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Heads We Win, Tails You Lose: The Fascist Philosophy Behind Private Equity’s Leveraged Buyout of Everything

It’s been the same head­line for months now:

* April of 2020: Amer­i­can bil­lion­aires have got­ten $280 bil­lion rich­er since the start of the COVID-19 pan­dem­ic

* May of 2020: Amer­i­can bil­lion­aires got $434 rich­er dur­ing the pan­dem­ic

* August of 2020: Amer­i­can bil­lion­aires got $637 rich­er dur­ing the pan­dem­ic

* Sep­tem­ber of 2020: U.S. bil­lion­aires got $845 bil­lion rich­er since the start of the pan­dem­ic/Wealth of US bil­lion­aires ris­es by near­ly a third dur­ing pan­dem­ic.

* Octo­ber of 2020: US bil­lion­aires saw their net worth rise by almost $1 tril­lion between March and Octo­ber — Jeff Bezos remains the rich­est, a study says.

From near­ly the start of the COVID-19 pan­dem­ic it’s been clear that the pub­lic health dis­as­ter was­n’t a dis­as­ter for every­one, with the wealth­i­est indi­vid­u­als being not only large­ly insu­lat­ed from the eco­nom­ic lock­down but in many cas­es well posi­tioned to prof­it from it. The pan­dem­ic was turn­ing into a giant trans­fer of wealth. But get­ting a sense of the scale of the mas­sive trans­fer of wealth was going to take time. And time has indeed passed, with the wealth of US bil­lion­aires hav­ing risen by near­ly a third since the start of the pan­dem­ic.

And that’s only as of Sep­tem­ber. At this rate the bil­lion­aires are on track to be tril­lion dol­lars rich­er by the end of the year. What kind of wealth gains are in store for the bil­lion­aires in 2021? Only time will tell. Time and the inevitable reports of tril­lions more dol­lars in bil­lion­aire wealth. It’s an absurd gen­uine soci­etal cat­a­stro­phe on top of all the oth­er cat­a­stro­phes. And that’s what it’s going to be cru­cial to keep in mind as this pan­dem­ic plays out that the emer­gence of a ‘heads we win, tails you lose’ bil­lion­aire class was nev­er actu­al­ly inevitable. There’s no law of nature that dic­tates we tol­er­ate an ever increas­ing wealth gap. It’s a pol­i­cy choice.

That’s why one of the major ques­tions fac­ing not just the US but the world at this point is what should be done about this egre­gious cap­ture of wealth by a tiny sliv­er of the pop­u­la­tion. A tiny sliv­er that was already egre­gious­ly wealthy. And as the fol­low­ing arti­cle excerpts make clear, if we’re going to final­ly begin to ask the ques­tion of how to cor­rect this yawn­ing wealth gap there’s a very obvi­ous tar­get: the pri­vate equi­ty indus­try, which has gone from a rel­a­tive­ly tiny and obscure sec­tor of finance pre-1980 to a behe­moth that today pow­ers the “shad­ow bank­ing” sec­tor of the econ­o­my using mas­sive debt and bru­tal cost-cut­ting mea­sures that often cross into the ter­ri­to­ry of cor­po­rate loot­ing. Includ­ing the loot­ing of a num­ber of cor­po­rate pen­sions. In terms of address­ing the gross and grow­ing lev­els of inequal­i­ty this seems like a good place to start.

As we’re going to see...

1. The long-hoped for “V‑shape” eco­nom­ic recov­ery from the pan­dem­ic is increas­ing­ly look­ing like a “K‑shaped” recov­ery where some sec­tors of the econ­o­my do well while oth­ers lag or lan­guish. Guess who owns the bulk of the sec­tors of the econ­o­my poised to do well.

2. Back in March, when the eco­nom­ic lock­down was first wreak­ing hav­oc, the pri­vate equi­ty was lob­by­ing to get access to the US fed­er­al gov­ern­men­t’s Pay­check Pro­tec­tion Pro­gram (PPP) loan pro­gram that was explic­it­ly set up for small busi­ness­es. Pub­licly, pri­vate equi­ty lob­bies for decry­ing the lack of access to the fed­er­al loans for small busi­ness own by pri­vate equi­ty firms (which would­n’t real­ly make them small busi­ness­es). Pri­vate­ly, pri­vate equi­ty firms were report­ed­ly inform­ing Con­gress that if they don’t get access to the loans they will be forced to engage in mass lay­offs. The pri­vate equi­ty indus­try was sit­ting on $2 tril­lion in cash at the time they were mak­ing this threat. Heads we win, tails you lose. Again and again.

3. At the same time the pri­vate equi­ty lob­by was threat­en­ing to engage in mass lay­offs if it did­n’t get access to the PPP loans it was also rais­ing a dis­turbing­ly valid point for why the pri­vate equi­ty indus­try should be bailed out by the fed­er­al gov­ern­ment: pub­lic pen­sion funds have become major investors in a num­ber of pri­vate equi­ty funds. For exam­ple, the Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem (CalPERS), put 27% of its assets in pri­vate equi­ty firms in 2018–2019, amount­ing to almost $7 bil­lion dol­lars that year alone. As we should expect, if we com­pare the annu­al returns of pri­vate equi­ty-run invest­ments the per­for­mance of pri­vate equi­ty has­n’t remote­ly jus­ti­fied the often exor­bi­tant pri­vate equi­ty fees.

4. While Con­gress even­tu­al­ly put in place lim­its (with some excep­tions) to pri­vate equi­ty’s par­tic­i­pa­tion in the PPP, numer­ous pri­vate equi­ty firms found var­i­ous loop­holes or arrange­ments used to jus­ti­fy tak­ing loans any­way.

5. In June of this year, the Trump admin­is­tra­tion expand­ed the role of pri­vate equi­ty in US retire­ment sav­ings beyond pen­sion funds when the Depart­ment of Labor announced that it would allow pri­vate equi­ty firms to sell retire­ment prod­ucts to indi­vid­ual 401k retire­ment accounts.

6. Just days ago, we learned that CalPERS is plan­ning on depend­ing even more on pri­vate equi­ty invest­ments in the future. Why? Well, as the chief exec­u­tive of CalPERS put it, a study from CalPERS and its out­side con­sul­tants showed that only pri­vate equi­ty and oth­er high risk invest­ments like dis­tressed debt were like­ly to yield the 7 per­cent annu­al­ized returns that CalPERS needs to meet its future oblig­a­tions. Now, as we’ll see, this sit­u­a­tion was arrived at in part due to the deeply unre­al­is­tic expec­ta­tions of future stock mar­ket per­for­mance that not just CalPERS but a num­ber of oth­er pen­sion funds have tra­di­tion­al­ly used for deter­min­ing how much mon­ey needs to actu­al­ly be invest­ed to meet pen­sion oblig­a­tions, so rely­ing on pri­vate equi­ty and dis­tressed debt is basi­cal­ly a gam­bit to cor­rect for those unre­al­is­tic expec­ta­tions. So the pub­lic is increas­ing­ly turn­ing to pri­vate equi­ty to address pen­sion short­falls instead of oth­er far more sen­si­ble approach­es like sim­ply tax­ing the rich more to pay for those pen­sions.

7. Final­ly, we’ll take a look at a piece by econ­o­mist Matt Stoller about the his­to­ry and phi­los­o­phy behind the rise of pri­vate equi­ty. A his­to­ry where load­ing com­pa­nies with debt was char­ac­ter­ized as ben­e­fi­cial because it would force man­agers to focus on cut­ting costs. And a his­to­ry where the rise of the pri­vate equi­ty move­ment in the 1980s was seed­ed by fig­ures like Bill Simon and the nascent “law and eco­nom­ics move­ment” that rep­re­sent­ed the con­ser­v­a­tive back­lash against the New Deal. As we’ll see, Simon viewed ruth­less­ness as a virtue and though the Repub­li­can Par­ty of Richard Nixon and Ger­ald Ford was too ‘soft’. Not sur­pris­ing­ly, Simon’s views were quite pop­u­lar with the bud­ding “New Right” Repub­li­can class of 1978. Today’s Repub­li­can Par­ty is almost entire­ly of the “New Right” strain. So when we look at the his­to­ry of the rise of pri­vate equi­ty we’re also look­ing at the his­to­ry of the rise of the con­tem­po­rary Repub­li­can Par­ty’s extrem­ist eco­nom­ic poli­cies run almost exclu­sive­ly for the ben­e­fit of big cor­po­ra­tions and the super rich.

The K‑Shaped Recov­ery: The Lat­est Exam­ple of the “Heads I Win, Tails You Lose” Econ­o­my Run By and For the Rich

Ok, first, let’s start with a look at the emerg­ing “K‑shaped” nature of the ongo­ing eco­nom­ic recov­ery. A ‘recov­ery’ in cer­tain seg­ments of the econ­o­my — in par­tic­u­lar the tech­nol­o­gy sec­tor, big banks, and big-box retail — and a gen­er­al recov­ery in the stock mar­ket — which is almost entire­ly owned by the wealth — while mom-and-pop stores and ser­vice pro­fes­sion­als lag. So it’s a “K‑shaped” recov­ery that pri­vate equi­ty is extreme­ly well poised to cap­i­tal­ize on. After all, pri­vate equi­ty has been one of the major play­ers in the big-box retail sec­tor for yeas — often to the detri­ment of those stores as their new pri­vate equi­ty own­ers loaded up on debt and a major investor in tech­nol­o­gy ...not so much mom-and-pop shops. So this real­ly is turn­ing into the kind of ‘recov­ery’ opti­mized to ensure the grow­ing influ­ence of pri­vate equi­ty on the econ­o­my is going to not just con­tin­ue grow­ing but accel­er­at­ing too. And as econ­o­mist point out, it’s not like this K‑shaped recov­ery is a nov­el phe­nom­e­na. The US econ­o­my has been increas­ing K‑shaped since the 1980s, with the real econ­o­my of reg­u­lar work­ers com­pris­ing the low­er half of the “K”, and finan­cial mar­kets mak­ing up the top half. So this just the lat­est K‑shaped recov­ery in an increas­ing­ly K‑shaped econ­o­my:

CNBC

Wor­ries grow over a K‑shaped eco­nom­ic recov­ery that favors the wealthy

* As the econ­o­my strug­gles to shake off the pan­dem­ic effects, wor­ries are grow­ing that the recov­ery could look like a K.
* That would be one where growth con­tin­ues but is uneven, split between sec­tors and income groups.
* One obvi­ous area of con­cern is the dichoto­my of the stock mar­ket vs the real econ­o­my, espe­cial­ly con­sid­er­ing that 52% of the mar­ket is owned by the top 1% of earn­ers.
* “Let’s not get lost on dif­fer­ent let­ters of the alpha­bet,” Trea­sury Sec­re­tary Steven Mnuchin said. “There are cer­tain­ly parts of the econ­o­my that need more work.”

Jeff Cox
Pub­lished Fri, Sep 4 2020 1:41 PM EDT
Updat­ed Sat, Sep 5 2020 5:35 PM EDT

The sto­ry for much of the past gen­er­a­tion has been a famil­iar one for the U.S. econ­o­my, where the ben­e­fits of expan­sion flow most­ly to the top and those at the bot­tom fall fur­ther behind.

Some experts think the coro­n­avirus pan­dem­ic is only going to make mat­ters worse.

Wor­ries of a K‑shaped recov­ery are grow­ing in the alpha­bet-obsessed eco­nom­ics pro­fes­sion. That would entail con­tin­ued growth, but split sharply between indus­tries and eco­nom­ic groups.

It’s a sce­nario where big-box retail and Wall Street banks ben­e­fit and mom-and-pop shops and restau­rants and oth­er ser­vice pro­fes­sion work­ers lag. Though not read­i­ly vis­i­ble in GDP num­bers for the next sev­er­al quar­ters that will look gaudy in his­tor­i­cal terms, the uneven ben­e­fits of the recov­ery pose longer-term risks for the nation­al eco­nom­ic health.

“The K‑shaped recov­ery is just a reit­er­a­tion of what we called the bifur­ca­tion of the econ­o­my dur­ing the Great Finan­cial Cri­sis. It real­ly is about the grow­ing inequal­i­ty since the ear­ly 1980s across the coun­try and the econ­o­my,” said Joseph Brusue­las, chief econ­o­mist at RSM. “When we talk K, the upper path of the K is clear­ly finan­cial mar­kets, the low­er path is the real econ­o­my, and the two are sep­a­rat­ed.”

Indeed, one of the sim­plest ways to envi­sion the cur­rent K pat­tern is by look­ing at the mete­oric surge of the stock mar­ket since late March, com­pared to the rest of the econ­o­my. While the mar­ket soared to new heights, GDP plunged at its most ever at an annu­al­ized rate, unem­ploy­ment, while falling, remains a prob­lem par­tic­u­lar­ly in low­er income groups, and thou­sands of small busi­ness­es have failed dur­ing the pan­dem­ic.

That in itself exac­er­bates inequal­i­ty at a time when 52% of stocks and mutu­al funds are owned by the top 1% of earn­ers.

But it’s not just about asset own­er­ship, it’s the nature of those assets.

The stock mar­ket gains have been large­ly the result of a hand­ful of stocks. Exclud­ing new­com­er Salesforce.com, Apple, Microsoft and Home Depot have con­tributed more points to the Dow Jones Indus­tri­al Aver­age this year than the oth­er 27 stocks on the index com­bined.

That’s why Wall Street when look­ing for the prop­er let­ter — V, W, U or vari­a­tions there­of — is begin­ning to see K as more of a pos­si­bil­i­ty.

“The K‑shaped nar­ra­tive is gain­ing trac­tion as the tale of two recov­er­ies con­forms well with the ongo­ing out­per­for­mance of risk assets and real estate while front-line ser­vice sec­tor jobs risk per­ma­nent elim­i­na­tion,” Ian Lyn­gen, head of U.S. rates strat­e­gy at BMO Cap­i­tal Mar­kets, said in a note.

The dom­i­nat­ing stocks, in fact, help tell a sto­ry about a shift­ing econ­o­my that is leav­ing those behind with less access to the tech­nol­o­gy that will shape the recov­ery.

“We believe this is now set­tled and that we are see­ing a ‘K‑shaped’ recov­ery,” wrote Marko Kolanovic, glob­al head of macro quan­ti­ta­tive and deriv­a­tives research at JPMor­gan Chase.

Kolanovic, who has fore­seen a num­ber of major mar­ket changes, said the rapid evo­lu­tion of soci­ety dur­ing the pan­dem­ic has trig­gered move­ments that have exac­er­bat­ed inequal­i­ty.

“The use of devices, cloud and inter­net ser­vices was bound to sky­rock­et while the rest of the econ­o­my took a nose dive (air­lines, ener­gy, shop­ping malls, offices, hos­pi­tal­i­ty, etc.),” he said. “This has cre­at­ed enor­mous inequal­i­ty not just in the per­for­mance of eco­nom­ic seg­ments, but in soci­ety more broad­ly. On one side, tech for­tunes reached all-time highs, while low­er income, blue col­lar work­ers and those that can­not work remote­ly suf­fered the most.”

Fed­er­al Reserve Chair­man Jerome Pow­ell has bemoaned the momen­tum that low­er earn­ers had just begun to see pri­or to the pan­dem­ic.

That’s one of the rea­sons the cen­tral bank last week adopt­ed a major pol­i­cy shift in which it will allow infla­tion to run above the Fed’s 2% goal for a peri­od of time after it has run below the mark. More than just a philo­soph­i­cal state­ment about infla­tion, cod­i­fy­ing the approach allows the Fed to keep inter­est rates low even after the job­less rate drops below what had once been con­sid­ered full employ­ment.

Fed offi­cials believe that keep­ing pol­i­cy loose when the unem­ploy­ment rate hit a 50-year low over the past year helped con­tribute to the wider dis­tri­b­u­tion of income gains, and should be the approach going for­ward.

“It’s a good start that the Fed­er­al Reserve, based on two decades of struc­tur­al change in the econ­o­my and a rapid­ly chang­ing demo­graph­ic struc­ture in the Unit­ed States, decid­ed to walk back its long-held pref­er­ence to act to pre­ven­ta­tive­ly against infla­tion, when expec­ta­tions were clear­ly anchored,” Brusue­las said.

The Fed, though, has tak­en some of the blame for the inequal­i­ty by imple­ment­ing poli­cies that seem to ben­e­fit asset hold­ers and ignore the rest of the pop­u­la­tion. While loans to small­er busi­ness­es have been slow to get out, the cen­tral bank has been buy­ing junk bonds and debt of big com­pa­nies like Apple and Microsoft to sup­port mar­ket func­tion­ing. The infla­tion piv­ot and an accom­pa­ny­ing change on the approach to the unem­ploy­ment rate, then, is seen as a way to focus pol­i­cy more broad­ly.

A vari­ety of paths

To be sure, the actu­al shape of the recov­ery depends on a num­ber of fac­tors, high among them the direc­tion of the virus and the extent to which Con­gress and the White House come through with more fis­cal aid.

This down­turn is unique in that it did not fol­low one of the usu­al paths low­er, such as a cred­it crunch or an asset bub­ble. Instead, this was a gov­ern­ment-induced reces­sion, a byprod­uct of efforts to con­tain the pan­dem­ic by pur­pose­ly keep­ing peo­ple away from their jobs and sub­se­quent­ly great­ly reduc­ing the abil­i­ty of busi­ness­es to oper­ate.

That’s why pre­dict­ing the path of recov­ery is dif­fi­cult.

“Every busi­ness cycle since 1990 has been one where there’s been some ‘K’ char­ac­ter­is­tics to it,” said Steven Ric­chi­u­to, U.S. chief econ­o­mist at Mizuho Secu­ri­ties. “Because they’ve been cred­it cycles, ris­ing waters don’t always lift all boats the same way. Some boats are tiny lit­tle lifeboats with­out much bag­gage, and some oth­er boats have heav­ier bags that need more ener­gy to lift. Those are the ones that have cred­it prob­lems.”

In the cur­rent sit­u­a­tion, cred­it is not the prob­lem and the Fed has back­stopped any of those issues that may arise through its myr­i­ad lend­ing and liq­uid­i­ty facil­i­ties.

Ric­chi­u­to sees a “more tra­di­tion­al recov­ery envi­ron­ment” that will turn into a “swoosh,” or one where an ini­tial burst lev­els off. That also is a pop­u­lar view.

“Clear­ly some areas are going to be slow­er to come back. That’s going to be true even when the vac­cine comes about,” said Yung-Yu Ma, chief invest­ment strate­gist at BMO Wealth Man­age­ment. “I don’t buy into the K shape so much. I think it’s more a mat­ter where there will be some indus­tries that take an extra six to nine months to real­ly pick up eco­nom­ic momen­tum. But once that hap­pens, every­thing will go togeth­er in the same gen­er­al tra­jec­to­ry.”

...

———-

“Wor­ries grow over a K‑shaped eco­nom­ic recov­ery that favors the wealthy” by Jeff Cox; CNBC; 09/04/2020

““The K‑shaped recov­ery is just a reit­er­a­tion of what we called the bifur­ca­tion of the econ­o­my dur­ing the Great Finan­cial Cri­sis. It real­ly is about the grow­ing inequal­i­ty since the ear­ly 1980s across the coun­try and the econ­o­my,” said Joseph Brusue­las, chief econ­o­mist at RSM. “When we talk K, the upper path of the K is clear­ly finan­cial mar­kets, the low­er path is the real econ­o­my, and the two are sep­a­rat­ed.””

Here we go again. Again. Anoth­er K‑shaped eco­nom­ic recov­ery in a K‑shaped econ­o­my increas­ing­ly dom­i­nate by a finan­cial sec­tor that has explod­ed in size since the 1980s, the decade when Pres­i­dent Rea­gan sent the US down the path of ‘sup­ply-side’ eco­nom­ics and pri­vate equi­ty explod­ed on the scene with debt-dri­ven lever­aged buy outs (LBOs). LBOs that, in many cas­es, destroyed and gut­ted the bought out com­pa­nies. Four decades lat­er pri­vate equi­ty’s grip on the econ­o­my is big­ger than ever, with a sig­nif­i­cant pres­ence in the tech­nol­o­gy sec­tor that hap­pens to be the hot sec­tor in the midst of this pan­dem­ic. The “top half of the K” is tech­nol­o­gy and finance, two pil­lars of today’s pri­vate equi­ty indus­try:

...
The dom­i­nat­ing stocks, in fact, help tell a sto­ry about a shift­ing econ­o­my that is leav­ing those behind with less access to the tech­nol­o­gy that will shape the recov­ery.

“We believe this is now set­tled and that we are see­ing a ‘K‑shaped’ recov­ery,” wrote Marko Kolanovic, glob­al head of macro quan­ti­ta­tive and deriv­a­tives research at JPMor­gan Chase.

Kolanovic, who has fore­seen a num­ber of major mar­ket changes, said the rapid evo­lu­tion of soci­ety dur­ing the pan­dem­ic has trig­gered move­ments that have exac­er­bat­ed inequal­i­ty.

“The use of devices, cloud and inter­net ser­vices was bound to sky­rock­et while the rest of the econ­o­my took a nose dive (air­lines, ener­gy, shop­ping malls, offices, hos­pi­tal­i­ty, etc.),” he said. “This has cre­at­ed enor­mous inequal­i­ty not just in the per­for­mance of eco­nom­ic seg­ments, but in soci­ety more broad­ly. On one side, tech for­tunes reached all-time highs, while low­er income, blue col­lar work­ers and those that can­not work remote­ly suf­fered the most.”
...

And note that one of the side effect of the Fed­er­al Reserve’s his­tor­i­cal­ly low rates and plans to keep them low for an extend­ed peri­od of time is obvi­ous­ly going to be to make debt-based takeovers of com­pa­nies even more capa­ble of buy up com­pa­nies. Low rates remain the right pol­i­cy at this time but there’s going to be side-effects and one of those side-effects is like­ly to be pri­vate equi­ty get­ting a much larg­er slice of ‘the pie’:

...
Fed­er­al Reserve Chair­man Jerome Pow­ell has bemoaned the momen­tum that low­er earn­ers had just begun to see pri­or to the pan­dem­ic.

That’s one of the rea­sons the cen­tral bank last week adopt­ed a major pol­i­cy shift in which it will allow infla­tion to run above the Fed’s 2% goal for a peri­od of time after it has run below the mark. More than just a philo­soph­i­cal state­ment about infla­tion, cod­i­fy­ing the approach allows the Fed to keep inter­est rates low even after the job­less rate drops below what had once been con­sid­ered full employ­ment.

Fed offi­cials believe that keep­ing pol­i­cy loose when the unem­ploy­ment rate hit a 50-year low over the past year helped con­tribute to the wider dis­tri­b­u­tion of income gains, and should be the approach going for­ward.

“It’s a good start that the Fed­er­al Reserve, based on two decades of struc­tur­al change in the econ­o­my and a rapid­ly chang­ing demo­graph­ic struc­ture in the Unit­ed States, decid­ed to walk back its long-held pref­er­ence to act to pre­ven­ta­tive­ly against infla­tion, when expec­ta­tions were clear­ly anchored,” Brusue­las said.
...

It’s one of the many exam­ples of the “heads we win, tails you lose” nature of the increas­ing­ly unequal US econ­o­my. In order to facil­i­tate job cre­ation to help peo­ple find jobs inter­est rates are going to have to be kept at lev­els that mak­ing buy up com­pa­nies eas­i­er than ever. Too bad for those work­ers that pri­vate equi­ty is noto­ri­ous for inflict­ing vicious lay­offs on the com­pa­nies they buy.

Lend Us the Mon­ey or the Lit­tle Guy Gets It

As the fol­low­ing Finan­cial Times arti­cle from March 31 of this year, right when the scale of the pan­dem­ic lock­down’s eco­nom­ic impact was being acknowl­edged and the US fed­er­al gov­ern­ment was set­ting up the Pay­check Pro­tec­tion Pro­gram (PPP) designed specif­i­cal­ly to assist small busi­ness, the “heads we win, tails you lose” nature of pri­vate equi­ty’s posi­tion in the econ­o­my was on full dis­play. The res­cue pack­age explic­it­ly banned small busi­ness from par­tic­i­pat­ing if they are back by a pri­vate equi­ty firm that col­lec­tive­ly employs more than 500 peo­ple across their busi­ness hold­ings. So a small busi­ness backed by a small pri­vate equi­ty firm could poten­tial­ly apply for those loans but not if it’s backed by a giant like the Car­lyle Group or Bain Cap­i­tal.

In response, the pri­vate equi­ty indus­try’s lob­by pub­licly threat­ened mass lay­offs of pri­vate equi­ty-owned com­pa­nies unless those com­pa­nies — at least those with few­er than 500 employ­ees — were also made eli­gi­ble for the loans. Yep. The indus­try best known for hos­tile lever­aged buy­outs fol­lowed by gut­ting the debt-laden com­pa­ny and fir­ing every­one want­ed in on the small busi­ness emer­gency loans set up to pre­vent mass lay­offs. As the arti­cle notes, the pri­vate equi­ty indus­try was sit­ting on $2 tril­lion in unspent cash right at that time.

But that was­n’t the only “heads we win, tails you lose” argu­ment made by the indus­try as the time. As one top pri­vate equi­ty fund man­ag­er put it, “We need to act in the best inter­est of our own investors, which include pen­sion funds.” And he had a point. The pri­vate equi­ty indus­try is no longer just the a tool for the super-rich to cap­ture the econ­o­my. It’s increas­ing­ly being used by pen­sion funds — espe­cial­ly pub­lic pen­sion funds — to earn the nec­es­sary yields that are no longer avail­able from safer-invest­ments like bonds due to the pre­vail­ing low inter­est rate envi­ron­ment.

It’s worth recall­ing at this point the var­i­ous reports about pri­vate equi­ty funds basi­cal­ly fleec­ing pub­lic pen­sion investors in hid­den fees an unusu­al prof­it-shar­ing arrange­ments. That’s who this indus­try group is using as their pub­lic face: the pen­sion funds they’re screw­ing. The episode was a chill­ing a reminder that the pri­vate equi­ty indus­try mak­ing these mass lay­off black­mail threats are shame­less in addi­tion to ruth­less. And shame­less ruth­less­ness is a pret­ty potent com­bo for get­ting your way, at least in con­tem­po­rary Amer­i­ca, espe­cial­ly when com­bined with disin­gen­u­ous griev­ances:

The Finan­cial Times

Pri­vate equi­ty groups seek US small busi­ness res­cue loans
Exclu­sive: Indus­try warns of mass job cuts if port­fo­lio com­pa­nies are denied assis­tance

James Fontanel­la-Khan, Mark Van­de­velde and Sujeet Indap in New York and James Poli­ti in Wash­ing­ton
March 31, 2020, 10:13 pm

Some of the most pow­er­ful groups on Wall Street are press­ing the Trump admin­is­tra­tion to allow pri­vate equi­ty-owned com­pa­nies to access hun­dreds of bil­lions of dol­lars in loan funds ear­marked for US small busi­ness­es hit by the coro­n­avirus pan­dem­ic.

White House and Trea­sury offi­cials have been con­tact­ed about the issue by indus­try lob­by­ists and exec­u­tives from major invest­ment firms, accord­ing to sev­en peo­ple who advised on the dis­cus­sions, or have spo­ken direct­ly with the par­tic­i­pants.

Con­gress last week autho­rised the Small Busi­ness Admin­is­tra­tion to dis­pense $350bn worth of res­cue loans to com­pa­nies with few­er than 500 work­ers that have been affect­ed by the coro­n­avirus pan­dem­ic.

The Wall Street groups are tak­ing aim at the so-called affil­i­a­tion rule, under which small busi­ness­es can be barred from access­ing the res­cue funds if they are backed by a pri­vate equi­ty firm whose port­fo­lio com­pa­nies col­lec­tive­ly have a work­force that exceeds the 500-per­son lim­it.

In a let­ter to Trea­sury Sec­re­tary Steven Mnuchin, seen by the Finan­cial Times, one indus­try body said fed­er­al “reg­u­la­tions effec­tive­ly pre­vent the small busi­ness port­fo­lio com­pa­nies owned by ven­ture cap­i­tal or pri­vate equi­ty funds from access­ing” the res­cue pro­gramme.

“We see no rea­son why being owned in a fund struc­ture should result in these busi­ness­es hav­ing less access to the cap­i­tal need­ed to keep their employ­ees on the pay­roll,” said the let­ter from Steve Nel­son, chief exec­u­tive of the Insti­tu­tion­al Lim­it­ed Part­ners Asso­ci­a­tion, whose mem­bers include pub­lic pen­sion funds that have invest­ed in funds run by Apol­lo, Black­stone, and oth­er big Wall Street firms.

The pleas echo a warn­ing that pri­vate equi­ty exec­u­tives have deliv­ered to offi­cials at the Trea­sury and the White House, accord­ing to peo­ple famil­iar with the con­ver­sa­tions: if their port­fo­lio com­pa­nies are locked out from the $2tn stim­u­lus pack­age agreed last week, they will be forced to dis­miss mil­lions of work­ers to sal­vage their own invest­ments.

“We need to act in the best inter­est of our own investors, which include pen­sion funds,” said an advis­er to one large pri­vate equi­ty firm. “If the gov­ern­ment wants to lim­it fund­ing for com­pa­nies we own just to pun­ish the pri­vate equi­ty indus­try, we will have to take dras­tic measures...That means cut­ting costs aggres­sive­ly, and restruc­tur­ing.”

The Amer­i­can Invest­ment Coun­cil, which rep­re­sents many lead­ing pri­vate equi­ty firms, said it would “con­tin­ue to work with the admin­is­tra­tion, the Fed­er­al Reserve and Con­gress to request that fed­er­al pro­grammes sup­port all busi­ness­es, regard­less of own­er­ship struc­ture, and their work­ers”.

Democ­rats have large­ly been opposed to help­ing out pri­vate equi­ty firms as part of the coro­n­avirus res­cue. Crit­ics say funds aimed at sav­ing mom-and-pop com­pa­nies should not be divert­ed to com­pa­nies backed by invest­ment firms that are sit­ting on more than $2tn in unspent cash.

But Nan­cy Pelosi, the Cal­i­for­nia Demo­c­rat who serves as Speak­er of the US House of Rep­re­sen­ta­tives, wrote to Mr Mnuchin on Tues­day to express con­cerns about help­ing small busi­ness­es backed by ven­ture cap­i­tal investors.

“Many small busi­ness­es in our dis­trict that employ few­er than 500 employ­ees, par­tic­u­lar­ly start-up com­pa­nies with equi­ty investors, have expressed con­cerns that an over­ly strict appli­ca­tion of the Small Busi­ness Administration’s affil­i­a­tion rule may exclude many from eli­gi­bil­i­ty” for the so-called pay­roll pro­tec­tion loans, wrote Ms Pelosi.

...

—————

“Pri­vate equi­ty groups seek US small busi­ness res­cue loans” by James Fontanel­la-Khan, Mark Van­de­velde and Sujeet Indap and James Poli­ti; Finan­cial Times; 03/31/2020

“The Wall Street groups are tak­ing aim at the so-called affil­i­a­tion rule, under which small busi­ness­es can be barred from access­ing the res­cue funds if they are backed by a pri­vate equi­ty firm whose port­fo­lio com­pa­nies col­lec­tive­ly have a work­force that exceeds the 500-per­son lim­it.”

It’s dis­crim­i­na­tion against real­ly, real­ly, real­ly big big com­pa­nies that own lots of oth­er com­pa­nies. That’s how the pri­vate equi­ty giants are react­ing to the small busi­ness res­cue pack­age that they could­n’t tap. As one let­ter sent to Steve Mnuchin put it, “We see no rea­son why being owned in a fund struc­ture should result in these busi­ness­es hav­ing less access to the cap­i­tal need­ed to keep their employ­ees on the pay­roll.” This is, again, a group that was sit­ting on $2 tril­lion in unspent cash fight­ing for a chunk of the $350 bil­lion small busi­ness res­cue loans:

...
In a let­ter to Trea­sury Sec­re­tary Steven Mnuchin, seen by the Finan­cial Times, one indus­try body said fed­er­al “reg­u­la­tions effec­tive­ly pre­vent the small busi­ness port­fo­lio com­pa­nies owned by ven­ture cap­i­tal or pri­vate equi­ty funds from access­ing” the res­cue pro­gramme.

“We see no rea­son why being owned in a fund struc­ture should result in these busi­ness­es hav­ing less access to the cap­i­tal need­ed to keep their employ­ees on the pay­roll,” said the let­ter from Steve Nel­son, chief exec­u­tive of the Insti­tu­tion­al Lim­it­ed Part­ners Asso­ci­a­tion, whose mem­bers include pub­lic pen­sion funds that have invest­ed in funds run by Apol­lo, Black­stone, and oth­er big Wall Street firms.

...

Democ­rats have large­ly been opposed to help­ing out pri­vate equi­ty firms as part of the coro­n­avirus res­cue. Crit­ics say funds aimed at sav­ing mom-and-pop com­pa­nies should not be divert­ed to com­pa­nies backed by invest­ment firms that are sit­ting on more than $2tn in unspent cash.
...

As shame­less as the pub­lic lob­by­ing cam­paign was, far more insid­i­ous was the pri­vate threats the indus­try was report­ed­ly mak­ing to Con­gress. The threat to lay­off mil­lions of work­ers to pro­tect their invest­ments. And part of that threat involved the counter-threat: if they did­n’t lay off the mil­lions of employ­ees the pen­sion funds invest­ed in pri­vate equi­ty would suf­fer. Heads we win, tails you lose, again and again:

...
The pleas echo a warn­ing that pri­vate equi­ty exec­u­tives have deliv­ered to offi­cials at the Trea­sury and the White House, accord­ing to peo­ple famil­iar with the con­ver­sa­tions: if their port­fo­lio com­pa­nies are locked out from the $2tn stim­u­lus pack­age agreed last week, they will be forced to dis­miss mil­lions of work­ers to sal­vage their own invest­ments.

“We need to act in the best inter­est of our own investors, which include pen­sion funds,” said an advis­er to one large pri­vate equi­ty firm. “If the gov­ern­ment wants to lim­it fund­ing for com­pa­nies we own just to pun­ish the pri­vate equi­ty indus­try, we will have to take dras­tic measures...That means cut­ting costs aggres­sive­ly, and restruc­tur­ing.
...

Also note that when the indus­try trum­pets its comitt­ment to act only in the best inter­ests of its investors, that idea — that cor­po­ra­tions should ONLY have the inter­ests of investors in mind to the exclu­sion of all oth­er inter­ests includ­ing the pub­lic inter­est — was one of the found­ing philoso­phies of the pri­vate equi­ty move­ment in the 70s and 80s, as we’ll see below. It is lit­er­al­ly a move­ment ded­i­cat­ed to under­min­ing the idea of the pub­lic good. It’s part of the rea­son the grow­ing reliance of pen­sions on pri­vate equi­ty is so per­verse.

So what are the odds that the pri­vate equi­ty indus­try pre­vails and gets to scoop up those small busi­ness loans? Well, while Democ­rats are the ones oppos­ing allow­ing pri­vate equi­ty to get those loans in the first place, there’s one par­tic­u­lar Demo­c­rat who was on board with the idea of chang­ing the eli­gi­bil­i­ty rule and giv­ing pri­vate equi­ty-own small busi­ness access to the funds: House Speak­er Nan­cy Pelosi, whose dis­trict includes Sil­i­con Val­ley, a city filled with pri­vate equi­ty-backed tech­nol­o­gy start-up com­pa­nies. And note that the let­ter Pelosi wrote to the Small Busi­ness Admin­is­tra­tion argu­ing for giv­ing pri­vate equi­ty access to the PPP loans was co-signed by fel­low Sil­i­con Val­ley Demo­c­rat Ro Khan­na, one of the most pro­gres­sive mem­bers of Con­gress. It’s a sign of increas­ing­ly inter­twined rela­tion­ship between pri­vate equi­ty and the tech­nol­o­gy sec­tor:

...
But Nan­cy Pelosi, the Cal­i­for­nia Demo­c­rat who serves as Speak­er of the US House of Rep­re­sen­ta­tives, wrote to Mr Mnuchin on Tues­day to express con­cerns about help­ing small busi­ness­es backed by ven­ture cap­i­tal investors.

Many small busi­ness­es in our dis­trict that employ few­er than 500 employ­ees, par­tic­u­lar­ly start-up com­pa­nies with equi­ty investors, have expressed con­cerns that an over­ly strict appli­ca­tion of the Small Busi­ness Administration’s affil­i­a­tion rule may exclude many from eli­gi­bil­i­ty” for the so-called pay­roll pro­tec­tion loans, wrote Ms Pelosi.
...

Also keep in mind that when the indus­try pri­vate­ly threat­ened Con­gress that it would engage in mass lay­offs if it did­n’t get access to those loans, that was implic­it­ly a threat to lay off large num­bers of the tech­nol­o­gy work­ers who hap­pened to be Pelosi and Khan­na’s con­stituents. So they real­ly were doing their jobs rep­re­sent­ing their con­stituents when they wrote that let­ter, which is an exam­ple of the pow­er of the “heads we win, tails you lose” nature of pri­vate equi­ty’s con­trol over the econ­o­my.

Head We Win, and Heads It Will Be. Because We are Too Big to Fail

But as we’ll see in the fol­low­ing Van­i­ty Fair piece by Bethany McLean from April of this year, there’s anoth­er major rea­son Cal­i­for­nia Democ­rats like Nan­cy Pelosi, Ro Khan­na, and Max­ine Waters sup­port­ed the pri­vate equi­ty indus­try’s calls for par­tic­i­pa­tion in the PPP: the Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem (CalPERS), has bil­lions of dol­lars invest­ed in pri­vate equi­ty funds. And CalPERS is just the biggest of the grow­ing num­ber of pen­sion sys­tems that are becom­ing increas­ing­ly reliant pri­vate equi­ty, which is the kind of sit­u­a­tion that puts pri­vate equi­ty in the same kind of sys­temic posi­tion as the behe­moth banks that received bil­lions in bailouts dur­ing the 2008 finan­cial cri­sis: the ‘Too Big to Fail’ sys­temic posi­tion:

Van­i­ty Fair

Too Big to Fail, COVID-19 Edi­tion: How Pri­vate Equi­ty Is Win­ning the Coro­n­avirus Cri­sis

Pri­vate equi­ty has made multi­bil­lion­aires of exec­u­tives like Blackstone’s Steve Schwarz­man (net worth: $17.5 bil­lion) and Apollo’s Leon Black ($7.5 bil­lion). Thanks to the $2 tril­lion bipar­ti­san bailout bill, the industry’s coro­n­avirus loss­es will belong to all of us.

By Bethany McLean
April 9, 2020

Ever since Con­gress vot­ed to hand out $2 tril­lion in tax­pay­er mon­ey to those hard­est hit by the coro­n­avirus pan­dem­ic, Amer­i­can busi­ness­es have been scram­bling for a piece of the action. Air­lines, hotels, and restaurants—all of whose rev­enues have cratered in the wake of sweep­ing stay-home orders—have engaged in Hunger Games–like lob­by­ing to cash in on the CARES Act, mak­ing their case for a share of the dis­as­ter relief. But among those angling for a fed­er­al hand­out is one of the wealth­i­est sec­tors of the Amer­i­can econ­o­my: pri­vate equi­ty. These firms not only have a record $1.5 tril­lion in cash on the side­lines, wait­ing to be invest­ed, but their CEOs are among America’s rich­est exec­u­tives. So why should they be per­mit­ted to raid the fed­er­al Trea­sury in a time of cri­sis?

The rea­son is as sim­ple as it is galling: while great pri­vate for­tunes, such as that of Blackstone’s Stephen Schwarz­man (net worth: $17.5 bil­lion and Apollo’s Leon Black ($7.5 bil­lion), have been made from pri­vate equity’s march through the world, its loss­es, to a remark­able degree, will belong to all of us. That’s because some of the major investors in pri­vate-equi­ty funds are pub­lic pen­sion plans; at Black­stone, rough­ly one-third of the firm’s mon­ey comes from retire­ment plans set up to pro­vide for over 30 mil­lion work­ing-class Amer­i­cans, accord­ing to some­one with knowl­edge of its port­fo­lio. So if Blackstone’s invest­ments crater, the teach­ers, fire­fight­ers, and health care work­ers who are count­ing on those invest­ments to gen­er­ate the returns nec­es­sary to pay their pen­sions will suf­fer. Think of pri­vate-equi­ty firms as the banks of the coro­na cri­sis: They are, for bet­ter or worse, too big to fail.

...

Even before the COVID cri­sis, there were ques­tions about how well pri­vate-equi­ty invest­ments were actu­al­ly per­form­ing. But that didn’t seem to mat­ter, because low inter­est rates facil­i­tat­ed pri­vate equi­ty in anoth­er way. Belea­guered pen­sion funds, which suf­fered big loss­es in the finan­cial cri­sis, could no longer count on decent returns from fixed invest­ments, giv­en how low inter­est rates have been kept by the Fed. Increas­ing­ly des­per­ate to boost the port­fo­lios of retir­ing work­ers, they too turned to pri­vate equi­ty as their savior—urged on by pri­vate equity’s promis­es that it alone could deliv­er the nec­es­sary returns. In 2019, the Amer­i­can Invest­ment Coun­cil (AIC), a lob­by­ing group which rep­re­sents pri­vate-equi­ty giants like Black­stone, the Car­lyle Group, Apol­lo Glob­al Man­age­ment, and KKR, declared that “in order to con­tin­ue to pro­vide the ben­e­fits they guar­an­tee, pen­sions must con­tin­ue to invest in pri­vate equi­ty.”

In 2018, accord­ing to ana­lyt­ics firm eVest­ment, pen­sion funds in the U.S. and the U.K. pumped 27% of their fresh allo­ca­tions of mon­ey into pri­vate-equi­ty funds, up from 25% the year before. America’s largest pub­lic pen­sion plan, the Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem, or CalPERS, put almost $7 bil­lion into pri­vate equi­ty dur­ing the 2018–2019 fis­cal year, accord­ing to Insti­tu­tion­al Investor. “We need pri­vate equi­ty, we need more of it, and we need it now,” chief invest­ment offi­cer Ben Meng said in ear­ly 2019—right before CalPERS hired a for­mer pri­vate-equi­ty guy, who began his career at Gold­man Sachs, to head its pri­vate-equi­ty efforts.

Dri­ven part­ly by pub­lic pen­sions, the pri­vate-equi­ty indus­try has mush­roomed. In each of the past four years, accord­ing to data-provider Pre­qin, pri­vate-cap­i­tal man­agers raised over $500 bil­lion of new mon­ey to invest. The industry’s total assets under man­age­ment have hit a record $4.1 tril­lion. The industry’s $1.5 tril­lion in cash on hand is also the high­est on record—and more than dou­ble what it was five years ago, accord­ing to Pre­qin. The half decade from 2013 to 2018 saw the most pri­vate-equi­ty deals over any five-year peri­od in Amer­i­can his­to­ry.

“Pri­vate-equi­ty man­agers won the finan­cial cri­sis,” as Bloomberg put it last fall. “Almost every­thing that’s hap­pened since 2008 has tilt­ed in their favor.” As a result, pri­vate equi­ty is now wound into the very fab­ric of our econ­o­my. Accord­ing to the Insti­tu­tion­al Lim­it­ed Part­ners Asso­ci­a­tion (ILPA), a lob­by­ing group which rep­re­sents CalPERs and oth­er pub­lic investors, busi­ness­es backed by pri­vate equi­ty employ more than 8.8 mil­lion Amer­i­cans at over 35,000 com­pa­nies, account­ing for a stag­ger­ing 5% of the Unit­ed States’ GDP. What’s more, the Milken Insti­tute report­ed, even by mid-2018, pri­vate equi­ty owned more com­pa­nies than the num­ber of busi­ness­es list­ed on all of the U.S. stock exchanges com­bined, and have account­ed for a more sig­nif­i­cant source of financ­ing than ini­tial pub­lic offer­ings in many recent years. If pri­vate equi­ty suf­fers, the blow will rever­ber­ate through­out the entire econ­o­my.

Which explains why ILPA wrote to Trea­sury Sec­re­tary Steven Mnuchin and Fed Chair­man Jerome Pow­ell last week, argu­ing that com­pa­nies backed by pri­vate equi­ty should be allowed to access the relief funds pro­vid­ed in the CARES Act. Oth­er­wise, the ILPA warned in a pre­vi­ous let­ter, there would be “sig­nif­i­cant harm not only to employ­ees that see their hours reduced or jobs elim­i­nat­ed, but also sig­nif­i­cant­ly reduced returns to the insti­tu­tions pro­vid­ing retire­ment secu­ri­ty through pen­sions, insur­ance poli­cies and oth­er invest­ments that serve hun­dreds of thou­sands of Amer­i­cans.” To make mat­ters worse, ILPA added, pro­vi­sions in many pri­vate-equi­ty invest­ments allow pri­vate-equi­ty firms to make addi­tion­al cap­i­tal calls when times are tough. That means pub­lic pen­sions might be forced to dump their hold­ings in pub­lic-backed invest­ments to pro­vide pri­vate-equi­ty firms with emer­gency cash—a move that could depress the stock mar­ket even fur­ther.

There are sev­er­al pots of fed­er­al mon­ey that the pri­vate-equi­ty indus­try is lob­by­ing to access. (And not all pri­vate-equi­ty firms care equal­ly about all of the pro­grams.) One is the so-called Pay­check Pro­tec­tion Pro­gram (PPP), set up to make $349 bil­lion in gov­ern­ment-guar­an­teed loans avail­able to busi­ness­es with few­er than 500 employ­ees. The prob­lem is, exist­ing rules at the Small Busi­ness Admin­is­tra­tion, which is over­see­ing the pro­gram, have been wide­ly inter­pret­ed as exclud­ing loan­ing mon­ey to most mom-and-pop busi­ness­es that are con­trolled by large par­ent companies—including pri­vate-equi­ty firms. So pri­vate equi­ty is push­ing to waive those rules, argu­ing that small firms should not be penal­ized for hav­ing been bought out by big investors. (Many of the com­pa­nies owned by mam­moth pri­vate-equi­ty firms like Black­stone are too big on their own to qual­i­fy for this buck­et of mon­ey.)

The pri­vate-equi­ty indus­try also wants the com­pa­nies they have invest­ed in to have access to the $454 bil­lion being doled out through the Trea­sury, an amount that the Fed said could be lever­aged into over $2 tril­lion. Because rules for access to this mon­ey weren’t spec­i­fied in the CARES Act, as ILPA notes, the exec­u­tive branch will have a fair amount of dis­cre­tion over who gets access to the money—and pri­vate-equi­ty firms want to take full advan­tage of that open­ing. “We’ll con­tin­ue to work with the admin­is­tra­tion and Con­gress to request that fed­er­al pro­grams sup­port all busi­ness­es, regard­less of own­er­ship struc­ture, and their work­ers,” says the AIC’s CEO, Drew Mal­oney.

The pol­i­tics dic­tat­ing whether the pri­vate-equi­ty indus­try will get its wish­es are sur­pris­ing. Mnuchin is a for­mer Gold­man Sachs exec­u­tive and hedge fund guy; Blackstone’s Schwarz­man has ties to Trump; Jared Kush­n­er ’s fam­i­ly busi­ness has got­ten loans from Apol­lo, accord­ing to the Wash­ing­ton Post. Yet an exemp­tion for the pri­vate-equi­ty indus­try did not make its way into the CARES Act; accord­ing to Bloomberg, Sen­ate Major­i­ty Leader Mitch McConnell is try­ing to pass a $250 bil­lion boost to the PPP—without pro­vi­sions open­ing it to pri­vate-equi­ty-backed com­pa­nies. On the oth­er hand, Democ­rats, includ­ing House Speak­er Nan­cy Pelosi and pow­er­ful Rep­re­sen­ta­tive Max­ine Waters, have weighed in loudly—on the industry’s behalf. “It is absolute­ly imper­a­tive,” Waters recent­ly wrote in sup­port of pri­vate equi­ty, “that the relief…be extend­ed to pro­tect all work­ers, irre­spec­tive of the affil­i­a­tions of their employ­ers.” Trans­la­tion: Work­ers shouldn’t suf­fer just because their boss­es sold a con­trol­ling stake in their busi­ness­es to a bunch of greedy fat cats. As for Pelosi, she doesn’t want to see com­pa­nies backed by ven­ture cap­i­tal exclud­ed from fed­er­al relief, giv­en her Sil­i­con Val­ley con­stituents.

Restau­rants and hotels owned by big chains have already received exemp­tions grant­i­ng them access to the relief funds, regard­less of how many peo­ple their par­ent com­pa­nies employ. The allies of pri­vate equi­ty hope that sim­i­lar exemp­tions will soon be forth­com­ing for their firms.“We are in a wait-and-see mode,” Chris Hayes, the ILPA’s senior pol­i­cy coun­sel, told me.

The fear, of course, is that pri­vate equi­ty will do what pri­vate equi­ty does best, which is pock­et the mon­ey them­selves rather than devot­ing it to the busi­ness­es they’ve invest­ed in. The typ­i­cal fee struc­ture in pri­vate equi­ty is the so-called 2 and 20, which means that a fund col­lects a fee of 2% of the total assets it man­ages, as well as 20% of any gains on its invest­ments after a cer­tain return is achieved. The indus­try also qui­et­ly helps itself to yet more mon­ey by hav­ing port­fo­lio com­pa­nies pay fees for con­sult­ing and financ­ing ser­vices pro­vid­ed by, of course, their pri­vate-equi­ty back­ers. If pri­vate equi­ty is hand­ed bil­lions in tax­pay­er mon­ey, it could use some of it to pay them­selves hefty fees today, then pock­et even more of it down the road, when they sell their port­fo­lio com­pa­nies and col­lect their 20% of the tax­pay­er-enabled gains. The tax­pay­er hand­outs will also help pri­vate equi­ty con­tin­ue its relent­less march through the glob­al econ­o­my, snap­ping up trou­bled com­pa­nies at bar­gain prices or extend­ing high-priced cred­it as oth­er investors, includ­ing hedge funds, are forced to sell off their hold­ings in the post-coro­na land­scape.

Unfor­tu­nate­ly, there isn’t real­ly an alter­na­tive to pro­vid­ing pri­vate equi­ty with fed­er­al funds. Like the big banks in 2008, pri­vate equi­ty is hold­ing us all hostage. But there are ways to make it work bet­ter. Accord­ing to the CARES Act, com­pa­nies can only receive loans from the Small Busi­ness Admin­is­tra­tion if they com­mit to pre­serv­ing jobs. Waters, in her let­ter, argues for plac­ing even more strings on the mon­ey tak­en by pri­vate-equi­ty-backed com­pa­nies. Not only should tax­pay­er funds not be used to pay man­age­ment or con­sult­ing firms, she says, but com­pa­nies that take the mon­ey should also, for instance, be required to include work­ers on their cor­po­rate boards and grad­u­al­ly increase their min­i­mum wage to at least $15 an hour.

We could go even fur­ther. A loop­hole in the tax code cur­rent­ly allows pri­vate-equi­ty financiers to pay tax­es on their returns at the low­er rate for cap­i­tal gains, rather than the high­er rate for per­son­al income. We could close that, once and for all. We could also lim­it the deductibil­i­ty of inter­est pay­ments for tax pur­pos­es even more than Pres­i­dent Don­ald Trump ’s new tax law already did, so com­pa­nies aren’t encour­aged to load up on debt. Ras­mussen points out that after the finan­cial cri­sis in 2008, the Fed­er­al Reserve set a lim­it on the amount of debt it con­sid­ered pru­dent. Even so, he told me, a “large num­ber of pri­vate-equi­ty firms ignored that guid­ance and decid­ed to put very high lev­els of lever­age on their port­fo­lio com­pa­nies.” Maybe those firms should now be required to con­tribute more equi­ty from their cash stock­piles, he sug­gests.

The big banks emerged from the finan­cial cri­sis vic­to­ri­ous, but also sub­ject to a host of new reg­u­la­tions designed to reduce lever­age and sta­bi­lize the econ­o­my. It’s essen­tial that we do the same today. Giv­en how much of the econ­o­my will rise and fall on the invest­ments that pri­vate-equi­ty funds man­age, we may be forced to let them share the fed­er­al hand­out. But it doesn’t have to be a blank check.

———-

“Too Big to Fail, COVID-19 Edi­tion: How Pri­vate Equi­ty Is Win­ning the Coro­n­avirus Cri­sis” by Bethany McLean; Van­i­ty Fair; 04/09/2020

“Pri­vate-equi­ty man­agers won the finan­cial cri­sis,” as Bloomberg put it last fall. “Almost every­thing that’s hap­pened since 2008 has tilt­ed in their favor.” As a result, pri­vate equi­ty is now wound into the very fab­ric of our econ­o­my. Accord­ing to the Insti­tu­tion­al Lim­it­ed Part­ners Asso­ci­a­tion (ILPA), a lob­by­ing group which rep­re­sents CalPERs and oth­er pub­lic investors, busi­ness­es backed by pri­vate equi­ty employ more than 8.8 mil­lion Amer­i­cans at over 35,000 com­pa­nies, account­ing for a stag­ger­ing 5% of the Unit­ed States’ GDP. What’s more, the Milken Insti­tute report­ed, even by mid-2018, pri­vate equi­ty owned more com­pa­nies than the num­ber of busi­ness­es list­ed on all of the U.S. stock exchanges com­bined, and have account­ed for a more sig­nif­i­cant source of financ­ing than ini­tial pub­lic offer­ings in many recent years. If pri­vate equi­ty suf­fers, the blow will rever­ber­ate through­out the entire econ­o­my.

Pri­vate Equi­ty “won” the 2008 finan­cial cri­sis and now own more com­pa­nies than the num­ber of busi­ness­es list­ed on all of the US stock exchanges com­bined. It’s anoth­er way of mea­sur­ing the extent of the pri­vate equi­ty indus­try’s cap­ture of the econ­o­my over the last four decades. And now, thanks in part to the ultra-low inter­est rates that result­ed from the 2008 finan­cial cri­sis that pri­vate equi­ty won, pen­sion funds are increas­ing­ly reliant on pri­vate equi­ty to ful­fill their pen­sion oblig­a­tions. In oth­er words, in addi­tion to cap­tur­ing more com­pa­nies than are list­ed on all of the US stock mar­kets, pri­vate equi­ty cap­tured the pen­sion sys­tem too:

...
In 2018, accord­ing to ana­lyt­ics firm eVest­ment, pen­sion funds in the U.S. and the U.K. pumped 27% of their fresh allo­ca­tions of mon­ey into pri­vate-equi­ty funds, up from 25% the year before. America’s largest pub­lic pen­sion plan, the Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem, or CalPERS, put almost $7 bil­lion into pri­vate equi­ty dur­ing the 2018–2019 fis­cal year, accord­ing to Insti­tu­tion­al Investor. “We need pri­vate equi­ty, we need more of it, and we need it now,” chief invest­ment offi­cer Ben Meng said in ear­ly 2019—right before CalPERS hired a for­mer pri­vate-equi­ty guy, who began his career at Gold­man Sachs, to head its pri­vate-equi­ty efforts.
...

And note one of the mech­a­nis­tic ways the pen­sion sys­tem’s reliance on pri­vate equi­ty makes the threat of not bail­ing out pri­vate equi­ty an even more potent threat: many pri­vate-equi­ty funds have cap­i­tal call pro­vi­sions that could force pen­sions to dump oth­er invest­ments (includ­ing stocks) in order to shore up ail­ing pri­vate equi­ty funds. So if those funds get dis­tressed they can basi­cal­ly trans­fer that dis­tress into dif­fer­ent asset class­es includ­ing the stock mar­ket:

...
Which explains why ILPA wrote to Trea­sury Sec­re­tary Steven Mnuchin and Fed Chair­man Jerome Pow­ell last week, argu­ing that com­pa­nies backed by pri­vate equi­ty should be allowed to access the relief funds pro­vid­ed in the CARES Act. Oth­er­wise, the ILPA warned in a pre­vi­ous let­ter, there would be “sig­nif­i­cant harm not only to employ­ees that see their hours reduced or jobs elim­i­nat­ed, but also sig­nif­i­cant­ly reduced returns to the insti­tu­tions pro­vid­ing retire­ment secu­ri­ty through pen­sions, insur­ance poli­cies and oth­er invest­ments that serve hun­dreds of thou­sands of Amer­i­cans.” To make mat­ters worse, ILPA added, pro­vi­sions in many pri­vate-equi­ty invest­ments allow pri­vate-equi­ty firms to make addi­tion­al cap­i­tal calls when times are tough. That means pub­lic pen­sions might be forced to dump their hold­ings in pub­lic-backed invest­ments to pro­vide pri­vate-equi­ty firms with emer­gency cash—a move that could depress the stock mar­ket even fur­ther.
...

Also note how the $1.5–2 tril­lion in cash that the indus­try had on on hand back in April was not just a record lev­el for the sec­tor but dou­ble what it was five years ago. It’s the kind of cash pile that sug­gests the sec­tor was wait­ing for the next inevitable reces­sion, when all sorts of com­pa­nies would become avail­able for pur­chase at fire sale prices:

...
Dri­ven part­ly by pub­lic pen­sions, the pri­vate-equi­ty indus­try has mush­roomed. In each of the past four years, accord­ing to data-provider Pre­qin, pri­vate-cap­i­tal man­agers raised over $500 bil­lion of new mon­ey to invest. The industry’s total assets under man­age­ment have hit a record $4.1 tril­lion. The industry’s $1.5 tril­lion in cash on hand is also the high­est on record—and more than dou­ble what it was five years ago, accord­ing to Pre­qin. The half decade from 2013 to 2018 saw the most pri­vate-equi­ty deals over any five-year peri­od in Amer­i­can his­to­ry.
...

Yes, this ‘Too Big to Fail’ sec­tor of the econ­o­my was at his­tor­i­cal­ly high lev­els of pre­pared­ness to cap­i­tal­ize on a fail­ing econ­o­my when the pan­dem­ic hit. It’s anoth­er rea­son we should expect pri­vate equi­ty’s grip over the econ­o­my to be a his­toric highs too when this pan­dem­ic is over.

CalPERS to Pri­vate Equi­ty: We’d Like to Dou­ble Down on Our Des­per­a­tion Play Please

And as the fol­low­ing New York Times arti­cle from just days ago makes clear, anoth­er rea­son we should expect pri­vate equi­ty to own even more of the econ­o­my at the end of this pan­dem­ic is sim­ply because pen­sion sys­tems show no sign of shy­ing away from pri­vate equi­ty. And in the case pen­sion giant CalPERS, the new­ly announced plan for the decade is to invest even more in pri­vate equi­ty funds for the next decade. Dou­bling down on des­per­a­tion. That’s the plan.

As the arti­cle describes, this is CalPER­S’s plan despite the fact that a num­ber of trustees have deep mis­giv­ings about the strat­e­gy and sus­pect they are being sold a bill of goods. Beyond that, the last CalPERS chief invest­ment offi­cer, Ben Meng, resigned in August after it was dis­cov­ered he holds per­son­al stakes in some of the same pri­vate equi­ty funds CalPERS was invest­ing in. And data shows that CalPERS’s pri­vate equi­ty returns are con­sis­tent­ly low­er than indus­try bench­marks. But CalPERS is pro­ceed­ing with the plan because they argue they have no choice. Pri­vate equi­ty — or oth­er risky invest­ments like dis­tressed debt — are the only invest­ments that might be able to return to CalPERS the ~7% annu­al­ized returns it needs to meet its oblig­a­tions. That’s what a study by CalPERS and an out­side con­sul­tant con­clud­ed. Pri­vate equi­ty has effec­tive­ly cap­tured CalPERS.

Also keep in mind that we can already pre­dict the ongo­ing era of his­tor­i­cal­ly low inter­est rates that pushed CalPERS and oth­er pen­sion plans towards risky invest­ments like pri­vate equi­ty is prob­a­bly going to con­tin­ue for years to come. So when we see CalPERS active­ly plan on invest­ing even more in pri­vate equi­ty over this next decade of low inter­est rates because they feel they have no choice there’s prob­a­bly quite a few more pen­sion funds that will fol­low suit, if they aren’t already:

The New York Times

March­ing Orders for the Next Invest­ment Chief of CalPERS: More Pri­vate Equi­ty

The nation’s biggest pub­lic pen­sion fund is con­sis­tent­ly short of the bil­lions of dol­lars it needs to pay all retirees their pen­sions. It seeks high­er returns.

By Mary Williams Walsh
Oct. 19, 2020, 5:00 a.m. ET

Ben Meng got the job of chief invest­ment offi­cer of CalPERS by con­vinc­ing the trustees of the nation’s largest pub­lic pen­sion fund that he could hit their tar­get of a 7 per­cent annu­al return on invest­ment by direct­ing more of the fund’s bil­lions into pri­vate equi­ty.

Now, Mr. Meng is gone — only a year and a half after he start­ed — and CalPERS, as the $410 bil­lion Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem is known, is no clos­er to that goal. The fund is con­sis­tent­ly short of the bil­lions of dol­lars it needs to pay all retirees their pen­sions. And it con­tin­ues to cal­cu­late that it can meet those oblig­a­tions only if it gets the kind of big invest­ment gains promised by pri­vate equi­ty.

The strat­e­gy involves putting mon­ey into funds man­aged by firms such as the Black­stone Group and Car­lyle, which buy com­pa­nies and retool them with the goal of sell­ing them or tak­ing them pub­lic. Even as some of the fund’s trustees have mis­giv­ings — they say the pri­vate equi­ty busi­ness is opaque, illiq­uid and car­ries high fees — they say they have lit­tle choice.

“Pri­vate equi­ty isn’t my favorite asset class,” There­sa Tay­lor, the chair of the CalPERS board’s invest­ment com­mit­tee, said at a recent meet­ing. “It helps us achieve our 7 per­cent solu­tion,” she said. “I know we have to be there. I wish we were 100 per­cent fund­ed. Then, maybe we wouldn’t.”

CalPERS, like many oth­er pen­sion funds, began putting mon­ey into pri­vate equi­ty funds decades ago. But its reliance on such funds has increased in recent years, as low inter­est rates have made bonds less attrac­tive and stocks have proven too volatile. Adding to the urgency are an aging pop­u­la­tion, expan­sive pen­sion ben­e­fits that can’t be reduced and a major fund­ing short­fall.

Mr. Meng’s abrupt depar­ture in August, and CalPERS’s slow-mov­ing search for a replace­ment, are delay­ing its plans to increase its pri­vate equi­ty invest­ments. Mr. Meng resigned after com­pli­ance staff noticed that he had per­son­al stakes in some of the invest­ment firms that he was com­mit­ting CalPERS’s mon­ey to, most notably Black­stone. Cal­i­for­nia state offi­cials in that sit­u­a­tion are sup­posed to recuse them­selves, but Mr. Meng did not.

Some of the fund’s stake­hold­ers, includ­ing cities, school dis­tricts and oth­er pub­lic employ­ers, wor­ry that in the mean­time, CalPERS’s trustees could react by putting new restric­tions on invest­ment chiefs, dis­cour­ag­ing top can­di­dates from apply­ing for the job or oth­er­wise mak­ing it hard­er for CalPERS to achieve its tar­get rate of return. If invest­ment returns fall short, local offi­cials know they’ll have to make up the dif­fer­ence, dip­ping into their bud­gets to free up more mon­ey to send to the fund.

“It gets hard­er and hard­er each year,” said Brett McFad­den, the super­in­ten­dent of a large school dis­trict north­east of Sacra­men­to. He has cut art, music and guid­ance coun­selors to get more mon­ey for the state pen­sion sys­tems every year. “These poli­cies are being made in Sacra­men­to, and I’m the one left hold­ing the bag,” he said.

Mar­cie Frost, the chief exec­u­tive of CalPERS, said that Mr. Meng’s depar­ture would not prompt the board to change CalPERS’s invest­ment strat­e­gy. She said a study by CalPERS and its out­side con­sul­tants showed that pri­vate equi­ty and dis­tressed debt were the only asset class­es pow­er­ful enough to boost the fund’s over­all aver­age gains up to 7 per­cent a year, over time.

“So we have to have a mean­ing­ful allo­ca­tion to those,” she said, adding: “There are no guar­an­tees that we’re going to be able to get 7 per­cent in the short term or, frankly, in the long term.”

Data show that CalPERS’s pri­vate equi­ty returns are con­sis­tent­ly low­er than indus­try bench­marks, but pri­vate equi­ty has still per­formed bet­ter than oth­er assets and “has gen­er­at­ed bil­lions of dol­lars in addi­tion­al returns as a result of our invest­ments,” said Greg Ruiz, CalPERS’s man­ag­ing invest­ment direc­tor for pri­vate equi­ty.

Mr. Meng was a big pro­po­nent of pri­vate equi­ty, telling trustees that “only one asset class” would deliv­er the returns they sought and that the fund would need to direct more mon­ey into it. But while CalPERS sought, under him, to increase its pri­vate equi­ty allo­ca­tion to 8 per­cent of total assets, the hold­ings fell to 6.3 per­cent, in part because the pri­vate equi­ty man­agers were return­ing mon­ey from pre­vi­ous invest­ments and CalPERS did not jump to rein­vest it. Over­all, the fund had about $80 bil­lion — or 21 per­cent of its assets — in pri­vate equi­ty, real estate and oth­er illiq­uid assets as of June 30, the end of its last fis­cal year.

CalPERS has some­times moved slow­ly on pri­vate equi­ty part­ly because of its trustees’ qualms.

At one recent meet­ing, Ms. Tay­lor, the invest­ment com­mit­tee chair and for­mer­ly a senior union offi­cial, recalled that some of CalPERS’s pri­vate equi­ty part­ners had bought Toys ‘R’ Us in 2005. The trans­ac­tion loaded it up with $5 bil­lion in debt just as the retailer’s bricks-and-mor­tar sales strat­e­gy was becom­ing anti­quat­ed, and the com­pa­ny went into a long, slow col­lapse that end­ed in liq­ui­da­tion and cost more than 30,000 jobs. “I’m hop­ing that we can get to a bet­ter strat­e­gy of mit­i­gat­ing some of these prob­lems,” she said.

Oth­er trustees ques­tioned the valid­i­ty of the inter­nal bench­mark CalPERS uses to eval­u­ate its pri­vate equi­ty invest­ments, say­ing they didn’t believe the returns were all that good after fees were deduct­ed.

“We’re going to be sold a bill of goods, and we’re going to believe what they say, because we want to believe it and we want to make high­er returns,” said Mar­garet Brown, a trustee and retired cap­i­tal invest­ments direc­tor for a school dis­trict south­east of Los Ange­les.

Still, the march­ing orders for CalPERS’s next invest­ment chief are appar­ent: find ways to increase the pen­sion giant’s invest­ments in pri­vate equi­ty funds.

Inde­pen­dent ana­lysts have long urged pub­lic pen­sion trustees to stop chas­ing high­er returns and instead take a deep, hard look at how they got to be so under­fund­ed in the first place. A grow­ing school of thought blames the way they cal­cu­late their total oblig­a­tions to retirees for under­stat­ing the true num­ber — specif­i­cal­ly, how they trans­late the val­ue of pen­sions due in the future into today’s dol­lars.

To do that, CalPERS uses the rou­tine prac­tice of dis­count­ing, which all finan­cial insti­tu­tions use and is based on the prin­ci­ple that mon­ey is worth more today than in the future. It requires the selec­tion of an appro­pri­ate dis­count rate. CalPERS uses its tar­get return on invest­ment of 7 per­cent as its dis­count rate — a prac­tice flat­ly reject­ed by finan­cial econ­o­mists, because 7 per­cent is asso­ci­at­ed with a high degree of risk, and CalPERS’s pen­sions are risk free. Econ­o­mists say that CalPERS, and oth­er pub­lic pen­sion sys­tems, should be using the rate asso­ci­at­ed with risk-free bonds like U.S. Trea­sury bonds. Doing it that way shows the tremen­dous intrin­sic val­ue of risk-free retire­ment income.

But by assum­ing a high so-called dis­count rate that match­es its assumed rate of return, CalPERS makes its short­fall look much small­er on paper — which allows the fund to bill the state of Cal­i­for­nia and its cities for small­er annu­al con­tri­bu­tions than it would oth­er­wise have to. That helps every­body bal­ance their bud­gets more eas­i­ly, but it has left the pen­sion sys­tem chron­i­cal­ly under­fund­ed.

Pub­lic pen­sion sys­tems in Cal­i­for­nia, includ­ing CalPERS, report­ed a com­bined short­fall of $352.5 bil­lion as of 2018, using their high invest­ment assump­tions as dis­count rates, accord­ing to a com­pi­la­tion by the Stan­ford Insti­tute for Eco­nom­ic Pol­i­cy Research. But by replac­ing just that one assump­tion with what econ­o­mists con­sid­er a valid dis­count rate, the insti­tute showed that the funds were real­ly $1 tril­lion short that year. If CalPERS sud­den­ly start­ed billing local gov­ern­ments accord­ing­ly, it would cause a cri­sis.

CalPERS stepped into this trap in 1999, at the end of a pow­er­ful bull mar­ket. On paper, it appeared to have far more mon­ey than it need­ed, and state law­mak­ers decid­ed to increase pub­lic pen­sions after hear­ing from CalPERS offi­cials it would not cost any­thing so long as the fund’s invest­ments could pro­duce 8.25 per­cent aver­age annu­al gains.

Then the dot-com bub­ble burst, and the invest­ment gains on paper that CalPERS had amassed melt­ed away, leav­ing a short­fall. But the big pen­sion increase was locked in because Cal­i­for­nia law bars any reduc­tion in pub­lic pen­sions. Sim­i­lar things hap­pened in many oth­er states. Before long, the race was on for high­er invest­ment returns.

“Over the past 20 years, U.S. pen­sion funds have set aggres­sive tar­gets and failed to meet them,” said Kurt Winkel­mann, a senior fel­low for pen­sion pol­i­cy design at the Uni­ver­si­ty of Minnesota’s Heller-Hur­wicz Eco­nom­ics Insti­tute.

He recent­ly com­piled the invest­ment returns of the 50 states’ pen­sion sys­tems from 2000 to 2018 and com­pared them with the states’ aver­age tar­gets dur­ing that peri­od. It turned out that the actu­al returns were 1.7 per­cent­age points per year less.

CalPERS’s invest­ment results were even more off the mark, Mr. Winkel­mann found. Its tar­get aver­aged 7.7 per­cent over the 18-year time frame. But actu­al aver­age returns were only 5.5 per­cent over that peri­od, Mr. Winkel­mann said.

...

———–

“March­ing Orders for the Next Invest­ment Chief of CalPERS: More Pri­vate Equi­ty” by Mary Williams Walsh; The New York Times; 10/19/2020

“The strat­e­gy involves putting mon­ey into funds man­aged by firms such as the Black­stone Group and Car­lyle, which buy com­pa­nies and retool them with the goal of sell­ing them or tak­ing them pub­lic. Even as some of the fund’s trustees have mis­giv­ings — they say the pri­vate equi­ty busi­ness is opaque, illiq­uid and car­ries high fees — they say they have lit­tle choice.

There’s no choice. That’s the con­clu­sion CalPERS grim­ly arrived. And arrived at in the face of data show­ing the returns from pri­vate equi­ty are con­sis­tent­ly low­er than indus­try bench­marks. It’s one thing to miss your bench­marks every few years but if the annu­al­ized aver­age returns are low­er that’s a giant fail. Com­pound inter­est works in the neg­a­tive direc­tion too. And accord­ing to a study of CalPERS’ pri­vate equi­ty returns from 2000–2018, the tar­get ben­chark of 7.7% annu­al returns actu­al­ly came in at 5.5%. That adds up...or maybe ‘sub­tracts up’ is a bet­ter way to put it:

...
Data show that CalPERS’s pri­vate equi­ty returns are con­sis­tent­ly low­er than indus­try bench­marks, but pri­vate equi­ty has still per­formed bet­ter than oth­er assets and “has gen­er­at­ed bil­lions of dol­lars in addi­tion­al returns as a result of our invest­ments,” said Greg Ruiz, CalPERS’s man­ag­ing invest­ment direc­tor for pri­vate equi­ty.

...

At one recent meet­ing, Ms. Tay­lor, the invest­ment com­mit­tee chair and for­mer­ly a senior union offi­cial, recalled that some of CalPERS’s pri­vate equi­ty part­ners had bought Toys ‘R’ Us in 2005. The trans­ac­tion loaded it up with $5 bil­lion in debt just as the retailer’s bricks-and-mor­tar sales strat­e­gy was becom­ing anti­quat­ed, and the com­pa­ny went into a long, slow col­lapse that end­ed in liq­ui­da­tion and cost more than 30,000 jobs. “I’m hop­ing that we can get to a bet­ter strat­e­gy of mit­i­gat­ing some of these prob­lems,” she said.

Oth­er trustees ques­tioned the valid­i­ty of the inter­nal bench­mark CalPERS uses to eval­u­ate its pri­vate equi­ty invest­ments, say­ing they didn’t believe the returns were all that good after fees were deduct­ed.

“We’re going to be sold a bill of goods, and we’re going to believe what they say, because we want to believe it and we want to make high­er returns,” said Mar­garet Brown, a trustee and retired cap­i­tal invest­ments direc­tor for a school dis­trict south­east of Los Ange­les.

...

“Over the past 20 years, U.S. pen­sion funds have set aggres­sive tar­gets and failed to meet them,” said Kurt Winkel­mann, a senior fel­low for pen­sion pol­i­cy design at the Uni­ver­si­ty of Minnesota’s Heller-Hur­wicz Eco­nom­ics Insti­tute.

He recent­ly com­piled the invest­ment returns of the 50 states’ pen­sion sys­tems from 2000 to 2018 and com­pared them with the states’ aver­age tar­gets dur­ing that peri­od. It turned out that the actu­al returns were 1.7 per­cent­age points per year less.

CalPERS’s invest­ment results were even more off the mark, Mr. Winkel­mann found. Its tar­get aver­aged 7.7 per­cent over the 18-year time frame. But actu­al aver­age returns were only 5.5 per­cent over that peri­od, Mr. Winkel­mann said.
...

Even with that lev­el of under­per­for­mance, pri­vate equi­ty is still deemed to be bet­ter than the low­er-yield­ing alter­na­tives. It’s the kind of dynam­ic that only points to more and more pen­sion mon­ey head­ing into pri­vate equi­ty, and not just CalPER­S’s mon­ey.

But also note the oth­er fac­tor that has cre­at­ed this per­ceived need for pri­vate equi­ty invest­ments: pen­sions are con­sis­tent­ly under­fund­ed, which is the fun­da­men­tal fac­tor dri­ving the need for the rel­a­tive­ly high returns pri­vate equi­ty promis­es to deliv­er. And while the pri­vate equi­ty indus­try can’t be blamed entire­ly for that sit­u­a­tion, it’s not blame­less either. Those con­sis­tent promis­es of 7%+ pro­ject­ed returns allow CalPERS to col­lect less mon­ey from the state and cities than is real­is­ti­cal­ly required, result­ing in a com­bined short­fall of $352.5 bil­lion as of 2018 for Cal­i­for­ni­a’s pub­lic pen­sion sys­tems:

...
“Pri­vate equi­ty isn’t my favorite asset class,” There­sa Tay­lor, the chair of the CalPERS board’s invest­ment com­mit­tee, said at a recent meet­ing. “It helps us achieve our 7 per­cent solu­tion,” she said. “I know we have to be there. I wish we were 100 per­cent fund­ed. Then, maybe we wouldn’t.”

CalPERS, like many oth­er pen­sion funds, began putting mon­ey into pri­vate equi­ty funds decades ago. But its reliance on such funds has increased in recent years, as low inter­est rates have made bonds less attrac­tive and stocks have proven too volatile. Adding to the urgency are an aging pop­u­la­tion, expan­sive pen­sion ben­e­fits that can’t be reduced and a major fund­ing short­fall.

...

Inde­pen­dent ana­lysts have long urged pub­lic pen­sion trustees to stop chas­ing high­er returns and instead take a deep, hard look at how they got to be so under­fund­ed in the first place. A grow­ing school of thought blames the way they cal­cu­late their total oblig­a­tions to retirees for under­stat­ing the true num­ber — specif­i­cal­ly, how they trans­late the val­ue of pen­sions due in the future into today’s dol­lars.

To do that, CalPERS uses the rou­tine prac­tice of dis­count­ing, which all finan­cial insti­tu­tions use and is based on the prin­ci­ple that mon­ey is worth more today than in the future. It requires the selec­tion of an appro­pri­ate dis­count rate. CalPERS uses its tar­get return on invest­ment of 7 per­cent as its dis­count rate — a prac­tice flat­ly reject­ed by finan­cial econ­o­mists, because 7 per­cent is asso­ci­at­ed with a high degree of risk, and CalPERS’s pen­sions are risk free. Econ­o­mists say that CalPERS, and oth­er pub­lic pen­sion sys­tems, should be using the rate asso­ci­at­ed with risk-free bonds like U.S. Trea­sury bonds. Doing it that way shows the tremen­dous intrin­sic val­ue of risk-free retire­ment income.

But by assum­ing a high so-called dis­count rate that match­es its assumed rate of return, CalPERS makes its short­fall look much small­er on paper — which allows the fund to bill the state of Cal­i­for­nia and its cities for small­er annu­al con­tri­bu­tions than it would oth­er­wise have to. That helps every­body bal­ance their bud­gets more eas­i­ly, but it has left the pen­sion sys­tem chron­i­cal­ly under­fund­ed.

Pub­lic pen­sion sys­tems in Cal­i­for­nia, includ­ing CalPERS, report­ed a com­bined short­fall of $352.5 bil­lion as of 2018, using their high invest­ment assump­tions as dis­count rates, accord­ing to a com­pi­la­tion by the Stan­ford Insti­tute for Eco­nom­ic Pol­i­cy Research. But by replac­ing just that one assump­tion with what econ­o­mists con­sid­er a valid dis­count rate, the insti­tute showed that the funds were real­ly $1 tril­lion short that year. If CalPERS sud­den­ly start­ed billing local gov­ern­ments accord­ing­ly, it would cause a cri­sis.
...

Also keep in mind that we can’t real­ly sep­a­rate the issue of pen­sion fund­ing short­falls and the strug­gling finances of states and cities from the US’s 40 year infat­u­a­tion with sup­ply-side eco­nom­ic phi­los­o­phy cel­e­brat­ed tax cuts for the wealthy as a pol­i­cy cure-all that cre­at­ed a decades-long tax rate race to the bot­tom for the wealth­i­est. A 40 year infat­u­a­tion with sup­ply-side eco­nom­ic poli­cies that hap­pened to fuel the rise of pri­vate equi­ty.

Too Big to Lose Even When It Los­es

So how was this fight over whether or not pri­vate equi­ty could access the fed­er­al bailouts resolved? Well, in late April, the Small Busi­ness Admin­is­tra­tion (SBA) announced that pri­vate equi­ty would not be allowed to tap those funds. But as the fol­low­ing Bloomberg arti­cle from July describes, while some of the biggest and most high profile/notorious pri­vate equi­ty firms like Black­stone did indeed decide to for­go the fed­er­al funds, numer­ous pri­vate equi­ty firms did so any­way. And while some pri­vate equi­ty-owned busi­ness did have an excep­tion and were allowed to access the funds — like food-ser­vice busi­ness­es — most pri­vate equi­ty-owned busi­ness don’t have this loop­hole avail­able. And yet numer­ous firms took the mon­ey any­way. How? Trick­ery and workarounds, more or less. Workarounds like ced­ed seats on the com­pa­ny board. In oth­er words, the pri­vate equi­ty firms effec­tive­ly pre­tend­ed to no longer con­trol their own com­pa­nies:

Bloomberg

Res­cue Cash Too Hot for KKR Proves Irre­sistible to Many PE Peers

By Heather Perl­berg
July 2, 2020, 3:00 AM CDT
Updat­ed on July 2, 2020, 10:55 AM CDT
* Dozens of buy­out firms are said to ben­e­fit from SBA’s lend­ing
* Some may soon face scruti­ny as gov­ern­ment iden­ti­fies bor­row­ers

Even inside bat­tle-scarred KKR & Co., enter­ing the polit­i­cal fray was enough to stoke unease.

As sev­er­al of the pri­vate equi­ty titan’s port­fo­lio com­pa­nies got loans from an emer­gency U.S. pro­gram aimed at help­ing small busi­ness­es sur­vive the coro­n­avirus pan­dem­ic, exec­u­tives at the firm’s New York head­quar­ters issued a blunt mes­sage: Return the mon­ey to tax­pay­ers.

Yet across the cash-rich pri­vate equi­ty world, many firms pushed ahead, ben­e­fit­ing from the $669 bil­lion Pay­check Pro­tec­tion Pro­gram run by the Small Busi­ness Admin­is­tra­tion and Trea­sury Depart­ment, accord­ing to lawyers and lenders with knowl­edge of the strate­gies. Now, some of those firms face the prospect of tough pub­lic scruti­ny, as the Trump admin­is­tra­tion acqui­esces to pres­sure from law­mak­ers to name bor­row­ers who drew poten­tial­ly for­giv­able loans from tax­pay­ers.

After the gov­ern­ment broad­ly exclud­ed pri­vate equi­ty firms from the pro­gram, dozens found ways to steer around the restric­tions, often adjust­ing gov­er­nance or own­er­ship arrange­ments with port­fo­lio com­pa­nies in sec­tors includ­ing enter­tain­ment, fit­ness, sports and der­ma­tol­ogy, the peo­ple said, ask­ing not to be named dis­cussing con­fi­den­tial arrange­ments.

What’s more, some port­fo­lio com­pa­nies also ben­e­fit­ed from indi­rect tax­pay­er sup­port after help­ing scores of relat­ed busi­ness­es apply for PPP loans, keep­ing rev­enue flow­ing, the peo­ple said.

The industry’s secret suc­cess in tap­ping SBA mon­ey risks stok­ing a new uproar in Wash­ing­ton. Pub­licly trad­ed com­pa­nies and hedge funds already faced a back­lash for try­ing to lean on U.S. cof­fers, lead­ing them to add to more than $38 bil­lion in loans that have been returned or oth­er­wise can­celed. Unclear is how many pri­vate equi­ty firms may soon be out­ed.

Some have held meet­ings in recent days to dis­cuss return­ing SBA mon­ey, accord­ing to peo­ple with knowl­edge of the talks. Spokes­men for the SBA and Trea­sury declined to com­ment or didn’t respond to mes­sages seek­ing com­ment, includ­ing on whether com­pa­nies that repay loans will be includ­ed in data to be made pub­lic.

Though peo­ple close to the pri­vate equi­ty indus­try were will­ing to describe how firms accessed SBA loans, the iden­ti­ty of those that did so remains close­ly guard­ed because of the polit­i­cal sen­si­tiv­i­ties. More than a dozen pri­vate equi­ty firms declined to com­ment or didn’t respond to mes­sages seek­ing com­ment on whether their port­fo­lio com­pa­nies had sought or received loans. But rep­re­sen­ta­tives for some of the largest — KKR, Black­stone Group Inc., Apol­lo Glob­al Man­age­ment, Car­lyle Group Inc., TPG and Ares Man­age­ment — said com­pa­nies they con­trol did not use SBA mon­ey.

...

Broad­ly Dis­qual­i­fied

To be clear, Con­gress and the SBA inten­tion­al­ly stopped short of out­right ban­ning relief to com­pa­nies backed by pri­vate equi­ty investors. Author­i­ties carved out excep­tions for food-ser­vice and accom­mo­da­tion com­pa­nies hit espe­cial­ly hard by the pan­dem­ic. Fran­chisees and affil­i­ates of firms already licensed as Small Busi­ness Invest­ment Com­pa­nies also were allowed in.

But most com­pa­nies backed by buy­out firms appeared to be dis­qual­i­fied by rules against lend­ing to bor­row­ers with more than 500 employ­ees, unless they met SBA stan­dards for larg­er firms. Reg­u­la­tors tal­ly such fig­ures by adding all the head­count at busi­ness­es con­trolled by a pri­vate equi­ty firm. If two busi­ness­es each employ 300 peo­ple, they could both be dis­qual­i­fied.

Defin­ing whether a pri­vate equi­ty firm con­trols a com­pa­ny isn’t always sim­ple. Funds are known to take minor­i­ty stakes with out­size influ­ence over strat­e­gy. If a buy­out firm wields enough clout on a board of direc­tors to pre­vent a quo­rum or to block deci­sions, then that “neg­a­tive con­trol” can make the com­pa­ny inel­i­gi­ble for SBA sup­port.

That’s prompt­ed a vari­ety of workarounds, accord­ing to peo­ple famil­iar with the strate­gies. For exam­ple, buy­out firms ced­ed some board seats or gave up oth­er rights to loosen their grip.

Ample Cash

Evi­dence of the strate­gies emerged in April when the SBA, in con­sul­ta­tion with the Trea­sury, pub­lished guid­ance on a list of fre­quent­ly asked ques­tions. It not­ed share­hold­ers who for­feit “rights to pre­vent a quo­rum or oth­er­wise block action by the board of direc­tors or share­hold­ers” must do so “irrev­o­ca­bly” to sat­is­fy the rules.

In oth­er cas­es, buy­out firms have got­ten around the ban with more arcane steps, such as pledg­ing not to add any more debt or giv­ing up the pow­er to make hir­ing and fir­ing deci­sions, accord­ing to the peo­ple famil­iar with the arrange­ments.

The pri­vate equi­ty indus­try lob­bied to access the SBA pro­gram as it was being set up, but to lit­tle avail. “It shouldn’t mat­ter if the com­pa­nies are backed by invest­ment from cor­po­ra­tions, pen­sion funds or oth­ers,” Drew Mal­oney, the pres­i­dent of the Amer­i­can Invest­ment Coun­cil, pri­vate equity’s trade group, said at the time.

The pro­gram isn’t meant to help com­pa­nies that have access to oth­er sources of cash, Trea­sury Sec­re­tary Steven Mnuchin has said. SBA offi­cials have urged the pri­vate equi­ty indus­try — which cur­rent­ly has about $1.5 tril­lion in avail­able cash — to help their port­fo­lio com­pa­nies. There’s also the moral haz­ard: Some com­pa­nies were par­tic­u­lar­ly vul­ner­a­ble to the pan­dem­ic because pri­vate equi­ty own­ers had loaded them up with debt to max­i­mize prof­its.

Still, buy­out firms argue there are restric­tions on how much they can pump into trou­bled deals and pri­vate­ly lament that their busi­ness mod­el is mis­un­der­stood.

Den­tal Relief

Some firms were able to get indi­rect tax­pay­er sup­port because of the way they hap­pened to struc­ture invest­ments in high­ly reg­u­lat­ed indus­tries. Take den­tistry, for exam­ple.

Laws in most states pre­vent investors from own­ing den­tal prac­tices out­right, so buy­out funds own a sep­a­rate enti­ty that pro­vides relat­ed ser­vices. Ares and Leonard Green & Part­ners own Aspen Den­tal Man­age­ment Inc., a provider of busi­ness and admin­is­tra­tive sup­port to den­tists.

As the pan­dem­ic shut down den­tistry, almost every prac­tice affil­i­at­ed with Aspen qual­i­fied for SBA financ­ing, Chief Exec­u­tive Offi­cer Bob Fontana told staff in a mes­sage April 19. “Two weeks ago, we worked with prac­tice own­ers to sub­mit PPP loan appli­ca­tions,” he said at the time. “We’re thrilled to report that every loan request we sub­mit­ted has been accept­ed.”

The fund­ing helped reopen prac­tices and return staff to work, a spokes­woman for Aspen said in an emailed state­ment. Aspen Den­tal itself didn’t seek SBA fund­ing, she said. Aspen “pro­vid­ed cer­tain pay­roll and oper­a­tions data, as required in the loan appli­ca­tions, for those inde­pen­dent prac­tices who chose to apply for the PPP loans.”

Back in Wash­ing­ton, law­mak­ers are tak­ing a tough look at how the SBA mon­ey was deployed. They suc­cess­ful­ly pressed the Trump admin­is­tra­tion to reverse its posi­tion on with­hold­ing all data about com­pa­nies that received PPP financ­ing and agree to dis­close com­pa­ny names and data for loans of more than $150,000, as well as details about small­er loans with­out per­son­al­ly iden­ti­fi­able infor­ma­tion they con­sid­er to be pro­pri­etary.

...

————-

“Res­cue Cash Too Hot for KKR Proves Irre­sistible to Many PE Peers” by Heather Perl­berg; Bloomberg; 07/02/2020

“After the gov­ern­ment broad­ly exclud­ed pri­vate equi­ty firms from the pro­gram, dozens found ways to steer around the restric­tions, often adjust­ing gov­er­nance or own­er­ship arrange­ments with port­fo­lio com­pa­nies in sec­tors includ­ing enter­tain­ment, fit­ness, sports and der­ma­tol­ogy, the peo­ple said, ask­ing not to be named dis­cussing con­fi­den­tial arrange­ments.”

Yes, all of a sud­den all sorts of pri­vate equi­ty-owned and con­trolled com­pa­nies ‘ced­ed con­trol’ of the com­pa­nies and that made the com­pa­nies eli­gi­ble for the funds. At least that was appar­ent­ly what numer­ous pri­vate equi­ty-owned firms con­clud­ed:

...
Defin­ing whether a pri­vate equi­ty firm con­trols a com­pa­ny isn’t always sim­ple. Funds are known to take minor­i­ty stakes with out­size influ­ence over strat­e­gy. If a buy­out firm wields enough clout on a board of direc­tors to pre­vent a quo­rum or to block deci­sions, then that “neg­a­tive con­trol” can make the com­pa­ny inel­i­gi­ble for SBA sup­port.

That’s prompt­ed a vari­ety of workarounds, accord­ing to peo­ple famil­iar with the strate­gies. For exam­ple, buy­out firms ced­ed some board seats or gave up oth­er rights to loosen their grip.
...

It all rais­es a dis­turb­ing ques­tion: so giv­en that pri­vate equi­ty’s busi­ness mod­el is heav­i­ly reliant on load­ing the com­pa­nies they buy with debt, how many of the pri­vate equi­ty-owned busi­ness that sought the PPP funds sought them in part because of the high debt loads their pri­vate equi­ty-own­ers inflict­ed upon the com­pa­nies made them high­ly frag­ile once the pan­dem­ic hit:

...
The pro­gram isn’t meant to help com­pa­nies that have access to oth­er sources of cash, Trea­sury Sec­re­tary Steven Mnuchin has said. SBA offi­cials have urged the pri­vate equi­ty indus­try — which cur­rent­ly has about $1.5 tril­lion in avail­able cash — to help their port­fo­lio com­pa­nies. There’s also the moral haz­ard: Some com­pa­nies were par­tic­u­lar­ly vul­ner­a­ble to the pan­dem­ic because pri­vate equi­ty own­ers had loaded them up with debt to max­i­mize prof­its.
...

It also rais­es the ques­tion of how much of the cash these pri­vate equi­ty-own­ers had on hand came direct­ly or indi­rect­ly from the act of load­ing these com­pa­nies up with debt.

Pri­vate Equi­ty: It’s Not Just For Pen­sions. Any­more. Thanks to Trump’s Depart­ment of Labor

Well, at least this grow­ing pri­vate equi­ty pen­sion night­mare — a night­mare where pen­sions seem to con­sis­tent­ly under­per­form indus­try bench­marks — is lim­it­ed to pen­sion plans and has­n’t bled into the US’s 401k per­son­al retire­ment accounts. Right? Well, not as of June, when the Depart­ment of Labor just issued an order that allows 401ks to invest in pri­vate equi­ty funds for the first time ever. Pri­vate equi­ty for the ‘lit­tle guy’. What could go wrong?

So what was the rea­son­ing behind this move? The Labor Depart­ment asserts that pri­vate equi­ty funds per­form well and point­ed to the fact that pri­vate equi­ty funds have per­formed as well as pub­lic equi­ty indices since at least 2006. What that rea­son­ing did­n’t fac­tor in is the fact that pri­vate equi­ty funds have high fees that can range any­where from 7–20 per­cent. Again, that adds up. Low fees in the range of 0.21 to 0.6 per­cent are one of the main fea­tures of pub­lic equi­ty indices. So the Depart­ment of Labor basi­cal­ly passed a rule that allows indi­vid­ual retirees to give pri­vate equi­ty a bunch of fees:

The Amer­i­can Prospect

Let­ting Pri­vate Equi­ty Bil­lion­aires Rob Work­er Retire­ment Funds

A new Depart­ment of Labor rule allows pri­vate equi­ty to get into 401(k) plans. One expert esti­mates a $13.7 bil­lion annu­al wealth trans­fer from work­ers to Wall Street tycoons.

by Robin Kaiser-Schat­zlein

June 18, 2020

On June 3, under the cov­er of viral chaos and civ­il unrest, the Depart­ment of Labor announced that it would allow pri­vate equi­ty firms to sell prod­ucts to indi­vid­ual retire­ment accounts, includ­ing 401(k)s. The impe­tus was Pres­i­dent Trump’s vague, blus­tery, and dereg­u­la­to­ry exec­u­tive order to “remove bar­ri­ers” to the “inno­va­tion, ini­tia­tive, and dri­ve of the Amer­i­can peo­ple.” But the Labor Department’s rule will do the oppo­site, exac­er­bat­ing wealth inequal­i­ty by suck­ing a huge pile of mon­ey out of the pock­ets of work­ers sav­ing for retire­ment and shep­herd­ing it to the few fab­u­lous­ly wealthy own­ers of pri­vate equi­ty firms.

By open­ing the flood­gates to pri­vate equi­ty, the Depart­ment of Labor will sub­ject indi­vid­ual retire­ment accounts to pri­vate equity’s exor­bi­tant­ly high fees, while pro­vid­ing rough­ly the same returns as low- and no-fee mutu­al funds. Experts sug­gest that this point­less pay­out to pri­vate equi­ty from these fees––borne entire­ly by workers––might be in the ball­park of $13.7 bil­lion per year.

Work­er mon­ey already props up the pri­vate equi­ty busi­ness mod­el. CalPERS, one of the largest pen­sion funds in the world, has been invest­ing heav­i­ly in pri­vate equi­ty firms that buy and sell dis­tressed assets for years. Now, Trump’s Labor Depart­ment has giv­en the green light for even more work­er mon­ey to flow into an indus­try that fre­quent­ly harms work­ers, by load­ing com­pa­nies with debt, forc­ing them to cut labor costs to the bone, and fre­quent­ly bank­rupt­ing them, while extract­ing the last bits of val­ue.

The Department’s ratio­nale for allow­ing retire­ment savers to buy prod­ucts from pri­vate equi­ty firms was that these funds per­form well. Sec­re­tary of Labor Eugene Scalia said in a press state­ment that let­ting pri­vate equi­ty funds devel­op prod­ucts for retire­ment savers was to allow them to “gain access to alter­na­tive invest­ments that often pro­vide strong returns.” But experts dis­agree. Pro­fes­sor Ludovic Phalip­pou at the Uni­ver­si­ty of Oxford ana­lyzed pri­vate equi­ty funds from 2006 to 2015, and found that they don’t earn back the leg­endary sky-high returns. Rather, the “funds have returned about the same as pub­lic equi­ty indices since at least 2006.” One main prob­lem is that the high fees that pri­vate equi­ty firms charge, which can range any­where from 7 per­cent on the low end to 20 per­cent for pri­vate clients, dimin­ish the returns to investors. These per­for­mance fees totaled about $230 bil­lion over the peri­od stud­ied.

If pri­vate equi­ty was to sell prod­ucts to indi­vid­ual investors, their fees would like­ly be in the range that they charge California’s pub­lic-employ­ee pen­sion fund CalPERS, which Phalip­pou notes is about 7 per­cent. Eileen Appel­baum, co-direc­tor at the Cen­ter for Eco­nom­ic and Pol­i­cy Research and an expert on pri­vate equi­ty, told me she thinks 7 per­cent is at best a con­ser­v­a­tive esti­mate. The invest­ments allowed by the gov­ern­ment in 401(k) plans would be a “fund of funds,” or an invest­ment fund com­posed of oth­er pri­vate equi­ty funds. This would like­ly tack on an extra per­cent­age point. Then you add in the stan­dard fee that a bro­ker­age like Fideli­ty or Van­guard takes for man­ag­ing the over­all 401(k) (which are small and range from 0.21 per­cent to 0.6 per­cent, accord­ing to Investo­pe­dia), and the fees for a pri­vate equi­ty prod­uct would be in the range of 8.2 to 8.6 per­cent. Com­pare this to the more stan­dard index fund, which would have only a minus­cule 0.21 to 0.6 per­cent fee.

The 401(k) mar­ket is cur­rent­ly a mas­sive $6.2 tril­lion, and Appel­baum notes that only a lit­tle more than half of that mar­ket is invest­ed in the kind of tar­get-date funds and bal­ance funds that the Labor Depart­ment made pri­vate equi­ty firms cur­rent­ly eli­gi­ble to sell into. (Tar­get-date funds are often the default option for work­ers, mak­ing that a big poten­tial prize for pri­vate equi­ty.) She thinks that for the time being, most finan­cial advis­ers will not feel com­fort­able sell­ing pri­vate equi­ty prod­ucts to their clients. Sources indi­cate that Van­guard and Fideli­ty, two of the biggest advis­ers, have thus far declined to move retire­ment funds into pri­vate equi­ty.

But even a small stake in such a giant mar­ket would be a wind­fall for pri­vate equi­ty man­agers. Even if the mar­ket set­tles in at around 5 per­cent of all 401(k) funds, that would rep­re­sent a still-giant pool of $171 bil­lion. If 8 per­cent of this goes to pri­vate equi­ty firm fees (less the bro­ker fees), pri­vate equi­ty will have charged work­ers $13.7 bil­lion to deliv­er returns equal to or less than pub­lic equi­ty mar­kets. As Appel­baum notes, retire­ment savers will suf­fer from “hav­ing all this mon­ey tak­en out that they didn’t have tak­en out before.”

There are oth­er dis­ad­van­tages, says Appel­baum. Pri­vate equi­ty invest­ments are noto­ri­ous­ly risky, lack the finan­cial trans­paren­cy of pub­lic firms, and typ­i­cal­ly force investors to com­mit their mon­ey for a decade. “There are a lot of down­sides,” Appel­baum said. “For the extra risk you’re sup­posed to get extra reward. But here there is no extra reward.”

Anoth­er prob­lem is that, even if the top quar­tile of glitzy pri­vate equi­ty firms per­form well (which Appel­baum sug­gests they often do), any retire­ment prod­uct would fea­ture a blend of pri­vate equi­ty funds, which like­ly would include the mid­dling and los­er funds, bring­ing down the prospec­tive return with­out bring­ing down the indus­try-stan­dard, sky-high fees. And as Bar­bara Rop­er of the Con­sumer Fed­er­a­tion of Amer­i­ca indi­cat­ed to me, with­out strong pro­tec­tions for work­ers from being ripped off by finan­cial advis­ers, they could eas­i­ly be talked into these haz­ardous invest­ments.

Appel­baum stress­es that the cre­ation and imple­men­ta­tion of the pri­vate equi­ty prod­ucts is like­ly a lit­tle ways off. Finan­cial firms aren’t like­ly to feel con­fi­dent sell­ing them right away. Pri­vate equi­ty funds also need upfront invest­ments of $5 mil­lion to $10 mil­lion, which will require asset man­agers to some­how pool 401(k)s into big invest­ments; this is espe­cial­ly dif­fi­cult giv­en the speed with which work­ers change jobs and will need to with­draw funds that pri­vate equi­ty firms want to lock up. “Fre­quent turnover in retire­ment plan invest­ments makes pri­vate equi­ty a par­tic­u­lar­ly poor choice for most retire­ment savers,” Rop­er said. And cur­rent­ly, the eco­nom­ic shut­down has dis­tract­ed pri­vate equi­ty with a per­verse prob­lem: They have over $1.4 tril­lion in unde­ployed cap­i­tal (known as “dry pow­der”) that they need to spend.

Nonethe­less, pri­vate equi­ty firms have been drool­ing over the tan­ta­liz­ing 401(k) mar­ket since at least 2013, Appel­baum says. (She wrote an orac­u­lar arti­cle in 2014 called “Pri­vate Equi­ty Is Com­ing for Your Nest Egg.”) The Trump Labor Depart­ment rule is the ful­fill­ment of a long-deferred dream.

...

Democ­rats are start­ing to speak out about the Labor Department’s deci­sion. Michael Gwin, spokesper­son for Demo­c­ra­t­ic pres­i­den­tial nom­i­nee Joe Biden, gave the Prospect this state­ment: “While Joe Biden stead­fast­ly sup­ports more equal access to retire­ment sav­ing incen­tives and oppor­tu­ni­ties for wealth build­ing, he staunch­ly oppos­es reg­u­la­to­ry changes that will lead to sky­rock­et­ing fees and dimin­ished retire­ment secu­ri­ty for savers. This reg­u­la­to­ry action is anoth­er exam­ple of Pres­i­dent Trump putting the inter­ests of Wall Street ahead of Amer­i­can work­ers and fam­i­lies.”

If pri­vate equi­ty prod­ucts won’t bring in extra returns for work­ers, what is the Trump admin­is­tra­tion after? It looks like they want to use work­ers’ mon­ey to pam­per and fash­ion a new class of bil­lion­aires. Many of them, after all, are friends and donors of the admin­is­tra­tion.

This mod­el has already been proven. Phalip­pou finds that as they got increas­ing­ly involved with pen­sion funds, the num­ber of pri­vate equi­ty multi­bil­lion­aires rose from three in 2005 to 22 in 2020. From study­ing the pri­vate equi­ty indus­try, he sug­gests that the use of pri­vate equi­ty is a wealth trans­fer that “might be one of the largest in the his­to­ry of mod­ern finance: from a few hun­dred mil­lion pen­sion scheme mem­bers … to a few thou­sand peo­ple work­ing in pri­vate equi­ty.” Under the guid­ance of the Trump admin­is­tra­tion, it seems it can only get worse.

————

“Let­ting Pri­vate Equi­ty Bil­lion­aires Rob Work­er Retire­ment Funds” by Robin Kaiser-Schat­zlein; The Amer­i­can Prospect; 06/18/2020

By open­ing the flood­gates to pri­vate equi­ty, the Depart­ment of Labor will sub­ject indi­vid­ual retire­ment accounts to pri­vate equity’s exor­bi­tant­ly high fees, while pro­vid­ing rough­ly the same returns as low- and no-fee mutu­al funds. Experts sug­gest that this point­less pay­out to pri­vate equi­ty from these fees––borne entire­ly by workers––might be in the ball­park of $13.7 bil­lion per year.”

The same returns as before but now with extra fees! That’s basi­cal­ly what Trump’s Depart­ment of Labor just unleashed upon US work­ers. No longer will work­ers be bur­dened with the ultra-low 0.21–0.6 per­cent fees charged by equi­ty index funds:

...
The Department’s ratio­nale for allow­ing retire­ment savers to buy prod­ucts from pri­vate equi­ty firms was that these funds per­form well. Sec­re­tary of Labor Eugene Scalia said in a press state­ment that let­ting pri­vate equi­ty funds devel­op prod­ucts for retire­ment savers was to allow them to “gain access to alter­na­tive invest­ments that often pro­vide strong returns.” But experts dis­agree. Pro­fes­sor Ludovic Phalip­pou at the Uni­ver­si­ty of Oxford ana­lyzed pri­vate equi­ty funds from 2006 to 2015, and found that they don’t earn back the leg­endary sky-high returns. Rather, the “funds have returned about the same as pub­lic equi­ty indices since at least 2006.” One main prob­lem is that the high fees that pri­vate equi­ty firms charge, which can range any­where from 7 per­cent on the low end to 20 per­cent for pri­vate clients, dimin­ish the returns to investors. These per­for­mance fees totaled about $230 bil­lion over the peri­od stud­ied.

If pri­vate equi­ty was to sell prod­ucts to indi­vid­ual investors, their fees would like­ly be in the range that they charge California’s pub­lic-employ­ee pen­sion fund CalPERS, which Phalip­pou notes is about 7 per­cent. Eileen Appel­baum, co-direc­tor at the Cen­ter for Eco­nom­ic and Pol­i­cy Research and an expert on pri­vate equi­ty, told me she thinks 7 per­cent is at best a con­ser­v­a­tive esti­mate. The invest­ments allowed by the gov­ern­ment in 401(k) plans would be a “fund of funds,” or an invest­ment fund com­posed of oth­er pri­vate equi­ty funds. This would like­ly tack on an extra per­cent­age point. Then you add in the stan­dard fee that a bro­ker­age like Fideli­ty or Van­guard takes for man­ag­ing the over­all 401(k) (which are small and range from 0.21 per­cent to 0.6 per­cent, accord­ing to Investo­pe­dia), and the fees for a pri­vate equi­ty prod­uct would be in the range of 8.2 to 8.6 per­cent. Com­pare this to the more stan­dard index fund, which would have only a minus­cule 0.21 to 0.6 per­cent fee.
...

How will inde­pen­dent investors fair with this grand new retire­ment invest­ment oppor­tu­ni­ty? Pre­sum­ably about as well as pen­sion funds...with con­sis­tent­ly under­per­form­ing results that lag the indus­try bench­marks. Lucky them.

Pri­vate Par­a­sites Tak­ing Over the World

But as the fol­low­ing Bloomberg arti­cle from Octo­ber of 2019 — right before the start of the coro­n­avirus pan­dem­ic — makes clear, there’s anoth­er major rea­son we should be con­cerned about 401k invest­ments in pri­vate equi­ty fund: pri­vate equi­ty is bad for busi­ness. Yes, it’s great of earn­ing mas­sive prof­its for the exec­u­tives in the pri­vate equi­ty firms. But as stud­ies have shown, the busi­ness bought out by pri­vate equi­ty are more frag­ile than their pub­licly held counter-parts, large­ly because they are typ­i­cal­ly pur­chased in a lever­aged buy out that loads the com­pa­ny with debt. Addi­tion­al­ly, the incen­tives for the new pri­vate equi­ty own­ers to effec­tive­ly gut a busi­ness and sell off its most valu­able assets in the inter­est of mak­ing a quick prof­it is exceed­ing­ly high, in large part because of the mas­sive lever­age used to make the pur­chase. Beyond that, pri­vate equi­ty can treat the busi­ness­es it owns effec­tive­ly like vir­tu­al ATM, where they force the com­pa­ny to bor­row mon­ey to pay its pri­vate equi­ty own­er spe­cial div­i­dends. As the arti­cle also points out, the cor­po­rate debt lev­els a year ago were look­ing scar­i­ly high should anoth­er reces­sion hit thanks in large part to pri­vate equi­ty’s grow­ing role in the econ­o­my over the last decade after it ‘won’ the 2008 finan­cial cri­sis. And then, of course, the coro­n­avirus pan­dem­ic hit and an even eco­nom­ic night­mare sce­nario we find our­selves in today emerged. So the more pen­sions and 401ks pile into pri­vate equi­ty, the more cash pri­vate equi­ty has on hand to effec­tive­ly loot the econ­o­my even more than the present-day loot­ing lev­els:

Bloomberg Busi­ness­week

Every­thing Is Pri­vate Equi­ty Now
Spurred by cheap loans and investors des­per­ate to boost returns, buy­out firms roam every cor­ner of the cor­po­rate world.

Octo­ber 3, 2019, 3:00 AM CDT
Cor­rect­ed Octo­ber 8, 2019, 3:10 PM CDT

Pri­vate equi­ty man­agers won the finan­cial cri­sis. A decade since the world econ­o­my almost came apart, big banks are more heav­i­ly reg­u­lat­ed and scru­ti­nized. Hedge funds, which live on the volatil­i­ty cen­tral banks have worked so hard to quash, have most­ly lost their flair. But the firms once known as lever­aged buy­out shops are thriv­ing. Almost every­thing that’s hap­pened since 2008 has tilt­ed in their favor.

Low inter­est rates to finance deals? Check. A friend­ly polit­i­cal cli­mate? Check. A long line of clients? Check.

The PE indus­try, which runs funds that can invest out­side pub­lic mar­kets, has tril­lions of dol­lars in assets under man­age­ment. In a world where bonds are pay­ing next to nothing—and some have neg­a­tive yields—many big investors are des­per­ate for the high­er returns PE man­agers seem to be able to squeeze from the mar­kets.

The busi­ness has made bil­lion­aires out of many of its founders. Funds have snapped up busi­ness­es from pet stores to doc­tors’ prac­tices to news­pa­pers. PE firms may also be deep into real estate, loans to busi­ness­es, and start­up investments—but the heart of their craft is using debt to acquire com­pa­nies and sell them lat­er.

In the best cas­es, PE man­agers can nur­ture fail­ing or under­per­form­ing com­pa­nies and set them up for faster growth, cre­at­ing out­size returns for investors that include pen­sion funds and uni­ver­si­ties. But hav­ing once oper­at­ed on the com­fort­able mar­gins of Wall Street, pri­vate equi­ty is now fac­ing tougher ques­tions from politi­cians, reg­u­la­tors, and activists. One of PE’s super­pow­ers is that it’s hard for out­siders to see and under­stand the indus­try, so we set out to shed light on some of the ways it’s chang­ing finance and the econ­o­my itself. —Jason Kel­ly

The Mag­ic For­mu­la Is Lever­age ... and Fees

PE invests in a range of dif­fer­ent assets, but the core of the busi­ness is the lever­aged buy­out

The basic idea is a lit­tle like house flip­ping: Take over a com­pa­ny that’s rel­a­tive­ly cheap and spruce it up to make it more attrac­tive to oth­er buy­ers so you can sell it at a prof­it in a few years. The tar­get might be a strug­gling pub­lic com­pa­ny or a small pri­vate busi­ness that can be combined—or “rolled up”—with oth­ers in the same indus­try.

1. A few things make PE dif­fer­ent from oth­er kinds of invest­ing. First is the lever­age. Acqui­si­tions are typ­i­cal­ly financed with a lot of debt that ends up being owed by the acquired com­pa­ny. That means the PE firm and its investors can put in a com­par­a­tive­ly small amount of cash, mag­ni­fy­ing gains if they sell at a prof­it.

2. Sec­ond, it’s a hands-on invest­ment. PE firms over­haul how a busi­ness is man­aged. Over the years, firms say they’ve shift­ed from brute-force cost-cut­ting and lay­offs to McK­in­sey-style oper­a­tional con­sult­ing and reor­ga­ni­za­tion, with the aim of leav­ing com­pa­nies bet­ter off than they found them. “When you grow busi­ness­es, you typ­i­cal­ly need more peo­ple,” said Black­stone Group Inc.’s Stephen Schwarz­man at the Bloomberg Glob­al Busi­ness Forum in Sep­tem­ber. Still, the busi­ness mod­el has put PE at the fore­front of the finan­cial­iza­tion of the economy—any busi­ness it touch­es is under pres­sure to real­ize val­ue for far-flung investors. Quick­ly.

3. Final­ly, the fees are huge. Con­ven­tion­al mon­ey man­agers are lucky if they can get investors to pay them 1% of their assets a year. The tra­di­tion­al PE struc­ture is “2 and 20”—a 2% annu­al fee, plus 20% of prof­its above a cer­tain lev­el. The 20 part, known as car­ried inter­est, is espe­cial­ly lucra­tive because it gets favor­able tax treat­ment. —J.K.

The Returns Are Spec­tac­u­lar. But There Are Catch­es

For investors the draw of pri­vate equi­ty is sim­ple: Over the 25 years end­ed in March, PE funds returned more than 13% annu­al­ized, com­pared with about 9% for an equiv­a­lent invest­ment in the S&P 500, accord­ing to an index cre­at­ed by invest­ment firm Cam­bridge Asso­ciates LLC. Pri­vate equi­ty fans say the funds can find val­ue you can’t get in pub­lic mar­kets, in part because pri­vate man­agers have more lee­way to over­haul under­val­ued com­pa­nies. “You can­not make trans­for­ma­tion­al changes in a pub­lic com­pa­ny today,” said Neu­berg­er Berman Group LLC man­ag­ing direc­tor Tony Tutrone in a recent inter­view on Bloomberg TV. Big insti­tu­tion­al investors such as pen­sions and uni­ver­si­ty endow­ments also see a diver­si­fi­ca­tion ben­e­fit: PE funds don’t move in lock­step with broad­er mar­kets.

But some say investors need to be more skep­ti­cal. “We have seen a num­ber of pro­pos­als from pri­vate equi­ty funds where the returns are real­ly not cal­cu­lat­ed in a man­ner that I would regard as hon­est,” said bil­lion­aire investor War­ren Buf­fett at Berk­shire Hath­away Inc.’s annu­al meet­ing ear­li­er this year. There are three main con­cerns.

