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Elizabeth Warren, in Detailed Attack on Private Equity Firms, Unveils Plan to Stop 'Looting' of US Companies
Written by <a href="index.php?option=com_comprofiler&task=userProfile&user=6554"><span class="small">Peter Whoriskey, The Washington Post</span></a>   
Thursday, 18 July 2019 12:40

Whoriskey writes: "Sen. Elizabeth Warren (D-Mass.) on Thursday released a plan to attack some of the most controversial methods of private equity firms, the financiers who buy and sell companies for profit."

Many bankers view Elizabeth Warren as the safer presidential choice if the progressive wing wins out in the Democrats' internal war. (photo: Ethan Miller/Getty)
Many bankers view Elizabeth Warren as the safer presidential choice if the progressive wing wins out in the Democrats' internal war. (photo: Ethan Miller/Getty)


Elizabeth Warren, in Detailed Attack on Private Equity Firms, Unveils Plan to Stop 'Looting' of US Companies

By Peter Whoriskey, The Washington Post

18 July 19

 

en. Elizabeth Warren (D-Mass.) on Thursday released a plan to attack some of the most controversial methods of private equity firms, the financiers who buy and sell companies for profit.

The plan from the 2020 Democratic presidential contender would take several significant steps to rein in the industry, including measures to block the private equity firms from stripping cash, real estate and other assets from the companies they take over.

Most critically, however, the plan would hold private equity firms responsible for the large debts that they use to buy companies. These debts, a hallmark of private equity investment, typically wind up as a burden to the targeted company, not the private equity firm, and have precipitated many bankruptcies.

Private equity firms invest a half-trillion dollars in U.S. companies every year, according to the American Investment Council, but their role in the U.S. economy has drawn increasing resentment from economic populists.

The role of private of equity in the companies they control is often invisible to consumers and workers, but their big profits and their participation in the bankruptcies of major U.S. companies such as Toys R Us, the HCR ManorCare nursing home empire, Friendly’s restaurants — and many others — have highlighted their importance.

“For far too long, Washington has looked the other way while private equity firms take over companies, load them with debt, strip them of their wealth, and walk away scot-free — leaving workers, consumers, and whole communities to pick up the pieces, ” Warren said in a statement announcing the proposal, which is also a bill that has the support of a number of other Democratic lawmakers in the House and Senate.

The plan is Warren’s latest effort to make the U.S. economy fairer, but it will also draw pushback from industry boosters, who say such proposals would stifle investments that have made the economy more productive and prosperous.

Private equity firms make money by pooling from investors, then buying companies, revamping them and selling at a profit. Their advocates say that private equity managers make the businesses more efficient and spur growth. Moreover, the profits private equity firms make are shared with their investors, and while some investors are wealthy financial firms or individuals, some are worker pension funds.

“Private equity is an engine for American growth and innovation — especially in Senator Warren’s home state of Massachusetts,” said Drew Maloney, president and CEO of the American Investment Council. “Extreme political plans only hurt workers, investment, and our economy.”

Others, however, have called private equity investment “capitalism on steroids” and say it distorts normal economic incentives.

Private equity methods are typically geared toward generating returns for investors within a matter of years and critics say that as a result they too often merely plunder a company’s assets while neglecting its employees, customers and long-term prospects.

Moreover, one of the curiosities of private equity investment is that a firm can make money even when it drives a company it has purchased into bankruptcy.

The Warren proposal takes aim at several methods that private equity firms commonly use to take money out of the companies they purchase.

For example, private equity firms often sell off a company’s real estate — and then lease it back from the new owners. While this may seem an odd maneuver, the practice allows the private equity firm to distribute a quick real estate profit to their investors. The Warren proposal would block such a maneuver for the first two years after a company is purchased.

Another piece of the legislation would essentially block companies from taking “monitoring fees” or “transaction fees” out of the companies they buy. These fees simply force companies to turn over money to the private equity firms.

Finally, what may be the most critical piece of the proposal would rein in one of private equity’s characteristic methods of investment: They use a lot of debt to buy companies. That debt often becomes a burden to the company and has played a key role in many bankruptcies. The proposal would make the use of debt far less attractive for private equity firms because it would hold the private equity firms — and not just the company — responsible for its repayment.

“Private equity firms have been playing with other people’s money,” said Eileen Appelbaum, senior economist at the Center for Economic and Policy Research, whose research helped shape Warren’s proposal. Forcing the private equity firms to repay those debts is “the really big thing in this bill.”

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+6 # lorenbliss 2019-07-19 00:00
"...some are worker pension funds."

This is one of the more astounding displays of economic ignorance -- or perhaps Ayn Rand moral imbecility -- I have encountered, though I must confess I am not shocked merely because Capitalist Evil is now our everyday commonplace.

However, speaking as both a socialist and an AFL-CIO union member, I cannot but hope the officials who invest workers' dues-money in private-equity scams -- and for their innumerable Working Class victims, scams is precisely what they are -- will be ousted as criminals by rank-and-file rebellions.
 
 
+6 # tedrey 2019-07-19 04:30
The most salient recent example is the hostile takeover of the American administration by the Republican Party under Trump. If Warren can make the GOP pay back the increased national debt they have added instead of loading it onto the taxpayers the country may get back on the road to recovery.
 
 
+10 # Rodion Raskolnikov 2019-07-19 06:09
I'm sure Mitt Romney is spinning in his grave. Oh, wait. He's not in his grave yet. But he is sure spinning.

This is really needed. I have to say, Warren gets it about the looting of the American economy by the "investor" class. They need to be stopped.

About half of the US GDP is generated by investments. Most of this is just gambling or looting. This is a major reason why individuals are making less and less money. The US no longer makes very much; the real money is in "arbitrage" -- a term which helps to obscure what is actually going on.

Private Equity firms are scams. They are Bernie Madoff on a national scale. I hope Warren can put an end to them.
 
 
+11 # Texas Aggie 2019-07-19 07:14
Making them responsible for their own debt rather than pawning it off on the company they are victimizing in itself will go a long way to making the equity firms more honest. Think what Rmoney would be if he were responsible for the damage he caused rather than the victim.
 
 
+1 # WorkingClass 2019-07-22 17:19
A good read on this subject are books written by Les Leopold. It is about time a national political figure started talking about the practices described in the above article.