or as she calls these firms, “money-spinning machines.” The 'private' means that everything they do is as secret as non-public companies can be.

Their efforts are aided by numerous government legal and policy decisions from both parties: A 1978 Supreme Court decision allowing usury; a 1978 rule killed off employer-run pension funds; a 1978 decision allowed pension funds to invest in private equity deals – all in Carter-time at the beginnings of neo-liberalism. In 1986 debt interest became a primary tax-lowering strategy, very useful in private equity mergers using debt. In the 1980s, the SEC had a light hand on even hostile mergers, blocking very few. That pattern has continued. In 1994 Clinton's Riegle-Neal law allowed banks to merge across state borders.  In 1996 a law opened private equity partnerships to more people while shielding them from state investigation. In 1997 capital gains taxes were cut, allowing a flood of investors into private equity. The rule separating normal banking and investment gambling, Glass-Steagall, was abolished in 1999 by Clinton and Rubin. After the tech wreck in 2000 the Fed dropped interest rates to historic lows, fueling more mergers using cheap debt. In 2010 a rule was passed that helped 'self-dealing' in private equity among their related companies.  In 2020 Jerome Powell, former private equity executive at Carlyle, had the Federal Reserve prop up corporate bonds by buying them, which was an aid to private equity.  In 2020 private equity was allowed to get involved in 401(k)s retirement accounts. These are just some of the decisions that show the 'public' state's involvement in building private equity privateers.

DREXEL to APOLLO

Apollo's head goon, Leon Black, came out of the corrupt junk debt machine Drexel Burnham Lambert in the late 1980s when he started Apollo. Apollo was basically an extension of Drexel, staffed by many of the same people. He remained a buddy of Drexel's Michael Milliken, convicted felon and HY bond assassin of the S&L industry. He later had a tight relationship with Jeffrey Epstein, who had provided 'tax advice' to Black for $158M. This scandal led to Black losing control of Apollo in 2021. His own father Eli had committed suicide over a United Fruit tax fraud bribery scheme in Honduras that had been discovered in 1977. So sad!

Morgensen tells the story of how private 'equity' grew out of the junk bond / leverage buyout heyday of the late 1980s. Drexel itself went bankrupt in 1990 after many of its leading players were indicted in 1986 for a wide range of frauds. Black's Apollo first targeted huge insurer First Executive, which he was able to buy for cheap with the help of the incompetent head of California's insurance regulation department in a no-bid, no due diligence process. This was the foundation of Apollo's wealth. As a result many ordinary First Executive insurance policy-holders were deprived of coverage, as they were collateral damage.

RAID TARGETS

The next targets Morgenson focuses on are Samsonite, Noranda Aluminum in Missouri, ManorCare; health outfits like HCA, Jazz Pharma and EmCare; Taminco Chemicals, Bayonne Water, Coastal Gaslink and Athene Insurance. The Noranda deal led to higher electricity rates for residential customers and the later bankruptcy of the firm and workers' pension fund. The effects on health care in hospitals and nursing homes was dire, especially during CoVid. Manorcare went from owning their own land to renting from others after the land was sold by Apollo, which drove it into bankruptcy. Jazz was indicted for illicit uses, creating a date-rape drug and later, engaged in price gouging. Taminco was an example of 'company flipping' – sort of like what you do with houses – but with a company that supplied chemicals to Mexican narco traffickers. The water rates for Bayonne, New Jersey ratepayers went 60% up under Carlyle's private water contract. The pipeline company Coastal Gaslink was a typical carbon polluter, as private equity invests heavily in carbon firms, something they try to hide. Athene is a serial insurance rule-breaker, fined by a number of states.

Studies show that 20% of companies taken over by private equity file for bankruptcy within 10 years, while employment in those firms fall by 16% prior to that. The average time for ownership is 5 years.  At the same time fraud convictions against financial industry players have dropped like a stone. 11% of nursing homes in 2021 were owned by private equity, which is somber news for that industry. These nursing homes were especially deadly during the CoVid pandemic. Pension funds and other private equity investors have to pay 10% management fees to these firms. Many familiar retail names come up in her analysis of private equities' role like Toys R Us, Neiman Marcus, Telemundo, Harrah's Casinos, HCA, Nine West and Linens N' Things.