• The val­ue of pri­vate invest­ments is hard to mea­sure

Because pri­vate com­pa­ny shares aren’t being con­stant­ly bought and sold, you can’t look up their price by typ­ing in a stock tick­er. So pri­vate funds have some flex­i­bil­i­ty in valu­ing their hold­ings. Andrea Auer­bach, Cambridge’s head of glob­al pri­vate invest­ments, says a mea­sure that PE firms often use to assess a company’s performance—earnings before inter­est, tax­es, depre­ci­a­tion, and amor­ti­za­tion, or Ebitda—is often over­stat­ed using var­i­ous adjust­ments. “It’s not an hon­est num­ber any­more,” she says. Ulti­mate­ly, though, there’s a lim­it to how much these val­u­a­tions can inflate a PE fund’s returns. When the fund sells the invest­ment, its true val­ue is exact­ly what­ev­er buy­ers are will­ing to pay.

Anoth­er con­cern is that the lack of trad­ing in pri­vate invest­ments may mask a fund’s volatil­i­ty, giv­ing the appear­ance of smoother returns over time and the illu­sion that illiq­uid assets are less risky, accord­ing to a 2019 report by asset man­ag­er AQR Cap­i­tal Man­age­ment, which runs funds that com­pete with pri­vate equi­ty.

• Returns can be gamed

Pri­vate equi­ty funds don’t imme­di­ate­ly take all the mon­ey their clients have com­mit­ted. Instead, they wait until they find an attrac­tive invest­ment. The inter­nal rate of return is cal­cu­lat­ed from the time the investor mon­ey comes in. The short­er the peri­od the investor cap­i­tal is put to work, the high­er the annu­al­ized rate of return. That opens up a chance to juice the fig­ures. Funds can bor­row mon­ey to make the ini­tial invest­ment and ask for the clients’ mon­ey a bit lat­er, mak­ing it look as if they pro­duced prof­its at a faster rate. “Over the last sev­er­al years, more pri­vate equi­ty funds have pur­sued this as a way to ensure their returns keep up with the Jone­ses,” Auer­bach says. The Amer­i­can Invest­ment Coun­cil, the trade group for PE, says short-term bor­row­ing allows fund man­agers to react quick­ly to oppor­tu­ni­ties and sophis­ti­cat­ed investors to use a vari­ety of mea­sures besides inter­nal rate of return to eval­u­ate PE per­for­mance.

• The best returns might be in the rearview mir­ror

Two decades ago an investor could pick a pri­vate equi­ty fund at ran­dom and have a bet­ter than 75% chance of beat­ing the stock mar­ket, accord­ing to a report by finan­cial data com­pa­ny Pitch­Book. Since 2006 those odds have dropped to worse than a coin flip. “Not only are few­er man­agers beat­ing the mar­ket but their lev­el of out­per­for­mance has shrunk, too,” the report says.

One like­ly rea­son will be famil­iar to investors in mutu­al funds and hedge funds. When strate­gies suc­ceed, more peo­ple pile in—and it gets hard­er and hard­er to find the kinds of bar­gains that fueled the ear­ly gains. There are now 8,000-plus PE-backed com­pa­nies, almost dou­ble the num­ber of their pub­licly list­ed coun­ter­parts. The PE play­book informs activist hedge funds and has been mim­ic­ked by pen­sions and sov­er­eign funds. Some of PE’s secret sauce has been shared lib­er­al­ly in busi­ness school sem­i­nars and man­age­ment books.

A deep­er prob­lem could be that the first gen­er­a­tion of buy­out man­agers wrung out the eas­i­est prof­its. PE think­ing per­vades the cor­po­rate suite—few chief exec­u­tive offi­cers are now sit­ting around wait­ing for PE man­agers to tell them to sell under­per­form­ing divi­sions and cut costs. Auer­bach says there are still good PE man­agers out there and all these changes have “forced evo­lu­tion and inno­va­tion.” But it’s pos­si­ble that a cos­mic align­ment of lax cor­po­rate man­age­ment, cheap debt, and des­per­ate-for-yield pen­sions cre­at­ed a moment that won’t be repeat­ed soon.Hema Par­mar and Jason Kel­ly

Buy­outs Push Com­pa­nies to the Lim­it. Or Over It

If your com­pa­ny finds itself part of a PE port­fo­lio, what should you expect? Research has shown that com­pa­nies acquired through lever­aged buy­outs (LBOs) are more like­ly to depress work­er wages and cut invest­ments, not to men­tion have a high­er risk of bank­rupt­cy. Pri­vate equi­ty own­ers ben­e­fit through fees and div­i­dends, crit­ics say, while the com­pa­ny is left to grap­ple with often debil­i­tat­ing debt.

Kristi Van Beck­um worked as an assis­tant man­ag­er for Shop­ko Stores Inc. in Wis­con­sin when the chain of rur­al depart­ment stores was bought by PE firm Sun Cap­i­tal Part­ners Inc. in a 2005 LBO. “When they took over, our pay­roll got dras­ti­cal­ly cut, our retire­ment plan got cut, and we saw a lot of turnover among exec­u­tives,” she says.

One of Sun Capital’s first moves as own­er was to mon­e­tize Shopko’s most valu­able asset, its real estate, by sell­ing it for about $800 mil­lion and leas­ing back the space to its stores. That gen­er­at­ed a short-term wind­fall but added to Shopko’s long-term rent costs. “A lot of stores that were once prof­itable start­ed to show low­er prof­its because they had to start pay­ing rent,” Van Beck­um says.

In 2019, Shop­ko said it could no longer ser­vice its debt and filed for bank­rupt­cy, ulti­mate­ly shut­ter­ing all of its more than 360 stores. Van Beck­um was asked to stay on as a man­ag­er dur­ing her store’s liq­ui­da­tion and was promised sev­er­ance and a clos­ing bonus in return, she says. Weeks lat­er, she received an email telling her that her sev­er­ance claim wouldn’t be paid. Sun Cap­i­tal has said mon­ey has been con­tributed to the bank­rupt­cy plan that can pay such claims.

Pri­vate equi­ty and hedge funds gained con­trol of more than 80 retail­ers in the past decade, accord­ing to a July report by a group of pro­gres­sive orga­ni­za­tions includ­ing Amer­i­cans for Finan­cial Reform and Unit­ed for Respect. And PE-owned mer­chants account for most of the biggest recent retail bank­rupt­cies, includ­ing those of Gym­boree, Pay­less, and Shop­ko in the past year alone. Those bank­rupt­cies wiped out 1.3 mil­lion jobs—including posi­tions at retail­ers and relat­ed jobs, such as at ven­dors—accord­ing to the report, which esti­mates that “Wall Street firms have destroyed eight times as many retail jobs as they have cre­at­ed in the past decade.”

Whether LBOs per­form poor­ly because of debt, busi­ness strat­e­gy, or com­pe­ti­tion from Amazon.com Inc., research shows they fare worse than their pub­lic coun­ter­parts. A July paper by Bri­an Ayash and Mah­di Ras­tad of Cal­i­for­nia Poly­tech­nic State Uni­ver­si­ty exam­ined almost 500 com­pa­nies tak­en pri­vate from 1980 to 2006. It fol­lowed both the LBOs and a sim­i­lar num­ber of com­pa­nies that stayed pub­lic for a peri­od of 10 years. They found about 20% of the PE-owned com­pa­nies filed for bankruptcy—10 times the rate of those that stayed pub­lic. Pile on debt, and employ­ees lose, Ayash says. “The com­mu­ni­ty los­es. The gov­ern­ment los­es because it has to sup­port the employ­ees.” Who wins? “The funds do.”

Research by Eileen Appel­baum, co-direc­tor of the Cen­ter for Eco­nom­ic and Pol­i­cy Research, says the prob­lem isn’t lever­age per se but too much of it. She points to guid­ance issued by the Fed­er­al Deposit Insur­ance Corp. in 2013 say­ing debt lev­els of more than six times earn­ings before inter­est, tax­es, depre­ci­a­tion, and amor­ti­za­tion, or Ebit­da, “rais­es con­cerns for most indus­tries.” A 2019 McK­in­sey report shows that medi­an debt in pri­vate equi­ty deals last year was just under the six times Ebit­da thresh­old at 5.5, up from five in 2016.

...

The retail indus­try was long a prime tar­get for buy­outs because of its reli­able cash flow and the val­ue of the real estate it owned. But the sec­tor is no longer as suit­ed to PE own­er­ship amid ever-chang­ing cus­tomer whims and the mas­sive upheaval brought by Ama­zon, says Per­ry Man­dari­no, head of restruc­tur­ing and co-head of invest­ment bank­ing at B. Riley FBR. “Pri­vate equi­ty has suc­cess­ful­ly pre­served com­pa­nies across a num­ber of sec­tors,” he says, “but the dis­rup­tion in retail has proven dif­fi­cult for even some of the most savvy investors to nav­i­gate. High lever­age, espe­cial­ly in this dif­fi­cult envi­ron­ment, can be fatal.”

The most notable recent exam­ple of that is Toys “R” Us Inc. When the children’s toy retail­er filed for bank­rupt­cy in 2017, it was pay­ing almost $500 mil­lion a year to ser­vice the debt from its 2005 takeover by Bain Cap­i­tal LP, Vor­na­do Real­ty Trust, and Kohlberg Kravis Roberts & Co. After it was liq­ui­dat­ed in March fol­low­ing poor hol­i­day sea­son sales, its own­ers became the tar­get of protests by laid-off work­ers, as well as scruti­ny from investors and crit­i­cism from elect­ed offi­cials. Lat­er that year, KKR and Bain said they’d each con­tribute $10 mil­lion to a fund for work­ers who lost their jobs when the retail­er col­lapsed. Sen­a­tor Eliz­a­beth War­ren (D‑Mass.) intro­duced a bill in July that would lim­it pay­outs pri­vate equi­ty own­ers could receive from trou­bled com­pa­nies.

That kind of impact isn’t unique to retail, says Heather Slavkin Cor­zo, senior fel­low at Amer­i­cans for Finan­cial Reform and direc­tor of cap­i­tal mar­ket poli­cies at the union fed­er­a­tion AFL-CIO. “The mas­sive growth of pri­vate equi­ty over the past decade means that this industry’s influ­ence, eco­nom­ic and polit­i­cal, has mush­roomed,” she says. “It’s hard­ly an exag­ger­a­tion to say that we are all stake­hold­ers in pri­vate equi­ty these days, one way or anoth­er.”Lau­ren Cole­man-Lochn­er and Eliza Ronalds-Han­non

After the Cri­sis, Rental Homes Became an Asset Class

Rent­ing out hous­es used to be a rel­a­tive­ly small-time busi­ness. Now rentals are what Wall Street calls an asset class—another invest­ment like stocks or tim­ber­land, with ten­ants’ month­ly checks show­ing up as yield in someone’s port­fo­lio. About 1 mil­lion peo­ple may now live in homes owned by large land­lords. This tec­ton­ic shift can be traced to the U.S. hous­ing cri­sis.

Pri­vate equi­ty com­pa­nies includ­ing Black­stone Group Inc. had the mon­ey to gorge on fore­closed hous­es in the years after the crash and quick­ly applied their mod­el to a whole new busi­ness. They used economies of scale, cost-cut­ting, and lever­age to max­i­mize prof­its on under­val­ued assets. The key was to cre­ate a stan­dard­ized way to man­age sin­gle-fam­i­ly homes, scat­tered from Atlanta to Las Vegas, almost as effi­cient­ly as apart­ment build­ings. PE-backed land­lords set up cen­tral­ized 24/7 cus­tomer ser­vice cen­ters and auto­mat­ed sys­tems for rent col­lec­tion and main­te­nance calls.

Black­stone-backed rental com­pa­ny Invi­ta­tion Homes Inc. even­tu­al­ly went pub­lic, then merged with a land­lord seed­ed by Star­wood Cap­i­tal Group and Colony Cap­i­tal Inc. to cre­ate the U.S.’s largest sin­gle-fam­i­ly rental com­pa­ny, with more than 80,000 units. Invi­ta­tion Homes owns less than 1% of the sin­gle-fam­i­ly rental stock, says Ken Caplan, Blackstone’s glob­al co-head of real estate. “But it has raised the bar for pro­fes­sion­al ser­vice for the indus­try,” he says.

The aims of the land­lords and the needs of their ten­ants often diverge, says Leilani Farha, the Unit­ed Nations’ spe­cial rap­por­teur on the right to hous­ing. Steady rent increas­es that make investors hap­py come out of ten­ants’ pay­checks, strain­ing house­hold finances and mak­ing it hard­er to save for a down pay­ment. Mean­while, PE-backed com­pa­nies’ sprawl­ing port­fo­lios of rental prop­er­ties may lim­it the avail­abil­i­ty of entry-lev­el hous­es that could be occu­pied by home­own­ers. Insti­tu­tion­al land­lords were 66% more like­ly than oth­er oper­a­tors to file evic­tion notices, accord­ing to Geor­gia Insti­tute of Tech­nol­o­gy pro­fes­sor Elo­ra Ray­mond, whose 2016 study of Ful­ton Coun­ty, Ga., court records was pub­lished by the Fed­er­al Reserve Bank of Atlanta. Invi­ta­tion Homes was less like­ly to file notices than its largest peers, accord­ing to the paper. A com­pa­ny spokesman says it works with ten­ants to avoid evic­tion and that its high renew­al rates indi­cate cus­tomer sat­is­fac­tion.

From Wall Street’s point of view, the mod­el has worked beau­ti­ful­ly. Invi­ta­tion Homes has con­vinced stock mar­ket investors that it can man­age oper­at­ing costs. It also bought shrewd­ly, swal­low­ing up starter homes in good school dis­tricts, antic­i­pat­ing that tight cred­it and ane­mic con­struc­tion rates would push the U.S. toward what one indus­try ana­lyst dubbed a renter­ship soci­ety. Sure enough, U.S. home­own­er­ship is near its low­est point in more than 50 years, allow­ing Invi­ta­tion Homes to raise rents by more than 5%, on aver­age, when ten­ants renew leas­es.

“The sin­gle-fam­i­ly rental com­pa­nies have a per­fect recipe,” says John Pawlows­ki, an ana­lyst at Green Street Advi­sors LLC. “It’s a com­bi­na­tion of sol­id eco­nom­ic growth in these Sun Belt mar­kets and very few options out there on the own­er­ship front.” Shares of Invi­ta­tion Homes have gained almost 50% since the start of 2019. Black­stone has sold more than $4 bil­lion in shares of it this year. Its remain­ing stake is worth about $1.7 bil­lion. —Prashant Gopal and Patrick Clark

As Prof­its Grow, So Does Inequal­i­ty

In July, Demo­c­ra­t­ic pres­i­den­tial can­di­date Eliz­a­beth War­ren of Mass­a­chu­setts likened the pri­vate equi­ty indus­try to vam­pires. She struck a nerve: Even among Wall Street com­pa­nies, PE stands out as a sym­bol of inequal­i­ty in the U.S. “There’s this con­cen­tra­tion of extreme wealth, and pri­vate equi­ty is a huge part of that sto­ry,” says Char­lie Eaton, an assis­tant pro­fes­sor of soci­ol­o­gy at the Uni­ver­si­ty of Cal­i­for­nia at Merced.

Income gains for the top 1% in the U.S. have been ris­ing at a faster clip than for low­er groups since 1980. Since that time, PE man­agers have steadi­ly tak­en up a larg­er share of the high­est income groups, includ­ing the rich­est 400 peo­ple, accord­ing to sev­er­al research papers from the Uni­ver­si­ty of Chicago’s Steven Kaplan and Stanford’s Joshua Rauh. There are more pri­vate equi­ty man­agers who make at least $100 mil­lion annu­al­ly than invest­ment bankers, top finan­cial exec­u­tives, and pro­fes­sion­al ath­letes com­bined, they found. The very struc­ture of PE firms is par­tic­u­lar­ly prof­itable for man­agers at the top; not only do they earn annu­al man­age­ment fees, but they also get a cut of any prof­its.

Beyond that, PE may con­tribute to inequal­i­ty in sev­er­al ways. First, it offers investors high­er returns than those avail­able in pub­lic stocks and bonds mar­kets. Yet, to enjoy those returns, it helps to already be rich. Pri­vate equi­ty funds are open sole­ly to “qual­i­fied” (read: high-net-worth) indi­vid­ual investors and to insti­tu­tions such as endow­ments. Only some work­ers get indi­rect expo­sure via pen­sion funds.

Sec­ond, PE puts pres­sure on the low­er end of the wealth divide. Com­pa­nies can be bro­ken up, merged, or gen­er­al­ly restruc­tured to increase effi­cien­cy and pro­duc­tiv­i­ty, which inevitably means job cuts. The result is that PE accel­er­ates job polar­iza­tion, or the growth of jobs at the high­est and low­est skill and wage lev­el while the mid­dle erodes, accord­ing to research from econ­o­mists Mar­tin Ols­son and Joacim Tag.

The imper­a­tive to make high­ly lever­aged deals pay off may also encour­age more preda­to­ry busi­ness prac­tices. A study co-authored by UC Merced’s Eaton, for exam­ple, found that buy­outs of pri­vate col­leges lead to high­er tuition, stu­dent debt, and law enforce­ment action for fraud, as well as low­er grad­u­a­tion rates, loan-repay­ment rates, and grad­u­ate earn­ings. But the deals did increase prof­its.

...

Crit­ics and advo­cates of PE gen­er­al­ly agree on at least one thing: When peo­ple are hurt by deals that turn com­pa­nies upside down, there should be sys­tems in place to assist them. “You don’t want to stand in the way of eco­nom­ic inno­va­tion,” says Gre­go­ry Brown, a finance pro­fes­sor at UNC Kenan-Fla­gler Busi­ness School. “But you would hope that peo­ple who get run over are helped.” —Katia Dmitrie­va

Bar­bar­ians at the Gate Become the New Estab­lish­ment

1970s
The U.S. Depart­ment of Labor relax­es reg­u­la­tions to allow pen­sion funds to hold riski­er invest­ments. This opens up a new pool of mon­ey for buy­out artists. Cousins Hen­ry Kravis and George Roberts leave Bear Stearns with their men­tor Jerome Kohlberg to form Kohlberg Kravis Roberts & Co.

1980s
L.A. financier Michael Milken (above, sec­ond from left) turns junk bonds into a hot invest­ment, which makes get­ting lever­age eas­i­er. For­mer Lehman Broth­ers part­ners Pete Peter­son and Stephen Schwarz­man found Black­stone Group. KKR takes con­trol of RJR Nabis­co in a stun­ning $24 bil­lion deal.

1990s
Milken goes to jail for secu­ri­ties vio­la­tions, and his firm, Drex­el Burn­ham Lam­bert, col­laps­es. But takeover artists are find­ing more tools for financ­ing deals, as banker Jim­my Lee (pic­tured, third from left) pop­u­lar­izes lever­aged loans at what’s now JPMor­gan Chase & Co.

2000s
Pen­sions for Cal­i­for­nia state employ­ees and Mid­dle East sov­er­eign funds pour mon­ey into record-set­ting funds that rou­tine­ly sur­pass $15 bil­lion apiece. Big deals of the era include Dol­lar Gen­er­al Corp. and Hilton Hotels. Sev­er­al pri­vate equi­ty firms them­selves go pub­lic.

2010s
After the finan­cial cri­sis, Black­stone, Ares Cap­i­tal, and Apol­lo Glob­al expand their pri­vate cred­it busi­ness­es, pro­vid­ing financ­ing to com­pa­nies no longer served by big banks. Vet­er­an PE exec­u­tive Mitt Rom­ney is the 2012 Repub­li­can pres­i­den­tial nom­i­nee. —J.K.

Pri­vate Equi­ty Is Get­ting Com­pa­nies Hooked on Debt

Pri­vate equi­ty couldn’t exist with­out debt. It’s the jet fuel that makes a cor­po­rate acqui­si­tion so lucra­tive for a turn­around investor. The more debt you can raise against a tar­get com­pa­ny, the less cash you need to pay for it, and the high­er your return on that cash once you sell.

Ultralow inter­est rates have made this fuel espe­cial­ly potent and easy to obtain. The mar­ket for lever­aged loans—industry jar­gon for loans made to com­pa­nies with less-than-stel­lar credit—has dou­bled in the past decade. Almost 40% of all such loans out­stand­ing are to com­pa­nies con­trolled by pri­vate equi­ty, accord­ing to data from Dealog­ic.

Some lever­aged loans are arranged by banks. But there’s also been a boom in pri­vate lenders, who may be will­ing to pro­vide financ­ing when banks or pub­lic debt mar­kets won’t. All the while, bond and loan investors des­per­ate for yield have accept­ed high­er risks. As buy­out titans have chased big­ger and riski­er deals, their tar­get com­pa­nies have been left with more frag­ile bal­ance sheets, which gives man­age­ment less room for error. This could set the stage for a rude awak­en­ing dur­ing the next reces­sion.

“We’re see­ing scary lev­els of lever­age,” says Dan Zwirn, chief invest­ment offi­cer of alter­na­tive asset man­ag­er Are­na Investors. “Pri­vate equi­ty spon­sors are all slam­ming against each oth­er to get deals done.” Loans to com­pa­nies with espe­cial­ly high debt loads now exceed peaks in 2007 and 2014, accord­ing to the U.S. Fed­er­al Reserve. And com­pa­nies owned by pri­vate equi­ty typ­i­cal­ly car­ry a high­er debt load rel­a­tive to their earn­ings and offer less trans­paren­cy on their finan­cial posi­tion than oth­er cor­po­rate bor­row­ers.

...

PE firms can use some of the com­pa­nies they own as vir­tu­al ATMs—having the com­pa­ny bor­row mon­ey to pay its own­er spe­cial div­i­dends. That allows the funds to recov­er their invest­ment soon­er than they typ­i­cal­ly would through a sale or an ini­tial pub­lic offer­ing. Sycamore Part­ners LLC, known for its aggres­sive bets in the retail indus­try and relat­ed run-ins with cred­i­tors, has already recov­ered about 80% of the mon­ey it put down to acquire Sta­ples Inc. in 2017 through div­i­dends most­ly fund­ed by debt. Car­lyle Group, Hell­man & Fried­man, and Sil­ver Lake have also sad­dled their port­fo­lio com­pa­nies with new debt to extract div­i­dends this year. Rep­re­sen­ta­tives for the four pri­vate equi­ty firms declined to com­ment.

Lit­tle bub­bles have already start­ed to pop, giv­ing debt investors a glimpse of how quick­ly things can dete­ri­o­rate. Bonds issued last year to finance Kohlberg Kravis Roberts & Co.’s deal to take pri­vate Envi­sion Health­care, a hos­pi­tal staffing com­pa­ny, have already lost almost half their face val­ue after ini­tia­tives in Wash­ing­ton to stop sur­prise med­ical bills spooked investors. (A rep­re­sen­ta­tive for KKR declined to com­ment.) The debt of some oth­er pri­vate equi­ty-owned com­pa­nies, includ­ing the largest Piz­za Hut fran­chisee in the world and a phone recy­cling com­pa­ny, has also fall­en in mar­ket val­ue in recent months. “When you have peo­ple des­per­ate for yield, buy­ing low­er-rat­ed, poor-qual­i­ty debt, the ques­tion is what’s going to make this stuff blow out,” says Zwirn. “And it will.” —Davide Scigli­uz­zo, Kelsey But­ler, and Sal­ly Bakewell

————

“Every­thing Is Pri­vate Equi­ty Now”; Bloomberg Busi­ness­week; 10/03/2019

“Two decades ago an investor could pick a pri­vate equi­ty fund at ran­dom and have a bet­ter than 75% chance of beat­ing the stock mar­ket, accord­ing to a report by finan­cial data com­pa­ny Pitch­Book. Since 2006 those odds have dropped to worse than a coin flip. “Not only are few­er man­agers beat­ing the mar­ket but their lev­el of out­per­for­mance has shrunk, too,” the report says.”

You can only keep re-loot­ing an econ­o­my so many times before your loot­ing-returns start declin­ing. That’s the trag­ic les­son we appear to be watch­ing play out. The ‘low hang­ing loot fruit’ has already been loot­ed:

...
One like­ly rea­son will be famil­iar to investors in mutu­al funds and hedge funds. When strate­gies suc­ceed, more peo­ple pile in—and it gets hard­er and hard­er to find the kinds of bar­gains that fueled the ear­ly gains. There are now 8,000-plus PE-backed com­pa­nies, almost dou­ble the num­ber of their pub­licly list­ed coun­ter­parts. The PE play­book informs activist hedge funds and has been mim­ic­ked by pen­sions and sov­er­eign funds. Some of PE’s secret sauce has been shared lib­er­al­ly in busi­ness school sem­i­nars and man­age­ment books.

A deep­er prob­lem could be that the first gen­er­a­tion of buy­out man­agers wrung out the eas­i­est prof­its. PE think­ing per­vades the cor­po­rate suite—few chief exec­u­tive offi­cers are now sit­ting around wait­ing for PE man­agers to tell them to sell under­per­form­ing divi­sions and cut costs. Auer­bach says there are still good PE man­agers out there and all these changes have “forced evo­lu­tion and inno­va­tion.” But it’s pos­si­ble that a cos­mic align­ment of lax cor­po­rate man­age­ment, cheap debt, and des­per­ate-for-yield pen­sions cre­at­ed a moment that won’t be repeat­ed soon. —Hema Par­mar and Jason Kel­ly
...

But declin­ing returns don’t mean we should expect pri­vate equi­ty to shrink. It can still be plen­ty profitable...thanks to the prof­it-mul­ti­ply­ing pow­er of lever­aged buy­outs. Prof­itable to the pri­vate equi­ty investors...not so much for soci­ety at large which ends up with job loss­es, debt-bloat­ed com­pa­nies that tend to fare worse than their pub­licly-held coun­ter­parts, and an exac­er­ba­tion of eco­nom­ic inequal­i­ty as new low­er-paid employ­ees replace the laid-off work­ers, assum­ing the com­pa­ny isn’t dri­ven into bank­rupt­cy from all the debt:

...
If your com­pa­ny finds itself part of a PE port­fo­lio, what should you expect? Research has shown that com­pa­nies acquired through lever­aged buy­outs (LBOs) are more like­ly to depress work­er wages and cut invest­ments, not to men­tion have a high­er risk of bank­rupt­cy. Pri­vate equi­ty own­ers ben­e­fit through fees and div­i­dends, crit­ics say, while the com­pa­ny is left to grap­ple with often debil­i­tat­ing debt.

...

Pri­vate equi­ty and hedge funds gained con­trol of more than 80 retail­ers in the past decade, accord­ing to a July report by a group of pro­gres­sive orga­ni­za­tions includ­ing Amer­i­cans for Finan­cial Reform and Unit­ed for Respect. And PE-owned mer­chants account for most of the biggest recent retail bank­rupt­cies, includ­ing those of Gym­boree, Pay­less, and Shop­ko in the past year alone. Those bank­rupt­cies wiped out 1.3 mil­lion jobs—including posi­tions at retail­ers and relat­ed jobs, such as at ven­dors—accord­ing to the report, which esti­mates that “Wall Street firms have destroyed eight times as many retail jobs as they have cre­at­ed in the past decade.”

Whether LBOs per­form poor­ly because of debt, busi­ness strat­e­gy, or com­pe­ti­tion from Amazon.com Inc., research shows they fare worse than their pub­lic coun­ter­parts. A July paper by Bri­an Ayash and Mah­di Ras­tad of Cal­i­for­nia Poly­tech­nic State Uni­ver­si­ty exam­ined almost 500 com­pa­nies tak­en pri­vate from 1980 to 2006. It fol­lowed both the LBOs and a sim­i­lar num­ber of com­pa­nies that stayed pub­lic for a peri­od of 10 years. They found about 20% of the PE-owned com­pa­nies filed for bankruptcy—10 times the rate of those that stayed pub­lic. Pile on debt, and employ­ees lose, Ayash says. “The com­mu­ni­ty los­es. The gov­ern­ment los­es because it has to sup­port the employ­ees.” Who wins? “The funds do.”

...

Beyond that, PE may con­tribute to inequal­i­ty in sev­er­al ways. First, it offers investors high­er returns than those avail­able in pub­lic stocks and bonds mar­kets. Yet, to enjoy those returns, it helps to already be rich. Pri­vate equi­ty funds are open sole­ly to “qual­i­fied” (read: high-net-worth) indi­vid­ual investors and to insti­tu­tions such as endow­ments. Only some work­ers get indi­rect expo­sure via pen­sion funds.

Sec­ond, PE puts pres­sure on the low­er end of the wealth divide. Com­pa­nies can be bro­ken up, merged, or gen­er­al­ly restruc­tured to increase effi­cien­cy and pro­duc­tiv­i­ty, which inevitably means job cuts. The result is that PE accel­er­ates job polar­iza­tion, or the growth of jobs at the high­est and low­est skill and wage lev­el while the mid­dle erodes, accord­ing to research from econ­o­mists Mar­tin Ols­son and Joacim Tag.
...

And check out the new method of fleec­ing the pub­lic that emerged as a direct con­se­quence of the 2008 finan­cial cri­sis and flood of dis­tressed real estate avail­able for pri­vate equi­ty to scoop up at fire sale prices: Pri­vate equi­ty has such a large stake in the home rental mar­kets it now has the mar­ket pow­er to just keep rais­ing rents every year:

...
Pri­vate equi­ty com­pa­nies includ­ing Black­stone Group Inc. had the mon­ey to gorge on fore­closed hous­es in the years after the crash and quick­ly applied their mod­el to a whole new busi­ness. They used economies of scale, cost-cut­ting, and lever­age to max­i­mize prof­its on under­val­ued assets. The key was to cre­ate a stan­dard­ized way to man­age sin­gle-fam­i­ly homes, scat­tered from Atlanta to Las Vegas, almost as effi­cient­ly as apart­ment build­ings. PE-backed land­lords set up cen­tral­ized 24/7 cus­tomer ser­vice cen­ters and auto­mat­ed sys­tems for rent col­lec­tion and main­te­nance calls.

Black­stone-backed rental com­pa­ny Invi­ta­tion Homes Inc. even­tu­al­ly went pub­lic, then merged with a land­lord seed­ed by Star­wood Cap­i­tal Group and Colony Cap­i­tal Inc. to cre­ate the U.S.’s largest sin­gle-fam­i­ly rental com­pa­ny, with more than 80,000 units. Invi­ta­tion Homes owns less than 1% of the sin­gle-fam­i­ly rental stock, says Ken Caplan, Blackstone’s glob­al co-head of real estate. “But it has raised the bar for pro­fes­sion­al ser­vice for the indus­try,” he says.

The aims of the land­lords and the needs of their ten­ants often diverge, says Leilani Farha, the Unit­ed Nations’ spe­cial rap­por­teur on the right to hous­ing. Steady rent increas­es that make investors hap­py come out of ten­ants’ pay­checks, strain­ing house­hold finances and mak­ing it hard­er to save for a down pay­ment. Mean­while, PE-backed com­pa­nies’ sprawl­ing port­fo­lios of rental prop­er­ties may lim­it the avail­abil­i­ty of entry-lev­el hous­es that could be occu­pied by home­own­ers. Insti­tu­tion­al land­lords were 66% more like­ly than oth­er oper­a­tors to file evic­tion notices, accord­ing to Geor­gia Insti­tute of Tech­nol­o­gy pro­fes­sor Elo­ra Ray­mond, whose 2016 study of Ful­ton Coun­ty, Ga., court records was pub­lished by the Fed­er­al Reserve Bank of Atlanta. Invi­ta­tion Homes was less like­ly to file notices than its largest peers, accord­ing to the paper. A com­pa­ny spokesman says it works with ten­ants to avoid evic­tion and that its high renew­al rates indi­cate cus­tomer sat­is­fac­tion.

From Wall Street’s point of view, the mod­el has worked beau­ti­ful­ly. Invi­ta­tion Homes has con­vinced stock mar­ket investors that it can man­age oper­at­ing costs. It also bought shrewd­ly, swal­low­ing up starter homes in good school dis­tricts, antic­i­pat­ing that tight cred­it and ane­mic con­struc­tion rates would push the U.S. toward what one indus­try ana­lyst dubbed a renter­ship soci­ety. Sure enough, U.S. home­own­er­ship is near its low­est point in more than 50 years, allow­ing Invi­ta­tion Homes to raise rents by more than 5%, on aver­age, when ten­ants renew leas­es.
...

Final­ly, keep in mind this Bloomberg arti­cle was writ­ten in Octo­ber of 2019 and warn­ing about already scary lev­els of cor­po­rate debt thanks in large part to pri­vate equi­ty. “Lever­aged loans” (loans to com­pa­nies with low­er qual­i­ty cred­it) have dou­bled over the past decade and almost 40% of that is held by pri­vate equi­ty-owned com­pa­nies:

...
Ultralow inter­est rates have made this fuel espe­cial­ly potent and easy to obtain. The mar­ket for lever­aged loans—industry jar­gon for loans made to com­pa­nies with less-than-stel­lar credit—has dou­bled in the past decade. Almost 40% of all such loans out­stand­ing are to com­pa­nies con­trolled by pri­vate equi­ty, accord­ing to data from Dealog­ic.

Some lever­aged loans are arranged by banks. But there’s also been a boom in pri­vate lenders, who may be will­ing to pro­vide financ­ing when banks or pub­lic debt mar­kets won’t. All the while, bond and loan investors des­per­ate for yield have accept­ed high­er risks. As buy­out titans have chased big­ger and riski­er deals, their tar­get com­pa­nies have been left with more frag­ile bal­ance sheets, which gives man­age­ment less room for error. This could set the stage for a rude awak­en­ing dur­ing the next reces­sion.

“We’re see­ing scary lev­els of lever­age,” says Dan Zwirn, chief invest­ment offi­cer of alter­na­tive asset man­ag­er Are­na Investors. “Pri­vate equi­ty spon­sors are all slam­ming against each oth­er to get deals done.” Loans to com­pa­nies with espe­cial­ly high debt loads now exceed peaks in 2007 and 2014, accord­ing to the U.S. Fed­er­al Reserve. And com­pa­nies owned by pri­vate equi­ty typ­i­cal­ly car­ry a high­er debt load rel­a­tive to their earn­ings and offer less trans­paren­cy on their finan­cial posi­tion than oth­er cor­po­rate bor­row­ers.

...

PE firms can use some of the com­pa­nies they own as vir­tu­al ATMs—having the com­pa­ny bor­row mon­ey to pay its own­er spe­cial div­i­dends. That allows the funds to recov­er their invest­ment soon­er than they typ­i­cal­ly would through a sale or an ini­tial pub­lic offer­ing. Sycamore Part­ners LLC, known for its aggres­sive bets in the retail indus­try and relat­ed run-ins with cred­i­tors, has already recov­ered about 80% of the mon­ey it put down to acquire Sta­ples Inc. in 2017 through div­i­dends most­ly fund­ed by debt. Car­lyle Group, Hell­man & Fried­man, and Sil­ver Lake have also sad­dled their port­fo­lio com­pa­nies with new debt to extract div­i­dends this year. Rep­re­sen­ta­tives for the four pri­vate equi­ty firms declined to com­ment.
...

How many of the pri­vate equi­ty-owned com­pa­nies that took those PPP loans in 2020 were com­pa­nies that were treat­ed like vir­tu­al ATMS in 2019? It’s one of the many ques­tions we should all be ask­ing about the grow­ing role pri­vate equi­ty is place across soci­ety.

We Already Invit­ed the Vam­pire Into the House. It Did­n’t Go Well. How About We Kick Them Out?

And of all the ques­tions we should be ask­ing about pri­vate equi­ty, per­haps the most impor­tant, and press­ing, ques­tion is why on earth this is being allowed to hap­pen? It’s lit­er­al­ly an indus­try where the pri­ma­ry prod­uct they pro­duce is cor­po­rate debt that get trans­ferred into pri­vate prof­its. Why is this even allowed to exist? It’s a ques­tion econ­o­mist Matt Stoller asked and answered in a piece that not only describes what pri­vate equi­ty does but why. Why, philo­soph­i­cal­ly, did such a destruc­tive indus­try emerge in the first place. As Stoller describes, the rise if pri­vate equi­ty was in part a reflec­tion of the polit­i­cal rise of a par­tic­u­lar indi­vid­ual who held an espe­cial­ly ruth­less world­view that equat­ed ruth­less­ness with moral­i­ty: William (Bill) Simon, the top exec­u­tive and bond trad­er as Salomon Broth­ers in the 1960s and 70s who went on to become a leader at the Trea­sury Depart­ment under Richard Nixon and Ger­ald Ford. Simon was so ruth­less he was con­vinced the Repub­li­can Par­ty of that era was too lib­er­al and “soft”. Simon went on to become pres­i­dent of the hard right Olin Foun­da­tion, the key con­ser­v­a­tive foun­da­tion that was pro­vid­ing mon­ey to the nascent “law and eco­nom­ics” move­ment that arose as the con­ser­v­a­tive back­lash against New Deal restric­tions on finan­cial and cor­po­rate pow­er. A move­ment that cham­pi­oned the idea that busi­ness should sole­ly respon­si­ble to share­hold­er inter­ests, for­get the rest of soci­ety. It was a move­ment that also cham­pi­oned the idea that load­ing cor­po­ra­tions with debt would dis­ci­pline waste­ful cor­po­rate man­agers and end up plac­ing own­er­ship in the hands of those who would force man­agers to be atten­tive to effi­cient oper­a­tion of the cor­po­ra­tion. In oth­er words, cor­po­rate debt could force the simul­ta­ne­ous ‘race to the bot­tom’ for things like work­er pay and employ­ment and ‘race to the top’ of soci­ety’s wealth, which is real­ly a race for dom­i­na­tion.

So pri­vate equi­ty is basi­cal­ly the man­i­fes­ta­tion of the “law and eco­nom­ics” move­ment. Bill Simon even car­ried out the first large scale lever­aged buy­out in 1982 when he and two oth­er investors bor­rowed heav­i­ly to buy Gib­son from a strug­gling RCA for $80 mil­lion. The three put up $1 mil­lion them­selves and bor­rowed the oth­er $79 mil­lion. They imme­di­ate­ly had Gib­son issue a $900,000 “spe­cial div­i­dend” to them­selves. They then sold off Gib­son’s real estate assets, gave the man­agers 20% of the shares (so they would be focused pri­mar­i­ly on the stock price) and eigh­teen months lat­er they took Gib­son pub­lic dur­ing a bull mar­ket for $270 mil­lion. Simon him­self made $70 mil­lion on a per­son­al invest­ment of $330,000. The lever­aged buy now the ‘hot’ invest­ment strat­e­gy and a new par­a­digm for cor­po­rate Amer­i­ca was born. A par­a­digm that has almost exclu­sive­ly ben­e­fit­ted a tiny per­cent of soci­ety and helped pro­pel the Unit­ed States into the cor­po­rate hell hole it is today:

mattstoler.substack

Why Pri­vate Equi­ty Should Not Exist
(Big issue 7-30-2019)
Matt Stoller
Jul 30, 2019

Hi,

Wel­come to Big, a newslet­ter about the pol­i­tics of monop­oly. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to dis­cuss address the nascent polit­i­cal attack on pri­vate equi­ty, the finan­cial mod­el in com­merce which more than any oth­er defines the West­ern polit­i­cal land­scape. The most impor­tant sig­nal of this attack is in the Demo­c­ra­t­ic Pres­i­den­tial cam­paign, where can­di­dates are being pres­sured on what they will do about PE. Sure enough, Sen­a­tor Eliz­a­beth War­ren, the stan­dard bear­er for sophis­ti­cat­ed pol­i­cy think­ing, recent­ly announced a plan to rein in PE. And Bernie Sanders is lead­ing protests against PE acqui­si­tions. Per­haps as impor­tant are rum­blings on the right; Repub­li­can Sen­a­tor Mar­co Rubio’s released a report in March attack­ing the con­trol of the econ­o­my by financiers.

In oth­er words, PE is start­ing to face some of the same head­winds that big tech is expe­ri­enc­ing. I’m going to explain what pri­vate equi­ty is and why it is fac­ing these attacks. I’ll also go into a bit of his­to­ry, how pri­vate equi­ty, which used to be called the lever­aged buy-out indus­try (LBO), was start­ed by a Nixon admin­is­tra­tion offi­cial who over­saw the both the bank­rupt­cy of New York City and the intel­lec­tu­al attack on antitrust in the 1970s. Final­ly I’ll also dis­cuss what it would mean to elim­i­nate PE from our econ­o­my and pol­i­tics.

...

Why Pri­vate Equi­ty Should Not Exist

Ear­li­er this month, a for­mer Toys “R” Us employ­ee named Sarah Wood­hams con­front­ed Demo­c­ra­t­ic Pres­i­den­tial can­di­date Julian Cas­tro. Wood­hams told Cas­tro about her expe­ri­ence at the cor­po­ra­tion. She worked there for sev­en years, and then was laid off with no sev­er­ance because a set of pri­vate equi­ty firms bought the com­pa­ny and loot­ed it. What she described is not an iso­lat­ed instance, but an increas­ing­ly com­mon one in Amer­i­ca. Wood­hams told Cas­tro that “dozens of retail com­pa­nies con­trolled by Wall Street have gone into bank­rupt­cy, includ­ing RadioShack, Pay­less, and Kmart,” with 15,000 jobs alone in Penn­syl­va­nia hav­ing dis­ap­peared.

“Bil­lion­aires buy up these com­pa­nies, make huge prof­its on our backs, and get away with it because there’s no finan­cial reg­u­la­tion,” Sarah Wood­hams explained. “As pres­i­dent, what will you do to hold pri­vate equi­ty firms and hedge funds account­able for the destruc­tion of our com­mu­ni­ties and liveli­hoods?”

Part­ly because of orga­niz­ing by work­ers like Wood­hams, part­ly because of the scale of the indus­try, pri­vate equi­ty is becom­ing an impor­tant part of the polit­i­cal dia­logue. Mil­lions of work­ers work­ing for com­pa­nies con­trolled by PE funds. As I not­ed above, the debate is now hot; Eliz­a­beth War­ren released a plan specif­i­cal­ly on pri­vate equi­ty, par­al­leled by a report on finan­cial pow­er by Repub­li­can Mar­co Rubio in March. More impor­tant­ly, Cas­tro was con­front­ed by an activist. Cas­tro was embar­rassed because he did not seem to know what PE was, so you can be sure the oth­er Pres­i­den­tial can­di­dates are prepar­ing talk­ing points on PE for their boss­es. That’s a big deal, when even the mediocre politi­cians start to get it.

So what is pri­vate equi­ty? In one sense, it’s a sim­ple ques­tion to answer. A pri­vate equi­ty fund is a large unreg­u­lat­ed pool of mon­ey run by financiers who use that mon­ey to invest in and/or buy com­pa­nies and restruc­ture them. They seek to recoup gains through div­i­dend pay-outs or lat­er sales of the com­pa­nies to strate­gic acquir­ers or back to the pub­lic mar­kets through ini­tial pub­lic offer­ings. But that doesn’t cap­ture the scale of the mod­el. There are also pri­vate equi­ty-like busi­ness­es who scour the land­scape for com­pa­nies, buy them, and then use extrac­tive tech­niques such as price goug­ing or legal­ized forms of com­plex fraud to gen­er­ate cash by mov­ing debt and assets like real estate among shell com­pa­nies. PE funds also lend mon­ey and act as bro­kers, and are mor­ph­ing into invest­ment bank-like insti­tu­tions. Some of them are pub­lic com­pa­nies.

While the move­ment is couched in the lan­guage of busi­ness, using terms like strat­e­gy, busi­ness mod­els returns of equi­ty, inno­va­tion, and so forth, and pro­po­nents refer to it as an indus­try, pri­vate equi­ty is not busi­ness. On a deep­er lev­el, pri­vate equi­ty is the ulti­mate exam­ple of the col­lapse of the enlight­en­ment con­cept of what own­er­ship means. Own­er­ship used to mean domin­ion over a resource, and respon­si­bil­i­ty for care­tak­ing that resource. PE is a polit­i­cal move­ment whose goal is extend deep man­age­r­i­al con­trols from a small group of financiers over the pro­duc­ers in the econ­o­my. Pri­vate equi­ty trans­forms cor­po­ra­tions from insti­tu­tions that house peo­ple and cap­i­tal for the pur­pose of pro­duc­tion into extrac­tive insti­tu­tions designed sole­ly to shift cash to own­ers and leave the rest behind as trash. Like much of our polit­i­cal econ­o­my, the ideas behind it were devel­oped in the 1970s and the actu­al imple­men­ta­tion was oper­a­tional­ized dur­ing the Rea­gan era.

Now what I just described is of course not the ratio­nale that pri­vate equi­ty guys give for their mod­el. Accord­ing to them, PE takes under­per­form­ing com­pa­nies and restruc­tures them, deliv­er­ing need­ed inno­va­tion for the econ­o­my. PE can also invest in ear­ly stages, help­ing to build new busi­ness­es with risky cap­i­tal. There is some mer­it to the argu­ment. Pools of cap­i­tal can invest to improve com­pa­nies, and many funds have built a com­pa­ny here and there. But only small-scale funds real­ly do that, or such exam­ples are excep­tions to the rule or involve build­ing high­ly finan­cial­ized scal­able busi­ness­es, like chain stores that roll up an indus­try (such as Sta­ples, financed by Bain in the 1980s). At some lev­el, hav­ing a pool of funds means being able to invest in any­thing, includ­ing build­ing good busi­ness­es in a dynam­ic econ­o­my where cre­ative destruc­tion leads to bet­ter prod­ucts and ser­vices. Unfor­tu­nate­ly, these days PE empha­sizes the “destruc­tion” part of cre­ative destruc­tion.

The takeover of Toys “R” Us is a good exam­ple of what pri­vate equi­ty real­ly does. Bain Cap­i­tal, KKR, and Vor­na­do Real­ty Trust bought the pub­lic com­pa­ny in 2005, load­ing it up with debt. By 2007, though Toys “R” Us was still an immense­ly pop­u­lar toy store, the com­pa­ny was spend­ing 97% of its oper­at­ing prof­it on debt ser­vice. Bain, KKR, and Vor­na­do were tech­ni­cal­ly the ‘own­ers’ of Toys “R” Us, but they were not liable for any of the debts of the com­pa­ny, or the pen­sions. Peri­od­i­cal­ly, Toys “R” Us would pay fees to Bain and com­pa­ny, rough­ly $500 mil­lion in total. The toy store stopped inno­vat­ing, stopped tak­ing care of its stores, and cut costs as aggres­sive­ly as pos­si­ble so it could con­tin­ue the pay­out. In 2017, the com­pa­ny final­ly went under, liq­ui­dat­ing its stores and fir­ing all of its work­ers with­out sev­er­ance. A lot of peo­ple assume Ama­zon or Wal­mart killed Toys “R” Us, but it was sell­ing mas­sive num­bers of toys until the very end (and toy sup­pli­ers are going to suf­fer as the mar­ket con­cen­trates). What destroyed the com­pa­ny were financiers, and pub­lic poli­cies that allowed the divorc­ing of own­er­ship from respon­si­bil­i­ty.

The Ori­gins of the Mod­el: Build­ing a “Counter-intel­li­gentsia”

If there is a father to the pri­vate equi­ty indus­try, it is a man named William Simon. Simon is per­haps one of the most impor­tant Amer­i­can polit­i­cal fig­ures of the 1970s and ear­ly 1980s, a bril­liant inno­va­tor in pol­i­tics, finan­cial, and in how ideas are pro­duced in Amer­i­can pol­i­tics. Simon was an accoun­tant, a nerd, but also an apoc­a­lyp­ti­cal­ly ori­ent­ed con­ser­v­a­tive financier who was a bond trad­er and top exec­u­tive at Salomon Broth­ers in the 1960s and 1970s. Beyond ruth­less, Simon believed in ruth­less­ness as a moral phi­los­o­phy. He was, accord­ing to a friend, “a mean, nasty, tough bond trad­er who took no BS from any­one,” and would appar­ent­ly wake up his chil­dren on week­end morn­ings with buck­ets of cold water. He was such a dif­fi­cult per­son that he was invit­ed onto the Citibank board of direc­tors, and short­ly there­after, essen­tial­ly kicked off.

In the ear­ly 1970s, Simon went into pol­i­tics, a leader at the Trea­sury Depart­ment under Nixon and Ford. He over­saw not just Trea­sury but became the the ‘Ener­gy Czar’ in charge of the oil cri­sis, and a key play­er in reject­ing New York City’s 1975 request for funds to ward off bank­rupt­cy. Simon, along with a few oth­ers like Pete Peter­son, came out of the Nixon admin­is­tra­tion with a bet­ter rep­u­ta­tion than he had going in, per­ceived as a neu­tral and com­pe­tent tech­no­crat. Simon saw both pros­per­i­ty and poi­son in Nixon and Ford. He sup­port­ed the attacks on New York City’s and the forced aus­ter­i­ty by the Fed­er­al gov­ern­ment, but he also despised Nixon’s attempt­ed econ­o­my-wide price con­trols to deal with infla­tion.

After his time at the Trea­sury, Simon turned to intel­lec­tu­al orga­niz­ing, because he believed that the Repub­li­cans were soft. Simon though Repub­li­cans, even when they had pow­er, as Nixon or Ford of Gov­er­nors like Nel­son Rock­e­feller of New York, were still lib­er­al, oper­at­ing as con­ser­v­a­tive Phyl­lis Schafly put it, mere­ly “an echo” of the Democ­rats. So he sought to finance thinkers in acad­e­mia to restruc­ture how elites did pol­i­cy, or as he put it, a “counter-intel­li­gentsia.” He became the Pres­i­dent of the Olin Foun­da­tion, the key con­ser­v­a­tive foun­da­tion pro­vid­ing mon­ey to the nascent law and eco­nom­ics move­ment, the con­ser­v­a­tive intel­lec­tu­al back­lash against New Deal con­trols on finance and cor­po­rate pow­er. Law and eco­nom­ics wasn’t per­ceived of as a right-wing insti­tu­tion­al frame­work, but a sci­en­tif­ic one. Olin gave to Har­vard Law to build out a law and eco­nom­ics pro­gram, and finan­cial suprema­cy over cor­po­ra­tions was accept­ed quick­ly in lib­er­al citadels.

The law and eco­nom­ics move­ment helped build the intel­lec­tu­al edi­fice for PE, a mod­el designed to restruc­ture the Amer­i­can econ­o­my from the very begin­ning. In 1965, Hen­ry Manne, a law and eco­nom­ics orga­niz­er, wrote about the “mar­ket for cor­po­rate con­trol,” putting forth finan­cial mar­kets where cor­po­ra­tions were bought and sold as the essen­tial mech­a­nisms for fir­ing inef­fi­cient man­agers and replac­ing them with ones who would look out for the own­ers.

In 1965, Manne was ahead of his time, because most peo­ple thought Amer­i­can busi­ness­es were well-run. But in the 1970s, in an infla­tion­ary envi­ron­ment and as for­eign imports began com­ing into the U.S. in force, this belief col­lapsed. In 1970, Mil­ton Fried­man put for­ward the share­hold­er val­ue of the firm, a the­o­ry that the only rea­son for the cor­po­ra­tion to exist is to max­i­mize share­hold­er val­ue. In 1976, Michael Jensen, the intel­lec­tu­al patron saint of PE, refined these con­cepts into a paper titled “The­o­ry of the firm: Man­age­r­i­al behav­ior, agency costs and own­er­ship struc­ture,” argu­ing that load­ing up firms with debt would dis­ci­pline waste­ful man­age­ment, and that plac­ing own­er­ship in the hands of a few would force man­agers to be atten­tive to effi­cient oper­a­tion of the cor­po­ra­tion.

The increas­ing­ly wide­spread belief that Amer­i­can cor­po­ra­tions were mis­man­aged, infla­tion­ary chaos, and a cri­sis of con­fi­dence among lib­er­als com­bined into what was a polit­i­cal rev­o­lu­tion in com­merce. William Simon was both both a par­tic­i­pant in and a moral light for this rev­o­lu­tion. In the mid-1970s, he (or his ghost­writer) put pen to paper, and wrote a book pop­u­lar among mem­bers of “the new right” as the large class of 1978 Con­gres­sion­al Repub­li­cans (which includ­ed a young Newt Gin­grich) was known. His book was called A Time for Truth, and along with Robert Bork’s Antitrust Para­dox, it gave the New Right a lan­guage to mar­ry moral­i­ty and polit­i­cal eco­nom­ics. Rea­gan would run on New Right themes in 1980.

A Time for Truth reflect­ed Simon’s hard­core atti­tude. It was a jere­mi­ad, with terms tossed around like ‘eco­nom­ic dic­ta­tor­ship’, charges of Com­mu­nism and fas­cism, and a screed about the per­ils of gov­ern­ment. The book was intro­duced by the intel­lec­tu­al god­fa­ther of the right-wing, the Aus­tri­an econ­o­mist, F.A. Hayek, who laud­ed it as “a bril­liant and pas­sion­ate book by a bril­liant and pas­sion­ate man.” Simon pop­u­lar­ized the pseu­do-sci­en­tif­ic term, ‘cap­i­tal short­age,’ or the the idea that busi­ness­es sim­ply didn’t have the incen­tive to invest in fac­to­ries because of gov­ern­ment rules or fear of infla­tion. This led to infla­tion, low­er pro­duc­tiv­i­ty, and stag­na­tion. The solu­tion would be sim­ple: cut cap­i­tal gains tax­es, cut gov­ern­ment spend­ing, reduce antitrust enforce­ment, and stop reg­u­lat­ing through pub­lic insti­tu­tions.

The Carter admin­is­tra­tion and Con­gres­sion­al Democ­rats took Simon’s advice, and slashed cap­i­tal gains tax­es, cut­ting the max­i­mum rate to 28% from 49% in 1978. They dereg­u­lat­ed truck­ing, finance, air­planes, and rail­roads. In addi­tion, changes in pen­sion laws enabled Amer­i­can retire­ment sav­ings to flood into new vehi­cles, like ven­ture cap­i­tal and its cousin, what would first be known as lever­aged buy-outs and then pri­vate equi­ty. The Rea­gan administration’s fur­ther dereg­u­la­tion of finance enabled a long bull mar­ket in the 1980s as spec­u­la­tors took con­trol of the econ­o­my. Share­hold­ers no longer were con­tent to leave their mon­ey in stocks that paid div­i­dends, because they could now keep most of their cap­i­tal gains. And the chaos unleashed by dereg­u­la­tion opened up the door to cor­po­rate restruc­tur­ing of cor­po­ra­tions who had been tight­ly con­trolled by pub­lic rules, but were now free to enter and exit new busi­ness­es.

In 1982, William Simon turned into a leader of the finan­cial rev­o­lu­tion. He pulled off the first large scale lever­aged buy­out, of a com­pa­ny called Gib­son Greet­ing cards, a deal that shocked Wall Street. He and his part­ner paid $80 mil­lion for Gib­son, buy­ing the com­pa­ny from the strug­gling con­glom­er­ate RCA. The key was that they didn’t use their own mon­ey to buy the com­pa­ny, instead using Simon’s polit­i­cal cred­i­bil­i­ty and con­nec­tions to bor­row much of the nec­es­sary $79 mil­lion from Bar­clays Bank and Gen­er­al Elec­tric, only putting down $330,000 apiece. They imme­di­ate­ly paid them­selves a $900,000 spe­cial div­i­dend from Gib­son, made $4 mil­lion sell­ing the company’s real estate assets, and gave 20% of the shares to the man­agers of the com­pa­ny as an incen­tive to keep the stock price in mind. Eigh­teen months lat­er, they took Gib­son pub­lic in a bull mar­ket, sell­ing the com­pa­ny at $270 mil­lion. Simon cleared $70 mil­lion per­son­al­ly in a year and a half off an invest­ment of $330,000, an insane­ly great return on such a small invest­ment. Eyes popped all over Wall Street, and Gib­son became the start­ing gun for the merg­ers and acqui­si­tions PE craze of the 1980s.

Anoth­er busi­ness trend inter­sect­ed with changes in pol­i­cy encour­ag­ing finan­cial dom­i­nance: the rise of man­age­ment con­sult­ing. Like law and eco­nom­ics, man­age­ment con­sul­tants rose in the late 1960s with pseu­do-sci­en­tif­ic the­o­ries about busi­ness, and they began treat­ing cor­po­ra­tions as finan­cial port­fo­lios, with sub­sidiaries of assets. Many of the orga­niz­ers of pri­vate equi­ty firms in the 1980s came from man­age­ment con­sult­ing firms like the Boston Con­sult­ing Group and McK­in­sey. Mitt Rom­ney was an ear­ly inno­va­tor around PE. He came from Bain, which was a con­sult­ing firm. To give you a sense of what that meant in terms of the phi­los­o­phy of com­merce, here’s Bain Con­sult­ing today, help­ing com­pa­nies find ways to inno­vate around rais­ing prices instead of pro­duc­tive tech­niques.

PE firms serve as trans­mit­ters of infor­ma­tion across busi­ness­es, sort of dis­ease vec­tors for price goug­ing and legal arbi­trage. If a cer­tain kind of price goug­ing strat­e­gy works in a phar­ma­ceu­ti­cal com­pa­ny, a pri­vate equi­ty com­pa­ny can roll through the indus­try, buy­ing up every pos­si­ble can­di­date and quick­ly forc­ing the price goug­ing every­where. In the defense sec­tor, Trans­digm serves this role, buy­ing up aero­space spare parts mak­ers with pric­ing pow­er and jack­ing up prices, in effect spread­ing cor­rupt con­tract­ing arbi­trage against the Pen­ta­gon much more rapid­ly than it would have spread oth­er­wise.

More fun­da­men­tal­ly, pri­vate equi­ty was about get­ting rid of the slack that Amer­i­can man­agers had to look out for the long-term, slack that allowed them to fund research and exper­i­ment with pro­duc­tive tech­niques. PE replaced slack with bru­tal debt sched­ules and mas­sive upside for high­er stock prices, and no down­side for the own­er-financiers should the com­pa­ny fail. The goal is to elim­i­nate pro­duc­tion in favor of scal­able prof­itable things like brands, patents, and tax loop­holes, because pro­duc­ers — engi­neers, artists, work­ers — are cost cen­ters. Pro­duc­tion can also be elim­i­nat­ed by fis­sur­ing the work­place, such as the mass move to off­shore pro­duc­tion to low­er cost coun­tries in the 1980s onward. When I report­ed on the prob­lem of finan­cial­iza­tion destroy­ing our nation­al secu­ri­ty capac­i­ty, one of the man­u­fac­tur­ers I talked to told me about how the “LBO boys” — or Lever­aged Buy Out Boys — took apart fac­to­ries in the mid­west and shipped them to Chi­na.

There hasn’t been a lot of analy­sis of just how prof­itable pri­vate equi­ty real­ly is for investors or lenders, and I’m only touch­ing on part of what is a very com­plex phe­nom­e­non. There are ways PE funds orga­nize fees against pen­sion funds, there’s self-deal­ing among banks and mid­dle­men, and at this point large PE firms are buy­ing insur­ance com­pa­nies and ded­i­cat­ing their insur­ance port­fo­lios to PE deals. But I found this paper by Bri­an Ayash and Mah­di Ras­tad quite use­ful. What Ayash and Ras­tad not­ed is that com­pa­nies bought by pri­vate equi­ty are ten times more like­ly than com­pa­ra­ble com­pa­nies to go bank­rupt. And this makes sense. The goal in PE isn’t to cre­ate or to make a com­pa­ny more effi­cient, it is to find legal loop­holes that allow the orga­niz­ers of the fund to max­i­mize their return and shift the risk to some­one else, as quick­ly as pos­si­ble. Bank­rupt­cies are a nat­ur­al result if you load up on risk, and because the bank­rupt­cy code is com­plex, bank­rupt­cy can even be an oppor­tu­ni­ty for the financier to restruc­ture his/her invest­ment and push the cost onto employ­ees by seiz­ing the pen­sion.

Eliz­a­beth War­ren just put for­ward a fair­ly rea­son­able plan to address the prob­lem. Under her plan, pri­vate equi­ty funds who buy com­pa­nies would them­selves respon­si­ble for any debt those com­pa­nies bor­row, as well as the pen­sion funds of their sub­sidiaries. PE firms could no longer pay them­selves spe­cial fees and div­i­dends, they would lose their spe­cial advan­tages in bank­rupt­cy and in the tax code, and would have to dis­close what they charge to investors. Effec­tive­ly she reuni­fies own­er­ship with respon­si­bil­i­ty. Invest­ing would basi­cal­ly become once again about tak­ing mod­est risks and reap­ing mod­est returns, rather than pil­lag­ing good com­pa­nies. (I’d pro­pose a cou­ple of oth­er changes as well, like rais­ing cap­i­tal gains tax­es quite rad­i­cal­ly, and gut­ting gold­en para­chutes. We also need to replace cap­i­tal pro­vid­ed by PE with small busi­ness lend­ing by gov­ern­ment, as Mar­co Rubio is orga­niz­ing. But I don’t want to demand too many pol­i­cy changes. After all no sense in get­ting… greedy.)

Warren’s plan has gen­er­at­ed some back­lash, because she’s mak­ing a philo­soph­i­cal point about what kind of soci­ety we want to live in. I’ll focus on two quotes from War­ren crit­ics.

Steven Pearl­stein in the Wash­ing­ton Post not­ed:

“Unfor­tu­nate­ly, Warren’s fix­es for these prob­lems... would pret­ty much guar­an­tee that nobody invests in or lends to pri­vate equi­ty firms.”

Aaron Brown in Bloomberg said:

A 100% tax on fees doesn’t mean PE funds will work for free; in fact, they won’t work at all… If you strip doc­tors of all assets if a patient dies, you won’t improve health­care; you’ll make sur­geons and oncol­o­gists switch to cos­met­ic der­ma­tol­ogy.”

Of course, Pearl­stein and Brown are both in one sense right. Warren’s plan will large­ly elim­i­nate pri­vate equi­ty, or at least that which is based on legal arbi­trage, which is near­ly all of it. In anoth­er sense they are entire­ly miss­ing the point. Brown calls PE firms doc­tors sav­ing patients. But pri­vate equi­ty, for War­ren, is bad, a form of legal­ized fraud shift­ing mon­ey from the pock­ets of investors and work­ers to the pock­ets of financiers. It is also, as she knows, the mod­el that best rep­re­sents the destruc­tive direc­tion of Amer­i­can polit­i­cal econ­o­my over the past four decades.

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.

What crit­ics of PE are propos­ing is a pro­found restruc­tur­ing of the phi­los­o­phy of the Amer­i­can polit­i­cal econ­o­my, a return to excel­lence in pro­duc­tion as the goal instead of excel­lence in manip­u­la­tion. If crit­ics suc­ceeds, those who make and cre­ate will have their bar­gain­ing pow­er increase rad­i­cal­ly, which will mean wage growth across the bot­tom and mid­dle tier. Swaths of elite pow­er­ful peo­ple will lose pow­er. It’ll be real­ly jar­ring, because we aren’t used to a pro­duc­er-focused eco­nom­ic order any­more. But it is what we need to do.

...

———–

“Why Pri­vate Equi­ty Should Not Exist” by Matt Stoller; mattstoler.substack; 07/30/2019

More fun­da­men­tal­ly, pri­vate equi­ty was about get­ting rid of the slack that Amer­i­can man­agers had to look out for the long-term, slack that allowed them to fund research and exper­i­ment with pro­duc­tive tech­niques. PE replaced slack with bru­tal debt sched­ules and mas­sive upside for high­er stock prices, and no down­side for the own­er-financiers should the com­pa­ny fail. The goal is to elim­i­nate pro­duc­tion in favor of scal­able prof­itable things like brands, patents, and tax loop­holes, because pro­duc­ers — engi­neers, artists, work­ers — are cost cen­ters. Pro­duc­tion can also be elim­i­nat­ed by fis­sur­ing the work­place, such as the mass move to off­shore pro­duc­tion to low­er cost coun­tries in the 1980s onward. When I report­ed on the prob­lem of finan­cial­iza­tion destroy­ing our nation­al secu­ri­ty capac­i­ty, one of the man­u­fac­tur­ers I talked to told me about how the “LBO boys” — or Lever­aged Buy Out Boys — took apart fac­to­ries in the mid­west and shipped them to Chi­na.”

PE replaced slack with bru­tal debt sched­ules and mas­sive upside for high­er stock prices, and no down­side for the own­er-financiers should the com­pa­ny fail. Heads we win. Tails you lose. To the most ruth­less goes the spoils. The only thing should mat­ter to com­pa­ny man­age­ment is max­i­miz­ing short-term returns for share­hold­ers. Plan­ning for the long-term or fac­tor­ing in the pub­lic good was seen as bad. And the best way to ensure man­age­ment would abide by these prin­ci­ples is to load the cor­po­ra­tion up with debt so man­agers would have no choice but to focus on cut­ting costs (as opposed to cut­ting yields to the own­ers that forced all the new debt). That’s the phi­los­o­phy that has tak­en over cor­po­rate Amer­i­ca and it’s the philo­soph­i­cal foun­da­tion for the entire pri­vate equi­ty move­ment:

...
In the ear­ly 1970s, Simon went into pol­i­tics, a leader at the Trea­sury Depart­ment under Nixon and Ford. He over­saw not just Trea­sury but became the the ‘Ener­gy Czar’ in charge of the oil cri­sis, and a key play­er in reject­ing New York City’s 1975 request for funds to ward off bank­rupt­cy. Simon, along with a few oth­ers like Pete Peter­son, came out of the Nixon admin­is­tra­tion with a bet­ter rep­u­ta­tion than he had going in, per­ceived as a neu­tral and com­pe­tent tech­no­crat. Simon saw both pros­per­i­ty and poi­son in Nixon and Ford. He sup­port­ed the attacks on New York City’s and the forced aus­ter­i­ty by the Fed­er­al gov­ern­ment, but he also despised Nixon’s attempt­ed econ­o­my-wide price con­trols to deal with infla­tion.

After his time at the Trea­sury, Simon turned to intel­lec­tu­al orga­niz­ing, because he believed that the Repub­li­cans were soft. Simon though Repub­li­cans, even when they had pow­er, as Nixon or Ford of Gov­er­nors like Nel­son Rock­e­feller of New York, were still lib­er­al, oper­at­ing as con­ser­v­a­tive Phyl­lis Schafly put it, mere­ly “an echo” of the Democ­rats. So he sought to finance thinkers in acad­e­mia to restruc­ture how elites did pol­i­cy, or as he put it, a “counter-intel­li­gentsia.” He became the Pres­i­dent of the Olin Foun­da­tion, the key con­ser­v­a­tive foun­da­tion pro­vid­ing mon­ey to the nascent law and eco­nom­ics move­ment, the con­ser­v­a­tive intel­lec­tu­al back­lash against New Deal con­trols on finance and cor­po­rate pow­er. Law and eco­nom­ics wasn’t per­ceived of as a right-wing insti­tu­tion­al frame­work, but a sci­en­tif­ic one. Olin gave to Har­vard Law to build out a law and eco­nom­ics pro­gram, and finan­cial suprema­cy over cor­po­ra­tions was accept­ed quick­ly in lib­er­al citadels.

The law and eco­nom­ics move­ment helped build the intel­lec­tu­al edi­fice for PE, a mod­el designed to restruc­ture the Amer­i­can econ­o­my from the very begin­ning. In 1965, Hen­ry Manne, a law and eco­nom­ics orga­niz­er, wrote about the “mar­ket for cor­po­rate con­trol,” putting forth finan­cial mar­kets where cor­po­ra­tions were bought and sold as the essen­tial mech­a­nisms for fir­ing inef­fi­cient man­agers and replac­ing them with ones who would look out for the own­ers.

In 1965, Manne was ahead of his time, because most peo­ple thought Amer­i­can busi­ness­es were well-run. But in the 1970s, in an infla­tion­ary envi­ron­ment and as for­eign imports began com­ing into the U.S. in force, this belief col­lapsed. In 1970, Mil­ton Fried­man put for­ward the share­hold­er val­ue of the firm, a the­o­ry that the only rea­son for the cor­po­ra­tion to exist is to max­i­mize share­hold­er val­ue. In 1976, Michael Jensen, the intel­lec­tu­al patron saint of PE, refined these con­cepts into a paper titled “The­o­ry of the firm: Man­age­r­i­al behav­ior, agency costs and own­er­ship struc­ture,” argu­ing that load­ing up firms with debt would dis­ci­pline waste­ful man­age­ment, and that plac­ing own­er­ship in the hands of a few would force man­agers to be atten­tive to effi­cient oper­a­tion of the cor­po­ra­tion.
...

And note how Simon’s book, A Time for Truth, that laid out his ruth­less phi­los­o­phy was so extreme that Aus­tri­an school econ­o­mist Friedrich von Hayek wrote the intro­duc­tion. It was a book that pop­u­lar­ized the ‘sup­ply-side’ ideas that have been used to jus­ti­fy all forms of tax and reg­u­la­tion cuts over the past four decades and look who just hap­pened loved the book: the rad­i­cal “New Right” wing of the Repub­li­can Par­ty from the class of 1978. The New Right that is the over­whelm­ing dom­i­nant force in the Repub­li­can Par­ty today (it’s not so new any­more). It’s a reminder that the phi­los­o­phy behind pri­vate equi­ty did­n’t just cap­ture the minds of cor­po­rate board rooms. It also cap­tured the Repub­li­can Par­ty and pro­pelled the par­ty into the mon­strous enti­ty it is today:

...
The increas­ing­ly wide­spread belief that Amer­i­can cor­po­ra­tions were mis­man­aged, infla­tion­ary chaos, and a cri­sis of con­fi­dence among lib­er­als com­bined into what was a polit­i­cal rev­o­lu­tion in com­merce. William Simon was both both a par­tic­i­pant in and a moral light for this rev­o­lu­tion. In the mid-1970s, he (or his ghost­writer) put pen to paper, and wrote a book pop­u­lar among mem­bers of “the new right” as the large class of 1978 Con­gres­sion­al Repub­li­cans (which includ­ed a young Newt Gin­grich) was known. His book was called A Time for Truth, and along with Robert Bork’s Antitrust Para­dox, it gave the New Right a lan­guage to mar­ry moral­i­ty and polit­i­cal eco­nom­ics. Rea­gan would run on New Right themes in 1980.

A Time for Truth reflect­ed Simon’s hard­core atti­tude. It was a jere­mi­ad, with terms tossed around like ‘eco­nom­ic dic­ta­tor­ship’, charges of Com­mu­nism and fas­cism, and a screed about the per­ils of gov­ern­ment. The book was intro­duced by the intel­lec­tu­al god­fa­ther of the right-wing, the Aus­tri­an econ­o­mist, F.A. Hayek, who laud­ed it as “a bril­liant and pas­sion­ate book by a bril­liant and pas­sion­ate man.” Simon pop­u­lar­ized the pseu­do-sci­en­tif­ic term, ‘cap­i­tal short­age,’ or the the idea that busi­ness­es sim­ply didn’t have the incen­tive to invest in fac­to­ries because of gov­ern­ment rules or fear of infla­tion. This led to infla­tion, low­er pro­duc­tiv­i­ty, and stag­na­tion. The solu­tion would be sim­ple: cut cap­i­tal gains tax­es, cut gov­ern­ment spend­ing, reduce antitrust enforce­ment, and stop reg­u­lat­ing through pub­lic insti­tu­tions.
...

And that’s all why we real­ly need to ask our­selves: should the pri­vate equi­ty indus­try even be allowed to exist? Does the gen­er­al pub­lic share Bill Simon’s world­view? Do peo­ple real­ly want a world where cor­po­ra­tions care ONLY about short-term share­hold­er returns? Do peo­ple real­ly want a world where lever­aged buy­outs are the tool of choice to allow the rich turn a quick prof­it buy effect­ing loot­ing com­pa­nies and prof­it­ing from their down­fall? Do peo­ple real­ly want a ‘Heads We Win. Tails You Lose” soci­ety? Because if not, pri­vate equi­ty has to go, at least in its cur­rent form. And this is no longer just a ques­tion for the Amer­i­can pub­lic. This is now the glob­al cor­po­rate phi­los­o­phy.

Or we can just con­tin­ue down our cur­rent path and allow pri­vate equi­ty to take over effec­tive­ly every­thing. Which will hap­pen if it’s allowed to. That’s the nature of preda­to­ry sys­tems. They will take it all if they can. That’s the phi­los­o­phy. A phi­los­o­phy where ruth­less­ness is a virtue. And that’s why the ques­tion of whether or not pri­vate equi­ty should even be allowed to exist is also the ques­tion of whether or not we’ll final­ly address the pan­dem­ic of awful ideas that are con­tin­u­ing to loot the future or if we all just want to role over and let the most ruth­less peo­ple on the plan­et con­tin­ue tak­ing it all. In oth­er words, which one is real­ly ‘too big to fail’: pri­vate equi­ty or every­one else?

Discussion

35 comments for “Heads We Win, Tails You Lose: The Fascist Philosophy Behind Private Equity’s Leveraged Buyout of Everything”

  1. @Pterrafractyl–

    Indeed!

    Great work.

    This antic­i­pates the shows I will be doing in the near future.

    SARS Cov‑2 is, among oth­er things, “The Wealth Con­cen­tra­tion Virus”!

    This is delib­er­ate and pre-planned.

    Details to fol­low.

    Again, mag­nif­i­cent work!

    Best,

    Dave

    Posted by Dave Emory | October 22, 2020, 6:43 pm
  2. Here’s a pair of arti­cles that point towards what real­ly should be a grow­ing scan­dal for the Trump admin­is­tra­tion regard­ing the admin­is­tra­tion of the Pay­check Pro­tec­tion Pro­gram (PPP):

    First, here’s a Forbes piece from back in July that gives us a sense of just how much mon­ey as being made the Wall Street banks that actu­al­ly issued most of the PPP loans to small busi­ness: bil­lions of dol­lars in fees were col­lect­ed, with the biggest loan issuer, JP Mor­gan Chase, mak­ing over $800 mil­lion as of June 30. The bank told Forbes, “We will not make a prof­it from the pro­gram and remain ful­ly com­mit­ted to sup­port­ing under­served com­mu­ni­ties that have been eco­nom­i­cal­ly impact­ed by the pan­dem­ic,” but then declined to elab­o­rate.

    Now, the fact that banks were prof­it­ing from the loans isn’t par­tic­u­lar­ly sur­pris­ing or nec­es­sar­i­ly scan­dalous. They pre­sum­ably had to actu­al­ly do work vet­ting appli­cants to issue the loans since many of the appli­cants pre­sum­ably weren’t already clients with the banks.

    But that does­n’t mean there isn’t a scan­dal here. Because as we’re going to see in the sec­ond Forbes arti­cle from last week, a new report released by a House of Rep­re­sen­ta­tives select com­mit­tee that inves­ti­gat­ed how the eight largest banks issu­ing these loans were were actu­al­ly car­ry­ing out the PPP pro­gram dis­cov­ered that the Trump Trea­sury Depart­ment and Small Busi­ness Admin­is­tra­tion (SBA) gave guid­ance to the big banks to pro­vide loans from the PPP to their “wealthy exist­ing clients at the expense of tru­ly strug­gling small busi­ness­es in under­served com­mu­ni­ties.” Wealthy exist­ing clients that include pri­vate equi­ty-owned com­pa­nies. Wealthy exist­ing clients that are pre­sum­ably a lot eas­i­er to vet for the loans too.

    And note that we are told the Trump admin­is­tra­tion encour­aged, but did­n’t order, these banks to pri­or­i­tize wealthy exist­ing clients. So while the banks can’t be blamed for the Trump admin­is­tra­tion giv­ing them guid­ance to do the wrong thing, they can sure be blamed for fol­low­ing it. Or, at least, they can be blamed for fol­low­ing that advice if we hold cor­po­ra­tions up to a high­er moral stan­dard than blind­ly pur­su­ing max­i­mal prof­its for share­hold­ers, which, we’ll recall, hap­pens to be the cor­po­rate phi­los­o­phy behind the pri­vate equi­ty move­ment.

    Ok, first, here’s the Forbes piece from back in July that gives us an idea of just how much the largest banks pro­cess­ing PPP loans, along with some of the banks’ vague pledges to some­how not keep these prof­its:

    Forbes

    Banks Made Bil­lions On PPP Loans. Learn What They’re Doing With The Cash

    Robin Saks Frankel
    Forbes Staff
    Jul 10, 2020, 08:51pm EDT

    Banks earned bil­lions of dol­lars in fees from pro­cess­ing over 4.5 mil­lion Pay­check Pro­tec­tion Pro­gram (PPP) loans worth more than $511 bil­lion in the last sev­er­al months, with the largest haul going to the country’s biggest banks, accord­ing to a new U.S. Small Busi­ness Admin­is­tra­tion (SBA) report.

    The finan­cial insti­tu­tions pro­cess­ing coro­n­avirus res­cue loans earn fees on a slid­ing scale based on the total dol­lar amount approved. Lenders earn 5% on loans of $350,000 or less, 3% on loans between $350,000 and less than $2 mil­lion, and 1% for loans of at least $2 mil­lion. Addi­tion­al­ly, banks will earn a 1% inter­est rate on loans they hold that are not eli­gi­ble for for­give­ness under PPP rules.

    But faced with mount­ing crit­i­cism, some banks say they won’t keep any prof­its. Instead, they will donate what they have earned after fac­tor­ing in the cost to process the loans.

    Here’s where some of the largest U.S. lenders say their loan cuts will go to after account­ing for expens­es.

    Chase

    Loans issued as of June 30: 269,424

    Amount dis­bursed: $29,066,127,405

    Aver­age loan size: $107,882

    The largest bank in the U.S. by asset size, JPMor­gan Chase has issued the high­est total dol­lar amount in PPP loans of any bank. Chase’s $28.6 bil­lion in loans would have snagged the bank­ing giant over $800 mil­lion in loan pro­cess­ing fees, accord­ing to an esti­mate by S&P Glob­al Mar­ket Intel­li­gence. A spokesper­son for the bank said the bank won’t real­ize any gains from the loans.

    “We will not make a prof­it from the pro­gram and remain ful­ly com­mit­ted to sup­port­ing under­served com­mu­ni­ties that have been eco­nom­i­cal­ly impact­ed by the pan­dem­ic,” a Chase rep­re­sen­ta­tive told Forbes Advi­sor. They declined to elab­o­rate.

    Bank of Amer­i­ca

    Loans issued as of June 30: 334,761

    Amount dis­bursed: $25,203,076,316

    Aver­age loan size: $75,287

    As the sec­ond largest U.S. bank by asset size, Bank of Amer­i­ca has processed rough­ly 335,000 PPP loans worth $25.2 bil­lion. Over 80% of those loans were for busi­ness­es with 10 or few­er employ­ees.

    The bank has pledged to donate all earn­ings from PPP loan pro­cess­ing fees—esti­mat­ed to be $755 mil­lion accord­ing to an analy­sis by S&P Glob­al Mar­ket Intel­li­gence—to com­mu­ni­ty devel­op­ment finan­cial insti­tu­tions (CDFIs) to rein­vest and sup­port char­i­ta­ble pro­grams, includ­ing low- to mod­er­ate-income hous­ing and small-busi­ness assis­tance.

    “We will use the net pro­ceeds of fees from the Pay­check Pro­tec­tion Pro­gram to sup­port small busi­ness­es and the com­mu­ni­ties and non­prof­its we serve,” a Bank of Amer­i­ca spokesper­son said.

    Tru­ist

    Loans issued as of June 30: 78,669

    Amount dis­bursed: $13,075,965,877

    Aver­age loan size: $166,215

    Tru­ist has not indi­cat­ed that it plans to donate any net pro­ceeds from PPP loan pro­cess­ing. In an April earn­ings call, the bank said it paid out $65 mil­lion in coro­n­avirus-relat­ed bonus­es to employ­ees mak­ing under $100,000 a year dur­ing the quar­ter.

    In March, Tru­ist launched its Tru­ist Cares Ini­tia­tive which pro­vides phil­an­thropic funds to help those affect­ed by the COVID-19 cri­sis. Tru­ist, the third largest lender of PPP funds, is the result of the merg­er between the for­mer Sun­Trust and BB&T banks, com­plet­ed in Decem­ber 2019.

    PNC Bank

    Loans issued as of June 30: 72,908

    Amount dis­bursed: $13,038,347,212

    Aver­age loan size: $178,833

    In a press release, PNC high­light­ed its com­mit­ment to serv­ing low-to-mod­er­ate income areas as well as non­prof­it orga­ni­za­tions when it came to pro­cess­ing PPP loans. Accord­ing to the release, more than 14,500 of the loans processed by PNC went to bor­row­ers locat­ed in low-to-mod­er­ate income cen­sus tracts, and more than 4,500 of the reg­is­tered loans were for non­prof­it orga­ni­za­tions. Addi­tion­al­ly, the Pitts­burgh-based bank said they ear­marked funds to local com­mu­ni­ty devel­op­ment groups.

    “PNC has com­mit­ted more than $45 mil­lion to eight com­mu­ni­ty devel­op­ment finan­cial insti­tu­tions (CDFIs) since March 2020 to sup­port their own orig­i­na­tion of PPP loans in poten­tial­ly under­served geo­gra­phies and sec­tors,” accord­ing to a May state­ment by PNC.

    Wells Far­go

    Loans issued as of June 30: 185,598

    Amount dis­bursed: $10,470,396,296

    Aver­age loan size: $56,414

    Of Wells Fargo’s PPP loans, 84% went to com­pa­nies with few­er than 10 employ­ees, 60% were for $25,000 or less, and 90% of these appli­cants had $2 mil­lion or less in annu­al rev­enue, accord­ing to a bank press release.

    Wells Far­go has indi­cat­ed it will allo­cate near­ly $400 mil­lion in PPP loan pro­cess­ing fees to help busi­ness­es impact­ed by COVID-19.

    “By donat­ing approx­i­mate­ly $400 mil­lion in pro­cess­ing fees to assist small busi­ness­es in need, Wells Fargo’s Open for Busi­ness Fund cre­ates oppor­tu­ni­ties for near-term access to cap­i­tal and address­es the road ahead to mean­ing­ful eco­nom­ic recov­ery, espe­cial­ly for Black and African Amer­i­can entre­pre­neurs and oth­er minor­i­ty-owned busi­ness­es,” Wells Far­go CEO Char­lie Scharf said in a state­ment.

    TD Bank

    Loans issued as of June 30: 82,773

    Amount dis­bursed: $8,468,624,019

    Aver­age loan size: $102,311

    TD Bank has not pub­licly indi­cat­ed what it plans to do with its PPP loan pro­ceeds. The bank in April announced the for­ma­tion of the TD Com­mu­ni­ty Resilience Ini­tia­tive, which TD Bank is fund­ing with an ini­tial $25 mil­lion Cana­di­an dol­lars to go toward com­mu­ni­ty phil­an­thropy projects. TD-bank is a Cana­di­an-based bank.

    Citibank

    Loans issued: Unknown

    Amount dis­bursed: Unknown

    Aver­age loan size: Unknown

    Citibank was the last of the major banks to start accept­ing PPP appli­ca­tions, begin­ning April 9. As such, the bank has not had the same time span or capac­i­ty to process the vol­ume of loans its peers han­dled. Addi­tion­al­ly, it is only accept­ing loan appli­ca­tions from its exist­ing Small Busi­ness Clients and data on loans dis­bursed to date is not pub­licly avail­able.

    The bank released a state­ment at the end of June that it would use its net pro­ceeds from PPP loans—about $25 million—to fund the expan­sion of its COVID-19 U.S. Small Busi­ness Relief Pro­gram, which was launched in April with a $7.5 mil­lion ini­tial allo­ca­tion.

    The pro­gram is intend­ed to help CDFIs in assist­ing small­er busi­ness­es and entre­pre­neurs who may not oth­er­wise be eli­gi­ble for fed­er­al stim­u­lus pro­grams. Citibank said it’s allo­cat­ing up to $500,000 per CDFI up to $15 mil­lion total to sup­port small busi­ness­es owned by peo­ple of col­or and low­er-income indi­vid­u­als and com­mu­ni­ties.

    The remain­ing esti­mat­ed $10 mil­lion in PPP loan rev­enue is expect­ed to be fun­neled to the Local Ini­tia­tives Sup­port Corp. (LISC) to sup­port the New York For­ward Loan Fund, which helps CDFIs pro­vide loans to small busi­ness­es, non­prof­its and small land­lords for work­ing cap­i­tal.

    ————-

    “Banks Made Bil­lions On PPP Loans. Learn What They’re Doing With The Cash” by Robin Saks Frankel; Forbes; 07/10/2020

    “But faced with mount­ing crit­i­cism, some banks say they won’t keep any prof­its. Instead, they will donate what they have earned after fac­tor­ing in the cost to process the loans.”

    We’re not going to prof­it from this at all. Or at least not keep the prof­its we’ve already made. Trust us. That was the spin we were hear­ing from the banks back in July.

    So did the banks ulti­mate donate all of their prof­its? That’s unclear at this point. But those banks that did end up donat­ing their PPP prof­its are prob­a­bly rather relieved they did so after the release of the House report last week that revealed that not only did the Trump Trea­sury Depart­ment and SBA active­ly encour­aged big banks to pro­vide loans from the PPP to their “wealthy exist­ing clients at the expense of tru­ly strug­gling small busi­ness­es in under­served com­mu­ni­ties,” but also revealed that all but one of the eight largest banks appar­ent­ly took that advice, to the detri­ment of gen­uine small busi­ness­es which, in turn, result­ed in a dis­pro­por­tion­ate­ly neg­a­tive impact on minor­i­ty owned busi­ness­es:

    Forbes

    Big Banks Pri­or­i­tized Bil­lions In PPP Funds For Wealthy Clients At The Expense Of Strug­gling Small Busi­ness­es, House Report Finds

    Jonathan Pon­ciano
    Forbes Staff
    Oct 16, 2020, 04:36pm EDT
    Updat­ed Oct 16, 2020, 05:09pm EDT

    TOPLINE

    The Trea­sury Depart­ment and Small Busi­ness Admin­is­tra­tion encour­aged big banks to pro­vide loans from the $670 bil­lion Pay­check Pro­tec­tion Pro­gram (PPP) to their “wealthy exist­ing clients at the expense of tru­ly strug­gling small busi­ness­es in under­served com­mu­ni­ties,” a House sub­com­mit­tee said Fri­day as it announced the release of a 19-page report con­clud­ing a months-long inves­ti­ga­tion into the dis­burse­ment of PPP funds.

    KEY FACTS

    * Doc­u­ments obtained by the House Select Sub­com­mit­tee on the Coro­n­avirus Cri­sis show that the Trea­sury pri­vate­ly told lenders to “go to their exist­ing cus­tomer base” when issu­ing PPP loans, the report says, and all but one of the eight banks involved in the inves­ti­ga­tion fol­lowed the guid­ance.

    * At least one bank, Cit­i­group, did so while rec­og­niz­ing that this cre­at­ed “a height­ened risk of dis­parate impact on minor­i­ty- and women-owned busi­ness­es,” an inter­nal Citi pre­sen­ta­tion obtained by the Select Sub­com­mit­tee revealed.

    * The report also claims that the SBA and Trea­sury failed to imple­ment the PPP as Con­gress intend­ed because they pro­vid­ed no guid­ance (except for one “vague” tweet from an SBA admin­is­tra­tor) ask­ing lenders to pri­or­i­tize under­served mar­kets, includ­ing minor­i­ty- and women-owned busi­ness­es, despite the CARES Act’s lan­guage, which called for pri­or­i­ti­za­tion of under­served mar­kets.

    * The report con­clud­ed that sev­er­al banks—including JPMor­gan, the biggest PPP lender—processed larg­er PPP loans for wealthy cus­tomers at more than dou­ble the speed of small­er loans “for the need­i­est small busi­ness­es.”

    * In Sep­tem­ber, the Select Sub­com­mit­tee released pre­lim­i­nary find­ings that claimed bil­lions of dol­lars in PPP loans might have been divert­ed to fraud, waste and abuse, includ­ing more than $1 bil­lion in loans that went to com­pa­nies that had already received anoth­er PPP loan and $195 mil­lion that went to gov­ern­ment con­trac­tors pre­vi­ous­ly flagged by the fed­er­al gov­ern­ment for per­for­mance or integri­ty issues.

    * The Select Sub­com­mit­tee began inves­ti­gat­ing the Trump Administration’s imple­men­ta­tion of the PPP on June 15, fol­low­ing reports that the pro­gram favored large com­pa­nies over “the need­i­est” small busi­ness­es.

    KEY BACKGROUND

    In March, the $2.2 tril­lion CARES (Coro­n­avirus Aid, Relief and Eco­nom­ic Secu­ri­ty) Act estab­lished the PPP with $349 bil­lion in for­giv­able loans meant to go to small busi­ness­es and non­prof­its exac­er­bat­ed by the coro­n­avirus pan­dem­ic to cov­er pay­roll, rent and util­i­ty pay­ments. That first round of fund­ing was exhaust­ed in just 14 days, so the pro­gram received an addi­tion­al $321 bil­lion from Con­gress in April. Reports soon sur­faced that many small busi­ness­es claimed they strug­gled to get loans while dozens of bil­lion­aire-owned com­pa­nies and pri­vate equi­ty firms man­aged to secure fund­ing. The toll on minor­i­ty- and women-owned busi­ness­es has since become more clear with data that shows the num­ber of active busi­ness own­ers has fall­en the sharpest among Black and immi­grant com­mu­ni­ties.

    CRUCIAL QUOTE

    “The Administration’s imple­men­ta­tion fail­ures had con­se­quences,” the report states. “Forty-one per­cent of busi­ness­es owned by African Amer­i­cans failed between Feb­ru­ary and April 2020, high­er than any oth­er demo­graph­ic group and more than dou­ble the per­cent­age of white-owned busi­ness­es that closed over the same peri­od.” That fig­ure has since soft­ened to 19%, but Black busi­ness own­ers still account for the hard­est-hit demo­graph­ic, and immi­grants fol­low close­ly behind, with 18% of their busi­ness­es fail­ing through June.

    TANGENT

    The PPP closed to new appli­ca­tions on June 30, leav­ing near­ly $134 bil­lion unused. The Trump Admin­is­tra­tion has since pro­posed using at least some of the left­over PPP funds as a stop­gap for stim­u­lus fund­ing while nego­ti­a­tions for anoth­er round of coro­n­avirus relief con­tin­ue to play out. White House eco­nom­ic advi­sor, Lar­ry Kud­low, told Fox Busi­ness Net­work today that Con­gress should appro­pri­ate unused funds from the pre­vi­ous res­cue pack­age to help small busi­ness­es, but added that “it takes leg­isla­tive and polit­i­cal will to do it” and that law­mak­ers and nego­tia­tors are “bick­er­ing.”

    ...

    ————

    “Big Banks Pri­or­i­tized Bil­lions In PPP Funds For Wealthy Clients At The Expense Of Strug­gling Small Busi­ness­es, House Report Finds” by Jonathan Pon­ciano; Forbes; 10/16/2020

    “Doc­u­ments obtained by the House Select Sub­com­mit­tee on the Coro­n­avirus Cri­sis show that the Trea­sury pri­vate­ly told lenders to “go to their exist­ing cus­tomer base” when issu­ing PPP loans, the report says, and all but one of the eight banks involved in the inves­ti­ga­tion fol­lowed the guid­ance.”

    Well, at least one bank seemed to demon­strate an inkling of a con­science (or more like­ly real­ized fol­low­ing such guid­ance was going to blow up in their faces). It’s progress. Painful­ly slow progress.

    So which of those eight big banks decid­ed not to fol­low the Trump admin­is­tra­tion’s ‘guid­ance’? As the House report describes, the eight banks they inves­ti­gat­ed were JPMor­gan Chase (JPMor­gan), Citibank (Citi), PNC Bank (PNC), Bank of Amer­i­ca, U.S. Bank, Tru­ist, Wells Far­go, and San­tander. And while the part of the report that tells us sev­en of the eight banks fol­lowed the Trump admin­is­tra­tion’s guid­ance does­n’t say which bank was the odd man out, it’s clear from the rest of the report that this is U.S. Bank, which was the only one to allow non-cus­tomers to apply for loans on the first day of the PPP. Plus, the para­graph of the report that tells us sev­en of the eight banks fol­lowed the Trump admin­is­tra­tion’s guid­ance cites foot­note 18 and that foot­note cites let­ters giv­en to the House sub­com­mit­tee from the sev­en remain­ing banks but makes no men­tion of U.S. Bank.

    But there’s anoth­er high­ly note­wor­thy rev­e­la­tion in the House report: when ques­tioned about this ‘guid­ance’, the Trea­sury Depart­ment com­plete­ly denied it. So it looks like this scan­dal includes a cov­er up:

    coronavirus.house.gov

    UNDERSERVED AND UNPROTECTED

    How the TrumpAd­min­is­tra­tion Neglect­edthe Need­i­est Small Busi­ness­es in the PPP

    SELECT SUBCOMMITTEE ON THE CORONAVIRUS CRISIS
    STAFF REPORT / OCTOBER 2020

    ...
    Despite the lack of clear writ­ten guid­ance, doc­u­ments and infor­ma­tion obtained by the Select Sub­com­mit­tee show that Trea­sury pri­vate­ly encour­aged banks to lim­it their PPP lend­ing pro­grams to exist­ing cus­tomers, which had the impact of exclud­ing many minor­i­ty and women-owned busi­ness­es that did not have estab­lished rela­tion­ships with these banks.

    In an email obtained by the Select Sub­com­mit­tee dat­ed March 28, 2020, the head of the Amer­i­can Bankers Asso­ci­a­tion (ABA) described to ABA’s board of direc­tors a call with Trea­sury offi­cials on March 27, the day the CARES Act was enact­ed. He explained that “Trea­sury would like for banks to go to their exist­ing cus­tomer base.”14 The Amer­i­can Bankers Asso­ci­a­tion rep­re­sents “the entire bank­ing industry.”15

    In a brief­ing for Select Sub­com­mit­tee staff, JPMor­gan cor­rob­o­rat­ed this account, explain­ing, “From ear­ly on there was an under­stand­ing from Trea­sury that banks were work­ing with exist­ing clients.”16

    Yet when the Select Sub­com­mit­tee staff asked Trea­sury about this “under­stand­ing,” they denied it ever exist­ed. Trea­sury told the Select Sub­com­mit­tee that they “nev­er addressed any­thing about lenders pri­or­i­tiz­ing exist­ing customers.”17

    ...

    ———–

    “UNDERSERVED AND UNPROTECTED” SELECT SUBCOMMITTEE ON THE CORONAVIRUS CRISIS STAFF REPORT; coronavirus.house.gov; OCTOBER 2020

    That sure sounds like a cov­er up!

    And it’s not like this is the kind of thing the Trea­sury Depart­ment would­n’t be high­ly inter­est­ed in cov­er­ing up. Of course they denied this to Con­gress. It looks awful. Because it is awful. Espe­cial­ly the all the small busi­ness­es that could­n’t get a loan. Or, rather, for­mer small busi­ness­es. They’re pre­sum­ably not in busi­ness any­more.

    Posted by Pterrafractyl | October 22, 2020, 9:27 pm
  3. @Dave: Here’s an arti­cle from Jan­u­ary 3, of 2020, weeks before the glob­al nature of the coro­n­avirus pan­dem­ic was known, that points to anoth­er man­ner in which this pan­dem­ic was like man­na from heav­en for the pri­vate equi­ty indus­try:

    Thanks, in part, to the long-run­ning his­tor­i­cal­ly low inter­est rates that are a con­se­quence of the 2008 finan­cial cri­sis, record lev­els of cash had been flow­ing into pri­vate equi­ty funds since that’s one of the only invest­ment class­es remain­ing that has paid above aver­age yields in recent years. Even hedge funds were aver­ag­ing only 5.5% vs +14% for pri­vate equi­ty.

    But all of that mon­ey flow­ing into pri­vate equi­ty was cre­at­ing a prob­lem: Too much mon­ey in pri­vate equi­ty means too much com­pe­ti­tion and low­er yields. That was one of the big fears fac­ing the pri­vate equi­ty sec­tor head­ing into this pan­dem­ic. It was becom­ing a vic­tim of its own suc­cess. Beyond that, most pri­vate equi­ty funds have a 5 to 10 year invest­ment time frame. So while funds could sit on cash for a while to wait for the right oppor­tu­ni­ty to invest, they can’t wait for­ev­er. They HAVE to find some­where to invest.

    Also keep in mind that part of what makes pri­vate equi­ty appeal­ing as an invest­ment for things like pen­sion funds seek­ing a com­bi­na­tion of high­er-yields but also ‘safe’ invest­ments is that pri­vate equi­ty has the capac­i­ty to do well when the rest of the econ­o­my is doing poor­ly. Which makes sense...when economies weak­en that inevitably cre­ates all sorts of buy­ing oppor­tu­ni­ties for with cash to spend.

    So at the start of this year, the whole pri­vate equi­ty indus­try was sit­ting on a his­toric pile of cash but fac­ing the prospect of no great buy­ing oppor­tu­ni­ties and pos­si­bly very a dis­ap­point­ing upcom­ing decade if the indus­try is forced to spend all that cash on already-over­priced invest­ments....unless there’s a new reces­sion that cre­ates all sorts of new buy­ing oppor­tu­ni­ties. And that’s why the coro­n­avirus pan­dem­ic real­ly was like man­na from finan­cial heav­en for pri­vate equi­ty:

    CNBC

    Pri­vate equity’s record $1.5 tril­lion cash pile comes with a new set of chal­lenges

    * Pri­vate investors are sit­ting on a record $1.5 tril­lion in cash, accord­ing to new data from Pre­qin. That is the high­est on record and more than dou­ble what it was five years ago.
    * Ana­lysts say investors are flood­ing to pri­vate equi­ty thanks to low inter­est rates, hedge fund under­per­for­mance, and low­er expect­ed returns from pub­lic mar­kets.
    * The flush of cash means more com­pe­ti­tion for the same deals, how­ev­er, push­ing up val­u­a­tions. Some ana­lysts think returns will “dis­ap­point.”

    Kate Rooney
    Pub­lished Fri, Jan 3 2020 12:31 PM EST
    Updat­ed Fri, Jan 3 2020 2:40 PM EST

    Pri­vate-equi­ty firms are hold­ing on to a record pile of cash. Increased com­pe­ti­tion might make it hard­er to spend, how­ev­er, in order to get the same dou­ble-dig­it returns that have made the group so pop­u­lar.

    The indus­try — which includes ven­ture cap­i­tal — had a total $1.45 tril­lion in “dry pow­der,” or cash, to invest at the end of 2019, accord­ing to data from Pre­qin. That is the high­est on record and more than dou­ble what it was five years ago.

    Ini­go Fras­er-Jenk­ins, head of the port­fo­lio strat­e­gy team at Bern­stein Research, said the steady cash stream into pri­vate equi­ty has been dri­ven by more investors expect­ing low­er returns from pub­lic mar­kets. The flood of mon­ey is dri­ving up entry prices and could mean low­er future returns, he said.

    “We think that the returns are going to dis­ap­point,” Fras­er-Jenk­ins told CNBC. “We also do not believe that over the cycle that it can de-cor­re­late from pub­lic mar­kets.”

    Hedge funds are anoth­er pop­u­lar invest­ment vehi­cle that insti­tu­tion­al investors, such as endow­ments and pen­sion funds, are turn­ing to. But the hedge-fund industry’s returns are lag­ging by com­par­i­son. Over the past five years end­ing in June, hedge funds post­ed 5.5% returns, com­pared with 14.4% for pri­vate equi­ty, accord­ing to the lat­est data avail­able from Pre­qin.

    Search for yield

    Anoth­er rea­son investors are pour­ing into the pri­vate equi­ty asset class is low glob­al yields. As the 10-year Trea­sury yield sank below 2% this year, investors went look­ing for bet­ter invest­ment alter­na­tives, accord­ing to Nan­cy Davis, chief invest­ment offi­cer and founder of advi­so­ry firm Qua­drat­ic Cap­i­tal. But pri­vate equi­ty is still “not a gold­en goose,” she said.

    “There aren’t too many investors with dou­ble-dig­it per­cent­age gain — so, as has been the case for the last few years, many feel like they have no choice but to get long and try to catch up by chas­ing the pri­vate-equi­ty per­for­mance,” Davis said. The result is “a ner­vous eupho­ria.”

    Davis not­ed that sen­ti­ment has got­ten “ridicu­lous­ly pos­i­tive” and is con­tribut­ing to a rise in val­u­a­tions. The idea that pri­vate equi­ty could con­tin­ue to pro­duce an inter­nal rate of return, or IRR, of 20% to 25% is “laugh­able” with bond yields as low as they are, she said.

    It’s not just pri­vate equi­ty sit­ting on cash. Revered investor War­ren Buf­fett — a vocal crit­ic of the indus­try — is sit­ting on a record $128 bil­lion at Berk­shire Hath­away. In recent months, the Oma­ha-based firm has passed on mul­ti­ple oppor­tu­ni­ties to acquire com­pa­nies as the firm’s cash hoard grew. In Novem­ber, Buf­fett stepped away from a bid­ding war to buy tech­nol­o­gy dis­trib­u­tor Tech Data, and he declined to pur­chase lux­u­ry jew­el­er Tiffany when it was look­ing for a buy­er last year.

    Com­pet­ing with Black­stone

    Mega-firms such as Black­stone, Apol­lo and KKR have been rais­ing increas­ing­ly larg­er funds for insti­tu­tion­al investors. In some cas­es, they invest in oth­er pri­vate-equi­ty funds. Blackstone’s most recent buy­out fund this year topped $26 bil­lion — mak­ing it the largest of its kind in U.S. his­to­ry. This year, tech-focused Vista Equi­ty Part­ners closed a $16 bil­lion fund, while Thoma Bra­vo raised $12.6 bil­lion for its lat­est fund.

    Despite these mon­ster funds, thou­sands of oth­er firms have been able to raise mon­ey with­out much con­sol­i­da­tion, accord­ing to Bain. They are not “gob­bling up the mar­ket at the expense of oth­er firms,” said Bren­da Rainey, senior direc­tor of Bain & Co.’s glob­al pri­vate equi­ty prac­tice.

    Still, all of these firms are work­ing with a shot clock. Pri­vate-equi­ty invest­ments have a life­cy­cle of five to 10 years, and mon­ey man­agers need to get that cap­i­tal out the door with­in a cer­tain time frame. But Bain said much of Preqin’s esti­mat­ed $1.5 tril­lion total is “fresh” cap­i­tal that still has time to be invest­ed.

    “We don’t have con­cerns that it will go unspent. The ques­tion is, how will it be put to work?” said Rainey. “There’s no short­age of dol­lars to be put to work or indus­tries to spend them on.”

    Many of those oppor­tu­ni­ties are com­ing from pub­lic mar­kets, where com­pa­nies are increas­ing­ly being tak­en pri­vate — a trend that Rainey expects to con­tin­ue. Those who are already pri­vate are increas­ing­ly com­fort­able stay­ing that way, par­tial­ly because there’s plen­ty of cap­i­tal at every stage. She expects more deal activ­i­ty despite val­u­a­tions, which are also ele­vat­ed in pub­lic mar­kets.

    ...

    ————

    “Pri­vate equity’s record $1.5 tril­lion cash pile comes with a new set of chal­lenges” by Kate Rooney; CNBC; 01/03/2020

    Still, all of these firms are work­ing with a shot clock. Pri­vate-equi­ty invest­ments have a life­cy­cle of five to 10 years, and mon­ey man­agers need to get that cap­i­tal out the door with­in a cer­tain time frame. But Bain said much of Preqin’s esti­mat­ed $1.5 tril­lion total is “fresh” cap­i­tal that still has time to be invest­ed.”

    Too much mon­ey chas­ing too few remain­ing oppor­tu­ni­ties and the clock is tick­ing. That was the chal­lenge fac­ing the indus­try right before the pan­dem­ic-induced glob­al eco­nom­ic implo­sion. And then, all of a sud­den, the whole world turned into a fire sale. A fire sale that promis­es to keep inter­est rates even low­er for even longer.

    So instead of fac­ing ques­tions about how the indus­try is going to invest an abun­dance of cash with­out an abun­dance of invest­ment oppor­tu­ni­ties, the new ques­tion is just how much of the econ­o­my isn’t going to be owned by pri­vate equi­ty a decade from now.

    Posted by Pterrafractyl | October 23, 2020, 7:16 pm
  4. Oh look at that: Over the past cou­ple of months the pri­vate equi­ty indus­try has start­ed doing exact­ly the thing peo­ple fear pri­vate equi­ty for doing. Yes, pri­vate equi­ty firms or now forc­ing the com­pa­nies they own to load up on debt for the pur­pose of pay­ing div­i­dends back their pri­vate equi­ty own­ers. This always hap­pens to some degree but as of mid-Sep­tem­ber near­ly 24 per­cent of the mon­ey raised in the US loan mar­ket had been used to fund div­i­dends to pri­vate equi­ty investors, com­pared to 4 per­cent aver­age over the past two years. So there was a sud­den 600% jump in these “div­i­dend recap­i­tal­i­sa­tions” last month and the trend was just get­ting start­ed.

    And as the sec­ond excerpt below demon­strates, part of what’s dri­ving this is a will­ing­ness by bond investors to accept what are known as pay­ment-in-kind (PIK) bonds. PIKs are espe­cial­ly risky bonds that pay rel­a­tive­ly high rate but with terms that allow the bor­row­er to pay inter­est with addi­tion­al bor­row­ing. So lenders get extra high inter­est rates at the cost of ele­vat­ing the risk their bor­row­er will be dri­ven into bank­rupt­cy in order to finance the loan. So pri­vate equi­ty firms are get­ting the com­pa­nies they own to bor­row mon­ey using spe­cial loans that make com­pa­nies extra vul­ner­a­ble to bank­rupt­cy in order to pay out div­i­dends to the pri­vate equi­ty own­ers. Which, again, is why peo­ple hate and fear the pri­vate equi­ty indus­try:

    Finan­cial Times

    Pri­vate equi­ty own­ers pile on lever­age to pay them­selves div­i­dends
    TPG, Apax load com­pa­nies with loans, seiz­ing on strong demand for high-yield­ing debt

    Joe Ren­ni­son in Lon­don
    Sep­tem­ber 16 2020

    Pri­vate equi­ty groups includ­ing TPG and Apax Part­ners are tak­ing advan­tage of block­buster demand for cor­po­rate debt by load­ing com­pa­nies they own with fresh loans and using the cash to award them­selves a bumper pay­day.

    So-called div­i­dend recap­i­tal­i­sa­tions have become a fea­ture of the loan mar­ket in recent weeks, ring­ing alarm bells since they come on top of already high lever­age and weak investor pro­tec­tions and against a back­drop of eco­nom­ic uncer­tain­ty.

    So far in Sep­tem­ber, almost 24 per cent of mon­ey raised in the US loan mar­ket has been used to fund div­i­dends to pri­vate equi­ty own­ers, up from an aver­age of less than 4 per cent over the past two years. That would be the high­est pro­por­tion since the begin­ning of 2015, accord­ing to month­ly data from S&P Glob­al Mar­ket Intel­li­gence.

    The leap in divi recaps part­ly reflects how investors are clam­our­ing for debt that can pro­vide some income as the Fed­er­al Reserve holds inter­est rates low..

    The loan mar­ket — where pri­vate equi­ty firms typ­i­cal­ly fund the com­pa­nies they own — had until recent­ly not seen the same vol­ume of issuance as oth­er parts of the finan­cial mar­kets.

    Investors have been accept­ing divi recaps because “there isn’t a ton going on”, said Jes­si­ca Reiss, head of US lever­aged loan research at Covenant Review.

    “From the lender’s per­spec­tive they are look­ing for deals, so if spon­sors and their com­pa­nies can refi­nance and get a div­i­dend up to their own­ers they will try it.”

    In the lat­est exam­ple, cloud com­put­ing com­pa­ny ECi Soft­ware — owned by Apax Part­ners — is set to raise $740m in new loans, ear­mark­ing $118m to fund a div­i­dend to its own­er, accord­ing to S&P Glob­al Rat­ings and peo­ple famil­iar with the deal.

    It fol­lows on the heels of snack foods mak­er Shearer’s Foods — owned by Chica­go-based pri­vate equi­ty com­pa­ny Wind Point Part­ners and the Ontario Teach­ers’ Pen­sion Plan — which raised over $1bn in the loan mar­ket on Tues­day in part to fund a $388m pay­ment to its own­ers, accord­ing to rat­ing agency Moody’s.

    The bor­row­ings will increase lever­age at Shearer’s from 5.1 times adjust­ed debt to earn­ings to 6.6 times, accord­ing to cal­cu­la­tions from Moody’s. At ECi, it could rise to almost 10 times, accord­ing to S&P.

    Broad­band com­pa­ny Radi­ate Hold­co was also in the mar­ket this week to fund a $500m pay­ment to its own­er TPG.

    ...

    “If pri­vate equi­ty spon­sors can take mon­ey off the table then they are doing it,” said John Gre­go­ry, head of lever­aged finance cap­i­tal mar­kets at Wells Far­go Secu­ri­ties. “There’s going to be more com­ing for sure.”

    Over­all, just over $4bn of the $15bn bor­rowed in the loan mar­ket this month would be paid out in div­i­dends, accord­ing to S&P’s data. Anoth­er $2bn would come before Sep­tem­ber ends, if deals cur­rent­ly being mar­ket­ed to investors get com­plet­ed, accord­ing to peo­ple famil­iar with the plans.

    The peak for recaps came in Octo­ber 2016, as the Fed was gear­ing up to raise rates for the sec­ond time and demand for loans was high. But the $13bn raised that month rep­re­sent­ed a much small­er por­tion of the total $55bn of issuance.

    Investors, bankers and ana­lysts not­ed that the oppor­tu­ni­ty for pri­vate equi­ty com­pa­nies to pull cash out of the groups they con­trol has been lim­it­ed large­ly to high­er-qual­i­ty bor­row­ers.

    Moody’s upgrad­ed Shearer’s this week, fol­low­ing its deal announce­ment, despite say­ing the div­i­dend pay­out and increase in lever­age was “aggres­sive”. The rat­ing agency not­ed the company’s pos­i­tive per­for­mance fol­low­ing the out­break of coro­n­avirus, as well as its improved finan­cial flex­i­bil­i­ty after pay­ing back a bank lend­ing facil­i­ty.

    “You have some very high lever­age deals,” said Mr Gre­go­ry. “But if it’s a good com­pa­ny that peo­ple are famil­iar with and investors have mon­ey that they need to invest then trans­ac­tions tend to go through. It’s a bull mar­ket trade for sure.”

    How­ev­er, investors express con­cern over loose doc­u­men­ta­tion under­pin­ning the loans, offer­ing lit­tle pro­tec­tion to investors should a com­pa­ny end up in trou­ble.

    Some see this year’s mar­ket tur­moil as a missed oppor­tu­ni­ty to improve lend­ing stan­dards after years of see­ing them whit­tled away.

    “It’s a shame,” said John Bell, a port­fo­lio man­ag­er at Loomis Sayles. “I wished this pan­dem­ic could have reset the clock for a while but it doesn’t look like that is hap­pen­ing.”

    ————-

    “Pri­vate equi­ty own­ers pile on lever­age to pay them­selves div­i­dends” by Joe Ren­ni­son; Finan­cial Times; 09/16/2020

    So far in Sep­tem­ber, almost 24 per cent of mon­ey raised in the US loan mar­ket has been used to fund div­i­dends to pri­vate equi­ty own­ers, up from an aver­age of less than 4 per cent over the past two years. That would be the high­est pro­por­tion since the begin­ning of 2015, accord­ing to month­ly data from S&P Glob­al Mar­ket Intel­li­gence.”

    Have we already hit the “bust out” phase of the pri­vate equi­ty cycle, or is that yet to come? It’s sure feel­ing like it at least start­ed. But as the sec­ond arti­cle, from just a cou­ple days ago, make clear, if this is the “bust out” phase — where com­pa­nies are basi­cal­ly stripped of their val­ue and allowed to col­lapse — the pri­vate equi­ty indus­try is going to have a lot of help pulling it off. Help from all the bond investors will­ing to buy the high-risk pay­ment-in-kind (PIK) bonds that are poised to make this explod­ing debt blow up even big­ger down the line:

    Finan­cial Times

    Risky PIK deals pitched by pri­vate equi­ty to yield-hun­gry investors
    Re-emer­gence of pay­ment-in-kind bonds a sign of ‘frothy’ mar­kets

    Joe Ren­ni­son in Lon­don
    Octo­ber 23, 2020 3:26 PM

    Pri­vate equi­ty firms are test­ing investors’ appetite for returns with new sales of pay­ment-in-kind bonds that offer juicy inter­est rates but are among the riski­est deals since the Covid cri­sis began.

