EXTREME CAPITALISM OF PRIVATE EQUITY FIRMS DOES GREAT HARM Part 1

Summary: The current brand of capitalism in the U.S. does lots of harm. Nowhere are the harms more evident than in the extreme capitalism of private equity (PE) firms. These vulture capitalists use financial manipulation to extract big profits from companies they buy without regard to the health or survival of the companies, or the welfare of their employees, customers, and communities. There’s a bill in Congress that will stop this vulture capitalism and all the damage it does.

(Note: If you find my posts too long to read on occasion, please just skim the bolded portions. Thanks for reading my blog!)

The current brand of capitalism in the U.S. does lots of harm. Even “routine” corporate activity results in lots of bad behavior, some of it illegal or corrupt, all of which harms employees, consumers, and the public. I’ve cited examples of this in many previous posts and, in my most recent post, I highlighted three examples and also shared why it’s important to be aware of this. The profit motive of capitalism and the greed of capitalists result in harmful business behaviors unless they’re well-regulated and the penalties and punishments for businesses and their executives are sufficient to truly discourage bad behavior or to put them out of business.

Nowhere are the harms of capitalism more evident than in the extreme capitalism of private equity (PE) firms. PE firms (i.e., “vulture capitalists”) use financial manipulation to extract profits from companies without regard to the health or survival of the companies, or the welfare of their employees, customers, and communities. Vulture capitalism fails to produce benefits for anyone other than the rich private equity financiers. They are not investing in the companies they buy; they are looking to maximize their short-term profits and have no qualms about the companies going bankrupt – in some cases that’s their plan. (See this previous post from 2018 describing the private equity business model and why it deserves to be called vulture capitalism.)

PE firms have purchased companies in many sectors of the economy from health care (over $500 billion between 2018 and 2023) to child care to pet care, from housing to private colleges, and from retail store chains to newspapers. Everywhere they’ve gone they’ve left destruction in their wake, including decimating local newspapers, bankrupting long-standing retail store chains, and causing deaths and injuries in health care.

In my next post, I’ll give a description of the PE business model and some specific recent examples of the harm it’s done, but, for now, here’s what can be done to stop this vulture capitalism. The Stop Wall Street Looting Act has been introduced in Congress by Senators Elizabeth Warren (D-MA), Tammy Baldwin (D-WI), Sherrod Brown (D-OH), (all three are up for re-election, by the way) and others, along with over half a dozen Representatives. First introduced in 2019, the Act would: [1]

·         Make the PE owners and investors responsible for the debts and liabilities of the companies they own rather than allowing them to continue to avoid responsibility and liability by claiming to be an independent entity.

·         Change bankruptcy laws so that when PE-owned companies go bankrupt (as they often do) workers’ pay and benefits, including pensions, would be given a higher priority, rather than being the last party to get paid if there’s any money left over (which there usually isn’t).

·         Ban practices that allow PE owners to extract short-term profits that undermine the financial viability of a purchased company. For example, if a PE-owned company files for bankruptcy, the PE owners and investors could be forced to pay back the fees, dividends, and other payments they had received over the last 3 – 5 years.

·         Prohibit PE-owned firms that receive federal or state funds (as all health care providers do and as 611 PE-owned companies that received $5.3 billion in Covid relief funds did) from acquiring other companies or making payments to the PE owners or investors for two years.

·         Ban PE-owned health care companies from receiving federal money from Medicare or Medicaid if they sell property to or receive property-based loans from a real estate investment trust (REIT). REIT transactions are a standard, financial manipulation practice for PE-owned hospitals and were a key factor in Steward Health’s rapid expansion and then bankruptcy.

·         Subject PE firms to greater oversight and disclosure requirements. Cerberus Capital Management, the PE firm behind the Steward health care bankruptcy and debacle, would not have been able to withhold financial information from health care oversight agencies and from Congress – as it continues to do today.

I urge you to contact your U.S. Representative and Senators to ask them to support the Stop Wall Street Looting Act. Private equity’s model of vulture capitalism needs to be reined in before more patients, customers, employees, and communities are harmed. You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

The PE industry and its allies will, of course, strenuously oppose this legislation, as they have since it was first introduced in Congress in 2019. For example, during the 2021-2022 election cycle, the PE industry donated almost $350 million to federal election candidates and committees.

If you need any convincing of the need to stop the vulture capitalism of the PE model of business financial manipulation, my next post will present some recent examples of PE ownership and the detrimental effects it’s had. It will also share an overview of the PE model.

[1]      Office of Senator Warren, 10/10/24, “Warren, lawmakers renew legislative push to stop private equity looting,” Press release (U.S. Senator Elizabeth Warren | Warren, Lawmakers Renew L...) and (Stop Wall Street Looting Act One Pager)