Hostess workers strike private equity outfit GGH

The overall picture you get from the book is a trail of enormous damage left by these raiders, these modern day pillagers who make actual pirates and Vikings look like reasonable pikers. Also how this private club of financiers seem to turn up everywhere.  Private equity is the apotheosis of neo-liberal financial capital and it was let lose by both capitalist parties, wreaking havoc on the working class and nature. Her book is only focused on the U.S. situation but private equity roams the world, with Blackrock having the most assets. She leaves this international reach unmentioned, as her book focuses on the minutia of miserable U.S. private equity deals. Private equity was very close to the Trump administration in 2016.  It provided some of his leading financial advisors like Steven Schwarzman of Blackstone Group.  This is another picture of the revolving door between the Federal government and the financial industry itself, with Jay Powell being another example.

SOLUTIONS?

Morgenson thinks private equity is an outlier that good judicial decisions like 2020's private equity induced Nine West bankruptcy decision could cure. That decision said that “creditors, workers, pensioners and taxpayers” had to be taken into account, not just shareholders. Morgenson praises the Biden SEC, FTC and other agencies for limiting private equity fees and health-care consolidation. Apollo spent $7.1M lobbying to prevent any changes, and the rest of the industry pitched in too. A 2022 Delaware legal decision exposing corrupt payments to Carlyle and Apollo executives in league with governor and ex-Carlyle CEO Glenn Youngkin was another stone in their shoe.

The industry is putting up cosmetic changes around charity and stock awards to some workers as their answer to their reputation as thieves. Yet stronger bills in Congress against private equity were defeated after heavy lobbying by the industry. The Supreme Court blocked a key SEC rule change that would inhibit EPA pollution rules from applying to a KKR coal and natural gas plant in West Virginia. Instead Morgenson hopes for a block between Tucker Carlson and Elizabeth Warren, much like Ralph Nader's own pleas to 'left & right' and to 'good' billionaires, to unite against fraud, against the privateers, against cannibalizing mergers, in order to mitigate the automatic processes of capitalist consolidation built into the system. There is even evidence these PE firms collude in private about deals.  This “competition” actually creates oligopoly and monopoly, as Marx pointed out long ago, and private equity has proved this once again.

Socialists have a different take. We'd re-institute Glass-Steagal and roll back the laws benefiting the industry. Morgenson singles out one aspect of Wall Street, private equity, for damaging U.S. health care – and yet it's not as if the general capitalist 'health providers' are not also wrecking health care. Like the rest of the banking industry, private equity should be seized without compensation, nationalized, its books opened and its operations put under the control of workers, socialists and a social state. This will actually end private equities' run of madness, and begin to create a stable financial system. Instead of tolerating the Leon Blacks of the world, or chastening them, send them into obscurity and irrelevance.

Pastor Chris Hedges interviews Morgenson 3/2/24 on Scheerpost: Hedges interviews Morgenson

Prior blog reviews on this subject, use blog search box, upper left, to investigate our 17 year archive, using these terms: “The Capitalists of the 21^st Century,” “Capital in the 21^st Century” (Piketty);“Giants – the Global Power Elite” (P. Phillips); “The Big Short,” “Liar's Poker”(on Salomon Bros); “Flash Boys,” (all 3 by M. Lewis); “The Wolf of Wall Street” (Scorsese); “Den of Thieves” (on Drexel); “Liquidated – An Ethnography of Wall Street” (2 part review); “The Ponzi Factor,” “House of Cards” (on Bear Stearns); “Ponzi Unicorns!” “Antitrust” (Klobuchar).

And I got it at the Library!

May Day Books has many books on capitalist financial issues.

Red Frog / March 5, 2024