    The re-emer­gence of PIKs under­scores how fixed-income investors are increas­ing­ly being asked to accept high­er degrees of risk and more oner­ous terms from cor­po­rate bond issuers as soar­ing prices of high­er-qual­i­ty assets in recent months has deeply depressed yields.

    A duo of high­ly-indebt­ed bor­row­ers are seek­ing to raise a com­bined $1bn through so-called PIK tog­gle deals, in which issuers are allowed to defer inter­est pay­ments. The struc­ture allows com­pa­nies to pay inter­est using more debt, lead­ing the amount that ulti­mate­ly needs to be paid at the bond’s matu­ri­ty to bal­loon.

    Apol­lo and Plat­inum Equi­ty, the pri­vate equi­ty par­ents of the two issuers, will receive bumper pay­outs from the pro­ceeds of the bond sales if they go through as planned.

    The deals fol­low a flur­ry of so-called div­i­dend recap­i­tal­i­sa­tions through the loan mar­ket, where pri­vate equi­ty own­ers have used bor­row­ings to fund pay­outs from their port­fo­lio com­pa­nies.

    Ken Mon­aghan, co-direc­tor of high yield at Amun­di Pio­neer, said the re-emer­gence of PIK deals was an indi­ca­tion of a “frothy” mar­ket. “It tells you investors are will­ing to take on a greater lev­el of risk,” he said.

    Apol­lo-owned Aspen Insur­ance bor­rowed $500m through its Bermu­da-based par­ent com­pa­ny High­land Hold­ings on Fri­day, with rough­ly 50 per cent set aside for a div­i­dend, accord­ing to peo­ple famil­iar with the issuance. The five-year deal priced with an inter­est rate of about 7.63 per cent, which would rise above 8 per cent if the pay­ment is deferred.

    Plat­inum Equi­ty-backed label mak­er Mul­ti-Col­or Cor­po­ra­tion is also look­ing to raise $500m with a five-year note. The pro­ceeds will be used sole­ly to fund a pay­out to the com­pa­nies’ own­ers, after fees, accord­ing to peo­ple famil­iar with the deal. Ear­ly dis­cus­sions hint­ed at a dou­ble-dig­it inter­est rate on the bond.

    How­ev­er, the deal has received some push­back from investors. The bor­row­ing was ini­tial­ly expect­ed to be finalised on Thurs­day but plans have since been delayed to next week, accord­ing to peo­ple famil­iar with the fundrais­ing.

    ...

    Inter­est rates on safer debt either issued by gov­ern­ments or more high­ly rat­ed com­pa­nies have fall­en to his­toric lows since the coro­n­avirus cri­sis began, kick­ing off a hunt by bond investors for deals in which they can gar­ner high­er returns.

    This shift has reduced the bor­row­ing costs lenders can demand even from com­pa­nies with spec­u­la­tive-grade cred­it rat­ings.

    The aver­age yield across high-yield US cor­po­rate debt has fall­en to 5.3 per cent this month, hav­ing trad­ed as high as 11.4 per cent dur­ing the depths of the coro­n­avirus induced mar­ket tumult in March, accord­ing to Ice Data Ser­vices.

    Fed­er­al Reserve offi­cials have repeat­ed­ly warned of the poten­tial for ris­ing lever­age, with some call­ing for tougher rules to pre­vent the cen­tral bank’s pol­i­cy of keep­ing US inter­est rates low from lead­ing to exces­sive risk-tak­ing.

    This is not the first time Plat­inum has turned to PIKs to raise funds through the com­pa­nies it owns. In 2013 the car chas­sis mak­er Chas­six com­plet­ed a $150m PIK to fund a pay­out to Plat­inum. The com­pa­ny slipped into bank­rupt­cy two years lat­er.

    ...

    ————-

    “Risky PIK deals pitched by pri­vate equi­ty to yield-hun­gry investors” by Joe Ren­ni­son in Lon­don; Finan­cial Times; 10/23/2020

    “A duo of high­ly-indebt­ed bor­row­ers are seek­ing to raise a com­bined $1bn through so-called PIK tog­gle deals, in which issuers are allowed to defer inter­est pay­ments. The struc­ture allows com­pa­nies to pay inter­est using more debt, lead­ing the amount that ulti­mate­ly needs to be paid at the bond’s matu­ri­ty to bal­loon.

    The struc­ture allows com­pa­nies to pay inter­est using more debt. What could go wrong?

    And note that these aren’t obscure rel­a­tive­ly tiny pri­vate equi­ty firms doing this. Apol­lo and Plat­inum Equi­ty are giants in the indus­try. In the case of the Apol­lo-own Aspen Insur­ance, half of the $500 mil­lion is set aside for a div­i­dend. And for Plat­inum, all of the $500 mil­lion raised by Mul­ti-col­or Cor­po­ra­tion will go to the pri­vate equi­ty own­ers:

    ...
    Apol­lo and Plat­inum Equi­ty, the pri­vate equi­ty par­ents of the two issuers, will receive bumper pay­outs from the pro­ceeds of the bond sales if they go through as planned.

    ...

    Apol­lo-owned Aspen Insur­ance bor­rowed $500m through its Bermu­da-based par­ent com­pa­ny High­land Hold­ings on Fri­day, with rough­ly 50 per cent set aside for a div­i­dend, accord­ing to peo­ple famil­iar with the issuance. The five-year deal priced with an inter­est rate of about 7.63 per cent, which would rise above 8 per cent if the pay­ment is deferred.

    Plat­inum Equi­ty-backed label mak­er Mul­ti-Col­or Cor­po­ra­tion is also look­ing to raise $500m with a five-year note. The pro­ceeds will be used sole­ly to fund a pay­out to the com­pa­nies’ own­ers, after fees, accord­ing to peo­ple famil­iar with the deal. Ear­ly dis­cus­sions hint­ed at a dou­ble-dig­it inter­est rate on the bond.

    ...

    This is not the first time Plat­inum has turned to PIKs to raise funds through the com­pa­nies it owns. In 2013 the car chas­sis mak­er Chas­six com­plet­ed a $150m PIK to fund a pay­out to Plat­inum. The com­pa­ny slipped into bank­rupt­cy two years lat­er.
    ...

    Whether or not we’ve entered the ‘bust out’ phase for the pri­vate equi­ty indus­try as a whole, Apol­lo and Plat­inum Equi­ty have clear­ly decid­ed to start ‘bust­ing out’ their hold­ings. And find­ing will­ing part­ners in the yield-hun­gry bond investors will­ing to hold the bag. As long as there are enough investors will­ing to buy these ‘bust out’ bonds more of them are going to be issued.

    So when all of this blows up and we see a major cor­po­rate debt cri­sis that threat­ens to crip­ple the glob­al econ­o­my and calls for major bailouts grow, that the pri­vate equi­ty indus­try — which will no doubt be pin­ing for those bailouts — it’s going to be impor­tant to keep in mind that the upcom­ing cor­po­rate debt cri­sis is the pri­vate equi­ty indus­try bailout.

    Posted by Pterrafractyl | October 25, 2020, 7:06 pm
  5. This is rich: Hen­ry Kavis — the co-founder of noto­ri­ous pri­vate equi­ty giant Kohlberg Kravis Roberts (KKR), Pres­i­dent Trump’s first choice for the job of Trea­sury Sec­re­tary to in Novem­ber of 2016, and some­one who is wide­ly seen as an inspi­ra­tion for Gor­don Geck­o’s char­ac­ter in the movie Wall Street who cham­pi­oned the “greed is good” men­tal­i­ty — just gave an inter­view with Bloomberg about his take on the impact of the coro­n­avirus pan­dem­ic. Kravis talks about the extreme and seem­ing­ly irra­tional volatil­i­ty in the mar­kets and the mas­sive swings up or down for no appar­ent rea­son. And then he ends with the type of com­ment that we should expect to hear a lot more of as the pri­vate equi­ty indus­try pounces on this cri­sis to grow big­ger than ever: Kravis claims the pan­dem­ic has made him more empa­thet­ic.

    Now, as we’ll see in the sec­ond excerpts below from back in May, KKR was call­ing the cri­sis an “inflec­tion point” for its busi­ness an even bet­ter oppor­tu­ni­ty for the firm to expand than the 2008 finan­cial cri­sis. Think about that: the busi­ness that has seen explo­sive debt-fueled growth for decades and is now a pri­vate equi­ty giant is hit­ting an inflec­tion point now. It’s pre­dict­ing even more explo­sive growth for years to come.

    And in the third excerpt below, we learn that KKR did indeed make record invest­ments of $5.5 bil­lion in the sec­ond quar­ter of this year and top that record with $6.2 bil­lion in the third quar­ter. KKR real­ly has been expand­ing at an even faster pace than dur­ing the 2008 finan­cial cri­sis as they pre­dict­ed. So let’s hope Hen­ry Kravis and the rest of the pri­vate equi­ty chiefs real­ly are some­how grow­ing a con­science and become gen­uine­ly empa­thet­ic peo­ple, because if cur­rent trends hold the pri­vate equi­ty chiefs are going to be every­one’s boss once this is over:

    Bloomberg Quint

    Hen­ry Kravis Says the Mar­ket Is Wilder Than at Any Time in His Career

    Melis­sa Karsh and Jason Kel­ly
    Pub­lished: Oct 30 2020, 9:35 PM
    Last Updat­ed Oct 31 2020, 3:19 AM

    (Bloomberg) — Hen­ry Kravis said there’s more tur­moil in the mar­kets than any time in his half-cen­tu­ry career as investors react to pan­dem­ic news. “I’ve been invest­ing for over 50 years, I don’t remem­ber a time when I’ve seen such volatil­i­ty as we see today,” Kravis, the co-founder of KKR & Co., said Fri­day on the Bloomberg Invest Talks web­cast. “Just look at our mar­kets in the U.S., we’re up one day 300, 400 points and then the next day, for almost no rea­son, we’re down 400 to 500 points.”

    While he praised glob­al stim­u­lus efforts for keep­ing economies from col­lapse, he said mar­kets remain unnerved by the Covid-19 pan­dem­ic, espe­cial­ly on the prospects for a vac­cine. “Any news com­ing out of the phar­ma­ceu­ti­cal indus­try on progress with a ther­a­peu­tic or with a vac­cine is chang­ing sym­pa­thy in the mar­kets,” he said.

    ...

    Wild swings were also a rou­tine fea­ture of the 2008 finan­cial cri­sis. That year saw 42 days where the S&P 500 moved by more than 3%, com­pared with 28 days this year since the pan­dem­ic start­ed roil­ing mar­kets.

    In the midst of such tur­bu­lence, New York-based KKR has been among the most active deal­mak­ers. It has invest­ed more than $40 bil­lion across var­i­ous strate­gies this year.

    “When we shut down our offices in the U.S. on about March 12, I was won­der­ing, ‘What are we going to do, how are we going to even keep busy?’” Kravis, 76, said. “As it turned out, we’ve prob­a­bly had the busiest year and (most) pro­duc­tive year that we’ve had almost ever.”

    Kravis has been mak­ing deals since he found­ed KKR in 1976 with Bear Stearns & Co. alums Jerome Kohlberg and his cousin George Roberts. Over the years, they’ve built a rep­u­ta­tion as hard-charg­ing cap­i­tal­ists and gained fame with trans­ac­tions includ­ing the takeover of RJR Nabis­co Inc. in the 1980s.

    While buy­ing and sell­ing com­pa­nies still dri­ves Kravis, he said the pan­dem­ic has changed his out­look on life and work.

    “You see so many peo­ple in the U.S., in New York City in par­tic­u­lar ear­li­er on, become ill and so many of them pass away,” he said. “It makes you think about what’s real­ly impor­tant in life and to me, it’s fam­i­ly, my wife with­out a doubt.”

    Beyond that, “I prob­a­bly have become more patient than I was. I’ve always been known to be impa­tient,” he said. “Prob­a­bly my empa­thy lev­els have gone up, and try­ing to show more empa­thy toward every­body that I come into con­tact with, peo­ple at our firm and make sure they are OK.”

    ————-

    “Hen­ry Kravis Says the Mar­ket Is Wilder Than at Any Time in His Career” by Melis­sa Karsh and Jason Kel­ly; Bloomberg Quint; 10/30/2020

    ““When we shut down our offices in the U.S. on about March 12, I was won­der­ing, ‘What are we going to do, how are we going to even keep busy?’” Kravis, 76, said. “As it turned out, we’ve prob­a­bly had the busiest year and (most) pro­duc­tive year that we’ve had almost ever.”

    Oh what a sur­prise. The vul­ture cap­i­tal indus­try ben­e­fit­ed from a glob­al cri­sis. Who could have seen that com­ing. But hey, at least the top vul­tures are report­ed­ly grow­ing a heart:

    ...
    While buy­ing and sell­ing com­pa­nies still dri­ves Kravis, he said the pan­dem­ic has changed his out­look on life and work.

    “You see so many peo­ple in the U.S., in New York City in par­tic­u­lar ear­li­er on, become ill and so many of them pass away,” he said. “It makes you think about what’s real­ly impor­tant in life and to me, it’s fam­i­ly, my wife with­out a doubt.”

    Beyond that, “I prob­a­bly have become more patient than I was. I’ve always been known to be impa­tient,” he said. “Prob­a­bly my empa­thy lev­els have gone up, and try­ing to show more empa­thy toward every­body that I come into con­tact with, peo­ple at our firm and make sure they are OK.”
    ...

    Let’s hope that new found patience and empa­thy applies to all the employ­ees slat­ed to be laid off by the firms gob­bled up by KKR this year. And all the firms that are going to be scoop up at rock-bot­tom prices in years to come. Because as KKR warned us back in may, this cri­sis rep­re­sents an inflec­tion point for the firm and a greater oppor­tu­ni­ty than 2008. The sky’s the lim­it! For KKR. The lim­its are much low­er for the rest of us:

    Bloomberg

    KKR Says Coro­n­avirus Cri­sis Will Spur Deal­mak­ing Oppor­tu­ni­ties

    * Exec­u­tives say firm well posi­tioned for uncer­tain­ty ahead
    * KKR saw declines across most of busi­ness­es in first quar­ter

    By Sab­ri­na Willmer
    May 6, 2020, 6:56 AM EDT
    Updat­ed on May 6, 2020, 12:28 PM EDT

    KKR & Co. is pre­dict­ing the coro­n­avirus cri­sis will ulti­mate­ly be anoth­er inflec­tion point for its busi­ness even as its hold­ings took a hit.

    Scott Nut­tall, co-pres­i­dent of KKR, said dur­ing an earn­ings call that the pos­si­bil­i­ties for the firm to expand are even greater now than dur­ing the last finan­cial cri­sis.

    “We find our­selves in the for­tu­nate posi­tion of being ready as a firm this time to not only play defense but also play­ing more offense and we’ve been doing a lot of both over the last sev­er­al weeks,” Nut­tall said.

    The New York-based firm spent about $8 bil­lion across cred­it and equi­ty since the start of the cri­sis, Nut­tall said. And, in a sign there’s an appetite for deals, KKR has raised $10 bil­lion over the last two months.

    KKR exec­u­tives focused on look­ing ahead after the com­pa­ny post­ed declines in the first quar­ter across most of its busi­ness­es. The firm’s pri­vate equi­ty port­fo­lio fell 12%, accord­ing to a state­ment Wednes­day. Glob­al infra­struc­ture had the only gain, an 18% increase, helped by an asset sale from the sec­ond fund.

    The major pri­vate equi­ty firms suf­fered in the first quar­ter along with most oth­er assets man­agers as the dam­age inflict­ed by the pan­dem­ic spread to all cor­ners of the mar­ket. Apol­lo Glob­al Man­age­ment Inc., Car­lyle Group Inc. and Black­stone Group Inc. saw depre­ci­a­tion last quar­ter across most of their busi­ness seg­ments. Apol­lo also faces the prospect of hav­ing to hand back ear­li­er prof­its from sev­er­al funds.

    The poten­tial for a glob­al reces­sion threat­ens to slow future sales of busi­ness­es as well as fundrais­ing efforts by asset man­agers. Even so, pri­vate equi­ty firms are sit­ting on about $1.5 tril­lion of cap­i­tal and in sev­er­al cas­es look­ing to gath­er more to invest in poten­tial bar­gains cre­at­ed by mar­ket tur­moil.

    KKR is find­ing oppor­tu­ni­ties to pro­vide liq­uid­i­ty to strug­gling com­pa­nies, said Nut­tall. As an exam­ple he cit­ed pub­lic and pri­vate com­pa­nies that are look­ing to sell non-core sub­sidiaries to delever. The firm is also work­ing with sev­er­al of its port­fo­lio com­pa­nies that are look­ing to grow and con­sol­i­date through acqui­si­tions. While there was a pause in the deal pipeline at the start of the cri­sis, oppor­tu­ni­ties have picked up, par­tic­u­lar­ly in Asia.

    Some of KKR’s key hold­ings, includ­ing finan­cial tech­nol­o­gy com­pa­ny Fis­erv Inc. — its largest bal­ance sheet invest­ment — had dou­ble-dig­it declines dur­ing the quar­ter. The S&P 500 Index fell 20%, its biggest quar­ter­ly drop in more than a decade.

    Port­fo­lio com­pa­nies squeezed by the pan­dem­ic include Envi­sion Health­care Corp., one of the largest physi­cian-staffing firms in the U.S. It has been fac­ing steep loss­es after elec­tive surg­eries were stopped because of the virus.

    But like its peers, KKR is try­ing to take advan­tage of the mar­ket stress. Its cred­it busi­ness pur­chased dis­count­ed secured debt in resilient sec­tors such as telecom­mu­ni­ca­tions and nat­ur­al-gas dis­tri­b­u­tion. The firm also reboot­ed an unsuc­cess­ful cred­it fund in hopes that it can raise mon­ey to buy loans and bonds affect­ed by the out­break.

    The firm brought in $7.1 bil­lion dur­ing the quar­ter, lift­ing its dry pow­der to $58 bil­lion, and exec­u­tives said KKR plans to raise mon­ey for three of its largest funds in the com­ing months.

    KKR rose 3% at 12:26 p.m. in New York. The stock was down 16% this year through Tues­day, trail­ing Apol­lo and Black­stone but far­ing bet­ter than Car­lyle.

    ...

    ————

    “KKR Says Coro­n­avirus Cri­sis Will Spur Deal­mak­ing Oppor­tu­ni­ties” by Sab­ri­na Willmer; Bloomberg; 05/06/2020

    “Scott Nut­tall, co-pres­i­dent of KKR, said dur­ing an earn­ings call that the pos­si­bil­i­ties for the firm to expand are even greater now than dur­ing the last finan­cial cri­sis.

    It’s the great­est oppor­tu­ni­ty in his­to­ry. For KKR. Every­one else is basi­cal­ly f*cked but KKR and the rest of the pri­vate equi­ty giants are doing juu­ust fii­ine. Bet­ter than ever, in fact. Note how KKR raised $10 bil­lion alone from March through May! When the pan­dem­ic was just get­ting under­way. Heads we win. Tails you lose:

    ...
    The New York-based firm spent about $8 bil­lion across cred­it and equi­ty since the start of the cri­sis, Nut­tall said. And, in a sign there’s an appetite for deals, KKR has raised $10 bil­lion over the last two months.
    ...

    And note how KKR was “find­ing oppor­tu­ni­ties to pro­vide liq­uid­i­ty to strug­gling com­pa­nies.” It was­n’t with low-inter­est loans. It was from com­pa­nies sell­ing off sub­sidiaries to KKR. That’s how the com­pa­ny is pro­vid­ing liq­uid­i­ty:

    ...
    The poten­tial for a glob­al reces­sion threat­ens to slow future sales of busi­ness­es as well as fundrais­ing efforts by asset man­agers. Even so, pri­vate equi­ty firms are sit­ting on about $1.5 tril­lion of cap­i­tal and in sev­er­al cas­es look­ing to gath­er more to invest in poten­tial bar­gains cre­at­ed by mar­ket tur­moil.

    KKR is find­ing oppor­tu­ni­ties to pro­vide liq­uid­i­ty to strug­gling com­pa­nies, said Nut­tall. As an exam­ple he cit­ed pub­lic and pri­vate com­pa­nies that are look­ing to sell non-core sub­sidiaries to delever. The firm is also work­ing with sev­er­al of its port­fo­lio com­pa­nies that are look­ing to grow and con­sol­i­date through acqui­si­tions. While there was a pause in the deal pipeline at the start of the cri­sis, oppor­tu­ni­ties have picked up, par­tic­u­lar­ly in Asia.
    ...

    .
    Did things turn out the way KKR was pre­dict­ing back in May? The two straight quar­ters of record invest­ments KKR just announced give us our answer:

    Bloomberg

    KKR Invests Record $6.2 Bil­lion With Tur­moil Spurring Deals

    * Firm’s assets under man­age­ment hit $234 bil­lion as of Sept. 30
    * KKR is on track for its most active fundrais­ing year ever

    By Melis­sa Karsh
    Octo­ber 30, 2020, 6:50 AM EDT Updat­ed on Octo­ber 30, 2020, 10:18 AM EDT

    KKR & Co. deployed a record amount of cap­i­tal in the third quar­ter, tak­ing advan­tage of tur­moil spurred by the Covid-19 pan­dem­ic.

    The firm invest­ed about $6.2 bil­lion in mar­kets across pri­vate equi­ty, infra­struc­ture and real estate, New York-based KKR said Fri­day in a state­ment. That fig­ure sur­passed its pre­vi­ous peak of $5.5 bil­lion in the sec­ond quar­ter.

    This year “is on pace to be the most active deploy­ment and fundrais­ing year in our his­to­ry,” co-Chief Exec­u­tive Offi­cers Hen­ry Kravis and George Roberts said in the state­ment.

    KKR has been one of the industry’s busiest deal­mak­ers dur­ing the pan­dem­ic and has said the cri­sis will be an inflec­tion point for its busi­ness. In July, the firm agreed to buy retire­ment and life insur­ance provider Glob­al Atlantic Finan­cial Group in a deal that could be val­ued at more than $4 bil­lion, giv­ing it a major pres­ence in the insur­ance indus­try and adding long-term cap­i­tal.

    ...

    KKR shares slid 0.3% to $34.69 at 10:12 a.m. in New York. They had climbed about 21% this year through Thurs­day.

    ————

    “KKR Invests Record $6.2 Bil­lion With Tur­moil Spurring Deals” by Melis­sa Karsh; Bloomberg; 10/30/2020

    “This year “is on pace to be the most active deploy­ment and fundrais­ing year in our his­to­ry,” co-Chief Exec­u­tive Offi­cers Hen­ry Kravis and George Roberts said in the state­ment.”

    Well, we can’t say they did­n’t warn us. From the begin­ning of the out­break it was clear this was a his­toric oppor­tu­ni­ty for the pri­vate equi­ty industry...just as every eco­nom­ic cri­sis is an oppor­tu­ni­ty for the indus­try. This cri­sis just hap­pens to be his­toric. Heads we his­tor­i­cal­ly win. Tails you his­tor­i­cal­ly lose. But don’t wor­ry, now that we’ve ruth­less­ly cap­tured every­thing we’re final­ly learn­ing to have empa­thy, so we’ll feel extra bad as we squeeze you rubes for every­thing you have.

    Posted by Pterrafractyl | October 30, 2020, 5:49 pm
  6. Pres­i­dent Trump has been tout­ing the third quar­ter GDP growth num­bers that just came out a cou­ple of days ago. And it’s no sur­prise he would be cel­e­brat­ing the num­bers. There was, as expect­ed, a record 33.1% annu­al­ized GDP growth in the quar­ter, the kind of num­ber that could be con­sid­ered beyond spec­tac­u­lar if we were to ignore the con­text of the the num­ber and the fact that it was pre­ced­ed by a record con­trac­tion of 32.9% in the sec­ond quar­ter. And as the fol­low­ing Politi­co excerpt men­tions, when you first con­tract an econ­o­my by 32.9%, a 33.1% rebound does­n’t actu­al­ly get you back to where you were before. You would need 46% growth for that and a 63% gain would have been required in the third quar­ter to get the GDP back to the lev­el where it like­ly would have been if COVID nev­er hap­pened and pre­vi­ous growth rates were main­tained. It’s a sign of how deep an eco­nom­ic hole the US finds itself in the midst of this elec­tion.

    But as the fol­low­ing arti­cle also notes, if there’s one thing that made that record 33.1% annu­al­ized pos­si­ble in the third quar­ter it was the tril­lions in fed­er­al stim­u­lus. That was the cru­cial ingre­di­ent. A cru­cial ingre­di­ent that has been sys­tem­at­i­cal­ly blocked from hap­pen­ing again by the Repub­li­can-con­trolled Sen­ate, which chose to focus on con­firm­ing Amy Coney Bar­rett to the Supreme Court instead of mak­ing a sec­ond stim­u­lus bill hap­pen. Recall how we’re already hear­ing from Repub­li­can insid­ers that pri­or­i­tiz­ing of Bar­ret­t’s Supreme Court nom­i­na­tion over the stim­u­lus bill was sim­ply out of desire to fill that seat. It was also an oppor­tunis­tic ploy that allowed the Sen­ate GOP to ‘keep its pow­der dry’ should Joe Biden win the White House in antic­i­pa­tion of the GOP revert­ing back to its aus­ter­i­ty-focused fix­a­tion on cut­ting fed­er­al spend­ing at all costs, just like it did fol­low­ing the 2008 finan­cial cri­sis.

    It’s one of the many under­ap­pre­ci­at­ed sto­ries of the this elec­tion cycle : the GOP Sen­ate has already shift­ed into eco­nom­ic sab­o­tage mode, which is why econ­o­mists aren’t expect­ing more spec­tac­u­lar (and need­ed) quar­ters com­ings up:

    Politi­co

    GDP rebounds at record pace, but dark clouds reap­pear

    Trump got a great eco­nom­ic report to use on the cam­paign trail. But behind the sur­face, giant risks are loom­ing.

    By BEN WHITE

    10/29/2020 04:30 AM EDT

    Updat­ed: 10/29/2020 11:02 AM EDT

    Pres­i­dent Don­ald Trump got a juicy head­line to brag about with a report Thurs­day show­ing the U.S. econ­o­my rebound­ed in the third quar­ter at a 33.1 per­cent annu­al­ized rate, par­tial­ly recov­er­ing from the col­lapse in eco­nom­ic out­put ear­li­er this year.

    The Com­merce Department’s report Thurs­day marked the fastest pace of annu­al­ized growth on record just after thworst drope worst drop on record. But it still left U.S. eco­nom­ic out­put below pre-pan­dem­ic lev­els as dark clouds reap­pear with anoth­er surge in coro­n­avirus cas­es this month, slam­ming mar­kets just ahead of Elec­tion Day.

    Beneath the eye-pop­ping head­line — and the cam­paign ral­ly applause lines cer­tain to flow from it — the eco­nom­ic pic­ture looks far less sun­ny for busi­ness­es and work­ers alike. Investors are grow­ing increas­ing­ly wor­ried about dark­er days ahead with mar­kets tum­bling on a sharp spike in Covid-19 cas­es in the U.S. and Europe and the lack of fresh res­cue mon­ey com­ing out of Wash­ing­ton.

    Even the 33.1 per­cent annu­al­ized gain — a 7.4 per­cent jump in the third quar­ter from the sec­ond quar­ter — did not get the U.S. econ­o­my back to where it was at the end of the first quar­ter. And it would take a far big­ger jump to get the econ­o­my back to where it would have been had Covid-19 not slammed the coun­try at all.

    “From a num­bers per­spec­tive, you would need 46 per­cent growth in the third quar­ter just to get back to where we were,” said Ian Shep­herd­son, chief econ­o­mist at Pan­theon Macro­eco­nom­ics. Get­ting the econ­o­my back to where it would have been with­out Covid-19 would have tak­en a 63 per­cent gain in the third quar­ter.

    “To look at this more sub­stan­tive­ly, what these num­bers tell you is fis­cal pol­i­cy works,” Shep­herd­son said. “The fed­er­al gov­ern­ment bor­rowed a ton of mon­ey and sent it out to indi­vid­u­als and busi­ness­es and it worked. Now we don’t have those things, and the expec­ta­tion is growth will be much weak­er in the fourth quar­ter and the virus pic­ture is already much worse. We are in dan­ger of falling into a deep hole again.”

    Even includ­ing the rebound, the econ­o­my shrank 2.9 per­cent from the third quar­ter of 2019 to the third quar­ter of this year. The decline is among the largest record­ed in reces­sions over the last half-cen­tu­ry, eclipsed only by the 3.9 per­cent decline hit in the sec­ond quar­ter of 2009 dur­ing the finan­cial cri­sis and sub­se­quent Great Reces­sion.

    Econ­o­mists and Wall Street ana­lysts now expect much slow­er growth in the fourth quar­ter and ear­ly next year than they pre­vi­ous­ly expect­ed, giv­en that the approx­i­mate­ly $4 tril­lion in fed­er­al stim­u­lus spend­ing that propped up con­sumers and busi­ness­es through the end of the sum­mer has large­ly fad­ed. This means it will like­ly take months or years — depend­ing on the direc­tion of the virus — to get back to where the econ­o­my would have been with­out Covid-19..

    Thursday’s num­bers, if tak­en out of con­text, tell us noth­ing about the road ahead. The surge in new virus cas­es is already lead­ing to more restric­tions on activ­i­ty that could fur­ther dent the econ­o­my. Restau­rant and trav­el activ­i­ty is once again slid­ing after bounc­ing back ear­li­er this year. Per­ma­nent­ly changed con­sumer behav­ior could also damp­en fur­ther recov­ery.

    Much of the gain in the third quar­ter came from increas­es in the ser­vices por­tion of per­son­al con­sump­tion with health care and food ser­vices lead­ing the advance as busi­ness­es con­tin­ued to adapt to a social­ly dis­tanced land­scape.

    High-con­tact indus­tries includ­ing air­lines and restau­rants remain less than halfway back to where they were before the virus hit. This sug­gests it will take sig­nif­i­cant improve­ments in the tra­jec­to­ry of Covid-19 and the devel­op­ment of vac­cines and oth­er treat­ments to ful­ly heal the econ­o­my.

    It also shows just how pow­er­ful­ly the injec­tions of fed­er­al cash into people’s pock­ets over the spring and sum­mer con­tributed to the rebound through increased spend­ing. For now at least, that cash is no longer flow­ing. Mean­while, the labor mar­ket remains deeply dam­aged with 751,000 Amer­i­cans seek­ing ini­tial unem­ploy­ment ben­e­fits last week, a relent­less­ly lofty fig­ure that remains above the all-time high of around 700,000 hit back in the 1980s.

    “Con­sumers and busi­ness­es led the way to the fastest peri­od for eco­nom­ic growth on record,” said Ben Ayers, senior econ­o­mist at Nation­wide Insur­ance, in a research note. “While this is an extreme­ly fast start to the next expan­sion, the lev­el of real GDP remains 3.5 per­cent below the peak from the fourth quar­ter of 2019.”

    Trump, who has repeat­ed­ly not­ed on the cam­paign trail that he would get this big GDP num­ber right before the elec­tion, cel­e­brat­ed just that on Thurs­day morn­ing. “GDP num­ber just announced,” he wrote on Twit­ter. “Biggest and Best in the His­to­ry of our Coun­try, and not even close. … So glad this great GDP num­ber came out before Novem­ber 3rd.”

    Trump aides in the White House and cam­paign hit the air­waves and social media to ampli­fy the GDP report. “I think it exceed­ed all expec­ta­tions,” Trump eco­nom­ic advis­er Lar­ry Kud­low said on Fox News Thurs­day morn­ing. “It is a record high since the data going back to 1947. We’ve nev­er had any­thing remote­ly close to this.”

    While that’s true, it’s also true that the surge fol­lowed the equal­ly his­toric 31 per­cent decline in the sec­ond quar­ter. Because the third quar­ter start­ed from such a low base, even an increase slight­ly larg­er than the 31 per­cent decline would not have returned eco­nom­ic activ­i­ty to where it was at the end of the first quar­ter.

    Trump faces anoth­er conun­drum on employ­ment num­bers. He reg­u­lar­ly boasts of record job cre­ation — more than 11 mil­lion in the last sev­er­al months. And they are, in fact, record num­bers. But they fol­lowed a record loss of more than 22 mil­lion jobs dur­ing the ear­ly stages of the Covid-19 cri­sis. The U.S. is only around half way to get­ting all those jobs back. And in brag­ging about the num­bers, Trump risks look­ing out of touch with more than 23 mil­lion Amer­i­cans still on some form of unem­ploy­ment assis­tance.

    This prob­lem is reflect­ed in Trump’s approval num­bers on the econ­o­my, once a clear advan­tage. Demo­c­ra­t­ic nom­i­nee Joe Biden has now erased that advan­tage and even took a very nar­row lead on the econ­o­my as an issue in the lat­est POLITICO/Morning Con­sult poll.

    The num­bers sug­gest that vot­ers are not swayed by juicy-sound­ing head­line num­bers that do not reflect the real­i­ty many Amer­i­cans are liv­ing through, espe­cial­ly those in low­er income brack­ets not able to work from home. Democ­rats are already try­ing to rebut any Trump brag­ging over Thursday’s GDP num­ber.

    ...

    Among the biggest risks now, beyond the sharp rise in Covid-19 cas­es, is the lack of new fed­er­al stim­u­lus keep­ing a floor under the econ­o­my while the nation strug­gles with the health cri­sis.

    “Broad­ly speak­ing, it was a com­bi­na­tion of aggres­sive mon­e­tary stim­u­lus and fis­cal sup­port that pro­vid­ed a bridge for an econ­o­my try­ing to make it to the oth­er side of a chasm cre­at­ed by a shock that shut down large por­tions of the econ­o­my vir­tu­al­ly overnight ear­li­er this year,” said Jim Baird, chief invest­ment offi­cer at wealth man­age­ment firm Plante Moran, in a note to clients. “Although the recov­ery is on track, both fis­cal and mon­e­tary pol­i­cy sup­port will be need­ed for some time to con­tin­ue to sup­port an econ­o­my that remains vul­ner­a­ble.”

    ————-

    “GDP rebounds at record pace, but dark clouds reap­pear” by BEN WHITE; Politi­co; 10/29/2020

    “From a num­bers per­spec­tive, you would need 46 per­cent growth in the third quar­ter just to get back to where we were,” said Ian Shep­herd­son, chief econ­o­mist at Pan­theon Macro­eco­nom­ics. Get­ting the econ­o­my back to where it would have been with­out Covid-19 would have tak­en a 63 per­cent gain in the third quar­ter.

    It’s basic math: If your GDP drops by a third, you’re going to need to grow by a lot more than a third (50%) to get back to what you were and even high­er to get back to where you should have been if growth had con­tin­ued. There’s A LOT more ground to be made up. Ground that won’t be made up with­out the fur­ther stim­u­lus the GOP is already block­ing. It’s why the major point of cel­e­bra­tion with these new GDP growth num­bers is real­ly a cel­e­bra­tion that fis­cal pol­i­cy works. We already knew but bit it’s a major con­fir­ma­tion. Just hav­ing the fed­er­al gov­ern­ment give every­one mon­ey is actu­al­ly very sound pol­i­cy in a sit­u­a­tion like this. Hooray! That’s a good thing! Too bad the Repub­li­cans in the Sen­ate won’t allow us to keep doing this great pol­i­cy.

    So when we read that econ­o­mists warn that the biggest risk fac­ing the US econ­o­my right now is the risk of inad­e­quate fis­cal stim­u­lus bills, they’re telling us that the biggest risk to the econ­o­my is the Repub­li­can hold­ing onto the Sen­ate:

    ...
    “To look at this more sub­stan­tive­ly, what these num­bers tell you is fis­cal pol­i­cy works,” Shep­herd­son said. “The fed­er­al gov­ern­ment bor­rowed a ton of mon­ey and sent it out to indi­vid­u­als and busi­ness­es and it worked. Now we don’t have those things, and the expec­ta­tion is growth will be much weak­er in the fourth quar­ter and the virus pic­ture is already much worse. We are in dan­ger of falling into a deep hole again.”

    ...

    Econ­o­mists and Wall Street ana­lysts now expect much slow­er growth in the fourth quar­ter and ear­ly next year than they pre­vi­ous­ly expect­ed, giv­en that the approx­i­mate­ly $4 tril­lion in fed­er­al stim­u­lus spend­ing that propped up con­sumers and busi­ness­es through the end of the sum­mer has large­ly fad­ed. This means it will like­ly take months or years — depend­ing on the direc­tion of the virus — to get back to where the econ­o­my would have been with­out Covid-19..

    ...

    It also shows just how pow­er­ful­ly the injec­tions of fed­er­al cash into people’s pock­ets over the spring and sum­mer con­tributed to the rebound through increased spend­ing. For now at least, that cash is no longer flow­ing. Mean­while, the labor mar­ket remains deeply dam­aged with 751,000 Amer­i­cans seek­ing ini­tial unem­ploy­ment ben­e­fits last week, a relent­less­ly lofty fig­ure that remains above the all-time high of around 700,000 hit back in the 1980s.

    ...

    Among the biggest risks now, beyond the sharp rise in Covid-19 cas­es, is the lack of new fed­er­al stim­u­lus keep­ing a floor under the econ­o­my while the nation strug­gles with the health cri­sis.

    “Broad­ly speak­ing, it was a com­bi­na­tion of aggres­sive mon­e­tary stim­u­lus and fis­cal sup­port that pro­vid­ed a bridge for an econ­o­my try­ing to make it to the oth­er side of a chasm cre­at­ed by a shock that shut down large por­tions of the econ­o­my vir­tu­al­ly overnight ear­li­er this year,” said Jim Baird, chief invest­ment offi­cer at wealth man­age­ment firm Plante Moran, in a note to clients. “Although the recov­ery is on track, both fis­cal and mon­e­tary pol­i­cy sup­port will be need­ed for some time to con­tin­ue to sup­port an econ­o­my that remains vul­ner­a­ble.”
    ...

    But as the fol­low­ing Reuters piece also reminds us, it’s not enough to imple­ment poli­cies that sim­ply rebound the GDP. Where that GDP rebound takes place and who ben­e­fits is far more impor­tant. After all, if we have a rebound where the super-rich and pri­vate equi­ty are the pri­ma­ry ben­e­fi­cia­ries while the gen­er­al pub­lic lan­guish­es that would obvi­ous­ly be an mega-dis­as­ter, regard­less of how high those GDP growth num­bers end up being. In fact, one could argue that a full GDP rebound that end­ed up being con­cen­trat­ed in just bank accounts of the rich would be the worst pos­si­ble out­come. A rebound that makes Amer­i­ca’s wealth divide even more of chasm — the ‘K‑shaped’ recov­ery sce­nario where the rich get rich­er and the poor get poor­er and stay poor­er — isn’t real­ly a rebound. It’s eco­nom­ic plun­der­ing. And thus far, the cur­rent rebound that Trump is ask­ing us to cel­e­brate is look­ing a lot like a ‘V’ for the very rich and an ‘E’ recov­ery for every­one else, if ‘E’ stands for an extend­ed eco­nom­ic emer­gency and evic­tions:

    Reuters

    The great diver­gence: U.S. COVID-19 econ­o­my has deliv­ered lux­u­ry hous­es for some, evic­tions for oth­ers

    By Michelle Con­lin
    Octo­ber 31, 2020 6:09 AM Updat­ed

    (Reuters) — When the tem­per­a­ture dipped near freez­ing in Colum­bus, Ohio in mid-Octo­ber, the chil­dren had no heat. The gas had been shut off in their apart­ment for non­pay­ment. DaMir Cole­man, 8, and his broth­er, KyMir, 4, warmed them­selves in front of the elec­tric oven.

    The pow­er, too, was set to be dis­con­nect­ed. Soon there might be no oven, no lights and no inter­net for online school­ing. The boys’ moth­er, Shanell McGee, already had her cell phone switched off and feared she could soon face evic­tion from their $840-a-month apart­ment. The run­down unit con­sumes near­ly half her wages from her job as a med­ical assis­tant at a clin­ic, where she works full-time but gets no health ben­e­fits.

    Just 14 miles north­west of McGee’s neigh­bor­hood, Kiki Kull­man is hav­ing one of the best years of her life.

    The real-estate busi­ness she runs with her fam­i­ly just sold the high­est-priced house in its his­to­ry: a 13,000-square-foot estate, list­ed for $4.5 mil­lion, that came with an ele­va­tor and a clas­sic-car show­room. And in late Octo­ber, Kull­man closed on a home of her own — a $645,000 three-sto­ry Colo­nial, paint­ed a state­ly white with a front door flanked by columns, a pleas­ant place for her two-year-old twin boys to grow up.

    Colum­bus exem­pli­fies the eco­nom­ic split ani­mat­ing America’s coro­n­avirus cri­sis.

    Pro­fes­sion­als like Kull­man are thriv­ing, thanks in part to pan­dem­ic-induced poli­cies by the Fed­er­al Reserve that have buoyed the stock mar­ket and fueled indus­tries such as real estate with record-low inter­est rates.

    For many low­er-wage work­ers, mean­while, the cri­sis has deliv­ered a cru­el shove, top­pling fam­i­lies like the McGees who were already liv­ing on the finan­cial edge. Nation­wide, mil­lions of peo­ple includ­ing hotel work­ers, retail clerks, wait­ers, bar­tenders, air­line employ­ees and oth­er ser­vice work­ers have lost jobs as COVID-19 fears crushed con­sumer demand.

    Econ­o­mists call this phe­nom­e­non a “K‑shaped” recov­ery, in which those on the top con­tin­ue to climb upward while those on the bot­tom see their prospects wors­en.

    Ned Hill, pro­fes­sor of eco­nom­ic devel­op­ment at Ohio State Uni­ver­si­ty, called that down­ward slope of the K “fat and broad and long and ugly look­ing.” He said there’s lit­tle hope for a return to nor­mal as long as coro­n­avirus con­tin­ues to spread unabat­ed in the Unit­ed States. In Ohio, COVID-19 cas­es are soar­ing and hit a record of 3,590 new cas­es on Oct. 29. In Colum­bus alone, at least 643 peo­ple have died.

    “People’s jobs and incomes have dis­ap­peared, and they aren’t com­ing back until people’s threat of dying from the virus dis­si­pates,” Hill said. “That’s it.”

    Locat­ed in the cen­ter of Ohio, about halfway between Pitts­burgh and Indi­anapo­lis, Colum­bus is a city of some 900,000 peo­ple. Home to Ohio State Uni­ver­si­ty and the state’s cap­i­tal, its employ­ment is root­ed in sec­tors like hos­pi­tal­i­ty, edu­ca­tion and health, gov­ern­ment, and pro­fes­sion­al and busi­ness ser­vices.

    That mix has allowed it to fare bet­ter dur­ing the cri­sis than some oth­er Rust Belt cities that are more heav­i­ly depen­dent on man­u­fac­tur­ing. Columbus’s Sep­tem­ber unem­ploy­ment rate of 7.5% was low­er than the nation­al aver­age of 7.9%. But like the rest of the Unit­ed States, its front-line and mod­est­ly skilled work­ers have been slammed the hard­est.

    The diver­gence of for­tune can be seen in the city’s hous­ing mar­ket.

    For those with means, like the clients of real estate agent Kull­man, low inter­est rates have trans­lat­ed into cheap­er mort­gages, allow­ing them to afford big­ger hous­es. Colum­bus is just one of four U.S. cities — along with Cincin­nati, Kansas City and Indi­anapo­lis — where hous­es are sell­ing in less than five days on aver­age, accord­ing to real estate research firm Zil­low.

    “It is crazy to see in Colum­bus the mil­lion-plus price point get­ting mul­ti­ple offers and all-cash bids,” said Kull­man, 36.

    For renters ham­mered by the down­turn, mean­while, hous­ing is a pre­car­i­ous busi­ness.

    Dur­ing the ear­ly days of the pan­dem­ic as Ohio’s res­i­dents shel­tered in place, evic­tions in Colum­bus fell, thanks to local and fed­er­al pro­tec­tions to keep renters in their homes. But since Sep­tem­ber, 1,774 evic­tion cas­es have been filed, far sur­pass­ing sum­mer lev­els, accord­ing to Prince­ton University’s Evic­tion Lab, which tracks evic­tions. The Greater Colum­bus Con­ven­tion Cen­ter now serves as a bustling evic­tion court.

    Those fil­ings came despite a Sept. 4 decree by the U.S. Cen­ters for Dis­ease Con­trol and Pre­ven­tion (CDC) ban­ning all evic­tions nation­wide until Jan. 1 to pre­vent a surge of new­ly home­less peo­ple from con­tract­ing and spread­ing the coro­n­avirus. Under the mora­to­ri­um, land­lords can­not evict ten­ants who can no longer pay rent because their earn­ings have been affect­ed by COVID-19.

    But land­lords are not required to inform ten­ants of these pro­tec­tions and are free to file evic­tion law­suits. Only renters who know about the CDC ban, qual­i­fy for it and take legal action to assert their rights can stop their evic­tions. Among the 24 cities the Evic­tion Lab tracks, Colum­bus is one of the few where evic­tions did not fall after the ban.

    The fall­out can be seen across Colum­bus. The local pot of mon­ey from fed­er­al relief to help cash-strapped ten­ants pay rent was tapped out in Sep­tem­ber. Food banks are run­ning low on sta­ples, and home­less shel­ters are at capac­i­ty, accord­ing to com­mu­ni­ty advo­cates.

    Util­i­ty shut-offs have surged to the point that lawyers for the Legal Aid Soci­ety of Colum­bus have resort­ed to fil­ing per­son­al bank­rupt­cy peti­tions for ten­ants to keep their heat, lights and water on.

    If present con­di­tions per­sist, and with­out a new round of fed­er­al relief, as many as 40 mil­lion peo­ple could be at risk of evic­tion in com­ing months, accord­ing to the Aspen Insti­tute, a think tank. In a typ­i­cal year, 3.6 mil­lion evic­tion cas­es are filed.

    ‘BEING POOR COSTS YOU’

    Even before the pan­dem­ic, McGee, 29, was strug­gling finan­cial­ly. In 2014, she bought a 2008 Chevy Mal­ibu off a cor­ner lot charg­ing 22% inter­est. She said the junker stopped run­ning long ago, so she stopped pay­ing in 2016. McGee said she offered to return the vehi­cle, which has 176,475 miles on it, but the lender wouldn’t take it back.

    In March, McGee’s live-in boyfriend lost his job at a fast-food restau­rant as Ohio went on lock­down, cut­ting their household’s income. In August, he was diag­nosed with COVID-19 and the entire fam­i­ly had to quar­an­tine. That same week, McGee got a call from her employ­er, telling her that her lender had got­ten a court order to gar­nish 25% of her wages to repay more than $10,000, with penal­ties and late fees, that she still owed on the car.

    That left her with take-home pay of $728 every two weeks. She couldn’t afford school sup­plies for her sons and had to bor­row gas mon­ey from her mom to get to work in her boyfriend’s car.

    “It was heart­break­ing, it was every­thing all at once,” said McGee, who wears rec­tan­gu­lar glass­es and has a broad, easy smile.

    She sought help from Paul Bryson, an attor­ney with the Legal Aid Soci­ety who filed a bank­rupt­cy peti­tion in Octo­ber to get McGee’s util­i­ties turned back on and the gar­nish­ment frozen. The court approved the peti­tion, but not before McGee’s lender took $1,023 of her wages.

    “Being poor costs you a lot of mon­ey,” Bryson said. “Even before the pan­dem­ic, somebody’s entire life falls apart when they get a gar­nish­ment. And now? If noth­ing is done, we are just going to have a lot of peo­ple on the street.”

    ...

    LIVING THE DREAM

    For years, Kull­man, the real estate agent, fan­ta­sized about liv­ing on Bed­ford Road, a cov­et­ed address in the Colum­bus sub­urbs.

    In the region’s posh­est neigh­bor­hoods, sump­tu­ous hous­es that make per­fect pan­dem­ic com­pounds, with ameni­ties like his-and-hers home offices and roomy base­ments for online school­ing, can sell in a day, often with mul­ti­ple offers in all-cash deals well above the ask­ing price. Kull­man said some shop­pers are sub­mit­ting bids with­out ever tour­ing a house. The most des­per­ate are agree­ing to “no-rem­e­dy” inspec­tions, mean­ing they won’t ask for con­ces­sions if the inspec­tion turns up a major defect. Oth­ers, she said, have autho­rized “crazy esca­la­tion claus­es with no cap.” In real estate par­lance, that means they will beat any oth­er offer, no mat­ter how high the price.

    “You have to sign away your life to get the house you want,” Kull­man said.

    In August, Kull­man, who runs the Kull­man Group at Street Sotheby’s Inter­na­tion­al with her hus­band, father and sis­ter, found out that a cou­ple who lived on Bed­ford Road were about to move. She made a bid before the house hit the mar­ket and the own­ers accept­ed. The Colo­nial is right next door to her sister’s home; their kids will share back­yards.

    Kull­man is aware of her good for­tune amidst the pan­dem­ic, and the mean hand that coro­n­avirus has dealt to the city’s most vul­ner­a­ble.

    Her hus­band has been doing busi­ness with a land­lord who’s sell­ing a port­fo­lio of homes in Columbus’s low-income neigh­bor­hood of Lin­den. Non-pay­ing ten­ants in those prop­er­ties have been get­ting evic­tion notices.

    “It is night and day, what we see here,” Kull­man said. “Which is not what you would expect in COVID. It’s sad but it’s true.”

    ————-

    “The great diver­gence: U.S. COVID-19 econ­o­my has deliv­ered lux­u­ry hous­es for some, evic­tions for oth­ers” by Michelle Con­lin; Reuters; 10/31/2020

    If present con­di­tions per­sist, and with­out a new round of fed­er­al relief, as many as 40 mil­lion peo­ple could be at risk of evic­tion in com­ing months, accord­ing to the Aspen Insti­tute, a think tank. In a typ­i­cal year, 3.6 mil­lion evic­tion cas­es are filed.”

    If we can’t expect new fed­er­al fis­cal stim­u­lus, what can we expect? 40 mil­lion evic­tions in com­ing months, that’s what. And all those evic­tions will be tak­ing place while the high end hous­ing mar­ket remains so hot peo­ple are buy­ing hous­es sight unseen. A ‘night and day’ recov­ery, where it’s ‘Morn­ing in Amer­i­ca’ for the wealthy, and just ‘Mourn­ing’ for the rest of us:

    ...
    For years, Kull­man, the real estate agent, fan­ta­sized about liv­ing on Bed­ford Road, a cov­et­ed address in the Colum­bus sub­urbs.

    In the region’s posh­est neigh­bor­hoods, sump­tu­ous hous­es that make per­fect pan­dem­ic com­pounds, with ameni­ties like his-and-hers home offices and roomy base­ments for online school­ing, can sell in a day, often with mul­ti­ple offers in all-cash deals well above the ask­ing price. Kull­man said some shop­pers are sub­mit­ting bids with­out ever tour­ing a house. The most des­per­ate are agree­ing to “no-rem­e­dy” inspec­tions, mean­ing they won’t ask for con­ces­sions if the inspec­tion turns up a major defect. Oth­ers, she said, have autho­rized “crazy esca­la­tion claus­es with no cap.” In real estate par­lance, that means they will beat any oth­er offer, no mat­ter how high the price.

    “You have to sign away your life to get the house you want,” Kull­man said.

    In August, Kull­man, who runs the Kull­man Group at Street Sotheby’s Inter­na­tion­al with her hus­band, father and sis­ter, found out that a cou­ple who lived on Bed­ford Road were about to move. She made a bid before the house hit the mar­ket and the own­ers accept­ed. The Colo­nial is right next door to her sister’s home; their kids will share back­yards.

    Kull­man is aware of her good for­tune amidst the pan­dem­ic, and the mean hand that coro­n­avirus has dealt to the city’s most vul­ner­a­ble.

    Her hus­band has been doing busi­ness with a land­lord who’s sell­ing a port­fo­lio of homes in Columbus’s low-income neigh­bor­hood of Lin­den. Non-pay­ing ten­ants in those prop­er­ties have been get­ting evic­tion notices.

    “It is night and day, what we see here,” Kull­man said. “Which is not what you would expect in COVID. It’s sad but it’s true.”
    ...

    And as long as the Repub­li­cans retain con­trol of the Sen­ate this ‘night and day’ recov­ery is exact­ly what we should con­tin­ue to expect. Regard­less of who wins the White House. Sure, Sen­ate Repub­li­cans will prob­a­bly be a lit­tle less Grinch-like with the fis­cal stim­u­lus if Trump wins the White House only because they won’t be quite as incen­tivized to sab­o­tage the econ­o­my for polit­i­cal rea­sons. But when you’re the GOP — par­ty of, by, and for the preda­to­ry super-rich — only don’t need polit­i­cal rea­sons as a moti­va­tion to sab­o­tage the econ­o­my. The ‘K‑shaped’ nature of cur­rent recov­ery, with the rich get­ting rich­er and the poor get­ting poor­er, is rea­son itself to con­tin­ue the sab­o­tag­ing the econ­o­my. A ‘night and day’ recov­ery is just an exten­sion of the GOP’s long-term ‘trick­le-down’ eco­nom­ic agen­da that’s been car­ried out for decades now. Much like Trump’s tax cut scam with ‘night and day’ ben­e­fits. If the GOP sees an oppor­tu­ni­ty to make the rich rich­er and the poor poor­er that’s not an oppor­tu­ni­ty it’s going to pass up. 40 years of empir­i­cal evi­dence proves this beyond a shad­ow of a doubt. Putting the poors in their place (and fool­ing them into accept­ing it) is kind of the meta-point of the con­tem­po­rary GOP.

    So as we enter the post-Elec­tion peri­od — a peri­od where dis­cus­sion of what a ‘post-Trump’ GOP might look like whether or not Trump wins or los­es the elec­tion — it’s going to be impor­tant to keep in mind that we’re cur­rent­ly all liv­ing in the mid­dle of mere­ly the lat­est exam­ple of why the upcom­ing talk about the nature of a ‘post-Trump’ GOP should real­ly be a dis­cus­sion about a ‘post-GOP’ Amer­i­ca. What kind of coun­try could lib­er­als and con­ser­v­a­tives build togeth­er with­out a major par­ty ded­i­cat­ed to mak­ing the rich rich­er and the poor poor­er? There would still be some sort of con­ser­v­a­tive par­ty, just not one that oper­ates at the behest of bil­lion­aires suf­fer­ing from a finan­cial hoard­ing syn­drome. What kind of coun­try could the US become? It’s a fun thought. A fun, hope­ful­ly not too quaint for 2020, thought.

    Posted by Pterrafractyl | November 1, 2020, 8:52 pm
  7. Here’s a quick sto­ry about the large­ly unrec­og­nized role pri­vate equi­ty firms played in the US 2020 elec­tions. Just a rel­a­tive hand­ful of pri­vate equi­ty. Recall how the US elec­tron­ic voting/tabulating machine indus­try is large­ly an oli­gop­oly con­trolled today by three com­pa­nies. Hart Inter­Civic, Domin­ion, and ES&S. As the fol­low­ing Axios arti­cle points out, all three of these vot­ing sys­tem giants are owned by pri­vate equi­ty. Hart Inter­Civic was pur­chased by Enlight­en­ment Cap­i­tal this sum­mer. Enlight­ment Cap­i­tal’s two lead part­ners have a his­to­ry of sig­nif­i­cant dona­tions to Demo­c­ra­t­ic Par­ty can­di­dates. One of Enlight­en­ment Cap­i­tal’s lead part­ners, Devin Tal­bott, is Strobe Tal­bot­t’s son. Devin used to work the Cohen Group, a mer­chant bank found­ed by for­mer defense sec­re­tary William Cohen.

    ES&S been backed for decades by pri­vate equi­ty firm McCarthy Cap­i­tal, whose cur­rent pres­i­dent and man­ag­ing part­ner has a his­to­ry of Repub­li­can dona­tions. Recall how ES&S was run by Chuck Hagel until he left to run for the Nebraskan US Sen­ate seat in the 1996 elec­tion and he won...and kept shares in ES&S as a sen­a­tor. Old school elec­tion scan­dals of yes­ter­year. Quaint.

    The third mem­ber of the oli­gop­oly is Domin­ion, acquired in mid-2018 by Sta­ple Street Cap­i­tal, a mid-mar­ket buy­out firm co-found­ed by two guys from the Car­lyle Groups. Stephen D. Owens became a Man­ag­ing Direc­tor the Car­lyle Group before co-found­ing Sta­ple Street Cap­i­tal. And Hootan Yaghoobzadeh was a Senior Vice Pres­i­dent at Cer­berus Cap­i­tal and worked at the Car­lyle group before that. Recall how Cer­berus’s founder and CEO, Stephen A Fein­berg, is a major Repub­li­can donor and close Trump ally. Domin­ion bought Diebold’s Pre­mier Elec­tion Sys­tems in 2010. So any ‘bugs’ in Diebold’s vot­ing machine were passed along to Domin­ion.

    So pri­vate equi­ty basi­cal­ly owned and oper­at­ed the elec­tron­ic vot­ing infra­struc­ture that ran the US 2020 elec­tion. Fun fact:

    Axios

    Pri­vate equi­ty dom­i­nat­ed the 2020 elec­tion process

    Dan Pri­mack, author of Pro Rata
    Nov 17, 2020 — Pol­i­tics & Pol­i­cy

    Pri­vate equi­ty dom­i­nat­ed Elec­tion Day. Not in terms of the win­ning can­di­dates, but in terms of the elec­tion process itself.

    Between the lines: The most-uti­lized elec­tion sys­tem and soft­ware com­pa­nies are owned by U.S. pri­vate equi­ty firms. Domin­ion Vot­ing Sys­tems is the best-known of these ven­dors, as it’s become the sub­ject of evi­dence-free con­spir­a­cy the­o­ries.

    * The Cana­da-found­ed and Den­ver-based com­pa­ny was acquired in mid-2018 by Sta­ple Street Cap­i­tal, a mid-mar­ket buy­out firm co-found­ed by Car­lyle Group and Cer­berus vets.

    Hart Inter­Civic is a Texas-based com­pa­ny whose sys­tems were used in some of the Michi­gan and Geor­gia coun­ties where some con­spir­a­cy the­o­rists base­less­ly claim that Domin­ion (not Hart) changed votes from Pres­i­dent Trump to Joe Biden.

    * Enlight­en­ment Cap­i­tal, a Wash­ing­ton, D.C., firm whose two lead part­ners have a his­to­ry of sig­nif­i­cant dona­tions to Demo­c­ra­t­ic Par­ty can­di­dates, pur­chased Hart Inter­Civic from H.I.G. Cap­i­tal this past sum­mer.

    ES&S of Oma­ha was found­ed in 1979, and appears to be the coun­try’s largest mak­er of vot­ing machines.

    * It’s been backed for decades by pri­vate equi­ty firm McCarthy Cap­i­tal, whose cur­rent pres­i­dent and man­ag­ing part­ner has donat­ed to Repub­li­can Par­ty can­di­dates.

    Oth­er cer­ti­fied providers include: Clear Bal­lot Group (Boston-based start­up backed by VC firms like Besse­mer Ven­ture Part­ners), MicroVote (owned by Fideli­ty Nation­al Infor­ma­tion Solu­tions) and Unisyn Vot­ing Solu­tions (owned by an Asian lot­tery group).

    Of note: Axios reached out to the pri­vate equi­ty own­ers of Domin­ion, Hart Inter­Civic, and ES&S. None returned any calls or emails.

    * Domin­ion’s own­er is keep­ing a par­tic­u­lar­ly low pro­file, remov­ing the team, port­fo­lio and con­tact pages from its web­site in recent days.

    ...

    ————

    “Pri­vate equi­ty dom­i­nat­ed the 2020 elec­tion process” by Dan Pri­mack; Axios; 11/17/2020

    “The Cana­da-found­ed and Den­ver-based com­pa­ny was acquired in mid-2018 by Sta­ple Street Cap­i­tal, a mid-mar­ket buy­out firm co-found­ed by Car­lyle Group and Cer­berus vets.”

    That’s who owns Domin­ion Vot­ing Sys­tems. Sta­ple Street Cap­i­tal, a pri­vate equi­ty group co-found­ed by Car­lyle Group and Cer­berus vets. Sta­ple Street and its co-investors who can remain mys­ter­ies thanks to the opaque trans­paren­cy rules for the pri­vate equi­ty indus­try. And the rest of the elec­tron­ic vot­ing machine oli­gop­oly is owned by pri­vate equi­ty too.

    So when Pres­i­dent Trump tweets that Domin­ion cheat­ed against him, it’s a good time to bring up the fact that entire elec­tron­ic vot­ing machine indus­try in the US is dom­i­nat­ed by a pri­vate equi­ty owned oli­gop­oly. And since pri­vate equi­ty is noto­ri­ous­ly opaque, with own­er­ship or investor iden­ti­ties often unclear and writ­ten in a note­book some­where, we can con­fi­dent­ly say that we don’t real­ly know who ulti­mate­ly owns any of the major vot­ing machine com­pa­nies. It’s a pri­vate equi­ty ‘fea­ture’.

    Posted by Pterrafractyl | November 19, 2020, 1:17 am
  8. Here’s a poten­tial­ly great (poten­tial­ly hor­ri­bly great) exam­ple of why the grow­ing reliance of pen­sion funds on pri­vate equi­ty invest­ments is a recipe for dis­as­ter. Well, dis­as­ter for the pub­lic. For the pri­vate equi­ty indus­try’s wealthy investors it’s more a recipe for avoid­ing dis­as­ter by pass­ing that dis­as­ter along to the pub­lic:

    It turns out the grow­ing mega-hack­ing hack­ing scan­dal that his the US gov­ern­ment and thou­sands of cor­po­ra­tions involv­ing Solar­Winds has a pri­vate equi­ty angle. A pri­vate-equi­ty-scam­ming-pub­lic-pen­sions angle. Maybe. Either that or it’s a sto­ry about pri­vate equi­ty investors get­ting incred­i­bly lucky at the expense of a pub­lic pen­sion plan.

    On Decem­ber 7, short­ly before the Solar­Winds hack­ing scan­dal was made pub­lic by the US gov­ern­ment, two major pri­vate equi­ty investors in Solar­Winds sold a $315 mil­lion stake in the com­pa­ny to a Cana­di­an pub­lic pen­sion fund, the Cana­da Pub­lic Pen­sion Plan Invest­ment Board (CPPIB). 10 days after this sale the Solar­Winds stock was already down 15 per­cent. As we’ll see in the sec­ond arti­cle excerpt below, the Solar­sWinds stock is down around 26% this week. The two pri­vate equi­ty firms, Sil­ver Lake and Thoma Bra­vo, owned togeth­er rough­ly 75 per­cent of Solar­Winds at the end up Sep­tem­ber and three mem­bers of each firm sit on Solar­Wind­s’s board, which means these were the pri­ma­ry investors in Solar­Winds who dumped that stock on a pub­lic pen­sion plan right before this melt­down. Both Sil­ver Lake and Thoma Bra­vo sold 5.8 per­cent of their shares in Solar­Winds dur­ing this trans­ac­tion, so it was still only a rel­a­tive­ly small por­tion of their total stake in the firm sold to the CPPIB which is an indi­ca­tion of just how much expo­sure these two pri­vate equi­ty enti­ties have to the Solar­Winds scan­dal.

    How was this ill fat­ed trans­ac­tion orches­trat­ed? Well, it also turns out that the CPPIB has has com­mit­ted $1.7bn to four Sil­ver Lake funds since 2004 and $1.1bn to five Thoma Bra­vo funds since 2014. So these were the same pri­vate equi­ty investors that the CPPIB has been team­ing up with for years and trust­ing to invest CPPIB funds in good faith who basi­cal­ly set the CPPIB to take to cush­ion the finan­cial blow of this hack.

    Of course, Sil­ver Lake and Thoma Bra­vo are claim­ing that they knew noth­ing about the hack when they exe­cut­ed the sale of the stake on Decem­ber 7. It was all just real­ly bad luck for CPPIB and real­ly great luck for Sil­ver Lake and Thoma Bra­vo. Which would also make it a ran­dom coin­ci­dence that Solar­Winds got a new CEO on Dec 9, two days after this stock sale. The time­lines we’re being told is as fol­lows:

    Dec 7: the $315 mil­lion in Solar­Winds stock is sold to CPPIB
    Dec 8: Fire­Eye, the cyber­se­cu­ri­ty firm, first announced that it was hacked.
    Dec 9: Solar­Winds gets a new CEO
    Dec 12: Solar­Winds is informed it was hacked by Fire­Eye
    Dec 14: Solar­Winds pub­licly acknowl­edges it was hacked.

    Based on this time­line, the defense of Sil­ver Lake and Thoma Bra­vo is based on the time­line where Fire­Eye informs Solar­Winds about the hack on Decem­ber 12 and not ear­li­er. Fire­Eye itself claims that it did­n’t inform Solar­Winds until Decem­ber 12, so Fire­Eye is back­ing up Solar­Winds on this time­line. But, again, it sure is inter­est­ing that a new CEO was put in place just three days before Solar­Winds alleged­ly first learned about the hack from Fire­Eye. Also a coin­ci­dence? That’s what we are asked to believe. Heads we win, tails you lose. This only looks bad but there’s a good expla­na­tion:

    The Finan­cial Times

    Pri­vate equi­ty firms sold stake in Solar­Winds days before hack warn­ing
    Sil­ver Lake and Thoma Bra­vo offloaded 5% stake to one of Canada’s biggest pen­sion funds

    Mark Van­de­velde in New York and Kaye Wig­gins in Lon­don
    12/16/2020 1:04 pm

    Pri­vate equi­ty investors in Solar­Winds sold a $315m stake in the soft­ware group to one of their own long­stand­ing finan­cial back­ers, short­ly before the US warned that “nation-state” hack­ers had hijacked one of the company’s prod­ucts.

    The trans­ac­tion reduced the expo­sure of Sil­ver Lake and Thoma Bra­vo to the strick­en soft­ware com­pa­ny days before its share price fell as vul­ner­a­bil­i­ties were dis­cov­ered in a prod­uct that is used by mul­ti­ple fed­er­al agen­cies and almost all For­tune 500 com­pa­nies.

    But the trade could prove embar­rass­ing for Men­lo Park-based Sil­ver Lake and its rival Thoma Bra­vo, which rank among the biggest tech­nol­o­gy-focused pri­vate equi­ty firms in the world.

    ***********

    The firms togeth­er held rough­ly 75 per cent of Solar­Winds at the end of Sep­tem­ber, secu­ri­ties fil­ings show, and three exec­u­tives from each of the pri­vate equi­ty firms sit on SolarWind’s board.

    The two firms sold a por­tion of that stake to Cana­da Pub­lic Pen­sion Plan Invest­ment Board at a price of $21.97 a share in a pri­vate place­ment trans­ac­tion that closed on Decem­ber 7, rep­re­sent­ing a 5 per cent stake in the IT com­pa­ny, secu­ri­ties fil­ings show.

    Solar­Wind shares changed hands at $18.52 on Wednes­day, leav­ing the Cana­di­an pen­sion fund nurs­ing a paper loss of about 15 per cent after less than 10 days.

    Insti­tu­tion­al investors often cul­ti­vate long-term rela­tion­ships with pri­vate equi­ty spon­sors in the hope of receiv­ing side-ben­e­fits such as ear­ly access to new funds and the abil­i­ty to co-invest in deals. CPPIB has com­mit­ted $1.7bn to four Sil­ver Lake funds since 2004 and $1.1bn to five Thoma Bra­vo funds since 2014, accord­ing to data from Pitch­Book.

    In a joint state­ment, the firms said they “were not aware of this poten­tial cyber attack at Solar­Winds pri­or to enter­ing into a pri­vate place­ment to a sin­gle insti­tu­tion­al investor on Decem­ber 7”. CPPIB declined to com­ment on the trans­ac­tion.

    Unlike buy or sell orders that are exe­cut­ed by a stock­bro­ker, sec­ondary pri­vate place­ments are typ­i­cal­ly heav­i­ly nego­ti­at­ed over a peri­od of days or weeks, ana­lysts say.

    *********************

    Such “pri­vate place­ments” can pro­vide large investors with an oppor­tu­ni­ty to pur­chase stock at a dis­count, while allow­ing the sell­er to liq­ui­date a large hold­ing at an agreed price.

    ...

    The US gov­ern­ment issued an emer­gency warn­ing on Sun­day about what appeared to be a sophis­ti­cat­ed cyber espi­onage cam­paign that cen­tred on Ori­on, a piece of its soft­ware used by hun­dreds of thou­sands of organ­i­sa­tions around the world.

    The Pen­ta­gon, the US state depart­ment, all five branch­es of the US mil­i­tary, the NSA, the Depart­ment of Jus­tice and the Office of the Pres­i­dent of the Unit­ed States are among Solar­Winds’ clients, accord­ing to its web­site.

    ————

    “Pri­vate equi­ty firms sold stake in Solar­Winds days before hack warn­ing” by Mark Van­de­velde in New York and Kaye Wig­gins; The Finan­cial Times; 12/16/2020

    “Insti­tu­tion­al investors often cul­ti­vate long-term rela­tion­ships with pri­vate equi­ty spon­sors in the hope of receiv­ing side-ben­e­fits such as ear­ly access to new funds and the abil­i­ty to co-invest in deals. CPPIB has com­mit­ted $1.7bn to four Sil­ver Lake funds since 2004 and $1.1bn to five Thoma Bra­vo funds since 2014, accord­ing to data from Pitch­Book.

    The CPPIB clear­ly trusts Sil­ver Lake and Thoma Bra­vo. Years of invest­ing bil­lions with them demon­strates that trust. So was this mis­placed trust? Or did the Sil­ver Lake and Thoma Bra­vo mere­ly get real­ly, real­ly lucky at the expense of the CPPIB? That’s the big ques­tion sur­round­ing these trades. A ques­tion that comes down to whether or not Solar­Winds real­ly did­n’t have any idea about the hack before the Dec 7 trade. Because if Solar­Winds knew about it, Sil­ver Lake and Thoma Bra­vo must have known too since they each have three exec­u­tives sit­ting on the Solar­Winds board:

    ...
    The firms togeth­er held rough­ly 75 per cent of Solar­Winds at the end of Sep­tem­ber, secu­ri­ties fil­ings show, and three exec­u­tives from each of the pri­vate equi­ty firms sit on SolarWind’s board.

    The two firms sold a por­tion of that stake to Cana­da Pub­lic Pen­sion Plan Invest­ment Board at a price of $21.97 a share in a pri­vate place­ment trans­ac­tion that closed on Decem­ber 7, rep­re­sent­ing a 5 per cent stake in the IT com­pa­ny, secu­ri­ties fil­ings show.
    ...

    But all par­ties involved are assur­ing us that Solar­Winds had no idea about the hack until Fire­Eye informed them on Decem­ber 12, five days after the stock sale. And that includes the CPPIB itself, which released state­ment to Axios on Fri­day express­ing its full con­fi­dence in Sil­ver Lake and Thoma Bra­vo and an expec­ta­tion that the pri­vate equi­ty firms will con­tin­ue to give CPPIB excep­tion­al val­ue going for­ward. So it will be inter­est­ing to see if there’s any mean­ing­ful inves­ti­ga­tion of this poten­tial insid­er trading/client abuse scan­dal because the poten­tial­ly abused client is already con­vinced no inves­ti­ga­tion is nec­es­sary. Heads we win, tails you lose. And we assure you every­thing is above board here:

    Axios

    Solar­Winds denies insid­er trad­ing activ­i­ty ahead of hack rev­e­la­tion

    Dan Pri­mack, author of Pro Rata
    Dec 18, 2020 — Tech­nol­o­gy

    Solar­Winds is at the heart of what might be the most sig­nif­i­cant cyber­se­cu­ri­ty breach in U.S. his­to­ry, as hack­ers used an exploit in its sys­tem to pos­si­bly access every­thing from the Nation­al Nuclear Secu­ri­ty Admin­is­tra­tion to most of the U.S. For­tune 500.

    What’s new: The IT ven­dor is (belat­ed­ly) push­ing back against sug­ges­tions that its two largest investors engaged in insid­er trad­ing ahead of the hack rev­e­la­tions.

    The his­to­ry: Texas-based Solar­Winds was tak­en pri­vate in 2016 for $4.5 bil­lion by pri­vate equi­ty firms Sil­ver Lake and Thoma Bra­vo. It then com­plet­ed an IPO in Octo­ber 2018.

    * In August 2020 Solar­Winds announced plans to hire a new CEO.
    * On Dec. 7, Sil­ver Lake and Thoma Bra­vo sold around $315 mil­lion in Solar­Winds stock to Cana­da Pen­sion Plan Invest­ment Board (CPPIB). The two firms retained equi­ty posi­tions and seats on the Solar­Winds board of direc­tors.
    * On Dec. 8, U.S. cyber­se­cu­ri­ty com­pa­ny Fire­Eye dis­closed that it had been hacked, like­ly by a gov­ern­ment.

    * On Dec. 9, Solar­Winds named its new CEO.
    * On Dec. 14 came reports that both the U.S. Trea­sury and Com­merce Depart­ments had been hacked, with Fire­Eye pub­licly iden­ti­fy­ing Solar­Winds for the first time.
    * Solar­Winds on Dec. 14 acknowl­edged it “has been made aware” of the hack, but declined to say when. One day lat­er, the Wash­ing­ton Post pub­lished a sto­ry ques­tion­ing the stock sales.

    All of which leads us to yes­ter­day, when Solar­Winds put more details on its cal­en­dar.

    * Per an 8‑K fil­ing, Solar­Winds says its CEO was first informed of the sit­u­a­tion, by Fire­Eye, on Dec. 12.
    * Solar­Winds does­n’t say when the board, includ­ing Sil­ver Lake and Thoma Bra­vo reps, were informed, but the impli­ca­tion is that it could­n’t have been before the 12th. If so, the trades were clean and CPPIB sim­ply has a case of awful luck, as Solar­Winds stock is down 26% on the week.

    In a state­ment, the pri­vate equi­ty firms said: “Thoma Bra­vo and Sil­ver Lake were not aware of this poten­tial cyber­at­tack at Solar­Winds pri­or to enter­ing into a pri­vate place­ment to a sin­gle insti­tu­tion­al investor on 12/7.”

    * A CPPIB spokesman declined to com­ment on if the sys­tem was aware of Solar­Winds’ CEO hire when clos­ing its pur­chase.

    The bot­tom line: Expect U.S. secu­ri­ties reg­u­la­tors to trust but ver­i­fy.

    ...

    Update: CPPIB pro­vid­ed Axios with the fol­low­ing state­ment on Fri­day after­noon:

    “Ter­rif­ic part­ners with a long track record of col­lab­o­ra­tion. Real­ly good com­pa­ny and we expect they will con­tin­ue to cre­ate excep­tion­al val­ue along our invest­ment hori­zon.

    To the best of our knowl­edge no one was aware of the hack lead­ing to our cap­i­tal com­mit­ment. Nonethe­less we are always focused on the very best inter­ests of the Fund and we will con­tin­ue to assess the cir­cum­stances for opti­mal cer­tain­ty.”

    ————

    “Solar­Winds denies insid­er trad­ing activ­i­ty ahead of hack rev­e­la­tion” by Dan Pri­mack; Axios; 12/18/2020

    “Per an 8‑K fil­ing, Solar­Winds says its CEO was first informed of the sit­u­a­tion, by Fire­Eye, on Dec. 12.”

    Decem­ber 12. That’s the date Solar­Winds is giv­ing for when its CEP was first informed of the sit­u­a­tion by Fire­Eye. It’s worth not­ing that this answer from CEO does­n’t address whether or not Solar­Winds was already made aware of the hack through oth­er means.

    We also aren’t told by the CPPIB whether or not they knew about the new CEO announce­ment that was came two days after their $315 mil­lion invest­ment. But the CPPIB told Axios it had com­plete :

    ...
    * On Dec. 7, Sil­ver Lake and Thoma Bra­vo sold around $315 mil­lion in Solar­Winds stock to Cana­da Pen­sion Plan Invest­ment Board (CPPIB). The two firms retained equi­ty posi­tions and seats on the Solar­Winds board of direc­tors.
    * On Dec. 8, U.S. cyber­se­cu­ri­ty com­pa­ny Fire­Eye dis­closed that it had been hacked, like­ly by a gov­ern­ment.
    * On Dec. 9, Solar­Winds named its new CEO.

    ...

    * Solar­Winds does­n’t say when the board, includ­ing Sil­ver Lake and Thoma Bra­vo reps, were informed, but the impli­ca­tion is that it could­n’t have been before the 12th. If so, the trades were clean and CPPIB sim­ply has a case of awful luck, as Solar­Winds stock is down 26% on the week.

    ...

    * A CPPIB spokesman declined to com­ment on if the sys­tem was aware of Solar­Winds’ CEO hire when clos­ing its pur­chase.

    The bot­tom line: Expect U.S. secu­ri­ties reg­u­la­tors to trust but ver­i­fy.

    ...

    Update: CPPIB pro­vid­ed Axios with the fol­low­ing state­ment on Fri­day after­noon:

    “Ter­rif­ic part­ners with a long track record of col­lab­o­ra­tion. Real­ly good com­pa­ny and we expect they will con­tin­ue to cre­ate excep­tion­al val­ue along our invest­ment hori­zon.

    To the best of our knowl­edge no one was aware of the hack lead­ing to our cap­i­tal com­mit­ment. Nonethe­less we are always focused on the very best inter­ests of the Fund and we will con­tin­ue to assess the cir­cum­stances for opti­mal cer­tain­ty.”

    ...

    Keep in mind that part of what makes this sit­u­a­tion look so bad for Sil­ver Lake and Thoma Bra­vo is that the two firms basi­cal­ly run Solar­Winds. There’s noth­ing Solar­Winds would know or do that Sil­ver Lake and Thoma Bra­vo did­n’t ful­ly know about and agree to. So ques­tions like the ques­tion of whether or not Solar­Winds know about the hack before Fire­Eye told them on Decem­ber 12 dou­ble as ques­tions of whether Sil­ver Lake and Thoma Bra­vo knew about the hack before Decem­ber 12. We’ll see what, if any, inves­ti­ga­tion hap­pens.

    And who knows, maybe it real­ly was just bad luck for the CPPIB and great luck for Sil­ver Lake and Thoma Bra­vo. It’s pos­si­ble. Heads we win, tails you lose, because that’s how damn lucky we are. The only non-cheat­ing form of ‘heads we win, tails you lose’. Hope­ful­ly that’s what hap­pened here. Because oth­er­wise the Cana­di­an pub­lic is like­ly going to get ‘unlike­ly’ like this a lot more in the future.

    Posted by Pterrafractyl | December 21, 2020, 12:30 am
  9. Here’s a Finan­cial Times arti­cle about the “K‑shaped” nature of pan­dem­ic eco­nom­ic in the US, where the biggest and strongest com­pa­nies are get­ting big­ger and strong while the small­er and weak­er com­pa­nies get small­er and weak­er or die off com­plete­ly. In many cas­es the pan­dem­ic exac­er­bat­ed and accel­er­at­ed exist­ing trends, like the grow­ing impor­tance of the dig­i­tal sec­tor of the econ­o­my and online retail at the expense of brick-and-mor­tar enter­pris­es. Some com­pa­nies that rely heav­i­ly on brick-and-mor­tar retail have done well this year and seen their mar­ket share grow, but that’s pri­mar­i­ly just the exist­ing giants like Wal­mart, Cost­co, and Home Depot. The giants grew while the lit­tle guy per­ished. That’s one of the mega-trends of 2020.

    The pan­dem­ic also cre­at­ed a sit­u­a­tion where large firms with good cred­it can retain access to his­tor­i­cal­ly low inter­est rates and bor­row mas­sive­ly. Large pub­lic com­pa­nies with invest­ment-grade cred­it rat­ings led a record $2.5 tril­lion of cor­po­rate bor­row­ing this year. At the same time, one study found that the kinds of loans small busi­ness­es rely on from banks become much hard­er to acquire this year as banks tight­ened lend­ing stan­dards. Recall how Repub­li­can Sen­a­tor Pat Toomey demand­ed that a Fed­er­al Reserve pro­gram that could act as a lender of “last resort” for small and mid-sized busi­ness­es be per­ma­nent­ly end­ed as a price of get­ting his sup­port for the COVID relief bill.

    It’s a reflec­tion of the “K‑shaped” nature of the recov­ery when it comes to big vs small busi­ness­es: the strong are giv­en the best cush­ions mon­ey can buy while the small and weak get their cred­it cut off and then the GOP suck­er-punch­es small busi­ness by pulling the “last resort” finan­cial safe­ty-net for no rea­son. Or as Black­stone CEO Steve Schwarz­man put it, “I think it’s going to turn out to be anoth­er one of those accel­er­a­tion moments,” in ref­er­ence to the 2008 finan­cial cri­sis where firms like Black­stone came out larg­er than ever. It’s anoth­er way of look­ing at the impact of the pan­dem­ic, where exist­ing pre-pan­dem­ic trends are get­ting exac­er­bat­ed and accel­er­at­ed. Things are accel­er­at­ing. Accel­er­at­ing to new debt-fueled heights if you’re on top or accel­er­at­ing into the ground for every­one else:

    The Finan­cial Times

    Cor­po­rate Amer­i­ca expe­ri­ences ‘K‑shaped’ recov­ery
    Many of the largest busi­ness­es got larg­er in 2020 as small­er rivals plunged into cri­sis

    Andrew Edge­cliffe-John­son in New York
    Decem­ber 28 2020

    “These are times when the strong can get stronger,” Nike chief exec­u­tive John Don­a­hoe said in Sep­tem­ber, as he cel­e­brat­ed the dig­i­tal invest­ments and robust brand that helped the sports­wear group to increase its earn­ings even as Covid-19 closed its stores.

    Nike was far from the only house­hold name boast­ing of resilient prof­its and a grow­ing share of a mar­ket it already leads. From Ama­zon to Star­bucks, McDonald’s to Mon­delez, many of America’s biggest busi­ness­es got big­ger this year, even as the tur­moils of Covid-19 plunged small­er rivals into cri­sis.

    Just as Black­stone had been “a huge win­ner com­ing out of the glob­al finan­cial cri­sis”, chief exec­u­tive Steve Schwarz­man told ana­lysts who fol­low the pri­vate equi­ty group recent­ly, “I think it’s going to turn out to be anoth­er one of those accel­er­a­tion moments.”

    The unequal, “K‑shaped” recov­ery that econ­o­mists fear is divid­ing the wider US econ­o­my is also play­ing out across cor­po­rate Amer­i­ca, as the pan­dem­ic deep­ens the gulf between the largest, best-financed com­pa­nies and those lack­ing scale, lead­ing brands or robust bal­ance sheets.

    Bank and cen­tral bank poli­cies cou­pled with shifts in con­sumer behav­iour have accen­tu­at­ed trends that were already putting more wealth and growth in the hands of a few large com­pa­nies, accord­ing to aca­d­e­mics, con­sul­tants and cor­po­rate advis­ers.

    That, some of them warn, threat­ens to reduce com­pe­ti­tion, sti­fle inno­va­tion and hold back small­er busi­ness­es that are sup­posed to be sources of job cre­ation and eco­nom­ic dynamism.

    “The last year’s clear­ly been K‑shaped,” said James Manyi­ka, chair­man of the McK­in­sey Glob­al Insti­tute, not­ing that an MGI analy­sis found almost all of the “super­star” com­pa­nies at the top of its rank­ings had become stronger in 2020.

    That part­ly reflect­ed the fact that the group fea­tured many tech­nol­o­gy and phar­ma­ceu­ti­cal com­pa­nies, and that most of its mem­bers had the glob­al reach to ride out local Covid-19 waves.

    But the year’s win­ners had also typ­i­cal­ly invest­ed more in the dig­i­tal tools which became crit­i­cal as employ­ees and cus­tomers scat­tered.

    Even with­in sec­tors, “the vari­a­tions between the most and least digi­tised com­pa­nies were huge”, Mr Manyi­ka said. From retail­ers forced to step up their ecom­merce offer­ings to banks need­ing to move more trans­ac­tions online, “the dig­i­tal­ly enabled ones were ready for this moment”.

    ‘It reminds them of their child­hood’

    The trend towards cor­po­rate con­cen­tra­tion began long before the pan­dem­ic, with large US pub­lic com­pa­nies seiz­ing a grow­ing share of eco­nom­ic activ­i­ty since the mid-1990s, Dart­mouth pro­fes­sor Vijay Govin­dara­jan and col­leagues found in a study last year.

    Small com­pa­nies have found it increas­ing­ly hard to “escape their class”, they wrote, while the biggest busi­ness­es have had the resources to invest in assets includ­ing their brands.

    The com­pa­nies that went into the pan­dem­ic with the strongest brands most­ly extend­ed their lead, as cus­tomers retreat­ed to famil­iar sup­pli­ers.

    ...

    Bureau of Labor Sta­tis­tics data show the human impact of a diver­gence that hap­pened part­ly along sec­toral lines.

    Couri­er and ware­hous­ing com­pa­nies fuelling the ecom­merce boom, tech groups, and big banks and insur­ers were among the few to add jobs in 2020. In the more frag­ment­ed arts and enter­tain­ment world, and at hotel and air­line com­pa­nies which were sin­gu­lar­ly strick­en by the pan­dem­ic, the lay-offs fell heav­i­ly.

    The same data set also reveals the divide between win­ners and losers with­in cer­tain sec­tors. The only retail­ers beyond those sell­ing food and alco­hol to have cre­at­ed jobs in the year to Novem­ber were big box retail­ers such as Wal­mart and Cost­co, and those sell­ing build­ing mate­ri­als and gar­den sup­plies, such as Home Depot.

    In their lat­est earn­ings state­ments, Wal­mart, Cost­co and Home Depot report­ed year-on-year sales increas­es of 5.3 per cent, 16.9 per cent and 23 per cent respec­tive­ly.

    Each has seen its shares rise more than 20 per cent this year, even as Amazon’s grow­ing ecom­merce dom­i­nance lift­ed its stock more than two-thirds.

    Much of the diver­gence stems from big­ger com­pa­nies’ eas­i­er access to cap­i­tal, accord­ing to Olivi­er Dar­mouni, a Colum­bia Busi­ness School eco­nom­ics pro­fes­sor.

    Large pub­lic com­pa­nies with invest­ment-grade cred­it rat­ings led a record $2.5tn of cor­po­rate bor­row­ing this year. That posi­tioned exist­ing indus­try lead­ers such as Ford and Gen­er­al Motors to be ready when demand for their prod­ucts began to recov­er.

    By con­trast, a study led by Mr Dar­mouni showed that the more cost­ly bank loans on which small­er com­pa­nies are more depen­dent became much hard­er to access this year as banks tight­ened their lend­ing stan­dards. The increase in bank cred­it in the first half of 2020 “came almost entire­ly from draw­downs by large firms on pre-com­mit­ted lines of cred­it”, his research con­clud­ed.

    “There’s a very clear pre­mi­um from being large,” he said. “The con­tracts that were signed in good times are... only reli­able if you’re a big firm.”

    ‘It doesn’t trick­le down’

    The past year has shown not only how unequal­ly cred­it flowed, but also how pol­i­cy respons­es to the cri­sis risked ampli­fy­ing the trend, Mr Dar­mouni said.

    “The Fed and the Trea­sury are used to help­ing big com­pa­nies like big automak­ers and big banks. They’re not used to deal­ing with small­er com­pa­nies. The big les­son there is it doesn’t trick­le down,” he said.

    The biggest cor­po­rate casu­al­ties of 2020 were those which went into the pan­dem­ic with frag­ile bal­ance sheets, such as Hertz, the car rental com­pa­ny, and out-of-favour oper­a­tors in mar­kets such as retail, restau­rants and prop­er­ty which suf­fer from over­ca­pac­i­ty.

    “The pan­dem­ic has exac­er­bat­ed the strength of the good and sim­i­lar­ly high­light­ed the weak­ness­es of the worst com­pa­nies,” said Mohsin Meghji, chief exec­u­tive of the restruc­tur­ing advi­so­ry group M‑III Part­ners.

    Poor­ly cap­i­talised com­pa­nies out­side their industry’s top two or three com­peti­tors could “mud­dle along” in a strong econ­o­my, he said, but now “peo­ple will direct their cap­i­tal to the sur­vivors and remove it from the ones that shouldn’t sur­vive”.

    Mr Meghji now expect­ed “sig­nif­i­cant ratio­nal­i­sa­tion” in those over­crowd­ed sec­tors, with some weak com­pa­nies sell­ing to their indus­tries’ win­ners and oth­ers col­laps­ing alto­geth­er.

    If that hap­pened, he argued, “Covid could end up being a sig­nif­i­cant cat­a­lyst for mak­ing the Amer­i­can econ­o­my a lot more clear and com­pet­i­tive because it’s forced what should have tak­en place over five, sev­en or 10 years to hap­pen much faster.”

    Accord­ing to MGI’s Mr Manyi­ka, rough­ly half of the win­ners of one busi­ness cycle fall out of the “super­star” ranks in the next cycle. That, he said, raised ques­tions about how long the K‑shaped dynam­ic would last.

    Those com­pa­nies that ben­e­fit­ed from stim­u­lus-boost­ed con­sumer spend­ing this year could suf­fer if pol­i­cy inter­ven­tions fall short in 2021, while those that depend­ed on a for­giv­ing debt mar­ket “can only rely on [their] bal­ance sheet for so long before share­hold­ers say ‘we can’t keep sup­port­ing this’”, Mr Manyi­ka observed.

    “Even­tu­al­ly, demand has to show back up.”

    ———

    “Cor­po­rate Amer­i­ca expe­ri­ences ‘K‑shaped’ recov­ery” by Andrew Edge­cliffe-John­son; The Finan­cial Times; 12/28/2020

    “Just as Black­stone had been “a huge win­ner com­ing out of the glob­al finan­cial cri­sis”, chief exec­u­tive Steve Schwarz­man told ana­lysts who fol­low the pri­vate equi­ty group recent­ly, “I think it’s going to turn out to be anoth­er one of those accel­er­a­tion moments.”

    Anoth­er “accel­er­a­tion moment” is upon us. That’s how Black­stone’s CEO sees the sit­u­a­tion and he should know. The “accel­er­a­tion moment” the pri­vate equi­ty giant has expe­ri­enced for over a decade now fol­low­ing the 2008 finan­cial cri­sis is accel­er­at­ing some more. But it’s not just Black­stone expe­ri­enc­ing this “accel­er­a­tion moment”, and these “accel­er­a­tion moments” did­n’t start with the 2008 cri­sis. Large cor­po­ra­tions in the US have had a grow­ing share of the over­all econ­o­my for decades now. It’s been a mega-meta-trend in the US ever since it decid­ed to embrace Reaganomics and sup­ply-side eco­nom­ic poli­cies. And now that mega-meta-trend is get­ting tur­bocharged by a pan­dem­ic that is sys­tem­at­i­cal­ly con­sol­i­dat­ing the posi­tion of largest indus­try lead­ers at the same time small and weak­er play­ers are sys­tem­at­i­cal­ly dri­ven out of busi­ness:

    ...
    The unequal, “K‑shaped” recov­ery that econ­o­mists fear is divid­ing the wider US econ­o­my is also play­ing out across cor­po­rate Amer­i­ca, as the pan­dem­ic deep­ens the gulf between the largest, best-financed com­pa­nies and those lack­ing scale, lead­ing brands or robust bal­ance sheets.

    Bank and cen­tral bank poli­cies cou­pled with shifts in con­sumer behav­iour have accen­tu­at­ed trends that were already putting more wealth and growth in the hands of a few large com­pa­nies, accord­ing to aca­d­e­mics, con­sul­tants and cor­po­rate advis­ers.

    That, some of them warn, threat­ens to reduce com­pe­ti­tion, sti­fle inno­va­tion and hold back small­er busi­ness­es that are sup­posed to be sources of job cre­ation and eco­nom­ic dynamism.

    ...

    The trend towards cor­po­rate con­cen­tra­tion began long before the pan­dem­ic, with large US pub­lic com­pa­nies seiz­ing a grow­ing share of eco­nom­ic activ­i­ty since the mid-1990s, Dart­mouth pro­fes­sor Vijay Govin­dara­jan and col­leagues found in a study last year.

    Small com­pa­nies have found it increas­ing­ly hard to “escape their class”, they wrote, while the biggest busi­ness­es have had the resources to invest in assets includ­ing their brands.

    The com­pa­nies that went into the pan­dem­ic with the strongest brands most­ly extend­ed their lead, as cus­tomers retreat­ed to famil­iar sup­pli­ers.

    ...

    The same data set also reveals the divide between win­ners and losers with­in cer­tain sec­tors. The only retail­ers beyond those sell­ing food and alco­hol to have cre­at­ed jobs in the year to Novem­ber were big box retail­ers such as Wal­mart and Cost­co, and those sell­ing build­ing mate­ri­als and gar­den sup­plies, such as Home Depot.

    In their lat­est earn­ings state­ments, Wal­mart, Cost­co and Home Depot report­ed year-on-year sales increas­es of 5.3 per cent, 16.9 per cent and 23 per cent respec­tive­ly.
    ...

    And it’s a trend that showed up crys­tal clear in the 2020 bank lend­ing trends, where cor­po­ra­tions bor­rowed a record $2.5 tril­lion and yet, in the first half of the year, vir­tu­al­ly ALL of the addi­tion­al bank lend­ing was being giv­en to large cor­po­ra­tions with strong cred­it-lines. Big cor­po­ra­tions were giv­en a gold­en cred­it card at the same time their small­er or weak­er com­peti­tors found it hard­er to bor­row:

    ...
    Much of the diver­gence stems from big­ger com­pa­nies’ eas­i­er access to cap­i­tal, accord­ing to Olivi­er Dar­mouni, a Colum­bia Busi­ness School eco­nom­ics pro­fes­sor.

    Large pub­lic com­pa­nies with invest­ment-grade cred­it rat­ings led a record $2.5tn of cor­po­rate bor­row­ing this year. That posi­tioned exist­ing indus­try lead­ers such as Ford and Gen­er­al Motors to be ready when demand for their prod­ucts began to recov­er.

    By con­trast, a study led by Mr Dar­mouni showed that the more cost­ly bank loans on which small­er com­pa­nies are more depen­dent became much hard­er to access this year as banks tight­ened their lend­ing stan­dards. The increase in bank cred­it in the first half of 2020 “came almost entire­ly from draw­downs by large firms on pre-com­mit­ted lines of cred­it”, his research con­clud­ed.

    “There’s a very clear pre­mi­um from being large,” he said. “The con­tracts that were signed in good times are... only reli­able if you’re a big firm.”
    ...

    And note the way the pan­demic’s tur­bocharg­ing of this trend of more and more indus­try con­sol­i­da­tion — where only the top lead­ers in each sec­tor sur­vive as their com­pe­ti­tion per­ish­es or are forced to let them­selves get bought out — is spun by Mohsin Meghji, chief exec­u­tive of the ‘restruc­tur­ing advi­so­ry’ group M‑III Part­ners, which is the kind of busi­ness that makes its mon­ey when oth­er busi­ness­es are going through things like bank­rupt­cy. He described the sce­nario of the pan­dem­ic dri­ving the weak­er com­peti­tors out of busi­ness as a good thing for the Amer­i­can econ­o­my. Why? Because, argues Meghji, many of the weak­er com­pe­ti­tions should have been dri­ven out of busi­ness years ago, and once they are final­ly dri­ven out of busi­ness the remain­ing sur­vivors will the the strongest. And there­fore, by con­sol­i­dat­ing the indus­try into an oli­gop­oly, this will cre­ate com­pe­ti­tion by cre­at­ing clar­i­ty in the sec­tor:

    ...
    “The pan­dem­ic has exac­er­bat­ed the strength of the good and sim­i­lar­ly high­light­ed the weak­ness­es of the worst com­pa­nies,” said Mohsin Meghji, chief exec­u­tive of the restruc­tur­ing advi­so­ry group M‑III Part­ners.

    Poor­ly cap­i­talised com­pa­nies out­side their industry’s top two or three com­peti­tors could “mud­dle along” in a strong econ­o­my, he said, but now “peo­ple will direct their cap­i­tal to the sur­vivors and remove it from the ones that shouldn’t sur­vive”.

    Mr Meghji now expect­ed “sig­nif­i­cant ratio­nal­i­sa­tion” in those over­crowd­ed sec­tors, with some weak com­pa­nies sell­ing to their indus­tries’ win­ners and oth­ers col­laps­ing alto­geth­er.

    If that hap­pened, he argued, “Covid could end up being a sig­nif­i­cant cat­a­lyst for mak­ing the Amer­i­can econ­o­my a lot more clear and com­pet­i­tive because it’s forced what should have tak­en place over five, sev­en or 10 years to hap­pen much faster.”
    ...

    Killing off all the small­er and weak­er com­pe­ti­tion with be good for the Amer­i­can econ­o­my and increase com­pe­ti­tion. These are the kinds of argu­ments we should expect to hear more and more as the eco­nom­ic fall­out con­tin­ues.

    Now, keep in mind that Meghji is echo­ing an argu­ment often heard in the finan­cial sec­tor that the his­tor­i­cal­ly low inter­est rates fol­low­ing the finan­cial cri­sis has cre­at­ed ‘zom­bie’ com­pa­nies that are only viable because of the cheap cost of bor­row­ing and it would have been bet­ter to raise rates and just let them die off (cre­at­ing an even deep Great Reces­sion). And to some extent it’s going to be true that his­tor­i­cal­ly low inter­est rates have allowed for com­pa­nies to sur­vive that would­n’t have oth­er­wise been able to sur­vive with­out years of cheap bor­row­ing costs, albeit to dif­fer­ent degrees in dif­fer­ent sec­tors of the econ­o­my. But it’s obvi­ous­ly not always going to be the the case that the weak­er com­pa­nies — those that can’t sur­vive a pan­dem­ic econ­o­my because they aren’t blessed with the stel­lar cred­it of their larg­er com­peti­tors — are ‘zom­bie’ com­pa­nies that have no viable future and are just burn­ing cash. And for pri­vate equi­ty — where buy­ing dis­tressed com­pa­nies that have a viable future and turn­ing them around is sup­posed to be at the heart of what the indus­try does — they aren’t just inter­est­ed in buy­ing the rem­nants of ‘zom­bie’ com­pa­nies. Healthy firms in the midst of a cred­it squeeze are going to be the juici­est tar­gets. But expect to hear all sorts of excus­es about how the upcom­ing econ­o­my-wide con­sol­i­da­tion is actu­al­ly a good thing because it’s so long-over­due. Oli­gop­o­lies tends to have effec­tive PR.

    Also keep in mind that if ‘good for the econ­o­my’ is defined pure­ly in terms of cor­po­rate prof­its, then, yes, it’s pos­si­ble that a mas­sive pan­dem­ic-dri­ven con­sol­i­da­tion of the US econ­o­my into even few­er hands real­ly will be ‘good’ for the US econ­o­my. Of course, by that def­i­n­i­tion, wealth con­sol­i­da­tion in gen­er­al is as ‘good’ for the econ­o­my and the entire mega-meta-trend of wealth-cap­ture that’s been going on for decades has indeed been ‘great’ for the econ­o­my. One great ‘accel­er­a­tion moment’ that’s been going on for decades and just keeps accel­er­at­ing.

    Posted by Pterrafractyl | January 2, 2021, 10:59 pm
  10. The sto­ry of Robin­hood and GameStop — where small time day traders on a Red­dit mes­sage board used the pow­er of social media and the deep pub­lic antipa­thy towards the super-rich to trig­ger a run­away short-squeeze in GameStop’s stock and bil­lions of dol­lars in loss­es for the hedge funds short­ing the stock — is one of those rare feel good sto­ries where the lit­tle guy seemed to final­ly get the bet­ter of Wall Street for once. But one of the obvi­ous ques­tions raised by the sto­ry was whether or not the ‘lit­tle guy’ investors using social media to orga­nize col­lec­tive runs on stocks were, them­selves, being manip­u­lat­ed by oth­er Wall Street play­ers. And while, at this point, we don’t have evi­dence that the pop­ulist cam­paign to buy GameStop stocks were some­how being dri­ven by large investors, we also should­n’t be too shocked if we do end up learn­ing about pow­er­ful inter­ests who want­ed to see this social media exper­i­ment suc­ceed. Espe­cial­ly since some of the most pow­er­ful pri­vate equi­ty firms on Wall Street were major investors in GameStop and now their hold­ings are worth bil­lions of dol­lars more:

    Vice

    Invest­ment Firms Are the Big Win­ners of the GameStop Stock Rev­o­lu­tion So Far
    Indi­vid­u­als spend­ing hun­dreds or thou­sands of dol­lars on GME stock are up, but the posi­tions of firms like Black­Rock are worth bil­lions.

    by Edward Ong­we­so Jr
    Jan­u­ary 28, 2021, 8:00am

    Over the two past weeks, the stock of ail­ing phys­i­cal video game retail­er GameStop has been sent soar­ing thanks to a per­fect storm of events: greedy hedge funds, an overzeal­ous com­mu­ni­ty of Red­dit day traders, and var­i­ous cycles of hype fueled by social and news media.

    We have a good idea of what got us here. Gamestop investors decid­ed the com­pa­ny was under­val­ued after it announced huge growth in its e‑commerce sales and new board mem­bers focused on con­tin­u­ing that growth. On the oth­er side of the aisle: short sell­ers bet­ting against the company’s stock price. Some, like Cit­ron Research, loud­ly and con­fi­dent­ly declared that buy­ers were “suck­ers” who would eat loss­es once the stock went “back to $20 fast.” Oth­er short sell­ers like Melvin Cap­i­tal, a Wall Street promi­nent hedge fund, sim­ply dou­bled down on short sell­ing with­out any sort of, you know, hedge, on their bets.

    Red­di­tors on the r/WallStreetBets sub­red­dit, social media traders, and buzz gen­er­at­ed from peo­ple like Elon Musk and Chamath Pal­i­hapi­tiya have helped pump GameStop’s stock price, even as short sell­ers have dou­bled down and loaded up on more short posi­tions. To para­phrase Mark Baum in The Big Short: the short sell­ers got greedy, they lost track of the mar­ket, and Wall Street Bets (and even­tu­al­ly every­one else) decid­ed to prof­it from their stu­pid­i­ty. As of this writ­ing, Gamestop is well over $340 and the short sell­ers are in trou­ble. On Fri­day, the vast major­i­ty of these short sell­ing posi­tions expire and they’ll be forced to buy shares they don’t have at stratos­pher­ic prices and eat even greater loss­es than before.

    The dom­i­nant nar­ra­tive of this saga is that it’s essen­tial­ly a mas­sive wealth trans­fer from insti­tu­tion­al investors and hedge funds to “aver­age” peo­ple (who still have enough mon­ey to invest in ran­dom stocks dur­ing a pan­dem­ic). This is true, to a degree. Peo­ple have post­ed sto­ries of now being able to cov­er med­ical bills thanks to GameStop stock, and the orig­i­nal $50,000 invest­ment of the Red­di­tor who start­ed the craze is now worth tens of mil­lions of dol­lars. Bol­ster­ing this nar­ra­tive is the fact that these folks have absolute­ly demol­ished large hedge funds that bet against GameStop, giv­ing it a David vs. Goliath fla­vor.

    But even as the cru­sade con­tin­ues, this isn’t a sim­ple sto­ry of the lit­tle guy win­ning. The enti­ties that own the major­i­ty of GameStop stock are also humon­gous invest­ment firms and pri­vate equi­ty. These enti­ties, such as Fideli­ty and Black­Rock, all own mil­lions of GameStop shares each. Indi­vid­ual day traders spend­ing a few hun­dred or thou­sand dol­lars on GME stock are mak­ing a bit of much-need­ed mon­ey, but these insti­tu­tion­al funds’ posi­tions are now in the bil­lions.

    Take Black­Rock, the mas­sive invest­ment fund which seems to own a chunk of every com­pa­ny, includ­ing 13.2 per­cent of GameStop. Black­Rock owned about 9.2 mil­lion shares worth about $174 mil­lion in Decem­ber 2020 accord­ing to an SEC fil­ing pub­lished on Tues­day. That stake is worth about $3.1 bil­lion right now.

    But wait, there’s more. As short sell­ers scram­ble to cov­er their posi­tion, an investor like Black­rock is in a good posi­tion to help with some­thing called secu­ri­ties lend­ing where “mutu­al funds lend stocks or bonds to gen­er­ate addi­tion­al returns for the funds.” If you are a short sell­er that needs to cov­er your posi­tion, you can always ask Black­Rock to bor­row some of its GameStop shares, pay them a fee, and offer up col­lat­er­al equal in val­ue to the mar­ket val­ue of the loaned GameStop share.

    GameStop’s oth­er big investors are also see­ing their posi­tions rise in val­ue. Board mem­ber Ryan Cohen—who paid rough­ly $76 mil­lion for his 13 per­cent—is also sit­ting on a stake approx­i­mate­ly worth $3 bil­lion. There’s also Don­ald Foss, founder and for­mer chief exec­u­tive of sub­prime auto lender Cred­it Accep­tance Corp. He bought 5 per­cent of Gamestop last Feb­ru­ary for $12 mil­lion, it’s near­ly worth $1.2 bil­lion now.

    ...

    The same is more or less true for oth­er com­pa­nies being pumped by Wall­Street­Bets. They may have net­ted pret­ty returns on AMC by pump­ing up the stock, but its major investors are pri­vate equi­ty firms, hedge funds, and asset man­agers like Sil­ver Lake Group, Black­Rock, Green­vale Cap­i­tal, Van­guard Group, and Mit­tle­man Invest­ment Man­age­ment. Wall­Street­Bets may have wound­ed a few greedy hedge funds, but it’s also (for now) stuff­ing the pock­ets of some while fur­ther enrich­ing oth­er share­hold­ers that will lend secu­ri­ties to hedge funds who were stu­pid enough to dou­ble down on shorts or enter the posi­tion with­out any sort of hedge.

    GameStop’s cur­rent val­u­a­tion will even­tu­al­ly pop, but even if it shoots down to $20 per share, the firms that own GameStop will still be in a bet­ter posi­tion than they were while a bunch of retail investors will prob­a­bly flame out.

    At the end of the day, the stock mar­ket is still a glo­ri­fied casi­no with none of the aes­thet­ic val­ue. That means you can walk out of there with $1 mil­lion, $100 mil­lion, or $10 bil­lion, but as long as the house is still stand­ing, the house is still win­ning. And if you look at the investors for these com­pa­nies, it is very clear the house is still stand­ing.

    —————

    “Invest­ment Firms Are the Big Win­ners of the GameStop Stock Rev­o­lu­tion So Far” by Edward Ong­we­so Jr; Vice; 01/28/2021

    “But even as the cru­sade con­tin­ues, this isn’t a sim­ple sto­ry of the lit­tle guy win­ning. The enti­ties that own the major­i­ty of GameStop stock are also humon­gous invest­ment firms and pri­vate equi­ty. These enti­ties, such as Fideli­ty and Black­Rock, all own mil­lions of GameStop shares each. Indi­vid­ual day traders spend­ing a few hun­dred or thou­sand dol­lars on GME stock are mak­ing a bit of much-need­ed mon­ey, but these insti­tu­tion­al funds’ posi­tions are now in the bil­lions.”

    The lit­tle guy won at the expense of Wall Street. It’s the feel-good part of this sto­ry. The only prob­lem is the lit­tle guy won to the ben­e­fit of some of the biggest play­ers out there too, like pri­vate equi­ty giant Black­Rock. And, impor­tant­ly, this is also going to be true for the rest of the stocks out there that end up being tar­get­ed by future pop­ulist short-squeezes. The biggest win­ners are inevitably going to be the biggest share­hold­ers and the biggest share­hold­ers of com­pa­nies in today’s econ­o­my are inevitably big investors. That’s just the nature of the obscene con­cen­tra­tion of wealth in mod­ern Amer­i­ca. The inevitable win­ners of any short-squeezes are going to be major share­hold­ers who will ulti­mate­ly be the super-rich:

    ...
    Take Black­Rock, the mas­sive invest­ment fund which seems to own a chunk of every com­pa­ny, includ­ing 13.2 per­cent of GameStop. Black­Rock owned about 9.2 mil­lion shares worth about $174 mil­lion in Decem­ber 2020 accord­ing to an SEC fil­ing pub­lished on Tues­day. That stake is worth about $3.1 bil­lion right now.

    ...

    The same is more or less true for oth­er com­pa­nies being pumped by Wall­Street­Bets. They may have net­ted pret­ty returns on AMC by pump­ing up the stock, but its major investors are pri­vate equi­ty firms, hedge funds, and asset man­agers like Sil­ver Lake Group, Black­Rock, Green­vale Cap­i­tal, Van­guard Group, and Mit­tle­man Invest­ment Man­age­ment. Wall­Street­Bets may have wound­ed a few greedy hedge funds, but it’s also (for now) stuff­ing the pock­ets of some while fur­ther enrich­ing oth­er share­hold­ers that will lend secu­ri­ties to hedge funds who were stu­pid enough to dou­ble down on shorts or enter the posi­tion with­out any sort of hedge.
    ...

    Again, we don’t have any evi­dence that these finan­cial giants active­ly used anony­mous social media accounts to orches­trate this pop­ulist short-squeeze. But we can be pret­ty sure they’re think­ing about it now. Why would­n’t they? All they would poten­tial­ly need is a few influ­en­tial per­son­al­i­ties on these stock trad­ing social media boards to get the nar­ra­tive going again. For all we know, we just saw the dawn­ing of a new era of social-media-dri­ven mar­ket manip­u­la­tion that’s only just get­ting start­ed.

    At the same time, the idea of using gen­uine grass­roots col­lec­tive actions by small-time investors to bank­rupt a hedge fund and dilute the dan­ger­ous con­cen­tra­tions of wealth is indeed quite appeal­ing. If social media can real­ly be used to make things at least a lit­tle less rigged in favor of the super-rich that should prob­a­bly be seen as a pos­i­tive devel­op­ment. So it’s going to be inter­est­ing to see what the future holds for online social-media dri­ven pop­ulist invest­ment cam­paigns.

    Still, keep in mind that if a soci­ety relies on the col­lec­tive actions of the lit­tle guy to out-rig the big guy in high­ly-manip­u­lat­ed finan­cial mar­kets as a means of address­ing the broad­er issue of obscene socioe­co­nom­ic inequal­i­ty, that’s still clos­er to a peas­ant revolt than a real democ­ra­cy. Actu­al­ly tax­ing the super-rich in ways they can’t dodge, break­ing up the grotesque con­cen­tra­tions of wealth, and final­ly reg­u­lat­ing the rou­tine mar­ket manip­u­la­tion car­ried out by the hedge fund indus­try is prob­a­bly going to be a lot more effec­tive, and won’t end up acci­den­tal­ly mak­ing bil­lions more for Black­Rock.

    Posted by Pterrafractyl | January 30, 2021, 3:07 pm
  11. Here’s a set of arti­cles about an emerg­ing trend in the pri­vate equi­ty indus­try: spe­cial pur­pose acqui­si­tion com­pa­nies (SPACs). It turns out SPACs are the new hot thing, with record fil­ings in 2020, and the “king of SPACs” just hap­pens to be Chamath Pal­i­hapi­tiya, the Sil­i­con Val­ley investor who announced that he’s inter­est­ed in run­ning against Gavin New­som in Cal­i­for­ni­a’s guber­na­to­r­i­al recall race. Run­ning as a pop­ulist. Sort of. The kind of pop­ulist who talks like a left­ist with social jus­tice con­cerns but is also call­ing for elim­i­nat­ing the state income tax. The kind of left­ist who recent­ly said the surge in the val­ue of Bit­coin was a sign of the fragili­ty of the finan­cial sys­tem and the com­ing replace­ment of the dol­lar as the glob­al reserve cur­ren­cy with a cryp­tocur­ren­cy ‘sta­ble­coin’. The recall effort Pal­i­hapi­tiya has jumped into appears to be a far right project with heavy back­ing from the QAnon com­mu­ni­ty, so we have a Sil­i­con Val­ley investor who has been build­ing his ‘pub­lic mav­er­ick’ cred in recent years play­ing a major role in facil­i­tat­ing a far right recall effort so he can run a ‘pop­ulist’ cam­paign against the Demo­c­ra­t­ic gov­er­nor. The red flags are boun­ti­ful.

    Pal­i­hapi­tiya’s career in Sil­i­con Val­ley was most­ly work in the ven­ture cap­i­tal side of things with some years work­ing on the tech­nol­o­gy side at AOL and Face­book. Fol­low­ing a stint at AOL in 2004, Pal­i­hapi­tiya got his start in Sil­i­con Val­ley’s invest­ment com­mu­ni­ty at the May­field ven­ture cap­i­tal fund in 2005 before jump­ing over to Face­book in 2007 to be senior exec­u­tive to work on their mes­sag­ing ser­vice. He left Face­book to start his ven­ture cap­i­tal fund Social Cap­i­tal in 2011. As we’ve seen, he’s been strik­ing an increas­ing­ly pop­ulist tone in recent year. Recall how, in 2017, he told audi­ences that he felt Face­book and social media are tear­ing soci­ety apart and exploit­ing human psy­chol­o­gy. Grow­ing up as a poor immi­grant in Cana­da, he’s also spo­ken pos­i­tive­ly of things like social safe­ty-nets and the role they played in his life. He even said in 2016 that he would have thrown Peter Thiel off the boards of com­pa­nies he owns over Thiel’s back­ing of Don­ald Trump.

    So Pal­i­hapi­tiya has brand­ed him­self as anoth­er ‘can­did’ Sil­i­con Val­ley per­son­al­i­ty who is high­ly crit­i­cal of the sys­tem that has made him a bil­lion­aire. But as we’ll see, he’s simul­ta­ne­ous­ly got a his­to­ry of rail­ing against gov­ern­ment and push­ing ‘small gov­ern­ment’ mar­ket-based pol­i­cy solu­tions that sound a lot like lib­er­tar­i­an­ism. And he just hap­pens to owe his suc­cess great­ly to Peter Thiel, who intro­duced him to the ‘Pay­Pal Mafia’ net­work of investors when he was set­ting up his ven­ture cap­i­tal fund Social Cap­i­tal in 2011. It appears that Pal­i­hapi­tiya is either loved or hat­ed in the Sil­i­con Val­ley investor com­mu­ni­ty which makes his asso­ci­a­tion with Thiel’s Pay­Pal Mafia net­work all the more sig­nif­i­cant because he needs them for mon­ey. The broad­er pos­si­ble invest­ment com­mu­ni­ty that comes with SPACs are report­ed­ly part of the appeal they have to Pal­i­hapi­tiya and his polar­iz­ing views in Sil­i­con Val­ley would play into that desire. That’s why it’s impor­tant that Thiel’s net­work of co-investors loves him and, more impor­tant­ly, invests in him. That’s his based of sup­port.

    We can be assured that Cal­i­for­ni­a’s right-wing busi­ness com­mu­ni­ty is going to have an inter­est in cul­ti­vat­ing busi­ness-friend­ly ‘left-wing’ polit­i­cal forces which is part of why this is an impor­tant sto­ry. Recall Pay­Pal Mafia alum and LinkedIn founder Reid Hoff­man, who also has a his­to­ry of pub­licly sup­port­ing Democ­rats while rail­ing against gov­ern­ment bureau­cra­cy and advo­cat­ing for a hyper-cap­i­tal­ist per­va­sive gig econ­o­my. A glob­al gig econ­o­my pow­ered by a kind of super LinkedIn. And now we find what appears to be anoth­er lib­er­tar­i­an wolf in sheep­’s cloth­ing fuel­ing a far right recall cam­paign while putting for­ward a pop­ulist per­sona. And this lib­er­tar­i­an wolf is the king of SPACs, one of the hottest trends in finance.

    So what exact­ly are SPACs? Well, they’re sort like a hybrid of pri­vate equi­ty and pub­licly trad­ed com­pa­nies: investors buy shares in a new­ly formed com­pa­ny, but that com­pa­ny has no pur­pose oth­er than to merge with anoth­er com­pa­ny with the even­tu­al goal of bring­ing the merged com­pa­ny to the pub­lic with an IPO. Com­pared to tra­di­tion­al pri­vate equi­ty, SPAC deals draw from a much larg­er pool of poten­tial investors, have few­er reg­u­la­tions than a tra­di­tion­al IPO, and the found­ing investors tend to get a larg­er share of the result­ing pub­licly trad­ed com­pa­ny with few­er invest­ments. So SPACs are basi­cal­ly an alter­na­tive mod­el to the pri­vate equi­ty indus­try and one that is arguably a bet­ter alter­na­tive, hence the record year for SPACs:

    Reuters

    Wall Street’s SPAC craze scales new heights with record fil­ings

    By Reuters Staff
    Feb­ru­ary 12, 2021 15:53 PM Updat­ed

    (Reuters) — Richard Bran­son and Bar­ry Stern­licht were among more than two dozen investor groups that filed with U.S. reg­u­la­tors on Fri­day to raise new blank-check acqui­si­tion com­pa­nies, set­ting a new record.

    The 28 fil­ings for new spe­cial pur­pose acqui­si­tion com­pa­nies (SPACs) under­score their grow­ing appeal on Wall Street. SPACs raised a record $82 bil­lion last year, and the trend has gath­ered fur­ther steam in the ear­ly weeks of 2021.

    Over­all, 144 SPACs have raised $45.7 bil­lion so far this year, accord­ing to data from SPAC Research, with back­ers includ­ing high-pro­file investors, politi­cians and sports per­son­al­i­ties.

    ...

    Friday’s fil­ings count more than dou­bled a pre­vi­ous record of 13 deals on Feb. 5, SPAC Research said.

    A SPAC is a shell com­pa­ny that rais­es mon­ey in an IPO to merge with a pri­vate­ly held com­pa­ny that then becomes pub­licly trad­ed as a result.

    SPACs have emerged as a pop­u­lar IPO alter­na­tive for com­pa­nies, pro­vid­ing a path to going pub­lic with less reg­u­la­to­ry scruti­ny and more cer­tain­ty over the val­u­a­tion that will be attained and funds that will be raised.

    ————–

    “Wall Street’s SPAC craze scales new heights with record fil­ings” by Reuters Staff; Reuters; 02/12/2021

    “The 28 fil­ings for new spe­cial pur­pose acqui­si­tion com­pa­nies (SPACs) under­score their grow­ing appeal on Wall Street. SPACs raised a record $82 bil­lion last year, and the trend has gath­ered fur­ther steam in the ear­ly weeks of 2021.

    2020 was a record year for SPACS and 2021 is on track for anoth­er record. Wall Street loves these blank check shell com­pa­nies. Because it’s a bet­ter invest­ment to buy a pri­vate com­pa­ny than buy pub­lic stock. In the con­text of the his­toric stock mar­ket mega-bull run of the last decade that even COVID could­n’t stop, the fact that finan­cial cir­cles have record inter­est in blind­ly buy­ing pri­vate com­pa­nies to sell on the stock mar­ket in IPOs is a mar­ket sig­nal in terms of where we are in terms of stock val­u­a­tions rel­a­tive to fun­da­men­tals. It’s also a sign of how much more advan­ta­geous the rules for SPACs are com­pared to the alter­na­tive invest­ment options that the pri­vate equi­ty indus­try rou­tine­ly deals with. And that’s why, as the fol­low­ing Pitch­Book arti­cle makes clear, if SPACs are expe­ri­enc­ing record inflows it’s prob­a­bly the pri­vate equi­ty indus­try we can thank:

    Pitch­Book

    Pri­vate equi­ty plays a star­ring role in 2020’s SPAC boom

    By Adam Lewis
    Sep­tem­ber 17, 2020

    For most of their exis­tence, spe­cial-pur­pose acqui­si­tion com­pa­nies were most­ly unknown. But this year, they’ve become some of the hottest invest­ment vehi­cles on Wall Street, offer­ing com­pa­nies an alter­na­tive to a tra­di­tion­al IPO and open­ing up fer­tile new ground for deal­mak­ers.

    Entre­pre­neurs, busi­ness exec­u­tives, hedge fund founders, politi­cians and sports exec­u­tives have all got­ten in on the act, launch­ing new blank-check com­pa­nies that are now hunt­ing for acqui­si­tion tar­gets. But few seg­ments of the finan­cial world have been as close­ly inter­twined with the SPAC boom as pri­vate equi­ty. Even an indus­try pow­er­house with $414 bil­lion in assets under man­age­ment has joined the fren­zy: On Wednes­day, Apol­lo Glob­al Man­age­ment reg­is­tered its own blank-check com­pa­ny with the SEC, with plans to raise $750 mil­lion.

    For some firms that were ear­ly adopters, this year is the con­tin­u­a­tion of a long­time strat­e­gy. Oth­er firms are dip­ping a toe into the SPAC pool for the first time. For vet­er­ans and new­com­ers alike, these deals have become a pop­u­lar path to cap­i­tal­iz­ing on the mar­ket volatil­i­ty dri­ven by this year’s pan­dem­ic. Alec Gores, the founder and CEO of The Gores Group, told CNBC in August that, because they offer sell­ers flex­i­bil­i­ty, effi­cien­cy and bet­ter val­u­a­tion cer­tain­ty, SPACs have become a great way to get to Wall Street.

    SPACs essen­tial­ly func­tion as shell com­pa­nies, with no oper­a­tions of their own. They first raise cap­i­tal from out­side investors in an IPO, and then lat­er use the pro­ceeds of that offer­ing to acquire a pri­vate com­pa­ny in a reverse merg­er. The tar­get com­pa­ny is still sub­ject to cer­tain reg­u­la­to­ry reviews, but the process offers a sim­pler path onto the pub­lic mar­ket than the usu­al IPO roadshow—particularly now, when trav­el and in-per­son meet­ings are much more dif­fi­cult. SPACs have exist­ed since the 1990s but only began to come into vogue in recent years.

    Few, if any, pri­vate equi­ty exec­u­tives are bet­ter posi­tioned than Gores to speak to the grow­ing appeal of SPACs. His firm launched its first blank-check com­pa­ny in 2015, rais­ing $375 mil­lion that it deployed the next year in a merg­er with Host­ess Brands. Gores has backed five more SPACs in the years since, includ­ing two that were active in August. That month, the firm raised $525 mil­lion from the IPO of a new vehi­cle, and one of its old­er SPACs lined up a $3.4 bil­lion merg­er with Lumi­nar Tech­nolo­gies, a devel­op­er of sen­sors for autonomous cars.

    Busy sum­mer for PE firms and SPACs

    Oth­er pri­vate equi­ty firms have also been busy this past sum­mer. Red­Bird Cap­i­tal Part­ners teamed up with famed base­ball exec­u­tive Bil­ly Beane—the man who inspired “Moneyball”—to launch a SPAC that will aim to acquire a pro­fes­sion­al sports team, rais­ing $575 mil­lion in an August IPO. Days lat­er, Solamere Cap­i­tal, led by Tagg Rom­ney, Mitt Rom­ney’s son, announced plans to raise up to $300 mil­lion for a new SPAC formed in con­junc­tion with for­mer House Speak­er Paul Ryan. And it was report­ed in late August that TPG Cap­i­tal is plan­ning a pair of SPACs, one focus­ing on tech and the oth­er on social impact deals, that will total some $700 mil­lion.

    These new blank-check com­pa­nies are con­tribut­ing to a sig­nif­i­cant spike in SPAC deal count and cap­i­tal raised. As of this writ­ing, 85 dif­fer­ent SPACs have gone pub­lic this year in the US, com­bin­ing to raise more than $39 bil­lion, accord­ing to Pitch­Book data. Those fig­ures are already more than dou­ble the full-year totals for 2019, a year that had estab­lished new annu­al highs.

    Why are SPACs pop­u­lar with PE firms?

    What’s mak­ing SPACs so pop­u­lar, espe­cial­ly among pri­vate equi­ty firms?

    The struc­ture of most reverse merg­ers means the deals require a more mod­est out­lay than tra­di­tion­al buy­outs. A pri­vate equi­ty firm spon­sor­ing a SPAC typ­i­cal­ly buys between 2% and 3% of the shares offered in its pub­lic list­ing.

    “For the pri­vate equi­ty firm, they get a large eco­nom­ic stake in the busi­ness for less upfront invest­ment,” said Cameron Stan­fill, a ven­ture cap­i­tal ana­lyst at Pitch­Book who spe­cial­izes in SPAC research.

    Pri­vate equi­ty investors, of course, are very famil­iar with rais­ing cap­i­tal on the pri­vate mar­ket to finance future takeovers. In a SPAC, they instead draw from pub­lic back­ers, allow­ing them to broad­en their invest­ment base and elim­i­nat­ing the time com­mit­ment and oth­er dif­fi­cul­ties of rais­ing funds from LPs.

    The spon­sors of a SPAC often line up an anchor com­mit­ment through a PIPE deal with an out­side investor, offer­ing pos­si­bil­i­ties for addi­tion­al liq­uid­i­ty after the SPAC goes pub­lic. A recent exam­ple came when hedge fund Mil­len­ni­um Man­age­ment pur­chased a 7.8% stake in Red­Bird’s sports-focused SPAC short­ly after its IPO.

    ...

    ————-

    “Pri­vate equi­ty plays a star­ring role in 2020’s SPAC boom” by Adam Lewis; Pitch­Book; 09/17/2020

    SPACs essen­tial­ly func­tion as shell com­pa­nies, with no oper­a­tions of their own. They first raise cap­i­tal from out­side investors in an IPO, and then lat­er use the pro­ceeds of that offer­ing to acquire a pri­vate com­pa­ny in a reverse merg­er. The tar­get com­pa­ny is still sub­ject to cer­tain reg­u­la­to­ry reviews, but the process offers a sim­pler path onto the pub­lic mar­ket than the usu­al IPO roadshow—particularly now, when trav­el and in-per­son meet­ings are much more dif­fi­cult. SPACs have exist­ed since the 1990s but only began to come into vogue in recent years.”

    Shell com­pa­nies that exist exclu­sive­ly merge with oth­er com­pa­nies and then go pub­lic, but allow for investors from a much broad­er group than tra­di­tion­al pri­vate equi­ty. You can see why pri­vate equi­ty would be inter­est­ed:

    ...
    The struc­ture of most reverse merg­ers means the deals require a more mod­est out­lay than tra­di­tion­al buy­outs. A pri­vate equi­ty firm spon­sor­ing a SPAC typ­i­cal­ly buys between 2% and 3% of the shares offered in its pub­lic list­ing.

    “For the pri­vate equi­ty firm, they get a large eco­nom­ic stake in the busi­ness for less upfront invest­ment,” said Cameron Stan­fill, a ven­ture cap­i­tal ana­lyst at Pitch­Book who spe­cial­izes in SPAC research.

    Pri­vate equi­ty investors, of course, are very famil­iar with rais­ing cap­i­tal on the pri­vate mar­ket to finance future takeovers. In a SPAC, they instead draw from pub­lic back­ers, allow­ing them to broad­en their invest­ment base and elim­i­nat­ing the time com­mit­ment and oth­er dif­fi­cul­ties of rais­ing funds from LPs.
    ...

    SPACs are where it’s at. At least right now when stocks are near record highs and it’s a great time to engage in an IPO.

    And as the fol­low­ing Jacobin arti­cle describes, the ‘king of SPACs’ is cur­rent­ly attempt­ing to unseat the gov­er­nor of Cal­i­for­nia under a ban­ner of pop­ulism. Pop­ulism that, upon clos­er scruti­ny, appears to be a lot of tra­di­tion­al lib­er­tar­i­an­ism and ‘mar­ket-based’ pol­i­cy solu­tion, but sol­id with a gen­uine­ly much more empa­thet­ic mes­sen­ger in Pal­i­hapi­tiya.
    He talks a great game about how the sys­tem is rigged by the pow­er­ful against the mass­es and how this needs to change. And then he pro­pos­es solu­tions that make the pow­er­ful more pow­er­ful. It’s either some seri­ous polit­i­cal con­fu­sion or fun­da­men­tal­ly right-wing pop­ulist cam­paign that has tak­en on a left­ish veneer. And giv­en that Pal­i­hapi­tiya career as a ven­ture cap­i­tal­ist was pro­pelled by his rela­tion­ship with Peter Thiel and his plans for Cal­i­for­nia involve elim­i­nat­ing the state income tax, we should prob­a­bly be sus­pect­ing the worst:

    Jacobin Mag­a­zine

    Sil­i­con Val­ley Star Chamath Pal­i­hapi­tiya Is No Robin Hood

    In the recent GameStop saga, Chamath Pal­i­hapi­tiya por­trayed him­self as a defend­er of the lit­tle guy and float­ed run­ning for office. But beyond the shrewd PR, he’s just anoth­er cor­po­rate-friend­ly Third Way cen­trist with an intense devo­tion to free-mar­ket tri­umphal­ism.

    By Walk­er Brag­man
    02.11.2021

    In all the recrim­i­na­tions over the GameStop trad­ing boom­let last month, bil­lion­aire ven­ture cap­i­tal­ist Chamath Pal­i­hapi­tiya emerged as a con­quer­ing hero. On Twit­ter and in elite media, he was depict­ed as the rare swash­buck­ling, tech age investor with the integri­ty to side with those demand­ing jus­tice for rapa­cious short sell­ers and hedge fund vul­tures. The myth­mak­ing and the euphor­ic enthu­si­asm crescen­doed with him float­ing the idea of a run for gov­er­nor of America’s largest state.

    Pal­i­hapi­tiya was mak­ing an oppor­tu­ni­ty out of Amer­i­can pol­i­tics’ age-old dream of an enlight­ened cap­i­tal­ist-turned-pop­ulist para­chut­ing in to bridge the par­ti­san divide and res­cue the coun­try. But Pal­i­hapi­tiya is not a typ­i­cal man of the peo­ple: beneath the pub­lic image is a par­a­dig­mat­ic tech indus­try oli­garch pro­mot­ing anti-gov­ern­ment ide­ol­o­gy, repack­aged and updat­ed for the social media age.

    Whether or not he ends up run­ning for pub­lic office — he’s said he’s “not ready” to run for gov­er­nor — Pal­i­hapi­tiya rep­re­sents a counter to the resur­gent pro­gres­sive wing of the Demo­c­ra­t­ic Par­ty: a cor­po­rate-friend­ly Third Way cen­trist, with a sprin­kle of social jus­tice rhetoric but also an intense devo­tion to lib­er­tar­i­an free-mar­ket tri­umphal­ism.

    From Col­orado Gov. Jared Polis to Elon Musk and Peter Thiel, the arche­type is increas­ing­ly famil­iar in pol­i­tics and in the online game of think­flu­ence — but Pal­i­hapi­tiya has struck the most pop­ulist pose of all.

    “I Am Biased”

    Pal­i­hapi­tiya, who did not respond to mul­ti­ple requests for com­ment, burst into the nation­al con­scious­ness back in April when he sug­gest­ed in a CNBC inter­view that the fed­er­al gov­ern­ment should not bail out the air­lines and oth­er “zom­bie com­pa­nies.”

    “On Main Street today, peo­ple are get­ting wiped out,” he said. “Right now, rich CEOs are not, boards that have hor­ri­ble gov­er­nance are not. Peo­ple are.”

    Pal­i­hapi­tiya did not make his wealth on Main Street. He was an ear­ly Face­book exec­u­tive, and on the side he invest­ed in com­pa­nies such as Dis­ney and Thiel’s Palan­tir — the lat­ter of which came under fire in 2019 for pro­vid­ing Immi­gra­tion and Cus­toms Enforce­ment (ICE) with the dig­i­tal pro­fil­ing tools it need­ed to car­ry out for­mer pres­i­dent Don­ald Trump‘s depor­ta­tion agen­da. Thiel, a cofounder of Pay­Pal who was on Facebook’s board, became a busi­ness con­tact and ear­ly investor in Palihapitiya’s com­pa­ny, Social Cap­i­tal, and intro­duced Pal­i­hapi­tiya to oth­er Pay­Pal exec­u­tives.

    Pal­i­hapi­tiya has now become a viral sen­sa­tion after he weighed in on the shake­up on Wall Street over GameStop and oth­er “meme stocks,” which retail traders coor­di­nat­ing on Red­dit pumped up in val­ue to stick it to hedge fund short sell­ers. In anoth­er CNBC inter­view, he defend­ed the Red­di­tors.

    “I think what you’re see­ing is a push­back against the estab­lish­ment in a real­ly impor­tant way,” said the ven­ture cap­i­tal­ist.

    It was a per­fect TV moment, coin­cid­ing with spec­u­la­tion over a guber­na­to­r­i­al run. Pal­i­hapi­tiya went on to con­demn Wall Street spec­u­la­tors for their role in caus­ing the 2008 sub­prime mort­gage cri­sis, not­ing that mil­lions of Amer­i­cans nev­er tru­ly recov­ered.

    The next day, after Robin­hood halt­ed pur­chas­es of the so-called meme stocks, Pal­i­hapi­tiya exco­ri­at­ed the bro­ker­age. He rec­om­mend­ed alter­na­tives to Robinhood’s app, includ­ing one in which his firm has a stake.

    “Here are three apps you can use to replace Robin­hood: 1) @SoFi * 2) @CashApp 3) @public,” Pal­i­hapi­tiya wrote in a tweet that was shared thou­sands of times. “*Dis­claimer: I am tak­ing this com­pa­ny pub­lic via $IPOE so I am biased, but I think it kicks ass.”

    I remem­ber when I met the @RobinhoodApp founders when they were rais­ing their Seed, Series A and Series B. I passed.Why? Opti­mize for integri­ty when­ev­er pos­si­ble because integri­ty com­pounds and ass­holes will fuck you.#DeleteR­obin­hood— Chamath Pal­i­hapi­tiya (@chamath) Jan­u­ary 29, 2021

    A day lat­er, Pal­i­hapi­tiya com­pared Robin­hood to Face­book, sug­gest­ing the bro­ker­age had turned users of its app into a prod­uct by sell­ing their data — pre­sum­ably a dig at Robinhood’s rela­tion­ship with Citadel LLC, a hedge fund with which it has an order-flow agree­ment.

    Face­book and @RobinhoodApp are the same:They both trick you into think­ing you are the cus­tomer. But, in fact, you are the prod­uct and your data is the asset. These assets are then sold to their true cus­tomers who pay them mon­ey and always at your expense.STOP BEING TRICKED!— Chamath Pal­i­hapi­tiya (@chamath) Jan­u­ary 29, 2021

    SoFi Active Invest­ing is being brought pub­lic by Social Cap­i­tal. And despite Palihapitiya’s repeat­ed crit­i­cism of Robin­hood, SoFi engages in sim­i­lar prac­tices to the app, in that it has an order-flow agree­ment with clear­ing­house Apex — a firm that is par­tial­ly owned by SoFi, accord­ing to its S‑4.

    The King of SPACs

    Pal­i­hapi­tiya emerged a “hero,” as Vox’s Recode put it, for appar­ent­ly weigh­ing in on the side of Red­dit retail investors. While Red­di­tors were call­ing on their fel­low investors to hold, Pal­i­hapi­tiya bought in and sold off the meme stocks, mak­ing $500,000. And while he announced that the mon­ey would go to the Barstool Fund for small busi­ness, many Red­di­tors end­ed up hold­ing the bag on the stocks he tac­it­ly pro­mot­ed, suf­fer­ing stag­ger­ing loss­es.

    Indeed, the big win­ners appeared to be Palihapitiya’s pub­lic image and SoFi. Shares of Social Capital’s spe­cial pur­pose acqui­si­tion com­pa­ny (SPAC) linked to SoFi shot up rough­ly 30 per­cent the day Pal­i­hapi­tiya com­pared Robin­hood to Face­book.

    Pal­i­hapi­tiya is known as the king of SPACs, which are shell com­pa­nies used as vehi­cles to take oth­er com­pa­nies pub­lic. SPACs are a cheap­er and faster alter­na­tive to the ini­tial pub­lic offer­ing (IPO) route but come with more risks for investors who effec­tive­ly go in blind since the com­pa­nies are formed with­out spe­cif­ic tar­gets in mind. In the 1980s, they were known as “blank check com­pa­nies” and were hotbeds for fraud, though the rules sur­round­ing them have been tight­ened since.

    A recent, exten­sive report from short sell­ing firm Hin­den­burg Research alleged that a com­pa­ny brought pub­lic by a Pal­i­hapi­tiya SPAC, Clover Health, was fac­ing an undis­closed Depart­ment of Jus­tice inves­ti­ga­tion, among oth­er issues.

    Respond­ing to the report, Pal­i­hapi­tiya tweet­ed that the Hin­den­burg report was “rife with per­son­al attacks, thin facts and blus­ter that has been rebuked by the com­pa­ny.” He called on investors to “trust the process.”

    For those fol­low­ing $CLOV, trust the process and the facts. pic.twitter.com/AfSHhNVLSe— Chamath Pal­i­hapi­tiya (@chamath) Feb­ru­ary 5, 2021

    Hin­den­burg fired back:

    The fact is we do “trust the process”; our own research process – and we didn’t need your help to find the same “truth” you should have already dis­closed to $CLOV investors.

    “If the Gov­ern­ment Shuts Down, Noth­ing Hap­pens”

    Palihapitiya’s pop­ulism is laced with lib­er­tar­i­an, anti-gov­ern­ment views.

    In a 2017 inter­view on CNBC, he echoed Ron Paul in encour­ag­ing peo­ple to invest in Bit­coin, which he said would even­tu­al­ly reach $1 mil­lion a coin, explain­ing that the cryp­tocur­ren­cy was “a fan­tas­tic, fun­da­men­tal hedge and store val­ue against auto­crat­ic regimes and bank­ing infra­struc­ture that we know is cor­ro­sive to how the world needs to work prop­er­ly.”

    “You can­not have cen­tral banks infi­nite­ly print­ing cur­ren­cy,” he said. “You can­not have folks with mis­guid­ed and mis­di­rect­ed fis­cal pol­i­cy.”

    Pal­i­hapi­tiya has tout­ed social safe­ty nets, telling Insti­tu­tion­al Investor that as a Sri Lankan refugee who grew up in Cana­da, he was “a by-prod­uct of an enor­mous num­ber of pro­gres­sive ideals—universal health care, almost-free basic edu­ca­tion, a social wel­fare pol­i­cy to take care of the low­est rungs of soci­ety but give them a path of upward mobil­i­ty.”

    How­ev­er, there’s an inher­ent ten­sion between those views and his anti-tax zealotry. For exam­ple, Pal­i­hapi­tiya has sug­gest­ed zero­ing out the cap gains tax rate over time.

    “There should be a step down in cap­i­tal gains tax for indi­vid­u­als as they hold stocks. 20% per year decrease in cap gains tax. 0% after a five year hold peri­od,” he tweet­ed. “Reward long term behav­ior.”

    It’s not just fed­er­al tax­es Pal­i­hapi­tiya wants to cut. He has also called for slash­ing California’s tax rate to zero and tout­ed pop­u­la­tion growth in low tax states.

    If you recall @GavinNewsom here is my plat­form for Governor:1) Cut CA income tax from 16% to 0%2) free edu­ca­tion vouch­ers for all kids3) $2k for every new child born and raised in CA4) make CA the glob­al cen­ter of all tech and cli­mate job­sWho wants some?— Chamath Pal­i­hapi­tiya (@chamath) Jan­u­ary 16, 2021

    An amaz­ing graph:1) All US cities with pop­u­la­tion growth are in states where income tax­es are 5% or less2) 5 of 9 US cities (55%) with pop­u­la­tion growth are in states with zero income taxes3) Back­drop is only 7 states (14%) in the US have zero income tax­es pic.twitter.com/F6aOtELLqc— Chamath Pal­i­hapi­tiya (@chamath) June 12, 2020

    ...

    Palihapitiya’s polit­i­cal phi­los­o­phy tout­ing the suprema­cy of cor­po­ra­tions and den­i­grat­ing the pub­lic sec­tor was summed up most suc­cinct­ly in a state­ment he made in 2013 about the loom­ing gov­ern­ment shut­down.

    “If com­pa­nies shut down, the stock mar­ket would col­lapse,” he said at the time. “If the gov­ern­ment shuts down, noth­ing hap­pens and we all move on, because it just doesn’t mat­ter. Sta­sis in the gov­ern­ment is actu­al­ly good for all of us.

    —————

    “Sil­i­con Val­ley Star Chamath Pal­i­hapi­tiya Is No Robin Hood” by Walk­er Brag­man; Jacobin Mag­a­zine; 02/11/2021

    Pal­i­hapi­tiya is known as the king of SPACs, which are shell com­pa­nies used as vehi­cles to take oth­er com­pa­nies pub­lic. SPACs are a cheap­er and faster alter­na­tive to the ini­tial pub­lic offer­ing (IPO) route but come with more risks for investors who effec­tive­ly go in blind since the com­pa­nies are formed with­out spe­cif­ic tar­gets in mind. In the 1980s, they were known as “blank check com­pa­nies” and were hotbeds for fraud, though the rules sur­round­ing them have been tight­ened since.”

    The king of SPACs wants to become gov­er­nor of Cal­i­for­nia. He’s talk­ing a pop­ulist game. But he also talks like a cor­po­ratist lib­er­tar­i­an who at best presents a ‘Third Way’-style cen­ter-Right col­lec­tion of pol­i­cy pre­scrip­tions while pump­ing Bit­coin, rail­ing against ‘big gov­ern­ment’ and advo­cat­ing a gov­ern­ment shut down. Even his pro­pos­als for Cal­i­for­nia include elim­i­nat­ing Cal­i­for­ni­a’s income tax:

    ...
    Pal­i­hapi­tiya was mak­ing an oppor­tu­ni­ty out of Amer­i­can pol­i­tics’ age-old dream of an enlight­ened cap­i­tal­ist-turned-pop­ulist para­chut­ing in to bridge the par­ti­san divide and res­cue the coun­try. But Pal­i­hapi­tiya is not a typ­i­cal man of the peo­ple: beneath the pub­lic image is a par­a­dig­mat­ic tech indus­try oli­garch pro­mot­ing anti-gov­ern­ment ide­ol­o­gy, repack­aged and updat­ed for the social media age.

    Whether or not he ends up run­ning for pub­lic office — he’s said he’s “not ready” to run for gov­er­nor — Pal­i­hapi­tiya rep­re­sents a counter to the resur­gent pro­gres­sive wing of the Demo­c­ra­t­ic Par­ty: a cor­po­rate-friend­ly Third Way cen­trist, with a sprin­kle of social jus­tice rhetoric but also an intense devo­tion to lib­er­tar­i­an free-mar­ket tri­umphal­ism.

    ...

    Palihapitiya’s pop­ulism is laced with lib­er­tar­i­an, anti-gov­ern­ment views.

    In a 2017 inter­view on CNBC, he echoed Ron Paul in encour­ag­ing peo­ple to invest in Bit­coin, which he said would even­tu­al­ly reach $1 mil­lion a coin, explain­ing that the cryp­tocur­ren­cy was “a fan­tas­tic, fun­da­men­tal hedge and store val­ue against auto­crat­ic regimes and bank­ing infra­struc­ture that we know is cor­ro­sive to how the world needs to work prop­er­ly.”

    “You can­not have cen­tral banks infi­nite­ly print­ing cur­ren­cy,” he said. “You can­not have folks with mis­guid­ed and mis­di­rect­ed fis­cal pol­i­cy.”

    Pal­i­hapi­tiya has tout­ed social safe­ty nets, telling Insti­tu­tion­al Investor that as a Sri Lankan refugee who grew up in Cana­da, he was “a by-prod­uct of an enor­mous num­ber of pro­gres­sive ideals—universal health care, almost-free basic edu­ca­tion, a social wel­fare pol­i­cy to take care of the low­est rungs of soci­ety but give them a path of upward mobil­i­ty.”

    How­ev­er, there’s an inher­ent ten­sion between those views and his anti-tax zealotry. For exam­ple, Pal­i­hapi­tiya has sug­gest­ed zero­ing out the cap gains tax rate over time.

    “There should be a step down in cap­i­tal gains tax for indi­vid­u­als as they hold stocks. 20% per year decrease in cap gains tax. 0% after a five year hold peri­od,” he tweet­ed. “Reward long term behav­ior.”

    It’s not just fed­er­al tax­es Pal­i­hapi­tiya wants to cut. He has also called for slash­ing California’s tax rate to zero and tout­ed pop­u­la­tion growth in low tax states.

    ...

    Palihapitiya’s polit­i­cal phi­los­o­phy tout­ing the suprema­cy of cor­po­ra­tions and den­i­grat­ing the pub­lic sec­tor was summed up most suc­cinct­ly in a state­ment he made in 2013 about the loom­ing gov­ern­ment shut­down.

    “If com­pa­nies shut down, the stock mar­ket would col­lapse,” he said at the time. “If the gov­ern­ment shuts down, noth­ing hap­pens and we all move on, because it just doesn’t mat­ter. Sta­sis in the gov­ern­ment is actu­al­ly good for all of us.
    ...

    And to top it all, we find that Pal­i­hapi­tiya was an ear­ly investor in Peter Thiel’s Palan­tir, with Thiel also invest­ing in Pal­i­hapi­tiya’s ven­ture cap­i­tal firm, Social Cap­i­tal, and intro­duc­ing Pal­i­hapi­tiya to “oth­er Pay­Pal exec­u­tives” which is pre­sum­ably a term for the Pay­Pal Mafia Sil­i­con Val­ley net­work:

    ...
    Pal­i­hapi­tiya did not make his wealth on Main Street. He was an ear­ly Face­book exec­u­tive, and on the side he invest­ed in com­pa­nies such as Dis­ney and Thiel’s Palan­tir — the lat­ter of which came under fire in 2019 for pro­vid­ing Immi­gra­tion and Cus­toms Enforce­ment (ICE) with the dig­i­tal pro­fil­ing tools it need­ed to car­ry out for­mer pres­i­dent Don­ald Trump‘s depor­ta­tion agen­da. Thiel, a cofounder of Pay­Pal who was on Facebook’s board, became a busi­ness con­tact and ear­ly investor in Palihapitiya’s com­pa­ny, Social Cap­i­tal, and intro­duced Pal­i­hapi­tiya to oth­er Pay­Pal exec­u­tives.
    ...

    So when we learn that Thiel has been invest­ing in Pal­i­hapi­tiya’s ven­ture cap­i­tal firms, keep in mind that there’s a good chance this broad­er Pay­Pal Mafia net­work of obscene­ly wealthy peo­ple have played a major role in financ­ing Pal­i­hapi­tiya invest­ments, in addi­tion to Thiel. That’s part of why Thiel’s intro­duc­tion of Pal­i­hapi­tiya to the ‘oth­er Pay­Pal exec­u­tives’ is poten­tial­ly a very sig­nif­i­cant detail in Pal­i­hapi­tiya’s career path from senior Face­book exec­u­tive to “king of SPACs” and a big part of why the vot­ers of Cal­i­for­nia should be extreme­ly wary of this ‘pop­ulist’ lib­er­tar­i­an financier claim­ing to be look­ing out for the lit­tle guy. That’s the net­work that’s pro­vid­ing him a base of finan­cial secu­ri­ty while he rails against Sil­i­con Val­ley.

    And as the fol­low­ing May 2020 pro­file of Pal­i­hapi­tiya in Insti­t­u­a­tion­al Investor describes, his grow­ing rep­u­ta­tion as a vocal insid­er crit­ic of the finan­cial sys­tem that dri­ves Sil­i­con Val­ley has and harsh social media crit­ic has made his rela­tion­ships with the Pay­Pal mafia net­work of investors all the more valu­able. Because a lot of the rest of the Sil­i­con Val­ley invest­ment com­mu­ni­ty hates him for his com­ments. So Pal­i­hapi­tiya is seem­ing to wage a pop­ulist insid­er Sil­i­con Val­ley cru­sade with the back­ing of Thiel and the Pay­Pal Mafia. It’s the kind of arrange­ment that should, at a min­i­mum, give one pause. But as the fol­low­ing arti­cle also makes clear, Pal­i­hapi­tiya is very seri­ous about talk­ing his pop­ulist game. Pal­i­hapi­tiya explains that it’s only been in the last few yers that he’s felt free to express his con­trar­i­an views crit­i­cal of the invest­ment com­mu­ni­ty and how things like expect­ed short-term invest­ment returns skew busi­ness deci­sion-mak­ing in a neg­a­tive way. But now he’s free to share how he real­ly feels, which is appar­ent­ly a feel­ing that the sys­tem needs pro­found change. Now, as we now know, that kind of pro­found change includes poli­cies like elim­i­nat­ing Cal­i­for­ni­a’s income tax, which gives us a sense of the kind of pol­i­cy solu­tions. But as this pro­file of Pal­i­hapi­tiya from May fo 2020 makes clear, he’s very much inter­est­ed in cul­ti­vat­ing a pub­lic per­sona of being high­ly crit­i­cal of the sys­temic inequities exem­pli­fied by Sil­i­con Val­ley and very much inter­est­ed in social reform. He wants to be the kind of change agent that advo­cates for fun­da­men­tal change, which is why the foun­da­tions of his true ide­o­log­i­cal ori­en­ta­tion are impor­tant ques­tions yet to be answered:

    Insti­tu­tion­al Investor

    The Unusu­al Ambi­tions of Chamath Pal­i­hapi­tiya

    A bil­lion­aire turns on his own.

    By Michelle Celar­i­er
    May 31, 2020

    Among the gild­ed denizens of Sil­i­con Val­ley, it’s known as the “Who cares? rant.”

    It began when Chamath Pal­i­hapi­tiya argued, in a a CNBC inter­view on April 9, that “zom­bie com­pa­nies” like air­lines did not deserve a bailout from the U.S. gov­ern­ment, despite a glob­al pan­dem­ic that had shut down busi­ness — and trav­el — the world over.

    Then he took aim square­ly at the men (and they are almost entire­ly men) run­ning the hedge funds he blames for the cor­po­rate world’s inabil­i­ty to weath­er a cri­sis in the first place.

    “The peo­ple that get wiped out are the spec­u­la­tors that own the unse­cured tranch­es of debt or the folks that own the equi­ty,” he stressed, unmut­ed insis­tence ris­ing in his voice. “And by the way, those are the rules of the game. That’s right. Because these are the peo­ple who pur­port to be the most sophis­ti­cat­ed investors in the world. They deserve to get wiped out.”

    Pal­i­hapi­tiya con­tin­ued. “Who are we talk­ing about? We’re talk­ing about a hedge fund that serves a bunch of bil­lion­aire fam­i­ly offices. Who cares? Let them get wiped out. Who cares?” And then, with a prac­ticed insou­ciance: “They don’t get to sum­mer in the Hamp­tons? Who cares?”

    By the time of the inter­view, of course, hedge fund man­agers had already fled Man­hat­tan for the Hamp­tons. It was also when tens of mil­lions of Amer­i­cans had signed up for unem­ploy­ment and the coro­n­avirus pan­dem­ic was at its peak in New York City, where hun­dreds of cit­i­zens — most of them work­ing-class peo­ple of col­or — were dying in hos­pi­tals every day.

    “On Main Street today, peo­ple are get­ting wiped out,” an utter­ly calm Pal­i­hapi­tiya remind­ed CNBC’s well-heeled view­ers. “Hedge funds are not.”

    He offers a sly grin when remind­ed of the inter­view — which CNBC esti­mates has been viewed more than 10 mil­lion times — dur­ing the first of two Zoom con­ver­sa­tions with Insti­tu­tion­al Investor in May. How­ev­er, Palihapitiya’s not hav­ing any of that rant busi­ness. “Rants, rants. I pre­fer to call them thought­ful com­men­tary,” he says.

    “I just con­tin­ue to want to say the things that are on my mind,” he explains, his large brown eyes lean­ing for­ward into the com­put­er from a spa­cious sun­room in his Palo Alto home, the light illu­mi­nat­ing the over­size house­plants and cream-col­ored easy chairs behind him. “I don’t think these things are con­tro­ver­sial. These are the things that I believe. And I think what hap­pens is that peo­ple are a lit­tle shocked by the rad­i­cal can­dor in pub­lic because they’re not used to it.”

    These “peo­ple” should start get­ting used to it, for Pal­i­hapi­tiya, it is clear, is not tak­ing on just hedge funds. Whether it’s val­ue-invest­ing “morons,” the Sil­i­con Val­ley ven­ture cap­i­tal­ist elite, or uni­ver­si­ty endow­ments, to name a few of his tar­gets, Pal­i­hapi­tiya — him­self a bil­lion­aire — is doing one thing that many of sim­i­lar means find abhor­rent:

    Turn­ing on his own.

    ********

    It was not his first rant, what­ev­er he’d like to call it. In 2015, for exam­ple, Pal­i­hapi­tiya went after the free-spend­ing hip­ster ways of San Fran­cis­co start-ups in what oth­er VCs refer to as his “Kind bar rant.”

    “It’s fine to fail,” he told atten­dees at a San Fran­cis­co Strict­lyVC event that year. “But if you fail because you didn’t have the courage to move to Oak­land, and instead you burned 30 per­cent of your cash on Kind bars and exposed brick walls in the office, you’re a fuck­ing moron.”

    Then in 2018, Pal­i­hapi­tiya took on the ser­i­al fundrais­ing of that world in his “Ponzi scheme rant.” In a 45-minute inter­view at a Launch Scale con­fer­ence, he attacked the growth-at-all-costs imper­a­tive for start-ups forced to meet the con­stant fundrais­ing, fee-mak­ing needs of their ven­ture cap­i­tal back­ers. “It’s got­ten out of con­trol,” he said, telling atten­dees they were “in the mid­dle of an enor­mous, mul­ti­var­ied kind of Ponzi scheme.”

    Pal­i­hapi­tiya has, of course, prof­it­ed hand­some­ly from the VC busi­ness mod­el he so open­ly dis­dains. The 43-year-old founder of invest­ment firm Social Cap­i­tal — which for sev­er­al years ran both a hedge fund and five ven­ture cap­i­tal funds — cur­rent­ly has a $6 bil­lion bal­ance sheet invest­ed in every­thing from start-ups tack­ling thorny social, eco­nom­ic, and envi­ron­men­tal issues to tech-enabled giants Ama­zon and Tes­la.

    Those two stocks — along with work mes­sag­ing plat­form Slack Tech­nolo­gies (Pal­i­hapi­tiya owns 10 per­cent of the com­pa­ny, which went pub­lic last year) and space tourism pio­neer Vir­gin Galac­tic (which he teamed up with founder Richard Bran­son to buy with his first blank-check com­pa­ny, or SPAC, and of which he is now chair­man) — made up the bulk of Social Capital’s $1.7 bil­lion prof­it last year.

    Such finan­cial suc­cess has, of course, led some to view Palihapitiya’s attacks as hyp­o­crit­i­cal.

    “He’s per­sona non gra­ta with a lot of Sil­i­con Val­ley,” one indi­vid­ual says, men­tion­ing sev­er­al of those Pal­i­hapi­tiya has crit­i­cized by name. They include Marc Andreessen, Sequoia Cap­i­tal, and even Mark Zuckerberg’s Face­book — Palihapitiya’s for­mer employ­er.

    Yet the blunt-speak­ing investor has just as many back­ers with­in that ecosys­tem.

    ...

    Chamath Pal­i­hapi­tiya, a Sri Lankan native whose fam­i­ly received refugee sta­tus in Cana­da when he was a child, start­ed as an out­sider in the tech world. At May­field Fund, where he land­ed his first job in the VC world some 15 years ago, “Chamath wore the same jack­et every day — a light-tan velour jack­et — and jeans,” one for­mer col­league recalls. When the col­league asked Pal­i­hapi­tiya about his sar­to­r­i­al choic­es at the time, the young ana­lyst talked about “low ROI,” mean­ing he didn’t want to spend his time and mon­ey wor­ry­ing about clothes.

    The out­fit was also a not-so-sub­tle way for Pal­i­hapi­tiya to thumb his nose at the Sil­i­con Val­ley dress code of the era: kha­ki pants and blue blaz­er. “His atti­tude was ‘I’m not like all you guys. Fuck you. I’m smarter than you, and I’m going to show you,’” says the for­mer col­league.

    Kapoor, then a May­field prin­ci­pal who had hired Pal­i­hapi­tiya away from AOL, where the young man had a rep­u­ta­tion as some­thing of a wun­derkind after head­ing its instant-mes­sag­ing divi­sion, recalls him as par­tic­u­lar­ly artic­u­late. But Pal­i­hapi­tiya also had mas­tered what has become almost a cliché require­ment for suc­cess in VC land: “He didn’t just think about where things were — but where they were going to go,” Kapoor notes.

    In 2007, Pal­i­hapi­tiya left May­field for Face­book, where he is cred­it­ed with help­ing orches­trate its mas­sive growth. His time at Face­book, and a per­son­al invest­ment in gam­ing com­pa­ny Play­dom, which was sold to Dis­ney, put him on the fast track. Pal­i­hapi­tiya had the cap­i­tal and access to investors to start his own firm, which he named Social+Capital Part­ner­ship, in 2011.

    Kapoor says Palihapitiya’s “mag­net­ic per­son­al­i­ty” drew in the big names. They have includ­ed such well-known VC giants as John Doerr of Klein­er Perkins and Reid Hoff­man, co-founder of LinkedIn, along with hedge fund tech investor Chase Cole­man, the Tiger Glob­al founder. Pal­i­hapi­tiya also gained entrée into the so-called Pay­Pal mafia of tech­nol­o­gy heavy­weights when one of its founders, Peter Thiel — then on the board of Face­book — became an ear­ly investor and intro­duced him to oth­er Pay­Pal execs.

    “Peo­ple want­ed to lis­ten to him,” Kapoor says of Pal­i­hapi­tiya. “Lots of peo­ple can artic­u­late ideas that every­one agrees with, but can you artic­u­late with vision and log­ic ideas that are not main­stream? That’s his gift.”

    Pal­i­hapi­tiya had opened his firm, along with his then-wife Brigette Lau, with a plan to invest in com­pa­nies in fields being ignored by the VC world, like health, finan­cial ser­vices, and edu­ca­tion. But the VC game seems to have worn him down.

    And then he filed for divorce.

    “Every­thing was so suc­cess­ful. I’m work­ing and work­ing and work­ing, but I wasn’t hap­py,” he recalls. “And then as I sought hap­pi­ness in my per­son­al life, I found hap­pi­ness in my pro­fes­sion­al life. I didn’t need to man­age hun­dreds of peo­ple or thou­sands of peo­ple any­more. I want­ed to be a real allo­ca­tor of cap­i­tal, because I want­ed to change the parts of soci­ety I dis­agreed with.”

    Social Cap­i­tal was on the verge of rais­ing a cred­it fund when Pal­i­hapi­tiya found he could not pull the trig­ger. “I could not sign the doc­u­ments,” he says. “And that was the point where I was like ‘You know what? I’m bet­ter off doing what I want to do.’”

    About this time, sev­er­al of the firm’s top exec­u­tives left. Mamoon Hamid, an ear­ly part­ner, went to Klein­er Perkins; a num­ber of oth­ers, includ­ing for­mer part­ner Ted Maid­en­berg, start­ed a new VC firm called Tribe Cap­i­tal.

    By the end of 2018, Pal­i­hapi­tiya had closed the hedge fund he had launched to invest in pub­licly trad­ed com­pa­nies and shut his out­stand­ing VC funds to new mon­ey. He says those steps were part of his plan to shrink the firm and change the way it was run.

    “I don’t think invest­ing is a team sport,” he says, refer­ring to argu­ments at the firm over what he calls “pow­er-shar­ing agree­ments” that led to the depar­tures — some vol­un­tary, oth­ers not. (By all accounts, it was messy and Pal­i­hapi­tiya didn’t han­dle it well.)

    “The fun­da­men­tal under­writ­ing deci­sions of great investors over long peri­ods of time are very lone­ly indi­vid­ual deci­sions,” he explains. “It’s about a kind of pat­tern recog­ni­tion that very few peo­ple have. I don’t know if I have it. But in order to find out, I need to iso­late myself and do it myself.”

    At the time, the scut­tle­butt was that Social Cap­i­tal would not sur­vive. But Pal­i­hapi­tiya says the funds have com­pound­ed at 33 per­cent annu­al­ly, with a 3‑and-30 fee struc­ture that result­ed in net returns in the mid- to upper 20 per­cent range. To top those off, he recent­ly raised more than $1 bil­lion in two addi­tion­al blank-check IPOs, includ­ing one launched in the midst of the pan­dem­ic.

    Pal­i­hapi­tiya says he prefers the mon­ey-rais­ing process of a SPAC to that of a VC fund. “SPACs are short bursts of effort from a fundrais­ing per­spec­tive, while VC fundrais­ing requires more hand-hold­ing and thus time and focus,” he notes. “As a head of a VC fund, you are no longer an investor; you become the head of investor rela­tions. This is not a job I either liked or want­ed to do.”

    Pal­i­hapi­tiya adds, “I still have a cou­ple of bil­lion that I’m man­ag­ing on behalf of oth­ers. But there’s a $4 bil­lion bal­ance sheet that’s mine. I don’t have to answer to any­body.” He then jokes that the $4 bil­lion is “all fake, and I wouldn’t take that num­ber very seri­ous­ly. I am always 100 per­cent invest­ed, and at any moment some­thing cat­a­clysmic could make it zero in an instant.”

    It was after he quit rais­ing mon­ey for his VC funds that Pal­i­hapi­tiya became vocal in his crit­i­cisms about the VC mod­el.

    As he explains it, “In the ven­ture mar­ket, build­ing has become hard­er. Com­pa­nies take longer and longer to get any kind of mate­r­i­al break­out, and they’re less and less like­ly to do so, which then means that these com­pa­nies are pri­vate for 12, 13 years. But if a ven­ture fund is to be in busi­ness, they need to raise mon­ey every two or three years. So they’re in the busi­ness of basi­cal­ly pump­ing up their com­pa­nies. You show mark-to-mar­ket gains, you show fake IRR, and you raise more funds. And LPs are the fuel to all of this. They are the ones that are torch­ing their mon­ey on fire, feed­ing this dynam­ic.”

    Expos­ing what he sees as venture’s ugly truths has made him unpop­u­lar in some quar­ters. But, as one long­time lim­it­ed part­ner points out, Social Cap­i­tal is one VC firm that has actu­al­ly returned mon­ey, not just unre­al­ized gains, to investors in its funds.

    Hedge funds, of course, are also engaged in the hunt for fees. More cap­i­tal is being raised by the funds, even as the uni­verse of pub­lic com­pa­nies they can invest in has shrunk. “Very quick­ly,” says Pal­i­hapi­tiya, “you real­ize that you want to opti­mize for short-term fees, because it’s hard­er and hard­er to have an edge.”

    He argues that that dynam­ic dri­ves a lot of short-term behav­ior, which is then imposed on the com­pa­nies hedge funds invest in via buy­backs or div­i­dends. “Less than a third of S&P com­pa­nies actu­al­ly have R&D bud­gets. Do you think that’s by choice, or do you think that’s by investor pres­sure? I think a lot of it is the lat­ter.”

    Pal­i­hapi­tiya has called for a ban on stock buy­backs, which he con­sid­ers “idi­ot­ic.”

    Provoca­tive, yes. But his way with words, not to men­tion his wealth, gives Pal­i­hapi­tiya a plat­form — espe­cial­ly at a time when the rules appear to have sud­den­ly changed.

    Con­sid­er his mas­sive gains on just two stocks that have soared — Ama­zon and Tes­la. In 2017, as he likes to tell the sto­ry, Pal­i­hapi­tiya was almost laughed off the stage at the Sohn Invest­ment Con­fer­ence for rec­om­mend­ing investors buy Tes­la con­vert­ible bonds. At that time, seem­ing­ly every­one who was any­one in the world of finance was short Tes­la. A year ear­li­er his Ama­zon call at Sohn was also dis­missed by atten­dees, includ­ing Green­light Cap­i­tal founder David Ein­horn.

    As the bull mar­ket of the past decade reached what seemed to be bub­ble pro­por­tions, val­ue investors like Ein­horn expect­ed the bust to come from high-fly­ing, unprof­itable tech com­pa­nies, and val­ue investors who had suf­fered in the loose-mon­ey after­math of 2008 would shine again. It hasn’t hap­pened.

    “Those guys are morons,” says Pal­i­hapi­tiya of many val­ue investors. The his­toric way of deter­min­ing val­ue by look­ing at bal­ance sheets and dis­count­ed cash flow no longer works, he asserts.

    “Today, when mon­ey has no val­ue, because we’ve essen­tial­ly print­ed all the mon­ey in the world and we’ll con­tin­ue to print it over and over, you have to find val­ue in oth­er parts of the bal­ance sheet, so you have to go to things like brand or intan­gi­bles,” he says. “And this is where their math­e­mat­i­cal mod­els break, and then their brains explode.”

    Pal­i­hapi­tiya, who moved to Cana­da when he was six years old, grew up with a father who was often unem­ployed and a moth­er who worked as a house­keep­er, then a nurse’s aide. The fam­i­ly, which also includes his two sis­ters, lived in a small apart­ment above a laun­dro­mat and got by on wel­fare.

    Pover­ty fueled the young man’s ambi­tion, but it also made him acute­ly aware of the impor­tance of the country’s social safe­ty net. “I went to one of the best schools in Cana­da, but it cost me $8,000 a year,” he says. (Pal­i­hapi­tiya earned a degree in elec­tri­cal engi­neer­ing from the Uni­ver­si­ty of Water­loo in 1999.) “I am a by-prod­uct of an enor­mous num­ber of pro­gres­sive ideals — uni­ver­sal health care, almost-free basic edu­ca­tion, a social wel­fare pol­i­cy to take care of the low­est rungs of soci­ety but give them a path of upward mobil­i­ty.”

    His goal, at an ear­ly age, was to make it onto the Forbes bil­lion­aire list. “I guess I’m like the 300th- or 400th- or 500th-rich­est per­son in the world now,” he says.

    Pal­i­hapi­tiya acts like it doesn’t mat­ter. “I can still only wear one pair of pants. I can only live in one house. I can only eat one thing at a time.” But he has hard­ly tak­en a vow of pover­ty. He owns three Tes­las, as well as a stake in the NBA’s Gold­en State War­riors.

    Still, he insists he has lofti­er goals. “I care more that there’s change. I like to think that if all of these start­ing lines are evened up, there’s peo­ple way bet­ter than me who will do even more than me. I’d like to see some of that in my life­time,” he says.

    Davi­da Her­zl, the founder and CEO of Acli­ma, a Social Cap­i­tal port­fo­lio com­pa­ny, refers to Palihapitiya’s path as the “long dis­tance trav­eled.”

    She notes, “That jour­ney cre­ates a lot of grit. It gives you a dif­fer­ent per­spec­tive on what’s pos­si­ble.”

    Take Acli­ma, a mak­er of dig­i­tal sen­sors that can take a block-by-block mea­sure­ment of air pol­lu­tion and green­house gas­es.

    “Why is that impor­tant?” asks Pal­i­hapi­tiya. “It turns out that when kids go to school near places that have high emis­sions, they have high absen­teeism. They actu­al­ly are more func­tion­al­ly and edu­ca­tion­al­ly, not pejo­ra­tive­ly, retard­ed — like you’re held back rel­a­tive to peers that go to oth­er high schools or pri­ma­ry schools or mid­dle schools in areas where there isn’t as much pol­lu­tion. Turns out that socioe­co­nom­i­cal­ly, we do a real­ly good job of putting immi­grants and poor peo­ple near areas of high pol­lu­tion.”

    Aclima’s tech­nol­o­gy can pin­point where those areas are, yet the com­pa­ny was starved of cap­i­tal when Pal­i­hapi­tiya showed up to become its Series A lead investor, says Her­zl. (Pal­i­hapi­tiya notes that Acli­ma was reject­ed by his part­ners, so “I just did it by myself.”)

    As Her­zl explains, “The kind of inno­va­tion in Sil­i­con Val­ley applied to retail and con­sumer apps has not been applied to the biggest chal­lenges fac­ing soci­ety. That’s what Chamath is try­ing to do — take all of these amaz­ing tech­nolo­gies and capa­bil­i­ties devel­oped in Sil­i­con Val­ley and apply them to the biggest chal­lenges in soci­ety.”

    Oth­ers in Palihapitiya’s port­fo­lio include com­pa­nies like Sail­drone, which maps the ocean floor to under­stand cli­mate change, and Cov­er, which elim­i­nates the mid­dle­man for con­sumers and busi­ness­es buy­ing insur­ance.

    But Pal­i­hapi­tiya also believes that the prob­lems are much big­ger than what tech­nol­o­gy can solve on its own. They need gov­ern­ment. “That’s its job. One of the most impor­tant jobs, right after health and safe­ty and secu­ri­ty of cit­i­zens, is incen­tives. Gov­ern­ment shapes behav­ior with incen­tives.”

    Speak­ing up about the role of gov­ern­ment, and extolling his views on things like uni­ver­sal health care — which he con­sid­ers a “no-brain­er” — is some­thing rel­a­tive­ly new for Pal­i­hapi­tiya.

    “Up until about two or three years ago, I was fun­da­men­tal­ly afraid of rejec­tion. I think that was prob­a­bly my great­est fear. And so I oper­at­ed out of fear for a long time,” he says.

    Pal­i­hapi­tiya traces that fear to grow­ing up the child of an alco­holic.

    “When you go back to being a kid in a sit­u­a­tion that is that com­pli­cat­ed, you learn to basi­cal­ly do what­ev­er it takes to get by,” he explains. “Because if the par­ent is drink­ing, then con­fronta­tion or dia­logue or rad­i­cal can­dor can go in a very bad direc­tion. And so it becomes a cop­ing mech­a­nism.”

    Oth­ers sus­pect his wealth made Pal­i­hapi­tiya less con­cerned about what oth­er peo­ple — pre­sum­ably those in the finan­cial world — think of him. He has an answer for that:

    “I actu­al­ly think I care even more now what oth­er peo­ple think, but I care more about the peo­ple that don’t have a voice as much” instead of some “ran­dom cap­i­tal allo­ca­tor who at some very basic lev­el I don’t fun­da­men­tal­ly respect because of the pol­i­tics, or because of the game that the cap­i­tal allo­ca­tion process trans­forms it into.”

    The coro­n­avirus pan­dem­ic has had a way of alter­ing real­i­ty by forc­ing even the rich­est peo­ple back to basics. Pal­i­hapi­tiya, for one, says he cleans the toi­lets twice a week and does all the vac­u­um­ing in the home he shares with his part­ner, Ital­ian phar­ma­ceu­ti­cals heiress Nathalie Dompe, the CEO of Dompe Hold­ings, and his four chil­dren. (His ex-wife, with whom he shares cus­tody of three of those chil­dren, lives four min­utes away.)

    It won’t last for­ev­er, of course. But Pal­i­hapi­tiya couldn’t have envi­sioned that that’s what 2020 would look like when he wrote Social Capital’s 2019 annu­al let­ter, which came out just before Covid-19 took hold of the glob­al dis­course. In it, he talks about the com­ing end of the gild­ed age, with its mas­sive eco­nom­ic inequal­i­ties, and pre­dicts that an era of reform will replace it, with tighter reg­u­la­tion and high­er tax­es.

    There are a grow­ing num­ber in his class who agree. “I think he’s absolute­ly right,” says Kapoor. “You can be a great investor and a great cap­i­tal­ist and at the same time rewrite the rules of how it’s all dis­trib­uted.”

    Pal­i­hapi­tiya still believes that reform is com­ing — but prob­a­bly not until 2024. “Right now we are going to go through two or three years of pain. And then I think going into 2024 and out of it, we’ll have a polit­i­cal change, we’ll have an ide­o­log­i­cal change.”

    For the time being, he believes there will be defla­tion in the real econ­o­my and asset infla­tion at the same time, giv­en the Fed’s recent moves to sup­port finan­cial mar­kets. That might “unfor­tu­nate­ly end in mas­sive civ­il con­flict,” Pal­i­hapi­tiya says. “The ques­tion is, how tumul­tuous is it from here to there? And can we get the next gen­er­a­tion of lead­er­ship that keeps the lid on so that it doesn’t blow off?”

    Every day, it seems, his more than 340,000 Twit­ter fol­low­ers look to Pal­i­hapi­tiya for such lead­er­ship, often beg­ging him to run for pres­i­dent.

    He can’t.

    “I’m Cana­di­an, so I can rule that out,” he says. “Thank you, no.” But there is an alter­na­tive, he teas­es.

    “Maybe prime min­is­ter.”

    ———–

    “The Unusu­al Ambi­tions of Chamath Pal­i­hapi­tiya” by Michelle Celar­i­er; Insti­tu­tion­al Investor; 05/31/2020

    “Pal­i­hapi­tiya still believes that reform is com­ing — but prob­a­bly not until 2024. “Right now we are going to go through two or three years of pain. And then I think going into 2024 and out of it, we’ll have a polit­i­cal change, we’ll have an ide­o­log­i­cal change.””

    An ide­o­log­i­cal change is com­ing to Amer­i­ca in 2024. That’s the pre­dic­tion of Chamath Pal­i­hapi­tiya in this May 2020. An ide­o­log­i­cal change that he clear­ly has an inter­est in cat­alyz­ing. The guy has ambi­tion. And until 2024, he pre­dicts simul­ta­ne­ous defla­tion with asset infla­tion (very plau­si­ble and an exten­sion of the trend we’ve seen for a while in the US) with the pos­si­bil­i­ty of mas­sive civ­il con­flict. But instead of blam­ing that mas­sive civ­il con­flict on Don­ald Trump and the mil­i­tant far right, he appears to blame the Fed­er­al Reserve’s mon­e­tary poli­cies and pines for a next gen­er­a­tion of lead­er­ship that avoid this mas­sive civ­il con­flict:

    ...
    For the time being, he believes there will be defla­tion in the real econ­o­my and asset infla­tion at the same time, iven the Fed’s recent moves to sup­port finan­cial mar­kets. That might “unfor­tu­nate­ly end in mas­sive civ­il con­flict,” Pal­i­hapi­tiya says. “The ques­tion is, how tumul­tuous is it from here to there? And can we get the next gen­er­a­tion of lead­er­ship that keeps the lid on so that it doesn’t blow off?”
    ...

    And more gen­er­al, Pal­i­hapi­tiya has spent the last few year rebrand­ing him­self as a crit­ic of his own class. The Sil­i­con Val­ley ven­ture cap­i­tal­ist class. It’s part of what’s led to his image as a polar­iz­ing fig­ure who has half of Sil­i­con Val­ley not want­i­ng to talk to him and the oth­er half, with Pay­Pal Mafia half, financ­ing his rise as a ven­ture cap­i­tal­ist:

    ...
    He offers a sly grin when remind­ed of the inter­view — which CNBC esti­mates has been viewed more than 10 mil­lion times — dur­ing the first of two Zoom con­ver­sa­tions with Insti­tu­tion­al Investor in May. How­ev­er, Palihapitiya’s not hav­ing any of that rant busi­ness. “Rants, rants. I pre­fer to call them thought­ful com­men­tary,” he says.

    “I just con­tin­ue to want to say the things that are on my mind,” he explains, his large brown eyes lean­ing for­ward into the com­put­er from a spa­cious sun­room in his Palo Alto home, the light illu­mi­nat­ing the over­size house­plants and cream-col­ored easy chairs behind him. “I don’t think these things are con­tro­ver­sial. These are the things that I believe. And I think what hap­pens is that peo­ple are a lit­tle shocked by the rad­i­cal can­dor in pub­lic because they’re not used to it.”

    These “peo­ple” should start get­ting used to it, for Pal­i­hapi­tiya, it is clear, is not tak­ing on just hedge funds. Whether it’s val­ue-invest­ing “morons,” the Sil­i­con Val­ley ven­ture cap­i­tal­ist elite, or uni­ver­si­ty endow­ments, to name a few of his tar­gets, Pal­i­hapi­tiya — him­self a bil­lion­aire — is doing one thing that many of sim­i­lar means find abhor­rent:

    Turn­ing on his own.

    ...

    “He’s per­sona non gra­ta with a lot of Sil­i­con Val­ley,” one indi­vid­ual says, men­tion­ing sev­er­al of those Pal­i­hapi­tiya has crit­i­cized by name. They include Marc Andreessen, Sequoia Cap­i­tal, and even Mark Zuckerberg’s Face­book — Palihapitiya’s for­mer employ­er.

    Yet the blunt-speak­ing investor has just as many back­ers with­in that ecosys­tem.

    ...

    In 2007, Pal­i­hapi­tiya left May­field for Face­book, where he is cred­it­ed with help­ing orches­trate its mas­sive growth. His time at Face­book, and a per­son­al invest­ment in gam­ing com­pa­ny Play­dom, which was sold to Dis­ney, put him on the fast track. Pal­i­hapi­tiya had the cap­i­tal and access to investors to start his own firm, which he named Social+Capital Part­ner­ship, in 2011.

    Kapoor says Palihapitiya’s “mag­net­ic per­son­al­i­ty” drew in the big names. They have includ­ed such well-known VC giants as John Doerr of Klein­er Perkins and Reid Hoff­man, co-founder of LinkedIn, along with hedge fund tech investor Chase Cole­man, the Tiger Glob­al founder. Pal­i­hapi­tiya also gained entrée into the so-called Pay­Pal mafia of tech­nol­o­gy heavy­weights when one of its founders, Peter Thiel — then on the board of Face­book — became an ear­ly investor and intro­duced him to oth­er Pay­Pal execs.

    “Peo­ple want­ed to lis­ten to him,” Kapoor says of Pal­i­hapi­tiya. “Lots of peo­ple can artic­u­late ideas that every­one agrees with, but can you artic­u­late with vision and log­ic ideas that are not main­stream? That’s his gift.”
    ...

    And then, around 2018, a num­ber of exec­u­tives left his Social Cap­i­tal fund at the same time Pal­i­hapi­tiya cut off addi­tion­al out­side fund­ing and began talk­ing about chang­ing how the fund was ran and mak­ing the invest­ment deci­sions in iso­la­tion. This break from the ven­ture cap­i­tal fundrais­ing was appar­ent­ly was freed Pal­i­hapi­tiya to start becom­ing more vocal about his con­cerns with the sys­temic prob­lems of ven­ture cap­i­tal:

    ...
    Pal­i­hapi­tiya had opened his firm, along with his then-wife Brigette Lau, with a plan to invest in com­pa­nies in fields being ignored by the VC world, like health, finan­cial ser­vices, and edu­ca­tion. But the VC game seems to have worn him down.

    And then he filed for divorce.

    “Every­thing was so suc­cess­ful. I’m work­ing and work­ing and work­ing, but I wasn’t hap­py,” he recalls. “And then as I sought hap­pi­ness in my per­son­al life, I found hap­pi­ness in my pro­fes­sion­al life. I didn’t need to man­age hun­dreds of peo­ple or thou­sands of peo­ple any­more. I want­ed to be a real allo­ca­tor of cap­i­tal, because I want­ed to change the parts of soci­ety I dis­agreed with.”

    Social Cap­i­tal was on the verge of rais­ing a cred­it fund when Pal­i­hapi­tiya found he could not pull the trig­ger. “I could not sign the doc­u­ments,” he says. “And that was the point where I was like ‘You know what? I’m bet­ter off doing what I want to do.’”

    About this time, sev­er­al of the firm’s top exec­u­tives left. Mamoon Hamid, an ear­ly part­ner, went to Klein­er Perkins; a num­ber of oth­ers, includ­ing for­mer part­ner Ted Maid­en­berg, start­ed a new VC firm called Tribe Cap­i­tal.

    By the end of 2018, Pal­i­hapi­tiya had closed the hedge fund he had launched to invest in pub­licly trad­ed com­pa­nies and shut his out­stand­ing VC funds to new mon­ey. He says those steps were part of his plan to shrink the firm and change the way it was run.

    “I don’t think invest­ing is a team sport,” he says, refer­ring to argu­ments at the firm over what he calls “pow­er-shar­ing agree­ments” that led to the depar­tures — some vol­un­tary, oth­ers not. (By all accounts, it was messy and Pal­i­hapi­tiya didn’t han­dle it well.)

    “The fun­da­men­tal under­writ­ing deci­sions of great investors over long peri­ods of time are very lone­ly indi­vid­ual deci­sions,” he explains. “It’s about a kind of pat­tern recog­ni­tion that very few peo­ple have. I don’t know if I have it. But in order to find out, I need to iso­late myself and do it myself.”

    ...

    But Pal­i­hapi­tiya also believes that the prob­lems are much big­ger than what tech­nol­o­gy can solve on its own. They need gov­ern­ment. “That’s its job. One of the most impor­tant jobs, right after health and safe­ty and secu­ri­ty of cit­i­zens, is incen­tives. Gov­ern­ment shapes behav­ior with incen­tives.”

    peak­ing up about the role of gov­ern­ment, and extolling his views on things like uni­ver­sal health care — which he con­sid­ers a “no-brain­er” — is some­thing rel­a­tive­ly new for Pal­i­hapi­tiya.

    “Up until about two or three years ago, I was fun­da­men­tal­ly afraid of rejec­tion. I think that was prob­a­bly my great­est fear. And so I oper­at­ed out of fear for a long time,” he says.
    ...

    And yet, while Pal­i­hapi­tiya stopped tak­ing ven­ture cap­i­tal mon­ey in 2018, he appar­ent­ly start­ed tak­ing in bil­lions of dol­lars in “blank-check IPO” SPAC mon­ey right at this time. So he did­n’t break off out­side fund­ing. He just shift­ed from ven­ture cap­i­tal fund­ing to SPAC fund­ing. Which, in the­o­ry, does allow a broad­er field of poten­tial investors. But it’s still most­ly just real­ly, real­ly rich peo­ple and prob­a­bly large­ly the same peo­ple who would have invest­ed through the ven­ture cap­i­tal any­way. In oth­er words, large­ly cos­met­ic:

    ...
    At the time, the scut­tle­butt was that Social Cap­i­tal would not sur­vive. But Pal­i­hapi­tiya says the funds have com­pound­ed at 33 per­cent annu­al­ly, with a 3‑and-30 fee struc­ture that result­ed in net returns in the mid- to upper 20 per­cent range. To top those off, he recent­ly raised more than $1 bil­lion in two addi­tion­al blank-check IPOs, includ­ing one launched in the midst of the pan­dem­ic.

    Pal­i­hapi­tiya says he prefers the mon­ey-rais­ing process of a SPAC to that of a VC fund. “SPACs are short bursts of effort from a fundrais­ing per­spec­tive, while VC fundrais­ing requires more hand-hold­ing and thus time and focus,” he notes. “As a head of a VC fund, you are no longer an investor; you become the head of investor rela­tions. This is not a job I either liked or want­ed to do.”

    Pal­i­hapi­tiya adds, “I still have a cou­ple of bil­lion that I’m man­ag­ing on behalf of oth­ers. But there’s a $4 bil­lion bal­ance sheet that’s mine. I don’t have to answer to any­body.” He then jokes that the $4 bil­lion is “all fake, and I wouldn’t take that num­ber very seri­ous­ly. I am always 100 per­cent invest­ed, and at any moment some­thing cat­a­clysmic could make it zero in an instant.”

    It was after he quit rais­ing mon­ey for his VC funds that Pal­i­hapi­tiya became vocal in his crit­i­cisms about the VC mod­el.

    As he explains it, “In the ven­ture mar­ket, build­ing has become hard­er. Com­pa­nies take longer and longer to get any kind of mate­r­i­al break­out, and they’re less and less like­ly to do so, which then means that these com­pa­nies are pri­vate for 12, 13 years. But if a ven­ture fund is to be in busi­ness, they need to raise mon­ey every two or three years. So they’re in the busi­ness of basi­cal­ly pump­ing up their com­pa­nies. You show mark-to-mar­ket gains, you show fake IRR, and you raise more funds. And LPs are the fuel to all of this. They are the ones that are torch­ing their mon­ey on fire, feed­ing this dynam­ic.”

    Expos­ing what he sees as venture’s ugly truths has made him unpop­u­lar in some quar­ters. But, as one long­time lim­it­ed part­ner points out, Social Cap­i­tal is one VC firm that has actu­al­ly returned mon­ey, not just unre­al­ized gains, to investors in its funds.
    ...

    And that’s the dis­turbing­ly fas­ci­nat­ing devel­op­ing sto­ry of Chamath Pal­i­hapi­tiya and his quest to recall Gavin New­som and run Cal­i­for­nia. He’s gone from one of Sil­i­con Val­ley’s ven­ture cap­i­tal shin­ing stars to the ‘king of SPACs’ and one of Sil­i­con Val­ley’s ven­ture cap­i­tal biggest crit­ics. So he is in the­o­ry free of Sil­i­con Val­ley’s oli­garchic influ­ences now that he’s jumped from VC to SPACS, and yet he’s cho­sen to sup­port a far right recall effort on a plat­form of elim­i­nat­ed the state income tax. This does­n’t look good for the prospects of Pal­i­hapi­tiya actu­al­ly doing good if he’s giv­en pow­er. The recent his­to­ry of busi­ness­ment promis­ing to ‘shake up’ pol­i­tics isn’t exact­ly great.

    So now that SPACs are a hot new invest­ment vehi­cle, and one that democ­ra­tizes finances as Pal­i­hapi­tiya puts it, we have a time­ly reminder in Pal­i­hapi­tiya that even if SPACs free up peo­ple like Pal­i­hapi­tiya from hav­ing to care what the rest of Sil­i­con Val­ley invest­ment com­mu­ni­ty thinks (in the­o­ry), it does­n’t free them of their ide­olo­gies. That requires a dif­fer­ent kind of invest­ment.

    Posted by Pterrafractyl | February 15, 2021, 2:33 am
  12. With all of the grow­ing inter­est­ing in spe­cial pur­pose acqui­si­tion com­pa­nies (SPACs) in the ven­ture cap­i­tal indus­try — where com­pa­nies are incor­po­rat­ed for the sole pur­pose of buy­ing up exist­ing com­pa­nies — here’s an arti­cle about anoth­er alter­na­tive form of invest­ment that investors are flock­ing towards: sec­ondary pri­vate mar­ket sales, where the shares of a pri­vate­ly held com­pa­nies are sold to oth­er investors in pri­vate­ly arranged trans­ac­tions.

    Sec­ondary pri­vate mar­ket trans­ac­tions have the obvi­ous­ly advan­tage over buy­ing pub­licly trad­ed shares in that you can buy shares in pri­vate­ly held com­pa­nies, espe­cial­ly before they go pub­lic. But there’s a dis­tinct dis­ad­van­tage to buy­ing pub­licly trad­ed shared: the dis­clo­sure rules are far more lenient for the sale of pri­vate­ly held shares. Lenient in the sense that much less needs to be revealed to the buy­er about the com­pa­ny’s inter­nal finances. In oth­er words, when shares are trad­ed in a pri­vate­ly held com­pa­ny it’s a lot eas­i­er for a sell­er to unload the shares with­out reveal­ing prob­lems with the com­pa­ny’s finances. So the sec­ondary pri­vate mar­ket is tempt­ing to buy­ers look­ing to pur­chase shares of com­pa­nies ear­ly before they have their IPOs, but also tempt­ing to sell­ers who can unload shares with few­er dis­clo­sures. All in all, we can see why there’s grow­ing inter­est in the sec­tor. It poten­tial­ly gives buy­ers and sell­ers an edge. Specif­i­cal­ly, buy­ers and sell­ers who pos­sess an infor­ma­tion edge have a big poten­tial advan­tage in this unreg­u­lat­ed sec­tor.

    But there’s anoth­er sig­nif­i­cant new devel­op­ment in this sec­tor: mul­ti­ple groups are plan­ning on cre­at­ing what amounts to sec­ondary pri­vate mar­ket exchanges, in the hopes of cre­at­ing the pri­vate mar­ket equiv­a­lent of the Nas­daq or New York Stock Exchange. Bro­ker­ages where any­one can go by buy pri­vate­ly-owned shares. The mar­ket already exists, but it’s cur­rent­ly split up between dozens of dif­fer­ent bro­kers. What we’re see­ing now is the push to con­sol­i­date that mar­ket place, and there­fore cap­ture all of those fees.

    To get a sense of the scale of this mar­ket, accord­ing to a Finan­cial Times analy­sis, there are an esti­mat­ed 546 “uni­corn” pri­vate com­pa­nies with a col­lec­tive val­ue of $1.8 tril­lion. So just the “uni­corns” alone have tril­lions in pri­vate­ly held shares that can poten­tial­ly be pri­vate­ly trad­ed. Now con­sid­er the much larg­er uni­verse of pri­vate non-uni­corn com­pa­nies and fac­tor in that this is a mar­ket where com­pa­nies don’t have to dis­close their finances in the same way pub­licly trad­ed com­pa­nies do. But some of those non-uni­corns are obvi­ous­ly yet-to-be-dis­cov­ered uni­corns that are prob­a­bly a great bar­gain if you can get your hands on those pri­vate­ly-held shares. So we have the mak­ings of a mar­ket­place com­prised of juicy “uni­corns” and yet-to-be-dis­cov­ered uni­corns hid­den in a sea of lemons. And min­i­mal trans­paren­cy rules. As the arti­cle describes, the demand for pri­vate­ly held shares is huge and grow­ing. It’s the sup­ply that’s the prob­lem. And these mar­kets could facil­i­tate grow­ing the sup­ply of avail­able pri­vate­ly held shares by pro­vid­ing those share­hold­ers ready access to mar­ket with a huge sup­ply-demand imbal­ance. The oppor­tu­ni­ty for IPO prices with­out the actu­al IPO. What could pos­si­bly go wrong?

    One such com­pa­ny work­ing to cre­ate a pri­vate share Nas­daq, Car­ta, has the back­ing of Sil­i­con Val­ley investor Marc Andreessen. Anoth­er, Zan­ba­to, is backed by JP Mor­gan. Zan­ba­to’s plans are some­what less pop­ulist than Car­ta’s, and lim­it­ed to act­ing as a cen­tral match­mak­er for more than 100 banks and bro­kers exe­cut­ing orders on behalf of clients. Even Nas­daq itself is report­ed­ly work­ing on some sort of pri­vate share mar­ket­place. Car­ta’s founder, Hen­ry Ward, says he envi­sions his pri­vate share exchange as allow­ing com­pa­nies to raise cap­i­tal while remain­ing pri­vate for­ev­er. So the growth of the pri­vate sec­ondary mar­ket is, in some sense, the emer­gence of a new reg­u­la­to­ry loop­hole to allow com­pa­nies to avoid the reg­u­la­tions of pub­licly trad­ed com­pa­nies.

    The over­all trend in the ultra-hot IPO mar­ket is clear. Bar­ring reg­u­la­tion, the direct sales of pri­vate-held shares is com­ing one way or anoth­er. Which means, in real­i­ty, we’re look­ing at an emer­gence of a new bare­ly reg­u­lat­ed stock mar­ket dri­ven by the mar­ket dynam­ics of obfus­ca­tion and decep­tion and every­one plays ‘find-the-hid­den-uni­corn’:

    The Finan­cial Times

    Stay­ing pri­vate: the boom­ing mar­ket for shares in the hottest start-ups
    New exchanges aim to boost trade in promis­ing busi­ness­es, but more reg­u­la­tion of an opaque sec­tor may be need­ed

    Miles Krup­pa in San Fran­cis­co
    Feb­ru­ary 27 2021

    In 2014, an Aus­tri­an entre­pre­neur offered investors a rare chance to pur­chase shares in Jumio, his fast-grow­ing and prof­itable pay­ments com­pa­ny. The deal was not a typ­i­cal ven­ture cap­i­tal trans­ac­tion. Instead of pur­chas­ing new shares, investors could buy out ear­li­er share­hold­ers, in what are known as pri­vate sec­ondary trans­ac­tions.

    Daniel Mattes, who calls him­self a “vision­ary” on his Insta­gram page and has been a judge on the Aus­tri­an ver­sion of Shark Tank, the Amer­i­can real­i­ty TV series for entre­pre­neurs, told at least one prospec­tive buy­er he had no plans to reduce his own stake in the busi­ness, accord­ing to a US Secu­ri­ties and Exchange Com­mis­sion com­plaint filed in 2019. Mattes also signed off on doc­u­ments that, accord­ing to the com­plaint, claimed Jumio made a small prof­it and rev­enues of more than $100m in 2013 — a sig­nif­i­cant sum for a three-year-old com­pa­ny.

    Two years lat­er, Jumio filed for bank­rupt­cy, and the company’s shares became worth­less. In real­i­ty, accord­ing to the SEC, Jumio had only made one-tenth of the rev­enues it claimed, and Mattes had bypassed his board of direc­tors to sell about $14m of his own shares.

    Jumio’s case high­light­ed the risks of an opaque but fast-grow­ing cor­ner of finance: the glob­al mar­ket for shares in pri­vate start-ups such as Tik­Tok own­er ByteDance, Elon Musk’s SpaceX and pay­ments com­pa­ny Stripe. In 2019, the mar­ket was esti­mat­ed to host almost $40bn in light­ly reg­u­lat­ed trades, accord­ing to one par­tic­i­pant, more than dou­bling its vol­ume from 2014.

    Recent­ly, the mar­ket has been hot­ter than ever. Though pri­vate com­pa­nies have large­ly tried to restrict trad­ing, bro­kers say hedge funds, mutu­al funds and oth­er insti­tu­tion­al investors have begun pour­ing in, buy­ing large blocks of exist­ing shares in start-ups that are near­ing ini­tial pub­lic offer­ings or big acqui­si­tions. Often, the investors receive scant rights to infor­ma­tion on finan­cial per­for­mance.

    Tech­nol­o­gy upstarts and finan­cial insti­tu­tions includ­ing big banks have rushed to cap­i­talise on the inter­est by bro­ker­ing deals and form­ing trad­ing venues, set­ting up a bat­tle that could fun­da­men­tal­ly alter the market’s struc­ture and poten­tial­ly allow com­pa­nies to stay pri­vate indef­i­nite­ly.

    The boom reflects how cash-flush investors are clam­our­ing for stakes in fast-grow­ing busi­ness­es, with low inter­est rates push­ing non-tra­di­tion­al funds deep­er into pri­vate mar­kets. To meet the demand, bro­kers now face two key chal­lenges: increas­ing the sup­ply of shares in desir­able com­pa­nies while pre­vent­ing fraud and manip­u­la­tion in a com­pet­i­tive mar­ket.

    Until recent­ly, pri­vate sec­ondary mar­kets resem­bled “that guy with a trench­coat that’s sell­ing you watch­es in Times Square”, says Inder­pal Singh, who leads a pri­vate sec­ondary mar­ket project at the start-up mar­ket­place Angel­List. “In the last year, there’s been a big shift.”

    In addi­tion to Angel­List, JPMor­gan and the soft­ware start-up Car­ta have begun facil­i­tat­ing trades in pri­vate com­pa­nies. They com­pete with estab­lished play­ers like Nas­daq and Forge Glob­al, which pur­chased the rival mar­ket­place Share­s­Post in a $160m deal last year, as well as scores of small­er inde­pen­dent bro­kers.

    Car­ta and some oth­er inter­me­di­aries have advo­cat­ed that the SEC relax restric­tions on who can pur­chase shares in pri­vate com­pa­nies, poten­tial­ly open­ing up the mar­ket to a broad­er swath of investors.

    But some observers remain scep­ti­cal that the grow­ing mar­ket can pro­tect investors against bad actors. Mattes, who paid $17m to set­tle the charges, did not admit or deny the SEC’s alle­ga­tions, though he resigned from Jumio in 2015 fol­low­ing an inter­nal inves­ti­ga­tion. The entre­pre­neur did not respond to ques­tions sent to his per­son­al web­site.

    The rush to expand trad­ing could lead to fraud and manip­u­la­tion, says Stephen Dia­mond, a pro­fes­sor of law at San­ta Clara Uni­ver­si­ty who has stud­ied pri­vate sec­ondary trans­ac­tions.

    “All too often in Sil­i­con Val­ley, peo­ple want to basi­cal­ly ignore the con­se­quences of unhealthy mar­ket struc­tures,” Dia­mond says.

    The Face­book episode

    The debates reflect a decade-long shift in cap­i­tal mar­kets as com­pa­nies grow larg­er than ever in pri­vate — secur­ing bil­lion-dol­lar val­u­a­tions and “uni­corn” sta­tus while push­ing back their pub­lic debuts. As a con­se­quence, start-ups, investors and employ­ees have accu­mu­lat­ed tril­lions of dol­lars’ worth of shares that can­not eas­i­ly be bought and sold, bar­ring a pub­lic list­ing or acqui­si­tion.

    Pri­vate sec­ondary mar­kets grew in impor­tance in the lead-up to Facebook’s ini­tial pub­lic offer­ing in 2012. Investors rushed to buy the social media company’s shares, cre­at­ing a fren­zied mar­ket where inde­pen­dent bro­kers facil­i­tat­ed thou­sands of trades with lit­tle over­sight from the com­pa­ny.

    The trades cre­at­ed headaches. One Face­book exec­u­tive left the com­pa­ny after he report­ed­ly pur­chased stock ahead of a big fund­ing announce­ment. Face­book some­times lost track of who owned its shares, com­pli­cat­ing prepa­ra­tions for its IPO.

    Facebook’s strug­gles caused many start-ups to adopt strict claus­es in their legal doc­u­ments that pre­vent­ed employ­ees from trad­ing shares with­out com­pa­ny approval. Some com­pa­nies have gone even fur­ther, requir­ing sell­ers to receive approval from boards of direc­tors months in advance of any trans­ac­tion.

    Though the restric­tions have made trad­ing dif­fi­cult, bro­kers say the mar­ket has been busier than ever in the past 12 months, with big investors such as Tiger Glob­al Man­age­ment hunt­ing for shares in start-ups that look like sure bets for block­buster pub­lic list­ings.

    Tiger Glob­al has used sec­ondary sales to gain stakes in com­pa­nies such as China’s ByteDance and the soft­ware group Snowflake, accord­ing to fund doc­u­ments and peo­ple famil­iar with the trades. Oth­er hedge funds and mutu­al funds rou­tine­ly pur­chase new stakes in com­pa­nies worth tens of mil­lions of dol­lars, bro­kers say.

    On the oth­er side of the trades, exist­ing share­hold­ers such as ven­ture cap­i­tal­ists have sought to unload stakes in high­ly-val­ued com­pa­nies as they delay pub­lic list­ings. The mar­ket can also be an impor­tant source of cash for start-up employ­ees, who receive a large por­tion of their pay in stock options.

    Sev­er­al new entrants, such as Carta’s pri­vate stock exchange Car­taX, now hope to for­malise the mar­ket and cap­ture trad­ing fees that have been spread between dozens of inde­pen­dent bro­kers.

    “There is now, in the past few years, not a push to go all the way back to the days of strict pro­hi­bi­tions on sec­ondary trad­ing, but a push to have more avenues for organ­ised liq­uid­i­ty,” says Cameron Con­ti­zano, a part­ner at law firm Good­win Proc­ter who works on sec­ondary trans­ac­tions.

    Mean­while, investor demand has pushed up prices for com­pa­nies such as ByteDance, SpaceX and Stripe. Bar­rett Cohn, chief exec­u­tive of the pri­vate secu­ri­ties bro­ker Scenic Advise­ment, says he advised com­pa­nies on twice as many sec­ondary trans­ac­tions in 2020 com­pared with the pre­vi­ous year. Of the last dozen deals Scenic worked on in the past few quar­ters, only one result­ed in shares being sold at a dis­count to a company’s most recent stock price, he says.

    Com­pet­ing for busi­ness

    The rise in trad­ing vol­umes and the rush to cap­ture the mar­ket will shape the way pri­vate shares change hands. San Fran­cis­co-based Car­ta, a com­pa­ny best known for sell­ing share­hold­er man­age­ment soft­ware to start-ups, has become a light­ning rod in debates about the market’s direc­tion. Its 45-year-old chief exec­u­tive, Hen­ry Ward, has set out an ambi­tious goal to build the “pri­vate stock exchange” for tech start-ups.

    Ward wants the Car­taX mar­ket­place to com­pete with the Nas­daq exchange, pro­vid­ing a list­ing venue where com­pa­nies could poten­tial­ly stay pri­vate indef­i­nite­ly. The exchange uses an auc­tion mod­el that Ward says will result in high­er prices for sell­ers.

    But the project has already drawn strong respons­es from rivals and mar­ket par­tic­i­pants. Some bro­kers and start-ups say Car­taX amount­ed to an attempt to monop­o­lise the mar­ket, and the com­pa­ny is naive to think it could unseat pub­lic exchanges. Scenic’s Cohn says Car­ta has made it increas­ing­ly dif­fi­cult for its clients to export their share­hold­er data for use in oth­er kinds of sec­ondary trans­ac­tions, such as ten­der offers.

    ...

    Oth­ers say the most desir­able start-ups would not want to use Car­taX because few pri­vate com­pa­nies want to sub­ject their shares to month­ly or quar­ter­ly auc­tions mar­ket­ed by the exchange.

    Eric Folke­mer, head of Nas­daq Pri­vate Mar­kets, says it has already set up a sim­i­lar mar­ket­place with price dis­cov­ery tools for com­pa­nies such as the work­place col­lab­o­ra­tion com­pa­ny Asana that want to facil­i­tate trad­ing in their shares before going pub­lic.

    ...

    JPMor­gan has put its mon­ey behind Zan­ba­to, a pri­vate share trad­ing sys­tem that is tak­ing a dif­fer­ent approach from Car­ta, act­ing as a cen­tral match­mak­er for more than 100 banks and bro­kers exe­cut­ing orders on behalf of clients.

    Nico Sand, chief exec­u­tive of Zan­ba­to, says the exchange has made a con­scious choice to focus on trades between large, qual­i­fied buy­ers with more than $100m in assets, who reg­u­la­tors assume have high amounts of finan­cial exper­tise and require less over­sight.

    Zan­ba­to has applied for a patent for a trad­ing sys­tem with “firm orders”, a legal con­tract that forces buy­ers and sell­ers to trans­act shares in a pri­vate com­pa­ny after they have sub­mit­ted orders with desired prices and quan­ti­ties, says Sand.

    He says the con­cept, which is stan­dard in pub­lic mar­kets, is nec­es­sary for cre­at­ing effi­cient trad­ing in pri­vate shares. “At the end of the day, it comes down to for­mal­is­ing the mar­ket struc­ture in a way it’s not cur­rent­ly for­malised.”

    ‘The third con­fig­u­ra­tion’

    So far, Car­ta is the only com­pa­ny that is list­ed for trad­ing on Car­taX. This month, investors pur­chased almost $100m in shares fol­low­ing the company’s first auc­tions on the exchange, in trades that val­ued the com­pa­ny at $6.9bn — more than dou­ble the val­u­a­tion it received from ven­ture cap­i­tal­ists less than one year ago.

    Marc Andreessen, the Netscape co-founder and Car­ta board mem­ber, said in a blog post that he would encour­age start-ups backed by his ven­ture cap­i­tal firm Andreessen Horowitz to con­sid­er list­ing on the exchange. He also said the firm would buy shares in com­pa­nies on the exchange.

    “The third con­fig­u­ra­tion — beyond the false bina­ry of sim­ply pri­vate or pub­lic — is here,” Andreessen wrote.

    But Ward has set tar­gets for the exchange that some peo­ple famil­iar with its work­ings described as over­ly ambi­tious.

    Ward told investors he expect­ed Car­taX to gen­er­ate about $1.1bn in annu­al rev­enues by 2024, accord­ing to a pre­sen­ta­tion viewed by the Finan­cial Times. Under the most opti­mistic sce­nario, the mar­ket­place would bring in $3.9bn in rev­enues that year, the pre­sen­ta­tion said. Car­ta declined to com­ment for this arti­cle.

    Car­taX charges 1 per cent fees to both buy­ers and sell­ers, imply­ing it would need to facil­i­tate about $55bn in trades a year to reach Ward’s expec­ta­tions.

    Those vol­umes would require about 3 per cent of the shares in all bil­lion-dol­lar start-ups to change hands every year, accord­ing to Finan­cial Times analy­sis of data from CB Insights, which esti­mates that 546 “uni­corns” hold a col­lec­tive val­ue of $1.8tn.

    Plat­forms like Car­taX may strug­gle to meet their tar­gets if pri­vate com­pa­nies remain selec­tive about who owns their shares. SpaceX, one of the most active com­pa­nies in sec­ondary trad­ing, already hosts an inter­nal mar­ket­place where employ­ees and ven­ture cap­i­tal­ists can sell stock to invit­ed investors.

    “They have a lot of demand from buy­ers,” says Hans Swildens, chief exec­u­tive of Indus­try Ven­tures, which has invest­ed in Car­ta. “The ques­tion, like all the oth­er mar­ket­places, is sup­ply.”

    Ven­ture cap­i­tal­ists say the new exchange could also face com­pe­ti­tion from an unlike­ly source — spe­cial pur­pose acqui­si­tion com­pa­nies (Spacs), which have recent­ly lured rel­a­tive­ly young start-ups to pub­lic mar­kets.

    Car­taX would force com­pa­nies to share two years of finan­cial state­ments pre­pared using gen­er­al­ly accept­ed account­ing prin­ci­ples, in order to com­ply with a secu­ri­ties exemp­tion the exchange is using to allow par­tic­i­pa­tion from an unlim­it­ed num­ber of accred­it­ed investors.

    Lawyers and gov­er­nance experts say the require­ment could help solve incon­sis­ten­cies in infor­ma­tion dis­clo­sure in pri­vate mar­kets. But oth­ers say it would be a bur­den for young com­pa­nies, which often remain pri­vate to avoid shar­ing their finan­cial infor­ma­tion to a broad audi­ence of investors, reflect­ing a cen­tral ten­sion in the mar­ket as bro­kers and traders attempt to cap­i­talise on the surge of inter­est in sec­ondary trans­ac­tions.

    “The ‘move fast and break things’ cul­ture of start-ups mil­i­tates pre­cise­ly against this,” says Dia­mond at San­ta Clara Uni­ver­si­ty. “That, to me, is the fun­da­men­tal para­dox here.”

    ————-

    “Stay­ing pri­vate: the boom­ing mar­ket for shares in the hottest start-ups” by Miles Krup­pa; The Finan­cial Times; 02/27/2021

    Until recent­ly, pri­vate sec­ondary mar­kets resem­bled “that guy with a trench­coat that’s sell­ing you watch­es in Times Square”, says Inder­pal Singh, who leads a pri­vate sec­ondary mar­ket project at the start-up mar­ket­place Angel­List. “In the last year, there’s been a big shift.””

    Yes, until last year, the pri­vate sec­ondary mar­kets resem­bled “that guy with a trench­coat that’s sell­ing you watch­es in Times Square”. This is the sec­tor of finance that’s explod­ing now, with a grow­ing num­ber of com­pa­nies promis­ing to bring those ‘guy with a trench­coat that’s sell­ing you watch­es in Times Square’ ser­vices to the broad­er pub­lic. They’re even lob­by­ing the SEC to relax restric­tions on who can pur­chase shares in pri­vate com­pa­nies. Again, what could go wrong?

    ...
    Car­ta and some oth­er inter­me­di­aries have advo­cat­ed that the SEC relax restric­tions on who can pur­chase shares in pri­vate com­pa­nies, poten­tial­ly open­ing up the mar­ket to a broad­er swath of investors.

    But some observers remain scep­ti­cal that the grow­ing mar­ket can pro­tect investors against bad actors. Mattes, who paid $17m to set­tle the charges, did not admit or deny the SEC’s alle­ga­tions, though he resigned from Jumio in 2015 fol­low­ing an inter­nal inves­ti­ga­tion. The entre­pre­neur did not respond to ques­tions sent to his per­son­al web­site.

    The rush to expand trad­ing could lead to fraud and manip­u­la­tion, says Stephen Dia­mond, a pro­fes­sor of law at San­ta Clara Uni­ver­si­ty who has stud­ied pri­vate sec­ondary trans­ac­tions.

    “All too often in Sil­i­con Val­ley, peo­ple want to basi­cal­ly ignore the con­se­quences of unhealthy mar­ket struc­tures,” Dia­mond says.

    ...

    Sev­er­al new entrants, such as Carta’s pri­vate stock exchange Car­taX, now hope to for­malise the mar­ket and cap­ture trad­ing fees that have been spread between dozens of inde­pen­dent bro­kers.
    ...

    And notice how Car­ta’s CEO, Hen­ry Ward, talks about his dream of cre­at­ing a sys­tem where com­pa­nies can access cap­i­tal mar­kets while remain­ing pri­vate indef­i­nite­ly. And Car­ta investor Marc Andreessen speaks of how com­pa­nies don’t have to be pub­lic or pri­vate and that’s there’s a ‘third way’. This is the third way: pri­vate com­pa­nies fund­ed in the pri­vate sec­ondary mar­kets mar­kets made avail­able to the pub­lic:

    ...
    The rise in trad­ing vol­umes and the rush to cap­ture the mar­ket will shape the way pri­vate shares change hands. San Fran­cis­co-based Car­ta, a com­pa­ny best known for sell­ing share­hold­er man­age­ment soft­ware to start-ups, has become a light­ning rod in debates about the market’s direc­tion. Its 45-year-old chief exec­u­tive, Hen­ry Ward, has set out an ambi­tious goal to build the “pri­vate stock exchange” for tech start-ups.

    Ward wants the Car­taX mar­ket­place to com­pete with the Nas­daq exchange, pro­vid­ing a list­ing venue where com­pa­nies could poten­tial­ly stay pri­vate indef­i­nite­ly. The exchange uses an auc­tion mod­el that Ward says will result in high­er prices for sell­ers.

    But the project has already drawn strong respons­es from rivals and mar­ket par­tic­i­pants. Some bro­kers and start-ups say Car­taX amount­ed to an attempt to monop­o­lise the mar­ket, and the com­pa­ny is naive to think it could unseat pub­lic exchanges. Scenic’s Cohn says Car­ta has made it increas­ing­ly dif­fi­cult for its clients to export their share­hold­er data for use in oth­er kinds of sec­ondary trans­ac­tions, such as ten­der offers.

    ...

    ‘The third con­fig­u­ra­tion’

    So far, Car­ta is the only com­pa­ny that is list­ed for trad­ing on Car­taX. This month, investors pur­chased almost $100m in shares fol­low­ing the company’s first auc­tions on the exchange, in trades that val­ued the com­pa­ny at $6.9bn — more than dou­ble the val­u­a­tion it received from ven­ture cap­i­tal­ists less than one year ago.

    Marc Andreessen, the Netscape co-founder and Car­ta board mem­ber, said in a blog post that he would encour­age start-ups backed by his ven­ture cap­i­tal firm Andreessen Horowitz to con­sid­er list­ing on the exchange. He also said the firm would buy shares in com­pa­nies on the exchange.

    “The third con­fig­u­ra­tion — beyond the false bina­ry of sim­ply pri­vate or pub­lic — is here,” Andreessen wrote.
    ...

    But these pri­vate sec­ondary mar­ket exchanges like Car­taX are still going to have dis­clo­sure require­ments of their own. In the case of the Car­taX exchange, it forces com­pa­nies to share two years of finan­cial state­ments pre­pared using gen­er­al­ly accept­ed account prin­ci­ples, which grants them a reg­u­la­to­ry exemp­tion that allows for an unlim­it­ed num­ber of a accred­it­ed investors to use their plat­form:

    ...
    Oth­ers say the most desir­able start-ups would not want to use Car­taX because few pri­vate com­pa­nies want to sub­ject their shares to month­ly or quar­ter­ly auc­tions mar­ket­ed by the exchange.

    ...

    Car­taX would force com­pa­nies to share two years of finan­cial state­ments pre­pared using gen­er­al­ly accept­ed account­ing prin­ci­ples, in order to com­ply with a secu­ri­ties exemp­tion the exchange is using to allow par­tic­i­pa­tion from an unlim­it­ed num­ber of accred­it­ed investors.

    Lawyers and gov­er­nance experts say the require­ment could help solve incon­sis­ten­cies in infor­ma­tion dis­clo­sure in pri­vate mar­kets. But oth­ers say it would be a bur­den for young com­pa­nies, which often remain pri­vate to avoid shar­ing their finan­cial infor­ma­tion to a broad audi­ence of investors, reflect­ing a cen­tral ten­sion in the mar­ket as bro­kers and traders attempt to cap­i­talise on the surge of inter­est in sec­ondary trans­ac­tions.

    “The ‘move fast and break things’ cul­ture of start-ups mil­i­tates pre­cise­ly against this,” says Dia­mond at San­ta Clara Uni­ver­si­ty. “That, to me, is the fun­da­men­tal para­dox here.”
    ...

    So Car­ta is requir­ing some degree of pub­lic dis­clo­sure by these com­pa­nies, but only because that’s the price they had to pay to get a reg­u­la­to­ry exemp­tion on the num­ber of peo­ple, which is an exemp­tion they would obvi­ous­ly need to make the exchange open to the broad­er pub­lic. It’s an impor­tant detail because it rais­es the ques­tion of what hap­pens if that secu­ri­ty reg­u­la­tion is relaxed. Like, what if the two year dis­clo­sure is dropped entire­ly or exot­ic account­ing rules are allowed by the SEC in order to qual­i­ty for the exemp­tion that grants unlim­it­ed investors to access the exchange? Will Car­ta sim­i­lar­ly relax its dis­clo­sure rules? Drop them entire­ly? We don’t know. But the fact that Car­ta’s two year dis­clo­sure require­ment was put in place to gain that secu­ri­ties exemp­tion, and not out of a ded­i­ca­tion to greater-than-required-trans­paren­cy, does­n’t bode well.

    And that points to what is prob­a­bly the most omi­nous aspect of this sto­ry: it’s a finan­cial indus­try sto­ry so we know it’s going to get worse. As bad is this idea sounds now, it’s going to get a lot worse. Reg­u­la­tors will be lob­bied, leg­is­la­tors bribed, and what­ev­er else that is required to make this ‘third con­fig­u­ra­tion’ pub­licly-financed pri­vate com­pa­ny a real­i­ty will tran­spire. Some­thing will be done to turn the pri­vate sec­ondary mar­ket­place of shares into a tick­ing finan­cial time bomb that makes a select few for­tunes before blow­ing up while the pub­lic holds the bag.

    We know that’s what will hap­pen because that’s the only thing that hap­pens when con­cen­trat­ed wealth cap­tures the econ­o­my and pol­i­tics to the extent that it has done so in the US. New exot­ic ways to break the rules and blow up bub­bles are devised. A bunch of ‘inno­va­tors’ make obscene bub­ble for­tunes. What­ev­er safe­guards to the pub­lic that hap­pen to be put in place will be even­tu­al­ly removed and then it will all blow up in a man­ner than was obvi­ous­ly inevitable with no one held account­able and the pub­lic hold­ing the bag. It’s the lat­est iter­a­tion of that same old sto­ry. That same old sto­ry that some­how nev­er gets old.

    Posted by Pterrafractyl | February 28, 2021, 10:02 pm
  13. Here’s an inter­est­ing sto­ry about pri­vate equi­ty in the coal indus­try that has sud­den­ly become much more top­i­cal in light of the Texas win­ter black­out dis­as­ter:

    It turns out pri­vate equi­ty has been busy buy­ing up coal plants of late. It’s a rather unex­pect­ed shake­up for an indus­try that’s long been seen as a dying lega­cy that human­i­ty needs to phase out and replace with renew­ables. So why is are pri­vate equi­ty com­pa­nies so inter­est­ed in a dying indus­try? Because coal tends to play a spe­cial role in the US elec­tri­cal grid: back­up pow­er.

    Yes, it turns out that states with harsh win­ters like Penn­syl­va­nia and Michi­gan have coal pow­ered elec­tri­cal plants that are paid to essen­tial­ly not oper­ate but be ready to oper­ate at a momen­t’s notice. These pay­ments are called capac­i­ty pay­ments, and grid oper­a­tors tend to favor coal pow­ered plants that keep a large stock­pile of coal on hand for these pay­ments.

    Now, it’s worth not­ing that in the case of Texas and the black­outs, there was no issue with the back­up pow­er seg­ment of the pow­er mar­ket because there is no back­up sege­ment of the Texas pow­er mar­ket. Instead of pay­ing ener­gy oper­a­tors capac­i­ty pay­ments to ensure there’s enough pow­er avail­able under high-stress peri­ods, Texas lift­ed the max­i­mum price that pro­duc­ers could charge to $9,000/megawatt-hour and assumed that allow­ing such exor­bi­tant prices would ensure there’s enough capac­i­ty. So this issue with pri­vate equi­ty buy­ing up the back­up pow­er capac­i­ty of the elec­tri­cal grid excludes Texas because Texas has an even more insane mar­ket design.

    And as we’ll see, there’s anoth­er rea­son pri­vate equi­ty has shown a new inter­est in coal. Sad­ly for coal work­ers, it’s the same rea­son pri­vate equi­ty shows an inter­est in all sorts of dying indus­try: it’s a new oppor­tu­ni­ty to load the com­pa­nies up with debt to pay out div­i­dends to the pri­vate equi­ty share­hold­ers. So pri­vate equi­ty is basi­cal­ly try­ing to cap­ture the mar­ket for these poten­tial­ly lucra­tive capac­i­ty pay­ments by buy­ing up com­pa­nies in a doomed indus­try and then accel­er­at­ing the doom by load­ing the com­pa­nies up with debt:

    Reuters

    How pri­vate equi­ty squeezes cash from the dying U.S. coal indus­try

    By Tim McLaugh­lin
    March 2, 2021 9:59 AM
    Updat­ed

    BOSTON (Reuters) — Pri­vate equi­ty firms are prov­ing there’s still plen­ty of prof­it in the U.S. coal indus­try despite a decade of falling demand for the fos­sil fuel. They are spend­ing bil­lions of dol­lars buy­ing coal-fired plants on the cheap — and get­ting paid even when they are not pro­vid­ing pow­er.

    Since the end of 2014, at least five U.S. pri­vate equi­ty firms have bought coal plants in mar­kets where reg­u­la­tors pay them to be on stand­by to pro­vide emer­gency pow­er when demand surges with extreme hot or cold weath­er, accord­ing to a Reuters review of U.S. reg­u­la­to­ry dis­clo­sures and cred­it-rat­ing agency reports.

    The lucra­tive invest­ments illus­trate how fos­sil fuels will remain an impor­tant part of the ener­gy mix — and con­tin­ue spin­ning off cash for investors — even years after demand for them peaks as the world tran­si­tions toward clean­er ener­gy sources.

    The need for reserve pow­er was on dis­play dur­ing the util­i­ty cri­sis this month in Texas — the only U.S. grid sys­tem that oper­ates with­out such an emer­gency sys­tem. A cold snap knocked out sev­er­al of the state’s gen­er­at­ing plants and trig­gered wide­spread black­outs, leav­ing a wake of human suf­fer­ing includ­ing sev­er­al dozen deaths.

    The so-called capac­i­ty pay­ments are giv­en out in most U.S. pow­er mar­kets, and reg­u­la­tors tend to favor coal-fired gen­er­a­tors that store heaps of coal on site when oth­er pow­er sources might be dis­rupt­ed. In the Penn­syl­va­nia, Jer­sey, Mary­land Pow­er Pool (PJM), which has the largest stand­by mar­ket, capac­i­ty rev­enue pay­ments aver­age more than $100 per megawatt per day — an insur­ance pol­i­cy that costs about $9 bil­lion a year and aims to make sure the grid’s 65 mil­lion cus­tomers avoid black­outs dur­ing heat waves and Arc­tic blasts.

    “The capac­i­ty pow­er mar­ket is a cer­tain source of rev­enue for coal plants that might oth­er­wise be uneco­nom­i­cal,” said Sylvia Bialek, an econ­o­mist at New York University’s Insti­tute for Pol­i­cy Integri­ty.

    The admin­is­tra­tion of for­mer Pres­i­dent Don­ald Trump, a Repub­li­can, encour­aged capac­i­ty mar­ket incen­tives for coal-fired gen­er­a­tors. But Pres­i­dent Joe Biden, a Demo­c­rat, is like­ly to change those poli­cies in the com­ing years as part of an effort to slash near­ly all of the U.S. pow­er sector’s reliance on fos­sil fuels by 2035.

    In the mean­time, pri­vate equi­ty firms are in a good posi­tion to com­pete for capac­i­ty pay­ments because tra­di­tion­al util­i­ties are under pres­sure from activist share­hold­ers to reduce green­house gas emis­sions and to lim­it debt.

    The pri­vate equi­ty own­ers of Ohio’s Gavin Pow­er Plant in the PJM grid, for exam­ple, have squeezed hun­dreds of mil­lions of dol­lars out of the facil­i­ty since buy­ing it four years ago, even though it only runs about 60% of the time.

    Light­stone Gen­er­a­tion LLC — a joint ven­ture between Boston’s ArcLight Cap­i­tal Part­ners LLC and New York-based Black­stone Group Inc — took on $2.1 bil­lion in debt from Wall Street banks to buy the plant and three much small­er gas-fired units from Amer­i­can Elec­tric Pow­er Com­pa­ny Inc in 2017, accord­ing to term sheets viewed by Reuters.

    From 2018 to 2020, Lightstone’s pow­er plant oper­a­tions pro­duced about $1.1 bil­lion in oper­at­ing prof­it, accord­ing to esti­mates from Moody’s Investors Ser­vice. Up to 50% of Gavin’s cash flow comes from being on stand­by for emer­gency pow­er, accord­ing to sev­er­al econ­o­mists and cred­it ana­lysts.

    About 18 months after the Gavin acqui­si­tion, ArcLight and Black­stone went back to Wall Street to finance most of a $375 mil­lion spe­cial div­i­dend they paid to them­selves, accord­ing to cred­it rat­ing agen­cies. Such div­i­dends are a way for pri­vate equi­ty firms to lock in prof­its and shift risk to their debt-hold­ers, which are often mutu­al funds. If the busi­ness does well, the debt gets paid off at a pre­mi­um. But if the busi­ness fails, the debt-hold­ers end up with equi­ty stakes in plants of declin­ing val­ue.

    ...

    The pri­vate equi­ty firms’ back­ers have also been mak­ing mon­ey on the invest­ments, accord­ing to fil­ings. The state of Connecticut’s retire­ment plan, for exam­ple, invest­ed $85 mil­lion in ArcLight’s Ener­gy Part­ners Fund VI, which holds stakes in the Gavin plant along with oth­er ener­gy invest­ments, and has seen returns of about 8%.

    Mean­while, mutu­al funds that invest­ed in Lightstone’s debt are receiv­ing pay­ments pegged to a float­ing inter­est rate that has ranged from 4% to 6% — far high­er than about 1.4% on the U.S. bench­mark 10-year yield.

    ‘ABSOLUTELY VITAL’

    Oth­er pri­vate equi­ty firms have also been bet­ting on coal pow­er capac­i­ty pay­ments.

    Atlas Hold­ings, for exam­ple, led a joint ven­ture to buy New Hampshire’s Mer­ri­mack Sta­tion coal plant in 2018, the cen­ter­piece of a $175 mil­lion acqui­si­tion of gen­er­a­tors from New Eng­land-based util­i­ty Ever­source Ener­gy.

    Atlas declined to com­ment.

    The coal plant hard­ly runs but has been eli­gi­ble to receive up to $188 mil­lion in capac­i­ty pay­ments from the New Eng­land ISO between 2018 and 2023, accord­ing to dis­clo­sures by reg­u­la­tors. Work­ers at Mer­ri­mack Sta­tion see their mis­sion as a mat­ter of life and death. They keep boil­ers warm and the plant in a con­stant state of readi­ness, said Tony Sapien­za, busi­ness man­ag­er for Local 1837 of the Inter­na­tion­al Broth­er­hood of Elec­tri­cal work­ers.

    “The capac­i­ty mar­ket is absolute­ly vital,” Sapien­za said. “And with­out Mer­ri­mack Sta­tion, peo­ple might die in the win­ter or dur­ing real­ly hot weath­er. It’s real­ly that sim­ple.”

    The reserve coal plants cre­ate good jobs. Pri­vate-equi­ty owned coal plants can pay their staff about $100,000 a year for keep­ing the facil­i­ties on stand­by and fir­ing them up when need­ed, accord­ing to Shawn Stef­fee, busi­ness agent for the Boil­er­mak­ers Local 154 union in Penn­syl­va­nia. He said coal plants in the state “ran like a freight train” dur­ing the recent cold snap.

    In anoth­er prof­itable invest­ment, pri­vate equi­ty firm River­stone Hold­ings LLC paid $1.8 bil­lion in late 2016 to buy the remain­ing stake in elec­tric­i­ty pro­duc­er Tal­en Ener­gy Corp. The take-pri­vate deal includ­ed stakes in sev­er­al coal plants, includ­ing ones receiv­ing PJM capac­i­ty pay­ments, an “impor­tant com­po­nent” of gross prof­its, accord­ing to an SEC dis­clo­sure. About a year lat­er, Tal­en paid its own­ers, includ­ing River­stone, a spe­cial $500 mil­lion div­i­dend. River­stone did not return mes­sages seek­ing com­ment.

    WITH REWARD COMES RISK

    Pri­vate equi­ty ven­tures into coal-fired pow­er don’t always turn out well, with some deals get­ting caught up in the broad­er decline of the coal indus­try. A cred­it fund run by pri­vate equi­ty firm KKR & Co Inc in 2015, for exam­ple, took a big stake in Longview Pow­er LLC — whose major asset is a West Vir­ginia coal plant plugged into the PJM elec­tric grid — as part of a bank­rupt­cy restruc­tur­ing.

    But in April 2020, Longview filed for bank­rupt­cy pro­tec­tion again, wip­ing out some $350 mil­lion in debt, as coro­n­avirus lock­downs cut elec­tric­i­ty demand. KKR declined to com­ment.

    Ana­lysts and econ­o­mists expect Biden’s admin­is­tra­tion to crack down on rules that pro­long the lifes­pan of dirty coal plants as part of sweep­ing mea­sures to fight cli­mate change. Biden has named Richard Glick, a Demo­c­rat, as the new chair­man of the Fed­er­al Ener­gy Reg­u­la­to­ry Com­mis­sion. Under a Repub­li­can major­i­ty on the com­mis­sion, Glick had been crit­i­cal of FERC rules he con­tends unfair­ly favor coal over renew­able ener­gy sources in capac­i­ty pow­er mar­kets, say­ing they “would have made the Krem­lin econ­o­mists in the old Sovi­et Union blush.”

    ...

    “I’m con­fi­dent, in the next cou­ple of years, FERC will order changes,” said Ari Peskoe, direc­tor of the Elec­tric­i­ty Law Ini­tia­tive at Har­vard Law School.

    Pol­i­cy changes could make it hard­er for high­ly-lever­aged pri­vate equi­ty own­ers of coal plants, like Light­stone, to refi­nance their debts, accord­ing to Richard Don­ner, a cred­it ana­lyst at Moody’s Investors Ser­vice. About $1.7 bil­lion in the company’s debt comes due in 2024.

    Even so, Lightstone’s cred­i­tors are the ones with the great­est risk, accord­ing to Peskoe.

    “Some­how the pri­vate equi­ty guys always make out OK,” Peskoe said. “It’s every­one else who doesn’t.”

    ————

    “How pri­vate equi­ty squeezes cash from the dying U.S. coal indus­try” by Tim McLaugh­lin; Reuters; 03/02/2021

    “The so-called capac­i­ty pay­ments are giv­en out in most U.S. pow­er mar­kets, and reg­u­la­tors tend to favor coal-fired gen­er­a­tors that store heaps of coal on site when oth­er pow­er sources might be dis­rupt­ed. In the Penn­syl­va­nia, Jer­sey, Mary­land Pow­er Pool (PJM), which has the largest stand­by mar­ket, capac­i­ty rev­enue pay­ments aver­age more than $100 per megawatt per day — an insur­ance pol­i­cy that costs about $9 bil­lion a year and aims to make sure the grid’s 65 mil­lion cus­tomers avoid black­outs dur­ing heat waves and Arc­tic blasts.

    A pow­er insur­ance mar­ket that pays out $9 bil­lion a year in capac­i­ty pay­ments for the states of Penn­syl­va­nia, Jer­sey, Mary­land alone. That’s the scale of this sec­tor of elec­tric­i­ty mar­ket the pri­vate equi­ty indus­try is try­ing to cor­ner.

    And the fact that coal plants are the kind of thing a lot of activist share­hold­ers reject over eth­i­cal con­cerns only makes it that much eas­i­er for pri­vate equi­ty to suc­ceed. They’re lack of eth­i­cal con­straint allows them to go where oth­er investors won’t:

    ...
    In the mean­time, pri­vate equi­ty firms are in a good posi­tion to com­pete for capac­i­ty pay­ments because tra­di­tion­al util­i­ties are under pres­sure from activist share­hold­ers to reduce green­house gas emis­sions and to lim­it debt.
    ...

    But the capac­i­ty pay­ments are just one of fac­tors entic­ing pri­vate equi­ty to enter thes sec­tor. The fact that they can load up these com­pa­nies with debt to pay them­selves div­i­dends. It’s an oldie but a good­ie:

    ...
    The pri­vate equi­ty own­ers of Ohio’s Gavin Pow­er Plant in the PJM grid, for exam­ple, have squeezed hun­dreds of mil­lions of dol­lars out of the facil­i­ty since buy­ing it four years ago, even though it only runs about 60% of the time.

    Light­stone Gen­er­a­tion LLC — a joint ven­ture between Boston’s ArcLight Cap­i­tal Part­ners LLC and New York-based Black­stone Group Inc — took on $2.1 bil­lion in debt from Wall Street banks to buy the plant and three much small­er gas-fired units from Amer­i­can Elec­tric Pow­er Com­pa­ny Inc in 2017, accord­ing to term sheets viewed by Reuters.

    From 2018 to 2020, Lightstone’s pow­er plant oper­a­tions pro­duced about $1.1 bil­lion in oper­at­ing prof­it, accord­ing to esti­mates from Moody’s Investors Ser­vice. Up to 50% of Gavin’s cash flow comes from being on stand­by for emer­gency pow­er, accord­ing to sev­er­al econ­o­mists and cred­it ana­lysts.

    About 18 months after the Gavin acqui­si­tion, ArcLight and Black­stone went back to Wall Street to finance most of a $375 mil­lion spe­cial div­i­dend they paid to them­selves, accord­ing to cred­it rat­ing agen­cies. Such div­i­dends are a way for pri­vate equi­ty firms to lock in prof­its and shift risk to their debt-hold­ers, which are often mutu­al funds. If the busi­ness does well, the debt gets paid off at a pre­mi­um. But if the busi­ness fails, the debt-hold­ers end up with equi­ty stakes in plants of declin­ing val­ue.
    ...

    But there are still risks with these kinds of invest­ments. Risks like reg­u­la­to­ry changes intend­ed to phase out coal entire­ly. But as we saw, the indus­try has its ways of trans­fer­ring those risks to oth­ers while lock­ing in the gains. It’s the cred­i­tors who finance these debt-fuel div­i­dends who are assum­ing that reg­u­la­to­ry risk:

    ...
    Pol­i­cy changes could make it hard­er for high­ly-lever­aged pri­vate equi­ty own­ers of coal plants, like Light­stone, to refi­nance their debts, accord­ing to Richard Don­ner, a cred­it ana­lyst at Moody’s Investors Ser­vice. About $1.7 bil­lion in the company’s debt comes due in 2024.

    Even so, Lightstone’s cred­i­tors are the ones with the great­est risk, accord­ing to Peskoe.

    “Some­how the pri­vate equi­ty guys always make out OK,” Peskoe said. “It’s every­one else who doesn’t.”
    ...

    Final­ly, note how the pre­vail­ing ultra-low inter­est rates are help­ing to fuel this trend: As long as the bonds issued by these pri­vate-equi­ty-owned coal com­pa­nies (to pay out div­i­dends) are pay­ing rates high­er than the cur­rent his­tor­i­cal­ly-low trea­sury rates, there’s going to be demand for those bonds:

    ...
    Mean­while, mutu­al funds that invest­ed in Lightstone’s debt are receiv­ing pay­ments pegged to a float­ing inter­est rate that has ranged from 4% to 6% — far high­er than about 1.4% on the U.S. bench­mark 10-year yield.
    ...

    And keep in mind that, should rates on US trea­suries rise, the rates offered on these coal com­pa­ny bonds are going to have to rise too, fur­ther indebt­ing these com­pa­nies. In oth­er words, while the trend of buy­ing up coal com­pa­nies and load­ing them up on debt is cer­tain­ly con­cern­ing, it’s going to become a lot more con­cern­ing in the future as rates rise. At least con­cern­ing to those bond hold­ers who financed the div­i­dends.

    And that points towards a larg­er con­cern that we should keep in mind about what pri­vate equi­ty has been up to in recent years as the rates on US Trea­suries are at a 1‑year high and threat­en to go high­er in the future: the pri­vate pri­vate equi­ty sec­tor has had an unprece­dent­ed oppor­tu­ni­ty to load up the com­pa­nies they own with debt at his­tor­i­cal­ly low inter­est rates. And when an indus­try that exists for the pur­pose of buy­ing up com­pa­nies — typ­i­cal­ly using lots of debt fol­low­ing by load­ing those com­pa­nies up with even more debt to pay out div­i­dends — has access to record low bor­row­ing costs, we should expect record high bor­row­ing from the these pri­vate-equi­ty owned com­pa­nies. Record high bor­row­ing that’s only going to get more expen­sive as rates rise. It’s the kind of dynam­ic to could wreak hav­oc across all sec­tors of the econ­o­my with heavy pri­vate equi­ty own­er­ship, not just the coal indus­try.

    Final­ly, keep in mind that an indus­try that’s noto­ri­ous for gut­ting the com­pa­nies it owns and dri­ving them into the ground prob­a­bly isn’t the best indus­try to rely on for back­up pow­er capac­i­ty.

    Posted by Pterrafractyl | March 5, 2021, 8:41 pm
  14. Here’s a pair of arti­cles about a grow­ing pan­dem­ic-fueled trend in the insur­ance indus­try. A trend that, if crit­ics are cor­rect, is only going to result in the pri­vate equi­ty indus­try find­ing a new source of prof­its to exploit, with the indi­vid­ual life insur­ance and annu­ity pol­i­cy hold­ers pay­ing the price:

    First, here’s a report about a new insur­ance indus­try sur­vey show­ing a sig­nif­i­cant uptick in life insur­ance pol­i­cy sales over the past year, pre­sum­ably as a result of the pan­dem­ic. At the same time, the sur­vey notes that life insur­ance cov­er­age for US cit­i­zens is at the low­est point since the sur­vey was start­ed in 1960, with just 52% of Amer­i­cans own­ing a life insur­ance pol­i­cy out of their work­place cov­er­age (work­place cov­er­age that is inad­e­quate for many fam­i­lies). About 40% of the US adult pop­u­la­tion falls into the cat­e­gories of being unin­sured or under­in­sured accord­ing to this sur­vey, with the cost of life insur­ance cit­ed as one of the chief rea­sons peo­ple are going with­out it. So it sounds like the a pan­dem­ic man­aged to increase the demand for life insur­ance, but that jump in new poli­cies does­n’t ful­ly reflect the rise demand for life insur­ance because a large por­tion of the pop­u­lace can’t afford it even if they want it:

    Pitts­burgh Post-Gazette

    Life insur­ance sales have increased dur­ing the pan­dem­ic

    TIM GRANT
    APR 13, 2021 3:47 AM

    The num­ber of Amer­i­cans who own life insur­ance poli­cies remains at a low, but sales are pick­ing up, and an insur­ance indus­try sur­vey released Mon­day indi­cates fam­i­lies are more inter­est­ed in buy­ing life insur­ance.

    Life insur­ance pol­i­cy sales jumped 14% in Jan­u­ary com­pared with Jan­u­ary 2020. Sales increased 12% in Feb­ru­ary com­pared with Feb­ru­ary 2020, accord­ing to Lim­ra, a Wind­sor, Conn.-based trade group for the finan­cial ser­vices indus­try.

    Sales num­bers for life insur­ance poli­cies also grew in the sec­ond, third and fourth quar­ters of 2020 as more fam­i­lies choose to pur­chase life insur­ance cov­er­age dur­ing the COVID-19 pan­dem­ic.

    Lim­ra researchers found there’s a his­tor­i­cal basis for pan­dem­ic fears caus­ing fam­i­lies to make life insur­ance a pri­or­i­ty. Based on data from the country’s top three mutu­al life insur­ance com­pa­nies, the num­ber of poli­cies sold, on aver­age, increased 58% in 1919 — the year after the flu pan­dem­ic of 1918.

    “If you look at life insur­ance sales, they tend to go up after some type of life event — the birth of a child, get­ting mar­ried or the pass­ing of a loved one,” said David Lev­en­son, pres­i­dent and CEO of Lim­ra. “Sure­ly at a macro lev­el, the pan­dem­ic has been a sig­nif­i­cant life event for many indi­vid­u­als.”

    Limra’s Insur­ance Barom­e­ter Study released Mon­day found 36% of Amer­i­cans plan to buy life insur­ance in the next 12 months, which is the high­est pur­chase intent the sur­vey has found in 11 years.

    “This is a macro life event that affects every­one,” Mr. Lev­en­son said. “Now every­one is eval­u­at­ing what would hap­pen to their fam­i­ly if some­thing hap­pened to them. That is a nat­ur­al way of think­ing in the midst of a pan­dem­ic, and that’s why we see such demand for life insur­ance.”

    Cur­rent­ly, just 52% of Amer­i­cans own a life insur­ance pol­i­cy out­side of their work­place cov­er­age, which Lim­ra says is the low­est lev­el since it start­ed track­ing life insur­ance own­er­ship in 1960.

    Even with the increased demand, that still leaves 102 mil­lion unin­sured and under­in­sured Amer­i­cans, rep­re­sent­ing 40% of the adult pop­u­la­tion.

    The most com­mon rea­sons peo­ple sur­veyed in the study give for not pur­chas­ing life insur­ance are cost and hav­ing oth­er finan­cial pri­or­i­ties.

    Just over half (53%) aren’t sure what type of life insur­ance they need or how much cov­er­age to pur­chase; almost half (47%) stat­ed they have sim­ply put off buy­ing life insur­ance; and more than a third (36%) don’t believe they would qual­i­fy for life insur­ance cov­er­age.

    Forty-four per­cent of mil­len­ni­als esti­mat­ed the annu­al cost of a 20-year term life insur­ance pol­i­cy for a 30-year-old was more than $1,000, when it’s actu­al­ly clos­er to $165 per year.

    The study found many are at risk of putting too much reliance on employ­er-spon­sored life insur­ance cov­er­age. Men (35%) are more like­ly to believe the cov­er­age they get from their job is suf­fi­cient than women do (22%).

    Accord­ing to the U.S. Bureau of Labor Sta­tis­tics, the medi­an life insur­ance cov­er­age offered at the work­place is either a flat sum of $20,000 or one year’s salary.

    The lat­est Barom­e­ter study found more than half of U.S. house­holds rely on dual incomes (54%) and for many, los­ing one income could be finan­cial­ly dev­as­tat­ing to the fam­i­ly. It found that 42% of fam­i­lies would face finan­cial hard­ship in six months and a quar­ter of fam­i­lies would be in dire straits with­in a month.

    “Hav­ing ade­quate life insur­ance cov­er­age is the foun­da­tion of a secure finan­cial future,” Mr. Lev­en­son said. “A good rule of thumb is con­sumers should have 10 times their annu­al salary to ensure their loved ones’ futures are pro­tect­ed.

    ...

    ————-

    “Life insur­ance sales have increased dur­ing the pan­dem­ic” by TIM GRANT; Pitts­burgh Post-Gazette; 04/13/2021

    Lim­ra researchers found there’s a his­tor­i­cal basis for pan­dem­ic fears caus­ing fam­i­lies to make life insur­ance a pri­or­i­ty. Based on data from the country’s top three mutu­al life insur­ance com­pa­nies, the num­ber of poli­cies sold, on aver­age, increased 58% in 1919 — the year after the flu pan­dem­ic of 1918.”

    There’s noth­ing quite like a dead­ly pan­dem­ic to remind peo­ple of their own mor­tal­i­ty. And almost half the US pop­u­lace is unin­sured or under­in­sured, with the lack of afford­abil­i­ty being one of the top rea­sons:

    ...
    Cur­rent­ly, just 52% of Amer­i­cans own a life insur­ance pol­i­cy out­side of their work­place cov­er­age, which Lim­ra says is the low­est lev­el since it start­ed track­ing life insur­ance own­er­ship in 1960.

    Even with the increased demand, that still leaves 102 mil­lion unin­sured and under­in­sured Amer­i­cans, rep­re­sent­ing 40% of the adult pop­u­la­tion.

    The most com­mon rea­sons peo­ple sur­veyed in the study give for not pur­chas­ing life insur­ance are cost and hav­ing oth­er finan­cial pri­or­i­ties.
    ...

    So is there some hope around the cor­ner for that large group of US adults who sim­ply can’t afford decent life insur­ance? Not real­ly. But it sounds like there’s plen­ty of hope for the pri­vate equi­ty indus­try to increase its prof­its by buy­ing up life insur­ance com­pa­nies and squeez­ing them for what­ev­er prof­its they can get:

    CNBC

    Pri­vate equi­ty is buy­ing up annu­ity and life insur­ance poli­cies. That may be bad for con­sumers

    Greg Iacur­ci
    Pub­lished Sat, Apr 24 2021 11:19 AM EDT

    * Pri­vate equi­ty firms are buy­ing up busi­ness­es with bil­lions of dol­lars of annu­ity and life insur­ance assets.
    * Finan­cial advi­sors warn pol­i­cy­hold­ers could see high­er insur­ance costs and oth­er fees as a result.
    * How­ev­er, some deals are struc­tured so there may be a dis­in­cen­tive for firms to raise costs. Pol­i­cy­hold­ers could also ben­e­fit from high­er returns.

    Pri­vate equi­ty firms are buy­ing up insur­ers — and the poli­cies they hold — at a fever­ish pace.

    Some groups, name­ly finan­cial advi­sors, fear the trend may be bad for con­sumers who own annu­ity and life insur­ance con­tracts.

    Crit­ics are con­cerned the buy­ers will wring prof­its from cus­tomers — via high­er costs — to boost returns for their investors. Con­sumers may have owned such insur­ance for years and depend on a cer­tain price for their finan­cial plans.

    They may have bought a pol­i­cy based on an insurer’s finan­cial strength or cred­it rat­ing. New buy­ers may not have the same rat­ing, which sig­ni­fies its abil­i­ty to pay future ben­e­fits, advi­sors cau­tioned.

    “There’s noth­ing good in this for the pol­i­cy­hold­er,” Lar­ry Ryb­ka, chair­man and CEO of Akron, Ohio-based Val­mark Finan­cial Group, said of the pri­vate equi­ty trend.

    But oth­ers don’t see a five-alarm-fire sce­nario.

    Many of the big­ger buy­ers are well-cap­i­tal­ized firms and not all deals are inher­ent­ly bad, accord­ing to some ana­lysts. Pol­i­cy­hold­ers may ben­e­fit from poten­tial­ly high­er invest­ment returns in an envi­ron­ment of low inter­est rates.

    “I don’t know if I’d say [they’re] unfound­ed,” Dafi­na Dun­more, lead ana­lyst for alter­na­tive invest­ment man­agers at Fitch Rat­ings, said of the fears. “I’d say they’re over­played.”

    ‘Watch close­ly’

    The pace of acqui­si­tions has accel­er­at­ed since 2014, accord­ing to Refini­tiv, which tracks finan­cial data.

    There were 191 pri­vate-equi­ty-backed insur­ance deals last year in the U.S., beat­ing the pri­or record of 154 set in 2019.

    Buy­ers paid $12.1 bil­lion so far in 2021 for the deals — eclips­ing the $9.7 bil­lion record set in full-year 2018, accord­ing to Refini­tiv.

    “By def­i­n­i­tion, [pri­vate equity’s] man­date is not the pol­i­cy­hold­ers,” said Gre­go­ry Olsen, a cer­ti­fied finan­cial plan­ner and part­ner at Lenox Advi­sors. “It’s to make as much mon­ey for their investors [as pos­si­ble].”

    Annu­ity and life insur­ance poli­cies car­ry var­i­ous annu­al fees for con­sumers. Those fees can be raised up to a cer­tain cap guar­an­teed by the con­tract.

    Advi­sors are con­cerned pri­vate equi­ty buy­ers will raise those var­i­ous fees to their max­i­mum val­ues. The result may be erod­ed invest­ment earn­ings in a vari­able annu­ity or high­er annu­al pre­mi­ums required to keep a life insur­ance pol­i­cy, for exam­ple.

    “I’d watch close­ly on the expens­es,” Olsen said.

    Wor­ried or adverse­ly affect­ed con­sumers may be able to exchange their annu­ity or life insur­ance for anoth­er.

    How­ev­er, such trans­fers are com­pli­cat­ed, advi­sors said. Con­sumers may inad­ver­tent­ly trig­ger penal­ties and fees, or may be bet­ter suit­ed stay­ing in their cur­rent con­tract even with high­er annu­al fees, they said.

    Types of deals

    Acqui­si­tions are often com­pli­cat­ed and can take dif­fer­ent struc­tures, which have dif­fer­ent impli­ca­tions for con­sumers.

    For exam­ple, a buy­er may pur­chase a major­i­ty stake in an insur­er or buy it out­right.

    In Feb­ru­ary, KKR bought a 60% stake in insur­er Glob­al Atlantic for more than $4 bil­lion. More than 2 mil­lion peo­ple have fixed annu­ities, life insur­ance oth­er poli­cies with Glob­al Atlantic.

    In Jan­u­ary, Black­stone agreed to buy All­state Life Insur­ance Com­pa­ny for $2.8 bil­lion.

    The life insur­er rep­re­sents 80% — or $23 bil­lion — of All­state Corporation’s life insur­ance and annu­ity assets. (All­state is try­ing to sell the oth­er $5 bil­lion cur­rent­ly held by All­state Life Insur­ance Com­pa­ny of New York, it said in the deal announce­ment.)

    In these types of deals, pri­vate-equi­ty firms may have an incen­tive to avoid rais­ing costs and risk­ing rep­u­ta­tion­al dam­age that may cost them future busi­ness.

    Glob­al Atlantic, for exam­ple, hasn’t changed pol­i­cy­hold­er fees on any exist­ing poli­cies since the own­er­ship change, accord­ing to a KKR spokesper­son.

    “As own­er, KKR has a vest­ed inter­est in the long-term suc­cess of Glob­al Atlantic which can only be achieved through strong, trust­ed rela­tion­ships with pol­i­cy­hold­ers and their finan­cial advi­sors and by con­tin­u­ing to offer com­pet­i­tive prod­ucts,” accord­ing to an e‑mailed state­ment.

    Oth­er recent deals have involved lega­cy busi­ness lines closed to new cus­tomers. These types of trans­ac­tions may be a bit shaki­er, since that same incen­tive doesn’t exist, advi­sors said.

    Sixth Street Part­ners announced a deal to buy Tal­cott Res­o­lu­tion Life Insur­ance Com­pa­ny, which owns a large block of lega­cy insur­ance busi­ness, in Jan­u­ary. Tal­cott man­ages over $90 bil­lion for rough­ly 900,000 cus­tomers, includ­ing near­ly 600,000 annu­ity con­tract hold­ers.

    ...

    Low inter­est rates

    Insur­ers have large­ly sold off insur­ance busi­ness due to per­sis­tent­ly low inter­est rates since the Great Reces­sion, ana­lysts said.

    Low inter­est rates equate to low­er returns on bonds that under­pin their insur­ance port­fo­lios. That, in turn, makes it hard­er to keep the required cash on hand to pay promised insur­ance ben­e­fits.

    Sell­ing a block of busi­ness lets insur­ers free up cap­i­tal to invest else­where, accord­ing to Dou­glas Mey­er, lead life insur­ance ana­lyst at Fitch.

    Char­lie Lowrey, chair­man and CEO of Pru­den­tial Finan­cial, said in Feb­ru­ary dur­ing an investor call that the insur­er is look­ing at a poten­tial sale of “low-growth busi­ness­es” like annu­ities and life insur­ance to free up $5 bil­lion to $10 bil­lion of cap­i­tal, for exam­ple.

    Pri­vate equi­ty firms can lever­age the insur­ance pools, and con­sumers’ insur­ance pre­mi­ums and oth­er con­tract fees, as a steady stream of reli­able assets. Hav­ing that “per­ma­nent cap­i­tal” at their dis­pos­al means they won’t have to raise mon­ey in the mar­ket as read­i­ly, ana­lysts said.

    “The P/E angle is real­ly to gath­er assets that are ‘sticky,’” David Havens, a glob­al insur­ance ana­lyst at Impe­r­i­al Cap­i­tal, said in an e‑mail.

    KKR, for exam­ple, added $90 bil­lion of assets under man­age­ment with its pur­chase of Glob­al Atlantic.

    And pri­vate-equi­ty man­agers may be invest­ed across a broad­er range of assets, and in turn earn high­er returns for pol­i­cy­hold­ers beyond tra­di­tion­al bonds, said Dun­more of Fitch.

    “We believe the high­er returns net of all fees we’ve pro­duced — while main­tain­ing strong cred­it qual­i­ty — are espe­cial­ly vital to pol­i­cy­hold­ers in this low-inter­est-rate envi­ron­ment,” accord­ing to Matt Ander­son, a Black­stone spokesman.

    ———-

    “Pri­vate equi­ty is buy­ing up annu­ity and life insur­ance poli­cies. That may be bad for con­sumers” by Greg Iacur­ci; CNBC; 08/24/2021

    Crit­ics are con­cerned the buy­ers will wring prof­its from cus­tomers — via high­er costs — to boost returns for their investors. Con­sumers may have owned such insur­ance for years and depend on a cer­tain price for their finan­cial plans.”

    With the new pri­vate-equi­ty own­ers of these life insur­ance poli­cies attempt to raise fees to max­i­mize prof­its or low­er fees to be nice to the pol­i­cy hold­ers? Hmmm...which of those options will the pri­vate equi­ty indus­try choose? It’s such a mys­tery:

    ...
    “There’s noth­ing good in this for the pol­i­cy­hold­er,” Lar­ry Ryb­ka, chair­man and CEO of Akron, Ohio-based Val­mark Finan­cial Group, said of the pri­vate equi­ty trend.

    ...

    “By def­i­n­i­tion, [pri­vate equity’s] man­date is not the pol­i­cy­hold­ers,” said Gre­go­ry Olsen, a cer­ti­fied finan­cial plan­ner and part­ner at Lenox Advi­sors. “It’s to make as much mon­ey for their investors [as pos­si­ble].”

    Annu­ity and life insur­ance poli­cies car­ry var­i­ous annu­al fees for con­sumers. Those fees can be raised up to a cer­tain cap guar­an­teed by the con­tract.

    Advi­sors are con­cerned pri­vate equi­ty buy­ers will raise those var­i­ous fees to their max­i­mum val­ues. The result may be erod­ed invest­ment earn­ings in a vari­able annu­ity or high­er annu­al pre­mi­ums required to keep a life insur­ance pol­i­cy, for exam­ple.
    ...

    And note the tepid con­so­la­tion from Fitch ana­lyst: it’s not like ALL the pri­vate equi­ty buy­outs in the life insur­ance sec­tor are inher­ent­ly bad? It’s not exact­ly reas­sur­ing. Also, recall how the cred­it rat­ing indus­try played a major role in fuel­ing the 2008 finan­cial cri­sis by sys­tem­at­i­cal­ly under­stat­ing the risks asso­ci­at­ed with mortage-backed secu­ri­ties and these under­ly­ing con­flicts of inter­est in the indus­try con­tin­ue to this day. So when we hear a Fitch ana­lyst assure us that there real­ly should­n’t be THAT big of a con­cern about the finan­cial sta­bil­i­ty of these new pri­vate equi­ty own­ers, it’s the kind of reas­sur­ance we should take with a big grain a salt. As the 2008 finan­cial cri­sis made clear, the busi­ness mod­el of the cred­it rat­ings agen­cies are to pro­vide cred­it rat­ings in exchange for a fee. Not nec­es­sar­i­ly accu­rate cred­it rat­ings:

    ...
    But oth­ers don’t see a five-alarm-fire sce­nario.

    Many of the big­ger buy­ers are well-cap­i­tal­ized firms and not all deals are inher­ent­ly bad, accord­ing to some ana­lysts. Pol­i­cy­hold­ers may ben­e­fit from poten­tial­ly high­er invest­ment returns in an envi­ron­ment of low inter­est rates.

    “I don’t know if I’d say [they’re] unfound­ed,” Dafi­na Dun­more, lead ana­lyst for alter­na­tive invest­ment man­agers at Fitch Rat­ings, said of the fears. “I’d say they’re over­played.”
    ...

    Also note how, while we are being told that the new pri­vate equi­ty own­ers won’t have an incen­tive to abuse their new clients because that would dam­age their rep­u­ta­tion and hin­der their abil­i­ty to get new busi­ness, that log­ic does­n’t apply when it’s sole­ly lega­cy poli­cies that are pur­chased. There aren’t going to be any new clients to wor­ry about in that case:

    ...
    Oth­er recent deals have involved lega­cy busi­ness lines closed to new cus­tomers. These types of trans­ac­tions may be a bit shaki­er, since that same incen­tive doesn’t exist, advi­sors said.

    Sixth Street Part­ners announced a deal to buy Tal­cott Res­o­lu­tion Life Insur­ance Com­pa­ny, which owns a large block of lega­cy insur­ance busi­ness, in Jan­u­ary. Tal­cott man­ages over $90 bil­lion for rough­ly 900,000 cus­tomers, includ­ing near­ly 600,000 annu­ity con­tract hold­ers.
    ...

    Final­ly, note how part of the expla­na­tion for why we should­n’t be too con­cern about the finan­cial sta­bil­i­ty of these new pri­vate-equi­ty-owned insur­ance com­pa­nies is that the pri­vate equi­ty firms can lever­age the insur­ance pools. And while it is true that ‘risk pool­ing’ is an estab­lished way for indi­vid­ual insur­ance com­pa­nies to low­er their costs by pool­ing their risks togeth­er, these risk pools could also be turned into finan­cial time-bombs if the com­pa­nies in the pool are col­lec­tive­ly try­ing to juice their prof­its with risky investe­ments. And yet we’re also told that pri­vate equi­ty firms might be able to achieve high­er yields than tra­di­tion­al insur­ance com­pa­nies because pri­vate equi­ty firms can be invest­ed across a broad­er range of assets that earn high­er returns than tra­di­tion­al bonds. It’s anoth­er way of say­ing pri­vate equi­ty can earn high­er returns than tra­di­tion­al insur­ance com­pa­nies because pri­vate equi­ty can invest in riski­er assets. What could pos­si­bly go wrong?

    ...
    Pri­vate equi­ty firms can lever­age the insur­ance pools, and con­sumers’ insur­ance pre­mi­ums and oth­er con­tract fees, as a steady stream of reli­able assets. Hav­ing that “per­ma­nent cap­i­tal” at their dis­pos­al means they won’t have to raise mon­ey in the mar­ket as read­i­ly, ana­lysts said.

    “The P/E angle is real­ly to gath­er assets that are ‘sticky,’” David Havens, a glob­al insur­ance ana­lyst at Impe­r­i­al Cap­i­tal, said in an e‑mail.

    KKR, for exam­ple, added $90 bil­lion of assets under man­age­ment with its pur­chase of Glob­al Atlantic.

    And pri­vate-equi­ty man­agers may be invest­ed across a broad­er range of assets, and in turn earn high­er returns for pol­i­cy­hold­ers beyond tra­di­tion­al bonds, said Dun­more of Fitch.

    “We believe the high­er returns net of all fees we’ve pro­duced — while main­tain­ing strong cred­it qual­i­ty — are espe­cial­ly vital to pol­i­cy­hold­ers in this low-inter­est-rate envi­ron­ment,” accord­ing to Matt Ander­son, a Black­stone spokesman.
    ...

    So it looks like we’re see­ing the devel­op­ment of a life insur­ance mar­ket­place where pri­vate-equi­ty-owned insur­ance com­pa­nies can increase prof­its by mak­ing high­er-risk invest­ments than tra­di­tion­al insur­ance com­pa­nies while osten­si­bly mit­i­gat­ing the ele­vat­ed risk by pool­ing their high­er-risk invest­ments togeth­er.

    Now, in fair­ness, pool­ing assets does reduce net risk. But that’s only true as long as there aren’t sys­temic risks affect­ing all of the assets like we saw with the 2008 finan­cial cri­sis and the sys­tem­at­ic under­pric­ing of risk in the mort­gage-backed secu­ri­ties mar­ket. And that points to one of the biggest risks cre­at­ed by this new life insur­ance indus­try trend: life insur­ance poli­cies are slat­ed to become much more exposed to the sys­temic risks of the US finan­cial sys­tem.

    In oth­er words, if you hap­pen to have a large life insur­ance pol­i­cy that you are hop­ing will be there for your descen­dents, the odds of your life insur­ance pol­i­cy actu­al­ly being paid out to your fam­i­ly will be a lot high­er if you can man­aged to get all that dying tak­en care of before the next finan­cial cri­sis. No rush. Well, ok, there’s actu­al­ly a bit of a rush. But don’t rush it too much.

    Posted by Pterrafractyl | April 25, 2021, 7:22 pm
  15. The New York Times has an arti­cle about a busi­ness trend that, in once sense, is like an annu­al arti­cle that gets writ­ten every year. But in anoth­er sense, it’s a very unusu­al arti­cle about a very unusu­al occurence. And it’s the fact that this is an arti­cle about a very unusu­al occurence that’s also busi­ness as unusu­al that is per­haps the most sig­nif­i­cant:

    It turns out CEO pay at pub­licly trad­ed US com­pa­nies remained essen­tial­ly undent­ed by the pan­dem­ic-induced eco­nom­ic shock of 2020. Work­ers were frozen or fired. But it was the sta­tus quo for CEO com­pen­sa­tion. Same as last year. And the year before that. And a cou­ple of decades before that too. Sky high. Same as always in the mod­ern post-Rea­gan age for Amer­i­ca: Heads we win, tails you lose. Espe­cial­ly dur­ing a pan­dem­ic.

    So what’s the expla­na­tion giv­en for keep­ing CEO com­pen­sa­tion pack­ages at their already absurd lev­els even dur­ing a glob­al pan­dem­ic? Part of it has to do with the nature of mod­ern exec­u­tive com­pen­sa­tion pack­ages: much of the exec­u­tive pay comes in the form of stock options which have sim­i­lar­ly defied the pan­dem­ic and near records highs. So in that sense this is anoth­er aspect of how we’ve sys­tem­at­i­cal­ly rigged the US econ­o­my for eco­nom­ic cap­ture by the exec­u­tive class by cre­at­ing a soci­ety that requires a boom­ing stock mar­ket for every­one — to keep 401ks financed, etc — while sys­tem­at­i­cal­ly hand­ing out large chunks of the own­er­ship of that stock mar­ket direct­ly to exec­u­tives. It’s like we’ve struc­tured soci­ety into a giant gold­en para­chute.

    But we’re also told in the sto­ry about how cor­po­rate boards viewed the pan­dem­ic as an ‘Act of God’ and jus­ti­fied main­tain­ing high pay even in the mid­dle of mass lay­offs by argu­ing that it real­ly was­n’t any­one’s fault.

    So we can now answer the ques­tion of whether or not a glob­al pan­dem­ic that shut­ters much of the glob­al econ­o­my for a year can make a real dent in exec­u­tive pay. And that answer is no. It’s the kind of ques­tion we nev­er should have had to ask, were it not for the col­lec­tive actions of exec­u­tive com­pen­sa­tion boards for large cor­po­ra­tions seem­ing­ly every­where:

    The New York Times

    C.E.O. Pay Remains Stratos­pher­ic, Even at Com­pa­nies Bat­tered by Pan­dem­ic
    While mil­lions of peo­ple strug­gled to make ends meet, many of the com­pa­nies hit hard­est in 2020 show­ered their exec­u­tives with rich­es.

    By David Gelles
    April 24, 2021

    Boe­ing had a his­tor­i­cal­ly bad 2020. Its 737 Max was ground­ed for most of the year after two dead­ly crash­es, the pan­dem­ic dec­i­mat­ed its busi­ness, and the com­pa­ny announced plans to lay off 30,000 work­ers and report­ed a $12 bil­lion loss. Nonethe­less, its chief exec­u­tive, David Cal­houn, was reward­ed with some $21.1 mil­lion in com­pen­sa­tion.

    Nor­we­gian Cruise Line bare­ly sur­vived the year. With the cruise indus­try at a stand­still, the com­pa­ny lost $4 bil­lion and fur­loughed 20 per­cent of its staff. That didn’t stop Nor­we­gian from more than dou­bling the pay of Frank Del Rio, its chief exec­u­tive, to $36.4 mil­lion.

    And at Hilton, where near­ly a quar­ter of the cor­po­rate staff were laid off as hotels around the world sat emp­ty and the com­pa­ny lost $720 mil­lion, it was a good year for the man in charge. Hilton report­ed in a secu­ri­ties fil­ing that Chris Nas­set­ta, its chief exec­u­tive, received com­pen­sa­tion worth $55.9 mil­lion in 2020.

    The coro­n­avirus plunged the world into an eco­nom­ic cri­sis, sent the U.S. unem­ploy­ment rate sky­rock­et­ing and left mil­lions of Amer­i­cans strug­gling to make ends meet. Yet at many of the com­pa­nies hit hard­est by the pan­dem­ic, the exec­u­tives in charge were show­ered with rich­es.

    The diver­gent for­tunes of C.E.O.s and every­day work­ers illus­trate the sharp divides in a nation on the precipice of an eco­nom­ic boom but still racked by steep income inequal­i­ty. The stock mar­kets are up and the wealthy are spend­ing freely, but mil­lions are still fac­ing sig­nif­i­cant hard­ship. Exec­u­tives are mint­ing for­tunes while laid-off work­ers line up at food banks.

    “Many of these C.E.O.s have improved prof­itabil­i­ty by lay­ing off work­ers,” said Sen­a­tor Eliz­a­beth War­ren, Demo­c­rat of Mass­a­chu­setts, who has pro­posed new tax­es on the ultra­wealthy. “A tiny hand­ful of peo­ple who have shim­mied all the way to the top of the greasy pole get all of the rewards, while every­one else gets left behind.”

    For exec­u­tives who own large stakes in giant com­pa­nies, the gains have been even more pro­nounced. Eight of the 10 wealth­i­est peo­ple in the world are men who found­ed or ran tech com­pa­nies in the Unit­ed States, and each has grown bil­lions of dol­lars rich­er this year, accord­ing to Bloomberg. Jeff Bezos, the founder of Ama­zon, which saw prof­its sky­rock­et with peo­ple stuck at home, is now worth $193 bil­lion. Lar­ry Page, a Google co-founder, is worth $103 bil­lion, up $21 bil­lion in the last four months alone, as his company’s for­tunes have only improved dur­ing the pan­dem­ic.

    And, accord­ing to secu­ri­ty fil­ings, a select few are rapid­ly accu­mu­lat­ing new for­tunes. Chad Richi­son, founder and chief exec­u­tive of an Okla­homa soft­ware com­pa­ny, Pay­com, is worth more than $3 bil­lion and was award­ed $211 mil­lion last year, when his com­pa­ny made $144 mil­lion in prof­it. John Leg­ere, the for­mer chief exec­u­tive of T‑Mobile, was award­ed $137.2 mil­lion last year, a reward for tak­ing over the rival Sprint.

    “We’ve cre­at­ed this class of cen­timil­lion­aires and bil­lion­aires who have not been good for this coun­try,” said Nell Minow, vice chair of Val­ueEdge Advi­sors, an invest­ment con­sult­ing firm. “They may build a wing on a muse­um. But it’s not infra­struc­ture — it’s not the mid­dle class.”

    The gap between exec­u­tive com­pen­sa­tion and aver­age work­er pay has been grow­ing for decades. Chief exec­u­tives of big com­pa­nies now make, on aver­age, 320 times as much as their typ­i­cal work­er, accord­ing to the Eco­nom­ic Pol­i­cy Insti­tute. In 1989, that ratio was 61 to 1. From 1978 to 2019, com­pen­sa­tion grew 14 per­cent for typ­i­cal work­ers. It rose 1,167 per­cent for C.E.O.s.

    The pan­dem­ic only com­pound­ed these dis­par­i­ties, as hun­dreds of com­pa­nies award­ed their lead­ers pay pack­ages worth sig­nif­i­cant­ly more than most Amer­i­cans will make in their entire lives.

    “To my mind, they’re the log­i­cal con­se­quence of our total embrace of share­hold­er cap­i­tal­ism, start­ing with the cor­po­rate raiders of the 1980s, to the exclu­sion and sac­ri­fice of all else, includ­ing Amer­i­can work­ers,” said Robert Reich, a labor sec­re­tary under Pres­i­dent Bill Clin­ton. “The pay pack­ages reflect soar­ing share prices, which in turn reflect, at least in part, the will­ing­ness if not eager­ness of cor­po­ra­tions to cut pay­rolls at the slight­est provo­ca­tion.”

    AT&T, the media con­glom­er­ate, lost $5.4 bil­lion and cut thou­sands of jobs through­out the year. John Stankey, the chief exec­u­tive, received $21 mil­lion for his work in 2020, down from $22.5 mil­lion in 2019.

    T‑Mobile said it would cre­ate new jobs through its merg­er with Sprint, but has already begun lay­offs. It made $3.1 bil­lion in 2020. In addi­tion to Mr. Legere’s wind­fall, the com­pa­ny award­ed its cur­rent chief exec­u­tive, Mike Siev­ert, $54.9 mil­lion.

    Tenet Health­care, a hos­pi­tal chain, fur­loughed about 11,000 work­ers dur­ing the pan­dem­ic, but made near­ly $399 mil­lion in prof­it. “The last 12 months clear­ly have been an extra­or­di­nary chal­lenge and learn­ing expe­ri­ence,” the company’s chief exec­u­tive, Ronald Rit­ten­mey­er, wrote in a fil­ing with the Secu­ri­ties and Exchange Com­mis­sion. In the same doc­u­ment, Tenet revealed that Mr. Rit­ten­mey­er earned $16.7 mil­lion last year.

    And L Brands, the own­er of Victoria’s Secret, cut 15 per­cent of its office staff and tem­porar­i­ly closed most of its stores dur­ing the pan­dem­ic. Andrew Mes­low, who took over from Leslie H. Wexn­er as chief exec­u­tive in Feb­ru­ary last year, still earned $18.5 mil­lion.

    “They always talk about how their employ­ees are the most impor­tant assets,” Ms. Minow said. “But they sure don’t treat them that way.”

    Dozens of pub­lic com­pa­nies have already report­ed pay­ing their C.E.O.s $25 mil­lion or more last year, accord­ing to Equi­lar, an exec­u­tive com­pen­sa­tion con­sult­ing firm. Sev­er­al com­pa­nies that announced major lay­offs last year, includ­ing Com­cast and Nike, have not yet released exec­u­tive com­pen­sa­tion data for last year.

    Many com­pa­nies defend­ed their exec­u­tive com­pen­sa­tion plans. In some cas­es, C.E.O.s took less than they were enti­tled to. Most top exec­u­tives receive the bulk of their pay in shares, which may decrease in val­ue and often vest over sev­er­al years. And at many com­pa­nies, the stock price was up despite the tur­bu­lence in the econ­o­my and regard­less of whether the com­pa­ny was prof­itable.

    “At the end of the day, C.E.O.s end up get­ting reward­ed for how they respond to these exter­nal occur­rences,” said Jan­nice Koors, a com­pen­sa­tion con­sul­tant at Pearl Mey­er who works with com­pa­nies to deter­mine exec­u­tive pay. “If you think about stores clos­ing, fur­loughs, etc., C.E.O.s are get­ting reward­ed for mak­ing those deci­sions.”

    In many ways, the role of cor­po­rate chief­tains has nev­er been more pro­nounced. Beyond run­ning their busi­ness­es, C.E.O.s have emerged as promi­nent voic­es in the nation­al con­ver­sa­tions around race, cli­mate change and vot­ing rights.

    At the same time, they face crit­ics on all sides. Sen­a­tor Mitch McConnell recent­ly told com­pa­nies protest­ing Repub­li­can efforts to over­haul vot­ing laws to “stay out of pol­i­tics.” Mean­while, labor advo­cates are call­ing on com­pa­nies to take bet­ter care of their work­ers.

    “It’s time for the cor­po­ra­tions in this nation to play their part in a recov­ery that can be shared by every­body,” said Mary Kay Hen­ry, inter­na­tion­al pres­i­dent of the Ser­vice Employ­ees Inter­na­tion­al Union. “We can­not rein­force the eco­nom­ic inequal­i­ty that exist­ed before the pan­dem­ic.”

    Exec­u­tives at pub­licly trad­ed com­pa­nies receive most of their com­pen­sa­tion in stock, an arrange­ment intend­ed to align pay with the per­for­mance of a company’s share price. When the stock price goes up, the the­o­ry goes, investors and exec­u­tives alike share in the gains.

    Defy­ing log­ic, the stock mar­ket has been soar­ing for months now, more than mak­ing up the loss­es it suf­fered ear­ly in the pan­dem­ic. As a result, many chief exec­u­tives end­ed the first year of the pan­dem­ic hav­ing over­seen, improb­a­bly, a rise in their company’s share price. The resilience of the mar­kets, and the sense that Covid-19 was an act of God, not the fault of any one per­son, helped com­pa­nies jus­ti­fy big pay pack­ages.

    “Boards were think­ing: ‘This isn’t our man­age­ment team’s fault. This isn’t the result of bad plan­ing or lax gov­er­nance. This kind of hap­pened to every­body,’” Ms. Koors said. “There was a sense in board rooms that if, despite all this, they man­aged to deliv­er on the num­bers, who are we to cut those pay­ments in a year when every­one worked their butts off?”

    Some investors and cor­po­rate gov­er­nance groups are push­ing back on exec­u­tive com­pen­sa­tion plans.

    Star­bucks share­hold­ers vot­ed last month against the com­pen­sa­tion plans for the company’s two top exec­u­tives. The res­o­lu­tion was non­bind­ing, how­ev­er, and the chief exec­u­tive, Kevin John­son, received $14.7 mil­lion in cash and stock last year.

    The biggest clash over pay this year is at Gen­er­al Elec­tric, a com­pa­ny still reel­ing from years of mis­man­age­ment. Lar­ry Culp, the chief exec­u­tive, received $73.2 mil­lion last year and could col­lect well over $100 mil­lion more, thanks to a recent­ly updat­ed pay plan. Sev­er­al promi­nent cor­po­rate gov­er­nance groups have come out in oppo­si­tion to Mr. Culp’s pay, and investors will vote on the issue at G.E.’s annu­al meet­ing next month.

    Even when exec­u­tive pay was slashed, it often remained high. Robert A. Iger, the chair­man of the Walt Dis­ney Com­pa­ny, last year earned less than half what he did in 2019, but his com­pen­sa­tion was still $21 mil­lion. The pay cut was a reflec­tion of the dif­fi­cult year at Dis­ney, which laid off more than 28,000 peo­ple as its theme parks shut down.

    At Boe­ing, Mr. Cal­houn vol­un­tar­i­ly gave up most of his cash salary this year, tak­ing just $269,231 of the $1.4 mil­lion he was enti­tled to. Still, thanks to stock awards, his com­pen­sa­tion was more than $21 mil­lion.

    “Dave obvi­ous­ly gave up a lot,” a Boe­ing spokesman said in an email.

    ...

    ———-

    “C.E.O. Pay Remains Stratos­pher­ic, Even at Com­pa­nies Bat­tered by Pan­dem­ic” By David Gelles; The New York Times; 04/24/2021

    “The coro­n­avirus plunged the world into an eco­nom­ic cri­sis, sent the U.S. unem­ploy­ment rate sky­rock­et­ing and left mil­lions of Amer­i­cans strug­gling to make ends meet. Yet at many of the com­pa­nies hit hard­est by the pan­dem­ic, the exec­u­tives in charge were show­ered with rich­es.

    Heads we win, tails we win, pan­demics we win. It’s all about win­ning. Win­ning by greater and greater mar­gins over the past four decades:

    ...
    “We’ve cre­at­ed this class of cen­timil­lion­aires and bil­lion­aires who have not been good for this coun­try,” said Nell Minow, vice chair of Val­ueEdge Advi­sors, an invest­ment con­sult­ing firm. “They may build a wing on a muse­um. But it’s not infra­struc­ture — it’s not the mid­dle class.”

    The gap between exec­u­tive com­pen­sa­tion and aver­age work­er pay has been grow­ing for decades. Chief exec­u­tives of big com­pa­nies now make, on aver­age, 320 times as much as their typ­i­cal work­er, accord­ing to the Eco­nom­ic Pol­i­cy Insti­tute. In 1989, that ratio was 61 to 1. From 1978 to 2019, com­pen­sa­tion grew 14 per­cent for typ­i­cal work­ers. It rose 1,167 per­cent for C.E.O.s.

    The pan­dem­ic only com­pound­ed these dis­par­i­ties, as hun­dreds of com­pa­nies award­ed their lead­ers pay pack­ages worth sig­nif­i­cant­ly more than most Amer­i­cans will make in their entire lives.

    “To my mind, they’re the log­i­cal con­se­quence of our total embrace of share­hold­er cap­i­tal­ism, start­ing with the cor­po­rate raiders of the 1980s, to the exclu­sion and sac­ri­fice of all else, includ­ing Amer­i­can work­ers,” said Robert Reich, a labor sec­re­tary under Pres­i­dent Bill Clin­ton. “The pay pack­ages reflect soar­ing share prices, which in turn reflect, at least in part, the will­ing­ness if not eager­ness of cor­po­ra­tions to cut pay­rolls at the slight­est provo­ca­tion.”
    ...

    How much win­ning is too much win­ning? It’s the ques­tion cor­po­rate Amer­i­ca prob­a­bly does­n’t want the rest of the coun­try to ask. It’s the kind ques­tion that could raise a whole host of oth­er unpleas­ant ques­tions. Unpleas­ant ques­tions like what it is that the CEOs actu­al­ly do with their time that pro­vides gen­uine val­ue to these cor­po­ra­tions on par with their com­pen­sa­tion? Like, what are some exam­ples a gen­uine­ly inno­v­a­tive or impres­sive deci­sions being made by these fig­ures that played cru­cial roles in the suc­cess of the com­pa­nies and/or ben­e­fit­ed soci­ety at large? Like, are there any exam­ples that could be list­ed for all the top exec­u­tives where they made a deci­sion demon­strat­ing real wis­dom or insight that could­n’t eas­i­ly have been made by a range of oth­er peo­ple at the com­pa­ny? Do such wise deci­sion ever hap­pen for peo­ple in these posi­tion being paid mas­sive small and large for­tunes each year? If so, how often are these wise deci­sions made? Like once a week? Once a year at least, right?

    It all points towards one of the inter­est­ing ironies in mod­ern Amer­i­ca: the class of super-rich who most trans­par­ent­ly deserve their wealth are movies stars and pro­fes­sion­al ath­letes. Not because being a movie star or pro­fes­sion­al ath­lete should nec­es­sar­i­ly make one super-rich, but at least in those pro­fes­sions you have a sense of the ser­vice they pro­vide in exchange for that wealth. Very wealthy doc­tors at least hope­ful­ly pro­vid­ed a lot of good medicine/incredible plas­tic surgery in return. What gen­uine ser­vice to these com­pa­nies did these high­est paid exec­u­tives actu­al­ly pro­vide last year that could war­rants pay on this scale? We have absolute­ly no idea. Think about it: we just read an arti­cle about how exec­u­tive pay con­tin­ued its mul­ti-decade surge despite an eco­nom­i­cal­ly-crip­pling pan­dem­ic and the pri­ma­ry rea­son giv­en in the arti­cle for why this pay was so high were the excus­es giv­en for why exec­u­tive com­pen­sa­tion boards felt like it was unfair to pun­ish the exec­u­tives for a pan­dem­ic that was seen as an act of God...

    ...
    Defy­ing log­ic, the stock mar­ket has been soar­ing for months now, more than mak­ing up the loss­es it suf­fered ear­ly in the pan­dem­ic. As a result, many chief exec­u­tives end­ed the first year of the pan­dem­ic hav­ing over­seen, improb­a­bly, a rise in their company’s share price. The resilience of the mar­kets, and the sense that Covid-19 was an act of God, not the fault of any one per­son, helped com­pa­nies jus­ti­fy big pay pack­ages.

    “Boards were think­ing: ‘This isn’t our man­age­ment team’s fault. This isn’t the result of bad plan­ing or lax gov­er­nance. This kind of hap­pened to every­body,’” Ms. Koors said. “There was a sense in board rooms that if, despite all this, they man­aged to deliv­er on the num­bers, who are we to cut those pay­ments in a year when every­one worked their butts off?”
    ...

    ...and yet there’s almost nev­er an expla­na­tion giv­en from cor­po­ra­tions for why the cor­po­rate exec­u­tive pay was that high on the first place. Com­pa­nies can just point to ‘the mar­ket’ for CEO pay and observe that ‘every­body’ is pay­ing real­ly high com­pen­sa­tion pack­ages and jus­ti­fy almost any absurd com­pen­sa­tion pack­age based on that.

    Sure, com­pen­sa­tion in the form of stock options and his­tor­i­cal­ly high stock prices have played a role in this trend, but this is clear­ly not some­thing dri­ven just by stocks. And when a coun­try struc­tures its soci­ety around an ever-ris­ing stock mar­ket — which is exact­ly what the US has done by shift­ing to a 401k-cen­tric retire­ment mod­el — we can’t treat stock options as just an incen­tive too. It’s part of the rig­ging. Plus, it’s not like stock options are free for the rest of the investors. It points towards a fun­da­men­tal­ly bro­ken mar­ket­place for CEOs that’s oper­at­ing more like an unchecked union for the exec­u­tive class. As long as all the exec­u­tive com­pen­sa­tion boards gross­ly over-pay their exec­u­tives, it’s no one’s fault. Just blame ‘the mar­ket’ for exec­u­tives.

    At least with some of the top exec­u­tives, like Jeff Bezos, they can claim to have start­ed the com­pa­ny. Not that there still aren’t major issues with own US-style mod­ern cap­i­tal­ism sys­tem­i­cal­ly shunts almost all of the val­ue gen­er­at­ed by every­one into the hands of the ‘own­er­ship class, but at least some of them can make a lega­cy claim about start­ed the com­pa­ny. What about exec­u­tives who just kind of rose through the ranks or got recruit­ed to be a CEO? What nov­el val­ue are they actu­al­ly pro­vid­ing? It’s in increas­ing­ly impor­tant ques­tion. Increas­ing­ly impor­tant because the more the CEO-to-aver­age-pay ratio grows the more impor­tant the ques­tion becomes.

    Even worse, as the exec­u­tive class and investor class­es cap­ture greater and greater shares of the over­all stock mar­ket, the nat­ur­al mar­ket counter-force for this trend — the cor­po­rate own­ers putting a stop to exec­u­tive over-com­pen­sa­tion — can get blunt­ed. It’s cor­po­rate com­pen­sa­tion incest, which means we can’t just hope that ‘activist share­hold­ers’ are going to reverse this.

    It points towards an inter­est­ing tool that could be used by soci­ety at large solu­tions for address­ing this issue: cre­ate the social expec­ta­tion that com­pa­nies actu­al­ly pro­vide to the rest of soci­ety a gen­er­al descrip­tion of the actu­al ser­vices pro­vid­ed by the high­est paid offi­cers in the com­pa­ny for the past year. Like, what did these peo­ple actu­al­ly do that was in any way sig­nif­i­cant? Could cre­at­ing such an expec­ta­tion that com­pa­nies actu­al­ly attempt to jus­ti­fy their exec­u­tive com­pen­sa­tion pack­ages to the gen­er­al pub­lic actu­al­ly shame com­pa­nies into reign­ing in these absurd pay pack­ages? Indus­tries can be incred­i­bly com­plex that require spe­cial­ized knowl­edge and expe­ri­ence that only a few peo­ple have. It’s not like there isn’t a case to be made for why a CEO could jus­ti­fy a high pay. But when the growth in CEO pay surges past the pay of every­one else decade after decade, some pub­lic jus­ti­fi­ca­tion for why that’s hap­pen­ing should be seen as a basic required for the integri­ty and log­ic of cap­i­tal­ism to keep work­ing. If the gen­er­al pub­lic stops believ­ing the peo­ple who own the econ­o­my basi­cal­ly earned that own­er­ship, that’s kind of an exis­ten­tial threat to some­thing like cap­i­tal­ism. Or at least sup­posed to be in a free soci­ety.

    Along those lines, if we were to apply this expec­ta­tion to And L Brands to explain why Andrew Mes­low was paid $18.5 mil­lion dur­ing a year when he cut office staff and tem­porar­i­ly closed most of the com­pa­ny’s stores...

    ...
    And L Brands, the own­er of Victoria’s Secret, cut 15 per­cent of its office staff and tem­porar­i­ly closed most of its stores dur­ing the pan­dem­ic. Andrew Mes­low, who took over from Leslie H. Wexn­er as chief exec­u­tive in Feb­ru­ary last year, still earned $18.5 mil­lion.

    “They always talk about how their employ­ees are the most impor­tant assets,” Ms. Minow said. “But they sure don’t treat them that way.”
    ...

    ... note that there is one major ser­vice Andrew Mes­low pro­vides that his pre­de­ces­sor, Leslie H. Wexn­er, could­n’t pro­vide the com­pa­ny: Mes­low can hon­est­ly claim to NOT be one of the clos­est fig­ures to Jef­frey Epstein and arguably the secret sources of Epstein’s wealth. Which is some­thing Wexn­er can’t quite claim. So in that sense, Mes­low real­ly has pro­vid­ed his com­pa­ny an enor­mous ser­vice. Although it seems like there should be a lot of peo­ple who could pro­vide that ser­vice. Maybe Mes­low knows a ton about fir­ing peo­ple extra-prof­itably and that’s the great ser­vice he pro­vid­ed. Who knows, but it would be nice to hear even an attempt at an expla­na­tion one of these years.

    Posted by Pterrafractyl | April 26, 2021, 10:38 pm
  16. Jonathan Gray, pres­i­dent and chief oper­a­tion offi­cer of pri­vate equi­ty giant Black­stone, recent­ly held a results call that includ­ed some pret­ty remark­able state­ments about a grow­ing trend in the indus­try that Gray is pre­dict­ing will be grow­ing much more going for­ward that rep­re­sents a fun­da­men­tal shift in the pri­vate equi­ty indus­try’s busi­ness mod­el. A shift away from a focus on debt-dri­ven short­er-term acqui­si­tions with an eye on mak­ing a quick prof­it towards more a ‘Berk­shire Hath­away’ busi­ness mod­el of long-term own­er­ship of com­pa­nies.

    To put it in indus­try jar­gon terms, ‘alter­na­tive asset man­agers’ (pri­vate equi­ty firms) are increas­ing­ly cre­at­ing non-pri­vate equi­ty invest­ment funds called “per­pet­u­al cap­i­tal” funds, which are basi­cal­ly funds where investors are not inter­est­ed in cash­ing out any time soon in favor of long-term invest­ments that can gen­er­ate an income. Which is basi­cal­ly anti­thet­i­cal to the short-term ‘bor­row, buy on lever­age, and sell for a quick prof­it’ mod­el that has been gen­er­at­ing the indus­try tur­bo-charged returns in recent decades. It’s also obvi­ous­ly poten­tial­ly very tempt­ing to pen­sion funds that might val­ue con­sis­ten­cy over net-returns, although we’re also told that these long-term invest­ments should­n’t expect the same kind of rates of return as the pre­vail­ing high­er-risk/high­er-reward pri­vate equi­ty mod­el. It’s like an invest­ment prod­uct that offers some of the rates of return of high qual­i­ty cor­po­rate bonds for the per­pet­u­al cap­i­tal fund investors, but instead of buy­ing the bond they’re buy­ing the cor­po­ra­tion and milk­ing it for a steady rev­enue stream.

    It sounds like Black­stone has been lead­ing the indus­try in per­pet­u­al cap­i­tal, open­ing a num­ber of funds over the last 7 years with a focus on real estate invest­ments. But oth­er firms have been using per­pet­u­al cap­i­tal for pur­chas­es of life insur­ance and annu­ity com­pa­nies. So while the pri­vate equi­ty indus­try has been increas­ing­ly shap­ing the glob­al econ­o­my for decades, that pres­ence might be more strong­ly felt as giants like Black­stone become Berk­shire Hawath­way-like long-term own­ers of a grow­ing port­fo­lio of com­pa­nies.

    And per­haps more impor­tant­ly, that means pri­vate equi­ty firms like Black­stone will have the abil­i­ty to impose its tra­di­tion­al cut-throat­ed man­age­ment atti­tude — and least when it comes to employ­ees vs investors — on a grow­ing num­ber of large employ­ers for decades to come. It’s an ‘alter­na­tive asset man­age­ment’ indus­try cap­ture of cor­po­rate deci­sion-mak­ing.

    What is dri­ving this change in the long-stand­ing pri­vate equi­ty busi­ness mod­el? Well, on the one hand, the indus­try is telling us that investors appre­ci­ate the steady income streams that can come with long-term invest­ments. At the same time, as the arti­cle notes, it’s pos­si­ble this shift is a reflec­tion of asset man­ager’s chang­ing expec­ta­tions about the long-term via­bil­i­ty of main­tain­ing the pri­vate equi­ty indus­try’s rel­a­tive­ly high annu­al returns. Recall how much of the expla­na­tion we’ve heard for why pen­sion funds are increas­ing­ly invest­ed in pri­vate equi­ty is due to the his­tor­i­cal­ly low rates of returns avail­able else­where. So if it is the case that the pri­vate equi­ty indus­try is fac­ing a future if low­er expect­ed returns, that effec­tive­ly dou­bles as a warn­ing to pen­sion funds unless these per­pet­u­al cap­i­tal funds can fill the gap. Let’s hope that’s pos­si­ble but it sure sucks that we have to hope the pri­vate equi­ty indus­try — which is like the legal man­i­fes­ta­tion of a scammy/predatory eco­nom­ic mod­el — does well on its new per­pet­u­al cap­i­tal busi­ness mod­el to save the pen­sion funds. It was always one of the trag­ic parts of tying the fate of peo­ples’ retire­ments to an indus­try that pri­mar­i­ly exists to make the rich rich­er.

    We’re also told that the COVID pan­dem­ic played a role in this his­toric indus­try shift from short-term to long-term invest­ment in the sense that the pan­dem­ic lim­it­ed the abil­i­ty of pri­vate equi­ty firms to exit out of their invest­ments. But at the same time, the expe­ri­ence gave pri­vate equi­ty giants like Black­stone a new appre­ci­a­tion on the val­ue of patient long-term investors who are will­ing to sit on an invest­ment until bet­ter oppor­tu­ni­ties to sell emerge. And let’s not for­get that the pri­vate equi­ty indus­try has explod­ed dur­ing the pan­dem­ic in part because it is an indus­try incred­i­bly well-posi­tioned to ben­e­fit from the eco­nom­ic tur­moil of the pan­dem­ic. So part of the shift to per­pet­u­al cap­i­tal may be due to the pan­dem­ic caus­ing the indus­try to rec­og­nize the perks of long-term invest­ment funds over the tra­di­tion­al ‘turn­around’ mod­el. But it’s also the case that the indus­try is sit­ting on records amount of cash, in part because investors gave it record amounts of cash because they know it’s the indus­try that always wins in our ‘heads we win, tails you lose’ econ­o­my and the pan­dem­ic cre­at­ed a whole bunch of new eco­nom­ic losers.

    So it sounds like the pri­vate equi­ty indus­try — an indus­try with a tra­di­tion­al busi­ness mod­el of lever­aged debt and fast turn-arounds — is hit­ting some sort of sat­u­ra­tion point. Too much cash. Not enough invest­ment options. And lots of investors who now need to be con­vinced that these forced changes to the indus­try busi­ness mod­el are in their best inter­ests too:

    Bloomberg

    Black­stone Wants to Be More Like Berk­shire Hath­away

    With per­pet­u­al cap­i­tal vehi­cles, pri­vate equi­ty firms are buy­ing and hold­ing, much like War­ren Buf­fett. It’s a dra­mat­ic shift from the rapid turn­around typ­i­cal of the indus­try.

    By Anjani Trive­di
    May 13, 2021, 6:30 PM EDT

    Are pri­vate-equi­ty firms tak­ing to the Berk­shire Hath­away Inc.’s buy-and-hold mod­el? It sure looks like it.

    Alter­na­tive asset man­agers are increas­ing­ly diver­si­fy­ing into what is called per­pet­u­al cap­i­tal. Such vehi­cles are “fuel­ing a pow­er­ful trans­for­ma­tion in the assets we man­age and the earn­ings we gen­er­ate,” Jonathan Gray, pres­i­dent and chief oper­a­tion offi­cer of Black­stone said on a recent results call. The War­ren Buf­fett-style for­ev­er time hori­zon is a stark shift from the tra­di­tion­al pri­vate-equi­ty mod­el, where exit­ing invest­ments is cen­tral to max­i­mum prof­its and min­i­mum time.

    t Black­stone Group Inc., per­pet­u­al cap­i­tal rose 47% to $149.1 bil­lion in the first quar­ter of the year, at a faster pace than over­all assets under man­age­ment. At KKR & Co. Inc., it made up over 30% of the total.

    Tra­di­tion­al pri­vate equi­ty in its most basic sense is about buy­ing assets to sell them at an oppor­tune time. It’s all about turn­arounds: buy a com­pa­ny and pad it with debt. Then, fix it up, cut costs, man­age gov­er­nance and rejig­ger oper­a­tions for growth, greater effi­cien­cies and returns. Typ­i­cal funds run any­where from sev­en to 10 years. Investors pro­vide cap­i­tal and pay man­age­ment fees, then the mon­ey is put to work and in the final years of the fund, it’s har­vest­ed.

    Buffet’s approach is almost entire­ly dia­met­ri­cal­ly opposed to that. The Berk­shire way “induces cost min­i­miza­tion” with­out need­ing to impose dis­ci­pline on the com­pa­nies it buys, George Wash­ing­ton Uni­ver­si­ty Law School’s Lawrence A. Cun­ning­ham not­ed in his 2015 paper on Berk­shire ver­sus KKR. He also not­ed, “The idea of sell­ing a busi­ness is anti­thet­i­cal to the sense of per­ma­nence intend­ed to hold Berk­shire togeth­er in per­pe­tu­ity.”

    ...

    The evo­lu­tion Gray spoke of is like­ly to change the way firms like his invest and divest — and how they price assets over the long run. Alter­na­tive asset man­agers could hold assets through one, two or more cycles. Because the assets aren’t being primped and gussied up for a rel­a­tive­ly fast prof­it, returns from these vehi­cles will be low­er. That hasn’t deterred alter­na­tive asset man­agers from offer­ing this prod­uct as invest­ments to their clients.

    What’s the advan­tage? Covid-19 ham­strung pri­vate-equi­ty firms from exit­ing invest­ments. The likes of Black­stone, how­ev­er, have real­ized that pools of long-term, patient cap­i­tal give them the lux­u­ry of time. There’s no require­ment to return mon­ey to investors, except in cer­tain cir­cum­stances like ter­mi­nat­ing invest­ment man­age­ment agree­ments. There isn’t an oblig­a­tion to sell assets at prices they don’t like, either. Com­mit­ments are longer, remov­ing the oner­ous fundrais­ing and cap­i­tal allo­ca­tion process­es.

    Just look at Blackstone’s stock price. Share­hold­ers are reward­ing it for this shift: Pub­lic equi­ty mar­kets love the safe­ty of a con­stant stream of man­age­ment fees that this kind of cap­i­tal brings since it ensures sus­tain­able rev­enues. Oth­er types of fees that asset man­agers’ gen­er­ate like per­for­mance-dri­ven ones or those asso­ci­at­ed with trans­ac­tions, aren’t reward­ed as hand­some­ly.

    With the shift to longer-term cap­i­tal, alter­na­tive funds are tak­ing a big­ger share of the broad­er mul­ti-tril­lion dol­lar asset man­age­ment industry’s pie. Can the thrifty ethos of Buf­fet con­verge with that of pri­vate-equi­ty firms habit­u­at­ed to impos­ing dis­ci­pline on port­fo­lio com­pa­nies?

    Like Berkshire’s ever-grow­ing pile of cash, pri­vate-equi­ty giants are sit­ting on a record amount of unused cap­i­tal or dry pow­der. That’s worked well through nor­mal busi­ness cycles. But the aver­age age of such cap­i­tal is ris­ing along­side the wait. Deploy­ing cap­i­tal and find­ing assets isn’t get­ting any eas­i­er.

    As the process of invest­ing gets longer and hard­er, alter­na­tive-asset man­agers may be admit­ting that they can no longer guar­an­tee the high-octane returns they used to pro­duce. At the same time, they are dis­cov­er­ing that it may pay to be patient.

    ————

    “Black­stone Wants to Be More Like Berk­shire Hath­away” by Anjani Trive­di; Bloomberg; 05/13/2021

    “As the process of invest­ing gets longer and hard­er, alter­na­tive-asset man­agers may be admit­ting that they can no longer guar­an­tee the high-octane returns they used to pro­duce. At the same time, they are dis­cov­er­ing that it may pay to be patient.”

    Yeah, you can’t just keep shov­el­ing record amounts of investor mon­ey into the pri­vate equi­ty ‘alter­na­tive asset man­age­ment’ space year after year and expect to find end­less oppor­tu­ni­ties for the tra­di­tion­al ‘turn­around’ mod­el. New types of asset man­age­ment will need to be invent­ed to come up with things to do with all that mon­ey and “per­pet­u­al cap­i­tal” is how they going to do it. Now we know how the obscene amounts of mon­ey flow­ing into the pri­vate equi­ty space will be used. It will spill over into the long-term cap­ture of more and more of the econ­o­my:

    ...
    Tra­di­tion­al pri­vate equi­ty in its most basic sense is about buy­ing assets to sell them at an oppor­tune time. It’s all about turn­arounds: buy a com­pa­ny and pad it with debt. Then, fix it up, cut costs, man­age gov­er­nance and rejig­ger oper­a­tions for growth, greater effi­cien­cies and returns. Typ­i­cal funds run any­where from sev­en to 10 years. Investors pro­vide cap­i­tal and pay man­age­ment fees, then the mon­ey is put to work and in the final years of the fund, it’s har­vest­ed.

    ...

    The evo­lu­tion Gray spoke of is like­ly to change the way firms like his invest and divest — and how they price assets over the long run. Alter­na­tive asset man­agers could hold assets through one, two or more cycles. Because the assets aren’t being primped and gussied up for a rel­a­tive­ly fast prof­it, returns from these vehi­cles will be low­er. That hasn’t deterred alter­na­tive asset man­agers from offer­ing this prod­uct as invest­ments to their clients.

    ...

    With the shift to longer-term cap­i­tal, alter­na­tive funds are tak­ing a big­ger share of the broad­er mul­ti-tril­lion dol­lar asset man­age­ment industry’s pie. Can the thrifty ethos of Buf­fet con­verge with that of pri­vate-equi­ty firms habit­u­at­ed to impos­ing dis­ci­pline on port­fo­lio com­pa­nies?

    Like Berkshire’s ever-grow­ing pile of cash, pri­vate-equi­ty giants are sit­ting on a record amount of unused cap­i­tal or dry pow­der. That’s worked well through nor­mal busi­ness cycles. But the aver­age age of such cap­i­tal is ris­ing along­side the wait. Deploy­ing cap­i­tal and find­ing assets isn’t get­ting any eas­i­er.
    ...

    But as the fol­low­ing Forbes piece notes, Black­stone did­n’t just jump into the ‘per­pet­u­al cap­i­tal’ busi­ness yes­ter­day. Their core real estate per­pet­u­al cap­i­tal fund was start­ed sev­en years ago and now has $77 bil­lion in assets under man­age­ment. And Black­stone is just the biggest exam­ple in a trend that’s already well under­way across the indus­try, with per­pet­u­al cap­i­tal funds gob­bling up com­pa­nies in indus­tries like life insur­ance and annu­ities:

    Forbes

    Behind Blackstone’s Ban­ner Quar­ter And PE’s Pur­suit Of A Per­pet­u­al Earn­ings Machine

    Kevin Dowd
    Forbes Staff
    Apr 25, 2021, 07:00am EDT

    I’d like to start today with a big thank you to every­one who joined me for the first week of Deal Flow. There was plen­ty to cov­er, that’s for sure: Five newslet­ters and more than 12,000 words on every­thing from rail­road rival­ries to edi­ble insects.

    Here’s a recap of 11 things you need to know from that busy week, begin­ning with a ban­ner quar­ter at Black­stone that is the lat­est exam­ple of the firm’s seem­ing­ly insa­tiable invest­ing ambi­tions:

    1. Blackstone’s bonan­za

    When Black­stone report­ed its lat­est quar­ter­ly earn­ings this week, the green thumb of firm pres­i­dent Jonathan Gray was on full dis­play.

    It was a record-break­ing stretch in sev­er­al respects. Black­stone logged $1.75 bil­lion in net income for the quar­ter, a year-over-year increase of more than $2.8 bil­lion. Fee-relat­ed earn­ings leaped to $741 mil­lion. Assets under man­age­ment were up 21% year-over-year, hit­ting a new peak of $649 bil­lion, more than any oth­er pri­vate equi­ty firm in the world. Amid all that good news, Blackstone’s stock price rose near­ly 10% this week, tak­ing its mar­ket cap above $100 bil­lion for the first time.

    A plu­ral­i­ty of Blackstone’s cap­i­tal is still housed in its pri­vate equi­ty arm. But increas­ing­ly, the firm’s prof­its are com­ing from oth­er types of invest­ments. Which brings us back to Gray’s ideas about gar­den­ing.

    In a con­fer­ence call, Gray com­pared the tra­di­tion­al pri­vate equi­ty busi­ness to grow­ing crops. You plant a seed (or acquire a com­pa­ny), nur­ture it for a while, reap a har­vest (in the form of an exit), and then plant new seeds. It’s a great mod­el, Gray said. But it’s no longer the only strat­e­gy on Blackstone’s mind.

    This quarter’s earn­ings were aid­ed by an ongo­ing push into per­pet­u­al capital—essentially, fee-gen­er­at­ing assets that can be held for an unlim­it­ed time hori­zon, with no rush to return cash to LPs. It’s a type of invest­ment that’s boom­ing in pop­u­lar­i­ty across the pri­vate equi­ty sec­tor. To explain the appeal, Gray con­tin­ued his botan­i­cal metaphor.

    “With per­pet­u­al cap­i­tal, we’re now also plant­i­ng peren­ni­als,” he said. “Per­pet­u­al cap­i­tal remains in the ground and com­pounds in val­ue, gen­er­at­ing man­age­ment fees and, in most cas­es, recur­ring per­for­mance rev­enues with­out asset sales. These strate­gies are fuel­ing an accel­er­a­tion in the growth and qual­i­ty of the firm’s earn­ings.”

    Black­stone has 15 dif­fer­ent vehi­cles man­ag­ing per­pet­u­al cap­i­tal assets. As a top per­former, Gray sin­gled out the firm’s core real estate strat­e­gy, which tar­gets sta­ble, long-term invest­ments in var­i­ous indus­tri­al, res­i­den­tial, office and retail assets. Found­ed just sev­en years ago, it now boasts some $77 bil­lion in assets under man­age­ment.

    “This per­pet­u­al cap­i­tal is fuel­ing a pow­er­ful trans­for­ma­tion in the assets we man­age and the earn­ings we gen­er­ate,” Gray said. “It’s hard to over­state their pos­i­tive impact.”

    Not every pri­vate equi­ty pow­er­house is tak­ing the same approach to per­pet­u­al cap­i­tal. With­in the past year, both Apol­lo Glob­al Man­age­ment and KKR have opt­ed to expand in the space by acquir­ing life insur­ance annu­ity providers, with Apol­lo buy­ing Athene in an $11 bil­lion deal and KKR snap­ping up Glob­al Atlantic for $4.7 bil­lion.

    ...

    ————-

    “Behind Blackstone’s Ban­ner Quar­ter And PE’s Pur­suit Of A Per­pet­u­al Earn­ings Machine” by Kevin Dowd; Forbes; 04/25/2021

    This quarter’s earn­ings were aid­ed by an ongo­ing push into per­pet­u­al capital—essentially, fee-gen­er­at­ing assets that can be held for an unlim­it­ed time hori­zon, with no rush to return cash to LPs. It’s a type of invest­ment that’s boom­ing in pop­u­lar­i­ty across the pri­vate equi­ty sec­tor. To explain the appeal, Gray con­tin­ued his botan­i­cal metaphor.”

    Fee-gen­er­at­ing assets that can be held for an unlim­it­ed time hori­zon. It’s cer­tain­ly dif­fer­ent from the ‘turn­around’ mod­el. And while there’s no short­age of sig­nif­i­cant prob­lems with the impact the ‘turn­around’ mod­el has the econ­o­my and soci­ety — with its focus on aggres­sive cost-cut­ting and short-term think­ing — it remains to be seen if hav­ing the indus­try get into long-term invest­ing will make the sit­u­a­tion bet­ter. It might just trans­late into mak­ing the short-term think­ing the indus­try is known for into the long-term think­ing of one employ­er after anoth­er across the econ­o­my. In per­pe­tu­ity. Or at least until the assets are no longer gen­er­at­ing enough income, at which point they can be ‘turned around’ (stripped and gut­ted) and sold back to the pub­lic under the tra­di­tion­al mod­el.

    Posted by Pterrafractyl | May 17, 2021, 12:45 am
  17. There was a recent Bloomberg arti­cle about the his­to­ry of the Colo­nial Pipeline and the var­i­ous changes in own­er­ship it under­went over the decades lead­ing up to the great ran­somware hack of 2021. The arti­cle con­tained some fun facts about the own­er­ship his­to­ry of the pipeline that could be impor­tant to keep in mind now that the pri­vate equi­ty indus­try is set­ting its sights on the ‘per­pet­u­al cap­i­tal’ mod­el of invest­ing, where invest­ments that pay steady income streams are held over long peri­ods of time instead of the tra­di­tion ‘turn­around’ mod­el. Because not only are the Koch broth­ers the largest investors in the pipeline, but more recent investors include pri­vate equi­ty funds man­ag­ing on behalf of pen­sion funds, includ­ing a state-run Kore­an pen­sion fund. And it sounds like the pipeline has been treat­ed like a finan­cial asset over the past decade — pay­ing out almost all prof­its as div­i­dends — at the expense of main­te­nance and rein­vest­ments. Like cyber­se­cu­ri­ty invest­ments, pre­sum­ably.

    Yes, the pipeline that sup­plied about 45% of the gas to US East Coast was run like a cash cow. It’s part of the prob­lem with hav­ing retire­ment sys­tems depen­dent on mak­ing the kind of high returns pre­vi­ous­ly only avail­able to wealthy pri­vate equi­ty investors. The real needs of the pen­sion­ers act as cov­er for the greed of the rest of the investors and can pro­vide moral cov­er for cash cow treat­ments of infra­struc­ture. After all, if you’re going to treat a piece of crit­i­cal infra­struc­ture like a cash cow, it helps if at least some of that cash is going to a sym­pa­thet­ic group like pen­sion­ers. And based on the cyber­se­cu­ri­ty experts, less than 25% of the US oil and gas indus­try has ade­quate cyber­se­cu­ri­ty in place. And if the Colo­nial mod­el of own­er­ship of infra­struc­ture by pen­sion funds via pri­vate equi­ty catch­es on the way it looks like it will in com­ing years (the ‘per­pet­u­al cap­i­tal’ mod­el), we could end up with a lot more pen­sion funds invest­ed in pipelines and oth­er large pri­vate infra­struc­ture projects because that’s where the steady income streams can be found. The lit­tle guy is going to be increas­ing­ly co-invest­ed with whales like Charles Koch in Amer­i­ca’s pri­va­tized infra­struc­ture land­scape. But also increas­ing­ly sign­ing up for old lia­bil­i­ties that haven’t been addressed because the infra­struc­ture was being treat­ed like a cash cow:

    Bloomberg
    News

    Colo­nial Pipeline Has Been a Lucra­tive Cash Cow for Many Years

    By Ger­son Fre­itas Jr, Javier Blas, and David Wethe
    May 14, 2021, 6:00 AM EDT

    * It pays out near­ly all its prof­its in div­i­dends to own­ers
    * It has had a series of acci­dents that have raised con­cerns

    The U.S. com­pa­ny that just paid a $5 mil­lion ran­som to East Euro­pean hack­ers has been qui­et­ly mak­ing hun­dreds of mil­lions of dol­lars a year pro­vid­ing a vital ser­vice with lit­tle com­pe­ti­tion and a safe­ty record that has raised con­cerns.

    Colo­nial Pipeline, based in the Atlanta sub­urb of Alpharet­ta, Geor­gia, oper­ates the largest fuel pipeline in the coun­try, trans­port­ing more than 100 mil­lion gal­lons a day from Hous­ton to New York City, half the region’s needs.

    While it began six decades ago as a proud joint project of big oil com­pa­nies — the U.S. com­merce sec­re­tary was present for the 1962 ground­break­ing — today it’s most­ly owned by an arm of Koch Indus­tries and sev­er­al Wall Street investors, and is run as much like a finan­cial asset as a major piece of infra­struc­ture.

    Over the past decade, Colo­nial has dis­trib­uted near­ly all its prof­its, some­times more, in the form of div­i­dends. In 2018, for exam­ple, it paid near­ly $670 mil­lion to its own­ers, even more than the $467 mil­lion net income. Last year, it returned to investors over 90% of its $421.6 mil­lion in prof­its.

    It’s an approach that’s made plen­ty of mon­ey for its own­ers. Last year’s $421 mil­lion in net income was a gain of near­ly 32 cents for every dol­lar of rev­enue. Investors are get­ting an annu­al return of about 10%.

    Mean­while, its aging pipelines have suf­fered a series of acci­dents. Last August, a seg­ment of a con­duit was inter­rupt­ed for almost a week after more than 28,000 bar­rels of gaso­line spilled for days in a North Car­oli­na nature pre­serve, dis­cov­ered by two teenagers rid­ing all-ter­rain vehi­cles.

    That was caused by a fail­ure in a sleeve repair installed 16 years ear­li­er. In March, a fed­er­al reg­u­la­tor said sim­i­lar threats exist through­out the sys­tem and the con­tin­ued oper­a­tion with­out cor­rec­tive mea­sures “would pose a pipeline integri­ty risk to pub­lic safe­ty, prop­er­ty, or the envi­ron­ment.”

    Three oth­er spills due to cracks have been report­ed since 2015. In Sep­tem­ber 2016, a line was shut for 12 days, cut­ting sup­plies to mil­lions of cus­tomers. Two months lat­er, a fatal blast near­by led to anoth­er inter­rup­tion.

    “Colonial’s inabil­i­ty to effec­tive­ly detect and respond to such releas­es has poten­tial­ly exac­er­bat­ed the impacts of numer­ous releas­es over the oper­a­tional his­to­ry of Colonial’s entire pipeline sys­tem,” Pipeline and Haz­ardous Mate­ri­als Safe­ty Admin­is­tra­tion said in a notice of pro­posed safe­ty order sent to Colo­nial Chief Exec­u­tive Offi­cer Joseph Blount.

    Colo­nial Pipeline dis­agrees with those state­ments, is work­ing with the reg­u­la­tor to more ful­ly address any con­cerns and began to imple­ment lessons from the inci­dent almost imme­di­ate­ly after it occurred, a com­pa­ny spokesper­son said in an emailed response to ques­tions. “While one gal­lon released to our right of way is one too many, our safe­ty cul­ture is focused on zero oper­a­tional events,” the com­pa­ny said.

    Some have also accused Colo­nial, like much of the rest of the indus­try, of insuf­fi­cient atten­tion to cyber­se­cu­ri­ty. Matias Katz, founder of the cyber­se­cu­ri­ty firm Byos, esti­mates that less than 25% of the U.S. oil and gas indus­try has ade­quate cyber­se­cu­ri­ty in place.

    In a response to ques­tions, Colo­nial said it has increased over­all spend­ing on infor­ma­tion tech­nol­o­gy by 50% since 2017, when a new chief infor­ma­tion offi­cer was appoint­ed. Colo­nial uses more than 20 dif­fer­ent and over­lap­ping cyber­se­cu­ri­ty tools to mon­i­tor and defend the company’s net­works, and its third-par­ty inves­ti­ga­tor “has acknowl­edged many of the best prac­tices we had in place pri­or to the inci­dent,” it said in a state­ment.

    Colo­nial Pipeline’s capac­i­ty has increased mar­gin­al­ly since the ear­ly 2000s yet reliance on it has grown marked­ly as refiner­ies along the East Coast have shut down due to com­pe­ti­tion from shale sources in Texas and North Dako­ta.

    Fuel mak­ers in New Jer­sey and Penn­syl­va­nia depend on prici­er oil from Europe and West Africa, or domes­tic crude shipped on trains or on U.S. flagged-tankers, both expen­sive propo­si­tions. In 2019, Philadel­phia Ener­gy Solu­tions Inc., the largest refin­ing com­plex on the East Coast, shut after a gaso­line-mak­ing unit was almost destroyed by an explo­sion and fire.

    “The pipeline is 60 years old, but its impor­tance has only increased as Mid-Atlantic refin­ing capac­i­ty has decreased, and his­tor­i­cal­ly oper­at­ing refiner­ies in Vir­ginia, Penn­syl­va­nia and New Jer­sey have shut down,” said James Luci­er at Cap­i­tal Alpha Part­ners LLC, a Wash­ing­ton-based con­sul­tant.

    Tougher reg­u­la­tion and fierce oppo­si­tion from envi­ron­men­tal activists have made it increas­ing­ly cost­ly and more com­plex for com­pa­nies to pur­sue major pipeline projects, accord­ing to Alan Gelder, vice pres­i­dent of refin­ing and oil mar­kets at Wood Macken­zie, a con­sult­ing firm. In Jan­u­ary, Pres­i­dent Joe Biden blocked the $9 bil­lion Key­stone XL project. Even dur­ing the Trump admin­is­tra­tion, ener­gy com­pa­nies such as Williams Cos. and Domin­ion Ener­gy Inc. were forced to scrap major pipeline projects.

    “Build­ing pipelines is com­pli­cat­ed,” says Gelder. “Share­hold­ers would be very care­ful about cap­i­tal invest­ments.”

    If in the 1960s, pipelines made clear eco­nom­ic sense in a coun­try rapid­ly expand­ing its indus­tri­al econ­o­my, in 2021, with demand flat­ten­ing and gaso­line-burn­ing cars being grad­u­al­ly replaced by elec­tric ones, it’s become much hard­er to make the case for mas­sive invest­ment in fos­sil fuel infra­struc­ture.

    “Colo­nial con­tin­ues to active­ly explore growth oppor­tu­ni­ties, which are sub­ject to con­fi­den­tial pro­tec­tions,” the com­pa­ny said. “Refined prod­uct con­sump­tion in the Unit­ed States has remained rel­a­tive­ly flat, but our com­mer­cial affairs team is con­stant­ly eval­u­at­ing expan­sion oppor­tu­ni­ties to meet ship­per and mar­ket demand.”

    The reliance on Colo­nial Pipeline is also a result of reg­u­la­tion like the 1920’s Jones Act, a fed­er­al law that requires goods shipped between U.S. ports to be trans­port­ed on ves­sels that are built, owned, and oper­at­ed by U.S. cit­i­zens or per­ma­nent res­i­dents. The lim­it­ed num­ber of ves­sels that meet the cri­te­ria makes it extreme­ly expen­sive for refin­ers to get oil sup­plies from the Gulf of Mex­i­co by sea.

    “Is this the way it’s sup­posed to be? I would say ‘no’,” Gelder said. “I don’t think U.S. ener­gy infra­struc­ture has ever had a par­tic­u­lar plan.”

    It didn’t start out this way.

    In 1961, nine ener­gy behe­moths includ­ing Tex­a­co, Phillips Petro­le­um, Con­ti­nen­tal Oil and Mobil joined to build what was then the country’s largest-ever pri­vate­ly-fund­ed con­struc­tion project. The pipeline cost­ing $370 mil­lion (about $3.3 bil­lion today) would allow them to haul gaso­line and oth­er fuels from Hous­ton to New York Har­bor and points in-between. Colo­nial was oper­at­ing ful­ly by 1964.

    After mak­ing mas­sive invest­ments that more than dou­bled the system’s capac­i­ty over the 1970s and 1980s, the oil majors that held and ran the pipeline even­tu­al­ly sold their stakes as depressed oil prices through the end of the cen­tu­ry forced them to shed assets and com­bine oper­a­tions.

    The pipeline’s own­er­ship pro­file then began to change com­plete­ly. Today, a unit of Roy­al Dutch Shell PLC is the only oil major among the five firms which split the con­trol of the pipeline.

    .0A unit of the indus­tri­al con­glom­er­ate owned by bil­lion­aires Charles and David Koch emerged as Colonial’s largest share­hold­er after acquir­ing BP Plc’s and Marathon Oil Corp.’s inter­ests from 2002 onward. A joint ven­ture between pri­vate equi­ty firm Kohlberg, Kravis Roberts & Co. and South Korea’s state-run Nation­al Pen­sion Ser­vice bought Chevron Corp.’s stake in 2010. A year lat­er, Caisse de dépôt et place­ment du Québec, a Cana­di­an fund man­ag­er, bought out Cono­coPhillips. IFM Investors, an invest­ment firm owned by Aus­tralian pen­sion funds, holds a stake since 2007.

    Pri­vate equi­ty firms and pen­sion funds are attract­ed to pipelines because they are nat­ur­al monop­o­lies and typ­i­cal­ly pro­vide steady income streams even dur­ing eco­nom­ic down­turns. Investors led by EIG Glob­al Ener­gy Part­ners LLC last month paid $12.4 bil­lion for a stake in Sau­di Aramco’s pipeline pro­ceeds.

    ...

    ————–

    “Colo­nial Pipeline Has Been a Lucra­tive Cash Cow for Many Years” by Ger­son Fre­itas Jr, Javier Blas, and David Wethe; Bloomberg; 05/14/2021

    “Some have also accused Colo­nial, like much of the rest of the indus­try, of insuf­fi­cient atten­tion to cyber­se­cu­ri­ty. Matias Katz, founder of the cyber­se­cu­ri­ty firm Byos, esti­mates that less than 25% of the U.S. oil and gas indus­try has ade­quate cyber­se­cu­ri­ty in place.

    The wealth­i­est indus­try on the plan­et can’t be both­ered to invest in cyber­se­cu­ri­ty. Or basic safe­ty. But hey, at least the investors got their 10% annu­al returns in div­i­dends. Pri­or­i­ties:

    ...
    While it began six decades ago as a proud joint project of big oil com­pa­nies — the U.S. com­merce sec­re­tary was present for the 1962 ground­break­ing — today it’s most­ly owned by an arm of Koch Indus­tries and sev­er­al Wall Street investors, and is run as much like a finan­cial asset as a major piece of infra­struc­ture.

    Over the past decade, Colo­nial has dis­trib­uted near­ly all its prof­its, some­times more, in the form of div­i­dends. In 2018, for exam­ple, it paid near­ly $670 mil­lion to its own­ers, even more than the $467 mil­lion net income. Last year, it returned to investors over 90% of its $421.6 mil­lion in prof­its.

    It’s an approach that’s made plen­ty of mon­ey for its own­ers. Last year’s $421 mil­lion in net income was a gain of near­ly 32 cents for every dol­lar of rev­enue. Investors are get­ting an annu­al return of about 10%.

    Mean­while, its aging pipelines have suf­fered a series of acci­dents. Last August, a seg­ment of a con­duit was inter­rupt­ed for almost a week after more than 28,000 bar­rels of gaso­line spilled for days in a North Car­oli­na nature pre­serve, dis­cov­ered by two teenagers rid­ing all-ter­rain vehi­cles.

    That was caused by a fail­ure in a sleeve repair installed 16 years ear­li­er. In March, a fed­er­al reg­u­la­tor said sim­i­lar threats exist through­out the sys­tem and the con­tin­ued oper­a­tion with­out cor­rec­tive mea­sures “would pose a pipeline integri­ty risk to pub­lic safe­ty, prop­er­ty, or the envi­ron­ment.”

    Three oth­er spills due to cracks have been report­ed since 2015. In Sep­tem­ber 2016, a line was shut for 12 days, cut­ting sup­plies to mil­lions of cus­tomers. Two months lat­er, a fatal blast near­by led to anoth­er inter­rup­tion.

    “Colonial’s inabil­i­ty to effec­tive­ly detect and respond to such releas­es has poten­tial­ly exac­er­bat­ed the impacts of numer­ous releas­es over the oper­a­tional his­to­ry of Colonial’s entire pipeline sys­tem,” Pipeline and Haz­ardous Mate­ri­als Safe­ty Admin­is­tra­tion said in a notice of pro­posed safe­ty order sent to Colo­nial Chief Exec­u­tive Offi­cer Joseph Blount.
    ...

    The Koch broth­ers (now just Charles Koch) are the largest of the investors get­ting these hefty annu­al div­i­dends. But pen­sion funds hun­gry for reg­u­lar annu­al returns have been drawn to the sec­tor too. It’s a trend that’s poised to just keep grow­ing:

    ...
    A unit of the indus­tri­al con­glom­er­ate owned by bil­lion­aires Charles and David Koch emerged as Colonial’s largest share­hold­er after acquir­ing BP Plc’s and Marathon Oil Corp.’s inter­ests from 2002 onward. A joint ven­ture between pri­vate equi­ty firm Kohlberg, Kravis Roberts & Co. and South Korea’s state-run Nation­al Pen­sion Ser­vice bought Chevron Corp.’s stake in 2010. A year lat­er, Caisse de dépôt et place­ment du Québec, a Cana­di­an fund man­ag­er, bought out Cono­coPhillips. IFM Investors, an invest­ment firm owned by Aus­tralian pen­sion funds, holds a stake since 2007.

    Pri­vate equi­ty firms and pen­sion funds are attract­ed to pipelines because they are nat­ur­al monop­o­lies and typ­i­cal­ly pro­vide steady income streams even dur­ing eco­nom­ic down­turns. Investors led by EIG Glob­al Ener­gy Part­ners LLC last month paid $12.4 bil­lion for a stake in Sau­di Aramco’s pipeline pro­ceeds.
    ...

    It rep­re­sents anoth­er aspect of the sys­temic risks asso­ci­at­ed with the explo­sive growth of the pri­vate equi­ty sec­tor. The asset-strip­ping ‘turn­around’ mind­set the indus­try is known for is going to be increas­ing­ly applied to crit­i­cal infra­struc­ture.

    Posted by Pterrafractyl | May 23, 2021, 5:25 pm
  18. Remem­ber those reports from back in Decem­ber about the surge in “div­i­dend recap­i­tal­iza­tions” in the pri­vate equi­ty indus­try, where pri­vate equi­ty-owned com­pa­nies bor­row mon­ey in the US cor­po­rate bond mar­kets almost exclu­sive­ly for the pur­pose of pay­ing their pri­vate equi­ty own­ers div­i­dend. Well, it sounds like that trend has moved on to Europe. A com­bi­na­tion of ultra-low bor­row­ing rates and investors hun­gry for yield has fueled a growth of cor­po­rate bond for the pur­pose of div­i­dend recap­i­tal­iza­tions. Cor­po­rate junk bonds in many cas­es. As the arti­cle makes clear, there does­n’t appear to be a lot of strong eco­nom­ic log­ic behind this kind of bond issuance beyond pure oppor­tunism: rates are low, investors are hun­gry for high­est-yield­ing bonds, and they don’t real­ly care if they’re buy­ing bonds in com­pa­nies that are under­min­ing their own futures pure­ly to pay out div­i­dends to pri­vate equi­ty investors. That’s what’s dri­ving the peo­ple buy­ing these bonds and the peo­ple sell­ing them. The stars have aligned for oppor­tunis­tic debt-fueled loot­ing so that’s what’s hap­pen­ing. It’s the mag­ic of cap­i­tal­ism in action:

    Bloomberg

    ‘Buy Any­thing’ Debt Mar­ket Sees Pri­vate Equi­ty Pay­day

    By Lau­ra Ben­itez and Irene Gar­cia Perez
    May 20, 2021, 12:00 AM EDT Cor­rect­ed May 24, 2021, 12:49 PM EDT

    * PE firms take bond-fund­ed pay­outs at fastest pace since 2017
    * Afflelou deal to pay Lion Cap­i­tal flies; Picard is reject­ed

    It’s the lat­est sign of lever­aged mania hit­ting bond­hold­ers: Com­pa­nies across Europe are pil­ing on debt at the fastest pace in at least four years to enrich their pri­vate-equi­ty own­ers.

    The con­tro­ver­sial prac­tice known as div­i­dend recaps is grow­ing as investors gorge on every cred­it risk, hand­ing a wind­fall to buy­out pros at Lion Cap­i­tal LLP, Part­ners Group and Hell­man & Fried­man LLC, to name a few.

    Pri­vate equi­ty firms have always bor­rowed to buy com­pa­nies. But they’re lay­er­ing on extra debt to write them­selves div­i­dend checks at a time when cen­tral banks have dri­ven bor­row­ing costs to all-time lows to help fos­ter a glob­al eco­nom­ic rebound.

    “If peo­ple want to put cap­i­tal to work they’re just buy­ing any­thing with a bit of yield, regard­less of what pro­ceeds are for,” said Mark Ben­bow, a high-yield fund man­ag­er at Aegon Asset Man­age­ment. “Per­haps the mar­ket is just too com­pla­cent or per­haps believes the cen­tral bankers will always be there as a back­stop. What­ev­er the rea­son, these deals are get­ting done very eas­i­ly.”

    More than 10 com­pa­nies in the region have raised junk bonds this year in part to fund div­i­dends, the high­est year-to-date num­ber since 2017, accord­ing to data provider 9Fin. Some 13 firms also sold loans to finance pay­outs in the first quar­ter of this year, a post-finan­cial cri­sis high, accord­ing to data com­piled by Bloomberg.

    Some of this year’s trans­ac­tions were rat­ed CCC — the low­est rank­ing of junk debt — and paid rel­a­tive­ly high­er rates. But viewed along­side decades of his­to­ry, the deals are still dirt cheap.

    The div­i­dend pay­outs are one way for buy­out firms to take prof­its as they wait for the growth rebound to spur high­er prices in the IPO mar­ket. By issu­ing div­i­dend recaps they can take a cut now and keep their end investors hap­py while they bide their time to cash out com­plete­ly.

    “You have a lot of pri­vate equi­ty involve­ment in the high-yield mar­ket, and spon­sors don’t want to nec­es­sar­i­ly exit busi­ness­es now because we haven’t seen the full open­ing-up trade devel­op,” said Mar­tin Horne, head of glob­al pub­lic fixed income at Bar­ings LLC. “Maybe they wouldn’t get the right mul­ti­ple if they tried to get a full exit by nor­mal mechan­ics.”

    Alain Afflelou SA is the lat­est exam­ple. The French eye-glass retail­er skimmed off a por­tion of bonds sold this month and used some of its own cash to make a 135 mil­lion-euro pay­ment to own­er Lion Cap­i­tal, accord­ing to Andre Ver­neyre, Afflelou’s head of finan­cial oper­a­tions.

    The senior notes received orders for an excess of three times the amount on sale, indi­cat­ing that “investors know us very well and are hap­py to con­tin­ue with us,” he said. Despite the new debt, gross lever­age has remained steady as the com­pa­ny retired old­er bor­row­ings, Ver­neyre said.

    Frozen Out

    The deal fol­lowed div­i­dend recaps for French real-estate devel­op­er Fon­cia Hold­ing SAS and Swedish secu­ri­ty sys­tems mak­er Verisure Hold­ing AB this year. In the U.S., Ver­i­zon Com­mu­ni­ca­tions Vic­tra tapped investors for a div­i­dend twice in the space of just three months this year. The sec­ond $75 mil­lion trans­ac­tion which priced last week was used to fund a $65 mil­lion div­i­dend to its pri­vate-equi­ty spon­sor Lone Star.

    Yet even in the lat­est wave of mar­ket froth, there’s been push­back from bond investors.

    Lion Cap­i­tal failed to pull off a deal to extract div­i­dends from anoth­er one of its port­fo­lio hold­ings, French frozen-food retail­er Picard Groupe SAS. Investors demand­ed high­er pric­ing on the 1.7 bil­lion-euro deal in April and Lion walked away.

    “We com­plet­ed Afflelou but pulled Picard because we were being oppor­tunis­tic and didn’t like the pric­ing,” said Lyn­don Lea, co-founder of Picard’s major­i­ty own­er Lion Cap­i­tal. “There was no urgency because the pro­ceeds were for a div­i­dend, which is not time-sen­si­tive.”

    While the econ­o­my pow­ers ahead and com­pa­nies are grow­ing, ser­vic­ing the extra debt may not seem like much of a strain. The prob­lem aris­es when the eco­nom­ic boom comes to an end, and frag­ile bal­ance sheets are left strug­gling under the weight of large debt piles and falling rev­enue. In the U.S., the finan­cial tra­vails of the Pay­less shoe com­pa­ny were blamed in part on such pay­outs, and have been the tar­get of crit­i­cism from Sen­a­tor Eliz­a­beth War­ren.

    ...

    “It’s eas­i­er to keep adding debt when busi­ness mul­ti­ples are so high as the mar­ket still thinks there is plen­ty of equi­ty below the bonds,” said Ben­bow at Aegon. “Obvi­ous­ly when the cycle turns and the mar­ket cheap­ens up you real­ize that there is lit­tle to no equi­ty left.”

    ————

    “‘Buy Any­thing’ Debt Mar­ket Sees Pri­vate Equi­ty Pay­day” by Lau­ra Ben­itez and Irene Gar­cia Perez; Bloomberg; 05/20/2021

    ““It’s eas­i­er to keep adding debt when busi­ness mul­ti­ples are so high as the mar­ket still thinks there is plen­ty of equi­ty below the bonds,” said Ben­bow at Aegon. “Obvi­ous­ly when the cycle turns and the mar­ket cheap­ens up you real­ize that there is lit­tle to no equi­ty left.”

    Yes, all this cor­po­rate debt is obvi­ous­ly going to be a prob­lem when the econ­o­my even­tu­al­ly weak­ens. But for now, there’s an oppor­tu­ni­ty. As long as bond investors are hap­py to buy bonds that will do noth­ing oth­er than imper­il the finances of these com­pa­nies, pri­vate equi­ty investors will be hap­py to issue them. We’ll wor­ry about the future in the future:

    ...
    Pri­vate equi­ty firms have always bor­rowed to buy com­pa­nies. But they’re lay­er­ing on extra debt to write them­selves div­i­dend checks at a time when cen­tral banks have dri­ven bor­row­ing costs to all-time lows to help fos­ter a glob­al eco­nom­ic rebound.

    “If peo­ple want to put cap­i­tal to work they’re just buy­ing any­thing with a bit of yield, regard­less of what pro­ceeds are for,” said Mark Ben­bow, a high-yield fund man­ag­er at Aegon Asset Man­age­ment. “Per­haps the mar­ket is just too com­pla­cent or per­haps believes the cen­tral bankers will always be there as a back­stop. What­ev­er the rea­son, these deals are get­ting done very eas­i­ly.”

    ...

    While the econ­o­my pow­ers ahead and com­pa­nies are grow­ing, ser­vic­ing the extra debt may not seem like much of a strain. The prob­lem aris­es when the eco­nom­ic boom comes to an end, and frag­ile bal­ance sheets are left strug­gling under the weight of large debt piles and falling rev­enue. In the U.S., the finan­cial tra­vails of the Pay­less shoe com­pa­ny were blamed in part on such pay­outs, and have been the tar­get of crit­i­cism from Sen­a­tor Eliz­a­beth War­ren.
    ...

    Now, in fair­ness, much of this sit­u­a­tion has aris­es as a result of the still his­tor­i­cal­ly low cen­tral bank inter­est rates that has cre­at­ed this incred­i­ble demand for any­thing that pays high­er rates. It’s a cen­tral bank pol­i­cy designed to assets like junk bonds more tempt­ing to investors. And that’s great as long as those junk bonds are being used to help invest in busi­ness­es, or sim­ply keep them afloat dur­ing a rough peri­od. But issu­ing bonds to pay out div­i­dends is just loot­ing. Note how even Lion Cap­i­tal is acknowl­edg­ing that “we were being oppor­tunis­tic” when they had Alain Afflelou SA issue a bunch of bonds to pay Lion a 135 mil­lion euro div­i­dend. It points to one of the fun­da­men­tal prob­lems with the pri­vate equi­ty ‘turn­around’ busi­ness mod­el: The long-term future health of these com­pa­nies is kind of beside the point:

    ...
    Alain Afflelou SA is the lat­est exam­ple. The French eye-glass retail­er skimmed off a por­tion of bonds sold this month and used some of its own cash to make a 135 mil­lion-euro pay­ment to own­er Lion Cap­i­tal, accord­ing to Andre Ver­neyre, Afflelou’s head of finan­cial oper­a­tions.

    The senior notes received orders for an excess of three times the amount on sale, indi­cat­ing that “investors know us very well and are hap­py to con­tin­ue with us,” he said. Despite the new debt, gross lever­age has remained steady as the com­pa­ny retired old­er bor­row­ings, Ver­neyre said.

    ...

    Yet even in the lat­est wave of mar­ket froth, there’s been push­back from bond investors.

    Lion Cap­i­tal failed to pull off a deal to extract div­i­dends from anoth­er one of its port­fo­lio hold­ings, French frozen-food retail­er Picard Groupe SAS. Investors demand­ed high­er pric­ing on the 1.7 bil­lion-euro deal in April and Lion walked away.

    “We com­plet­ed Afflelou but pulled Picard because we were being oppor­tunis­tic and didn’t like the pric­ing,” said Lyn­don Lea, co-founder of Picard’s major­i­ty own­er Lion Cap­i­tal. “There was no urgency because the pro­ceeds were for a div­i­dend, which is not time-sen­si­tive.”
    ...

    We don’t know when the next eco­nom­ic down­turn is com­ing. But based on this trend, we know that future down­turn is going to be worse than it need­ed to be. Well, not worse for the pri­vate equi­ty investors who got all those div­i­dends.

    Posted by Pterrafractyl | May 29, 2021, 7:06 pm
  19. Check out the new kid on the pri­vate equi­ty block: Chi­na. Or rather, Chi­nese cities. Yes, it turns out that Chi­na has been on a kind of munic­i­pal pri­vate-equi­ty binge in recent years. Near­ly every major Chi­nese city has set up local invest­ment funds with the encour­age­ment of Chi­nese author­i­ties, with more than 1,000 gov­ern­ment-guid­ed invest­ment funds hav­ing popped up since 2015.

    But unlike the tra­di­tion­al pri­vate-equi­ty busi­ness mod­el, which are typ­i­cal­ly focused on max­i­miz­ing share­hold­er returns at any cost, these city-run funds are more inter­est­ed in attract­ing new busi­ness­es to the local area to increase the tax base. At the same time, many of these city-backed funds are still forced to team up with tra­di­tion­al pri­vate-sec­tor funds to car­ry out these invest­ments due to a lack of in-house invest­ment tal­ent. So there’s a grow­ing sit­u­a­tion in Chi­na’s pri­vate equi­ty mar­kets where the pub­lic investors — the cities — have a fun­da­men­tal­ly dif­fer­ent set of pri­or­i­ties than their pri­vate-sec­tor part­ners. This is lead­ing to some grous­ing by these pri­vate-sec­tor part­ners, and yet it sounds like it’s the cities that have the most clout because they have most of the mon­ey to invest­ment. It also sounds like this approach to invest­ing has worked out rea­son­ably well for these cities. At least no major deba­cles so far. So Chi­na appears to be exper­i­ment­ing with a pub­lic pri­vate-equi­ty mod­el that pri­or­i­ties local pros­per­i­ty over investor prof­its and it’s at least kind of work­ing so far:

    The Econ­o­mist

    The Chi­nese state is pump­ing funds into pri­vate equi­ty
    It sounds too good to be true to pri­vate investors—and it might be

    Jun 5th 2021

    HONG KONG

    STATE CASH is burn­ing a hole in the pock­et of Shenzhen’s Com­mu­nist Par­ty sec­re­tary. Wang Weizhong told angel investors late last year that if they set up a fund in the south Chi­na tech hub, the gov­ern­ment would bear 40% of their loss­es. For the mon­strous 400bn-yuan ($62bn) state fund back­ing such activ­i­ty, an invest­ment of 3m yuan—the size of a typ­i­cal angel investment—is a round­ing error. For pri­vate investors the invi­ta­tion sounds too good to be true. It might be.

    After sev­er­al years of loose mon­e­tary con­di­tions and bumper deal­mak­ing, liq­uid­i­ty in pri­vate equi­ty (PE) in Chi­na began to dry up in 2018. New reg­u­la­tions made it hard­er for banks and insur­ers to invest. So-called “gov­ern­ment-guid­ed” funds set up by local gov­ern­ments or nation­al min­istries, by con­trast, thrived. Local author­i­ties were encour­aged to launch such invest­ment vehi­cles to lure star­tups to their cities, along with tal­ent, tech­nol­o­gy and, even­tu­al­ly, tax rev­enues. Owing to a lack of in-house invest­ment tal­ent, most of them have act­ed as lim­it­ed part­ners (LPs) in pri­vate-sec­tor funds.

    More than 1,000 gov­ern­ment-guid­ed funds have cropped up across Chi­na since 2015. By late 2020 they man­aged some 9.4trn yuan, accord­ing to Chi­na Ven­ture, a research firm. A nation­al fund focused on upgrad­ing man­u­fac­tur­ing tech­nol­o­gy held 147bn yuan at the last count. One spe­cial­is­ing in microchips exceed­ed 200bn yuan in 2019. Almost every city of note across Chi­na oper­ates its own fund. A munic­i­pal fund in Shen­zhen says it has more than 400bn yuan in assets under man­age­ment, mak­ing it the largest city-lev­el man­ag­er of its kind. In the north­ern city of Tian­jin, the Hai­he Riv­er Indus­try Fund is putting to work 100bn yuan along with anoth­er 400bn yuan from oth­er investors.

    As a result, PE in Chi­na is now flush with state financ­ing. In 2015 pri­vate-sec­tor mon­ey made up at least 70% of lim­it­ed-part­ner funds pour­ing into the indus­try. By the end of 2019, state-backed funds account­ed for at least that much. Their dom­i­nance has only increased since then; by some counts they hold more than 90% of the mon­ey in Chi­nese funds of funds (ie, those that invest in oth­er funds). Accord­ing to Chi­nese media, learn­ing to deal with gov­ern­ment funds is now a “required course” for PE man­agers.

    A degree of state influ­ence is now unavoid­able. But whether that is ben­e­fi­cial or not is hot­ly con­test­ed. Some investors and advis­ers say tak­ing gov­ern­ment cash can help align pri­vate and pub­lic inter­ests. “Gov­ern­ment LPs can open doors for you,” says Kiki Yang of Bain, a con­sult­ing firm. State fund man­agers often under­stand local pol­i­cy objec­tives and can steer investors in the right direc­tion, says a ven­ture-cap­i­tal investor. The influ­ence can go too far, how­ev­er: Shen­zhen Cap­i­tal, a huge state fund, post­ed pic­tures on its web­site of a meet­ing it held in Decem­ber where it helped each of the 42 com­pa­nies it had invest­ed in to launch a Com­mu­nist Par­ty com­mit­tee. These are seen as a way to imbue pri­vate com­pa­nies with par­ty ide­ol­o­gy.

    There are oth­er draw­backs, too. Gov­ern­ment funds are “squeez­ing out oth­er LPs”, says one of China’s top ven­ture-cap­i­tal investors. Clear mis­match­es in inter­ests have also sur­faced. Mem­bers of China’s PE elite cut their teeth at glob­al invest­ment groups such as KKR and TPG, two Amer­i­can firms. Their main aim is to pro­duce hefty returns for LPs. Not so for gov­ern­ment-guid­ed funds. “Rarely do you have a guid­ed fund that is chas­ing returns,” says an advis­er to sev­er­al of them. Instead, state investors are main­ly try­ing to engi­neer a wind­fall in local tax rev­enues by attract­ing new com­pa­nies, espe­cial­ly tech groups. Bal­anc­ing these inter­ests can lead to ten­sions, says one Chi­na-based investor, and often results in invest­ments that hinge on whether or not a com­pa­ny is will­ing to move to a spe­cif­ic city. Some even fear such prob­lems could grad­u­al­ly low­er over­all returns for pri­vate-sec­tor investors.

    So far, though, the arrange­ment has worked well for many pri­vate funds. With small­er funds dying off over the past few years—either owing to lack of cap­i­tal or huge losses—competition for tar­get assets has eased a lit­tle. The mar­ket is health­i­er, investors say, as pri­vate and state cap­i­tal is chan­nelled to bet­ter fund man­agers.

    ...

    ———–

    “The Chi­nese state is pump­ing funds into pri­vate equi­ty”; The Econ­o­mist; 06/05/2021

    More than 1,000 gov­ern­ment-guid­ed funds have cropped up across Chi­na since 2015. By late 2020 they man­aged some 9.4trn yuan, accord­ing to Chi­na Ven­ture, a research firm. A nation­al fund focused on upgrad­ing man­u­fac­tur­ing tech­nol­o­gy held 147bn yuan at the last count. One spe­cial­is­ing in microchips exceed­ed 200bn yuan in 2019. Almost every city of note across Chi­na oper­ates its own fund. A munic­i­pal fund in Shen­zhen says it has more than 400bn yuan in assets under man­age­ment, mak­ing it the largest city-lev­el man­ag­er of its kind. In the north­ern city of Tian­jin, the Hai­he Riv­er Indus­try Fund is putting to work 100bn yuan along with anoth­er 400bn yuan from oth­er investors.

    Every major city gets its own invest­ment fund. That’s the state of con­tem­po­rary ‘com­mu­nism’ in Chi­na, which is real­ly oper­at­ing on a state-run cap­i­tal­ism mod­el. And it’s that mod­el of state-run cap­i­tal­ism that is get­ting put to the test in a big way with the emer­gence of this city-fund trend. Will pri­vate-sec­tor investors be sat­is­fied part­ner­ing with city-funds that have a dif­fer­ent set of pri­or­i­ties? So far so good, although the fact that the city-funds are the ones bring­ing all the cash to the table pre­sum­ably has a lot to do with it:

    ...
    As a result, PE in Chi­na is now flush with state financ­ing. In 2015 pri­vate-sec­tor mon­ey made up at least 70% of lim­it­ed-part­ner funds pour­ing into the indus­try. By the end of 2019, state-backed funds account­ed for at least that much. Their dom­i­nance has only increased since then; by some counts they hold more than 90% of the mon­ey in Chi­nese funds of funds (ie, those that invest in oth­er funds). Accord­ing to Chi­nese media, learn­ing to deal with gov­ern­ment funds is now a “required course” for PE man­agers.

    A degree of state influ­ence is now unavoid­able. But whether that is ben­e­fi­cial or not is hot­ly con­test­ed. Some investors and advis­ers say tak­ing gov­ern­ment cash can help align pri­vate and pub­lic inter­ests. “Gov­ern­ment LPs can open doors for you,” says Kiki Yang of Bain, a con­sult­ing firm. State fund man­agers often under­stand local pol­i­cy objec­tives and can steer investors in the right direc­tion, says a ven­ture-cap­i­tal investor. The influ­ence can go too far, how­ev­er: Shen­zhen Cap­i­tal, a huge state fund, post­ed pic­tures on its web­site of a meet­ing it held in Decem­ber where it helped each of the 42 com­pa­nies it had invest­ed in to launch a Com­mu­nist Par­ty com­mit­tee. These are seen as a way to imbue pri­vate com­pa­nies with par­ty ide­ol­o­gy.

    There are oth­er draw­backs, too. Gov­ern­ment funds are “squeez­ing out oth­er LPs”, says one of China’s top ven­ture-cap­i­tal investors. Clear mis­match­es in inter­ests have also sur­faced. Mem­bers of China’s PE elite cut their teeth at glob­al invest­ment groups such as KKR and TPG, two Amer­i­can firms. Their main aim is to pro­duce hefty returns for LPs. Not so for gov­ern­ment-guid­ed funds. “Rarely do you have a guid­ed fund that is chas­ing returns,” says an advis­er to sev­er­al of them. Instead, state investors are main­ly try­ing to engi­neer a wind­fall in local tax rev­enues by attract­ing new com­pa­nies, espe­cial­ly tech groups. Bal­anc­ing these inter­ests can lead to ten­sions, says one Chi­na-based investor, and often results in invest­ments that hinge on whether or not a com­pa­ny is will­ing to move to a spe­cif­ic city. Some even fear such prob­lems could grad­u­al­ly low­er over­all returns for pri­vate-sec­tor investors.

    So far, though, the arrange­ment has worked well for many pri­vate funds. With small­er funds dying off over the past few years—either owing to lack of cap­i­tal or huge losses—competition for tar­get assets has eased a lit­tle. The mar­ket is health­i­er, investors say, as pri­vate and state cap­i­tal is chan­nelled to bet­ter fund man­agers.
    ...

    It’s going to be inter­est­ing to see how this plays out. Giv­en the sim­plis­tic por­tray­als of Chi­na as a ‘com­mu­nist’ nation, it’s easy to for­get that one of the biggest threats Chi­na pos­es to ‘the West’ is pro­vid­ing the world an exam­ple of a dif­fer­ent kind of eco­nom­ic mod­el. Yes, the Chi­nese gov­ern­men­t’s polit­i­cal mod­el is obvi­ous­ly com­plete­ly author­i­tar­i­an in nature. It’s not exact­ly appeal­ing. But as Chi­na moves more and more towards a state-run cap­i­tal­ist sys­tem, its polit­i­cal mod­el is becom­ing more and more decou­pled from its eco­nom­ic mod­el and eas­i­er for oth­er nations to emu­late. But for the bil­lions of peo­ple in the devel­op­ing world liv­ing under some form of cap­i­tal­ism or anoth­er, the Chi­nese mod­el of state-run cap­i­tal­ism real­ly does present itself as a viable alter­na­tive mod­el to West­’s full-throat­ed embrace of a cut-throat pri­vate sec­tor as the cure all for near­ly all needs. It’s not as if cap­i­tal­ism has­n’t been a dis­as­ter for the glob­al poor. Coun­tries around the world have sov­er­eign wealth funds, after all. Chi­na is effec­tive­ly cre­at­ing city-lev­el sov­er­eign wealth funds and run­ning them with a ‘com­mu­ni­ty prof­its’ mind-set. That seems like some­thing that could be done else­where.

    With that in mind, it’s also worth not­ing the find­ings just released on a new report on the invest­ing philoso­phies guid­ing the worlds sov­er­eign wealth funds: in addi­tion to find­ing an explo­sion of sov­er­eign wealth fund invest­ments in pri­vate equi­ty projects, the report found less than 1 in 5 sov­er­eign wealth funds actu­al­ly have for­mal envi­ron­men­tal, social and gov­er­nance (ESG) poli­cies in place:

    IPE

    Few­er than 20% of SWFs have for­mal ESG pol­i­cy, Pre­qin reports

    By Rachel Fixsen
    2 June 2021

    Only one in five, or 19%, of the world’s sov­er­eign wealth funds (SWFs) have for­mal envi­ron­men­tal, social and gov­er­nance (ESG) poli­cies in place, accord­ing to a new report by alter­na­tives data provider Pre­qin. and law firm Bak­er McKen­zie.

    In their new “Sov­er­eign Wealth Funds in Motion” report, the firms also said the role of SWFs is chang­ing due to the pan­dem­ic, with the funds becom­ing tools of recon­struc­tion, with many invest­ing domes­ti­cal­ly, for exam­ple in big infra­struc­ture projects.

    While only 19% of SWFs had for­mal ESG poli­cies, Pre­qin said the funds that did were gen­er­al­ly the larg­er ones. In terms of assets under man­age­ment (AUM), $4.24trn (54%) of the total $7.84trn of SWF AUM at the end of 2020 was man­aged by funds that did have stat­ed poli­cies, it said.

    Over­all, the report found there had been a grow­ing momen­tum among SWFs “to a more sus­tain­able invest­ment future”, Pre­qin said.

    This has been dri­ven by inter­nal ini­tia­tives as well as stake­hold­er pres­sure from with­in the funds, and a vari­ety of recent nation­al and inter­na­tion­al reg­u­la­to­ry devel­op­ments, it said.

    David Low­ery, head of research insights at Pre­qin, said: “With most economies work­ing their way through the post-COVID-19 recov­ery phase, ESG is the means to focus on returns while deliv­er­ing pos­i­tive out­comes.”

    ...

    Pre­qin said SWFs were becom­ing more promi­nent in the glob­al finan­cial sys­tem, with col­lec­tive AUM hav­ing grown at a rate of 8% per annum since the end of 2011.

    At the end of 2020, SWFs made up rough­ly 7% of glob­al assets under man­age­ment (AUM) of $111.2trn, accord­ing to the report.

    Alter­na­tives allo­ca­tions up

    Pre­qin said alter­na­tive invest­ment funds were one way SWFs could play a part in the recon­struc­tion and recov­ery efforts, and that SWF invest­ments in pri­vate equi­ty, real estate, infra­struc­ture, pri­vate debt and hedge funds had grown a lot over the past decade.

    Cumu­la­tive SWF allo­ca­tions to such assets was over $700bn at the end of 2020, accord­ing to the report.

    Pri­vate equi­ty was the most pop­u­lar asset class out of these alter­na­tives for SWFs, Pre­qin said, with the sov­er­eign funds hav­ing a medi­an allo­ca­tion of 9.3% here, fol­lowed by real estate at 6.7%.

    Com­bined medi­an SWF tar­get allo­ca­tions to pri­vate equi­ty, real estate, and infra­struc­ture had grown to 30% in 2020, from just 18% back in 2011, it said.

    ———-

    “Few­er than 20% of SWFs have for­mal ESG pol­i­cy, Pre­qin reports” by Rachel Fixsen; IPE; 06/02/2021

    Only one in five, or 19%, of the world’s sov­er­eign wealth funds (SWFs) have for­mal envi­ron­men­tal, social and gov­er­nance (ESG) poli­cies in place, accord­ing to a new report by alter­na­tives data provider Pre­qin. and law firm Bak­er McKen­zie.”

    Only 19% of the funds set up to invest on behalf of entire nations for­mal­ly care about any­thing oth­er than mak­ing as much mon­ey as pos­si­ble. For the oth­er 81%, it’s pre­sum­ably just about invest­ing in what­ev­er brings the best finan­cial returns. It’s one of those fun fact that peo­ple in the future are going to look back on after we’ve allowed cap­i­tal­ism to col­lapse the bios­phere and tear soci­eties apart.

    And with a medi­an allo­ca­tion of near­ly 10% of sov­er­eign wealth fund assets in pri­vate equi­ty invest­ments and that num­ber only grow­ing, we can be con­fi­dent that what­ev­er type of influ­ence these sov­er­eign wealth funds decide to exert on their invest­ments will like­ly be sig­nif­i­cant­ly felt. These funds have the clout that comes with size. So should that 81% of sov­er­eign wealth funds that cur­rent­ly like an ESG pol­i­cy even­tu­al­ly put on in place, a whole lot of pos­i­tive impacts could poten­tial­ly be chan­neled through that own­er­ship. There’s no rea­son the recent sto­ry about an activist invest­ment fund forc­ing major pro-envi­ron­men­tal changes at Exxon could­n’t be repli­cat­ed else­where with all these sov­er­eign wealth invest­ments:

    ...
    Pre­qin said alter­na­tive invest­ment funds were one way SWFs could play a part in the recon­struc­tion and recov­ery efforts, and that SWF invest­ments in pri­vate equi­ty, real estate, infra­struc­ture, pri­vate debt and hedge funds had grown a lot over the past decade.

    Cumu­la­tive SWF allo­ca­tions to such assets was over $700bn at the end of 2020, accord­ing to the report.

    Pri­vate equi­ty was the most pop­u­lar asset class out of these alter­na­tives for SWFs, Pre­qin said, with the sov­er­eign funds hav­ing a medi­an allo­ca­tion of 9.3% here, fol­lowed by real estate at 6.7%.
    ...

    So that’s the lay­out of a fas­ci­nat­ing clash of mod­els in the pri­vate equi­ty space that’s cur­rent­ly unfold­ing glob­al­ly. We have an explo­sion of gov­ern­ment-guid­ed funds in Chi­na oper­at­ing under a ‘max­i­mal indi­rect prof­it for the city’ mod­el focused on bring­ing busi­ness to the city. At the same time, sov­er­eign wealth funds around the globe are con­tin­u­ing to pile into pri­vate equi­ty, but large­ly still oper­at­ing under a social­ly irre­spon­si­ble ‘prof­it for prof­it’s sake’ kind of tra­di­tion­al invest­ment mod­el. The two mod­els aren’t exact­ly in direct com­pe­ti­tion with each oth­er as long as there remains a democ­ra­cy vs autoc­ra­cy divide between Chi­na and West. But as the West con­tin­ues its decades-long lurch away from mean­ing­ful democ­ra­cy and close and clos­er towards an embrace of anti-demo­c­ra­t­ic far right fas­cism world views, that com­pe­ti­tion between the eco­nom­ic mod­els of Chi­na and the West real­ly does become much more of a direct com­par­i­son.

    That’s part of what makes this such a grim­ly fas­ci­nat­ing trend: as Chi­na con­tin­ues to evolve its econ­o­my more and more towards a form of state-run cap­i­tal­ism, the West con­tin­ues to move away from democ­ra­cy and clos­er towards a civ­i­liza­tion almost entire­ly cap­tured by a mod­el of short-term rapa­cious prof­it-max­i­mal­iz­ing cap­i­tal­ism. If trends con­tin­ue, the eco­nom­ic con­trasts of these two mod­els are only going to grow in impor­tance because the democ­ra­cy gap will have with­ered away. It’s the kind of dynam­ic that’s going to be increas­ing­ly impor­tant to keep in mind as the glob­al far right fix­a­tion on Chi­na con­tin­ues to fes­ter all. In oth­er words, an author­i­tar­i­an Chi­na that embraces cap­i­tal­ism isn’t a threat to West­ern fas­cism because of some sort of pro­found dis­agree­ment with Chi­nese author­i­tar­i­an­ism. The Chi­nese mod­el is a exis­ten­tial threat because the Chi­nese mod­el of author­i­tar­i­an cap­i­tal­ism has been demon­stra­bly bet­ter as deliv­er­ing very real eco­nom­ic gains to the mass­es than the crony cap­i­tal­ism of the West over the past cou­ple of gen­er­a­tions and that’s going to be a painful con­trast to deal with after the far right push­es the West into the post-democ­ra­cy future it has planned for us. The world is inevitably watch­ing.

    Posted by Pterrafractyl | June 6, 2021, 5:13 pm
  20. The US has long been a soci­ety heav­i­ly defined by its absurd jux­ta­po­si­tions. You can’t start off as a slave-own­ing democ­ra­cy with­out a capac­i­ty for incred­i­ble inter­nal con­tra­dic­tions. Weird inter­nal con­tra­dic­tions that per­sist to this day, like the US’s deeply held cul­tur­al aver­sion to a heavy-hand­ed gov­ern­ment jux­ta­posed with an almost cel­e­bra­to­ry embrace of cor­po­ratism and pri­vate wealth. Pri­vate wealth that has large­ly cap­tured the US gov­ern­ment and econ­o­my in the post-Rea­gan era. But per­haps the biggest recent exam­ple of that amaz­ing capac­i­ty for con­tra­dic­tion has been wit­ness­ing the rise of Trump­ism — a new kind of brand­ing for the Repub­li­can Par­ty based heav­i­ly on overt­ly anti-cor­po­ratist/an­ti-elit­ist right-wing pop­ulism — at the same time the par­ty remains com­plete in the grip of its cor­po­rate mega-donor net­works. A rebrand­ing that, some­what pre­dictably, emerged in the years fol­low­ing the 2008 finan­cial cri­sis that rat­tle what remained of the US soci­ety’s faith in its polit­i­cal and eco­nom­ic elites.

    And yet, at the same time we’ve seen the rise of Trump­ism and the faux anti-elite right-wing pop­ulism he ped­dles, the cap­ture of the US econ­o­my by those same eco­nom­ic elites has accel­er­at­ed since 2008. The under­ly­ing jux­ta­po­si­tion of ‘the land of the free’ being eco­nom­i­cal­ly cap­tured by a tiny elite has only grown in the post-cri­sis years. It’s a key part of the con­text of US’s seem­ing­ly end­less era mod­ern polit­i­cal crises: the nev­er-end­ing polit­i­cal cri­sis and loss of faith in polit­i­cal insti­tu­tions coin­cid­ed with the ongo­ing cap­ture of the US econ­o­my. We can’t actu­al­ly sep­a­rate the loss of faith in the US polit­i­cal sys­tem from the loss of faith in the basic fair­ness of the US econ­o­my. And yet chan­nel­ing that sense of griev­ance and a sense that Amer­i­ca is a rigged soci­ety is large­ly at the core of what Trump­ism rep­re­sent­ed. A brand­ing of that pro­found loss of faith in Amer­i­ca’s elites away from the cor­po­rate elites and towards ‘cul­tur­al elites’ like pub­lic school teach­ers or ‘woke’ aca­d­e­mics’. And you can’t argue it has­n’t been a wild­ly suc­cess­ful redi­rec­tion oper­a­tion. When was the last time you heard about some sort of lin­ger­ing pub­lic grum­bling over how no bankers were sent to jail for the finan­cial cri­sis? It’s basi­cal­ly been a non-sto­ry for like a decade now. Wall Street and cor­po­rate Amer­i­ca won. At the expense of the rest of Amer­i­ca.

    It’s that ongo­ing and grow­ing inter­nal jux­ta­po­si­tion in Amer­i­can soci­ety — where more and more of the econ­o­my con­tin­ues to be cap­tured by a sliv­er of soci­ety — that’s going to remain one of the more fas­ci­nat­ing angles to US pol­i­tics play out in com­ing elec­tion cycles as we wait to see what this Trump­ist move­ment morphs into next. Just how effec­tive­ly will the Repub­li­can Par­ty being able to direct and shape the anti-elit­ist sen­ti­ments that have become a core ele­ment of the mod­ern day Repub­li­can Par­ty’s griev­ance-dri­ven mes­sag­ing with­out tap­ping into the very real and jus­ti­fi­able anti-cor­po­rate elit­ist sen­ti­ments. After all, if the under­ly­ing mes­sage for the mod­ern day Repub­li­can Par­ty is going to be ‘the sys­tem is rigged against con­ser­v­a­tives’, it’s going to be hard to ignore the very real eco­nom­ic rig­ging that has defined the mod­ern Amer­i­can econ­o­my. And yet ignor­ing that cor­po­rate elit­ist eco­nom­ic rig­ging has to remain a core objec­tive for the par­ty. Cor­po­rate Amer­i­ca is the GOP’s core con­stituen­cy, after all.

    So with all of that in mind, here’s the lat­est reminder that not only has the US econ­o­my been effec­tive­ly cap­tured by its cor­po­rate eco­nom­ic elites over the last gen­er­a­tion, but that it’s done so via the rig­ging of the stock mar­ket. Sys­tem­at­ic rig­ging that has enable cor­po­rate exec­u­tives to effec­tive­ly engage in unre­strict­ed insid­er trad­ing for decades in what amounts to a giant scan­dalous open secret. Due a com­bi­na­tion of lax reg­u­la­tions, weak­er enforce­ment, and sys­tem of rules seem­ing­ly designed to facil­i­tate legal insid­er trad­ing, cor­po­rate exec­u­tives have been shown to earn annu­al­ized returns on their stock trades approach that of the high­est-per­form­ing hedge funds.

    And while insid­er trad­ing is, legal­ly speak­ing, a greater prob­lem for pub­licly trad­ed com­pa­nies, where the rules are stricter, that does­n’t mean pri­vate equi­ty does­n’t suf­fer from this prob­lem. The unequal treat­ment of pri­vate equi­ty investors is some­thing experts have been warn­ing for years is tak­ing place. It’s espe­cial­ly impor­tant to keep in mind giv­en the ongo­ing inter­ests groups like pen­sion funds have in boost­ing their returns with pri­vate equi­ty invest­ments.

    Yes, dur­ing the same peri­od when the US embraced stock port­fo­lios for all — turn­ing away from pen­sions for most work­ings and mak­ing a strong stock mar­ket effec­tive­ly a require­ment for aver­age Amer­i­cans with 401ks to enjoy a retire­ment — and this same peri­od when stocks have been repeat­ed­ly bailed out by the US gov­ern­ment, we’re also learn­ing that the cor­po­rate exec­u­tives who have been show­er­ing them­selves with stock options have also been engag­ing in ram­pant insid­er trad­ing. It’s an open secret. An open secret that aver­age Amer­i­cans have long sus­pect­ed but nev­er real­ly had con­firmed.

    Until now. Because accord­ing to new research study­ing the insid­er trad­ing in the US, it’s every­where and no one cares. At least no one involved with pre­vent­ing it. And while reg­u­la­tors have cer­tain­ly failed in pre­vent­ing this insid­er trad­ing, so to have the cor­po­ra­tions them­selves, who end up shar­ing much of the respon­si­bil­i­ty for over­see­ing and pre­vent­ing insid­er trad­ing under US law. The open secret was con­firmed by research. The ques­tion now is how long before this open secret becomes a wide­ly rec­og­nized open secret by a pub­lic that seems to have for­got­ten how angry it was at cor­po­rate Amer­i­ca and what will cor­po­rate Amer­i­ca do to redi­rect that rage this time. It points towards a tru­ly dan­ger­ous polit­i­cal dynam­ic that we should expect to emerge as pub­lic aware­ness of the gross rig­ging of Amer­i­ca con­tin­ues to gel. In oth­er words, Trump­ism 2.0 is going to have a lot of excess resent­ment to rechan­nel regard­ing the mass sys­tem­at­ic rig­ging and cheat­ing in US stock mar­kets by Amer­i­ca’s eco­nom­ic elites:

    Bloomberg Busi­ness­week

    ‘Most Amer­i­cans Today Believe the Stock Mar­ket Is Rigged, and They’re Right’
    New research shows insid­er trad­ing is every­where. So far, no one seems to care.

    By Liam Vaugh­an
    Sep­tem­ber 28, 2021, 11:01 PM CDT

    Jim­my Filler made his con­sid­er­able wealth buy­ing and sell­ing scrap met­al in Birm­ing­ham, Ala. Now approach­ing 80 and most­ly retired from busi­ness, he has dab­bled as a col­lec­tor of antique cars and casi­no mem­o­ra­bil­ia, acquired a 20,000-square-foot man­sion in the hills out­side the city, and donat­ed $1 mil­lion to help build a prac­tice facil­i­ty for the Uni­ver­si­ty of Alaba­ma at Birm­ing­ham foot­ball team. This largesse has made Filler a big name in his hometown—but he’s an even big­ger deal among a cer­tain class of stock trad­er.

    That’s because Filler has an incred­i­ble track record buy­ing shares in the com­pa­nies he advis­es and invests in. Of the 496 trades he’s made since 2014 in Alabama’s Serv­is­First Banc­shares Inc., where he sits on the board of direc­tors, and Cen­tu­ry Ban­corp Inc. of Mass­a­chu­setts, where he’s the largest share­hold­er, 372 of them, or 75%, have shown a prof­it three months lat­er. That’s the kind of run the world’s best stock­pick­ers dream of, the finan­cial equiv­a­lent of mak­ing the final table of the World Series of Pok­er main event in con­sec­u­tive years.

    Filler is the most suc­cess­ful cor­po­rate insid­er in the U.S., accord­ing to TipRanks, a data com­pa­ny that rates exec­u­tives by how good they are at tim­ing trades. As a result of this sta­tus, every time Filler buys a share in Serv­is­First or Cen­tu­ry, 2,699 TipRanks sub­scribers get an alert. Some of them, assum­ing Filler’s past per­for­mance will con­tin­ue, fol­low suit and buy some stock for them­selves.

    In the U.S., an insid­er is defined as a senior exec­u­tive, board mem­ber, or any share­hold­er who owns 10% or more of a com­pa­ny. There are about 82,000 of them, and every time they trade they’re required by law to file a dis­clo­sure, known as a Form 4, with­in two days. These fil­ings can be viewed on the U.S. Secu­ri­ties and Exchange Commission’s web­site, but scores are added each day, and most don’t offer much insight. “You have to know where to look,” says TipRanks Chief Exec­u­tive Offi­cer Uri Gru­en­baum. Direc­tors typ­i­cal­ly receive a pro­por­tion of their com­pen­sa­tion in stock options, giv­ing them the right to buy shares at a set price before a cer­tain date, so if an exec­u­tive is sim­ply exer­cis­ing an expir­ing option, it prob­a­bly doesn’t reveal a great deal about how he views the company’s prospects. Sell­ing may not tell you much either, because there are all sorts of rea­sons an insid­er might want to cash out—to buy a boat, for instance. It’s when insid­ers use their own funds to buy stock on the open mar­ket that it’s most worth pay­ing atten­tion.

    TipRanks uses an algo­rithm to sort through the tor­rent of SEC fil­ings, fil­ter out what it calls “unin­formed” transactions—that is, those that don’t seem to have pre­dic­tive value—and come up with a rolling list of the top 25 insid­ers. As well as look­ing at win rate, the ser­vice fac­tors in how much, as a per­cent­age, insid­ers are mak­ing per trade. Those with long track records, such as Filler, also score bet­ter. “Some­one might pick heads five times in a row, but to do it 20 times or 50 times is real­ly hard,” Gru­en­baum says.

    Besides Filler, oth­er TipRanks stars include Steve Mihay­lo, the CEO of tele­phone ser­vices com­pa­ny Crex­en­do Inc., where he owns a $60 mil­lion stake. Mihay­lo has turned a three-month prof­it on 83% of his trades over the past five years even as Crexendo’s shares have see­sawed. His 1,985 fol­low­ers under­stand that when the CEO is buy­ing, there’s a decent chance the stock is about to go up. Then there’s Sne­hal Patel, CEO of phar­ma­ceu­ti­cal com­pa­ny Green­wich Life­Sciences Inc., who’s made only five pur­chas­es but has earned an aver­age 488% return on them, because four of the trades pre­ced­ed the announce­ment of promis­ing results from a can­cer drug tri­al. Filler says he’s a long-term investor in Cen­tu­ry and has nev­er been affil­i­at­ed with the com­pa­ny; he also says he’s nev­er sold a share in either Cen­tu­ry or Serv­is­First. Patel points out that the suc­cess of the Green­wich Life­Sciences tri­al was ref­er­enced on the company’s web­site and IPO prospec­tus before he trad­ed. Mihay­lo declined to com­ment.

    It’s not just those at the top of the rank­ings who con­stant­ly beat the mar­ket. Pur­chas­es made by U.S. exec­u­tives out­per­formed the S&P 500 over the ensu­ing 12 months by an aver­age of five per­cent­age points between 2015 and 2020, accord­ing to a TipRanks analy­sis. The gap might seem scan­dalous to those with only a pass­ing acquain­tance with U.S. insid­er trad­ing rules, which make it ille­gal for insid­ers to trade using material—or finan­cial­ly significant—nonpublic infor­ma­tion. And yet on Wall Street it’s long been an open secret that insid­ers trade on what they know. In 1962, Per­ry Wysong, a bow-tie-sport­ing investor from Flori­da, start­ed a newslet­ter iden­ti­fy­ing oppor­tu­ni­ties based on insid­er trades. Years lat­er, a young stock­bro­ker in Flori­da, George Muzea, set up a con­sult­ing firm to advise George Soros, Stan­ley Druck­en­miller, and oth­er hedge fund man­agers, often over games of ten­nis. “We used to call the best prospects studs,” he recalls. In 2008 a group of quants from Cit­i­group Inc. pub­lished a paper that found a port­fo­lio mir­ror­ing insid­ers’ trades could yield an aston­ish­ing 23.5% a year, more than all but the most prof­itable hedge funds.

    No one is claim­ing to know if Filler or any of the oth­er TipRanks stars are tak­ing advan­tage of non­pub­lic infor­ma­tion. Pok­er leg­end Doyle “Texas Dol­ly” Brun­son made five final tables in his career, after all, and it’s pos­si­ble to get lucky enough to flip a coin and hit heads a bunch of times in a row. Plus, insid­ers will always have a bet­ter gen­er­al sense than oth­ers about how their com­pa­ny is doing. But a grow­ing body of research sug­gests that many insid­ers are trad­ing well thanks to some­thing more than luck or judg­ment. It indi­cates that insid­er trad­ing by exec­u­tives is per­va­sive and that nobody—not the reg­u­la­tors, not the Depart­ment of Jus­tice, not the com­pa­nies themselves—is doing any­thing to stop it. “There is a lack of appre­ci­a­tion for the amount of oppor­tunis­tic abuse that exists under the cur­rent sys­tem, the amount of egre­gious­ness,” says Daniel Tay­lor, a pro­fes­sor at the Whar­ton School and the head of the Whar­ton Foren­sic Ana­lyt­ics Lab. “Most Amer­i­cans today believe the stock mar­ket is rigged, and they’re right.”

    In many ways, insid­er trad­ing is the exem­plar white-col­lar trans­gres­sion. It’s what dri­ves Bob­by Axelrod’s nefar­i­ous prof­its in the Show­time series Bil­lions and what Wall Street’s Gor­don Gekko was engaged in when he said, “Greed is good.” In the real world, too, the crime cap­tures, almost per­fect­ly, the sense that the mar­ket is biased in favor of a cor­po­rate elite—a sen­ti­ment that under­girds both the recent meme-stock explo­sion and the rise of cryp­tocur­ren­cies. When an exec­u­tive learns his com­pa­ny is about to lose its well-regard­ed CEO and offloads shares to an unwit­ting pen­sion fund, or a board mem­ber hears about a poten­tial takeover on the dis­tant hori­zon and sets up a plan to start buy­ing, they’re prof­it­ing at the expense of reg­u­lar peo­ple. Pros­e­cut­ing insid­er trad­ing is “a man­i­fes­ta­tion of America’s basic bar­gain,” wrote Preet Bharara, the for­mer U.S. attor­ney for the South­ern Dis­trict of New York, in a 2018 op-ed arti­cle for the New York Times. “The well-con­nect­ed should not have unfair advan­tages over the every­day cit­i­zen,” he wrote.

    In the­o­ry, the law gov­ern­ing insid­er trad­ing is clear-cut: Under the Secu­ri­ties Exchange Act of 1934, exec­u­tives who abuse their access to non­pub­lic infor­ma­tion, either by trad­ing on it them­selves or pass­ing it along to some­one else, can be charged with fraud and sent to jail. But reg­u­la­tors and lawyers say iden­ti­fy­ing and pros­e­cut­ing the offense is decep­tive­ly dif­fi­cult, and law­mak­ers as diverse as Demo­c­ra­t­ic Sen­a­tor Eliz­a­beth War­ren of Mass­a­chu­setts and Repub­li­can Rep­re­sen­ta­tive Elise Ste­fanik of New York, prod­ded on by Tay­lor and oth­er researchers, have been call­ing for reform.

    Taylor’s focus on the top­ic dates to 2016, a few years after he arrived at Whar­ton, when he co-authored a draft paper show­ing that employ­ees at banks who pre­vi­ous­ly worked at the Fed­er­al Reserve, the U.S. Depart­ment of the Trea­sury, or some oth­er reg­u­la­tor sig­nif­i­cant­ly out­per­formed the mar­ket dur­ing the 2008 finan­cial cri­sis, as the gov­ern­ment was hand­ing out bailouts. Not long after, a mem­ber of one of the enforce­ment agen­cies asked to meet up to dis­cuss Taylor’s method­ol­o­gy.

    Work­ing with col­leagues at Stan­ford and oth­er insti­tu­tions, Tay­lor has since put out a half-dozen papers that apply sta­tis­ti­cal analy­sis to SEC dis­clo­sures and oth­er large datasets to look for evi­dence of poten­tial insid­er trad­ing. “Hope­ful­ly, we can help high­light what’s hap­pen­ing, and our col­lec­tive insti­tu­tions will start to tack­le this behav­ior,” he says.

    One area of Taylor’s research is how insid­ers respond when their employ­ers are fac­ing dif­fi­cul­ties. Each year the SEC opens probes into hun­dreds of com­pa­nies, but not all of them go any­where, and there’s no oblig­a­tion to dis­close any­thing about the inves­ti­ga­tions to share­hold­ers. It’s also up to com­pa­nies to decide whether their staff must abstain from trad­ing. Most imple­ment black­out win­dows in the runup to earn­ings reports, but beyond that they can be laid-back about let­ting their exec­u­tives trade. After a lengthy nego­ti­a­tion, Tay­lor per­suad­ed the SEC to give him a 300-page list of probes opened from 2000 to 2017, which he cross-ref­er­enced with Form 4 dis­clo­sures. It demon­strat­ed that, as a group, insid­ers con­sis­tent­ly avoid­ed loss­es by sell­ing shares before their com­pa­nies’ legal prob­lems were reflect­ed in the stock price.

    Tay­lor says he got the idea from see­ing shares of Under Armour Inc. fall by 18% on Nov. 4, 2019, after the Wall Street Jour­nal report­ed that its account­ing prac­tices were being looked into. Before that, fil­ings show, exec­u­tives had been sell­ing stock to unsus­pect­ing buy­ers. It’s a sur­pris­ing­ly com­mon sto­ry. At CBS, share­hold­ers are suing board mem­bers for offload­ing shares before the media com­pa­ny dis­closed CEO Les Moonves was under inves­ti­ga­tion for sex­u­al harass­ment. An exec­u­tive at Boe­ing Co. sold $5 mil­lion of stock after man­agers were report­ed­ly briefed that a soft­ware prob­lem may have been respon­si­ble for down­ing Lion Air Flight 610 over the Java Sea in Octo­ber 2018—an issue the com­pa­ny didn’t share with the pub­lic until five months lat­er, after a sec­ond crash. A spokesper­son for Boe­ing said cor­po­rate offi­cers are “only allowed to trade dur­ing an open trad­ing win­dow.” Under Armour didn’t return a request for com­ment. CBS said in a state­ment that all its exec­u­tives’ trans­ac­tions were either pre­planned or approved inter­nal­ly.

    In anoth­er paper, Tay­lor looked into insid­ers’ activ­i­ty when their com­pa­nies were being audit­ed. He found ele­vat­ed buy­ing and sell­ing that accel­er­at­ed in the cru­cial weeks after the audit report had been relayed to the board of direc­tors but before it had been made pub­lic. The insid­ers who trad­ed were able to avoid sig­nif­i­cant loss­es, par­tic­u­lar­ly in instances when a company’s results end­ed up hav­ing to be restat­ed. Time and time again, “insid­ers appear to exploit pri­vate infor­ma­tion” for “oppor­tunis­tic gain,” Tay­lor and his co-authors wrote. Cheat­ing, they’d dis­cov­ered, seemed to be every­where.

    At the heart of these find­ings are the U.S.’s some­what wool­ly dis­clo­sure rules. Under some­thing known as “dis­close or abstain,” U.S. insid­ers in receipt of mate­r­i­al non­pub­lic infor­ma­tion are for­bid­den from trad­ing unless they release it first. But unlike in the U.K. and the Euro­pean Union, com­pa­nies in the U.S. have a lot of dis­cre­tion over what is con­sid­ered mate­r­i­al, and a gray area exists between what a com­pa­ny deems wor­thy of dis­clo­sure and what its direc­tors might wish to trade on. Legal advis­ers face a con­stant flow of judg­ment calls, such as when, if ever, to tell the world about merg­er talks, a fraud inves­ti­ga­tion, or a cyber­at­tack. “If some­thing is mate­r­i­al enough to move the share price, then insid­ers should be restrict­ed from trad­ing on it,” Tay­lor says. “Unfor­tu­nate­ly, that’s not how some lawyers see it.”

    Ear­ly in the pan­dem­ic, sev­er­al phar­ma­ceu­ti­cal com­pa­ny exec­u­tives were crit­i­cized for mak­ing trades that seemed to be designed to prof­it from pos­i­tive vac­cine devel­op­ments, high­light­ing anoth­er flaw in the regime. The trans­ac­tions were made through so-called 10b5‑1 plans—trading sched­ules that lay out the tim­ing and size of trades in advance and are then exe­cut­ed by third par­ties. These plans were intro­duced in 2000 as a way for exec­u­tives to sell shares with­out being accused of wrong­do­ing, no mat­ter how for­tu­itous their trades turned out to be.

    But 10b5‑1 plans are vul­ner­a­ble to abuse, Tay­lor says, because there is no require­ment for insid­ers to wait after estab­lish­ing a plan to place their first trade. Three days before Mod­er­na Inc. announced that its Covid-19 vac­cine was ready for human test­ing, its then chief med­ical offi­cer, Tal Zaks, imple­ment­ed a plan to sell 10,000 shares a week for 10 weeks. The pro­gram coin­cid­ed with Moderna’s share price more than dou­bling, and Zaks net­ted $3.4 mil­lion. Mod­er­na told the health-care news web­site Stat that the sales were part of “SEC-com­pli­ant plans” set up “well in advance.” Zaks, who didn’t respond to requests for com­ment, is far from alone. A recent paper by the Rock Cen­ter for Cor­po­rate Gov­er­nance at Stan­ford, which col­lab­o­rat­ed with Tay­lor on the research, showed that 14% of exec­u­tives set up plans to trans­act with­in 30 days and 39% with­in 60 days, mak­ing it like­ly they were in receipt of some non­pub­lic infor­ma­tion. Anoth­er issue is that about half of all U.S. plans involve a sin­gle trans­ac­tion as opposed to a series of trades, as the SEC orig­i­nal­ly envi­sioned. These sin­gle trades col­lec­tive­ly avoid­ed loss­es of as much as 4%, accord­ing to the Rock Cen­ter report, sug­gest­ing some exec­u­tives use them to offload shares before bad news.

    Per­haps the biggest flaw in the 10b5‑1 frame­work is that exec­u­tives don’t have to stick to their plans. They can can­cel and rein­state sales when­ev­er they choose, mean­ing that an insid­er could set up a new plan every quar­ter then decide whether to stick with it depend­ing on how the next earn­ings report is shap­ing up. In a speech in June, Gary Gensler, the new chair of the SEC, said his staff would look into forc­ing com­pa­nies to imple­ment a “cool­ing off” peri­od between when exec­u­tives set up 10b5‑1 plans and when they place their first trades. He also said he’d con­sid­er pre­vent­ing insid­ers from can­cel­ing planned sales to cap­ture prof­its. “In my view these plans have led to real cracks in our insid­er trad­ing regime,” Gensler said.

    Gensler’s assess­ment may great­ly under­state the prob­lem. In two decades the SEC hasn’t brought a sin­gle insid­er trad­ing case involv­ing trades made under a 10b5‑1 plan. In recent years it hasn’t charged many indi­vid­u­als or com­pa­nies with the vio­la­tion at all. In 2019 the agency brought only 32 insid­er trad­ing actions, the fewest in more than 20 years. Last year that num­ber edged up slight­ly, to 33. What cas­es the gov­ern­ment does bring tend to involve insid­ers pass­ing along tips to co-conspirators—referred to as “tip­per-tippee” cas­es, such as the one that sent Martha Stew­art to prison for five months—as opposed to the oppor­tunis­tic trad­ing by exec­u­tives that Taylor’s work high­lights. “It’s a huge blind spot,” he says. The SEC declined to com­ment or make any­one avail­able for an inter­view.

    Why, then, isn’t the gov­ern­ment doing more? Part of the answer has to do with how insid­er trad­ing law has devel­oped. Unusu­al­ly for a fed­er­al crime, there’s no stand­alone offense for insid­er trad­ing. Instead, the notion that it’s ille­gal came into wide­spread accep­tance only in 1961, when the SEC charged a stock­bro­ker, Robert Gin­tel, with secu­ri­ties fraud for sell­ing shares in an avi­a­tion com­pa­ny after get­ting wind of an impend­ing div­i­dend cut.

    The Gin­tel case set a dif­fi­cult prece­dent. To prove secu­ri­ties fraud, it’s not enough for pros­e­cu­tors to sim­ply show that some­one prof­it­ed from non­pub­lic infor­ma­tion; pros­e­cu­tors have to demon­strate that the defen­dant knew they had such infor­ma­tion and intend­ed to cheat. This helps to make it among the most dif­fi­cult white-col­lar crimes to pros­e­cute. “Insid­er trad­ing is hard to prove with­out some kind of smok­ing gun,” says Russ Ryan, a for­mer assis­tant direc­tor in the SEC’s enforce­ment divi­sion who now works in pri­vate prac­tice at the law firm King & Spald­ing. “And because there’s no statute, the law is vague and unpre­dictable. Jurors don’t like con­vict­ing peo­ple of crimes where the law is not clear­ly defined.”

    Ankush Khardori, who worked as a pros­e­cu­tor in the Fraud Sec­tion of the Jus­tice Depart­ment until 2020, says it’s even tougher in cas­es in which the alleged tip­per and the tippee are the same per­son. “In these insid­er cas­es, most of the crime is tak­ing place with­in the executive’s mind,” he says. “There’s unlike­ly to be the kind of evi­dence you might hope to see in a tip­per-tippee case, like an email or a phone call.” Anoth­er hur­dle, he explains, is that insid­ers have some legit­i­mate advan­tage over every­one else. “Insid­ers have expe­ri­ence and exper­tise that allows them to put pub­lic infor­ma­tion into con­text in a way oth­ers can­not. That allows a defense lawyer to say, ‘This wasn’t inside infor­ma­tion. They were just bet­ter at read­ing what was already out there.’ ”

    The wide­spread adop­tion of trad­ing plans cre­ates a fur­ther hur­dle for pros­e­cu­tors. “There’s this whole set of rules and con­ven­tions that has built up—10b5‑1 plans, trad­ing win­dows, com­pli­ance programs—that exec­u­tives can use to say, ‘Look, I did every­thing by the book. I relied on the lawyers!’ ” Khardori says. Pros­e­cu­tors can the­o­ret­i­cal­ly argue that a plan wasn’t entered into in good faith, but that’s an addi­tion­al bur­den to meet in court, and in prac­tice they almost nev­er do so. As Lisa Bra­gan­ca, anoth­er for­mer reg­u­la­tor at the SEC, says, “Nobody wants to be on the front page of the New York Times for los­ing.”

    Nor do they want to go through the ignominy of see­ing their con­vic­tions over­turned. Bharara, the for­mer U.S. attor­ney, built up a fear­some rep­u­ta­tion tar­get­ing insid­er traders, includ­ing a num­ber of high-pro­file hedge fund man­agers. But in 2014 sev­er­al of his office’s con­vic­tions and guilty pleas were quashed after judges on an appeals court acquit­ted two hedge fund employ­ees in a rul­ing that made it even hard­er for pros­e­cu­tors to win cas­es. On leav­ing the gov­ern­ment, Bharara set up a task force of aca­d­e­mics and lawyers to con­sid­er how to fix things. Last year it issued a report that pro­posed cre­at­ing an entire­ly new statute defin­ing insid­er trad­ing as its own offense and sev­er­ing the link to fraud. The group also sug­gest­ed strength­en­ing the government’s hand by mak­ing insid­ers liable in crim­i­nal cas­es in which they should have known they were trad­ing on mate­r­i­al information—when they act­ed “recklessly”—even if there is no evi­dence that they actu­al­ly did know.

    Such dras­tic changes seem unlike­ly to make it into law, though a watered-down set of pro­pos­als, put for­ward by Con­necti­cut Demo­c­rat Jim Himes, passed the House of Rep­re­sen­ta­tives by 350 votes to 75 in May. Himes’s Insid­er Trad­ing Pro­hi­bi­tion Act falls short of Bharara’s call to cre­ate a new offense, but it would at least define insid­er trad­ing, going some way to clar­i­fy­ing and sim­pli­fy­ing the rules. “It’s time to take it out of the courts,” Himes says. “If we’re going to send peo­ple to prison for 20 years, then it’s impor­tant that we know exact­ly what for.” The next step is get­ting the bill through the Senate—something that’s scup­pered pri­or insid­er trad­ing bills over the years.

    Apart from amend­ing the law itself, Tay­lor says, the gov­ern­ment would ben­e­fit from adopt­ing a more sophis­ti­cat­ed approach to both iden­ti­fy­ing and pros­e­cut­ing insid­er trad­ing. He gives the exam­ple of an insid­er who’s made unusu­al­ly high returns over many years. The gov­ern­ment has some cir­cum­stan­tial evi­dence that the exec­u­tive is cheat­ing, but he attrib­ut­es his per­for­mance to a mix of skill and good for­tune. “We can now mod­el exact­ly how much he would have made had he placed each of those trades on oth­er ran­dom days,” Tay­lor says. “Being able to say there’s lit­er­al­ly no oth­er sequence of trades that would have net­ted him more mon­ey could be incred­i­bly use­ful.” Tay­lor has been shar­ing his insights with reg­u­la­tors, and the SEC recent­ly set up a small ana­lyt­ics unit to explore this kind of data-led approach. Per­suad­ing judges to embrace new forms of evi­dence, how­ev­er, has proved chal­leng­ing so far. In 2019 a judge refused to allow a suit that relied on data to allege insid­er trad­ing and account­ing irreg­u­lar­i­ties at Under Armour to pro­ceed.

    Of course there’s anoth­er pos­si­ble rea­son the gov­ern­ment isn’t charg­ing scores of exec­u­tives with insid­er deal­ing, which is that, deep down, many pros­e­cu­tors don’t see it as much of a prob­lem. Before the Gin­tel case, trad­ing on sen­si­tive infor­ma­tion was wide­ly con­sid­ered a perk of being an exec­u­tive at a pub­licly trad­ed com­pa­ny, and that think­ing seems to per­sist, even among those who are sup­posed to pros­e­cute the crime.

    Sev­er­al for­mer gov­ern­ment lawyers inter­viewed for this sto­ry ques­tioned how much dam­age well-timed trad­ing by exec­u­tives real­ly caus­es when com­pared with, say, a Ponzi scheme that takes elder­ly investors for their sav­ings or an Enron-style account­ing fraud that caus­es a com­pa­ny to col­lapse when exposed. Any­one unlucky enough to sell stock to a com­pa­ny CEO right before the share price bounces will prob­a­bly miss out on a few dol­lars per share at most.

    One for­mer gov­ern­ment pros­e­cu­tor recount­ed how, dur­ing his job inter­view, he was asked by his soon-to-be boss what he thought of the lib­er­tar­i­an argu­ment that regards insid­er trad­ing as good because it helps dis­sem­i­nate infor­ma­tion more quick­ly, mak­ing mar­kets effi­cient. “I will pros­e­cute the laws as they cur­rent­ly stand to the best of my abil­i­ty,” he replied, stone-faced, declin­ing to men­tion his sym­pa­thy for the idea.

    That some gov­ern­ment offi­cials are ambiva­lent about the laws they’re charged with enforc­ing doesn’t come as a sur­prise to Mis­sis­sip­pi Col­lege School of Law pro­fes­sor John Ander­son, who’s writ­ten dozens of papers defend­ing insid­er trad­ing. “It’s real­ly easy to say that our mar­kets should be a lev­el play­ing field, but the real­i­ty is that they nev­er have been,” he says. “The whole rea­son peo­ple come to the mar­ket is because they think they have bet­ter infor­ma­tion, bet­ter under­stand­ing than their coun­ter­par­ties.”

    ...

    Reform­ing insid­er trad­ing rules is a dif­fi­cult prospect. As a soci­ety, we want our exec­u­tives to have a stake in the busi­ness­es they run; but if they receive shares, they have to be able to sell them. When they do, they’ll always be at an advan­tage. “No one real­ly believes that cor­po­rate insid­ers are ever tru­ly cleansed of mate­r­i­al non­pub­lic infor­ma­tion,” says Philip Mous­takis, who left the SEC in 2019 to join Seward & Kissel, a law firm focused on Wall Street. “Trad­ing win­dows, 10b5‑1 plans—they’re all part of this use­ful fic­tion that soci­ety engages in. If you real­ly want­ed to stamp out insid­ers trad­ing on supe­ri­or knowl­edge, you’d have to reassess our entire approach to cor­po­rate gov­er­nance. Insid­ers would become more like trustees with no skin in the game, and that’s not going to hap­pen.”

    Tay­lor refus­es to accept that idea, point­ing to a slew of pro­pos­als cur­rent­ly under con­sid­er­a­tion, from tweak­ing 10b5‑1 plans to rip­ping up the insid­er trad­ing rule­book alto­geth­er and start­ing again. “Noth­ing in soci­ety worth fix­ing is easy,” he says. “The fact it’s not easy is not a rea­son not to do it.”

    ————–

    “‘Most Amer­i­cans Today Believe the Stock Mar­ket Is Rigged, and They’re Right’” by Liam Vaugh­an; Bloomberg Busi­ness­week; 09/28/2021

    In the U.S., an insid­er is defined as a senior exec­u­tive, board mem­ber, or any share­hold­er who owns 10% or more of a com­pa­ny. There are about 82,000 of them, and every time they trade they’re required by law to file a dis­clo­sure, known as a Form 4, with­in two days. These fil­ings can be viewed on the U.S. Secu­ri­ties and Exchange Commission’s web­site, but scores are added each day, and most don’t offer much insight. “You have to know where to look,” says TipRanks Chief Exec­u­tive Offi­cer Uri Gru­en­baum. Direc­tors typ­i­cal­ly receive a pro­por­tion of their com­pen­sa­tion in stock options, giv­ing them the right to buy shares at a set price before a cer­tain date, so if an exec­u­tive is sim­ply exer­cis­ing an expir­ing option, it prob­a­bly doesn’t reveal a great deal about how he views the company’s prospects. Sell­ing may not tell you much either, because there are all sorts of rea­sons an insid­er might want to cash out—to buy a boat, for instance. It’s when insid­ers use their own funds to buy stock on the open mar­ket that it’s most worth pay­ing atten­tion.”

    Rough­ly 82,000 “insid­ers” exist in the US. And while many of these insid­ers are going to be the insid­ers of tiny com­pa­nies of lit­tle val­ue, there’s sim­ply no deny­ing that a mas­sive and seem­ing­ly ever-grow­ing per­cent­age of the net wealth in the US has been accrued by cor­po­rate insid­ers over the last gen­er­a­tion, thanks large­ly to stock options. Stock options even­tu­al­ly con­vert­ed into stocks, and then sold. The sto­ry of Amer­i­ca’s insid­er trad­ing epi­dem­ic is just a sub­chap­ter in the larg­er sto­ry of the post-Regan cor­po­rate cap­ture of the US econ­o­my that’s been under­way since 1980. The end of pen­sions and the rise of the 401k stock retire­ment plan coin­cid­ing with the explo­sion of exec­u­tive stock options. The decades-long insid­er trad­ing pan­dem­ic is part of how that larg­er sto­ry of the cap­ture of the US econ­o­my actu­al­ly hap­pened, effec­tive­ly ampli­fy­ing that wealth cap­ture.

    And a big sub­chap­ter in the sto­ry of this insid­er trad­ing pan­dem­ic has been how the this pan­dem­ic has been prac­ticed more or less out in the open, with vir­tu­al­ly no reg­u­la­to­ry over­sight. Yes, it’s tech­ni­cal­ly ille­gal to engage in insid­er trad­ing in the US. But that appears to be a tech­ni­cal­i­ty with no legal teeth. Ram­pant insid­er trad­ing has long been an open secret on Wall Street:

    ...
    It’s not just those at the top of the rank­ings who con­stant­ly beat the mar­ket. Pur­chas­es made by U.S. exec­u­tives out­per­formed the S&P 500 over the ensu­ing 12 months by an aver­age of five per­cent­age points between 2015 and 2020, accord­ing to a TipRanks analy­sis. The gap might seem scan­dalous to those with only a pass­ing acquain­tance with U.S. insid­er trad­ing rules, which make it ille­gal for insid­ers to trade using material—or finan­cial­ly significant—nonpublic infor­ma­tion. And yet on Wall Street it’s long been an open secret that insid­ers trade on what they know. In 1962, Per­ry Wysong, a bow-tie-sport­ing investor from Flori­da, start­ed a newslet­ter iden­ti­fy­ing oppor­tu­ni­ties based on insid­er trades. Years lat­er, a young stock­bro­ker in Flori­da, George Muzea, set up a con­sult­ing firm to advise George Soros, Stan­ley Druck­en­miller, and oth­er hedge fund man­agers, often over games of ten­nis. “We used to call the best prospects studs,” he recalls. In 2008 a group of quants from Cit­i­group Inc. pub­lished a paper that found a port­fo­lio mir­ror­ing insid­ers’ trades could yield an aston­ish­ing 23.5% a year, more than all but the most prof­itable hedge funds.

    No one is claim­ing to know if Filler or any of the oth­er TipRanks stars are tak­ing advan­tage of non­pub­lic infor­ma­tion. Pok­er leg­end Doyle “Texas Dol­ly” Brun­son made five final tables in his career, after all, and it’s pos­si­ble to get lucky enough to flip a coin and hit heads a bunch of times in a row. Plus, insid­ers will always have a bet­ter gen­er­al sense than oth­ers about how their com­pa­ny is doing. But a grow­ing body of research sug­gests that many insid­ers are trad­ing well thanks to some­thing more than luck or judg­ment. It indi­cates that insid­er trad­ing by exec­u­tives is per­va­sive and that nobody—not the reg­u­la­tors, not the Depart­ment of Jus­tice, not the com­pa­nies themselves—is doing any­thing to stop it. “There is a lack of appre­ci­a­tion for the amount of oppor­tunis­tic abuse that exists under the cur­rent sys­tem, the amount of egre­gious­ness,” says Daniel Tay­lor, a pro­fes­sor at the Whar­ton School and the head of the Whar­ton Foren­sic Ana­lyt­ics Lab. “Most Amer­i­cans today believe the stock mar­ket is rigged, and they’re right.”

    ...

    In the­o­ry, the law gov­ern­ing insid­er trad­ing is clear-cut: Under the Secu­ri­ties Exchange Act of 1934, exec­u­tives who abuse their access to non­pub­lic infor­ma­tion, either by trad­ing on it them­selves or pass­ing it along to some­one else, can be charged with fraud and sent to jail. But reg­u­la­tors and lawyers say iden­ti­fy­ing and pros­e­cut­ing the offense is decep­tive­ly dif­fi­cult, and law­mak­ers as diverse as Demo­c­ra­t­ic Sen­a­tor Eliz­a­beth War­ren of Mass­a­chu­setts and Repub­li­can Rep­re­sen­ta­tive Elise Ste­fanik of New York, prod­ded on by Tay­lor and oth­er researchers, have been call­ing for reform.
    ...

    Part of the rea­son for this lack of enforce­ment of insid­er trad­ing rule is that the US law gives cor­po­ra­tions them­selves the dis­cre­tion to impose rules like black­out win­dows bar­ring exec­u­tive trad­ing in the runup to earn­ings reports and tak­ing a rather ‘laid back’ approach them. Those were the find­ings based on a sta­tis­ti­cal analy­sis done by Daniel Tay­lor, head of the Whar­ton Foren­sic Ana­lyt­ics Lab. Time and time again, Tay­lor found, exec­u­tives were trad­ing dur­ing these “black­out win­dows” in the lead up to earn­ings reports. It’s just bla­tant open insid­er trad­ing. Con­se­quence free. We’ll, there’s one con­se­quence: high­er trad­ing prof­its for the exec­u­tives:

    ...
    One area of Taylor’s research is how insid­ers respond when their employ­ers are fac­ing dif­fi­cul­ties. Each year the SEC opens probes into hun­dreds of com­pa­nies, but not all of them go any­where, and there’s no oblig­a­tion to dis­close any­thing about the inves­ti­ga­tions to share­hold­ers. It’s also up to com­pa­nies to decide whether their staff must abstain from trad­ing. Most imple­ment black­out win­dows in the runup to earn­ings reports, but beyond that they can be laid-back about let­ting their exec­u­tives trade. After a lengthy nego­ti­a­tion, Tay­lor per­suad­ed the SEC to give him a 300-page list of probes opened from 2000 to 2017, which he cross-ref­er­enced with Form 4 dis­clo­sures. It demon­strat­ed that, as a group, insid­ers con­sis­tent­ly avoid­ed loss­es by sell­ing shares before their com­pa­nies’ legal prob­lems were reflect­ed in the stock price.

    ...

    In anoth­er paper, Tay­lor looked into insid­ers’ activ­i­ty when their com­pa­nies were being audit­ed. He found ele­vat­ed buy­ing and sell­ing that accel­er­at­ed in the cru­cial weeks after the audit report had been relayed to the board of direc­tors but before it had been made pub­lic. The insid­ers who trad­ed were able to avoid sig­nif­i­cant loss­es, par­tic­u­lar­ly in instances when a company’s results end­ed up hav­ing to be restat­ed. Time and time again, “insid­ers appear to exploit pri­vate infor­ma­tion” for “oppor­tunis­tic gain,” Tay­lor and his co-authors wrote. Cheat­ing, they’d dis­cov­ered, seemed to be every­where.

    At the heart of these find­ings are the U.S.’s some­what wool­ly dis­clo­sure rules. Under some­thing known as “dis­close or abstain,” U.S. insid­ers in receipt of mate­r­i­al non­pub­lic infor­ma­tion are for­bid­den from trad­ing unless they release it first. But unlike in the U.K. and the Euro­pean Union, com­pa­nies in the U.S. have a lot of dis­cre­tion over what is con­sid­ered mate­r­i­al, and a gray area exists between what a com­pa­ny deems wor­thy of dis­clo­sure and what its direc­tors might wish to trade on. Legal advis­ers face a con­stant flow of judg­ment calls, such as when, if ever, to tell the world about merg­er talks, a fraud inves­ti­ga­tion, or a cyber­at­tack. “If some­thing is mate­r­i­al enough to move the share price, then insid­ers should be restrict­ed from trad­ing on it,” Tay­lor says. “Unfor­tu­nate­ly, that’s not how some lawyers see it.”
    ...

    And then there’s the fact that the US cre­at­ed the 10b5‑1 plan rule in 2000 that appeared to be effec­tive­ly designed to exec­u­tives a means of pre­emp­tive­ly legal­ly defend­ing them­selves from insid­er trad­ing charges. As long as exec­u­tives file a 10b5‑1 plan in advance a trade — even if it’s just days before the trade — this rule pro­tects them from insid­er trad­ing charges. And there’s no rule they have to stick with the plan. How many cas­es of been inves­ti­gat­ed by the SEC for 10b5‑1 abuse in the fol­low­ing two decades? Zero. It’s a ‘get out of jail free’ card for insid­er traders:

    ...
    Ear­ly in the pan­dem­ic, sev­er­al phar­ma­ceu­ti­cal com­pa­ny exec­u­tives were crit­i­cized for mak­ing trades that seemed to be designed to prof­it from pos­i­tive vac­cine devel­op­ments, high­light­ing anoth­er flaw in the regime. The trans­ac­tions were made through so-called 10b5‑1 plans—trading sched­ules that lay out the tim­ing and size of trades in advance and are then exe­cut­ed by third par­ties. These plans were intro­duced in 2000 as a way for exec­u­tives to sell shares with­out being accused of wrong­do­ing, no mat­ter how for­tu­itous their trades turned out to be.

    But 10b5‑1 plans are vul­ner­a­ble to abuse, Tay­lor says, because there is no require­ment for insid­ers to wait after estab­lish­ing a plan to place their first trade. Three days before Mod­er­na Inc. announced that its Covid-19 vac­cine was ready for human test­ing, its then chief med­ical offi­cer, Tal Zaks, imple­ment­ed a plan to sell 10,000 shares a week for 10 weeks. The pro­gram coin­cid­ed with Moderna’s share price more than dou­bling, and Zaks net­ted $3.4 mil­lion. Mod­er­na told the health-care news web­site Stat that the sales were part of “SEC-com­pli­ant plans” set up “well in advance.” Zaks, who didn’t respond to requests for com­ment, is far from alone. A recent paper by the Rock Cen­ter for Cor­po­rate Gov­er­nance at Stan­ford, which col­lab­o­rat­ed with Tay­lor on the research, showed that 14% of exec­u­tives set up plans to trans­act with­in 30 days and 39% with­in 60 days, mak­ing it like­ly they were in receipt of some non­pub­lic infor­ma­tion. Anoth­er issue is that about half of all U.S. plans involve a sin­gle trans­ac­tion as opposed to a series of trades, as the SEC orig­i­nal­ly envi­sioned. These sin­gle trades col­lec­tive­ly avoid­ed loss­es of as much as 4%, accord­ing to the Rock Cen­ter report, sug­gest­ing some exec­u­tives use them to offload shares before bad news.

    Per­haps the biggest flaw in the 10b5‑1 frame­work is that exec­u­tives don’t have to stick to their plans. They can can­cel and rein­state sales when­ev­er they choose, mean­ing that an insid­er could set up a new plan every quar­ter then decide whether to stick with it depend­ing on how the next earn­ings report is shap­ing up. In a speech in June, Gary Gensler, the new chair of the SEC, said his staff would look into forc­ing com­pa­nies to imple­ment a “cool­ing off” peri­od between when exec­u­tives set up 10b5‑1 plans and when they place their first trades. He also said he’d con­sid­er pre­vent­ing insid­ers from can­cel­ing planned sales to cap­ture prof­its. “In my view these plans have led to real cracks in our insid­er trad­ing regime,” Gensler said.

    Gensler’s assess­ment may great­ly under­state the prob­lem. In two decades the SEC hasn’t brought a sin­gle insid­er trad­ing case involv­ing trades made under a 10b5‑1 plan. In recent years it hasn’t charged many indi­vid­u­als or com­pa­nies with the vio­la­tion at all. In 2019 the agency brought only 32 insid­er trad­ing actions, the fewest in more than 20 years. Last year that num­ber edged up slight­ly, to 33. What cas­es the gov­ern­ment does bring tend to involve insid­ers pass­ing along tips to co-conspirators—referred to as “tip­per-tippee” cas­es, such as the one that sent Martha Stew­art to prison for five months—as opposed to the oppor­tunis­tic trad­ing by exec­u­tives that Taylor’s work high­lights. “It’s a huge blind spot,” he says. The SEC declined to com­ment or make any­one avail­able for an inter­view.
    ...

    Beyond that, there’s the fact that US law does­n’t real­ly even for­mal­ly treat insid­er trad­ing as a stand­alone offense and did­n’t real­ly even con­sid­er it ille­gal until 1961 when the SEC brought a case against Robert Gin­tel. A case that set the prece­dent that pros­e­cu­tors need to prove the defen­dant knew they had insid­er infor­ma­tion and intend­ed to cheat from it, a much high­er bar than sim­ply prov­ing they prof­it­ed from non­pub­lic infor­ma­tion. And many pros­e­cu­tors today still don’t even think insid­er trad­ing is a real crime. The sys­tem was set up for insid­er trad­ing and appar­ent­ly run by peo­ple who think its OK:

    ...
    Why, then, isn’t the gov­ern­ment doing more? Part of the answer has to do with how insid­er trad­ing law has devel­oped. Unusu­al­ly for a fed­er­al crime, there’s no stand­alone offense for insid­er trad­ing. Instead, the notion that it’s ille­gal came into wide­spread accep­tance only in 1961, when the SEC charged a stock­bro­ker, Robert Gin­tel, with secu­ri­ties fraud for sell­ing shares in an avi­a­tion com­pa­ny after get­ting wind of an impend­ing div­i­dend cut.

    The Gin­tel case set a dif­fi­cult prece­dent. To prove secu­ri­ties fraud, it’s not enough for pros­e­cu­tors to sim­ply show that some­one prof­it­ed from non­pub­lic infor­ma­tion; pros­e­cu­tors have to demon­strate that the defen­dant knew they had such infor­ma­tion and intend­ed to cheat. This helps to make it among the most dif­fi­cult white-col­lar crimes to pros­e­cute. “Insid­er trad­ing is hard to prove with­out some kind of smok­ing gun,” says Russ Ryan, a for­mer assis­tant direc­tor in the SEC’s enforce­ment divi­sion who now works in pri­vate prac­tice at the law firm King & Spald­ing. “And because there’s no statute, the law is vague and unpre­dictable. Jurors don’t like con­vict­ing peo­ple of crimes where the law is not clear­ly defined.”

    ...

    Of course there’s anoth­er pos­si­ble rea­son the gov­ern­ment isn’t charg­ing scores of exec­u­tives with insid­er deal­ing, which is that, deep down, many pros­e­cu­tors don’t see it as much of a prob­lem. Before the Gin­tel case, trad­ing on sen­si­tive infor­ma­tion was wide­ly con­sid­ered a perk of being an exec­u­tive at a pub­licly trad­ed com­pa­ny, and that think­ing seems to per­sist, even among those who are sup­posed to pros­e­cute the crime.

    Sev­er­al for­mer gov­ern­ment lawyers inter­viewed for this sto­ry ques­tioned how much dam­age well-timed trad­ing by exec­u­tives real­ly caus­es when com­pared with, say, a Ponzi scheme that takes elder­ly investors for their sav­ings or an Enron-style account­ing fraud that caus­es a com­pa­ny to col­lapse when exposed. Any­one unlucky enough to sell stock to a com­pa­ny CEO right before the share price bounces will prob­a­bly miss out on a few dol­lars per share at most.
    ...

    Final­ly, there’s the grim acknowl­edg­ment at the end of the arti­cle: as long as the peo­ple mak­ing the top deci­sions are the pri­ma­ry peo­ple ben­e­fit­ing from those deci­sions you’re going to have the threat of insid­er trad­ing. An over­haul to our entire approach to cor­po­rate gov­er­nance would be required. It’s a sys­tem run by insid­ers, for insid­ers, and there’s no expec­ta­tion of that ever chang­ing:

    ...
    Reform­ing insid­er trad­ing rules is a dif­fi­cult prospect. As a soci­ety, we want our exec­u­tives to have a stake in the busi­ness­es they run; but if they receive shares, they have to be able to sell them. When they do, they’ll always be at an advan­tage. “No one real­ly believes that cor­po­rate insid­ers are ever tru­ly cleansed of mate­r­i­al non­pub­lic infor­ma­tion,” says Philip Mous­takis, who left the SEC in 2019 to join Seward & Kissel, a law firm focused on Wall Street. Trad­ing win­dows, 10b5‑1 plans—they’re all part of this use­ful fic­tion that soci­ety engages in. If you real­ly want­ed to stamp out insid­ers trad­ing on supe­ri­or knowl­edge, you’d have to reassess our entire approach to cor­po­rate gov­er­nance. Insid­ers would become more like trustees with no skin in the game, and that’s not going to hap­pen.

    Tay­lor refus­es to accept that idea, point­ing to a slew of pro­pos­als cur­rent­ly under con­sid­er­a­tion, from tweak­ing 10b5‑1 plans to rip­ping up the insid­er trad­ing rule­book alto­geth­er and start­ing again. “Noth­ing in soci­ety worth fix­ing is easy,” he says. “The fact it’s not easy is not a rea­son not to do it.”
    ..

    And that’s all part of why we should prob­a­bly expect the ongo­ing and per­va­sive cri­sis in con­fi­dence in Amer­i­ca’s insti­tu­tions to con­tin­ue to include a cri­sis of faith in cor­po­rate Amer­i­ca’s lead­er­ship. And why we should also expect those cor­po­rate lead­ers to rely on the Trump­ism 2.0 to redi­rect that cri­sis. Because as the research on insid­er trad­ing makes clear, Amer­i­ca’s cor­po­rate lead­ers are more than hap­py to use what­ev­er means are nec­es­sary to accrue as much wealth and pow­er pos­si­ble as long as they’re con­fi­dent they can get away with it. And this is 2021. Four years after the his­to­ry GOP tax cut of 2017 and 13 years fol­low­ing the Great Finan­cial cri­sis that sent no one to jail. Trump­ism has cap­tured the hearts of minds of con­ser­v­a­tive Amer­i­ca and any hope of a uni­fied pop­ulist anti-cor­po­rate front in Amer­i­can pol­i­tics is long gone. They divid­ed and con­quered and got away with it. Why not do it again. It’s a great busi­ness mod­el.

    Posted by Pterrafractyl | October 3, 2021, 7:29 pm
  21. The sto­ry of the col­lapse of the Unit­ed States from the world’s lead­ing democ­ra­cy into a present day bas­ket-case soci­ety per­pet­u­al­ly on verge of a far right coup is a com­pli­cat­ed sto­ry span­ning decades. But on one lev­el, the sto­ry is quite sim­ple: the US pub­lic kind of intel­lec­tu­al­ly ‘checked out’ for over a gen­er­a­tion. News­pa­per lead­er­ship had been in decline long before the inter­net came along. TV has been rot­ting Amer­i­can brains en mass since the 1950s. Every­thing went to hell in a hand­bas­ket because every­one stopped mak­ing sure that did­n’t hap­pen. It’s a group effort. It’s also part of the rea­son the explo­sion of smart­phone-deliv­ered social media mass dis­in­for­ma­tion has been so wild­ly effec­tive at mov­ing the US pub­lic. Pre-smart­phone Amer­i­ca, when peo­ple had to actu­al­ly go out of their way to get the news, the US real­ly were kind of a blank slate soci­ety when it came to what was going on in the world. We were easy pick­ins.

    It’s why one of the more inter­est­ing quirks of the US democ­ra­cy over the past gen­er­a­tion has been how lit­tle inter­est there’s been in the sto­ry of the col­lapse of the US news indus­try over. You’d think this would be a big­ger sto­ry. Except, when you think about it, the col­lapse of the news indus­try is almost, by def­i­n­i­tion, not real­ly going to be much of a sto­ry at all. Fol­low­ing the oblig­a­tory lamen­ta­tions it’s most­ly just been a most­ly silent death rat­tle. We’ve already seen how the far right Sin­clair Broad­cast­ing has tak­en over the local TV news and filled it with right-wing dis­in­for­ma­tion and garbage cov­er­age, in part thanks to the Trump admin­is­tra­tion’s FEC.

    And as the fol­low­ing new piece in The Atlantic describes, the local print media has­n’t fared any bet­ter, with the finan­cial sec­tor hav­ing bought up almost the entire sec­tor over the last two years. But it’s been in just the last decade when this trend in local news­pa­per buy­outs by cyn­i­cal investors real­ly accel­er­at­ed. Specif­i­cal­ly, one group of cyn­i­cal investors: Alden Glob­al Cap­i­tal.

    In just a decade, the pri­vate equi­ty firm has sud­den­ly become the sec­ond largest own­er of local news­pa­pers in the US and experts expect them to be the largest one of these days as their appetite for local news has shown no sign of let­ting up. And while the own­er­ship of local news across the nation by a sin­gle enti­ty is inher­ent­ly prob­lem­at­ic from an anti-monop­oly per­spec­tive, the prob­lems with Alden Glob­al Cap­i­tal go much fur­ther. Because as we’re going to see in the fol­low­ing four arti­cle excerpts. Alden Glob­al Cap­i­tal isn’t just some ran­dom pri­vate equi­ty firm. It was start­ed by Ran­dall Smith, a hyper-secre­tive investor who just hap­pens to be one of the pio­neers of debt-dri­ven lever­aged buy­outs of dis­tressed com­pa­nies. The kind of invest­ing that gives pri­vate equi­ty such a bad name. The kind of invest­ing that claims to be ‘sav­ing’ dis­tressed com­pa­nies but instead just ends up loot­ing them and liq­ui­dat­ing them for any­thing of val­ue that can be sold off in short order. That’s the guy who is slat­ed to become the biggest own­er in the US local news­pa­per mar­ket. A secre­tive supervil­lain.

    And in case it’s not clear that Smith has a supervil­lain’s psy­chol­o­gy, his own son lit­er­al­ly described in an inter­view what moti­vates his dad. The answer: a sense that life is all a game and the per­son with the most mon­ey at the end wins. That’s the ethos dri­ving the destruc­tion of local news across the US.

    But it gets even worse. Because it’s not just the case that Alden Glob­al Cap­i­tal is buy­ing up dis­tressed local news out­lets and strip­ping them dry. They’re buy­ing up healthy local news out­lets too. And strip­ping them dry. Yes, it turns out Alden Glob­al Cap­i­tal oper­ates on the kind of short-term asset-strip­ping invest­ment mod­el where it makes sense to even destroy prof­itable enter­pris­es, includ­ing sell­ing off the news­pa­per’s real-estate and have the com­pa­ny lease it back. And when these mas­sive cost-cut­ting ini­tia­tives that gut the news­rooms do end up gen­er­at­ing real sav­ings and tem­porar­i­ly increas­ing rev­enues, the sav­ings aren’t being rein­vest­ed in the papers and instead are flow­ing back to the investors. The com­pa­ny real­ly is act­ing like a kind of preda­to­ry par­a­site, with local news nation­al­ly as the vic­tim.

    And as we should expect, Smith is a Trump sup­port­er. Inter­est­ing­ly, though, he appears to have only arrived at that posi­tion in 2019, despite a his­to­ry of gen­er­ous GOP sup­port. Smith was effec­tive­ly a ‘Nev­er Trumper’ in 2016. But in July of 2019, Smith and his wife both mad $50,000 con­tri­bu­tions to a “Trump Vic­to­ry” fund. Why the sud­den change? Well, less than two weeks before that $100k con­tri­bu­tion, Demo­c­ra­t­ic Sen­a­tor Eliz­a­beth War­ren pro­posed leg­is­la­tion that would put a major crimp in how the pri­vate equi­ty indus­try oper­ates. In addi­tion to address­ing the remark­able secre­cy pri­vate equi­ty firms are allowed to oper­ate under, War­ren’s pro­posed leg­is­la­tion would make pri­vate equi­ty firms liable for the debt they force their com­pa­nies to take on.
    Yes, the core strat­e­gy that pri­vate equi­ty has long used to prey upon com­pa­nies — the lever­aged buy­outs where the firm pur­chas­es a com­pa­ny using large amounts of debt and then forces the new­ly-owned com­pa­ny to issue large amounts of debt to pay back the investors, effec­tive­ly killing the com­pa­ny in the process — would be end­ed with this leg­is­la­tion. The strat­e­gy Ran­dall Smith pio­neered would be end­ed, pre­sum­ably along with the pri­vate equi­ty indus­try’s unchecked cap­ture of the US econ­o­my. A real kind of eco­nom­ic rev­o­lu­tion (real­ly counter-rev­o­lu­tion) would tran­spire if leg­is­la­tion like that ever become real­i­ty the US. That’s how wild­ly destruc­tive the lever­age buy­out phase of Amer­i­can cap­i­tal­ism has been. It’s effec­tive­ly been an eco­nom­ic coup.

    So the sto­ry of the col­lapse of the local US news­pa­per mar­ket is real­ly just one sub­chap­ter in the larg­er sto­ry of the cap­ture of the US econ­o­my by the pri­vate equi­ty sec­tor using the tech­niques pio­neered by none oth­er than Alden’s Ran­dall Smith. It’s quite a sto­ry. One you def­i­nite­ly should­n’t expect to read about in your local news­pa­per:

    The Atlantic

    A Secre­tive Hedge Fund Is Gut­ting News­rooms

    Inside Alden Glob­al Cap­i­tal

    By McK­ay Cop­pins
    Octo­ber 14, 2021

    The Tri­bune Tow­er ris­es above the streets of down­town Chica­go in a majes­tic snarl of Goth­ic spires and fly­ing but­tress­es that were designed to exude pow­er and pres­tige. When plans for the build­ing were announced in 1922, Colonel Robert R. McCormick, the long­time own­er of the Chica­go Tri­bune, said he want­ed to erect “the world’s most beau­ti­ful office build­ing” for his beloved news­pa­per. The best archi­tects of the era were invit­ed to sub­mit designs; lofty quotes about the Fourth Estate were select­ed to adorn the lob­by. Pri­or to the building’s com­ple­tion, McCormick direct­ed his for­eign cor­re­spon­dents to col­lect “frag­ments” of var­i­ous his­tor­i­cal sites—a brick from the Great Wall of Chi­na, an emblem from St. Peter’s Basilica—and send them back to be embed­ded in the tower’s facade. The final prod­uct, com­plet­ed in 1925, was an archi­tec­tur­al spec­ta­cle unlike any­thing the city had seen before—“romance in stone and steel,” as one writer described it. A cen­tu­ry lat­er, the Tri­bune Tow­er has retained its grandeur. It has not, how­ev­er, retained the Chica­go Tri­bune.

    To find the paper’s cur­rent head­quar­ters one after­noon in late June, I took a cab across town to an indus­tri­al block west of the riv­er. After a long walk down a win­dow­less hall­way lined with cin­der-block walls, I got in an ele­va­tor, which deposit­ed me near a mod­est bank of desks near the print­ing press. The scene was some­how even grim­mer than I’d imag­ined. Here was one of America’s most sto­ried newspapers—a pub­li­ca­tion that had endorsed Abra­ham Lin­coln and scooped the Treaty of Ver­sailles, that had top­pled polit­i­cal boss­es and tan­gled with crooked may­ors and col­lect­ed dozens of Pulitzer Prizes—reduced to a news­room the size of a Chipo­tle.

    Spend some time around the shell-shocked jour­nal­ists at the Tri­bune these days, and you’ll hear the same ques­tion over and over: How did it come to this? On the sur­face, the answer might seem obvi­ous. Craigslist killed the Clas­si­fied sec­tion, Google and Face­book swal­lowed up the ad mar­ket, and a pro­ces­sion of hap­less news­pa­per own­ers failed to adapt to the dig­i­tal-media age, mak­ing obso­les­cence inevitable. This is the sto­ry we’ve been telling for decades about the dying local-news indus­try, and it’s not with­out truth. But what’s hap­pen­ing in Chica­go is dif­fer­ent.

    In May, the Tri­bune was acquired by Alden Glob­al Cap­i­tal, a secre­tive hedge fund that has quick­ly, and with remark­able ease, become one of the largest news­pa­per oper­a­tors in the coun­try. The new own­ers did not fly to Chica­go to address the staff, nor did they both­er with paeans to the vital civic role of jour­nal­ism. Instead, they gut­ted the place.

    Two days after the deal was final­ized, Alden announced an aggres­sive round of buy­outs. In the ensu­ing exo­dus, the paper lost the Metro colum­nist who had cham­pi­oned the occu­pants of a trou­bled pub­lic-hous­ing com­plex, and the edi­tor who main­tained a homi­cide data­base that the police couldn’t manip­u­late, and the pho­tog­ra­ph­er who had pro­duced beau­ti­ful por­traits of the state’s undoc­u­ment­ed immi­grants, and the inves­tiga­tive reporter who’d helped expose the governor’s off­shore shell com­pa­nies. When it was over, a quar­ter of the news­room was gone.

    The hol­low­ing-out of the Chica­go Tri­bune was not­ed in the nation­al press, of course. There were sober op-eds and lamen­ta­tions on Twit­ter and expres­sions of dis­ap­point­ment by pro­fes­sors of jour­nal­ism. But out­side the indus­try, few seemed to notice. Mean­while, the Tri­bune’s remain­ing staff, which had been spread thin even before Alden came along, strug­gled to per­form the newspaper’s most basic func­tions. After a pow­er­ful Illi­nois state leg­is­la­tor resigned amid bribery alle­ga­tions, the paper didn’t have a reporter in Spring­field to fol­low the result­ing scan­dal. And when Chica­go suf­fered a bru­tal sum­mer crime wave, the paper had no one on the night shift to lis­ten to the police scan­ner.

    As the months passed, things kept get­ting worse. Morale tanked; reporters burned out. The edi­tor in chief mys­te­ri­ous­ly resigned, and man­agers scram­bled to deal with the cuts. Some in the city start­ed to won­der if the paper was even worth sav­ing. “It makes me pro­found­ly sad to think about what the Trib was, what it is, and what it’s like­ly to become,” says David Axel­rod, who was a reporter at the paper before becom­ing an advis­er to Barack Oba­ma. Through it all, the own­ers main­tained their ruth­less silence—spurning inter­view requests and declin­ing to artic­u­late their plans for the paper. Long­time Tri­bune staffers had seen their share of bad cor­po­rate over­lords, but this felt more cal­cu­lat­ed, more sin­is­ter.

    “It’s not as if the Tri­bune is just with­er­ing on the vine despite the best efforts of the gar­den­ers,” Char­lie John­son, a for­mer Metro reporter, told me after the lat­est round of buy­outs this sum­mer. “It’s being snuffed out, quar­ter after quar­ter after quar­ter.” We were sit­ting in a cof­fee shop in Logan Square, and he was still strug­gling to make sense of what had hap­pened. The Tri­bune had been prof­itable when Alden took over. The paper had weath­ered a decade and a half of mis­man­age­ment and declin­ing rev­enues and lay­offs, and had final­ly achieved a kind of sta­bil­i­ty. Now it might be fac­ing extinc­tion.

    “They call Alden a vul­ture hedge fund, and I think that’s hon­est­ly a mis­nomer,” John­son said. “A vul­ture doesn’t hold a wound­ed animal’s head under­wa­ter. This is preda­to­ry.”

    When Alden first start­ed buy­ing news­pa­pers, at the tail end of the Great Reces­sion, the indus­try respond­ed with cau­tious opti­mism. These were not exact­ly boom times for news­pa­pers, after all—at least some­one want­ed to buy them. Maybe this obscure hedge fund had a plan. One ear­ly arti­cle, in the trade pub­li­ca­tion Poyn­ter, sug­gest­ed that Alden’s inter­est in the local-news busi­ness could be seen as “flat­ter­ing” and quot­ed the own­er of The Den­ver Post as say­ing he had “enor­mous respect” for the firm. Read­ing these sto­ries now has a cer­tain hor­ror-movie qual­i­ty: You want to some­how warn the unwit­ting vic­tims of what’s about to hap­pen.

    Of course, it’s easy to roman­ti­cize past eras of jour­nal­ism. The fam­i­lies that used to own the bulk of America’s local newspapers—the Bon­filses of Den­ver, the Chan­dlers of Los Angeles—were nev­er per­fect stew­ards. They could be vain, bum­bling, even cor­rupt. At their worst, they used their papers to main­tain oppres­sive social hier­ar­chies. But most of them also had a stake in the com­mu­ni­ties their papers served, which meant that, if noth­ing else, their egos were wrapped up in putting out a respectable prod­uct.

    The 21st cen­tu­ry has seen many of these gen­er­a­tional own­ers flee the indus­try, to dev­as­tat­ing effect. In the past 15 years, more than a quar­ter of Amer­i­can news­pa­pers have gone out of busi­ness. Those that have sur­vived are small­er, weak­er, and more vul­ner­a­ble to acqui­si­tion. Today, half of all dai­ly news­pa­pers in the U.S. are con­trolled by finan­cial firms, accord­ing to an analy­sis by the Finan­cial Times, and the num­ber is almost cer­tain to grow.

    What threat­ens local news­pa­pers now is not just dig­i­tal dis­rup­tion or abstract mar­ket forces. They’re being tar­get­ed by investors who have fig­ured out how to get rich by strip-min­ing local-news out­fits. The mod­el is sim­ple: Gut the staff, sell the real estate, jack up sub­scrip­tion prices, and wring as much cash as pos­si­ble out of the enter­prise until even­tu­al­ly enough read­ers can­cel their sub­scrip­tions that the paper folds, or is reduced to a des­ic­cat­ed husk of its for­mer self.

    The men who devised this mod­el are Ran­dall Smith and Heath Free­man, the co-founders of Alden Glob­al Cap­i­tal. Since they bought their first news­pa­pers a decade ago, no one has been more mer­ce­nary or less inter­est­ed in pre­tend­ing to care about their pub­li­ca­tions’ long-term health. Researchers at the Uni­ver­si­ty of North Car­oli­na found that Alden-owned news­pa­pers have cut their staff at twice the rate of their com­peti­tors; not coin­ci­den­tal­ly, cir­cu­la­tion has fall­en faster too, accord­ing to Ken Doc­tor, a news-indus­try ana­lyst who reviewed data from some of the papers. That might sound like a los­ing for­mu­la, but these papers don’t have to become sus­tain­able busi­ness­es for Smith and Free­man to make mon­ey.

    With aggres­sive cost-cut­ting, Alden can oper­ate its news­pa­pers at a prof­it for years while turn­ing out a steadi­ly worse prod­uct, indif­fer­ent to the sub­scribers it’s alien­at­ing. “It’s the mean­ness and the ele­gance of the cap­i­tal­ist mar­ket­place brought to news­pa­pers,” Doc­tor told me. So far, Alden has lim­it­ed its clo­sures pri­mar­i­ly to week­ly news­pa­pers, but Doc­tor argues it’s only a mat­ter of time before the firm starts shut­ting down its dailies as well.

    This invest­ment strat­e­gy does not come with­out social con­se­quences. When a local news­pa­per van­ish­es, research shows, it tends to cor­re­spond with low­er vot­er turnout, increased polar­iza­tion, and a gen­er­al ero­sion of civic engage­ment. Mis­in­for­ma­tion pro­lif­er­ates. City bud­gets bal­loon, along with cor­rup­tion and dys­func­tion. The con­se­quences can influ­ence nation­al pol­i­tics as well; an an analy­sis by Politi­co found that Don­ald Trump per­formed best dur­ing the 2016 elec­tion in places with lim­it­ed access to local news.

    With its acqui­si­tion of Tri­bune Pub­lish­ing ear­li­er this year, Alden now con­trols more than 200 news­pa­pers, includ­ing some of the country’s most famous and influ­en­tial: the Chica­go Tri­bune, The Bal­ti­more Sun, the New York Dai­ly News. It is the nation’s sec­ond-largest news­pa­per own­er by cir­cu­la­tion. Some in the indus­try say they wouldn’t be sur­prised if Smith and Free­man end up becom­ing the biggest news­pa­per moguls in U.S. his­to­ry.

    They are also defined by an obses­sive secre­cy. Alden’s web­site con­tains no infor­ma­tion beyond the firm’s name, and its list of investors is kept strict­ly con­fi­den­tial. When law­mak­ers pressed for details last year on who funds Alden, the com­pa­ny replied that “there may be cer­tain legal enti­ties and orga­ni­za­tion­al struc­tures formed out­side of the Unit­ed States.”

    Smith, a reclu­sive Palm Beach sep­tu­a­ge­nar­i­an, hasn’t grant­ed a press inter­view since the 1980s. Free­man, his 41-year-old pro­tégé and the pres­i­dent of the firm, would be unrec­og­niz­able in most of the news­rooms he owns. For two men who employ thou­sands of jour­nal­ists, remark­ably lit­tle is known about them.

    If you want to know what it’s like when Alden Cap­i­tal buys your local news­pa­per, you could look to Mont­gomery Coun­ty, Penn­syl­va­nia, where cov­er­age of local elec­tions in more than a dozen com­mu­ni­ties falls to a sin­gle reporter work­ing out of his attic and email­ing ques­tion­naires to can­di­dates. You could look to Oak­land, Cal­i­for­nia, where the East Bay Times laid off 20 peo­ple one week after the paper won a Pulitzer. Or to near­by Mon­terey, where the for­mer Her­ald reporter Julie Reynolds says staffers were pushed to stop writ­ing inves­tiga­tive fea­tures so they could pro­duce mul­ti­ple sto­ries a day. Or to Den­ver, where the Post’s staff was cut by two-thirds, evict­ed from its news­room, and relo­cat­ed to a plant in an area with poor air qual­i­ty, where some employ­ees devel­oped breath­ing prob­lems.

    But maybe the clear­est illus­tra­tion is in Valle­jo, Cal­i­for­nia, a city of about 120,000 peo­ple 30 miles north of San Fran­cis­co. When John Glid­den first joined the Valle­jo Times-Her­ald, in 2014, it had a staff of about a dozen reporters, edi­tors, and pho­tog­ra­phers. Glid­den, then a mild-man­nered 30-year-old, had come to jour­nal­ism lat­er in life than most and was eager to prove him­self. He start­ed as a gen­er­al-assign­ment reporter, cov­er­ing local crime and com­mu­ni­ty events. The pay was ter­ri­ble and the work was not glam­orous, but Glid­den loved his job. A native of Valle­jo, he was proud to work for his home­town paper. It felt impor­tant.

    A month after he start­ed, one of his fel­low reporters left and Glid­den was asked to start cov­er­ing schools in addi­tion to his oth­er respon­si­bil­i­ties. When the city-hall reporter left a few months lat­er, he picked up that beat too. Glid­den had heard rum­blings about the paper’s own­ers when he first took the job, but he hadn’t paid much atten­tion. Now he was feel­ing the effects of their man­age­ment.

    It turned out that those owners—New York hedge fun­ders whom Glid­den took to call­ing “the lizard people”—were laser-focused on increas­ing the paper’s prof­it mar­gins. Year after year, the exec­u­tives from Alden would order new bud­get cuts, and Glid­den would end up with few­er co-work­ers and more work. Even­tu­al­ly he was the only news reporter left on staff, charged with cov­er­ing the city’s police, schools, gov­ern­ment, courts, hos­pi­tals, and busi­ness­es. “It played with my mind a lit­tle bit,” Glid­den told me. “I felt like a ter­ri­ble reporter because I couldn’t get to every­thing.”

    He gained 100 pounds and start­ed grind­ing his teeth at night. He used his own mon­ey to pull court records, and went years with­out going on a vaca­tion. Tips that he would nev­er have time to inves­ti­gate piled up on a legal pad he kept at his desk. At one point, he told me, the city’s entire civ­il-ser­vice com­mis­sion was abrupt­ly fired with­out expla­na­tion; his sources told him some­thing fishy was going on, but he knew he’d nev­er be able to run down the sto­ry.

    Mean­while, with few news­room jobs left to elim­i­nate, Alden con­tin­ued to find cre­ative ways to cut costs. The paper’s print­ing was moved to a plant more than 100 miles out­side town, Glid­den told me, which meant that the news arriv­ing on sub­scribers’ doorsteps each morn­ing was often more than 24 hours old. The “news­room” was moved to a sin­gle room rent­ed from the local cham­ber of com­merce. Lay­out design was out­sourced to free­lancers in the Philip­pines.

    Frus­trat­ed and worn out, Glid­den broke down one day last spring when a reporter from The Wash­ing­ton Post called. She was writ­ing about Alden’s grow­ing news­pa­per empire, and want­ed to know what it was like to be the last news reporter in town. “It hurts to see the paper like this,” he told her. “Valle­jo deserves bet­ter.” A few weeks after the sto­ry came out, he was fired. His edi­tor cit­ed a sup­posed jour­nal­is­tic infrac­tion (Glid­den had report­ed the res­ig­na­tion of a school super­in­ten­dent before an agreed-upon embar­go). But Glid­den felt sure he knew the real rea­son: Alden want­ed him gone.

    The sto­ry of Alden Cap­i­tal begins on the set of a 1960s TV game show called Dream House. A young man named Ran­dall Dun­can Smith—Randy for short—stands next to his wife, Kathryn, answer­ing quick-fire triv­ia ques­tions in front of a live stu­dio audi­ence. The show’s premise pits two cou­ples against each oth­er for the chance to win a home. When the Smiths win, they pass on the house and take the cash prize instead—a $20,000 haul that Randy will even­tu­al­ly use to seed a small trad­ing firm he calls R.D. Smith & Com­pa­ny.

    A Cor­nell grad with an M.B.A., Randy is on a part­ner track at Bear Stearns, where he’s poised to make a com­fort­able for­tune sim­ply by climb­ing the lad­der. But he has a big idea: He believes there’s seri­ous mon­ey to be made in buy­ing trou­bled com­pa­nies, steer­ing them into bank­rupt­cy, and then sell­ing them off in parts. The term vul­ture cap­i­tal­ism hasn’t been invent­ed yet, but Randy will come to be known as a pio­neer in the field. He scores big with a bank­rupt aero­space man­u­fac­tur­er, and again with a Dal­las-based drilling com­pa­ny.

    By the 1980s, this strat­e­gy has made Randy lux­u­ri­ous­ly wealthy—vacations in the French Riv­iera, a fam­i­ly com­pound out­side New York City—and he has begun to school his chil­dren on the won­ders of cap­i­tal­ism. He teach­es his 8‑year-old son, Caleb, to make trades on a Quotron com­put­er, and imparts the val­ue of delayed grat­i­fi­ca­tion by report­ed­ly post­pon­ing his family’s Christ­mas so that he can use all their avail­able cash to buy stocks at low­er prices in Decem­ber. Caleb will lat­er recall, in an inter­view with D Mag­a­zine, ask­ing his dad why he works so hard.

    “It’s a game,” Randy explains to his son.

    “How do you know who wins?” the boy asks.

    “Who­ev­er dies with the most mon­ey.”

    Even in the “greed is good” cli­mate of the era, Randy is a polar­iz­ing char­ac­ter on Wall Street. When The New York Times pro­files him in 1991, it notes that he excels at “prof­it­ing from oth­er people’s mis­ery” and quotes a parade of dis­grun­tled clients and part­ners. “The one cen­tral theme,” the Times reports, “seems to be that Smith and its web of affil­i­ates are out, first and fore­most, for them­selves.” If this rep­u­ta­tion both­ers Randy and his col­leagues, they don’t let on: For a while, accord­ing to The Vil­lage Voice, his firm proud­ly hangs a paint­ing of a vul­ture in its lob­by.

    Around this time, Randy becomes pre­oc­cu­pied with pri­va­cy. He stops talk­ing to the press, refus­es to be pho­tographed, and rarely appears in pub­lic. One acquain­tance tells The Vil­lage Voice that “he’s the kind of guy who divests him­self every cou­ple of years” to avoid end­ing up on lists of the world’s rich­est peo­ple.

    Most of his invest­ments are defined by a cold prag­ma­tism, but he takes a more per­son­al inter­est in the media sec­tor. With his own mon­ey, he helps his broth­er launch the New York Press, a free alt-week­ly in Man­hat­tan. Russ Smith is a puck­ish lib­er­tar­i­an whose self-described “con­tempt” for the jour­nal­is­tic class ani­mates the pages of the pub­li­ca­tion. “I’m repulsed by the inces­tu­ous world of New York jour­nal­ism,” he tells New York mag­a­zine. He writes a week­ly col­umn called “Mug­ger” that sav­ages the city’s jour­nal­ists by name and fre­quent­ly runs to 10,000 words.

    Randy claims no edi­to­r­i­al role in the Press, and his invest­ment in the project—which has lit­tle chance of pro­duc­ing the kind of return he’s accus­tomed to—could be chalked up to broth­er­ly loy­al­ty. But years lat­er, when Randy relo­cates to Palm Beach and becomes a major donor to Don­ald Trump’s pres­i­den­tial cam­paign, it will make a cer­tain amount of sense that his ear­li­est known media invest­ment was con­ceived as a giant mid­dle fin­ger to the jour­nal­is­tic estab­lish­ment.

    How exact­ly Ran­dall Smith chose Heath Free­man as his pro­tégé is a mat­ter of spec­u­la­tion among those who have worked for the two of them. In con­ver­sa­tions with for­mer Alden employ­ees, I heard repeat­ed­ly that their part­ner­ship seemed to tran­scend busi­ness. “They had a father-fig­ure rela­tion­ship,” one told me. “They were very tight.” Free­man has resist­ed elab­o­rat­ing on his rela­tion­ship with Smith, say­ing sim­ply that they were fam­i­ly friends before going into busi­ness togeth­er.

    Freeman’s father, Bri­an, was a suc­cess­ful invest­ment banker who spe­cial­ized in mak­ing deals on behalf of labor unions. After serv­ing in the Carter administration’s Trea­sury Depart­ment, Bri­an became wide­ly known—and feared—in the ’80s for his hard-line nego­ti­at­ing style. “I sort of bul­ly peo­ple around to get stuff done,” he boast­ed to The Wash­ing­ton Post in 1985. The details of how Smith got to know him are opaque, but the result­ing loy­al­ty was evi­dent.

    After Bri­an took his own life, in 2001, Smith became a men­tor and con­fi­dant to Heath, who was in col­lege at the time of his father’s death. Sev­er­al years lat­er, when Heath was still in his mid-20s, Smith co-found­ed Alden Glob­al Cap­i­tal with him, and even­tu­al­ly put him in charge of the firm.

    Peo­ple who know him described Freeman—with his shel­lacked curls, per­ma-stub­ble, and omnipresent smirk—as the arche­typ­al Wall Street frat boy. “If you went into a lab to cre­ate the per­fect bro, Heath would be that cre­ation,” says one for­mer exec­u­tive at an Alden-owned com­pa­ny, who, like oth­ers in this sto­ry, request­ed anonymi­ty to speak can­did­ly. Free­man would show up at busi­ness meet­ings straight from the gym, clad in ath­leisure, the exec­u­tive recalled, and would find excus­es to invoke his col­lege-foot­ball hero­ics, say­ing things like “When I played foot­ball at Duke, I learned some lessons about lead­er­ship.” (Free­man was a walk-on place­kick­er on a team that won no games the year he played.)

    When Alden first got into the news busi­ness, Free­man seemed will­ing to indulge some inno­va­tion. The firm over­saw the pro­mo­tion of John Paton, a charis­mat­ic dig­i­tal-media evan­ge­list, who improved the papers’ web and mobile offer­ings and increased online ad rev­enue. In 2011, Paton launched an ambi­tious ini­tia­tive he called “Project Thun­der­dome,” hir­ing more than 50 jour­nal­ists in New York and strate­gi­cal­ly deploy­ing them to sup­ple­ment short-staffed local news­rooms. For a fleet­ing moment, Alden’s news­pa­pers became unex­pect­ed dar­lings of the jour­nal­ism industry—written about by Poyn­ter and Nie­man Lab, endorsed by aca­d­e­mics like Jay Rosen and Jeff Jarvis. But by 2014, it was becom­ing clear to Alden’s exec­u­tives that Paton’s approach would be dif­fi­cult to mon­e­tize in the short term, accord­ing to peo­ple famil­iar with the firm’s think­ing. Rein­vent­ing their papers could require years of false starts and fine-tuning—and, most impor­tant, a delayed pay­day for Alden’s investors.

    So Free­man piv­ot­ed. He shut down Project Thun­der­dome, part­ed ways with Paton, and placed all of Alden’s news­pa­pers on the auc­tion block. When the sale failed to attract a suf­fi­cient­ly high offer, Free­man turned his atten­tion to squeez­ing as much cash out of the news­pa­pers as pos­si­ble.

    Alden’s cal­cu­lus was sim­ple. Even in a declin­ing indus­try, the news­pa­pers still gen­er­at­ed hun­dreds of mil­lions of dol­lars in annu­al rev­enues; many of them were turn­ing prof­its. For Free­man and his investors to come out ahead, they didn’t need to wor­ry about the long-term health of the assets—they just need­ed to max­i­mize prof­its as quick­ly as pos­si­ble.

    From 2015 to 2017, he presided over staff reduc­tions of 36 per­cent across Alden’s news­pa­pers, accord­ing to an analy­sis by the News­Guild (a union that also rep­re­sents employ­ees of The Atlantic). At the same time, he increased sub­scrip­tion prices in many mar­kets; it would take awhile for subscribers—many of them old­er loy­al­ists who didn’t care­ful­ly track their bills—to notice that they were pay­ing more for a worse prod­uct. Maybe they’d can­cel their sub­scrip­tions even­tu­al­ly; maybe the papers would fold alto­geth­er. But as long as Alden had made back its mon­ey, the invest­ment would be a suc­cess. (Free­man denied this char­ac­ter­i­za­tion through a spokesper­son.)

    Cru­cial­ly, the prof­its gen­er­at­ed by Alden’s news­pa­pers did not go toward rebuild­ing news­rooms. Instead, the mon­ey was used to finance the hedge fund’s oth­er ven­tures. In legal fil­ings, Alden has acknowl­edged divert­ing hun­dreds of mil­lions of dol­lars from its news­pa­pers into risky bets on com­mer­cial real estate, a bank­rupt phar­ma­cy chain, and Greek debt bonds. To indus­try observers, Alden’s brazen mod­el set it apart even from chains like Gan­nett, known for its aggres­sive cost-cut­ting. Alden “is not a news­pa­per com­pa­ny,” says Ann Marie Lip­in­s­ki, a for­mer edi­tor in chief of the Chica­go Tri­bune. “It’s a hedge that went and bought up some titles that it milks for cash.”

    Even as Alden’s port­fo­lio grew, Free­man rarely vis­it­ed his news­pa­pers. When he did, he exhib­it­ed a casu­al con­tempt for the jour­nal­ists who worked there. On more than one occa­sion, accord­ing to peo­ple I spoke with, he asked aloud, “What do all these peo­ple do?” Accord­ing to the for­mer exec­u­tive, Free­man once sug­gest­ed in a meet­ing that Alden’s news­pa­pers could get rid of all their full-time reporters and rely entire­ly on free­lancers. (Free­man denied this through a spokesper­son.) In my many con­ver­sa­tions with peo­ple who have worked with Free­man, not one could recall see­ing him read a news­pa­per.

    A sto­ry cir­cu­lat­ed through­out the company—possibly apoc­ryphal, though no one could say for sure—that when Free­man was informed that The Den­ver Post had won a Pulitzer in 2013, his first response was: “Does that come with any mon­ey?”

    In bud­get meet­ings, accord­ing to the for­mer exec­u­tive, Free­man hec­tored local pub­lish­ers, demand­ing that they pro­duce detailed num­bers off the top of their head and then humil­i­at­ing them when they couldn’t. But for all the the­atrics, his march­ing orders were always the same: Cut more.

    “It was clear that they didn’t care about this being a busi­ness in the future. It was all about the next quarter’s prof­it mar­gins,” says Matt DeRien­zo, who worked as a pub­lish­er for Alden’s Con­necti­cut news­pa­pers before final­ly resign­ing.

    Anoth­er ex-pub­lish­er told me Free­man believed that local news­pa­pers should be treat­ed like any oth­er com­mod­i­ty in an extrac­tive busi­ness. “To him, it’s the same as oil,” the pub­lish­er said. “Heath hopes the well nev­er runs dry, but he’s going to keep pump­ing until it does. And every­one knows it’s going to run dry.”

    On March 9, 2020, a small group of Bal­ti­more Sun reporters con­vened a secret meet­ing at the down­town Hyatt Regency. Alden Glob­al Cap­i­tal had recent­ly pur­chased a near­ly one-third stake in the Sun’s par­ent com­pa­ny, Tri­bune Pub­lish­ing, and the firm was sig­nal­ing that it would soon come for the rest. By that point, Alden was wide­ly known as the “grim reaper of Amer­i­can news­pa­pers,” as Van­i­ty Fair had put it, and news of the acqui­si­tion plans had unleashed a wave of pan­ic across the indus­try.

    But there was still a sliv­er of hope: Tri­bune and Alden agreed that the hedge fund would not increase its stake in the com­pa­ny for at least sev­en months. That gave the jour­nal­ists at the Sun a brief win­dow to stop the sale from going through. The ques­tion was how.

    In the Hyatt meet­ing, Ted Vene­toulis, a for­mer Bal­ti­more politi­cian, advised the reporters to pick a noisy pub­lic fight: Set up a war room, cir­cu­late peti­tions, hold events to ral­ly the city against Alden. If they did it right, Vene­toulis said, they just might be able to line up a local, civic-mind­ed own­er for the paper. The pitch had a cer­tain roman­tic appeal to the reporters in the room. “Bal­ti­more is an under­dog town,” Liz Bowie, a Sun reporter who was at the meet­ing, told me. “We were like, They’re not going to take our news­pa­per from us!

    The paper’s union hired a PR firm to launch a pub­lic-aware­ness cam­paign under the ban­ner “Save Our Sun” and pub­lished a let­ter call­ing on the Tri­bune board to sell the paper to local own­ers. Soon, Tri­bune-owned news­rooms across the coun­try were kick­ing off sim­i­lar cam­paigns. “We were in col­lec­tive revolt,” Lil­lian Reed, a Sun reporter who helped orga­nize the cam­paign, told me. When the jour­nal­ists cre­at­ed a Slack chan­nel to coor­di­nate their efforts across mul­ti­ple news­pa­pers, they dubbed it “Project May­hem.”

    In Orlan­do, the Sen­tinel ran an edi­to­r­i­al plead­ing with the com­mu­ni­ty to “deliv­er us from Alden” and com­par­ing the hedge fund to “a bib­li­cal plague of locusts.” In Allen­town, Penn­syl­va­nia, reporters held read­er forums where they tried to instill a sense of urgency about the threat Alden posed to The Morn­ing Call. The move­ment gained trac­tion in some mar­kets, with local politi­cians and celebri­ties express­ing sol­i­dar­i­ty. But even for a group of jour­nal­ists, it was tough to keep the public’s atten­tion. After a con­tentious pres­i­den­tial race and amid a still-rag­ing pan­dem­ic, there was a lim­it­ed sup­ply of out­rage and sym­pa­thy to spare for local reporters. When the Chica­go Tri­bune held a “Save Local News” ral­ly, most of the peo­ple who showed up were mem­bers of the media.

    Mean­while, reporters fanned out across their respec­tive cities in search of benev­o­lent rich peo­ple to buy their news­pa­pers. The most promis­ing prospect mate­ri­al­ized in Bal­ti­more, where a hotel mag­nate named Stew­art Bainum Jr. expressed inter­est in the Sun. Earnest and unpol­ished, with a per­pet­u­al­ly mussed mop of hair, Bainum pre­sent­ed him­self as a con­trast to the cut­throat cap­i­tal­ists at Alden. As a young man, he’d stud­ied at divin­i­ty school before tak­ing over his father’s com­pa­ny, and decades lat­er he still car­ried a healthy sense of noblesse oblige. He took par­tic­u­lar pride in find­ing nov­el ways to give away his fam­i­ly for­tune, fund­ing child-pover­ty ini­tia­tives in Bal­ti­more and pre­na­tal care for women in Liberia.

    Bainum told me he’d come to appre­ci­ate local jour­nal­ism in the 1970s while serv­ing in the Mary­land state leg­is­la­ture. At the time, the Sun had a bustling bureau in Annapo­lis, and he mar­veled at the reporters’ abil­i­ty to sort the hon­est politi­cians from the “polit­i­cal whores” by expos­ing abus­es of pow­er. “You have no way of know­ing that if you don’t have some nosy son of a bitch ask­ing a lot of ques­tions down there,” he told me.

    Bainum envi­sioned rebuild­ing the paper—which, by 2020, was down to a sin­gle full-time state­house reporter—as a non­prof­it. In Feb­ru­ary 2021, he announced a hand­shake deal to buy the Sun from Alden for $65 mil­lion once it acquired Tri­bune Pub­lish­ing.

    But with­in weeks, Bainum said, Alden tried to tack on a five-year licens­ing deal that would have cost him tens of mil­lions more. (Free­man has, in the past, dis­put­ed Bainum’s account of the nego­ti­a­tions.) Feel­ing burned by the hedge fund, Bainum decid­ed to make a last-minute bid for all of Tri­bune Publishing’s news­pa­pers, pledg­ing to line up respon­si­ble buy­ers in each mar­ket. For those who cared about the future of local news, it was hard to imag­ine a bet­ter out­come—which made it all the more dev­as­tat­ing when the bid fell through.

    What exact­ly went wrong would become a point of bit­ter debate among the jour­nal­ists involved in the cam­paigns. Some expressed exas­per­a­tion with the staff of the Chica­go Tri­bune, who were unable to find a sin­gle inter­est­ed local buy­er. Oth­ers point­ed to Bainum’s financ­ing part­ner, who pulled out of the deal at the 11th hour. The largest share of the blame was assigned to the Tri­bune board for allow­ing the sale to Alden to go through. Free­man, mean­while, would lat­er gloat to col­leagues that Bainum was nev­er seri­ous about buy­ing the news­pa­pers and just want­ed to bask in the wor­ship­ful media cov­er­age his bid gen­er­at­ed.

    But beneath all the recrim­i­na­tions and infight­ing was a cru­el real­i­ty: When faced with the like­ly dec­i­ma­tion of the country’s largest local news­pa­pers, most Amer­i­cans didn’t seem to care very much. “It was like watch­ing a slow-motion dis­as­ter,” says Gre­go­ry Pratt, a reporter at the Chica­go Tri­bune.

    Alden com­plet­ed its takeover of the Tri­bune papers in May. It financed the deal with the help of Cerberus—a pri­vate-equi­ty firm that owned, among oth­er busi­ness­es, the secu­ri­ty com­pa­ny that trained Sau­di oper­a­tives who par­tic­i­pat­ed in the mur­der of the jour­nal­ist Jamal Khashog­gi.

    Three days lat­er, Bainum—still smart­ing from his expe­ri­ence with Alden, but wor­ried about the Sun’s fate—sent a pride-swal­low­ing email to Free­man. After con­grat­u­lat­ing him on clos­ing the deal, Bainum said he was still inter­est­ed in buy­ing the Sun if Alden was will­ing to nego­ti­ate. Free­man nev­er respond­ed.

    Short­ly after the Tri­bune deal closed ear­li­er this year, I began try­ing to inter­view the men behind Alden Cap­i­tal. I knew they almost nev­er talked to reporters, but Ran­dall Smith and Heath Free­man were now two of the most pow­er­ful fig­ures in the news indus­try, and they’d got­ten there by dis­man­tling local jour­nal­ism. It seemed rea­son­able to ask that they answer a few ques­tions.

    My request for an inter­view with Smith was dis­missed by his spokesper­son before I fin­ished ask­ing. A reporter at one of his news­pa­pers sug­gest­ed I try “doorstep­ping” Smith—showing up at his home unan­nounced to ask ques­tions from the porch. But it turned out that Smith had so many doorsteps—16 man­sions in Palm Beach alone, as of a few years ago, some of them behind gates—that the plan proved imprac­ti­cal. At one point, I tracked down the pho­tog­ra­ph­er who’d tak­en the only exist­ing pic­ture of Smith on the inter­net. But when I emailed his stu­dio look­ing for infor­ma­tion, I was informed curt­ly that the pho­to was “no longer avail­able.” Had Smith bought the rights him­self? I asked. No response came back.

    Free­man was only slight­ly more acces­si­ble. He declined to meet me in per­son or to appear on Zoom. After weeks of back-and-forth, he agreed to a phone call, but only if parts of the con­ver­sa­tion could be on back­ground (which is to say, I could use the infor­ma­tion gen­er­al­ly but not attribute it to him). On the appoint­ed after­noon, I dialed the num­ber pro­vid­ed by his spokesper­son and found myself talk­ing to the most feared man in Amer­i­can news­pa­pers.

    When I asked Free­man what he thought was bro­ken about the news­pa­per indus­try, he launched into a mono­logue that was laden with jar­gon and light on insight—summarizing what has been the con­ven­tion­al wis­dom for a decade as though it were Alden’s dis­cov­ery. “Many of the oper­a­tors were look­ing at the news­pa­per busi­ness as a local adver­tis­ing busi­ness,” he said, “and we didn’t believe that was the right way to look at it. This is a sub­scrip­tion-based busi­ness.”

    Free­man was more ani­mat­ed when he turned to the prospect of extract­ing mon­ey from Big Tech. “We must final­ly require the online tech behe­moths, such as Google, Apple, and Face­book, to fair­ly com­pen­sate us for our orig­i­nal news con­tent,” he told me. He had spo­ken on this issue before, and it was easy to see why. Many in the jour­nal­ism indus­try, watch­ing law­suits play out in Aus­tralia and Europe, have held out hope in recent years that Google and Face­book will be com­pelled to share their adver­tis­ing rev­enue with the local out­lets whose con­tent pop­u­lates their plat­forms. Some have even sug­gest­ed that this rep­re­sents America’s last chance to save its local-news indus­try. But for that to hap­pen, the Big Tech mon­ey would need to flow to under­fund­ed news­rooms, not into the pock­ets of Alden’s investors.

    Before our inter­view, I’d con­tact­ed a num­ber of Alden’s reporters to find out what they would ask their boss if they ever had the chance. Most respond­ed with vari­a­tions on the same ques­tion: Which recent sto­ries from your news­pa­pers have you espe­cial­ly appre­ci­at­ed? I put the ques­tion to Free­man, but he declined to answer on the record.

    Free­man was clear­ly aware of his rep­u­ta­tion for ruth­less­ness, but he seemed to regard Alden’s com­mit­ment to cost-cut­ting as a badge of honor—the thing that dis­tin­guished him from the saps and cow­ards who made up America’s pre­vi­ous gen­er­a­tion of news­pa­per own­ers. “Pri­or to the acqui­si­tion of the Tri­bune Com­pa­ny, we pur­chased sub­stan­tial­ly all of our news­pa­pers out of bank­rupt­cy or close to liq­ui­da­tion,” he told me. “These papers were in many cas­es left for dead by local fam­i­lies not will­ing to make the tough but appro­pri­ate deci­sions to get these news orga­ni­za­tions to sus­tain­abil­i­ty. These papers would have been liq­ui­dat­ed if not for us step­ping up.”

    This was the core of Freeman’s argu­ment. But while it’s true that Alden entered the indus­try by pur­chas­ing floun­der­ing news­pa­pers, not all of them were nec­es­sar­i­ly doomed to liq­ui­da­tion. More to the point, Tri­bune Publishing—which rep­re­sents a sub­stan­tial por­tion of Alden’s titles—was prof­itable at the time of the acqui­si­tion.

    There’s lit­tle evi­dence that Alden cares about the “sus­tain­abil­i­ty” of its news­pa­pers. A more hon­est argu­ment might have claimed, as some econ­o­mists have, that vul­ture funds like Alden play a use­ful role in “cre­ative destruc­tion,” dis­man­tling out­mod­ed busi­ness­es to make room for more inno­v­a­tive insur­gents. But in the case of local news, noth­ing com­pa­ra­ble is ready to replace these papers when they die. Some pub­li­ca­tions, such as the Min­neapo­lis Star Tri­bune, have devel­oped suc­cess­ful long-term mod­els that Alden’s papers might try to fol­low. But that would require slow, painstak­ing work—and there are eas­i­er ways to make mon­ey.

    In truth, Free­man didn’t seem par­tic­u­lar­ly inter­est­ed in defend­ing Alden’s rep­u­ta­tion. When he’d agreed to the inter­view, I’d expect­ed him to say the things he was sup­posed to say—that the lay­offs and buy­outs were nec­es­sary but trag­ic; that he held local jour­nal­ism in the high­est esteem; that he felt a sacred respon­si­bil­i­ty to steer these news­pa­pers toward a robust future. I would know he didn’t mean it, and he would know he didn’t mean it, but he would at least go through the motions.

    But I had under­es­ti­mat­ed how lit­tle Alden’s founders care about their stand­ing in the jour­nal­ism world. For Free­man, news­pa­pers are finan­cial assets and noth­ing more—numbers to be rearranged on spread­sheets until they pro­duce the max­i­mum returns for investors. For Smith, the Palm Beach con­ser­v­a­tive and Trump ally, stick­ing it to the main­stream media might actu­al­ly be a perk of Alden’s strat­e­gy. Nei­ther man will ever be the guest of hon­or at the annu­al din­ner for the Com­mit­tee to Pro­tect Journalists—and that’s prob­a­bly fine by them. It’s hard to imag­ine they’d show, any­way.

    About a month after The Bal­ti­more Sun was acquired by Alden, a senior edi­tor at the paper took ques­tions from anx­ious reporters on Zoom. The new own­ers had announced a round of buy­outs, some beloved staffers were leav­ing, and those who remained were wor­ried about the future. When a reporter asked if their work was still val­ued, the edi­tor sound­ed deflat­ed. He said that he still appre­ci­at­ed their jour­nal­ism, but that he couldn’t speak for his cor­po­rate boss­es.

    “This com­pa­ny that owns us now seems to still be pretty—I don’t even know how to put it,” the edi­tor said, accord­ing to a record­ing of the meet­ing obtained by The Atlantic. “We don’t hear from them ... They’re, like, name­less, face­less peo­ple.”

    In the months that fol­lowed, the Sun did not imme­di­ate­ly expe­ri­ence the same deep staff cuts that oth­er papers did. Reporters kept report­ing, and edi­tors kept edit­ing, and the union kept look­ing for ways to put pres­sure on Alden. But a sense of fatal­ism per­me­at­ed the work. “It feels like we’re going up against cap­i­tal­ism now,” Lil­lian Reed, the reporter who helped launch the “Save Our Sun” cam­paign, told me. “Am I going to win against cap­i­tal­ism in Amer­i­ca? Prob­a­bly not.”

    To David Simon, the whim­per­ing end of The Bal­ti­more Sun feels both inevitable and infu­ri­at­ing. A for­mer Sun reporter whose work on the police beat famous­ly led to his cre­ation of The Wire on HBO, Simon told me the paper had suf­fered for years under a series of blun­der­ing cor­po­rate owners—and it was only a mat­ter of time before an enter­prise as cold-blood­ed as Alden final­ly put it out of its mis­ery.

    Like many alum­ni of the Sun, Simon is steeped in the paper’s his­to­ry. He can cite decades-old scoops and tell you whom they pissed off. He quotes H. L. Menck­en, the paper’s cru­sad­ing 20th-cen­tu­ry colum­nist, on the joys of jour­nal­ism: It is real­ly the life of kings. At the Sun’s peak, it employed more than 400 jour­nal­ists, with reporters in Lon­don and Tokyo and Jerusalem. Its World War II cor­re­spon­dent brought first­hand news of Nazi con­cen­tra­tion camps to Amer­i­can read­ers; its edi­to­r­i­al page had the pow­er to make or break polit­i­cal careers in Mary­land.

    But for Simon, that paper exists entire­ly in the past. With Alden in con­trol, he believes the Sun is “now a pris­on­er” that stands lit­tle chance of escape. What most con­cerns him is how his city will man­age with­out a robust paper keep­ing tabs on the peo­ple in charge. “The prac­ti­cal effect of the death of local jour­nal­ism is that you get what we’ve had,” he told me, “which is a hal­cy­on time for cor­rup­tion and mis­man­age­ment and basi­cal­ly mis­rule.”

    When Simon called me, he was on the set of his new minis­eries, We Own This City, which tells the true sto­ry of Bal­ti­more cops who spent years run­ning their own drug ring from inside the police depart­ment. By the time the FBI caught them, in 2017, the con­spir­a­cy had result­ed in one dead civil­ian and a rash of wrong­ful arrests and con­vic­tions. The show draws from a book writ­ten by a Sun reporter, and Simon was quick to point out that the paper still has good jour­nal­ists cov­er­ing impor­tant sto­ries. But he couldn’t help feel­ing that the police scan­dal would have been exposed much soon­er if the Sun were oper­at­ing at full force.

    Bal­ti­more has always had its prob­lems, he told me. “But if you real­ly start­ed fu cking up in grandiose and bel­liger­ent ways, if you start­ed steal­ing and grift­ing and lying, even­tu­al­ly some­body would come up behind you and say, ‘You’re grift­ing and you’re lying’ … and they’d put it in the paper.”

    “The bad stuff runs for so long now,” he went on, “that by the time you get to it, insti­tu­tions are irrepara­ble, or damn near close.”

    Take away the news­room packed with med­dling reporters, and a city los­es a cru­cial lay­er of account­abil­i­ty. What hap­pens next? Unless the Tri­bune’s tra­jec­to­ry changes, Chica­go may soon pro­vide a grim case study. For Bal­ti­more to avoid a sim­i­lar fate, Simon told me, some­thing new would have to come along—a spir­i­tu­al heir to the Sun: “A news­pa­per is its con­tents and the peo­ple who make it. It’s not the name or the flag.”

    He may get his wish. Stew­art Bainum, since los­ing his bid for the Sun, has been qui­et­ly work­ing on a new ven­ture. Con­vinced that the Sun won’t be able to pro­vide the kind of cov­er­age the city needs, he has set out to build a new pub­li­ca­tion of record from the ground up. In recent months, he’s been meet­ing with lead­ers of local-news start-ups across the coun­try—The Texas Tri­bune, the Dai­ly Mem­phi­an, The City in New York—and col­lect­ing best prac­tices. He’s impressed by their jour­nal­ism, he told me, but his clear­est take­away is that they’re not near­ly well fund­ed enough. To replace a paper like the Sun would require a large, tal­ent­ed staff that cov­ers not just gov­ern­ment, but sports and schools and restau­rants and art. “You need real cap­i­tal to move the nee­dle,” he told me. Oth­er­wise, “you’re just pee­ing in the ocean.”

    Next year, Bainum will launch The Bal­ti­more Ban­ner, an all-dig­i­tal, non­prof­it news out­let. He told me it will begin with an annu­al oper­at­ing bud­get of $15 mil­lion, unprece­dent­ed for an out­fit of this kind. It will rely ini­tial­ly on phil­an­thropic dona­tions, but he aims to sell enough sub­scrip­tions to make it self-sus­tain­ing with­in five years. He’s acute­ly aware of the risks—“I may end up with egg on my face,” he said—but he believes it’s worth try­ing to devel­op a suc­cess­ful mod­el that could be repli­cat­ed in oth­er mar­kets. “There’s no indus­try that I can think of more inte­gral to a work­ing democ­ra­cy than the local-news busi­ness,” he said.

    ...

    ———–

    “A Secre­tive Hedge Fund Is Gut­ting News­rooms” by McK­ay Cop­pins; The Atlantic; 10/14/2021

    ““They call Alden a vul­ture hedge fund, and I think that’s hon­est­ly a mis­nomer,” John­son said. “A vul­ture doesn’t hold a wound­ed animal’s head under­wa­ter. This is preda­to­ry.””

    You can’t call Alden Glob­al Cap­i­tal a “Vul­ture Fund”. Vul­tures aren’t preda­tors. A gen­uine vul­ture fund would­n’t kill viable com­pa­nies. Alden Glob­al Cap­i­tal is act­ing more like some sort of preda­to­ry par­a­site, bleed­ing its vic­tims to death. And it’s not a par­tic­u­lar­ly slow bleed. When Alden takes over a news oper­a­tion, the gut­ting com­mences imme­di­ate­ly, whether the paper is viable or not. Local news is being active­ly snuffed out across the US. And the peo­ple behind it are able to do this, in plain sight, with­out ever need­ing to explain their moti­va­tions:

    ...
    In May, the Tri­bune was acquired by Alden Glob­al Cap­i­tal, a secre­tive hedge fund that has quick­ly, and with remark­able ease, become one of the largest news­pa­per oper­a­tors in the coun­try. The new own­ers did not fly to Chica­go to address the staff, nor did they both­er with paeans to the vital civic role of jour­nal­ism. Instead, they gut­ted the place.

    As the months passed, things kept get­ting worse. Morale tanked; reporters burned out. The edi­tor in chief mys­te­ri­ous­ly resigned, and man­agers scram­bled to deal with the cuts. Some in the city start­ed to won­der if the paper was even worth sav­ing. “It makes me pro­found­ly sad to think about what the Trib was, what it is, and what it’s like­ly to become,” says David Axel­rod, who was a reporter at the paper before becom­ing an advis­er to Barack Oba­ma. Through it all, the own­ers main­tained their ruth­less silence—spurning inter­view requests and declin­ing to artic­u­late their plans for the paper. Long­time Tri­bune staffers had seen their share of bad cor­po­rate over­lords, but this felt more cal­cu­lat­ed, more sin­is­ter.

    “It’s not as if the Tri­bune is just with­er­ing on the vine despite the best efforts of the gar­den­ers,” Char­lie John­son, a for­mer Metro reporter, told me after the lat­est round of buy­outs this sum­mer. “It’s being snuffed out, quar­ter after quar­ter after quar­ter.” We were sit­ting in a cof­fee shop in Logan Square, and he was still strug­gling to make sense of what had hap­pened. The Tri­bune had been prof­itable when Alden took over. The paper had weath­ered a decade and a half of mis­man­age­ment and declin­ing rev­enues and lay­offs, and had final­ly achieved a kind of sta­bil­i­ty. Now it might be fac­ing extinc­tion.
    ...

    Remark­ably, this cap­ture of thew local news has tran­spired over just a decade, when Alden co-founders Ran­dall Smith and Heath Free­man bought their first paper. This is how con­tem­po­rary Amer­i­ca oper­ates. If you’re secre­tive pri­vate equi­ty firm with grand ambi­tions to cap­ture and bleed dry local news across the coun­try, that’s a viable busi­ness mod­el. A mod­el that lit­er­al­ly appears to be pred­i­cat­ed on the idea of scam­ming elder­ly sub­scribers into pay­ing more for less unless they final­ly can­cel their sub­scrip­tions, at which point the investors already made their mon­ey back. And if you exe­cute this busi­ness mod­el and destroy the only sources of infor­ma­tion in one com­mu­ni­ty after anoth­er, you will have to answer to no one, espe­cial­ly those com­mu­ni­ties. Alden Glob­al Cap­i­tal is already the sec­ond largest own­er of local news­pa­pers in the US, after just a decade, and on track to being the largest. You can lit­er­al­ly cap­ture the US news mar­ket with­out ever hav­ing to give an inter­view. It’s how eco­nom­ic pow­er oper­ates in the world’s old­est democ­ra­cy:

    ...
    The men who devised this mod­el are Ran­dall Smith and Heath Free­man, the co-founders of Alden Glob­al Cap­i­tal. Since they bought their first news­pa­pers a decade ago, no one has been more mer­ce­nary or less inter­est­ed in pre­tend­ing to care about their pub­li­ca­tions’ long-term health. Researchers at the Uni­ver­si­ty of North Car­oli­na found that Alden-owned news­pa­pers have cut their staff at twice the rate of their com­peti­tors; not coin­ci­den­tal­ly, cir­cu­la­tion has fall­en faster too, accord­ing to Ken Doc­tor, a news-indus­try ana­lyst who reviewed data from some of the papers. That might sound like a los­ing for­mu­la, but these papers don’t have to become sus­tain­able busi­ness­es for Smith and Free­man to make mon­ey.

    With aggres­sive cost-cut­ting, Alden can oper­ate its news­pa­pers at a prof­it for years while turn­ing out a steadi­ly worse prod­uct, indif­fer­ent to the sub­scribers it’s alien­at­ing. “It’s the mean­ness and the ele­gance of the cap­i­tal­ist mar­ket­place brought to news­pa­pers,” Doc­tor told me. So far, Alden has lim­it­ed its clo­sures pri­mar­i­ly to week­ly news­pa­pers, but Doc­tor argues it’s only a mat­ter of time before the firm starts shut­ting down its dailies as well.

    This invest­ment strat­e­gy does not come with­out social con­se­quences. When a local news­pa­per van­ish­es, research shows, it tends to cor­re­spond with low­er vot­er turnout, increased polar­iza­tion, and a gen­er­al ero­sion of civic engage­ment. Mis­in­for­ma­tion pro­lif­er­ates. City bud­gets bal­loon, along with cor­rup­tion and dys­func­tion. The con­se­quences can influ­ence nation­al pol­i­tics as well; an an analy­sis by Politi­co found that Don­ald Trump per­formed best dur­ing the 2016 elec­tion in places with lim­it­ed access to local news.

    With its acqui­si­tion of Tri­bune Pub­lish­ing ear­li­er this year, Alden now con­trols more than 200 news­pa­pers, includ­ing some of the country’s most famous and influ­en­tial: the Chica­go Tri­bune, The Bal­ti­more Sun, the New York Dai­ly News. It is the nation’s sec­ond-largest news­pa­per own­er by cir­cu­la­tion. Some in the indus­try say they wouldn’t be sur­prised if Smith and Free­man end up becom­ing the biggest news­pa­per moguls in U.S. his­to­ry.

    They are also defined by an obses­sive secre­cy. Alden’s web­site con­tains no infor­ma­tion beyond the firm’s name, and its list of investors is kept strict­ly con­fi­den­tial. When law­mak­ers pressed for details last year on who funds Alden, the com­pa­ny replied that “there may be cer­tain legal enti­ties and orga­ni­za­tion­al struc­tures formed out­side of the Unit­ed States.”

    Smith, a reclu­sive Palm Beach sep­tu­a­ge­nar­i­an, hasn’t grant­ed a press inter­view since the 1980s. Free­man, his 41-year-old pro­tégé and the pres­i­dent of the firm, would be unrec­og­niz­able in most of the news­rooms he owns. For two men who employ thou­sands of jour­nal­ists, remark­ably lit­tle is known about them.

    ...

    Alden’s cal­cu­lus was sim­ple. Even in a declin­ing indus­try, the news­pa­pers still gen­er­at­ed hun­dreds of mil­lions of dol­lars in annu­al rev­enues; many of them were turn­ing prof­its. For Free­man and his investors to come out ahead, they didn’t need to wor­ry about the long-term health of the assets—they just need­ed to max­i­mize prof­its as quick­ly as pos­si­ble.

    From 2015 to 2017, he presided over staff reduc­tions of 36 per­cent across Alden’s news­pa­pers, accord­ing to an analy­sis by the News­Guild (a union that also rep­re­sents employ­ees of The Atlantic). At the same time, he increased sub­scrip­tion prices in many mar­kets; it would take awhile for subscribers—many of them old­er loy­al­ists who didn’t care­ful­ly track their bills—to notice that they were pay­ing more for a worse prod­uct. Maybe they’d can­cel their sub­scrip­tions even­tu­al­ly; maybe the papers would fold alto­geth­er. But as long as Alden had made back its mon­ey, the invest­ment would be a suc­cess. (Free­man denied this char­ac­ter­i­za­tion through a spokesper­son.)

    Cru­cial­ly, the prof­its gen­er­at­ed by Alden’s news­pa­pers did not go toward rebuild­ing news­rooms. Instead, the mon­ey was used to finance the hedge fund’s oth­er ven­tures. In legal fil­ings, Alden has acknowl­edged divert­ing hun­dreds of mil­lions of dol­lars from its news­pa­pers into risky bets on com­mer­cial real estate, a bank­rupt phar­ma­cy chain, and Greek debt bonds. To indus­try observers, Alden’s brazen mod­el set it apart even from chains like Gan­nett, known for its aggres­sive cost-cut­ting. Alden “is not a news­pa­per com­pa­ny,” says Ann Marie Lip­in­s­ki, a for­mer edi­tor in chief of the Chica­go Tri­bune. “It’s a hedge that went and bought up some titles that it milks for cash.”
    ...

    Even more gross is the fact that the mas­ter­mind behind this is Ran­dall Smith, one of the pio­neers of finan­cial sec­tor’s pio­neers in “vul­ture cap­i­tal­ism”. A man who, by his own son’s admis­sion, views life as a giant game where “Who­ev­er dies with the most mon­ey.” So the guy who was too greedy for the “greed is good” decade is the man who is active­ly snuff­ing out local news for his short-term prof­it is appar­ent­ly doing this all for fun. Because it’s all just a big game. Again, wel­come to con­tem­po­rary cap­i­tal­ism. This is how the sausage is made:

    ...
    The sto­ry of Alden Cap­i­tal begins on the set of a 1960s TV game show called Dream House. A young man named Ran­dall Dun­can Smith—Randy for short—stands next to his wife, Kathryn, answer­ing quick-fire triv­ia ques­tions in front of a live stu­dio audi­ence. The show’s premise pits two cou­ples against each oth­er for the chance to win a home. When the Smiths win, they pass on the house and take the cash prize instead—a $20,000 haul that Randy will even­tu­al­ly use to seed a small trad­ing firm he calls R.D. Smith & Com­pa­ny.

    A Cor­nell grad with an M.B.A., Randy is on a part­ner track at Bear Stearns, where he’s poised to make a com­fort­able for­tune sim­ply by climb­ing the lad­der. But he has a big idea: He believes there’s seri­ous mon­ey to be made in buy­ing trou­bled com­pa­nies, steer­ing them into bank­rupt­cy, and then sell­ing them off in parts. The term vul­ture cap­i­tal­ism hasn’t been invent­ed yet, but Randy will come to be known as a pio­neer in the field. He scores big with a bank­rupt aero­space man­u­fac­tur­er, and again with a Dal­las-based drilling com­pa­ny.

    By the 1980s, this strat­e­gy has made Randy lux­u­ri­ous­ly wealthy—vacations in the French Riv­iera, a fam­i­ly com­pound out­side New York City—and he has begun to school his chil­dren on the won­ders of cap­i­tal­ism. He teach­es his 8‑year-old son, Caleb, to make trades on a Quotron com­put­er, and imparts the val­ue of delayed grat­i­fi­ca­tion by report­ed­ly post­pon­ing his family’s Christ­mas so that he can use all their avail­able cash to buy stocks at low­er prices in Decem­ber. Caleb will lat­er recall, in an inter­view with D Mag­a­zine, ask­ing his dad why he works so hard.

    “It’s a game,” Randy explains to his son.

    “How do you know who wins?” the boy asks.

    “Who­ev­er dies with the most mon­ey.”

    Even in the “greed is good” cli­mate of the era, Randy is a polar­iz­ing char­ac­ter on Wall Street. When The New York Times pro­files him in 1991, it notes that he excels at “prof­it­ing from oth­er people’s mis­ery” and quotes a parade of dis­grun­tled clients and part­ners. “The one cen­tral theme,” the Times reports, “seems to be that Smith and its web of affil­i­ates are out, first and fore­most, for them­selves.” If this rep­u­ta­tion both­ers Randy and his col­leagues, they don’t let on: For a while, accord­ing to The Vil­lage Voice, his firm proud­ly hangs a paint­ing of a vul­ture in its lob­by.

    Around this time, Randy becomes pre­oc­cu­pied with pri­va­cy. He stops talk­ing to the press, refus­es to be pho­tographed, and rarely appears in pub­lic. One acquain­tance tells The Vil­lage Voice that “he’s the kind of guy who divests him­self every cou­ple of years” to avoid end­ing up on lists of the world’s rich­est peo­ple.
    ...

    It’s also cru­cial to keep in mind that while this is a sto­ry about the cap­ture of local news by a sin­gle pri­vate equi­ty firm, Alden Glob­al Cap­i­tal is far from the only finan­cial firm that owns the news. Half of all dailies in the US are con­trolled by a finan­cial firm. In oth­er words, the sto­ry of Alden Glob­al Cap­i­tal’s cap­ture of a large potion of the local news mar­ket is part of the larg­er sto­ry of the finan­cial indus­try’s near com­plete cap­ture of this mar­ket:

    ...
    The 21st cen­tu­ry has seen many of these gen­er­a­tional own­ers flee the indus­try, to dev­as­tat­ing effect. In the past 15 years, more than a quar­ter of Amer­i­can news­pa­pers have gone out of busi­ness. Those that have sur­vived are small­er, weak­er, and more vul­ner­a­ble to acqui­si­tion. Today, half of all dai­ly news­pa­pers in the U.S. are con­trolled by finan­cial firms, accord­ing to an analy­sis by the Finan­cial Times, and the num­ber is almost cer­tain to grow.
    ...

    Final­ly, there’s the fas­ci­nat­ing ques­tion about the nature of the rela­tion­ship between Alden Glob­al Cap­i­tal and Don­ald Trump. Smith has a his­to­ry of large con­tri­bu­tions to the GOP. And his takeover of the Chica­go Tri­bune was even financed with the help of Cer­berus. Recall how Cer­berus is owned by Trump ally, GOP mega-donor, and major arms deal­er Stephen Fein­berg. Smith is also geo­graph­i­cal­ly next door to Trump’s Mar-a-Lago estate. And he sud­den­ly made a large dona­tion to Trump’s 2020 cam­paign. Which rais­es the ques­tion: is Smith’s assault on the what remains of local media in the US part of the GOP’s gen­er­al coor­di­nat­ed assault on what remains of the US’s democ­ra­cy?

    ...
    Most of his invest­ments are defined by a cold prag­ma­tism, but he takes a more per­son­al inter­est in the media sec­tor. With his own mon­ey, he helps his broth­er launch the New York Press, a free alt-week­ly in Man­hat­tan. Russ Smith is a puck­ish lib­er­tar­i­an whose self-described “con­tempt” for the jour­nal­is­tic class ani­mates the pages of the pub­li­ca­tion. “I’m repulsed by the inces­tu­ous world of New York jour­nal­ism,” he tells New York mag­a­zine. He writes a week­ly col­umn called “Mug­ger” that sav­ages the city’s jour­nal­ists by name and fre­quent­ly runs to 10,000 words.

    Randy claims no edi­to­r­i­al role in the Press, and his invest­ment in the project—which has lit­tle chance of pro­duc­ing the kind of return he’s accus­tomed to—could be chalked up to broth­er­ly loy­al­ty. But years lat­er, when Randy relo­cates to Palm Beach and becomes a major donor to Don­ald Trump’s pres­i­den­tial cam­paign, it will make a cer­tain amount of sense that his ear­li­est known media invest­ment was con­ceived as a giant mid­dle fin­ger to the jour­nal­is­tic estab­lish­ment.

    How exact­ly Ran­dall Smith chose Heath Free­man as his pro­tégé is a mat­ter of spec­u­la­tion among those who have worked for the two of them. In con­ver­sa­tions with for­mer Alden employ­ees, I heard repeat­ed­ly that their part­ner­ship seemed to tran­scend busi­ness. “They had a father-fig­ure rela­tion­ship,” one told me. “They were very tight.” Free­man has resist­ed elab­o­rat­ing on his rela­tion­ship with Smith, say­ing sim­ply that they were fam­i­ly friends before going into busi­ness togeth­er.

    ...

    Alden com­plet­ed its takeover of the Tri­bune papers in May. It financed the deal with the help of Cerberus—a pri­vate-equi­ty firm that owned, among oth­er busi­ness­es, the secu­ri­ty com­pa­ny that trained Sau­di oper­a­tives who par­tic­i­pat­ed in the mur­der of the jour­nal­ist Jamal Khashog­gi.
    ...

    And that brings us to the fol­low­ing Feb­ru­ary 2020 piece by Julie Reynolds at her DFWorkers.org site — a site ded­i­cat­ed to chron­i­cling Alden Glob­al Cap­i­tal’s cap­ture of the media — about the $100,000 Smith and his wife sud­den­ly decid­ed to donate to Don­ald Trump’s cam­paign in July of 2019. It was a notable dona­tion in part because, while Smith has a his­to­ry of large dona­tions to GOP pres­i­den­tial can­di­dates, he was more or less in the ‘Nev­er Trump’. Those 2019 dona­tions were his first big jump into the Trump camp.

    So had Smith mere­ly belat­ed­ly come around to the real­i­ty that, as a loy­al GOP mega-donor, he was going to need to get into Trump’s good graces? It’s a rea­son­able default assump­tion, but as Reynolds points out, Smith dona­tions just hap­pened to take place less than two weeks after Demo­c­ra­t­ic Sen­a­tor Eliz­a­beth War­ren unveiled pro­posed leg­is­la­tion aimed at mak­ing hedge funds and pri­vate equi­ty firms more trans­par­ent and account­able. In oth­er words, Sen­a­tor War­ren pro­posed leg­is­la­tion that would poten­tial destroy the abil­i­ty of peo­ple like Randy Smith to do what he’s done for decades with near com­plete secre­cy. Includ­ing, as we’ll see in the third arti­cle below, secre­cy about the iden­ti­ties of Alden Glob­al Cap­i­tal’s anony­mous investors. Yep, while this might seem like a sto­ry about Randy Smith and Heath Free­man, there are actu­al­ly at least 10 oth­er anony­mous Alden Glob­al Cap­i­tal clients, accord­ing to a March 2017 SEC fil­ing. It’s entire­ly pos­si­ble the news-destroy­ing agen­da that Smith and Free­man appear to be exe­cut­ing for their own per­son­al enrich­ment is real­ly an agen­da shared by a num­ber of oth­er fig­ures who choose to remain even more in the shad­ows than Smith and Free­man. It’s why this sto­ry isn’t just about the cap­ture and destruc­tion of local news. It’s about the cap­ture and destruc­tion of local news by the pri­vate equi­ty sec­tor, the area of finance that has effec­tive­ly cap­tured the rest of US econ­o­my too:

    DFMWorkers.org

    Alden own­er is deeply in Trump’s camp now

    Hedge fund founder Ran­dall Smith and his wife gave $100,000 to the president’s 2020 joint fundrais­ing com­mit­tee

    By Julie Reynolds
    Feb­ru­ary 4, 2020

    On a swel­ter­ing July after­noon last year, Sen. Eliz­a­beth War­ren unveiled pro­posed leg­is­la­tion aimed at mak­ing hedge funds and pri­vate equi­ty firms more trans­par­ent and account­able.

    Less than two weeks lat­er, Alden Glob­al Cap­i­tal co-founder Ran­dall Smith gave $50,000 to Don­ald Trump’s “Trump Vic­to­ry” fund. The same day, his wife Bar­bara gave exact­ly the same amount.

    Both pro­vid­ed Alden’s office in Manhattan’s Lip­stick Build­ing as their address.

    Alden is the hedge fund most recent­ly described as “the gelati­nous cube scour­ing the news industry’s dun­geon.” Or, more sim­ply, as a “destroy­er of news­pa­pers.”

    It’s also arguably the most secre­tive news chain own­er in the coun­try. As a pri­vate­ly held “vul­ture” hedge fund, we don’t know who Alden’s investors are. Its funds are based in tax secre­cy havens like the Cay­man Islands and Delaware.

    As Nicholas Shax­son, author of “The Finance Curse: How Glob­al Finance is Mak­ing Us All Poor­er,” recent­ly told DFMworkers.org, Alden is “about the most opaque” hedge fund he’s ever seen.

    It’s not clear whether the Smiths have met Pres­i­dent Trump. They reside in a West Palm Beach man­sion a few miles north of Trump’s Mar-A-Lago, and they own around a dozen other man­sions — two in the Hamp­tons and the rest scat­tered around West Palm Beach. (Ran­dall Smith start­ed mak­ing these pur­chas­es in 2013, a year after he acquired the Dig­i­tal First Media news­pa­per chain, spend­ing $57 mil­lion on 16 man­sions. Flori­da real estate records show he has since sold a cou­ple of them.)

    Fol­low­ing the mon­ey

    The Smiths’ dona­tions, as is cus­tom­ary these days with large con­tri­bu­tions, were made to “Trump Vic­to­ry,” a joint fundrais­ing com­mit­tee that under new cam­paign finance laws pro­vides a con­ve­nient way to cir­cum­vent con­tri­bu­tion lim­its.

    To put it sim­ply, the 2014 US Supreme Court rul­ing in McCutcheon v. FEC allows larg­er aggre­gate con­tri­bu­tions to can­di­dates as long as a cer­tain cut of the mon­ey is divert­ed to the par­ty. As The Sun­light Foun­da­tion reports, “In the major­i­ty opin­ion in McCutcheon, Jus­tice Samuel Ali­to dis­missed con­cerns that joint fundrais­ing com­mit­tees would be used to solic­it mas­sive checks for indi­vid­ual can­di­dates as ‘wild hypo­thet­i­cals.’”

    Except that’s exact­ly what’s hap­pened ever since.

    The Smiths’ $100,000 came in the form of two $50,000 con­tri­bu­tions to Trump Vic­to­ry. This was then divvied up between the Trump cam­paign and the Repub­li­can Nation­al Com­mit­tee, with a note on the Fed­er­al Elec­tion Commission’s site that the RNC cut came from “Trump Vic­to­ry.” The total of $5600 each from Bar­bara and Ran­dall Smith that end­ed up in “Trump For Pres­i­dent” is the max­i­mum allowed by law for an indi­vid­ual can­di­date, so the rest went to the RNC.

    Of course, noth­ing restricts the RNC from cam­paign­ing on Trump’s behalf.

    The screen­shots below show where the Smiths’ con­tri­bu­tions end­ed up, as list­ed on OpenSecrets.org:
    [see screen­shot of Smith’s 2019 polit­i­cal con­tri­bu­tions]

    These were large con­tri­bu­tions for the Smiths, and this was the first time Ran­dall Smith had giv­en to any cam­paign or par­ty since 2017, accord­ing to FEC records.

    While solid­ly Repub­li­can, the Smiths’ pre­vi­ous dona­tions were typ­i­cal­ly in the $2000 range, though back in 2012 Ran­dall did give $19,750 and $30,800 to two Repub­li­can com­mit­tees.

    Alden co-founder Heath Free­man doesn’t show any polit­i­cal con­tri­bu­tions in the FEC’s data­base.

    Christo­pher Min­net­ian, pres­i­dent of Ran­dall Smith’s “fam­i­ly invest­ment firm,” Smith Man­age­ment LLC, gave $10,800 to the Trump cam­paign for the 2016 elec­tion. (Min­net­ian was Alden’s pick for the board of Tri­bune Pub­lish­ing after the hedge fund took a 32 per­cent stake in the pub­lish­er of the Chica­go Tri­bune, Bal­ti­more Sun and oth­er papers.)

    Tim­ing is every­thing

    So what prompt­ed the Smiths to shell out $100,000 to the pres­i­dent and his par­ty in August?

    At the time, pri­vate equi­ty firms were begin­ning to react to Warren’s leg­is­la­tion, and they weren’t hap­py about it.

    The U.S. Cham­ber of Com­merce declared the act would cost 6.2 mil­lion jobs.

    Trump sup­port­er and Labor Sec­re­tary nom­i­nee Andy Puzder wrote in the Wall Street Jour­nal that “The sen­a­tor is try­ing to set pri­vate equi­ty up as a boogey­man to fear. Noth­ing could be fur­ther from the truth. Pri­vate equi­ty is an over­whelm­ing­ly pos­i­tive com­po­nent of the free-enter­prise sys­tem. It gen­er­ates val­ue for investors while cre­at­ing jobs and wealth for a broad spec­trum of indi­vid­u­als and enti­ties.”

    I should note here that I, togeth­er with reporter Evan Brandt of the Pottstown (PA) Mer­cury spoke at a press con­fer­ence about The Stop Wall Street Loot­ing Act. We described Alden’s gut­ting of its news­pa­pers and the dis­as­trous effects this had on com­mu­ni­ties served by the Dig­i­tal First Media chain (offi­cial­ly known as MNG Enter­pris­es).

    The week the Smiths made their dona­tions to Trump was also the week the Gan­nett and Gate­House news­pa­per chains merged, a bit­ter pill for Alden because its own takeover of Gan­nett was thwart­ed ear­li­er in the year.

    It’s hard to say what prompt­ed this sud­den inter­est in the president’s 2020 race con­sid­er­ing Smith didn’t donate at all to Trump’s 2016 efforts. In fact, he seemed to sup­port “any­one but Trump,” giv­ing only a few small­er dona­tions to Mar­co Rubio and Paul Ryan.

    Could it be that Smith, like Puzder, fears that leg­is­la­tors’ efforts to make pri­vate equi­ty more trans­par­ent are actu­al­ly a con­spir­a­cy to “pun­ish the suc­cess­ful?”

    Puzder main­tains that pri­vate equity’s goal is “always growth and val­ue cre­ation, not bank­rupt­cy.”

    But Alden’s track record — whether it takes over news­pa­pers, shoe stores or phar­ma­cies — proves oth­er­wise.

    The mon­ey for the attempt­ed acqui­si­tion of Gan­nett — and now, Alden’s $9.2 mil­lion pur­chase of stock in the Lee Enter­pris­es chain last month — didn’t come from Smith or Freeman’s pock­ets. It was stripped direct­ly from Dig­i­tal First news­pa­pers via two sub­sidiaries cre­at­ed by Alden: Strate­gic Invest­ment Oppor­tu­ni­ties LLC and MNG Invest­ment Hold­ings LLC. Hun­dreds of mil­lions of dol­lars have been siphoned from the papers while news­rooms strug­gle with only a quar­ter of pre­vi­ous staffing lev­els and offices are sold out from under them.

    This is not “growth and val­ue cre­ation.”

    Instead, Alden’s “wealth extrac­tion” strat­e­gy is expand­ing through­out the news­pa­per indus­try.

    ...

    And so one has to won­der — what ben­e­fits would anoth­er four years of Trump pro­vide Alden? Because there cer­tain­ly must be ben­e­fits — based on their record of the past sev­en years, Alden’s founders nev­er con­duct trans­ac­tions that don’t per­son­al­ly ben­e­fit them.

    ————-

    “Alden own­er is deeply in Trump’s camp now” by Julie Reynolds; DFMWorkers.org; 02/04/2020

    “Could it be that Smith, like Puzder, fears that leg­is­la­tors’ efforts to make pri­vate equi­ty more trans­par­ent are actu­al­ly a con­spir­a­cy to “pun­ish the suc­cess­ful?””

    Could it be that Smith and his wife sud­den­ly made that $100,000 dona­tion to Trump’s “Trump Vic­to­ry” fund less than two weeks after Eliz­a­beth War­ren pub­licly threat­ened the pri­vate equi­ty indus­try’s cov­et­ed secre­cy? Keep in mind that con­text of War­ren’s pro­pos­al: this was in mid-2019, when any rea­son­able per­son could project that the Democ­rats might retake con­trol of Con­gress and White House in 2020. War­ren was­n’t issu­ing hol­low threats. It points to one of the most impor­tant fun-facts in this entire sto­ry: Eliz­a­beth War­ren’s pro­pos­al real­ly was a threat to how pri­vate equi­ty oper­ates. A big enough threat to prompt pri­vate equi­ty fig­ures like Smith to final­ly jump on board the Trump train to ward off that threat:

    ...
    On a swel­ter­ing July after­noon last year, Sen. Eliz­a­beth War­ren unveiled pro­posed leg­is­la­tion aimed at mak­ing hedge funds and pri­vate equi­ty firms more trans­par­ent and account­able.

    Less than two weeks lat­er, Alden Glob­al Cap­i­tal co-founder Ran­dall Smith gave $50,000 to Don­ald Trump’s “Trump Vic­to­ry” fund. The same day, his wife Bar­bara gave exact­ly the same amount.

    ...

    Christo­pher Min­net­ian, pres­i­dent of Ran­dall Smith’s “fam­i­ly invest­ment firm,” Smith Man­age­ment LLC, gave $10,800 to the Trump cam­paign for the 2016 elec­tion. (Min­net­ian was Alden’s pick for the board of Tri­bune Pub­lish­ing after the hedge fund took a 32 per­cent stake in the pub­lish­er of the Chica­go Tri­bune, Bal­ti­more Sun and oth­er papers.)

    Tim­ing is every­thing

    So what prompt­ed the Smiths to shell out $100,000 to the pres­i­dent and his par­ty in August?

    At the time, pri­vate equi­ty firms were begin­ning to react to Warren’s leg­is­la­tion, and they weren’t hap­py about it.

    The U.S. Cham­ber of Com­merce declared the act would cost 6.2 mil­lion jobs.

    Trump sup­port­er and Labor Sec­re­tary nom­i­nee Andy Puzder wrote in the Wall Street Jour­nal that “The sen­a­tor is try­ing to set pri­vate equi­ty up as a boogey­man to fear. Noth­ing could be fur­ther from the truth. Pri­vate equi­ty is an over­whelm­ing­ly pos­i­tive com­po­nent of the free-enter­prise sys­tem. It gen­er­ates val­ue for investors while cre­at­ing jobs and wealth for a broad spec­trum of indi­vid­u­als and enti­ties.”

    ...

    It’s hard to say what prompt­ed this sud­den inter­est in the president’s 2020 race con­sid­er­ing Smith didn’t donate at all to Trump’s 2016 efforts. In fact, he seemed to sup­port “any­one but Trump,” giv­ing only a few small­er dona­tions to Mar­co Rubio and Paul Ryan.
    ...

    And that brings us to fol­low­ing 2017 piece by Julie Reynolds about Smith and his media spend­ing-spree. As Reynolds points out, Alden Glob­al Cap­i­tal isn’t sole­ly oper­at­ing for Smith and Free­man. It has clients. 10 anony­mous clients accord­ing to that March 2017 report, with a total of $2.1 bil­lion in cap­i­tal under man­age­ment. It’s a cru­cial part aspect of this sto­ry about the destruc­tion of local news: this destruc­tion is being exe­cut­ed by an indus­try that thrives on secre­cy, to the ben­e­fit of often secret ben­e­fi­cia­ries. And few things ensure secre­cy bet­ter than the sys­tem­at­ic pub­lic igno­rance that comes from the destruc­tion of the media:

    The Nation

    How Many Palm Beach Man­sions Does a Wall Street Tycoon Need?
    As many as destroy­ing America’s home­town news­pa­pers can buy him.

    By Julie Reynolds
    Sep­tem­ber 27, 2017

    In 2013, a reclu­sive New York tycoon and his wife began buy­ing up expen­sive Palm Beach real estate—lots of it. First they bought sev­en man­sions for a total of $23 mil­lion. Then anoth­er four “mod­er­ate­ly priced” homes for $8.4 mil­lion. Then five more for $23 mil­lion. None of them were pur­chased in the tycoon’s name. They weren’t pur­chased in his wife’s name, either. Instead, the homes were deed­ed to lim­it­ed-lia­bil­i­ty com­pa­nies, includ­ing L. Jakes LLC and 124 Coconut Row LLC.

    Think of those lux­u­ry homes as the shut­tered offices and fired work­ers of home­town news­pa­pers across the Unit­ed States, because gut­ting those news­pa­pers helped make spend­ing $57.2 mil­lion on 16 Palm Beach man­sions a tri­fling expense for the tycoon.

    His spend­ing spree began after the tycoon acquired two firms, the Jour­nal-Reg­is­ter and Medi­aNews Group, which would merge into one of America’s largest news­pa­per chains, Dig­i­tal First Media. It con­tin­ued under the veil of yet more lim­it­ed-lia­bil­i­ty com­pa­nies that like­wise owned lux­u­ry homes. The only thing link­ing all these pur­chas­es was the same postal address in Manhattan’s glam­orous Lip­stick Build­ing. There, with­in the tycoon’s pri­vate­ly held invest­ment firm, his per­son­al real-estate deals were com­min­gled with the sales of scores of news­rooms, print­ing plants, and office build­ings that pre­vi­ous­ly belonged to small home­town news­pa­pers across the Unit­ed States.

    The tycoon con­tin­ued to finance his lav­ish lifestyle by pur­chas­ing and then destroy­ing news­pa­pers. His henchmen—young exec­u­tives in expen­sive suits with no expe­ri­ence in the news business—laid off hun­dreds of jour­nal­ists and oth­er news work­ers. They ulti­mate­ly closed or rad­i­cal­ly down­sized such ven­er­a­ble papers as the Oak­land Tri­bune, the San Jose Mer­cury News, the St. Paul Pio­neer Press, and The Den­ver Post. At the Mer­cury News, the newspaper’s print­ing press was lit­er­al­ly dis­man­tled and cart­ed away, which one staff reporter likened to “watch­ing a heart being ripped out.”

    The tycoon behind all this pri­vate prof­it and pub­lic destruc­tion is Ran­dall D. Smith, a sea­soned Wall Street oper­a­tor in his mid-70s who shuns pub­lic­i­ty. Smith is the founder and chief of invest­ments at Alden Glob­al Cap­i­tal, which man­ages $2 bil­lion worth of assets. He has no expe­ri­ence with actu­al­ly man­ag­ing a news­pa­per, and his pro­fes­sion­al his­to­ry reflects no inter­est in jour­nal­ism beyond prof­i­teer­ing. Rather, he is what is known on Wall Street as a “vul­ture cap­i­tal­ist.” Or, as he prefers to phrase it in one of the company’s brochures, Smith invests in “dis­tress.”

    “Dis­tress” is an apt word for the cur­rent state of America’s news­pa­pers, and Smith isn’t the only finan­cial mogul gob­bling them up. On Sep­tem­ber 4, the New York Dai­ly News was pur­chased by Tronc, the media con­glom­er­ate whose major­i­ty share­hold­er is Michael W. Fer­ro, the busi­ness mag­nate who found­ed the invest­ment firm Mer­rick Ven­tures.

    The shrink­ing and dis­ap­pear­ing of home­town news­pa­pers has done incal­cu­la­ble dam­age to Amer­i­cans’ knowl­edge of the world around them. Demo­c­ra­t­ic self-gov­er­nance pre­sumes an informed pub­lic, but the ‑hol­low­ing-out of America’s news­pa­pers, in both their online and print ver­sions, leaves cit­i­zens increas­ing­ly igno­rant of vital pub­lic mat­ters. It also under­mines the press’s abil­i­ty to hold elect­ed offi­cials and pow­er­ful inter­ests to account. When vul­ture cap­i­tal­ism elim­i­nates reporters and clos­es home­town papers, where can cit­i­zens turn for in-depth local news? Who will cov­er City Coun­cil meet­ings, school-board deci­sions, elec­tion cam­paigns, and oth­er sta­ples of civic life? And who will call out cor­rup­tion and incom­pe­tence on the part of local offi­cials or pri­vate com­pa­nies?

    The most com­mon­ly cit­ed cul­prit for the decline of America’s news­pa­pers is the Inter­net and the assump­tion that no one needs to pay for news any­more. But sim­ple cap­i­tal­ist greed is also to blame. Since 2004, spec­u­la­tors have bought and sucked dry an esti­mat­ed 679 home­town news­pa­pers that reached a com­bined audi­ence of 12.8 mil­lion peo­ple.

    Unlike large cor­po­rate own­ers in the past, the stat­ed goal of the invest­ment firms is not to keep strug­gling news­pa­pers alive; it is to siphon off the assets and prof­its, then dis­pose of what lit­tle remains. Under this strat­e­gy, America’s news­rooms shriv­eled from 46,700 full-time jour­nal­ists in 2009 to 32,900 in 2015—a loss of rough­ly one jour­nal­ist out of every three. The Amer­i­can Soci­ety of News­pa­per Edi­tors stopped try­ing to esti­mate the num­ber of work­ing jour­nal­ists in 2016 because “lay­offs, buy­outs, and restruc­tur­ing are a norm.”

    Over the past six years, Dig­i­tal First Media has become America’s sec­ond-largest news­pa­per chain in terms of cir­cu­la­tion. Even as Dig­i­tal First has down­sized or closed its papers, it has held its edge in cir­cu­la­tion by con­tin­u­al­ly buy­ing up more pub­li­ca­tions, such as last year’s acqui­si­tion of The Orange Coun­ty Reg­is­ter. Dig­i­tal First’s annu­al prof­its have aver­aged a hand­some 10 to 12 per­cent under Alden Glob­al Capital’s man­age­ment, accord­ing to indus­try ana­lysts, with its small­er pub­li­ca­tions yield­ing more than 20 per­cent. (Because Alden Glob­al Cap­i­tal is pri­vate­ly held, its finan­cial state­ments are not pub­licly avail­able.) Since 2015, the com­pa­ny has inten­si­fied its cost-cut­ting to the point that it impos­es bud­get cuts and lay­offs at twice the aver­age rate for US news­pa­pers.

    Alden Glob­al Capital’s strat­e­gy appears to have worked, at least for its investors: A memo that CEO Steve Rossi sent to employ­ees in July stat­ed that the com­pa­ny was “solid­ly prof­itable” in fis­cal year 2017, and that “The company’s per­for­mance in adver­tis­ing rev­enue has been sig­nif­i­cant­ly bet­ter than that of our pub­licly trad­ed indus­try peers over the past cou­ple of years.” Rossi’s memo did not men­tion the new round of lay­offs he had over­seen just a week ear­li­er.

    Nei­ther Smith nor Rossi respond­ed to The Nation’s repeat­ed requests for com­ment.

    There’s a rea­son that hedge funds like Smith’s are known in Wall Street par­lance as “vul­ture funds”: They seek out strug­gling, bank­rupt companies—or countries—to invest in at rock-bot­tom prices. Then they find ways to squeeze out max­i­mum prof­it, from cut­ting costs to col­lect­ing debt repay­ments at high inter­est rates. When the investors sense that prof­its are dry­ing up, they leave the bones behind as they fly off in search of the next oppor­tu­ni­ty.

    Often these funds are shroud­ed in secre­cy. Orig­i­nal­ly incor­po­rat­ed in the Baili­wick of Jer­sey, Alden Glob­al Cap­i­tal bases many of its funds in the Cay­man Islands, anoth­er loca­tion known as a tax haven. Oth­er Alden funds are based in Delaware, whose tax-pri­va­cy laws are more gen­er­ous than New York’s.

    Like Don­ald Trump’s myr­i­ad firms, Alden’s invest­ments are dif­fi­cult to track through the maze of lim­it­ed-lia­bil­i­ty com­pa­nies. Alden’s few Secu­ri­ties and Exchange Com­mis­sion fil­ings show that in March 2017, its pri­ma­ry com­pa­ny, Alden Glob­al Cap­i­tal LLC, man­aged $2.1 bil­lion in assets for 10 unnamed clients. The min­i­mum invest­ment is $2 mil­lion.

    This lack of trans­paren­cy, along with investors’ devo­tion to max­i­miz­ing prof­its no mat­ter the social cost, trou­bles crit­ics. “These pri­vate-equi­ty firms, their first oblig­a­tion is to their share­hold­ers,” says Pene­lope Muse Aber­nathy, a for­mer Wall Street Jour­nal and New York Times exec­u­tive and the author of The Rise of a New Media Baron and the Emerg­ing Threat of News Deserts. Com­mu­ni­ty ser­vice is not part of the media barons’ vision, Aber­nathy notes: “Hedge funds and pri­vate-equi­ty com­pa­nies have a very short time hori­zon.”

    In less than a decade, news­pa­per own­er­ship in the Unit­ed States has changed at a dizzy­ing pace; these days, it rests increas­ing­ly in the hands of a few large­ly anony­mous invest­ment funds. Of the 10 largest news­pa­per own­ers in the coun­try, six are now invest­ment firms, Aber­nathy reports. In addi­tion to Alden Glob­al Cap­i­tal, the major play­ers include New Media/GateHouse, Com­mu­ni­ty News­pa­per Hold­ings Inc. (CNHI), Tronc (for­mer­ly Tri­bune Pub­lish­ing, own­er of the Chica­go Tri­bune and the Los Ange­les Times), and War­ren Buffett’s Berk­shire Hath­away. Anoth­er large chain, Gan­nett, is pub­licly trad­ed, but near­ly 95 per­cent of its stock is owned by invest­ment firms, accord­ing to the finan­cial web­site Post Ana­lyst.

    While some may shrug off this devel­op­ment as irrel­e­vant in the era of Face­book news, a Decem­ber 2016 Nielsen Scar­bor­ough study found that news­pa­pers and their web­sites still reach 69 per­cent of the US pop­u­la­tion every month. And it’s not just old folks cling­ing to their old-media ways: “Younger read­ers now account for a greater per­cent­age of news­pa­per read­ers,” the rat­ings agency report­ed. “Notably, Mil­len­ni­als 21–34 make up 25% of the US pop­u­la­tion and now rep­re­sent 24% of the total month­ly news­pa­per read­er­ship” (a total that includes online read­ers).

    Lit­tle-known invest­ment firms like Civ­i­tas Media have bought up news­pa­pers in “the poor­est and most rur­al” com­mu­ni­ties, Aber­nathy notes, where those out­lets are often the only source for local news. These com­pa­nies then “pur­sue a har­vest­ing strat­e­gy in which they ‘man­age the decline’ of the assets in their port­fo­lio. If their news­pa­pers fail, and viable alter­na­tives do not arise, many com­mu­ni­ties across the coun­try are in dan­ger of becom­ing news deserts.”

    In the San Fran­cis­co Bay Area, for exam­ple, Smith’s Dig­i­tal First Media has shut down many of its small-town papers, includ­ing the Alame­da Times-Star, the Fre­mont Argus, and the Hay­ward Dai­ly Review. In 2016, it also closed the 142-year-old Oak­land Tri­bune, fold­ing it and the for­mer Con­tra Cos­ta Times of Wal­nut Creek, Cal­i­for­nia, into brief sec­tions of a new dai­ly named the East Bay Times.

    Even in areas that aren’t com­plete news deserts, the decrease in cov­er­age is hav­ing dra­mat­ic effects. “It’s not just the towns with­out a paper, but the places where you’ve lost cov­er­age,” Aber­nathy says. “Reporters bare­ly have time to even fact-check. They end up cov­er­ing noth­ing but events or meetings—and then they have to cut back on the meet­ings.”

    Accord­ing to a study by Patrick Sims, a for­mer research asso­ciate at the Uni­ver­si­ty of North Carolina’s School of Media and Jour­nal­ism, the state’s “invest­ment-owned” news­pa­pers scored the worst when it came to cov­er­age of Hur­ri­cane Matthew, which dev­as­tat­ed parts of North Car­oli­na in 2016. The sto­ries in invest­ment-owned papers on Matthew’s after­math “tend­ed to be less in-depth—and pro­vide less context—than the sto­ries that appeared in the inde­pen­dent­ly owned [news­pa­pers],” Sims wrote. The invest­ment-owned papers also scored poor­ly for their cov­er­age of the local elec­tions in 2016; only a local­ly owned paper, The Pilot of South­ern Pines, pub­lished impor­tant vot­er infor­ma­tion well in advance of Elec­tion Day, an impor­tant ser­vice in an era when more cit­i­zens vote ear­ly by mail.

    Vul­ture capitalism’s longer-term impact on news­pa­pers is, para­dox­i­cal­ly, to dri­ve away the business’s cus­tomers. When news-busi­ness ana­lyst Ken Doc­tor gives pre­sen­ta­tions, he likes to show a pic­ture of two Coke bot­tles. One is a two-liter bot­tle that used to sell for a buck; next to it is a one-liter bot­tle that is now being offered for $2. That’s exact­ly what down­sized news­pa­pers are pitch­ing to their read­ers today, Doc­tor says, so it’s no won­der that cir­cu­la­tion, sub­scrip­tions, and adver­tis­ing are tank­ing: “Tell me anoth­er indus­try that’s been able to halve the prod­uct and sell it for twice as much.”

    ...

    Doc­tor believes it doesn’t have to be this way, and he’s try­ing to make the case for rein­vest­ment in newspapers—facing head-on the dis­rup­tion that new tech­nol­o­gy brings while explor­ing ways to inno­vate and sur­vive. That usu­al­ly means putting cash back into a busi­ness, not siphon­ing it away.

    One encour­ag­ing exam­ple is blos­som­ing in Doctor’s home state of Min­neso­ta. In 2014, Glen Tay­lor, the own­er of the Min­neso­ta Tim­ber­wolves, pur­chased the Min­neapo­lis Star-Tri­bune from the invest­ment firm Avista Cap­i­tal Part­ners. Tay­lor chart­ed a long-term course for the paper that didn’t require it to reach large prof­it mar­gins every year in order to be sus­tain­able.

    On a recent vis­it, Doc­tor was thrilled to see how thick the Star-Tri­bune was—“like an old-fash­ioned Sun­day paper!” The man­age­ment team “are very good busi­ness­peo­ple,” Doc­tor says. “They’ve added anoth­er DC cor­re­spon­dent and anoth­er at the State­house. They under­stand what keeps peo­ple read­ing, because they have a long-term vision. They know that at the root of it is their ser­vice to the com­mu­ni­ty.”

    Aber­nathy cites anoth­er suc­cess sto­ry, The Pilot in South­ern Pines, North Car­oli­na, whose cir­cu­la­tion of 14,000 is rough­ly equal to the town’s entire pop­u­la­tion. With a news­room of 12, The Pilot pub­lish­es twice week­ly in print and fre­quent­ly online. It pro­vides the sta­ples of local news—high-school sports scores, town-coun­cil elec­tion results—but it also pub­lish­es five arts-and-cul­ture mag­a­zines, a statewide busi­ness jour­nal, and a few tele­phone direc­to­ries. And it oper­ates a cozy store­front called the Coun­try Book­shop. “We felt this com­mu­ni­ty would be less with­out a local book­store,” says Pilot edi­tor John Nagy. “So we went out and bought it. And it’s final­ly mak­ing a prof­it.

    “What all that’s done is diver­si­fy our rev­enues, diver­si­fy our out­look, and diver­si­fy our busi­ness skills,” Nagy adds. “Part of the print industry’s prob­lem today is, they don’t believe in them­selves. Pub­lish­ers like Gate­House, Gan­nett, McClatchy, Berk­shire Hath­away, they’re man­ag­ing mar­gins. They’re not look­ing for real, aggres­sive growth strate­gies that have a lit­tle risk attached.”

    Some will argue that only a non­prof­it mod­el can keep local news safe from the clutch­es of the vul­tures. It’s an exper­i­ment being played out in Philadel­phia, where, in Jan­u­ary 2016, phil­an­thropist H.F. Lenfest donat­ed the Inquir­er, Dai­ly News, and Philly.com to the Philadel­phia Foun­da­tion. In August, Britain’s The Guardian announced that it had formed a non­prof­it US adjunct to pro­duce the kind of impor­tant jour­nal­ism that investors see as too cost­ly.

    Ulti­mate­ly, it may be a mix of altru­is­tic investors, non­prof­its, involved local own­ers, and cit­i­zen demand that keeps local news alive. Whether that news is print­ed on paper or pushed to a smart­phone isn’t near­ly as impor­tant as society’s will­ing­ness to invest in the act of report­ing itself—an act cen­tral to our founders’ vision of democ­ra­cy.

    ————-

    “How Many Palm Beach Man­sions Does a Wall Street Tycoon Need?” by Julie Reynolds; The Nation; 09/27/2017

    Over the past six years, Dig­i­tal First Media has become America’s sec­ond-largest news­pa­per chain in terms of cir­cu­la­tion. Even as Dig­i­tal First has down­sized or closed its papers, it has held its edge in cir­cu­la­tion by con­tin­u­al­ly buy­ing up more pub­li­ca­tions, such as last year’s acqui­si­tion of The Orange Coun­ty Reg­is­ter. Dig­i­tal First’s annu­al prof­its have aver­aged a hand­some 10 to 12 per­cent under Alden Glob­al Capital’s man­age­ment, accord­ing to indus­try ana­lysts, with its small­er pub­li­ca­tions yield­ing more than 20 per­cent. (Because Alden Glob­al Cap­i­tal is pri­vate­ly held, its finan­cial state­ments are not pub­licly avail­able.) Since 2015, the com­pa­ny has inten­si­fied its cost-cut­ting to the point that it impos­es bud­get cuts and lay­offs at twice the aver­age rate for US news­pa­pers.”

    What kind of returns has Alden Glob­al Cap­i­tal made on its media invest­ments? We don’t get to know. Being a pri­vate­ly held com­pa­ny, the pub­lic isn’t privy to Alden Glob­al Cap­i­tal’s finan­cial state­ments. But based on indus­try ana­lysts, the firm is like­ly mak­ing more than 20 per­cent on its small­er pub­li­ca­tions. It’s the kind of returns that reveal the gross lie to the claims that Alden Cap­i­tal is mere­ly sav­ing a dying indus­try. Dying indus­tries don’t yield 20 per­cent annu­al returns dur­ing the restruc­tur­ing phase. You need to snuff an indus­try out to get those kinds of returns. Who are the ulti­mate ben­e­fi­cia­ries of all this snuff­ing? We don’t get to know. It’s a sit­u­a­tion that isn’t lim­it­ed to Alden Glob­al Cap­i­tal. This is now the norm in the news­pa­per indus­try: a few large­ly anony­mous invest­ment funds own almost all of it:

    ...
    There’s a rea­son that hedge funds like Smith’s are known in Wall Street par­lance as “vul­ture funds”: They seek out strug­gling, bank­rupt companies—or countries—to invest in at rock-bot­tom prices. Then they find ways to squeeze out max­i­mum prof­it, from cut­ting costs to col­lect­ing debt repay­ments at high inter­est rates. When the investors sense that prof­its are dry­ing up, they leave the bones behind as they fly off in search of the next oppor­tu­ni­ty.

    Often these funds are shroud­ed in secre­cy. Orig­i­nal­ly incor­po­rat­ed in the Baili­wick of Jer­sey, Alden Glob­al Cap­i­tal bases many of its funds in the Cay­man Islands, anoth­er loca­tion known as a tax haven. Oth­er Alden funds are based in Delaware, whose tax-pri­va­cy laws are more gen­er­ous than New York’s.

    Like Don­ald Trump’s myr­i­ad firms, Alden’s invest­ments are dif­fi­cult to track through the maze of lim­it­ed-lia­bil­i­ty com­pa­nies. Alden’s few Secu­ri­ties and Exchange Com­mis­sion fil­ings show that in March 2017, its pri­ma­ry com­pa­ny, Alden Glob­al Cap­i­tal LLC, man­aged $2.1 bil­lion in assets for 10 unnamed clients. The min­i­mum invest­ment is $2 mil­lion.

    This lack of trans­paren­cy, along with investors’ devo­tion to max­i­miz­ing prof­its no mat­ter the social cost, trou­bles crit­ics. “These pri­vate-equi­ty firms, their first oblig­a­tion is to their share­hold­ers,” says Pene­lope Muse Aber­nathy, a for­mer Wall Street Jour­nal and New York Times exec­u­tive and the author of The Rise of a New Media Baron and the Emerg­ing Threat of News Deserts. Com­mu­ni­ty ser­vice is not part of the media barons’ vision, Aber­nathy notes: “Hedge funds and pri­vate-equi­ty com­pa­nies have a very short time hori­zon.”

    In less than a decade, news­pa­per own­er­ship in the Unit­ed States has changed at a dizzy­ing pace; these days, it rests increas­ing­ly in the hands of a few large­ly anony­mous invest­ment funds. Of the 10 largest news­pa­per own­ers in the coun­try, six are now invest­ment firms, Aber­nathy reports. In addi­tion to Alden Glob­al Cap­i­tal, the major play­ers include New Media/GateHouse, Com­mu­ni­ty News­pa­per Hold­ings Inc. (CNHI), Tronc (for­mer­ly Tri­bune Pub­lish­ing, own­er of the Chica­go Tri­bune and the Los Ange­les Times), and War­ren Buffett’s Berk­shire Hath­away. Anoth­er large chain, Gan­nett, is pub­licly trad­ed, but near­ly 95 per­cent of its stock is owned by invest­ment firms, accord­ing to the finan­cial web­site Post Ana­lyst.

    ...

    Final­ly, note the hor­ri­ble para­dox revealed by this whole sit­u­a­tion: as the dam­age from this vul­ture cap­i­tal­ism mod­el con­tin­ues to grow, a core les­son that emerges is that the US news­pa­per indus­try — and there­fore the US democ­ra­cy — might rely on altru­is­tic investors. Altru­ism, the exact oppo­site of the Smith/Freeman busi­ness mod­el. The US econ­o­my is built to effec­tive­ly extin­guish altru­ism. Quite lit­er­al­ly. Pri­vate equi­ty firms have a first oblig­a­tion to share­hold­ers. It’s the mod­el for how the US oper­ates: the assump­tion that the col­lec­tive embrace of greed and self­ish­ness is the best way to secure the col­lec­tive good. The preda­to­ry destruc­tion of local news­pa­pers is just the inevitable con­se­quence of that insane par­a­digm. And if altru­ism is what’s required to save local news in the US, that more or less means local news is dead in the US unless some­one can come up with a mod­el for for-prof­it altru­ism. Amer­i­ca does­n’t do altru­ism. Not for free:

    ...
    Vul­ture capitalism’s longer-term impact on news­pa­pers is, para­dox­i­cal­ly, to dri­ve away the business’s cus­tomers. When news-busi­ness ana­lyst Ken Doc­tor gives pre­sen­ta­tions, he likes to show a pic­ture of two Coke bot­tles. One is a two-liter bot­tle that used to sell for a buck; next to it is a one-liter bot­tle that is now being offered for $2. That’s exact­ly what down­sized news­pa­pers are pitch­ing to their read­ers today, Doc­tor says, so it’s no won­der that cir­cu­la­tion, sub­scrip­tions, and adver­tis­ing are tank­ing: “Tell me anoth­er indus­try that’s been able to halve the prod­uct and sell it for twice as much.”

    ...

    Ulti­mate­ly, it may be a mix of altru­is­tic investors, non­prof­its, involved local own­ers, and cit­i­zen demand that keeps local news alive. Whether that news is print­ed on paper or pushed to a smart­phone isn’t near­ly as impor­tant as society’s will­ing­ness to invest in the act of report­ing itself—an act cen­tral to our founders’ vision of democ­ra­cy.
    ...

    It’s that under­ly­ing sto­ry about Randy Smith seem­ing to cozy up to the Trump admin­is­tra­tion as a defen­sive act against Sen­a­tor War­ren’s threat to the pri­vate equi­ty indus­try that’s arguably the biggest aspect of this entire sto­ry. Because if Smith was prompt­ed to give $100,000 to Trump’s reelec­tion efforts, we have to ask what else he may have done to assist in Trump’s reelec­tion effort. What could the sec­ond largest own­er of local news out­lets in the US do to help a pres­i­dent get reelect­ed? What steps were active­ly tak­en? Of course, for a pres­i­dent as scan­dalous as Trump, sim­ply destroy­ing any mean­ing­ful news cov­er­age is itself a form of immense assis­tance. Just as basi­cal­ly any scan­dal would be assist­ed by the lack of a func­tion­ing press.

    And that brings us to what is per­haps the biggest scan­dal in this sto­ry: the ongo­ing scan­dal of the pri­vate equi­ty indus­try’s abil­i­ty to buy up com­pa­nies, loot the com­pa­nies by load­ing them up with debt, and the let­ting the com­pa­nies descend in bank­rupt­cy. Think about all the sto­ries we’ve heard about pri­vate equi­ty firms lit­er­al­ly forc­ing the com­pa­nies they own to issue bonds sole­ly for the pur­pose of issu­ing div­i­dends to their pri­vate equi­ty own­ers. That’s been tak­ing place across the US econ­o­my for a gen­er­a­tion now and noth­ing is stop­ping it. It’s a mega scan­dal. The kind of mega scan­dal that, in a sane soci­ety, would rat­tle the foun­da­tions of the per­ceived legit­i­ma­cy of how the US econ­o­my oper­ates. And it just hap­pens to be the case that Eliz­a­beth War­ren’s 2019 pro­pos­al would put an end to that prac­tice. Pri­vate equi­ty com­pa­nies would final­ly be held liable for the debt they force their com­pa­nies to take on. It was a direct threat to the busi­ness mod­el Randy Smith spent his entire life exploit­ing. And less than two weeks lat­er, Smith joins the Trump team in a big way. It’s hard to ignore the coin­ci­den­tal tim­ing. A Trump vic­to­ry was clear­ly seen by Smith, and prob­a­bly much of the rest of the pri­vate equi­ty indus­try, as a defen­sive move against a pos­si­ble Demo­c­ra­t­ic pri­vate equi­ty reform push. So when we’re flail­ing about look­ing for solu­tions to the col­lapse of the US local news­pa­per indus­try, it’s worth keep­ing in mind that address­ing the pri­vate equi­ty indus­try’s abil­i­ty to legal­ly gut healthy com­pa­nies would be a good way to start address­ing the prob­lem and a lot of oth­er prob­lems as the same time:

    The Wash­ing­ton Post

    Eliz­a­beth War­ren, in detailed attack on pri­vate equi­ty, unveils plan to stop ‘loot­ing’ of U.S. com­pa­nies

    By Peter Who­riskey
    July 18, 2019

    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.

    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.

    ...

    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.”

    ———-

    “Eliz­a­beth War­ren, in detailed attack on pri­vate equi­ty, unveils plan to stop ‘loot­ing’ of U.S. com­pa­nies” by Peter Who­riskey; The Wash­ing­ton Post; 07/18/2019

    “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.”

    Take a moment and chew on that: the big reg­u­la­to­ry change that pri­vate equi­ty fears is a change that would make pri­vate equi­ty firms liable for their own debt, instead of pass­ing it on to their vic­tim com­pa­nies. That’s how warped the US econ­o­my is. A major dri­ving force for a gen­er­a­tion now has been a busi­ness mod­el that allows the wealth­i­est peo­ple to acquire com­pa­nies with debt that is assumed by the com­pa­nies they pur­chase, and it’s all part of a busi­ness mod­el that assumes they com­pa­nies will be dri­ven into bank­rupt­cy. That’s arguably the most suc­cess­ful busi­ness mod­el in the US of the last gen­er­a­tion and one of the trail­blaz­ers behind that mod­el is the guy cur­rent­ly lead­ing the assault on local news­pa­pers. A secret preda­to­ry assault con­duct­ed, in part, on behalf of still-secret clients. And help­ing Don­ald Trump win reelec­tion in 2020 was part of defend­ing that busi­ness mod­el:

    ...
    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.”
    ...

    So should we expect this kind of reform leg­is­la­tion now that the Democ­rats have the oppor­tu­ni­ty to pass War­ren’s pro­pos­als? It’s hard to imag­ine at this point giv­en the real­i­ty that such a move would get 0 Repub­li­can sup­port and there­fore would require 100 per­cent sup­port of the Sen­ate Democ­rats, which isn’t real­is­tic. You would need a siz­able Demo­c­ra­t­ic major­i­ty in both cham­bers of Con­gress for some­thing like that to real­is­ti­cal­ly have a shot. The pri­vate equi­ty indus­try is sim­ply too vast and pow­er­ful to be reigned in that eas­i­ly.

    But with the local news­pa­per indus­try hav­ing been large­ly cap­tured, and destroyed, as a direct con­se­quence of the pri­vate equi­ty indus­try doing exact­ly what it does best — short-term asset-strip­ping — ques­tions about how the ever-grow­ing pow­er of pri­vate equi­ty over the US econ­o­my will play out polit­i­cal­ly become increas­ing­ly intrigu­ing ques­tion. Espe­cial­ly at a time when income inequal­i­ty and anger at employ­er abuse and exploita­tion is becom­ing an increas­ing­ly res­o­nant issue while the “Great Res­ig­na­tion” plays out. Amer­i­can work­ers have grown super pissed at their boss­es over the last gen­er­a­tion, with­out real­ly real­iz­ing that pri­vate equi­ty is the new boss in many cas­es. There’s a sto­ry here. A real­ly explo­sive and impor­tant sto­ry that has yet to be mean­ing­ful­ly told the US pub­lic with mas­sive eco­nom­ic and polit­i­cal ram­i­fi­ca­tions. A sto­ry that’s been play­ing out for decades. It would be nice if the US had a func­tion­ing indus­try that spe­cial­ized in telling these kinds of sto­ries and was­n’t being active­ly snuffed out.

    Posted by Pterrafractyl | October 17, 2021, 8:47 pm
  22. Fol­low­ing up on the sto­ry of Alden Glob­al Cap­i­tal’s cap­ture and gut­ting of the local news­pa­per mar­ket­place across the US over the past decade, here’s a sto­ry about a par­tic­u­lar­ly con­tro­ver­sial prac­tice by Alden that points towards one of the types of assets at these news­pa­pers that ruth­less investors like Alden might be par­tic­u­lar­ly inter­est­ed in: pen­sion funds. Yes, it turns out Alden Glob­al Cap­i­tal was caught tak­ing mon­ey from the pen­sion funds of the news­pa­pers it bought and invest­ing that mon­ey with oth­er Alden invest­ment funds. Over 90 per­cent of the pen­sion funds in some cas­es. It’s a mas­sive con­flict of inter­est. The kind of con­flict of inter­est that Gan­nett — the largest news­pa­per own­er in the US — was pub­licly point­ing out back in 2019 when the com­pa­ny was try­ing to ward off Alden’s hos­tile takeover.

    And thanks to the extreme secre­cy pri­vate equi­ty firms are allowed to oper­ate under, there’s a par­tic­u­lar­ly grotesque pos­si­bil­i­ty we can’t rule out: It’s entire­ly pos­si­ble Alden was tak­ing that pen­sion fund mon­ey and using it to finance the pur­chase of more news­pa­pers. Now, we don’t know that Alden did this. But we also don’t know they did­n’t do this and we know they could have been doing this all along with­out the pub­lic ever find­ing out. Those are the rules. Rules that force us to effec­tive­ly trust that com­pa­nies like Alden Glob­al Cap­i­tal are act­ing in an eth­i­cal man­ner while giv­ing every incen­tive to do the oppo­site:

    The Wash­ing­ton Post

    The hedge fund try­ing to buy Gan­nett faces fed­er­al probe after invest­ing news­pa­per work­ers’ pen­sions in its own funds

    By Jonathan O’Con­nell
    April 17, 2019

    Alden Glob­al Cap­i­tal, a promi­nent hedge fund that con­trols more than 100 local news­pa­pers, moved near­ly $250 mil­lion of employ­ee pen­sion sav­ings into its own accounts in recent years, an unusu­al move that is trig­ger­ing fed­er­al scruti­ny.

    The hedge fund, which is the con­trol­ling own­er of such news­pa­pers as the Den­ver Post and Boston Her­ald under the brand Medi­aNews Group, in some cas­es moved 90 per­cent of retirees’ sav­ings into two funds it con­trolled, accord­ing to pub­lic records filed with the Labor Depart­ment. Most of the mon­ey has now been moved back out of the hedge funds.

    Fed­er­al law gen­er­al­ly requires that pen­sion man­agers avoid con­flicts of inter­est and avoid tak­ing exces­sive risks with the assets they man­age, experts said, though some exemp­tions are allowed.

    Alden is being inves­ti­gat­ed by the Depart­ment of Labor for man­age­ment of its pen­sions, a hedge fund spokesman con­firmed. The spe­cif­ic nature of the inves­ti­ga­tion is unclear, but one per­son famil­iar with the agency’s inquiry, speak­ing on the con­di­tion of anonymi­ty because the inves­ti­ga­tion is con­fi­den­tial, said the depart­ment issued sub­poe­nas to Alden and its part­ners last year.

    The inquiry could become a fac­tor in Alden’s effort to acquire what is now the nation’s largest chain of dai­ly news­pa­pers, Gan­nett, includ­ing USA Today, as at least one promi­nent law­mak­er rais­es ques­tions about how it would man­age the company’s pen­sions. Alden has faced crit­i­cism for its stew­ard­ship of local news­pa­pers the com­pa­ny has pur­chased. Research shows it cuts jobs more rapid­ly than oth­er own­ers.

    Its sub­sidiary Medi­aNews Group, for­mer­ly known as Dig­i­tal First Media, buys news­pa­pers, often reduces jobs and sells off the build­ings. For three months, Medi­aNews Group has been try­ing to acquire McLean, Va.-based Gan­nett and its more than 100 news­pa­pers.

    A spokesman for Medi­aNews Group, Hugh Burns, con­firmed the Labor Department’s inves­ti­ga­tion and issued a state­ment deny­ing any vio­la­tions of the fed­er­al law pro­tect­ing pri­vate pen­sion hold­ers, the Employ­ee Retire­ment Income Secu­ri­ty Act (ERISA).

    “MNG believes that Alden’s man­age­ment of the pen­sion plan assets for which it pro­vid­ed man­age­ment ser­vices has at all times com­plied with all legal require­ments, includ­ing ERISA,” he said in a state­ment.

    He said that Alden rou­tine­ly man­ages pen­sion mon­ey for clients, that the funds per­formed well dur­ing the time they were invest­ed with Alden and that less than 1 per­cent of mon­ey in MNG pen­sions remains with Alden funds.

    “In 2017, con­sis­tent with its return of oth­er out­side cap­i­tal, Alden began wind­ing down its man­age­ment of these pen­sion plan assets, mak­ing reg­u­lar cash dis­tri­b­u­tions to the MNG pen­sion plan investors,” he said.

    Burns said Alden did not accept any fees for its work on MNG pen­sions.

    Heath Free­man, Alden’s pres­i­dent, did not respond to a request for com­ment. A Labor Depart­ment spokesman declined to com­ment. Aon, the firm that pro­vid­ed actu­ar­i­al ser­vices for the pen­sions, and Pru­den­tial Retire­ment, which serves as trustee and man­ag­er, both declined to com­ment.

    ERISA, which was passed into law in 1974, requires that pen­sions be invest­ed sole­ly on behalf of retirees and not in a way that could ben­e­fit the pen­sion man­agers them­selves.

    The law also requires that the man­agers be “pru­dent” in mak­ing invest­ments accord­ing to the statute’s lan­guage, gen­er­al­ly by diver­si­fy­ing funds to min­i­mize the risk of large loss­es.

    Experts say Alden may have run afoul of either or both of those require­ments by invest­ing large majori­ties of pen­sions in hedge funds that it con­trolled.

    Begin­ning in 2013, pub­lic records show 90 per­cent or more of some Medi­aNews Group pen­sions was invest­ed in two Alden funds based in the Cay­man Islands. At the San Jose Mer­cury News (now the Mer­cury News) $107 mil­lion out of the pension’s $119 mil­lion in 2015 was invest­ed in the Alden funds, accord­ing to Labor Depart­ment records.

    At the Den­ver Post, $47 mil­lion, or 91 per­cent of the pen­sion’s total in 2015, was invest­ed in the same two Alden funds, accord­ing to Labor Depart­ment fil­ings. That year, $248.5 mil­lion of pen­sion sav­ings for cur­rent and for­mer employ­ees of Medi­aNews Group papers was placed into the two Alden funds, accord­ing to court fil­ings in an unre­lat­ed case.

    Anoth­er plan for news­pa­per employ­ees had $45 mil­lion of its $58 mil­lion — 77 per­cent of the total — invest­ed in the Alden funds in 2015, accord­ing to Labor Depart­ment fil­ings.

    Mark Iwry, a for­mer senior Trea­sury Depart­ment offi­cial over­see­ing pen­sions and retire­ments, said he thinks the Depart­ment of Labor will prob­a­bly be look­ing at the process by which Alden moved the funds.

    Iwry said he did not know the specifics of the Alden case but that fed­er­al rules on con­flicts of inter­est gen­er­al­ly pro­hib­it plan man­agers from invest­ing with part­ners in which they have a finan­cial stake. “What did [the plan’s man­agers] think they were doing and what did they think was the jus­ti­fi­ca­tion for it?” he said.

    Rely­ing so heav­i­ly on hedge fund invest­ments could prompt ques­tions from inves­ti­ga­tors as well, experts said. While some of the Alden pen­sions were more than 90 per­cent invest­ed in Alden funds, For­tune 1000 com­pa­nies put only 3.3 per­cent of their pen­sion mon­ey into hedge funds, accord­ing to a Feb­ru­ary study by the advi­so­ry firm Willis­Tow­ers Wat­son.

    Regard­less of whether Alden’s prac­tices ran afoul of fed­er­al rules, they have irked some pen­sion ben­e­fi­cia­ries. Thou­sands of for­mer news­pa­per reporters, edi­tors, pho­tog­ra­phers and print­ing press work­ers — some of whom lost their jobs because of staff cuts at Alden papers — became again behold­en to the hedge fund because it con­trolled their retire­ment sav­ings.

    In some cas­es, ben­e­fi­cia­ries said they were either unaware that their sav­ings had been placed with Alden or didn’t real­ize the extent of Alden’s involve­ment. Many of them remain dis­con­cert­ed by the way the MNG and Alden treat­ed them or their col­leagues at their for­mer papers.

    Pete Carey worked for 49 years at the Mer­cury News and was part of a team of inves­tiga­tive reporters whowon a 1986 Pulitzer Prize for unveil­ing wide­spread cor­rup­tion in the Philip­pines.

    He retired in 2016 after watch­ing a decade’s worth of lay­offs and buy­outs, cost-cut­ting that has become an indus­try norm. He said he had learned about Alden’s invest­ment of the pen­sion mon­ey from an arti­cle pub­lished by the News­Guild labor union but hadn’t ful­ly con­sid­ered the ram­i­fi­ca­tions.

    “It sort of looks like self-deal­ing,” he said. “It just makes me a lit­tle ner­vous because if I had $5, I def­i­nite­ly would not invest it with Alden Glob­al. And it’s very hard to track.”

    John A. Far­rell, a 66-year-old author and vet­er­an of two five-year stints at the Den­ver Post, col­lects $151 a month from his pen­sion. He said he had not looked into the details of the plan but was appalled at the idea that Alden might have ben­e­fit­ed from it.

    “I cer­tain­ly hope they would be forth­com­ing about some­thing like that,” he said.

    The two funds that received the pen­sion mon­ey are Alden Glob­al Adfero BPI Fund, Lim­it­ed and Alden Glob­al CRE Oppor­tu­ni­ties Fund. Accord­ing to secu­ri­ties fil­ings, both were reg­is­tered in the Cay­man Islands, a com­mon loca­tion for hedge funds.

    In many cas­es, an MNG exec­u­tive is list­ed as the admin­is­tra­tor of the plans and Free­man is list­ed as pres­i­dent of the invest­ment advis­er.

    There is lit­tle infor­ma­tion avail­able pub­licly about how the funds per­formed or what they invest­ed in. Alden con­tin­ues to buy and invest in news­pa­per com­pa­nies, rais­ing the pos­si­bil­i­ty that its exec­u­tives have used news­pa­per employ­ees’ pen­sion mon­ey to buy oth­er papers.

    Alden declined to com­ment on what it did with the pen­sion mon­ey.

    In 2016, while Alden man­aged more than $200 mil­lion of its news­pa­pers’ pen­sion mon­ey, it financed the $52 mil­lion pur­chase of the Orange Coun­ty Reg­is­ter and the Press-Enter­prise in South­ern Cal­i­for­nia. It’s unknown whether Alden used pen­sion mon­ey in the deal, and Alden also buys stakes in oth­er com­pa­nies, includ­ing retail chains.

    When The Wash­ing­ton Post pub­lished a Feb­ru­ary sto­ry about Alden’s prac­tice of reap­ing real estate prof­its from news­pa­pers, Sen­ate Minor­i­ty Leader Charles E. Schumer (D‑N.Y.), wrote to Alden with con­cerns about how MNG would man­age the Gan­nett news­pa­pers and employ­ees’ pen­sions.

    “Medi­aNews Group’s deci­sion to invest its employ­ees’ pen­sion assets in Alden Global’s own high-risk hedge funds rais­es ques­tions regard­ing its abil­i­ty to sat­is­fy its cur­rent and future fidu­cia­ry oblig­a­tions,” he wrote. Schumer then wrote to the Pen­sion Ben­e­fit Guar­an­ty Cor­po­ra­tion last week to request a brief­ing on poten­tial reg­u­la­to­ry con­cerns.

    Experts said the Labor Depart­ment could view Alden’s trans­ac­tions as a con­flict of inter­est. ERISA pro­vides exemp­tions that some­times allow pen­sion man­agers to place funds with par­ties in which they have a finan­cial inter­est. A Labor Depart­ment spokesman said it appeared as though Alden had received no such exemp­tions.

    “Fed­er­al pen­sion law has strict rules pro­hibit­ing a wide swath of trans­ac­tions that can be viewed as con­flict­ed,” said Michael Kreps, prin­ci­pal at Groom Law Group, a D.C. firm that spe­cial­izes in retire­ment law. Kreps said every sit­u­a­tion is dif­fer­ent but that the agency “pays par­tic­u­lar atten­tion to sit­u­a­tions where retire­ment plan fidu­cia­ries enter into invest­ment and oth­er arrange­ments with relat­ed enti­ties.”

    Iwry, the for­mer Trea­sury offi­cial now at the Brook­ings Insti­tu­tion, said the risk­i­ness of plac­ing so much mon­ey in hedge funds, con­sid­ered more risky than oth­er invest­ments, could draw scruti­ny as well.

    “These are invest­ments that are not wide­ly held by the pub­lic, pre­sum­ably. There­fore you don’t have the same nat­ur­al pre­sump­tion that it’s rea­son­able to put these invest­ments into them,” Iwry said.

    Burns declined to say who act­ed as admin­is­tra­tors on the plans or what the Alden funds invest­ed in.

    Lead­ers of the Den­ver News­pa­per Guild began con­fronting man­age­ment about the trans­fers to Alden funds in 2013, said Tony Mul­li­gan, a for­mer Den­ver Post employ­ee who now works for the guild. Mul­li­gan said he con­tem­plat­ed suing the com­pa­ny over the prac­tice but that the Den­ver Post pen­sion plan had per­formed sim­i­lar­ly to oth­ers.

    “You can’t look at the results and say they screwed the plan,” Mul­li­gan said.

    Mul­li­gan said MNG told the guild in 2015 that it had begun mov­ing invest­ments out of Alden funds, and it has since merged some of the plans. Some of the pen­sion mon­ey was moved into more tra­di­tion­al, diver­si­fied accounts man­aged by Van­guard.

    MNG announced its plans to buy Gan­nett in Jan­u­ary, when R. Joseph Fuchs, chair­man of the MNG board, wrote to the Gan­nett board cas­ti­gat­ing the company’s efforts to grow rev­enue and say­ing it ought to do more to “max­i­mize val­ue right now.” MNG offered to buy Gan­nett for $12 a share, or $1.36 bil­lion.

    Since then, the two com­pa­nies have exchanged ugly accu­sa­tions in advance of Gannett’s May 16 annu­al meet­ing. MNG, which owns 7.5 per­cent of Gannett’s stock, pro­posed six new board mem­bers, includ­ing Free­man and Fuchs.

    As they strug­gle through the industry’s decline, many news­pa­pers in recent years have frozen pen­sion plans and declined to offer pen­sions to new hires.

    Gannett’s board has raised con­cerns about how MNG might man­age its pen­sions, writ­ing to share­hold­ers March 26 with “grave con­cerns that under MNG’s con­trol, the board would be repur­posed for siphon­ing val­ue — includ­ing poten­tial­ly from Gannett’s pen­sions — to deliv­er gen­er­ous man­age­ment fees and prof­its to Alden.”

    But Gannett’s own pen­sions were under­fund­ed by $294 mil­lion at the end of 2018, which will prob­a­bly force the com­pa­ny to make future con­tri­bu­tions.

    Fuchs wrote to share­hold­ers April 2 say­ing: “The real­i­ty is that the news­pa­per busi­ness is in sec­u­lar decline. Gan­nett is in seri­ous trou­ble and needs to quick­ly address its oper­a­tional and strate­gic issues if it is going to sur­vive.”

    ...

    ———–

    “The hedge fund try­ing to buy Gan­nett faces fed­er­al probe after invest­ing news­pa­per work­ers’ pen­sions in its own funds” by Jonathan O’Con­nell; The Wash­ing­ton Post; 04/17/2019

    “The hedge fund, which is the con­trol­ling own­er of such news­pa­pers as the Den­ver Post and Boston Her­ald under the brand Medi­aNews Group, in some cas­es moved 90 per­cent of retirees’ sav­ings into two funds it con­trolled, accord­ing to pub­lic records filed with the Labor Depart­ment. Most of the mon­ey has now been moved back out of the hedge funds.”

    Is it a con­flict of inter­est for Alden Glob­al Cap­i­tal to take the pen­sion funds from the news­pa­pers it con­trols and invest 90 per­cent of those funds in its own invest­ment fund? One would think, yes, this would be a mas­sive con­flict of inter­est. And yet it hap­pened, and the com­pa­ny appears to have large­ly got­ten away with it, despite the fed­er­al inves­ti­ga­tion. The only notice­able con­se­quence of the inves­ti­ga­tion is that it made it some­what eas­i­er for Gan­nett — the largest news­pa­per own­er in the US , and also pri­mar­i­ly owned by the finan­cial indus­try — to resist Alden’s hos­tile takeover attempt. For now:

    ...
    Alden is being inves­ti­gat­ed by the Depart­ment of Labor for man­age­ment of its pen­sions, a hedge fund spokesman con­firmed. The spe­cif­ic nature of the inves­ti­ga­tion is unclear, but one per­son famil­iar with the agency’s inquiry, speak­ing on the con­di­tion of anonymi­ty because the inves­ti­ga­tion is con­fi­den­tial, said the depart­ment issued sub­poe­nas to Alden and its part­ners last year.

    The inquiry could become a fac­tor in Alden’s effort to acquire what is now the nation’s largest chain of dai­ly news­pa­pers, Gan­nett, includ­ing USA Today, as at least one promi­nent law­mak­er rais­es ques­tions about how it would man­age the company’s pen­sions. Alden has faced crit­i­cism for its stew­ard­ship of local news­pa­pers the com­pa­ny has pur­chased. Research shows it cuts jobs more rapid­ly than oth­er own­ers.

    Its sub­sidiary Medi­aNews Group, for­mer­ly known as Dig­i­tal First Media, buys news­pa­pers, often reduces jobs and sells off the build­ings. For three months, Medi­aNews Group has been try­ing to acquire McLean, Va.-based Gan­nett and its more than 100 news­pa­pers.
    ...

    But note the tru­ly per­verse pos­si­bil­i­ty raised by the US’s rules around pri­vate equi­ty: Alden’s invest­ment funds are allowed to be so secre­tive that it’s entire­ly pos­si­ble they used the news­pa­per pen­sion mon­ey to buy more news­pa­pers. Talk about a vicious news cycle:

    ...
    Regard­less of whether Alden’s prac­tices ran afoul of fed­er­al rules, they have irked some pen­sion ben­e­fi­cia­ries. Thou­sands of for­mer news­pa­per reporters, edi­tors, pho­tog­ra­phers and print­ing press work­ers — some of whom lost their jobs because of staff cuts at Alden papers — became again behold­en to the hedge fund because it con­trolled their retire­ment sav­ings.

    ...

    The two funds that received the pen­sion mon­ey are Alden Glob­al Adfero BPI Fund, Lim­it­ed and Alden Glob­al CRE Oppor­tu­ni­ties Fund. Accord­ing to secu­ri­ties fil­ings, both were reg­is­tered in the Cay­man Islands, a com­mon loca­tion for hedge funds.

    In many cas­es, an MNG exec­u­tive is list­ed as the admin­is­tra­tor of the plans and Free­man is list­ed as pres­i­dent of the invest­ment advis­er.

    There is lit­tle infor­ma­tion avail­able pub­licly about how the funds per­formed or what they invest­ed in. Alden con­tin­ues to buy and invest in news­pa­per com­pa­nies, rais­ing the pos­si­bil­i­ty that its exec­u­tives have used news­pa­per employ­ees’ pen­sion mon­ey to buy oth­er papers.
    ...

    How many news­pa­pers did Alden Glob­al Cap­i­tal pur­chase with news­pa­per pen­sion mon­ey? We’ll pre­sum­ably nev­er find out. But just as we have to ask how many papers have been secret­ly financed by paper pen­sions, we also have to ask what hap­pens whey Alden Glob­al Cap­i­tal runs out of papers. This is basi­cal­ly a pyra­mid scheme, after all. In order for Paper X’s pen­sion fund to get the return it needs, Paper Y needs to be pur­chased, asset-stripped, and the cycle gets repeat­ed. What hap­pens when there are no more unstripped local papers left? What keeps the scheme going? Oh, that’s right, the vul­ture funds can just move on to what­ev­er oth­er indus­try they can find with assets left to strip. It’ll be just like before, but pre­sum­ably with few sto­ries writ­ten about it.

    Posted by Pterrafractyl | October 18, 2021, 6:02 pm
  23. Did a rev­o­lu­tion in polit­i­cal grift­ing just qui­et­ly tran­spire in the US? That’s the bizarre and rather gross ques­tion raised by a num­ber of recent sto­ries about the lat­est Trump-relat­ed media ven­ture. The big plan is for some sort of TRUTH social media app. And this new media ven­ture is going to ulti­mate­ly be a pub­licly trad­able enti­ty, but only after it com­pletes its new­ly announced merg­er with a Spe­cial Pur­pose Acqui­si­tion Com­pa­ny (SPAC). Yes, Trump’s new social media com­pa­ny is going the SPAC route. Recall how the SPAC mar­ket­place has been explod­ing in recent years, in part because it rep­re­sents a less-reg­u­lat­ed and poten­tial­ly more prof­itable form of tak­ing com­pa­nies pub­lic than the tra­di­tion­al IPO route. Instead of all the reg­u­la­tor bur­dens and dis­clo­sures that come with an IPO, SPAC investors get to draw mon­ey from the broad­er pub­lic while ulti­mate­ly mak­ing pri­vate-equi­ty-like invest­ments, cre­at­ing a pub­licly-trad­able merged com­pa­ny in the end. It’s the kind of mod­el that puts SPACs in a rel­a­tive­ly unreg­u­lat­ed mar­ket­place that invites retail investors in to play the role pri­vate-equi­ty has tra­di­tion­al­ly made in the IPO mar­ket­place. And a mod­el that poten­tial­ly ben­e­fits the ini­tial pre-merg­er SPAC investors enor­mous­ly.

    And now, with the emer­gence of Trump-themed SPACs, this mar­ket­place is poised to draw in polit­i­cal sup­port­ers to play the role of those SPAC investors. On the sur­face, it’s not exact­ly a sto­ry of a rev­o­lu­tion in grift. But the more we’re learn­ing about this deal, the more it appears that Don­ald Trump and the team of investors who set up this SPAC deal may have stum­bled upon a pow­er­ful new way to raise poten­tial­ly bil­lions of dol­lars from pub­lic. Yes, the mon­ey raised in this man­ner would osten­si­bly be invest­ment mon­ey in the new media ven­ture. But as we’re going to see, it real­ly does look like a lot of peo­ple poten­tial­ly are just hand­ing mon­ey to this new media ven­ture as a means of express­ing their sup­port for Trump. Buy­ing shares in a com­pa­ny as a means of express­ing your sup­port for a polit­i­cal per­sona. That’s the rev­o­lu­tion in polit­i­cal grift­ing that’s cur­rent­ly play­ing out.

    Sure, donat­ing funds to politi­cians you sup­port isn’t new. But merg­ing that process with the pump-and-dump spec­u­la­tive dynam­ics of invest­ing in a com­pa­ny is a very dif­fer­ent sce­nario. The kind of sce­nario that could gen­er­ate huge prof­its for the polit­i­cal fig­ures who are capa­ble of trans­lat­ing their fol­low­ing into some sort of for-prof­it cor­po­rate enter­prise. Huge prof­its for polit­i­cal fig­ures whether or not the com­pa­nies they cre­ate are actu­al­ly prof­itable. It’s a busi­ness mod­el focused on rais­ing mon­ey and prof­it­ing from the IPO, whether or not the new­ly cre­at­ed com­pa­ny actu­al­ly has a viable long-term busi­ness mod­el of its own is beside the point.

    So what indi­ca­tions are there that this new Trump media firm is just a giant fund-rais­ing scam? Well, it’s the fact that the SPAC deal around this new first just bust­ed all the SPAC fund-rais­ing records despite the new com­pa­ny hav­ing no actu­al prod­uct ready or even a gen­er­al busi­ness mod­el. Shares of the SPAC, Dig­i­tal World Acqui­si­tion Corp, spiked over %350 per­cent the day after it was announced the SPAC was going to merge with a new­ly cre­at­ed Trump Media and Tech­nol­o­gy Group. Near­ly a dozen hedge funds invest­ed in that SPAC in its IPO in Sep­tem­ber and are set to almost quin­tu­ple their invest­ment based on the near­ly $50 share price.

    Anoth­er part of the merg­er is a $293 mil­lion pay­out to Trump Media should the SPAC share­hold­ers NOT decide to cash in their shares at the planned $10/share price when the even­tu­al merg­er takes place. With prices cur­rent­ly near $50/share it’s look­ing like Trump will like­ly see the entire $293 mil­lion.

    So what might ruin all of the fun for Trump and his fel­low SPAC investors? Too much grift­ing, of course. Specif­i­cal­ly, while almost noth­ing is known about the actu­al tech­nol­o­gy that Trump Media will ulti­mate­ly deploy, what we do know is that they appear to be build­ing the soft­ware using freely avail­able open-source code while vio­lat­ing the terms of use of that code. Terms of use that include mak­ing what­ev­er code Trump Media devel­ops pub­licly avail­able and open for fur­ther devel­op­ment by oth­ers. In oth­er words, terms that this for-prof­it Trump Media prob­a­bly won’t be will­ing to abide by. The devel­op­er of the open source code has already indi­cat­ed they’re seek­ing legal coun­sel.

    Now, it’s always going to be an option for Trump Media to just pay for the devel­op­ment of its own pro­pri­etary code. But that costs mon­ey. And freely avail­able tools are sit­ting right there. All Trump needs to do is what he always does: break the rules and get away with it. Dom­i­nance pol­i­tics as a busi­ness mod­el.

    Will Don­ald Trump break once again break the mold of polit­i­cal grift­ing? Time will tell, but as the fol­low­ing arti­cle makes clear, it’s far from just Trump who is cash­ing in on this. It’s the kind of political/business grift mod­el that the whole finan­cial sec­tor can poten­tial­ly cash in on:

    Reuters

    Trump’s social media deal ignites 350% gain in SPAC’s shares

    By Med­ha Singh and Sinéad Carew
    Octo­ber 21, 2021 4:40 PM CDT Updat­ed

    Oct 21 (Reuters) — For­mer U.S. Pres­i­dent Don­ald Trump’s deal to cre­ate a social media app after Twit­ter Inc (TWTR.N) and Face­book Inc (FB.O) barred him won an exu­ber­ant endorse­ment from investors, with shares in a shell com­pa­ny back­ing the plan clos­ing up more than 350% on Thurs­day after ris­ing more than 400% ear­li­er in the day.

    Trump Media and Tech­nol­o­gy Group and Dig­i­tal World Acqui­si­tion Corp (DWAC.O), , a Spe­cial Pur­pose Acqui­si­tion Vehi­cle (SPAC), announced on Wednes­day they would merge to cre­ate a social media app called TRUTH Social. Trump’s com­pa­ny said it plans a beta launch — unveil­ing a tri­al ver­sion — next month and a full roll-out in the first quar­ter of 2022.

    SPACs use mon­ey raised through an ini­tial pub­lic offer­ing to take a pri­vate com­pa­ny pub­lic. This deal’s announce­ment lacked the trap­pings of the detailed busi­ness plans Wall Street is accus­tomed to in SPAC merg­ers, from nam­ing a lead­er­ship team to giv­ing detailed financ­ing earn­ings and pro­jec­tions.

    Even so, shares of Mia­mi-based Dig­i­tal World closed up 356.8% at $45.50 a share on Nas­daq after soar­ing more than 400% ear­li­er in the ses­sion. At the clos­ing price, its mar­ket cap­i­tal­iza­tion stood at $1.47 bil­lion, up from $321 mil­lion on Wednes­day.

    With vol­ume of more than 477 mil­lion shares, it was the most active­ly trad­ed stock on the exchange, draw­ing chat­ter on forums such as Red­dit, where retail investors have dri­ven so-called meme stocks to val­ues not sup­port­ed by main­stream finan­cial analy­sis. On Twit­ter and Stock­twits, some users cheered the ral­ly with posts dis­play­ing rock­et ships and GIFs of Trump.

    The ven­ture may pro­vide the first real test of the pow­er of right-wing social media with the full force of Trump’s sup­port. Ques­tions remain about how it plans to make mon­ey and avoid the same issues that led major social media plat­forms to ban­ish him.

    Some investors mar­veled at the ral­ly and won­dered whether the gains would last.

    “I have nev­er seen any­thing like this, such share reac­tion based on hopes and dreams,” Kristi Mar­vin, a for­mer invest­ment banker who found­ed research firm SPACIn­sid­er, told oth­er investors on a Twit­ter Spaces dis­cus­sion.

    Oth­ers said the mar­ket reac­tion reflect­ed sup­port for Trump as well as a bet that a plat­form with him would draw fol­low­ers.

    “Up to this point there has­n’t been a pub­licly trad­ed vehi­cle for those that sup­port the for­mer pres­i­dent,” said Jake Dol­larhide, co-founder of Long­bow Asset Man­age­ment in Tul­sa, Okla­homa.

    Michael O’Rourke, chief mar­ket strate­gist at Jon­esTrad­ing in Stam­ford, Con­necti­cut, said not just Trump sup­port­ers but also oppo­nents, media and investors would want to get on the plat­form to keep track of what Trump says.

    Still, its future is far from cer­tain. Dig­i­tal World, led by for­mer invest­ment banker Patrick Orlan­do, has launched at least four SPACs and plans to launch two more but none of them have com­plet­ed a deal yet. Orlan­do did not imme­di­ate­ly respond to requests for com­ment.

    DIRECT AND UNFILTERED

    Peo­ple close to the Repub­li­can for­mer pres­i­dent, speak­ing on con­di­tion of anonymi­ty, have said Trump has sought to set up his own social media com­pa­ny since leav­ing the White House. Trump, con­tem­plat­ing anoth­er White House run in 2024, has been frus­trat­ed that he does not have a direct and unfil­tered con­nec­tion with his mil­lions of fol­low­ers after Twit­ter and Face­book barred him, these peo­ple said.

    Social media giants sus­pend­ed Trump’s accounts after his sup­port­ers riot­ed at the U.S. Capi­tol on Jan. 6 fol­low­ing an incen­di­ary speech he gave repeat­ing false claims that the 2020 elec­tion was stolen from him through wide­spread vot­ing fraud.

    Twit­ter found that Trump posts vio­lat­ed its “glo­ri­fi­ca­tion of vio­lence” pol­i­cy. Face­book found that Trump praised vio­lence in con­nec­tion with the dead­ly attack in which riot­ers sought to block the for­mal con­gres­sion­al cer­ti­fi­ca­tion of his elec­tion loss to Pres­i­dent Joe Biden.

    ...

    Trump Media said it would receive $293 mil­lion in cash that Dig­i­tal World Acqui­si­tion had in a trust if no share­hold­er of the acqui­si­tion firm choos­es to cash in their shares.

    The soar­ing share price could increase the like­li­hood of a deal clos­ing. Investors in the SPAC must even­tu­al­ly choose whether to redeem their shares at the IPO price of $10 per share, which is now much low­er than the lev­el at which what many would have bought.

    Attempts to float alter­na­tives to Twit­ter and Face­book have fal­tered in the past. Par­ler, a social media app backed by promi­nent Repub­li­can Par­ty donor Rebekah Mer­cer and pop­u­lar with U.S. con­ser­v­a­tives, had sev­er­al tech com­pa­nies cut ties with it after the Jan. 6 riot.

    GETTR, a Twit­ter-style plat­form start­ed by for­mer Trump advis­er Jason Miller, claimed more than 1.5 mil­lion users in its first 11 days after being launched in July. Miller was unable to get Trump to join the plat­form.

    ———–

    “Trump’s social media deal ignites 350% gain in SPAC’s shares” by Med­ha Singh and Sinéad Carew; Reuters; 10/21/2021

    “Trump Media and Tech­nol­o­gy Group and Dig­i­tal World Acqui­si­tion Corp (DWAC.O), , a Spe­cial Pur­pose Acqui­si­tion Vehi­cle (SPAC), announced on Wednes­day they would merge to cre­ate a social media app called TRUTH Social. Trump’s com­pa­ny said it plans a beta launch — unveil­ing a tri­al ver­sion — next month and a full roll-out in the first quar­ter of 2022.

    Yes, the new­ly Trump media ven­ture announced this week does­n’t actu­al­ly have a beta ver­sion of its prod­uct ready and while be unveil­ing it until next month. Nor did the announce­ment include any of the trap­pings of a detailed busi­ness plan nor­mal­ly expect­ed with a deal like this. Despite this lack a prod­uct, or any sign of mean­ing­ful plan­ning, the announce­ment of the merg­er trig­gered a %350 increas­ing in the val­ue of Dig­i­tal World’s share prices, clos­ing at $45.50 at the end of the day:

    ...
    SPACs use mon­ey raised through an ini­tial pub­lic offer­ing to take a pri­vate com­pa­ny pub­lic. This deal’s announce­ment lacked the trap­pings of the detailed busi­ness plans Wall Street is accus­tomed to in SPAC merg­ers, from nam­ing a lead­er­ship team to giv­ing detailed financ­ing earn­ings and pro­jec­tions.

    Even so, shares of Mia­mi-based Dig­i­tal World closed up 356.8% at $45.50 a share on Nas­daq after soar­ing more than 400% ear­li­er in the ses­sion. At the clos­ing price, its mar­ket cap­i­tal­iza­tion stood at $1.47 bil­lion, up from $321 mil­lion on Wednes­day.
    ...

    And note how Trump him­self direct­ly ben­e­fits from the soar­ing Dig­i­tal World share price: as part of the deal, as long as no share­hold­er choos­es to cash in their shares for $10/share, Trump Media gets $293 mil­lion. And as long as the share price of Dig­i­tal World stays about $10/share, those investors will have an incen­tive to NOT cash in their shares. It’s like a sys­tem designed to max­i­mize the poten­tial prof­its from Trump’s abil­i­ty to cre­ate short-term hype:

    ...
    Trump Media said it would receive $293 mil­lion in cash that Dig­i­tal World Acqui­si­tion had in a trust if no share­hold­er of the acqui­si­tion firm choos­es to cash in their shares.

    The soar­ing share price could increase the like­li­hood of a deal clos­ing. Investors in the SPAC must even­tu­al­ly choose whether to redeem their shares at the IPO price of $10 per share, which is now much low­er than the lev­el at which what many would have bought.
    ...

    But it’s the fol­low­ing obser­va­tion that makes this poten­tial­ly a rev­o­lu­tion in polit­i­cal grift­ing: while some observers inter­pret this explod­ing stock price as a bet based on hopes and dreams, oth­ers see this as a mar­ket reflec­tion of polit­i­cal sup­port for Trump him­self. A pub­licly trad­ed vehi­cle for express­ing one’s sup­port of Trump. That’s new:

    ...
    Some investors mar­veled at the ral­ly and won­dered whether the gains would last.

    “I have nev­er seen any­thing like this, such share reac­tion based on hopes and dreams,” Kristi Mar­vin, a for­mer invest­ment banker who found­ed research firm SPACIn­sid­er, told oth­er investors on a Twit­ter Spaces dis­cus­sion.

    Oth­ers said the mar­ket reac­tion reflect­ed sup­port for Trump as well as a bet that a plat­form with him would draw fol­low­ers.

    “Up to this point there has­n’t been a pub­licly trad­ed vehi­cle for those that sup­port the for­mer pres­i­dent,” said Jake Dol­larhide, co-founder of Long­bow Asset Man­age­ment in Tul­sa, Okla­homa.
    ...

    And it’s not like this has to be the ONLY Trump-relat­ed SPAC deal of this nature. There’s noth­ing stop­ping Trump from form­ing new com­pa­nies and repeat­ing this process. Of course, if these investors end up get­ting ulti­mate­ly burned there may not be as much inter­est in future Trump SPACs. But that’s where the ambigu­ous nature about the inten­tion of these investors comes into ques­tion. Because if peo­ple are buy­ing these shares as an expres­sion of their sup­port for Trump and anal­o­gous to a polit­i­cal dona­tion where there isn’t real­ly any­thing direct­ly expect­ed in return then we should­n’t nec­es­sar­i­ly expect a poor Trump SPAC track record to squash the prospects for future Trump SPACs. We just have to wait and see how this emerg­ing ‘politi­cized SPACs’ mar­ket­place is going to set­tle but fol­low­ing the spec­tac­u­lar suc­cess of Trump’s SPAC so far for investors it’s hard to imag­ine there isn’t plen­ty of inter­est in repeat­ing this phe­nom­e­na. Because as the fol­low­ing arti­cle points out, the surg­ing share prices of Dig­i­tal World fol­low­ing Wednes­day’s announce­ment of the planned merg­er with Trump Media isn’t just a great day for those investors and Trump. It was a record-set­ting day for the SPAC world, record­ing the high­est SPAC gain ever on the first day fol­low­ing the announce­ment of a merg­er:

    Reuters

    Hedge funds score unprece­dent­ed gains on Trump’s SPAC deal

    By Svea Herb­st-Bayliss
    Octo­ber 21, 2021 10:58 PM UTC Updat­ed

    Oct 21 (Reuters) — Hedge funds that invest­ed in the blank-check acqui­si­tion com­pa­ny that made a $875 mil­lion deal to merge with for­mer U.S. Pres­i­dent Don­ald Trump’s new social media ven­ture are set to make five times their invest­ment, reg­u­la­to­ry fil­ings show.

    It is the biggest gain investors in so-called spe­cial pur­pose acqui­si­tion com­pa­nies (SPACs) have ever record­ed on the first day after a deal was announced, accord­ing to SPAC Research.

    Near­ly a dozen hedge funds invest­ed in the SPAC, Dig­i­tal World Acqui­si­tion Corp (DWAC.O), in its ini­tial pub­lic offer­ing (IPO) in Sep­tem­ber, accord­ing to the fil­ings. Like oth­er SPACs, Dig­i­tal World did not dis­close which com­pa­ny it was seek­ing to buy.

    Hedge funds have pumped hun­dreds of bil­lions of dol­lars into these types of vehi­cles in the past two years.

    The investor excite­ment had fiz­zled in the past few months as some com­pa­nies that merged with SPACs failed to deliv­er on their bull­ish pro­jec­tions and retail investors nursed loss­es. Stock mar­ket reac­tion has been so poor to recent deals that some hedge funds only make pen­nies on the dol­lar by buy­ing into the IPOs of SPACs and then sell­ing their shares in the stock mar­ket or redeem­ing them for their IPO price.

    But the hedge funds that invest­ed in Dig­i­tal World’s IPO are set to quin­tu­ple their invest­ment after Dig­i­tal World’s shares jumped more than 400% after the deal with new­ly launched Trump Media and Tech­nol­o­gy Group was announced. They were hov­er­ing around $50 in late after­noon trad­ing on Thurs­day, giv­ing Dig­i­tal World a mar­ket val­ue of $1.7 bil­lion.

    The hedge funds includ­ed D.E. Shaw, which over­sees $60 bil­lion in assets, and Yaki­ra Cap­i­tal Man­age­ment, which invests some $472 mil­lion, accord­ing to a reg­u­la­to­ry fil­ing.

    Mete­o­ra Cap­i­tal Part­ners, an affil­i­ate of heavy SPAC investor Glaz­er Cap­i­tal LLC, Sander Ger­ber’s Hud­son Bay Cap­i­tal, Booth­bay Fund Man­age­ment, Boaz Wein­stein’s Saba Cap­i­tal, Shaolin Cap­i­tal Man­age­ment, K2 Prin­ci­pal Fund and Rad­cliffe Cap­i­tal Corp, anoth­er heavy SPAC investor, also put in mon­ey, the fil­ings show.

    ...

    The ral­ly in Dig­i­tal World shares is also a boon to Trump because most stock mar­ket investors who buy the shares for much more than their $10 IPO price will not seek to redeem them at that price, ensur­ing that Trump Media and Tech­nol­o­gy Group will receive most if not all of the $293 mil­lion it is enti­tled to under the merg­er.

    Some founders of the hedge funds donat­ed to the Demo­c­ra­t­ic Par­ty, includ­ing to Pres­i­dent Joe Biden, who defeat­ed Trump in the 2020 U.S. elec­tion. Oth­ers backed Repub­li­can can­di­dates includ­ing Trump.

    Hud­son Bay’s Ger­ber donat­ed to Trump in last year’s elec­tion and backed the two Repub­li­can can­di­dates for Sen­ate in Geor­gia. Wein­stein donat­ed to Biden and sup­port­ed the Demo­c­ra­t­ic can­di­dates in Geor­gia, among oth­er dona­tions.

    David Shaw, who found­ed DE Shaw, donat­ed mil­lions of dol­lars to lib­er­al polit­i­cal action com­mit­tee Pri­or­i­ties USA Action, fil­ings show. Rep­re­sen­ta­tives for the firms either did not respond to a request for com­ment or declined to com­ment.

    ...

    ———-

    “Hedge funds score unprece­dent­ed gains on Trump’s SPAC deal” by Svea Herb­st-Bayliss; Reuters; 10/21/2021

    “It is the biggest gain investors in so-called spe­cial pur­pose acqui­si­tion com­pa­nies (SPACs) have ever record­ed on the first day after a deal was announced, accord­ing to SPAC Research.”

    The prece­dent has been estab­lished. A new bar has been set for what is pos­si­ble fol­low­ing this record-set­ting surge in Dig­i­tal World’s shares a day after the announced merg­er.

    But, of course, the pos­si­bil­i­ty that this whole ven­ture is going to col­lapse under the weight of its own lack of a busi­ness mod­el looms large too and a boom-bust SPAC prece­dent might ulti­mate­ly get estab­lished. And based on the fol­low­ing TPM piece, it looks like that implo­sion could come about soon­er than investors expect. Because while there’s no work­ing prod­uct yet avail­able for this new media ven­ture, there is a pro­to­type of sorts. A soft­ware pro­to­type with a sig­nif­i­cant legal prob­lem: the pro­to­type appears to vio­late the terms of the soft­ware tools used to build it.

    Yep, it turns out Trump Media built its TRUTH app using the Mastodon open source soft­ware. And while Trump Media has every right to build its app based on that freely avail­able soft­ware, the open source license does comes with a few require­ments. Name­ly, any soft­ware built using Mastodon must, itself, also be pub­licly avail­able, in keep­ing with the open source phi­los­o­phy. And Trump Media has shown no indi­ca­tion of mak­ing its mod­i­fied Mastodon code avail­able, in direct vio­la­tion of the license. So it appears that Trump Media decid­ed to build its for-prof­it app with freely avail­able soft­ware while refus­ing to abide by the rules. Yes, Trump’s new social media ven­ture has some­how man­aged to find a way to steal free code. It’s like dis­til­la­tion of the Trump ethos.

    So are there going to be con­se­quences for this effec­tive theft? Pos­si­bly. Mastodon founder Eugen Rochko told TPM he’s plan­ning on seek­ing legal coun­sel. Now, keep in mind that there’s no rea­son this TRUTH app needs to be build with Mastodon. There are alter­na­tives. But this was a free option. ‘Free’, with a few con­di­tions. So it looks like the Trump Media social media ven­ture is start­ing off with a con­tro­ver­sy that revolves around whether or not Trump needs to fol­low the same rules that apply to rest of us. Which is remark­ably on-brand if you think about:

    Talk­ing Points Memo
    Muck­rak­er

    Trump’s Brand New TRUTH App May Vio­late Terms Of Open Source Code It’s Built On

    By Josh Koven­sky
    Octo­ber 21, 2021 11:09 a.m.

    The new social net­work found­ed by for­mer Pres­i­dent Trump may vio­late the terms of use of the soft­ware on which it is based.

    -On Wednes­day night, after Trump revealed the TRUTH social app, Twit­ter users began to note that the net­work appeared to be based on an open-source social net­work­ing soft­ware called Mastodon, which allows peo­ple to mod­i­fy the under­ly­ing code so long as they abide by its license.

    But the Trump net­work appears to have tak­en the pub­licly avail­able code for the web­site while vio­lat­ing the terms that make it free to use.

    Mastodon founder Eugen Rochko told TPM in an email that TRUTH appeared to vio­late the terms of use that the soft­ware sets forth: mak­ing the source code avail­able, and hav­ing a copy of the gen­er­al prod­uct license avail­able to users.

    “I do intend to seek legal coun­sel on the sit­u­a­tion though,” Rochko told TPM, while declin­ing to dis­cuss any spe­cif­ic legal action he may be con­tem­plat­ing.

    “Com­pli­ance with our AGPLv3 license is very impor­tant to me as that is the sole basis upon which I and oth­er devel­op­ers are will­ing to give away years of work for free,” Rochko added.

    The AGPL license man­dates that soft­ware devel­oped for free — like Mastodon — remain pub­licly avail­able after its been mod­i­fied. Under the license, TRUTH needs to share any mod­i­fi­ca­tions to Mastodon’s code.

    The require­ment allows devel­op­ers to remain aware of how the soft­ware is being used so long as its run on pub­lic servers, con­tin­u­ing the chain by which dif­fer­ent open-source devel­op­ers con­tin­ue to work on and fur­ther mod­i­fy code that’s been cre­at­ed.

    ...

    Rochko first released Mastodon in Octo­ber 2016. Since then, the open-source soft­ware has been the base for a num­ber of “forks” — when devel­op­ers take open-source soft­ware and mod­i­fy it. That’s led to the devel­op­ment of sev­er­al niche social net­works that abide by the terms of use that Mastodon sets forth.

    Trump announced the cre­ation of the social net­work on Wednes­day night, herald­ing it as a means to “stand up to Big Tech” firms. The for­mer pres­i­dent was banned from major social net­work­ing plat­forms after the Jan. 6 Capi­tol insur­rec­tion.

    ...

    ————

    “Trump’s Brand New TRUTH App May Vio­late Terms Of Open Source Code It’s Built On” by Josh Koven­sky; Talk­ing Points Memo; 10/21/2021

    “I do intend to seek legal coun­sel on the sit­u­a­tion though,” Rochko told TPM, while declin­ing to dis­cuss any spe­cif­ic legal action he may be con­tem­plat­ing.”

    It’s going to be Mastodon founder Eugen Rochko vs Trump Media in a legal bat­tle that could deter­mine whether or not Trump’s record-set­ting SPAC debut crum­bles right out of the gate. Then again, Trump Media could just devel­op its own social media app code. It’s not like the ven­ture is lack­ing in finan­cial resources. But that would required Trump back­ing down from an oppor­tu­ni­ty for anoth­er scam. And based on every­thing we know about his psy­chol­o­gy it’s almost as if he’s com­pelled to find ways to cheat and grift when­ev­er pos­si­ble. It real­ly does appear to be patho­log­i­cal. That’s part of what makes what should be a minor sto­ry about this legal issue poten­tial­ly so sig­nif­i­cant. Open­ly steal­ing Mastodon’s code is the kind of Trumpian dom­i­nance play that real­ly does seem to appeal to him. Per­haps more impor­tant­ly, back­ing down in the face of legal threats at this point is the kind of pub­lic sign of weak­ness Trump abhors. It’s like he’s psy­cho­log­i­cal­ly backed him­self into a cor­ner. And yet this is a cor­ner where he might ulti­mate­ly bul­ly his way to anoth­er vic­to­ry and wild prof­it.

    But whether or not this Trump Media ven­ture ulti­mate­ly implodes under the weight of its own grift and mis­man­age­ment, the tem­plate is estab­lished. Polit­i­cal icons now have a means of cre­at­ing IPO-like oppor­tu­ni­ties for their polit­i­cal sup­port­ers to show their sup­port. And can grift like they’ve nev­er grift­ed before.

    Posted by Pterrafractyl | October 24, 2021, 6:36 pm
  24. Is the ‘Great Res­ig­na­tion’ more accu­rate­ly a ‘Great Res­ig­na­tion’ from most­ly crap­py jobs offered by pri­vate-equi­ty-owned firms? That’s the ques­tion posed by the fol­low­ing pair of arti­cles. David Dayen just pub­lished a big new piece in The Amer­i­can Prospect that involved a num­ber of inter­views of US work­ers walk­ing away from their jobs an found a per­va­sive trend: crap­py pay, no ben­e­fits, bad hours. It’s a low-wage ‘Great Res­ig­na­tion’, decades in the mak­ing. And while com­pa­nies are grudg­ing­ly rais­ing pay in response, Dayen’s inves­ti­ga­tion found that it was­n’t just high­er pay they’re seek­ing out. It’s mean­ing­ful careers with employ­ers who respect them. And as Dayen points out, respect and pay­ing work­ers more and not treat­ing them like expend­able com­modi­ties is some­thing cor­po­rate Amer­i­can sim­ply can­not sus­tain. It goes against the entire ‘investors first’ ethos that has dom­i­nat­ed the employer/employee rela­tion­ship in the US since the 1980. That’s part of what’s dri­ving the great res­ig­na­tion: the kind of pay and dig­ni­ty work­ers want does­n’t work with the dom­i­nant mod­ern cor­po­rate busi­ness mod­el reliant on cheap exploitable labor. A busi­ness mod­el exem­pli­fied by the pri­vate equi­ty indus­try:

    The Amer­i­can Prospect

    The Great Escape

    Why work­ers are quit­ting their jobs, after the trau­ma of the pan­dem­ic.

    by David Dayen
    Novem­ber 29, 2021

    The first thing you should know about Car­o­line Potts of Murfrees­boro, Ten­nessee, is that she loves her pets. “I have five cats and three dogs,” she told me, proud­ly. “The only thing I don’t have is birds.”

    So when she need­ed a job, PetS­mart seemed like the per­fect solu­tion. “My sis­ter worked at PetS­mart and I was in there so much,” she said.

    She start­ed as a bather, and showed enough promise to be invit­ed to the company’s dog groom­ing acad­e­my, where they teach how to cut hair. “I knew it was what I want­ed to do with my life,” Car­o­line said. “I was real­ly pas­sion­ate about ani­mals and I loved groom­ing.”

    There was only one prob­lem: PetS­mart. Groomers were pres­sured to com­plete as many dogs as pos­si­ble, through a con­stant whirl­wind of com­mo­tion and bark­ing and often ver­bal abuse and harass­ment from cus­tomers. With­out enough staff avail­able, Car­o­line some­times worked sev­en days in a row.

    Com­pa­ny pol­i­cy was sup­posed to pro­hib­it groom­ing dogs with seizure dis­or­ders or those that couldn’t han­dle the stress­ful envi­ron­ment. Man­agers in Murfrees­boro con­tin­u­al­ly pushed Car­o­line to groom them any­way. “Some can die in the ken­nel from stress,” she said. “One dog was ter­ri­fied of the dry­er, and they want­ed me to dry her straight through. They said, ‘Fig­ure it out.’”

    For some­one who loved to be around ani­mals, inflict­ing pain on dogs for a liv­ing was a night­mare, Car­o­line told me. “Every day when I was dri­ving to work, I was hop­ing for a car acci­dent so I didn’t have to go in. I talked to friends about it, they said, ‘Yeah, that was my thought too.’”

    Before going to the acad­e­my, PetS­mart made groomers sign a two-year con­tract, with­out the abil­i­ty to work for any rivals. Car­o­line approached her dis­trict man­ag­er and said, “I want out of my con­tract. You didn’t give me the train­ing I need­ed and you made this expe­ri­ence so bad.” Amaz­ing­ly, the dis­trict man­ag­er ripped up the con­tract.

    She went on to Pet­co, where things are a bit bet­ter. But if Car­o­line gets her way, she won’t be there very long either. She has a vision of going out on her own as an inde­pen­dent groomer. A friend of hers just rigged up a mobile groom­ing van and has seen the busi­ness take off.

    “That is all I can ever think about,” she said. “It’s the dream. That’s how you can make an amaz­ing life for your­self.”

    IN SEPTEMBER, 4.43 mil­lion work­ers fol­lowed Car­o­line Potts’s lead and quit their job, a new record high. That rep­re­sents 3 per­cent of the Amer­i­can work­force leav­ing their jobs, after 2.9 per­cent quit in August. In low­er-wage sec­tors like leisure and hos­pi­tal­i­ty and food ser­vices and accom­mo­da­tion, the num­bers were as high as 6.6 per­cent, around 1 in every 15 work­ers.

    Things could accel­er­ate from there. Accord­ing to a July sur­vey from the Soci­ety for Human Resource Man­age­ment, 41 per­cent of U.S. work­ers are either active­ly search­ing for a new job, or plan­ning to do so in the next few months. Two-thirds of those search­ing have con­sid­ered a career change, rather than mov­ing with­in their indus­try. Bankrate’s job seek­er sur­vey in August found even more tur­bu­lence; 55 per­cent of the work­force said they would like­ly look for a new job in the next year.

    This trend has been char­ac­ter­ized as the Great Res­ig­na­tion, and just about every econ­o­mist and pun­dit has tak­en their crack at teas­ing out why it’s hap­pen­ing. Expla­na­tions have includ­ed health and safe­ty fears, child care needs, a tight labor mar­ket, boost­ed sav­ings from stim­u­lus funds or reduced abil­i­ty to spend mon­ey on bars and movies, enhanced unem­ploy­ment ben­e­fits, increas­es in busi­ness for­ma­tion, desire to work from home, ear­ly retire­ments, restric­tions on immi­gra­tion, demo­graph­ic shrink­ing of the prime-age work­force, and my per­son­al favorite, expec­ta­tions of a labor short­age cre­at­ing a labor short­age.

    Some of these ideas have mer­it, though none can quite explain every­thing. In these moments, it’s best to actu­al­ly ask the work­ers them­selves. I did that, talk­ing to dozens of peo­ple who have recent­ly quit their job, or experts who close­ly track work­ers who have. And some pat­terns emerged.

    Work at the low end of the wage scale has become ghast­ly over the past sev­er­al decades. With no mean­ing­ful improve­ments in fed­er­al labor pol­i­cy since the 1930s, employ­ers have accrued tremen­dous pow­er. Work­ers were afraid to voice any dis­ap­proval, tak­ing what­ev­er scraps they could get. “The U.S. needs a reset, needs a big push, to get to a place where work is more secure and liv­able for a lot of the pop­u­la­tion,” said MIT econ­o­mist David Autor, who has tracked the mis­ery of Amer­i­can dein­dus­tri­al­iza­tion and the shock of China’s rise as a man­u­fac­tur­ing pow­er­house.

    The pan­dem­ic func­tioned as that reset, cre­at­ing a men­tal escape hatch from the immis­er­a­tion and even dan­ger of ordi­nary work. If you call some­one an “essen­tial work­er” for long enough, they start to believe it. They start to won­der whether they deserve more, giv­en their essen­tial nature. Gain­ing courage from social media, the most vul­ner­a­ble peo­ple in Amer­i­ca have start­ed the clos­est thing we’ve seen in a cen­tu­ry to a gen­er­al strike.

    For now, it’s work­ing to deliv­er high­er wages and bet­ter con­di­tions. But from my talks with work­ers, they’re real­ly seek­ing some­thing more inef­fa­ble than a cou­ple more bucks an hour. Work is the largest time block of the day, in a moment where we’ve all learned how pre­cious time can be. Peo­ple sim­ply want to spend that time get­ting the dig­ni­ty and respect denied to them for so long.

    WORKERS ARE QUITTING ACROSS the labor force; peo­ple I’ve talked to range from min­i­mum-wage employ­ees to senior exec­u­tives. But quit rates and job-to-job tran­si­tions in the Great Res­ig­na­tion are most­ly tak­ing place among work­ers with less than a high school edu­ca­tion, whose dai­ly toil is typ­i­cal­ly spent in dead-end low-wage jobs, an engine for cor­po­rate prof­its that pro­duces some of the grim­mer exis­tences in the indus­tri­al­ized world.

    The par­tic­u­lars of low-wage work have been well doc­u­ment­ed for years: stag­nant wages, short staffs, poor con­di­tions, errat­ic sched­ules, no ben­e­fits, over­bear­ing man­agers, and the con­stant fear of los­ing your job. The low-wage work­er must fend off thieves who are writ­ing their pay­checks; a 2014 report from the Eco­nom­ic Pol­i­cy Insti­tute esti­mates that wage theft steals $50 bil­lion from low-wage work­ers every year. The unique­ly Amer­i­can inno­va­tion of con­stant work­er sur­veil­lance, per­fect­ed by Ama­zon, now has work­ers’ every move tracked, every ounce of per­for­mance mea­sured, every slip pun­ished. All for 15 bucks an hour, if you’re lucky.

    The point of this is to deliv­er low­er prices and high­er prof­its on the backs of labor exploita­tion. Low-wage employ­ers rely on an end­less reserve of des­per­ate work­ers will­ing to break their backs for a pit­tance. Unsus­tain­able wages are a prob­lem for gov­ern­ment ben­e­fit pro­grams. High turnover is not a prob­lem as long as there’s one more job appli­ca­tion in the door.

    As of 2020, near­ly one-quar­ter of U.S. jobs were low-wage, the high­est per­cent­age in the devel­oped world. “We think it has to be this way,” said Autor. “But look at peer coun­tries, it doesn’t fit. All have ris­ing edu­ca­tion­al attain­ment and drops in work­er pow­er. But many have high­er wages and low­er eco­nom­ic inse­cu­ri­ty at the low end of the spec­trum.”

    Over­fi­nan­cial­iza­tion has added to the pain. More than 11.7 mil­lion U.S. work­ers, most of them low-wage, now work for com­pa­nies owned by pri­vate equi­ty firms. (One of those work­ers was Car­o­line Potts; PetS­mart is owned by BC Part­ners.) With a busi­ness mod­el of extract­ing as much cash out of port­fo­lio busi­ness­es as pos­si­ble, pri­vate equi­ty has turned even more jobs into low-wage night­mares.

    For exam­ple, Ed Gadom­s­ki worked at Water­bury Hos­pi­tal in Con­necti­cut, in the IT depart­ment, for 32 years before Leonard Green & Part­ners, a Los Angeles–based pri­vate equi­ty firm, took over. “In the first year, lay­offs became a house­hold word,” Gadom­s­ki said. “Longevi­ty employ­ees were par­tic­u­lar­ly tar­get­ed.” He lost his job in July 2020 and was offered it back at just $13.46 an hour, just one-third of his pre­vi­ous salary, with­out health insur­ance or retire­ment accounts. He declined the offer; now an out­side con­trac­tor has his job. “The fear among the cur­rent hos­pi­tal work­ers is that Leonard Green will out­source depart­ment by depart­ment and there’s noth­ing we can do about it,” he lament­ed.

    The pan­dem­ic took the drudgery of low-wage work and turned it up sev­er­al notch­es. In the ini­tial phase, retail and restau­rant estab­lish­ments laid off every­one and shut down. But essen­tial busi­ness­es, as the say­ing goes, con­tin­ued on, off­set­ting the risk of viral expo­sure with a few bucks of haz­ard pay, if that. “I worked the entire pan­dem­ic as an essen­tial work­er and got a T‑shirt out of it,” Collin Keehn, a beer sales rep­re­sen­ta­tive in Harp­er Woods, Michi­gan, told me.

    You can mea­sure a worker’s worth by how they were treat­ed in the pan­dem­ic. Reina Abra­ham­son of Salem, Ore­gon, was a cus­tomer ser­vice rep­re­sen­ta­tive with the cred­it card divi­sion of Wells Far­go. A trans­gen­der woman, she had med­ical issues and asked to work from home. But Wells Far­go would only pro­vide a 50-foot net­work cable, too small to hard­wire from the DSL router to where Reina could per­form her job. “I was like, ‘Can we get approval for a 100-foot cable?’” Abra­ham­son explained. “So [the man­ag­er] put in the request, and six months lat­er he got approval. I was on leave for that six months.” The leave offered a min­i­mum salary, but Abra­ham­son couldn’t acquire bonus­es for qual­i­ty assur­ance, which com­prised a sig­nif­i­cant chunk of her take-home pay. She end­ed up dri­ving for Door­Dash to pick up extra cash.

    Zel­la Roberts had a sep­a­rate prob­lem while work­ing as a carhop at a Son­ic in Asheville, North Car­oli­na (anoth­er pri­vate equity–owned firm, part of the Roark Cap­i­tal empire). Cus­tomers ordered either though an app or through a device at the dri­ve-in stalls. When she got there, nei­ther option gave any way for cus­tomers to tip carhops when pay­ing with a cred­it card. And yet Roberts was mak­ing a tipped min­i­mum wage of $5 an hour. Not only was she exposed to hun­dreds of unmasked cus­tomers, she was doing it for an ille­gal wage, only allowed because it was sup­posed to be sub­si­dized through an impos­si­ble pay­ment. “The busi­ness mod­el seems to be depen­dent on pay­ing their hard­work­ing staff pover­ty wages,” Roberts said. “It was awful know­ing I had to go in every day, risk­ing my life for five bucks an hour.”

    Health and safe­ty in the work­place went from an after­thought to an all-con­sum­ing fear. Stephanie Haynes, a sorter at an Ama­zon ware­house in Joli­et, Illi­nois, who lost her fiancé to COVID, not­ed that she would have to team up to break down a pal­let of goods with a co-work­er. “A pal­let isn’t six feet,” she said. Ama­zon wouldn’t tell ware­house staff when col­leagues con­tract­ed COVID; Haynes had to find out from friends. She walked out at the end of March 2020 and didn’t come back until July.

    “In the begin­ning, we didn’t receive no masks,” said Mon­i­ca Moody, at the time a pack­er at an Ama­zon ware­house near Char­lotte, North Car­oli­na. When Moody start­ed talk­ing to reporters about the con­di­tions, she was fired. She start­ed dri­ving for a sub­sidiary of Ama­zon, where the explo­sion of peo­ple want­i­ng home deliv­er­ies, and con­tin­ued sur­veil­lance to hit work rates, made the job unbear­able. “At my facil­i­ty alone, each dri­ver was get­ting over 300 pack­ages,” Moody said. “Imag­ine get­ting to work at 11, in the mid­dle of sum­mer, load my van, go get 300 pack­ages, and get 300 pack­ages out. I’m being over­worked and under­paid.”

    A study from the Uni­ver­si­ty of Cal­i­for­nia, San Fran­cis­co found that the pro­fes­sions see­ing the high­est num­ber of work­ing-age deaths from COVID-19 were cooks, ware­house line work­ers, agri­cul­tur­al work­ers, bak­ers, and con­struc­tion work­ers. All of them are low-wage jobs with inevitable con­tact with co-work­ers. Employ­ers knew this and saw it as an accept­able loss. A law­suit last year alleged that Tyson Foods man­agers in Water­loo, Iowa, placed bets on which of the plant’s meat­pack­ing assem­bly-line work­ers would con­tract COVID.

    When lock­downs end­ed and patrons final­ly start­ed to return, low-wage work­ers had a new role: police­men. Stir-crazy from months at home, cus­tomers came out angry, with many resist­ing face mask or vac­ci­na­tion poli­cies. Front­line work­ers, with no train­ing in con­flict res­o­lu­tion, had to enforce these poli­cies, thrust into the heart of the cul­ture wars. The jobs were bad enough before the ten­sion and hos­til­i­ty. Now, the pitched bat­tles, the fight­ing and shout­ing, thud­ded against the brain­pans of already stressed-out work­ers.

    “It’s a hor­ri­ble place to work,” said Sara Nel­son, pres­i­dent of the Asso­ci­a­tion of Flight Atten­dants union, about her own pro­fes­sion, which has seen some of the most high-pro­file inci­dents of rage. This is a job with union sup­port push­ing peo­ple to such a lim­it that one flight atten­dant told The New York Times, “I don’t even feel like a human any­more.” Imag­ine how those with no such help feel.

    Once you under­stand what work­ers are going through, then you can see the pan­dem­ic as kin­dling for a fire. As my col­league Harold Mey­er­son recent­ly wrote, the two largest strike waves in Amer­i­can his­to­ry occurred in 1919 and 1946—right after World Wars I and II, when infantry­men returned from Europe hailed as heroes and then found that their jobs were sig­nif­i­cant­ly less than hero­ic. They rebelled against menial work inap­pro­pri­ate to their sac­ri­fice. Today’s low-wage work­ers, shat­tered by col­lec­tive trau­ma, have sim­i­lar­ly been punched once too often, after being exalt­ed all too briefly as America’s back­bone.

    LETICIA REYES of Sacra­men­to, Cal­i­for­nia, has been on strike twice. But she doesn’t belong to a union; she works at a Jack in the Box fran­chise.

    The first strike was due to mal­func­tion­ing air con­di­tion­ing amid a his­toric heat wave, caus­ing tem­per­a­tures in the kitchen to rise as high as 109 degrees. “We asked the man­ag­er to fix it,” Reyes told me through an inter­preter (her pri­ma­ry lan­guage is Span­ish). “The first time, she wouldn’t lis­ten to us, she ignored us. The sec­ond time, she told us it wasn’t high tem­per­a­tures, it was us work­ers going through menopause.”

    Reyes had nev­er orga­nized any­one before. Her col­leagues were con­stant­ly told that they could have their hours cut, that they could lose their job. But her manager’s dis­re­spect moti­vat­ed her to try. The shift work­ers at Jack in the Box unit­ed, and with help from North­ern Cal­i­for­nia Fight for $15, they walked out. They not only got the air con­di­tion­ing fixed, they got the man­ag­er fired.

    But low-wage work in Amer­i­ca requires eter­nal vig­i­lance. Reyes and her col­leagues weren’t get­ting their required ten-minute breaks, or lunch breaks or over­time, while toil­ing in per­il dur­ing the pan­dem­ic. They decid­ed to strike again for three days. “On the sec­ond day, the own­er decid­ed to meet with us. He said he was los­ing a lot of mon­ey,” Reyes said. “The own­er and a few oth­er peo­ple, they actu­al­ly opened the store and were prepar­ing the food them­selves. It made them real­ize that they need us.” When the work­ers returned, they start­ed get­ting their breaks and their over­time, and more pay as well.

    ...

    The Sacra­men­to Jack in the Box is just one among a shock­ing­ly high num­ber of pan­dem­ic-era walk­outs at non-union work­places. These small mass actions are the corol­lary to mil­lions of indi­vid­ual actions of work­ers shov­ing off, unafraid of the con­se­quences. A switch has gone off. “The pan­dem­ic acti­vat­ed this latent inse­cu­ri­ty that was grow­ing as a result of the gig econ­o­my, in which no one is an employ­ee,” said Michael Duff, a for­mer Team­ster who now teach­es at St. Louis Uni­ver­si­ty School of Law. “If work is so bad, I will do any­thing to not do it. What do you have to lose, your crap­py, dan­ger­ous gig job?”

    Mike Elk, a labor jour­nal­ist and founder of Pay­day Report, has been track­ing strikes on an inter­ac­tive map since the onset of the pan­dem­ic, in March 2020. He has count­ed over 1,600 sep­a­rate walk­outs, in places like a donut shop in Kansas, or an IHOP in North Car­oli­na, or a tor­tilla plant in Illi­nois. Near­ly 100,000 work­ers have been involved. Every oth­er day, it seems, there’s a strike at McDonald’s or Instacart or some oth­er avatar of low-wage Amer­i­ca. A sign out­side a Burg­er King in Lin­coln, Nebras­ka, went viral for its mes­sage: “We all quit. Sor­ry for the incon­ve­nience.”

    The real num­ber of walk­outs is like­ly even high­er, as they are often uncov­ered by local media. “We check viral stuff on Tik­Tok,” Elk said. “You see teenage Black kids who say, ‘Let’s roll out’; we want­ed to put it on the strike track­er but we can’t do it because we didn’t know where.”

    This is where the Great Res­ig­na­tion meets the dig­i­tal age. Walk­out signs post­ed out­side busi­ness­es rou­tine­ly go viral, feed­ing a near-insa­tiable anger with low-wage work. #Quit­MyJob videos have been trend­ing on social media sites for more than a year. On any giv­en day, a nurse, an office drone, a Foot Lock­er clerk, or a preschool teacher (“Life’s too short to be stuck”) can be seen tak­ing the jump. Though the act of quit­ting is often indi­vid­ual, social media col­lec­tivizes it, cre­at­ing com­mu­ni­ty from an atom­ized and dis­lo­cat­ed work­force. In a splen­did dialec­tic, the same dig­i­tal tech­nol­o­gy that facil­i­tates speedup and sec­ond-by-sec­ond mon­i­tor­ing by the boss facil­i­tates acts of col­lec­tive con­scious­ness, orga­niz­ing, and rebel­lion.

    ...

    DESPITE OFFERING WAGES that would have attract­ed peo­ple a cou­ple of years ear­li­er, employ­ers get no tak­ers, and have to do the job them­selves. This bit of come­up­pance has popped up occa­sion­al­ly on social media dur­ing the cur­rent labor short­age. But it was also found in a cathe­dral pri­o­ry chron­i­cle of 14th-cen­tu­ry Rochester, Eng­land. “Such a short­age of work­ers ensued that the hum­ble turned up their noses at employ­ment,” reads the account. “As a result, church­men, knights and oth­er wor­thies have been forced to thresh their corn, plough the land and per­form every oth­er unskilled task if they are to make their own bread.”

    This was the time of the Black Death, which in its most high­ly affect­ed areas wiped out half the pop­u­la­tion between 1347 and 1351. The extreme labor short­age gave serfs and peas­ants, who worked the land for the wealthy, pow­er they had nev­er seen before in their lives: the abil­i­ty to bar­gain for cash wages, low­er rent, less haz­ardous con­di­tions. They could find oppor­tu­ni­ties at arti­sanal craft guilds in the cities, or just at the neigh­bor­ing lord’s vil­lage. They could use the mar­ket for labor to pick and choose their cir­cum­stances, for the first time.

    Chris­tine John­son, the his­to­ry pro­fes­sor at Wash­ing­ton Uni­ver­si­ty, St. Louis who unearthed that chron­i­cle, told me that a mem­ber of the high­er class­es going into the fields was such a “dread­ful pos­si­bil­i­ty” that few actu­al­ly car­ried it out. Since sub­vert­ing the social hier­ar­chy was unthink­able, lords could only grum­ble at this turn of affairs.

    “The thing that you see so often today is ‘Why won’t these peo­ple work for $14, $15 an hour?’” said Spencer Strub, an asso­ciate research schol­ar at the Human­i­ties Coun­cil at Prince­ton Uni­ver­si­ty. “You see the same thing from chron­i­cles of these abbeys, the major employ­ers of the day. ‘They aren’t work­ing for what they worked for two years ago.’ It’s a mor­al­ized state­ment that they are lazy, uppi­ty, have for­got­ten their place in the nat­ur­al order.”

    Where exas­per­a­tion failed, the nobil­i­ty appealed to the gov­ern­ment. England’s 1349 Ordi­nance of Labour­ers, lat­er cod­i­fied into statute as the nation’s first labor law, set wage con­trols in rur­al areas at pre–Black Death lev­els, restrict­ing the abil­i­ty to bar­gain for more pay. (It also includ­ed price con­trols, so no excess prof­its would fol­low.) Every­one under the age of 60 was required to work, in bound­ed con­tracts if they were unpledged, against penal­ty of impris­on­ment. “If you were found to be free of employ­ment, I can com­pel your ser­vice for a year at the 1346 pre­vail­ing wage,” John­son said. Serfs could not depart their lord to seek out a bet­ter deal. And no employ­ers could hire “excess” work­ers, allow­ing the labor pool to be spread even­ly.

    Final­ly, the ordi­nance sought to lim­it prac­ti­cal­ly the only form of social wel­fare avail­able: beg­gars who fre­quent­ed funer­als to receive alms from the rich. “Because that many valiant beg­gars … do refuse to labor, giv­ing them­selves to idle­ness and vice,” the ordi­nance read, “none upon the said pain of impris­on­ment shall, under the col­or of pity or alms, give any thing to such … so that there­by they may be com­pelled to labor for their nec­es­sary liv­ing.”

    It was an auda­cious move to pre­vent com­pe­ti­tion among landown­ers for scarce work­ers, and to main­tain the pre­vail­ing social order and keep the serfdom’s new­found pow­er tamped down. It was also a fail­ure. “We know that employ­ers would pay more, they would cook the books,” John­son said. “Landown­ers would say, ‘We will pay you more but we don’t want it acknowl­edged offi­cial­ly.’” Employ­ers in the city of Lon­don set high­er wages despite being express­ly for­bid­den. Thou­sands of cas­es with local jus­tices of the peace show an unwill­ing­ness from the low­er orders to sub­mit to the ordi­nance. Peo­ple refused com­pelled ser­vice; in one case, an indi­vid­ual claimed he could not be tak­en into ser­vice by anoth­er because he was already a serf.

    “A poem I study is Piers Plow­man,” said Strub. “There are scenes about work­ing in the fields, and they just stop: I’m not going to work in the fields unless you pay me a real wage, give me the real food.” This prim­i­tive sit-down strike was a recog­ni­tion of real work­er pow­er, despite a heavy-hand­ed effort to snuff it out.

    The peasantry’s refusal to accept sup­pres­sion led many landown­ers to sell off small plots to the low­er class­es. Even­tu­al­ly, this cre­at­ed a ris­ing mid­dle class, an entre­pre­neur­ial explo­sion, and the end of feu­dal­ism, accord­ing to some his­to­ri­ans. Real incomes dou­bled in Europe over the next sev­er­al years. And this is what we’d expect from such a cat­a­clysmic event, actu­al­ly. An April 2020 work­ing paper from the Nation­al Bureau of Eco­nom­ic Research sur­veyed 19 pan­demics stretch­ing back to the Black Death, find­ing that real wages con­sis­tent­ly went up and the return on cap­i­tal con­sis­tent­ly went down, some­thing not par­al­leled in sim­i­lar­ly trau­mat­ic events like wars. Pan­demics are a lev­el­er for inequal­i­ty.

    What’s most inter­est­ing about this find­ing is that it holds even absent orga­nized mass action; in Eng­land, the Statute of Labour­ers remained most­ly in force, with revi­sions, through­out a peri­od of high­er wages and rel­a­tive pros­per­i­ty. The change was more infor­mal, seen in an ad hoc under­cur­rent of com­mo­tion, with peas­ants learn­ing amongst them­selves who pays more and who needs labor. It is a social move­ment as much as it is a polit­i­cal one.

    How­ev­er, the rise of indus­tri­al cap­i­tal­ism led to a new cycle of repres­sion of work­ers. As small farm­ers were dri­ven off the land, the British Par­lia­ment in the 1830s “reformed” the Eliz­a­bethan poor laws that had pro­tect­ed peas­ants from des­ti­tu­tion, took away ben­e­fits, and com­pelled peo­ple to work in fac­to­ries for the going wage or be sent to the work­house. Will today’s work­ers be more like those of an ear­li­er age, who used scarci­ty to increase rights and earn­ings, or will they end up exploit­ed like those of more recent years?

    THE PARALLELS BETWEEN 14th-cen­tu­ry Europe and the present day are down­right eerie—and hope­ful. A cat­a­stro­phe cre­ates new oppor­tu­ni­ties and a new mind­set for work­ers, and the employ­er class can’t take it.

    First, like the Eng­lish aris­toc­ra­cy, employ­ers added a few scraps to attract work­ers, and then more and more. The Body Shop dropped its edu­ca­tion­al require­ments, back­ground checks, and work expe­ri­ence for new hires. UPS now makes offers after appli­cants fill out a ten-minute online ques­tion­naire. One pizze­ria in Alaba­ma announced it would “lit­er­al­ly hire any­one.”

    Bid­ding wars for peo­ple tran­si­tion­ing to new jobs are rou­tine. Min­i­mum wages at a num­ber of retail estab­lish­ments are ris­ing, and the aver­age wage at restau­rants and gro­cery stores just hit $15 an hour. Star­bucks has raised aver­age pay to $17 an hour. Flight atten­dants work­ing hol­i­day shifts at Amer­i­can Air­lines are earn­ing as much as triple pay. Wage growth over­all in the key low-wage leisure and hos­pi­tal­i­ty sec­tor is at 12.4 per­cent year-over-year, well above even the ele­vat­ed rate of infla­tion.

    Ama­zon is now dan­gling free col­lege tuition for its work­ers, as are Macy’s, Wal­mart, Tar­get, and sev­er­al oth­er retail­ers. Tyson Foods has exper­i­ment­ed with offer­ing 40 hours of pay for 36 hours of work. Oth­er meat­pack­ing com­pa­nies are offer­ing $3,000 sign­ing bonus­es; a hos­pi­tal net­work offered $40,000 up front for nurs­es.

    When few of these tac­tics actu­al­ly worked to fill open posi­tions, the mood soured, and grum­bling busi­ness own­ers fol­lowed the lead of their 14th-cen­tu­ry brethren; they tried to use the law to force peo­ple to work. Over the sum­mer, 25 states end­ed enhanced unem­ploy­ment ben­e­fits ear­ly, on the the­o­ry that this would starve peo­ple back into the work­place. As in the after­math of the Black Death, it didn’t work; sta­tis­tics show that states that end­ed UI had essen­tial­ly no dif­fer­ence in pay­roll growth com­pared with states that kept it going until Sep­tem­ber.

    Repub­li­can law­mak­ers, infu­ri­at­ed by any stir­rings of work­er pow­er, went to more extreme lengths. Wisconsin’s state Sen­ate passed a bill in Octo­ber to allow 14-year-olds to work as late as 11 p.m.; Ohio soon fol­lowed suit. Busi­ness­es start­ed adver­tis­ing for young teenagers to work in their fast-food stores. Rather than offer decent jobs, employ­ers and their allies in gov­ern­ment would rather roll back the 20th cen­tu­ry. That’s not like­ly to work either; younger work­ers have been instru­men­tal to non-union walk­outs.

    And then there’s the ever-present specter of robots tak­ing all the jobs, some­thing raised every time work­ers find them­selves in a decent bar­gain­ing posi­tion. This also hap­pened in the medieval post-pan­dem­ic peri­od, with advance­ments in small­er sail­ing ships, the print­ing press, and oth­er labor-sav­ing devices. Such enhance­ments to pro­duc­tiv­i­ty should be wel­comed, as long as every­one ben­e­fits from them.

    Despite employ­ers’ mea­ger efforts, quits keep ris­ing, buoyed by a few fac­tors. The endurance of the delta vari­ant con­tin­ues to keep a sub­set of work­ers off the job, reduc­ing the avail­able labor sup­ply. Mil­lions of par­ents are stay­ing home to watch their chil­dren, though that’s a chick­en-and-egg sce­nario; one major rea­son for the cri­sis involves how many child care work­ers have quit. There are 108,000 few­er work­ers in the field than in Feb­ru­ary 2020, accord­ing to a Uni­ver­si­ty of Cal­i­for­nia, Berke­ley analy­sis.

    Peo­ple do still have mon­ey in the bank from the var­i­ous COVID relief pro­grams, includ­ing three stim­u­lus checks and expand­ed unem­ploy­ment insur­ance. Com­bined with the forced sav­ings of a lot of places not being open for months, it totals extra sav­ings of rough­ly $2.4 tril­lion, giv­ing peo­ple time to make career deci­sions. “I’ve always felt that if you give work­ing peo­ple the abil­i­ty to sur­vive, you give them a choice,” said St. Louis University’s Michael Duff.

    We’re also see­ing a thin­ner labor force, from an aging soci­ety and severe Trump-era restric­tions on immi­gra­tion. Over two mil­lion more work­ers retired dur­ing the pan­dem­ic than would have been expect­ed. All of this tips the bal­ance in favor of those remain­ing in the labor mar­ket.

    Employ­ers, seem­ing­ly, have only put for­ward car­rots or sticks, when work­ers are seek­ing some­thing more. Mark Boli­no, a busi­ness pro­fes­sor at the Uni­ver­si­ty of Okla­homa, talks about a “psy­cho­log­i­cal con­tract” that work­ers have rewrit­ten. “His­tor­i­cal­ly, from the 1950s on, we had more of a rela­tion­al psy­cho­log­i­cal con­tract,” Boli­no told me. “You look out for the com­pa­ny and the com­pa­ny will look out for you. In the ’80s, there was a shift to a more trans­ac­tion­al psy­cho­log­i­cal con­tract. We’ll look out for our inter­ests and you will too.”

    That trans­ac­tion­al con­tract worked for employ­ers when they had work­ers essen­tial­ly trapped, with few options for escape. But in the cur­rent envi­ron­ment, “work­ers are rene­go­ti­at­ing the terms of the con­tract, and employ­ers aren’t equipped for that,” Boli­no said. What is on that list for rene­go­ti­a­tion, I asked Boli­no. “I do sense, anec­do­tal­ly, that peo­ple want mean­ing.”

    ...

    Have the scales fall­en from the eyes of the low-wage work­force? Will this change be per­ma­nent? Will the expan­sion of low-wage ser­vice work, rel­a­tive to Europe and oth­er indus­tri­al­ized nations, snap back and cor­rect itself?

    These trends are real­ly pos­i­tive for work­ers’ finan­cial and emo­tion­al well-being. Plus, it’s hard to roll back wages once they’ve been deliv­ered, at least in the imme­di­ate term. And many of the enhance­ments to hir­ing might prove pop­u­lar enough that com­pa­nies will need to keep them around. But ulti­mate­ly, social trans­for­ma­tions are hard to sus­tain. The rush of the Great Escape is enliven­ing, and could sig­nal a real shift in how peo­ple want to be treat­ed. But it’s most­ly an indi­vid­ual action. The loose con­fed­er­a­tion of social media and mar­ket forces can­not sub­sti­tute for a strong labor move­ment that brings col­lec­tive pow­er to entire work­places and sec­tors.

    As it hap­pens, labor unions are in the midst of their own walk­out wave, trig­gered by the same lev­el of degra­da­tion and pan­dem­ic haz­ardous­ness on the job as the rest of the work­force. Hun­dreds of strikes in 2021 have been iden­ti­fied by researchers at Cor­nell Uni­ver­si­ty, a pal­try num­ber his­tor­i­cal­ly but a spike of action com­pared to recent years. More impor­tant for the future of a des­ic­cat­ed labor move­ment, orga­niz­ing in new busi­ness­es, like a Dol­lar Gen­er­al in Con­necti­cut and a Star­bucks in Buf­fa­lo, sug­gests a moment for union expan­sion, buoyed by stronger pub­lic sen­ti­ment and anger at the expe­ri­ence of work. That this expan­sion is root­ed in low-wage ser­vice work seems appro­pri­ate for the moment.

    What’s notable is that rank-and-file union mem­bers are the ones uni­lat­er­al­ly shut­ting down work­places, and even reject­ing con­tracts nego­ti­at­ed by their own lead­er­ship. There’s a lev­el of dis­trust and dis­ap­point­ment in the sta­tus quo among work­ers that extends even to their elect­ed rep­re­sen­ta­tives in unions.

    I asked Sara Nel­son of the Asso­ci­a­tion of Flight Atten­dants what the labor move­ment should be doing to sup­port the record-high quit rate in the low-wage econ­o­my. “We have a short peri­od of time here to lock this in,” she replied. “We should be look­ing where we should be strik­ing for recog­ni­tion. If you have peo­ple who are com­plete­ly ready to walk off the job, why wouldn’t we run in there with every­thing we have to tell them to take on the boss, and get a bet­ter job for the long term? If you’re will­ing to walk, let’s make sure every­one else is will­ing, strike for recog­ni­tion and find your demands, and you get your con­tract overnight!” She relat­ed it to the sit-down strikes of 1934 that helped lead to the Con­gress of Indus­tri­al Orga­ni­za­tions. The CIO’s will­ing­ness to fight to open up new work­sites that year set it apart from an Amer­i­can Fed­er­a­tion of Labor that didn’t want to com­mit the resources.

    With­out such an action, the labor move­ment is sim­ply too small to dri­ve labor changes on its own. It needs to orga­nize many, many more work­ers to get to a lev­el of coun­ter­vail­ing force. Gov­ern­ment has also failed to cap­i­tal­ize on this shift thus far. Changes in labor law that would fine employ­ers for unfair labor prac­tices for the first time are slat­ed for pas­sage in Joe Biden’s Build Back Bet­ter Act, and that would help. But the aggres­sion Nel­son iden­ti­fied would have to be fol­lowed through by a labor move­ment that isn’t in the habit of con­duct­ing orga­niz­ing on the scale need­ed, and doesn’t have the resources avail­able to get it done.

    Non-union work­ers can say no, maybe for a while. But with­out the resources and sup­port of an orga­nized work­force, they will not make endur­ing changes. The labor short­ages that yield­ed pros­per­i­ty and choice out of the Black Death did not uni­form­ly reach all soci­eties strick­en by the dis­ease. Author­i­tar­i­an East­ern Europe and Rus­sia main­tained serf­dom for cen­turies after the plague, stunt­ing eco­nom­ic devel­op­ment in those regions. And even the gains in West­ern Europe didn’t com­plete­ly sur­vive as the labor sit­u­a­tion shift­ed.

    “More impor­tant for the long-term pos­si­bil­i­ties and oppor­tu­ni­ties than indi­vid­ual deci­sions or a mass inchoate move­ment, you need to make sure you have a rec­og­nized voice in deci­sion-mak­ing going for­ward,” said Chris­tine John­son. “If you don’t actu­al­ly change the struc­tures of pow­er, and you don’t actu­al­ly enact some changes in the labor and social hier­ar­chies, it’s not going to pro­duce last­ing improve­ment in con­di­tions of labor.”

    In the mean­time, Car­o­line Potts still day­dreams at her job of a bet­ter life. “We have just been neglect­ed and for­got­ten and used and abused by the cor­po­ra­tions,” she said. “I think I would walk out now, and even if I had no mon­ey, it would be 10,000 times bet­ter.”

    ———–

    “Why work­ers are quit­ting their jobs, after the trau­ma of the pan­dem­ic.” by David Dayen; The Amer­i­can Prospect; 11/19/2021

    As of 2020, near­ly one-quar­ter of U.S. jobs were low-wage, the high­est per­cent­age in the devel­oped world. “We think it has to be this way,” said Autor. “But look at peer coun­tries, it doesn’t fit. All have ris­ing edu­ca­tion­al attain­ment and drops in work­er pow­er. But many have high­er wages and low­er eco­nom­ic inse­cu­ri­ty at the low end of the spec­trum.””

    Near­ly a quar­ter of US jobs were low-wage in 2020, the high­est per­cent­age in the devel­oped world. The US econ­o­my is built on a foun­da­tion of cheap labor. Cheap exploit­ed labor con­stant­ly churned from one low wage job to anoth­er with min­i­mal nego­ti­at­ing pow­er. But this isn’t just a major foun­da­tion of the US econ­o­my. It’s also the core of the pri­vate equi­ty low-wage busi­ness mod­el. A low wage busi­ness mod­el built to max­i­mized exec­u­tive pay and investor pay­outs. That giant pool of exploitable low wage labor was a key resource from which to gen­er­ate the his­tor­i­cal­ly high pri­vate equi­ty returns. The US shift­ed towards an ‘every­one for them­selves’ pri­vate equi­ty social con­tract between labor and own­er­ship in the 1980s and spent the next forty years look­ing out exclu­sive­ly for investors by tak­ing over one com­pa­ny after anoth­er and gut­ting the pay and ben­e­fits. A ruth­less extrac­tion of prof­its where pay and qual­i­ty of life of the employ­ees are seen as the raw mate­ri­als from which to extract those extra prof­its. It was all going so well. For four decades. Cre­at­ing a sea of work­ers who have noth­ing to lose.

    And then the pan­dem­ic hits. Sud­den­ly, for the first time in decades, the low-wage Amer­i­can work­ers have some real bar­gain­ing pow­er. It’s why so many of the work­ers quit­ting or, even big­ger, orga­niz­ing mass walk-offs and strikes, and walk­ing away from jobs at pri­vate equi­ty-owned com­pa­nies. Shady exploita­tion is a pri­vate equi­ty spe­cial­ty:

    ...
    Over­fi­nan­cial­iza­tion has added to the pain. More than 11.7 mil­lion U.S. work­ers, most of them low-wage, now work for com­pa­nies owned by pri­vate equi­ty firms. (One of those work­ers was Car­o­line Potts; PetS­mart is owned by BC Part­ners.) With a busi­ness mod­el of extract­ing as much cash out of port­fo­lio busi­ness­es as pos­si­ble, pri­vate equi­ty has turned even more jobs into low-wage night­mares.

    For exam­ple, Ed Gadom­s­ki worked at Water­bury Hos­pi­tal in Con­necti­cut, in the IT depart­ment, for 32 years before Leonard Green & Part­ners, a Los Angeles–based pri­vate equi­ty firm, took over. “In the first year, lay­offs became a house­hold word,” Gadom­s­ki said. “Longevi­ty employ­ees were par­tic­u­lar­ly tar­get­ed.” He lost his job in July 2020 and was offered it back at just $13.46 an hour, just one-third of his pre­vi­ous salary, with­out health insur­ance or retire­ment accounts. He declined the offer; now an out­side con­trac­tor has his job. “The fear among the cur­rent hos­pi­tal work­ers is that Leonard Green will out­source depart­ment by depart­ment and there’s noth­ing we can do about it,” he lament­ed.

    ...

    Zel­la Roberts had a sep­a­rate prob­lem while work­ing as a carhop at a Son­ic in Asheville, North Car­oli­na (anoth­er pri­vate equity–owned firm, part of the Roark Cap­i­tal empire). Cus­tomers ordered either though an app or through a device at the dri­ve-in stalls. When she got there, nei­ther option gave any way for cus­tomers to tip carhops when pay­ing with a cred­it card. And yet Roberts was mak­ing a tipped min­i­mum wage of $5 an hour. Not only was she exposed to hun­dreds of unmasked cus­tomers, she was doing it for an ille­gal wage, only allowed because it was sup­posed to be sub­si­dized through an impos­si­ble pay­ment. “The busi­ness mod­el seems to be depen­dent on pay­ing their hard­work­ing staff pover­ty wages,” Roberts said. “It was awful know­ing I had to go in every day, risk­ing my life for five bucks an hour.”

    ...

    Employ­ers, seem­ing­ly, have only put for­ward car­rots or sticks, when work­ers are seek­ing some­thing more. Mark Boli­no, a busi­ness pro­fes­sor at the Uni­ver­si­ty of Okla­homa, talks about a “psy­cho­log­i­cal con­tract” that work­ers have rewrit­ten. “His­tor­i­cal­ly, from the 1950s on, we had more of a rela­tion­al psy­cho­log­i­cal con­tract,” Boli­no told me. “You look out for the com­pa­ny and the com­pa­ny will look out for you. In the ’80s, there was a shift to a more trans­ac­tion­al psy­cho­log­i­cal con­tract. We’ll look out for our inter­ests and you will too.”

    That trans­ac­tion­al con­tract worked for employ­ers when they had work­ers essen­tial­ly trapped, with few options for escape. But in the cur­rent envi­ron­ment, “work­ers are rene­go­ti­at­ing the terms of the con­tract, and employ­ers aren’t equipped for that,” Boli­no said. What is on that list for rene­go­ti­a­tion, I asked Boli­no. “I do sense, anec­do­tal­ly, that peo­ple want mean­ing.”
    ...

    To get anoth­er sense of the scale of pri­vate equi­ty’s reliance on low-wage jobs, here’s a recent report about the dom­i­na­tion of the pri­vate-equi­ty indus­try in areas like restau­rants, hotels, and oth­er indus­tries with exploitable work­forces. As the arti­cle notes, a 2019 study by the Nation­al Bureau of Eco­nom­ic Research ana­lyzed almost 10,000 debt-fueled buy­outs between 1980 and 2013 and found that employ­ment fell by 13 per­cent when a pri­vate-equi­ty firm took over a pub­lic com­pa­ny and by 16 per­cent when pri­vate equi­ty acquired a unit or divi­sion of a com­pa­ny.

    Cru­cial­ly, as one of the study co-authors, Eileen Appel­baum, observed, the grow­ing clout of the pri­vate equi­ty indus­try isn’t just a threat to US work­ers. That same focus on short-term prof­its and extrac­tion — where the investor prof­its are pri­or­i­tized above all else — is a threat to US pro­duc­tiv­i­ty. Com­pa­nies that under­pay and abuse work­ers might to max­i­mize prof­its are doing all sorts of oth­er things that will hurt long-term pro­duc­tiv­i­ty in order to max­i­mize short-term prof­its. It’s a busi­ness mod­el focused on max­i­miz­ing pri­vate investor returns through the sys­tem­at­ic dis­man­tle­ment and divest­ments in a func­tion­ing econ­o­my and soci­ety. In oth­er words, the pri­vate-equi­ty mod­el isn’t about a health coun­ty or econ­o­my. It’s about max­i­mum prof­its. Those aren’t the same thing.

    The fol­low­ing arti­cle also includes some more infor­ma­tion on fast-food giant Roark Cap­i­tal, which owns Inspire Brands. It turns out the name Roark is a ref­er­ence to the lib­er­tar­i­an pro­ta­gan­ist in Ayn Rand’s The Foun­tain­head. It also turns out three-dozen Roark-owned com­pa­nies received $183 mil­lion in fed­er­al assis­tance under the CARES Act in response to the pan­dem­ic. Imag­ine that. It also turns out that Inspire Brands has been oppos­ing efforts to raise the fed­er­al min­i­mum wage to $15/hour every time it’s come up since first intro­duced to Con­gress in 2017. It’s a sus­tained anti-min­i­mum-wage lob­by­ing cam­paign that start­ed before the pan­dem­ic and con­tin­ues through it.

    And as the arti­cle also notes, despite all these con­cerns about pri­vate equi­ty, it con­tin­ues to grow, even as the his­toric returns have shrunk to some extent. There are now more com­pa­nies owned by pri­vate equi­ty firms than list­ed on US stock exchanges. And its shared of the US econ­o­my is only poised to grow. There’s more extract­ing to be done. So while low-wage work­ers in the US may have some short-term lever­age in the labor mar­ket, it’s going to be impor­tant to keep in mind that pri­vate equi­ty isn’t going any­where and is only going to have a big­ger slice of the labor mar­ket going for­ward, long past this pan­dem­ic and into the next one:

    NBC News

    Work­ing for com­pa­nies owned by well-heeled pri­vate-equi­ty firms can mean low­er wages for employ­ees
    Work­ers at some fast-food chains owned by pub­lic firms are get­ting bet­ter wages now. It’s a dif­fer­ent sto­ry at restau­rants owned by pri­vate-equi­ty firms.

    By Gretchen Mor­gen­son
    Oct. 9, 2021, 5:00 AM CDT

    Alma Jor­dan, a cer­ti­fied nurs­ing assis­tant at the Mar­cel­la Cen­ter nurs­ing home in Burling­ton, New Jer­sey, respect­ed the res­i­dents she cared for there over the past 16 years. They were like fam­i­ly, she said, and she believes they’ve appre­ci­at­ed her atten­tive­ness, espe­cial­ly dur­ing Covid-19.

    Not so, the nurs­ing home’s new own­er, Jor­dan said. After Com­plete Care Man­age­ment, the largest for-prof­it nurs­ing home oper­a­tor in New Jer­sey, took over the 150-bed Mar­cel­la Cen­ter in April, it slashed work­er ben­e­fits, she and oth­er employ­ees as well as a rep­re­sen­ta­tive from their union told NBC News.

    Amid the pan­dem­ic, Jordan’s paid hol­i­days were reduced, and her month­ly health insur­ance costs more than tripled, she said. The com­pa­ny stopped con­tribut­ing to the employ­ee pen­sion, replac­ing it with a 401(k) plan that had no employ­er match or con­tri­bu­tion. Com­plete Care took away vision insur­ance and stopped a reim­burse­ment pro­gram cov­er­ing employ­ee edu­ca­tion costs, so Jor­dan, 45, won’t be able to recoup mon­ey she spent work­ing toward a degree to become a licensed prac­ti­cal nurse.

    “I put all my effort into this com­pa­ny, and some­one else took over and they don’t want to give us what we deserve,” Jor­dan said. “For them, it’s busi­ness. It’s not about the staff and the res­i­dents. It’s only about mak­ing prof­its.”

    In late Sep­tem­ber, Jor­dan quit her posi­tion at the facil­i­ty. The reduced ben­e­fits and dete­ri­o­rat­ing work con­di­tions got to be too much, she said.

    When Com­plete Care came in, Jor­dan and oth­er Mar­cel­la work­ers were oper­at­ing under a union con­tract struck with the facility’s pre­vi­ous own­er. Com­plete Care did away with that con­tract, which also cov­ered four oth­er union­ized New Jer­sey nurs­ing facil­i­ties it recent­ly acquired, accord­ing to the Ser­vice Employ­ees Inter­na­tion­al Union.

    Com­plete Care owns 61 facil­i­ties in eight states, includ­ing Con­necti­cut, Mary­land and Wis­con­sin. It is backed by a pri­vate-equi­ty firm called Peace Cap­i­tal in Lake­wood, New Jer­sey, whose prin­ci­pal own­er is Sam Stein.

    Jor­dan and her fel­low work­ers are not alone in expe­ri­enc­ing reduced cir­cum­stances after their com­pa­ny is tak­en over by a pri­vate-equi­ty firm. The new titans of finance, these firms use large pools of debt — typ­i­cal­ly raised in what’s called the lever­aged loan mar­ket — to acquire com­pa­nies they hope to resell in a few years at a prof­it. Among com­pa­nies rais­ing mon­ey in this loan mar­ket dur­ing the past three years, debt lev­els at pri­vate-equi­ty-backed enti­ties were at least 30 per­cent high­er than debt lev­els at com­pa­nies not backed by pri­vate equi­ty, accord­ing to LCD, a unit of S&P Glob­al Mar­ket Intel­li­gence.

    But the heavy debt loads they take on, com­bined with pres­sure to flip acquired com­pa­nies quick­ly, increas­es the like­li­hood that pri­vate-equi­ty firms will have to cut costs in the oper­a­tions that they buy. Often, the first to the chop­ping block is the company’s work­force.

    A 2019 study by the Nation­al Bureau of Eco­nom­ic Research lays this out. Researchers ana­lyzed almost 10,000 debt-fueled buy­outs between 1980 and 2013 and found that employ­ment fell by 13 per­cent when a pri­vate-equi­ty firm took over a pub­lic com­pa­ny. Employ­ment declined by even more — 16 per­cent — when pri­vate equi­ty acquired a unit or divi­sion of a com­pa­ny.

    Eileen Appel­baum is an econ­o­mist and co-direc­tor at the Cen­ter for Eco­nom­ic and Pol­i­cy Research, a pro­gres­sive think tank, and co-author of “Pri­vate Equi­ty at Work: When Wall Street Man­ages Main Street.” Her study of pri­vate equi­ty has led her to con­clude that the industry’s grow­ing clout is not only a con­cern for work­ers, but also has the poten­tial to harm the nation’s broad­er econ­o­my.

    “You have a lot more own­er­ship of pro­duc­tive resources by investors who don’t know an indus­try, don’t under­stand the val­ue of skilled work­ers and who are just in it to make their prof­it and get out,” Appel­baum said. “That erodes pro­duc­tiv­i­ty.”

    Almost 12 mil­lion employ­ees, or rough­ly 7 per­cent of the U.S. labor force, work for pri­vate-equi­ty-backed busi­ness­es, accord­ing to the Amer­i­can Invest­ment Coun­cil, an indus­try lob­by­ing group. These com­pa­nies gen­er­at­ed about 6.5 per­cent of the nation’s gross domes­tic prod­uct last year, the group said.

    The coun­cil said pri­vate-equi­ty firms cre­ate jobs, sup­port busi­ness­es and help pro­vide com­fort­able retire­ments for pen­sion­ers invest­ed in the strat­e­gy.

    A spokes­woman for Com­plete Care echoed this view. She said the com­pa­ny is com­mit­ted to the long-term via­bil­i­ty of its facil­i­ties, adding in a state­ment: “We offer a com­pre­hen­sive health plan and com­pet­i­tive ben­e­fits, and our facil­i­ties are known as great places to work.” The com­pa­ny is nego­ti­at­ing a new union con­tract, the spokes­woman said.

    Mean­while, though, care at the Mar­cel­la facil­i­ty is declin­ing, Jor­dan said, days after she quit. “We were very short-staffed,” she added. “And I think the res­i­dents pick up on that because it takes longer to answer a call.”

    In a state­ment, a spokesper­son for Com­plete Care said, “Com­plete Care at Mar­cel­la con­sis­tent­ly main­tains state man­dat­ed ratios. ... We take what­ev­er mea­sures nec­es­sary to ensure that we have prop­er staffing to meet the needs of those in our care, includ­ing bring­ing in agency staff and offer­ing bonus­es as need­ed.”

    Taxed less than a teacher

    Pri­vate equi­ty is a sophis­ti­cat­ed invest­ment strat­e­gy that has grown furi­ous­ly in recent years. At the end of last year, assets under man­age­ment at the firms world­wide stood at $5 tril­lion, up from $1.5 tril­lion over the past decade, accord­ing to Pre­qin, a finan­cial data provider. The num­ber of funds devot­ed to these activ­i­ties has more than dou­bled dur­ing that peri­od, and last year, pri­vate-equi­ty firms paid some $600 bil­lion to acquire com­pa­nies, up from $250 bil­lion 10 years ear­li­er.

    Pri­vate-equi­ty firms began their climb to pow­er in the 1980s; then they were known as lever­aged buy­out shops, because of the debt they use. The $25 bil­lion buy­out of RJR Nabis­co in 1988 by pri­vate-equi­ty giant Kohlberg Kravis & Roberts brought such deals to cen­ter stage.

    In recent years, as pre­vail­ing inter­est rates col­lapsed, pri­vate-equi­ty oper­a­tions have been able to take on greater amounts of low-cost debt to make their acqui­si­tions. Through Sept. 27, for exam­ple, $472 bil­lion of lever­aged loans were issued, up from $237 bil­lion issued dur­ing the same peri­od in 2019, accord­ing to LCD of S&P Glob­al.

    Out­side investors, such as pub­lic pen­sion funds and endow­ments, pour mon­ey into these takeover deals in the hopes of gen­er­at­ing high returns. But recent­ly, as the stock mar­ket has roared, out­size returns in pri­vate equi­ty have all but van­ished, aca­d­e­m­ic stud­ies show, and they are now in line with over­all mar­ket per­for­mance.

    Nev­er­the­less, more com­pa­nies are owned by pri­vate-equi­ty firms now than trade on the nation’s stock exchanges.

    Not sur­pris­ing­ly, pri­vate-equi­ty firms’ ris­ing dom­i­nance has gen­er­at­ed immense wealth for their exec­u­tives. The val­ue of Sam Stein’s hold­ings in Com­plete Care could not be deter­mined and the com­pa­ny declined to pro­vide it, but it is almost cer­tain­ly dwarfed by those of Stephen Schwarz­man, head of Black­stone Group. A close advis­er to Don­ald Trump dur­ing his pres­i­den­cy, Schwarz­man is worth $35 bil­lion, accord­ing to Forbes mag­a­zine, up from $15 bil­lion in 2020.

    Pri­vate equi­ty also ben­e­fit­ed from recent gov­ern­ment inter­ven­tions relat­ed to the Covid pan­dem­ic, doc­u­ments show. At least $5 bil­lion in fed­er­al bailout mon­ey went to com­pa­nies backed by large and well-cap­i­tal­ized pri­vate-equi­ty firms, accord­ing to a recent report from Amer­i­cans for Finan­cial Reform.

    Last year, the Fed­er­al Reserve Board launched an unprece­dent­ed $750 bil­lion pro­gram to prop up the cor­po­rate bond mar­ket, where many of these firms raise mon­ey for their buy­outs. Among the bonds pur­chased by the Fed, doc­u­ments show, were those issued by Black­stone and anoth­er pri­vate-equi­ty giant, Apol­lo Glob­al Man­age­ment, found­ed by Leon Black.

    Gary Gensler, the chair­man of the Secu­ri­ties and Exchange Com­mis­sion, recent­ly tes­ti­fied that the agency would increase its scruti­ny on fee dis­clo­sures and con­flicts of inter­est among pri­vate funds, to ensure their prac­tices don’t put investors in these strate­gies at a dis­ad­van­tage. And Lina Khan, the new chair­woman of the Fed­er­al Trade Com­mis­sion, said in a late Sep­tem­ber memo out­lin­ing the agen­cy’s pri­or­i­ties that “the grow­ing role of pri­vate equi­ty” invites an exam­i­na­tion of how these firms’ busi­ness mod­els “may facil­i­tate unfair meth­ods of com­pe­ti­tion and con­sumer pro­tec­tion vio­la­tions.”

    Final­ly, the Democ­rats’ pro­posed tax increase on cap­i­tal gains may crimp pri­vate-equi­ty exec­u­tives’ earn­ings. A key rea­son many of these exec­u­tives have been able to amass such for­tunes is that so much of their earn­ings are taxed as cap­i­tal gains with a top rate of 20 per­cent, not at the high­er 37 per­cent rate that can apply to income. This is a ben­e­fit they’ve tapped for decades, often allow­ing them to pay a low­er tax rate on earn­ings than a sec­re­tary or a teacher might.

    7,800 sig­na­tures

    One of the nation’s biggest pri­vate-equi­ty employ­ers is Roark Cap­i­tal of Atlanta. It owns Inspire Brands — par­ent com­pa­ny to an array of fast-food chains that includes Arby’s, Dunkin’, Baskin-Rob­bins and Son­ic — and oth­er brands such as Cinnabon and Seattle’s Best Cof­fee.

    NBC News esti­mates that more than 700,000 peo­ple work at Inspire Brands, many at inde­pen­dent­ly owned fran­chise stores.

    Roark is named for the lib­er­tar­i­an pro­tag­o­nist in “The Foun­tain­head” by Ayn Rand, whose life “exem­pli­fied the qual­i­ties of inde­pen­dence and integri­ty,” the company’s web­site said.

    One of lib­er­tar­i­an­is­m’s basic tenets is lim­it­ed gov­ern­ment, but three dozen com­pa­nies owned by Roark obtained $183 mil­lion in fed­er­al assis­tance under the CARES Act, accord­ing to the Amer­i­cans for Finan­cial Reform report. Asked whether this accep­tance of gov­ern­ment fund­ing ran counter to a lim­it­ed gov­ern­ment stance, Roark declined to com­ment through a spokes­woman.

    Zel­la Roberts, a recent grad­u­ate of War­ren Wil­son Col­lege near Asheville, North Car­oli­na, worked as a carhop at a Son­ic Dri­ve-In ear­li­er this year to help pay tuition. Her all-in pay plum­met­ed dur­ing the pan­dem­ic, Roberts told NBC News, because cus­tomers’ cash usage fell and Son­ic did not allow tips on cred­it cards.

    Roberts said she and some col­leagues sent an email to Roark Cap­i­tal “explain­ing the con­di­tions that Son­ic work­ers expe­ri­ence. The big ask was to put pres­sure on Son­ic cor­po­rate to make these changes.” She said she nev­er heard back about that or oth­er mes­sages sent to Neal Aron­son, man­ag­ing part­ner and founder of Roark Cap­i­tal. Aron­son is the con­trol­ling own­er of Roark, reg­u­la­to­ry fil­ings show, which has $18.6 bil­lion in assets under man­age­ment.

    ...

    In Jan­u­ary, after Roberts had col­lect­ed 7,800 sig­na­tures on a peti­tion ask­ing Roark to change its pol­i­cy, the com­pa­ny allowed tips on cred­it card orders placed through its app. An improve­ment, Roberts acknowl­edged, but such orders are a small per­cent­age of those made via cred­it cards, she point­ed out.

    The Inspire Brands spokesman said bar­ring tips on cred­it cards “is a tech­nol­o­gy lim­i­ta­tion that we inher­it­ed when we pur­chased the brand” in 2018. “We are now work­ing on imple­ment­ing the cred­it card tip­ping capa­bil­i­ty,” he said.

    Inspire Brands has also worked to bat­tle the Raise the Wage Act, which has been intro­duced in Con­gress every year since 2017 and would increase the fed­er­al min­i­mum wage to $15 an hour among work­ers like Roberts. In March, Inspire sent a memo to fran­chise own­ers high­light­ing its lob­by­ing suc­cess in oppos­ing the change. Describ­ing its efforts, Inspire said: “If you don’t have a seat at the table, you’re on the menu, and you can guar­an­tee your oppo­nents are eat­ing!”

    Chris Fuller, a spokesman for Inspire Brands, said the com­pa­ny fought the nation­al min­i­mum wage leg­is­la­tion because “we don’t sup­port a one-size-fits-all approach to the min­i­mum wage. We believe in let­ting the local mar­kets dic­tate.” He added: “More than 90 per­cent of our team mem­bers at cor­po­rate-owned restau­rants are above the state or local min­i­mum wage.”

    Some Inspire Brands work­ers have tak­en mat­ters into their own hands. This sum­mer, Matthew Hon­ey­cutt, 18, was work­ing at an Arby’s in Char­lotte, North Car­oli­na, mak­ing $9.50 an hour as a shift man­ag­er. He sup­ports an 8‑month-old son.

    On July 20, he and a group of work­ers walked off the job seek­ing a pay raise, forc­ing man­agers to close the Arby’s store two hours ear­ly, Hon­ey­cutt said.

    That got management’s atten­tion, he said. “The strike was on a Tues­day, and it was about Thurs­day when he start­ed get­ting the rais­es out,” Hon­ey­cutt said of his boss, who gave him a 50-cents-an-hour raise. “Every kind of work­er you can think of is work­ing so hard, but they’re not get­ting paid what they’re worth.”

    Honeycutt’s boss did not respond to a voice­mail mes­sage seek­ing com­ment. In mid-Sep­tem­ber, Hon­ey­cutt quit his job at Arby’s for a high­er-pay­ing posi­tion else­where.

    While Inspire Brands fights against a high­er min­i­mum wage, some oth­er restau­rant com­pa­nies owned by pub­licly trad­ed com­pa­nies are tak­ing a dif­fer­ent approach. They say increas­ing work­er pay is good for busi­ness.

    In Feb­ru­ary, Robert Verostek, the chief finan­cial offi­cer of restau­rant chain Denny’s, told investors that pay­ing a high­er wage to its work­ers in Cal­i­for­nia had result­ed in “not just pos­i­tive sales, but pos­i­tive guest traf­fic.”

    ...

    ———–

    “Work­ing for com­pa­nies owned by well-heeled pri­vate-equi­ty firms can mean low­er wages for employ­ees” by Gretchen Mor­gen­son; NBC News; 10/09/2021

    Eileen Appel­baum is an econ­o­mist and co-direc­tor at the Cen­ter for Eco­nom­ic and Pol­i­cy Research, a pro­gres­sive think tank, and co-author of “Pri­vate Equi­ty at Work: When Wall Street Man­ages Main Street.” Her study of pri­vate equi­ty has led her to con­clude that the industry’s grow­ing clout is not only a con­cern for work­ers, but also has the poten­tial to harm the nation’s broad­er econ­o­my.

    Pri­vate equi­ty has the poten­tial to harm the US’s broad­er econ­o­my if it keeps grow­ing. That’s the con­clu­sion Eileen Appel­baum arrived at. The pri­vate equi­ty extrac­tive exploita­tive busi­ness mod­el is so dam­ag­ing it’s a threat to US pro­duc­tiv­i­ty. Keep in mind she arrived at this con­clu­sion in her 2019 study, before the pan­dem­ic arrived to show the world just how cor­rect their warn­ings were. Pri­vate-equi­ty owned com­pa­nies that rely heav­i­ly on exploitable labor have sud­den­ly found they can’t real­ly func­tion. Peo­ple hate the jobs cre­at­ed by these com­pa­nies so much there’s a qua­si-nation­al strike of that exploit­ed work­force. And that’s just the labor com­po­nent. All sorts of aspects of the busi­ness can be mis­man­aged in this man­ner. As Appel­baum put it, “You have a lot more own­er­ship of pro­duc­tive resources by investors who don’t know an indus­try, don’t under­stand the val­ue of skilled work­ers and who are just in it to make their prof­it and get out. That erodes pro­duc­tiv­i­ty.” And there are now more pri­vate equi­ty owned com­pa­nies than pub­licly trad­ed firms. This is a growth sec­tor. Pirate cap­i­tal­ism is the growth sec­tor. It’s not great for a nation’s pro­duc­tiv­i­ty:

    ...
    Jor­dan and her fel­low work­ers are not alone in expe­ri­enc­ing reduced cir­cum­stances after their com­pa­ny is tak­en over by a pri­vate-equi­ty firm. The new titans of finance, these firms use large pools of debt — typ­i­cal­ly raised in what’s called the lever­aged loan mar­ket — to acquire com­pa­nies they hope to resell in a few years at a prof­it. Among com­pa­nies rais­ing mon­ey in this loan mar­ket dur­ing the past three years, debt lev­els at pri­vate-equi­ty-backed enti­ties were at least 30 per­cent high­er than debt lev­els at com­pa­nies not backed by pri­vate equi­ty, accord­ing to LCD, a unit of S&P Glob­al Mar­ket Intel­li­gence.

    But the heavy debt loads they take on, com­bined with pres­sure to flip acquired com­pa­nies quick­ly, increas­es the like­li­hood that pri­vate-equi­ty firms will have to cut costs in the oper­a­tions that they buy. Often, the first to the chop­ping block is the company’s work­force.

    A 2019 study by the Nation­al Bureau of Eco­nom­ic Research lays this out. Researchers ana­lyzed almost 10,000 debt-fueled buy­outs between 1980 and 2013 and found that employ­ment fell by 13 per­cent when a pri­vate-equi­ty firm took over a pub­lic com­pa­ny. Employ­ment declined by even more — 16 per­cent — when pri­vate equi­ty acquired a unit or divi­sion of a com­pa­ny.

    ...

    “You have a lot more own­er­ship of pro­duc­tive resources by investors who don’t know an indus­try, don’t under­stand the val­ue of skilled work­ers and who are just in it to make their prof­it and get out,” Appel­baum said. “That erodes pro­duc­tiv­i­ty.”

    Almost 12 mil­lion employ­ees, or rough­ly 7 per­cent of the U.S. labor force, work for pri­vate-equi­ty-backed busi­ness­es, accord­ing to the Amer­i­can Invest­ment Coun­cil, an indus­try lob­by­ing group. These com­pa­nies gen­er­at­ed about 6.5 per­cent of the nation’s gross domes­tic prod­uct last year, the group said.

    ...

    In recent years, as pre­vail­ing inter­est rates col­lapsed, pri­vate-equi­ty oper­a­tions have been able to take on greater amounts of low-cost debt to make their acqui­si­tions. Through Sept. 27, for exam­ple, $472 bil­lion of lever­aged loans were issued, up from $237 bil­lion issued dur­ing the same peri­od in 2019, accord­ing to LCD of S&P Glob­al.

    Out­side investors, such as pub­lic pen­sion funds and endow­ments, pour mon­ey into these takeover deals in the hopes of gen­er­at­ing high returns. But recent­ly, as the stock mar­ket has roared, out­size returns in pri­vate equi­ty have all but van­ished, aca­d­e­m­ic stud­ies show, and they are now in line with over­all mar­ket per­for­mance.

    Nev­er­the­less, more com­pa­nies are owned by pri­vate-equi­ty firms now than trade on the nation’s stock exchanges.
    ...

    And look at Roark Cap­i­tal, own­er of Inspire Brand which employs more than 700,000 peo­ple at a range of fast-food chains. Start­ing in 2017, Inspire Brand lob­bied against the push to raise the fed­er­al min­i­mum waged to $15, pre and post-pan­dem­ic:

    ...
    One of the nation’s biggest pri­vate-equi­ty employ­ers is Roark Cap­i­tal of Atlanta. It owns Inspire Brands — par­ent com­pa­ny to an array of fast-food chains that includes Arby’s, Dunkin’, Baskin-Rob­bins and Son­ic — and oth­er brands such as Cinnabon and Seattle’s Best Cof­fee.

    NBC News esti­mates that more than 700,000 peo­ple work at Inspire Brands, many at inde­pen­dent­ly owned fran­chise stores.

    Roark is named for the lib­er­tar­i­an pro­tag­o­nist in “The Foun­tain­head” by Ayn Rand, whose life “exem­pli­fied the qual­i­ties of inde­pen­dence and integri­ty,” the company’s web­site said.

    One of lib­er­tar­i­an­is­m’s basic tenets is lim­it­ed gov­ern­ment, but three dozen com­pa­nies owned by Roark obtained $183 mil­lion in fed­er­al assis­tance under the CARES Act, accord­ing to the Amer­i­cans for Finan­cial Reform report. Asked whether this accep­tance of gov­ern­ment fund­ing ran counter to a lim­it­ed gov­ern­ment stance, Roark declined to com­ment through a spokes­woman.

    ...

    Inspire Brands has also worked to bat­tle the Raise the Wage Act, which has been intro­duced in Con­gress every year since 2017 and would increase the fed­er­al min­i­mum wage to $15 an hour among work­ers like Roberts. In March, Inspire sent a memo to fran­chise own­ers high­light­ing its lob­by­ing suc­cess in oppos­ing the change. Describ­ing its efforts, Inspire said: “If you don’t have a seat at the table, you’re on the menu, and you can guar­an­tee your oppo­nents are eat­ing!”
    ...

    As Roark Cap­i­tal’s ongo­ing bat­tle against a $15 fed­er­al min­i­mum wage reminds us, all of these high­er wages that employ­ees in fast-food and oth­er low-wage sec­tors are final­ly mak­ing aren’t nec­es­sar­i­ly per­ma­nent. Preda­to­ry indus­tries aren’t going to per­ma­nent­ly change their ways. They’re going to bide their time. Min­i­mum wage laws can be repealed. Inspire Brands isn’t going to give up. And nei­ther are the rest of it fel­low pri­vate equi­ty peers who own busi­ness pred­i­cat­ed on a wage-slave mod­el.

    So yeah, all of that might have some­thing to do with the ‘Great Res­ig­na­tion’. And why the exploita­tion that led up to the ‘Great Res­ig­na­tion’ will like­ly return at the first avail­able oppor­tu­ni­ty. It’s just busi­ness.

    Posted by Pterrafractyl | December 1, 2021, 12:42 am
  25. Here’s an update on the Trump SPAC media ven­ture. Or rather, three updates on three sep­a­rate scan­dals relat­ed to this sto­ry:

    First, recall how it appeared that Don­ald Trump had devel­oped a major inno­va­tion in polit­i­cal grift­ing with the for­ma­tion of the Trump Media and Tech­nol­o­gy Group (TMTG), a new­ly formed enti­ty that announced its merg­er with Dig­i­tal World Acqui­si­tion Corp (DWAC), a spe­cial pur­pose acqui­si­tion com­pa­ny (SPAC), back in Octo­ber. The merged enti­ty promised to pro­duce ‘non-woke’ media con­tent, but as we saw, the real promise was hand­ful prof­its for the ini­tial SPAC investors who saw their share prices in Dig­i­tal World spike on the news.

    It’s those hand­some SPAC investor prof­its that are part of what’s under inves­ti­ga­tion. Accord­ing to US law, SPACs can’t secret­ly have a merg­er in mind before the com­pa­ny is formed and shares are sold to investors. Oth­er­wise, SPACs could end up become an end-run around the dis­clo­sure rules for IPOs. So, of course, that’s exact­ly what like­ly hap­pened with Trump Media.

    It turns out Trump-insid­ers met with the Dig­i­tal World fig­ures in April, weeks before Dig­i­tal World filed with the SEC for its Sep­tem­ber 3 IPO at $10 per share. And in that May SEC dis­clo­sure, Dig­i­tal World told the SEC it had no par­tic­u­lar plans for a merg­er, a clear lie. It’s like a kind of pre-SPAC insid­er trad­ing. Sur­prise! The Secu­ri­ties and Exchange Com­mis­sion (SEC) announced on Mon­day that it was inves­ti­gat­ing this. That’s scan­dal num­ber one.

    On Fri­day we got word of anoth­er SPAC-insid­er trad­ing-like scan­dal when the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty (FINRA) announced an inves­ti­ga­tion. But this time it’s in rela­tion to the Octo­ber announce­ment of the Trump Media/Digital World merg­er. It turns out there was an anom­alous spike in the trad­ing of war­rants in DWAC stock in the weeks lead­ing up to that Octo­ber 20 announce­ment by Trump about the Trump Media merg­er with Dig­i­tal World. Octo­ber 20 is the day the price of DWAC stock went nuts and the val­ue of those war­rants went up even more, rel­a­tive­ly speak­ing. The spike was first observed on Oct 4, and was­n’t matched in the trad­ing vol­ume of the shares. Just a spike in the vol­ume of war­rant trad­ing. Was there insid­er war­rant-trad­ing going on?

    Adding to the sus­pi­cious nature of this spike in war­rants trad­ing is that Dig­i­tal World announced on Sep­tem­ber 27 that shares and war­rants can trade sep­a­rate­ly. The first two days of war­rant trad­ing saw vol­umes in keep­ing with expec­ta­tions, but sud­den­ly on Octo­ber 4 the first of a surge in vol­ume for just war­rant trad­ing took place. About a week into the start of these secret Trump Media org talks. Are these things con­nect­ed? That’s what FINRA inves­ti­ga­tors are look­ing into.

    But there’s much more that makes this war­rant trad­ing spike, first observed, much more sus­pi­cious: It also turns out Trump Media and Dig­i­tal World entered for­mal talks in the late Sep­tem­ber, about a week before the Octo­ber 4 surge in war­rant trad­ing vol­ume. These for­mal talks were not made pub­lic, a vio­la­tion of secu­ri­ties law already. Don’t for­get, DWAC had its on Sep­tem­ber 3. Dig­i­tal World was a pub­licly trad­ed com­pa­ny when it held those secret for­mal talks with Trump Media in the last few days of Sep­tem­ber.

    The final major wrin­kle in this sto­ry is that the secret Trump meet­ing in late Sep­tem­ber appears to rough­ly coin­cide with a Sep­tem­ber 27 announce­ment by Dig­i­tal World that it was now allow­ing the sep­a­rate trad­ing of shares and war­rants. Nor­mal­ly, when SPACs first have an IPO, shares and war­rants are trad­ed as “units”, typ­i­cal­ly con­sist­ing of a share and a frac­tion of a war­rant (like 1 share and 1/3 of a war­rant). There were two days of sep­a­rate war­rant trad­ing before Octo­ber 4 that appeared to be in line with the share trad­ing vol­ume and what ana­lysts expect­ed. But then on Octo­ber 4 there’s a surge in war­rants trad­ing vol­ume, the begin­ning of a pat­tern that leads up to Octo­ber 20, when Trump announces to the world that Dig­i­tal World and Trump Media are cre­at­ing a joint ven­ture. How much insid­er trad­ing was trad­ing place with those war­rants dur­ing the weeks lead­ing up to that Octo­ber 20 announce­ment? It’s a sig­nif­i­cant legal ques­tion. Don’t for­get, this real­ly would be insid­ers cheat­ing ‘the lit­tle guy’. Dig­i­tal World was already a pub­licly trad­ed com­pa­ny when this appar­ent­ly insid­er trad­ing was hap­pen­ing.

    Final­ly, there’s the third scan­dal, which isn’t real­ly being inves­ti­gat­ed because there isn’t any­thing to inves­ti­gate. Instead, it’s just a scan­dalous state of affairs. Specif­i­cal­ly, it’s the scan­dalous fact that a ‘Trump SPAC’ is the per­fect vehi­cle for allow­ing for­eign gov­ern­ments, mob­sters, and pret­ty much any­one we can think of to buy influ­ence with Trump. Just invest a ton in his SPAC and he’ll kind of owe you one. A debt he’ll have lit­tle trou­ble repay­ing should he take office in 2025.

    So the fig­ure who is the like­ly GOP nom­i­nee for the US pres­i­den­cy in 2024 has been strik­ing it rich with a group of mys­tery investors who appear to have been engaged in ram­pant insid­er trad­ing. And that’s part of why the two new­ly opened inves­ti­ga­tions into the mys­te­ri­ous Trump media ven­ture is poten­tial­ly far more than just the lat­est Trump busi­ness cor­rup­tion scan­dal. It’s polit­i­cal cor­rup­tion scan­dal too with impli­ca­tion that could go well into the Trump’s puta­tive sec­ond term:

    The New York Times

    Trump’s Media Com­pa­ny Is Inves­ti­gat­ed Over Financ­ing Deal

    A financ­ing com­pa­ny told investors that it wasn’t in deal talks, weeks after its C.E.O. held a pri­vate video­con­fer­ence about a pos­si­ble deal with Don­ald Trump.

    By Matthew Gold­stein, David Enrich and Michael Schwirtz
    Dec. 6, 2021

    One day in April, a group of men gath­ered on a video­con­fer­ence call to dis­cuss a deal to bankroll for­mer Pres­i­dent Don­ald J. Trump’s planned media com­pa­ny.

    Among the par­tic­i­pants, accord­ing to two peo­ple famil­iar with the call, were Mr. Trump’s rep­re­sen­ta­tives and the chief exec­u­tive and a future board mem­ber of Dig­i­tal World Acqui­si­tion, a so-called blank-check com­pa­ny that would announce the deal with Mr. Trump six months lat­er.

    At the time, Patrick Orlan­do, Dig­i­tal World’s chief exec­u­tive, was also run­ning sev­er­al oth­er blank-check com­pa­nies, and it’s unclear which one he was rep­re­sent­ing on the video­con­fer­ence.

    Yet the month after the video call, which has not been pre­vi­ous­ly report­ed, Dig­i­tal World said in secu­ri­ties fil­ings that it had not iden­ti­fied or begun talk­ing with any poten­tial merg­er tar­gets.

    Blank-check com­pa­nies like Dig­i­tal World, also called spe­cial pur­pose acqui­si­tion com­pa­nies, or SPACs, sell their shares to investors first and then go look­ing for a busi­ness to merge with. They aren’t sup­posed to have a deal lined up before sell­ing shares.

    On Mon­day, Dig­i­tal World said reg­u­la­tors were inves­ti­gat­ing. The Secu­ri­ties and Exchange Com­mis­sion has request­ed infor­ma­tion about the deal, includ­ing the iden­ti­ties of some investors and “cer­tain doc­u­ments and com­mu­ni­ca­tions” between the SPAC and Mr. Trump’s com­pa­ny, Trump Media & Tech­nol­o­gy Group.

    “The inves­ti­ga­tion does not mean that the S.E.C. has con­clud­ed that any­one vio­lat­ed the law,” Dig­i­tal World said in its fil­ing.

    Also on Mon­day, Trump Media announced that Rep­re­sen­ta­tive Devin Nunes, Repub­li­can of Cal­i­for­nia, was retir­ing from Con­gress to become chief exec­u­tive of the com­pa­ny.

    If reg­u­la­tors find that Dig­i­tal World’s fil­ings includ­ed false or mis­lead­ing state­ments, they could take action against the com­pa­ny or its back­ers — poten­tial­ly com­pli­cat­ing the planned merg­er. Hun­dreds of mil­lions of dol­lars are at stake for Mr. Trump’s com­pa­ny: Last week, Trump Media announced that uniden­ti­fied investors had agreed to plow $1 bil­lion into the com­pa­ny — on top of the near­ly $300 mil­lion that Dig­i­tal World raised in its Sep­tem­ber ini­tial pub­lic offer­ing.

    The New York Times report­ed in Octo­ber that Trump Media’s dis­cus­sion of a deal with an exec­u­tive of Dig­i­tal World may have skirt­ed secu­ri­ties laws because the SPAC did not dis­close those talks in its fil­ings. The April video­con­fer­ence is a fur­ther indi­ca­tion that may have hap­pened.

    “The S.E.C. requires dis­clo­sure of deals that may be in the works so every­one is work­ing with the same infor­ma­tion,” said Tyler Gel­lasch, a for­mer S.E.C. lawyer who is a fel­low at Duke Uni­ver­si­ty School of Law.

    In addi­tion to Mr. Orlan­do, the chief exec­u­tive of Dig­i­tal World, the video call includ­ed Andy Litin­sky and Wes Moss, two for­mer con­tes­tants on “The Appren­tice” who had pitched the Trump social media ven­ture to the for­mer pres­i­dent short­ly after he left office in Jan­u­ary.

    Lori Hey­er-Bed­nar, the chief legal offi­cer for Trump Media, said the video­con­fer­ence was “strict­ly dis­cus­sions between” Trump Media and Benessere Cap­i­tal Acqui­si­tion, anoth­er SPAC that Mr. Orlan­do ran. “Any ref­er­ence to the con­trary is false and defam­a­to­ry,” Ms. Hey­er-Bed­nar said. She added that more infor­ma­tion about how the deal had come togeth­er would be includ­ed in a future secu­ri­ties fil­ing.

    Anoth­er par­tic­i­pant on the video­con­fer­ence was Rodri­go Veloso, who in July was named one of Dig­i­tal World’s inde­pen­dent board mem­bers. Mr. Veloso, the founder of a com­pa­ny that made O.N.E. coconut water and a friend of Mr. Orlando’s, par­tic­i­pat­ed on the call as an advis­er to Mr. Orlan­do, accord­ing to a per­son famil­iar with the mat­ter.

    In a brief inter­view, Mr. Veloso said he had “no rec­ol­lec­tion” of the April meet­ing.

    As it looks into the Trump SPAC, the Secu­ri­ties and Exchange Com­mis­sion will most like­ly encounter ARC Group, a Shang­hai financier that the agency has rep­ri­mand­ed in the past. In 2017, the S.E.C. stopped ARC’s exec­u­tives from list­ing shares of three com­pa­nies, cit­ing “mate­r­i­al mis­state­ments” in their secu­ri­ties fil­ings and a lack of coop­er­a­tion from the exec­u­tives.

    ARC is also a main backer of Dig­i­tal World and a key archi­tect of the SPAC deal with Trump Media. (There is no indi­ca­tion that the S.E.C. is inves­ti­gat­ing ARC for its role in the Trump deal.) Found­ed six years ago by Abra­ham Cin­ta, who was raised in Mex­i­co but lived in Shang­hai, ARC has tried its hand at sev­er­al busi­ness­es. It ini­tial­ly tried to start a Span­ish wine and olive oil import busi­ness in Asia, then piv­ot­ed to help­ing Chi­nese com­pa­nies list their shares on Amer­i­can stock exchanges.

    More recent­ly, when Wall Street became infat­u­at­ed with SPACs — a kind of com­pa­ny that had been around for decades but rarely grabbed head­lines — ARC shift­ed its focus again, build­ing a busi­ness pro­vid­ing them with seed mon­ey and advice.

    But in its efforts to project an image of suc­cess, the firm at times cut cor­ners. Some ARC exec­u­tives com­plained to lead­ers about the firm’s slop­pi­ness with paper­work and its pen­chant for exag­ger­at­ing its size, includ­ing by over­stat­ing its num­ber of glob­al loca­tions, two peo­ple with knowl­edge of the com­plaints said.

    ARC also exag­ger­at­ed its Wall Street cre­den­tials. The com­pa­ny said on its web­site that it had a strate­gic part­ner­ship with Mor­gan Stan­ley. A Mor­gan Stan­ley spokes­woman said that there was no such part­ner­ship and that the com­pa­ny had asked ARC to remove its name from its web­site.

    An ARC mar­ket­ing brochure reviewed by The Times list­ed oth­er “strate­gic part­ners,” includ­ing JPMor­gan Chase, Gold­man Sachs Group, the law firm Skad­den Arps, and the account­ing firms PwC and KPMG. Rep­re­sen­ta­tives of those com­pa­nies all said they had no rela­tion­ship with ARC.

    ARC had tapped Mr. Orlan­do to be the chief exec­u­tive of sev­er­al of its SPACs, includ­ing Benessere, which raised $100 mil­lion in a stock offer­ing ear­ly this year. As recent­ly as March, ARC had been try­ing to bro­ker a merg­er between Benessere and Trump Media.

    That month, a small invest­ment bank, Kingswood Cap­i­tal Mar­kets, which has fre­quent­ly teamed up with ARC, made a pre­sen­ta­tion to Benessere’s board mem­bers. Marked “strict­ly pri­vate and con­fi­den­tial,” the pre­sen­ta­tion, reviewed by The Times, list­ed about a half-dozen pos­si­ble acqui­si­tion tar­gets. One was Trump Media. Kingswood, now called EF Hut­ton, esti­mat­ed that Trump Media was worth $1.5 bil­lion and that with­in a few years it could gen­er­ate $2.3 bil­lion in annu­al rev­enue.

    Ser­gio Camarero, a man­ag­ing part­ner at ARC, told Benessere offi­cials that Trump Media was their pre­ferred tar­get. Some Benessere offi­cials, how­ev­er, balked because they didn’t want to have any­thing to do with Mr. Trump, two peo­ple famil­iar with the dis­cus­sions said.

    ...

    ARC quick­ly turned to Dig­i­tal World, its oth­er SPAC, as a poten­tial vehi­cle to merge with the Trump com­pa­ny. ARC had recent­ly installed Mr. Orlan­do as Dig­i­tal World’s chief exec­u­tive, after its pre­vi­ous C.E.O. failed to raise enough mon­ey to get it off the ground, a per­son with direct knowl­edge of the sit­u­a­tion said.

    The video­con­fer­ence call involv­ing ARC, Mr. Orlan­do, Mr. Veloso and mem­bers of the Trump team took place in ear­ly April. At the time, Dig­i­tal World had not yet filed with the S.E.C. to sell its shares to the pub­lic. It did so sev­en weeks lat­er, on May 26.

    “We have not select­ed any spe­cif­ic busi­ness com­bi­na­tion tar­get and we have not, nor has any­one on our behalf, ini­ti­at­ed any sub­stan­tive dis­cus­sions, direct­ly or indi­rect­ly, with any busi­ness com­bi­na­tion tar­get,” Dig­i­tal World said in its ini­tial fil­ing.

    The dis­clo­sure was impor­tant. Because reg­u­la­tors allow blank-check com­pa­nies to sell their shares to the pub­lic with min­i­mal finan­cial dis­clo­sures, the com­pa­nies are not allowed to have merg­er part­ners in mind before their I.P.O.s. The think­ing is that they oth­er­wise would serve as a back­door chan­nel for com­pa­nies to go pub­lic while escap­ing rig­or­ous pub­lic scruti­ny.

    By the sum­mer, Dig­i­tal World’s pub­lic offer­ing was tak­ing shape. The com­pa­ny said in July that it hoped to raise near­ly $350 mil­lion from investors. Around then, The Times pre­vi­ous­ly report­ed, a Trump Media exec­u­tive told peo­ple that the com­pa­ny was in an “exclu­sive agree­ment” to merge with an uniden­ti­fied SPAC.

    Dig­i­tal World went pub­lic on Sept. 8, rais­ing $293 mil­lion. Lat­er that month, Trump Media signed a let­ter of intent with Dig­i­tal World. On Oct. 20, Mr. Orlan­do and Mr. Veloso, the board mem­ber who took part in the April video call, went to Mar-a-Lago for the offi­cial announce­ment of the deal.

    Shares of Dig­i­tal World surged to $94, from $10, imme­di­ate­ly after the merg­er announce­ment, although the stock has since giv­en up more than half of those gains. Dig­i­tal World also dis­closed on Mon­day that the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty had request­ed infor­ma­tion about trad­ing activ­i­ty before the announce­ment of the merg­er.

    Days after the merg­er was unveiled, Mr. Cin­ta, the ARC chief exec­u­tive, agreed to par­tic­i­pate in an online dis­cus­sion about the deal, titled “The Deal That Shook Wall Street.”

    But in recent weeks, ARC has tak­en steps to low­er its pro­file. The firm removed a 2020 pre­sen­ta­tion that list­ed Mr. Orlan­do as a “senior advis­er” to ARC.

    Mr. Cinta’s planned online dis­cus­sion was also shelved. The spon­sor of the event, Voice of ASEAN TV, said in a post­ing on LinkedIn that it was being can­celed “owing to legal and con­fi­den­tial­i­ty issues aris­ing from Secu­ri­ties and Exchange Com­mis­sion reg­u­la­tions.” It is now ten­ta­tive­ly set to occur on Christ­mas Eve.

    ———-

    “Trump’s Media Com­pa­ny Is Inves­ti­gat­ed Over Financ­ing Deal” by Matthew Gold­stein, David Enrich and Michael Schwirtz; The New York Times; 12/06/2021

    “The New York Times report­ed in Octo­ber that Trump Media’s dis­cus­sion of a deal with an exec­u­tive of Dig­i­tal World may have skirt­ed secu­ri­ties laws because the SPAC did not dis­close those talks in its fil­ings. The April video­con­fer­ence is a fur­ther indi­ca­tion that may have hap­pened.

    We already had hints of a SPAC scan­dal. Because of course this was going to be as scan­dalous as pos­si­ble. This is a Trump SPAC. How could it not be scan­dalous? The reports of the April video­con­fer­ence attend­ed by Trump media fig­ures is just fur­ther con­fir­ma­tion of what we should have already known. SPACs aren’t sup­posed to have merg­ers worked out in advance and yet it has long looked like that is exact­ly what hap­pened here. Hence the need for an inves­ti­ga­tion:

    ...
    Among the par­tic­i­pants, accord­ing to two peo­ple famil­iar with the call, were Mr. Trump’s rep­re­sen­ta­tives and the chief exec­u­tive and a future board mem­ber of Dig­i­tal World Acqui­si­tion, a so-called blank-check com­pa­ny that would announce the deal with Mr. Trump six months lat­er.

    ...

    Yet the month after the video call, which has not been pre­vi­ous­ly report­ed, Dig­i­tal World said in secu­ri­ties fil­ings that it had not iden­ti­fied or begun talk­ing with any poten­tial merg­er tar­gets.

    Blank-check com­pa­nies like Dig­i­tal World, also called spe­cial pur­pose acqui­si­tion com­pa­nies, or SPACs, sell their shares to investors first and then go look­ing for a busi­ness to merge with. They aren’t sup­posed to have a deal lined up before sell­ing shares.
    ...

    An inves­ti­ga­tion that could include turn­ing over the iden­ti­fies of the investors, which is reminder that these Trump-relat­ed SPAC scan­dals have, at their core, mys­tery investors:

    ...
    On Mon­day, Dig­i­tal World said reg­u­la­tors were inves­ti­gat­ing. The Secu­ri­ties and Exchange Com­mis­sion has request­ed infor­ma­tion about the deal, includ­ing the iden­ti­ties of some investors and “cer­tain doc­u­ments and com­mu­ni­ca­tions” between the SPAC and Mr. Trump’s com­pa­ny, Trump Media & Tech­nol­o­gy Group.

    “The inves­ti­ga­tion does not mean that the S.E.C. has con­clud­ed that any­one vio­lat­ed the law,” Dig­i­tal World said in its fil­ing.
    ...

    Dig­i­tal World pri­ma­ry backer, ARC, is itself an inter­est­ing firm. A scan­dal-rid­den Shang­hai-based com­pa­ny that helps Chi­nese com­pa­nies list their shares on US stock exchanges. So when the SEC looks into the iden­ti­ties of these SPAC investors, the ear­li­est of those investors will have the clos­est ties to this mys­te­ri­ous ARC Group:

    ...
    As it looks into the Trump SPAC, the Secu­ri­ties and Exchange Com­mis­sion will most like­ly encounter ARC Group, a Shang­hai financier that the agency has rep­ri­mand­ed in the past. In 2017, the S.E.C. stopped ARC’s exec­u­tives from list­ing shares of three com­pa­nies, cit­ing “mate­r­i­al mis­state­ments” in their secu­ri­ties fil­ings and a lack of coop­er­a­tion from the exec­u­tives.

    ARC is also a main backer of Dig­i­tal World and a key archi­tect of the SPAC deal with Trump Media. (There is no indi­ca­tion that the S.E.C. is inves­ti­gat­ing ARC for its role in the Trump deal.) Found­ed six years ago by Abra­ham Cin­ta, who was raised in Mex­i­co but lived in Shang­hai, ARC has tried its hand at sev­er­al busi­ness­es. It ini­tial­ly tried to start a Span­ish wine and olive oil import busi­ness in Asia, then piv­ot­ed to help­ing Chi­nese com­pa­nies list their shares on Amer­i­can stock exchanges.

    More recent­ly, when Wall Street became infat­u­at­ed with SPACs — a kind of com­pa­ny that had been around for decades but rarely grabbed head­lines — ARC shift­ed its focus again, build­ing a busi­ness pro­vid­ing them with seed mon­ey and advice.
    ...

    And note the sto­ry we are being giv­en to explain away this poten­tial­ly ille­gal insid­er trad­ing: The April meet­ing between Patrick Orlan­do, Dig­i­tal World’s CEO, and the Trump Media rep­re­sen­ta­tives is being char­ac­ter­ized as not a meet­ing between Dig­i­tal World and Trump Media. No, instead, it was a meet­ing between Trump Media and a dif­fer­ent SPAC that Orlan­do just hap­pened to also rep­re­sent at that time, Benessere Cap­i­tal Acqui­si­tion. How con­ve­nient:

    ...
    At the time, Patrick Orlan­do, Dig­i­tal World’s chief exec­u­tive, was also run­ning sev­er­al oth­er blank-check com­pa­nies, and it’s unclear which one he was rep­re­sent­ing on the video­con­fer­ence.

    ...

    In addi­tion to Mr. Orlan­do, the chief exec­u­tive of Dig­i­tal World, the video call includ­ed Andy Litin­sky and Wes Moss, two for­mer con­tes­tants on “The Appren­tice” who had pitched the Trump social media ven­ture to the for­mer pres­i­dent short­ly after he left office in Jan­u­ary.

    Lori Hey­er-Bed­nar, the chief legal offi­cer for Trump Media, said the video­con­fer­ence was “strict­ly dis­cus­sions between” Trump Media and Benessere Cap­i­tal Acqui­si­tion, anoth­er SPAC that Mr. Orlan­do ran. “Any ref­er­ence to the con­trary is false and defam­a­to­ry,” Ms. Hey­er-Bed­nar said. She added that more infor­ma­tion about how the deal had come togeth­er would be includ­ed in a future secu­ri­ties fil­ing.

    Anoth­er par­tic­i­pant on the video­con­fer­ence was Rodri­go Veloso, who in July was named one of Dig­i­tal World’s inde­pen­dent board mem­bers. Mr. Veloso, the founder of a com­pa­ny that made O.N.E. coconut water and a friend of Mr. Orlando’s, par­tic­i­pat­ed on the call as an advis­er to Mr. Orlan­do, accord­ing to a per­son famil­iar with the mat­ter.

    In a brief inter­view, Mr. Veloso said he had “no rec­ol­lec­tion” of the April meet­ing.
    ...

    We are told that ARC had been try­ing to arrange a SPAC with Trump and this Benes­sare SPAC as ear­ly as March. But that ali­bi rais­es the same ques­tion: even if the meet­ings real­ly were between Benessere and Trump Media, would­n’t those meet­ings also be ille­gal in exact­ly the same way? Or is this some sort SPAC loop­hole they dis­cov­ered: using a dum­my SPAC to hold meet­ings with your prospec­tive merg­er part­ners and then switch to the real SPAC. Unless that’s a valid loop­hole, it seems like this was still a very ille­gal arrange­ment:

    ...
    ARC had tapped Mr. Orlan­do to be the chief exec­u­tive of sev­er­al of its SPACs, includ­ing Benessere, which raised $100 mil­lion in a stock offer­ing ear­ly this year. As recent­ly as March, ARC had been try­ing to bro­ker a merg­er between Benessere and Trump Media.

    That month, a small invest­ment bank, Kingswood Cap­i­tal Mar­kets, which has fre­quent­ly teamed up with ARC, made a pre­sen­ta­tion to Benessere’s board mem­bers. Marked “strict­ly pri­vate and con­fi­den­tial,” the pre­sen­ta­tion, reviewed by The Times, list­ed about a half-dozen pos­si­ble acqui­si­tion tar­gets. One was Trump Media. Kingswood, now called EF Hut­ton, esti­mat­ed that Trump Media was worth $1.5 bil­lion and that with­in a few years it could gen­er­ate $2.3 bil­lion in annu­al rev­enue.

    Ser­gio Camarero, a man­ag­ing part­ner at ARC, told Benessere offi­cials that Trump Media was their pre­ferred tar­get. Some Benessere offi­cials, how­ev­er, balked because they didn’t want to have any­thing to do with Mr. Trump, two peo­ple famil­iar with the dis­cus­sions said.

    ...

    ARC quick­ly turned to Dig­i­tal World, its oth­er SPAC, as a poten­tial vehi­cle to merge with the Trump com­pa­ny. ARC had recent­ly installed Mr. Orlan­do as Dig­i­tal World’s chief exec­u­tive, after its pre­vi­ous C.E.O. failed to raise enough mon­ey to get it off the ground, a per­son with direct knowl­edge of the sit­u­a­tion said.

    The video­con­fer­ence call involv­ing ARC, Mr. Orlan­do, Mr. Veloso and mem­bers of the Trump team took place in ear­ly April. At the time, Dig­i­tal World had not yet filed with the S.E.C. to sell its shares to the pub­lic. It did so sev­en weeks lat­er, on May 26.

    “We have not select­ed any spe­cif­ic busi­ness com­bi­na­tion tar­get and we have not, nor has any­one on our behalf, ini­ti­at­ed any sub­stan­tive dis­cus­sions, direct­ly or indi­rect­ly, with any busi­ness com­bi­na­tion tar­get,” Dig­i­tal World said in its ini­tial fil­ing.

    The dis­clo­sure was impor­tant. Because reg­u­la­tors allow blank-check com­pa­nies to sell their shares to the pub­lic with min­i­mal finan­cial dis­clo­sures, the com­pa­nies are not allowed to have merg­er part­ners in mind before their I.P.O.s. The think­ing is that they oth­er­wise would serve as a back­door chan­nel for com­pa­nies to go pub­lic while escap­ing rig­or­ous pub­lic scruti­ny.
    ...

    Final­ly, we get a hint at the end of the arti­cle about the oth­er Trump SPAC insid­er-trad­ing inves­ti­ga­tion announced the week: The FINRA inves­ti­ga­tion in into appar­ent insid­er trad­ing activ­i­ty that took place in the weeks lead­ing up to the actu­al announced Trump Media/Digital World Octo­ber 20 merg­er announce­ment:

    ...
    Shares of Dig­i­tal World surged to $94, from $10, imme­di­ate­ly after the merg­er announce­ment, although the stock has since giv­en up more than half of those gains. Dig­i­tal World also dis­closed on Mon­day that the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty had request­ed infor­ma­tion about trad­ing activ­i­ty before the announce­ment of the merg­er.
    ...

    Ok, now here’s Fri­day’s report on the new­ly announced FINRA inves­ti­ga­tion. An inves­ti­ga­tion in sus­pi­cious war­rant trad­ing activ­i­ty that took place in the weeks lead­ing up to the Octo­ber 20 merg­er announce­ment. On Octo­ber 27, Dig­i­tal World made the unusu­al announce­ment that hold­ers of “units” (a blends of shares and a frac­tion of a war­rant held by ear­ly investors) can trade those shares and war­rants sep­a­rate­ly. Around this same time, Trump Media and Dig­i­tal World entered into secret meet­ings. Dig­i­tal World began allow­ing the pre-IPO trad­ing of shares and war­rants at the begin­ning of Octo­ber. For the first two days the trad­ing was as one might expect, but on Octo­ber 4 the trad­ing in war­rants surged 8‑fold with­out a con­cur­rent surge in the share trad­ing vol­ume. In the end, it turns out the war­rants, which were priced at 50 cents pre-IPO, end­ed up being a far more prof­itable asset than the actu­al shares them­selves.

    Keep in mind that, as we just saw, Dig­i­tal World and the Trump Team had been in con­tact work­ing on some sort of deal since at least March or April. So it’s not like the secret meet­ing at the end of Sep­tem­ber was the first meet­ing between the two key enti­ties in this enter­prise. But the tim­ing sure is sus­pi­cious, and the fact that it was a secret meet­ing may make it ille­gal whether or not they were indeed dis­cussing the kinds of things that would impact the like­ly val­ue of those Dig­i­tal World shares. That’s why FINRA is now inves­ti­gat­ing. Whether or not it ends up being found cor­rupt, it’s just a gross­ly cor­rupt look­ing sit­u­a­tion that screams insid­er-trad­ing:

    The New York Times

    A Surge in Trad­ing Pre­ced­ed Trump’s SPAC Deal

    Trad­ing in the merg­er partner’s war­rants, which allow hold­ers to buy shares lat­er, spiked sev­er­al times before the Trump Media agree­ment was made pub­lic.

    By Matthew Gold­stein
    Dec. 9, 2021

    A few weeks before Dig­i­tal World Acqui­si­tion announced a deal to merge with a fledg­ling social media com­pa­ny backed by for­mer Pres­i­dent Don­ald J. Trump, it was at the cen­ter of a sud­den trad­ing fren­zy.

    Dig­i­tal World, a spe­cial pur­pose acqui­si­tion com­pa­ny, began allow­ing the trad­ing of war­rants — poten­tial­ly lucra­tive con­tracts that give the hold­er the right to buy shares of a stock at a pre­de­ter­mined price at a future date. Such secu­ri­ties are typ­i­cal­ly offered to investors or exec­u­tives as sweet­en­ers, allow­ing them to buy addi­tion­al shares of a com­pa­ny cheap­ly if the stock ris­es.

    About 350,000 war­rants of Dig­i­tal World trad­ed in the first two days. But on the third day — Oct. 4, a week after Dig­i­tal World and Trump Media & Tech­nol­o­gy Group entered into for­mal talks that were not dis­closed at the time — trad­ing in the war­rants explod­ed. More than 2.5 mil­lion changed hands that day.

    The surge was unusu­al, espe­cial­ly for a lit­tle-known SPAC that hadn’t pub­licly iden­ti­fied a merg­er tar­get, experts said. And with the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty now scru­ti­niz­ing the merg­er deal — par­tic­u­lar­ly trad­ing activ­i­ty that took place before the com­pa­nies announced their agree­ment on Oct. 20 — war­rants could be under a micro­scope.

    “FINRA may see some­thing in the high vol­ume of war­rant trad­ing that makes it won­der whether some­thing improp­er drove the vol­ume burst,” said Erik Gor­don, a law and busi­ness pro­fes­sor at the Uni­ver­si­ty of Michi­gan.

    ...

    War­rants are one of Wall Street’s more eso­teric secu­ri­ties, and have become a sta­ple fea­ture of spe­cial pur­pose acqui­si­tion com­pa­nies like Dig­i­tal World, which go pub­lic first and raise mon­ey with the inten­tion of find­ing a merg­er tar­get. Since the begin­ning of 2020, about 820 SPACs have gone pub­lic, accord­ing to Dealog­ic, and almost all have issued war­rants along with shares.

    War­rants cost only a frac­tion of what a share does because they can’t be exer­cised right away, but are a valu­able com­mod­i­ty if share prices rise sharply. In the case of Dig­i­tal World, a war­rant is redeemable 30 days after the merg­er clos­es and can be used to buy a share at $11.50. War­rants were trad­ing at rough­ly 50 cents each before the merg­er was announced, and closed at $21.50 on Wednes­day. The price of a sin­gle share of Dig­i­tal World was $65.42.

    When a SPAC goes pub­lic, its shares and war­rants ini­tial­ly trade as a sin­gle secu­ri­ty, unless a com­pa­ny decides to trade them sep­a­rate­ly. Dig­i­tal World announced its plan to sep­a­rate them on Sept. 27, the same day it signed a let­ter of intent for­mal­iz­ing the merg­er talks, a per­son who was briefed on the mat­ter said. The announce­ment did not men­tion the talks.

    Few ana­lysts close­ly track trad­ing in war­rants, so ana­lyz­ing trad­ing pat­terns can be dif­fi­cult. Data com­piled by Fact­Set shows that, on aver­age, about 200,000 war­rants in Dig­i­tal World were trad­ed dai­ly dur­ing the three weeks before the merg­er was announced. That’s in line with how war­rants in oth­er SPACs trad­ed after decou­pling from their shares.

    But there were unusu­al spikes in the trad­ing of Dig­i­tal World’s war­rants: 2.5 mil­lion on Oct. 4, 900,000 on Oct. 7 and one mil­lion on Oct. 20, the day of the merg­er announce­ment, which hap­pened after the mar­ket closed for the day.

    Trad­ing in actu­al shares of Dig­i­tal World was far more tepid over that same peri­od: Dai­ly vol­ume exceed­ed 600,000 shares just twice, and few­er than 50,000 trad­ed hands on some days. Dig­i­tal World’s high­est vol­ume in stock trad­ing before the announce­ment was 1.3 mil­lion shares on Sept. 16, before the war­rants could be trad­ed on their own.

    Mike Stege­moller, a finance pro­fes­sor at Bay­lor Uni­ver­si­ty who stud­ies SPACs, said the trad­ing vol­ume in war­rants on Oct. 4 was “par­tic­u­lar­ly abnor­mal.” That may not indi­cate any wrong­do­ing, he said, but the hand­ful of high-vol­ume days cou­pled with the ear­ly deal dis­cus­sions “are rea­son enough for FINRA to take a look.”

    Mr. Gor­don agreed that there might be noth­ing amiss in the trad­ing. “These inquiries often fiz­zle out because nobody did any­thing wrong,” he said.

    ...

    The trad­ing in war­rants of Dig­i­tal World has often been even more fren­zied than the company’s stock.

    On Oct. 21, the day after Dig­i­tal World announced its merg­er deal, the stock rose more than 350 per­cent. But its war­rants went from about 50 cents to $7 — a near­ly 1,300 increase.

    ———-

    “A Surge in Trad­ing Pre­ced­ed Trump’s SPAC Deal” by Matthew Gold­stein; The New York Times; 12/09/2021

    “War­rants cost only a frac­tion of what a share does because they can’t be exer­cised right away, but are a valu­able com­mod­i­ty if share prices rise sharply. In the case of Dig­i­tal World, a war­rant is redeemable 30 days after the merg­er clos­es and can be used to buy a share at $11.50. War­rants were trad­ing at rough­ly 50 cents each before the merg­er was announced, and closed at $21.50 on Wednes­day. The price of a sin­gle share of Dig­i­tal World was $65.42.

    These Dig­i­tal World war­rants were trad­ing at around 50 cents right before the merg­er with Trump Media was announced on Octo­ber 20. As of last week, those war­rants were trad­ing at around $21.50, mean­ing who­ev­er held those war­rants made a very hand­some return.

    But the wild prof­its aren’t what caught reg­u­la­tor’s eyes here. It was the fact that trad­ing in these war­rants surged in the weeks lead­ing up to that Octo­ber 20 IPO. A surge in war­rant trad­ing that did­n’t have a par­al­lel surge in actu­al share trad­ing.

    It was sev­er­al weeks before that Octo­ber 20 IPO that Dig­i­tal World first began allow­ing the trad­ing of war­rants sep­a­rate­ly. In the first cou­ple of days, the war­rants were trad­ing at lev­els rough­ly in line with the vol­ume of trad­ed shares. But on Octo­ber 4 — a week after Dig­i­tal World and Trump Media & Tech­nol­o­gy Group entered into for­mal talks that were not dis­closed at the time — the vol­ume of war­rant trad­ing sud­den­ly spiked round 8‑fold with­out a par­al­lel surge in share trad­ing. Then, on Octo­ber 20, the announce­ment is made and every­one makes a ton of mon­ey as the val­ue of shares spike and the val­ue of the war­rants spike even more. That’s what caught the eyes of observers, prompt­ing this FINRA inves­ti­ga­tion:

    ...
    Dig­i­tal World, a spe­cial pur­pose acqui­si­tion com­pa­ny, began allow­ing the trad­ing of war­rants — poten­tial­ly lucra­tive con­tracts that give the hold­er the right to buy shares of a stock at a pre­de­ter­mined price at a future date. Such secu­ri­ties are typ­i­cal­ly offered to investors or exec­u­tives as sweet­en­ers, allow­ing them to buy addi­tion­al shares of a com­pa­ny cheap­ly if the stock ris­es.

    ...

    About 350,000 war­rants of Dig­i­tal World trad­ed in the first two days. But on the third day — Oct. 4, a week after Dig­i­tal World and Trump Media & Tech­nol­o­gy Group entered into for­mal talks that were not dis­closed at the time — trad­ing in the war­rants explod­ed. More than 2.5 mil­lion changed hands that day.

    The surge was unusu­al, espe­cial­ly for a lit­tle-known SPAC that hadn’t pub­licly iden­ti­fied a merg­er tar­get, experts said. And with the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty now scru­ti­niz­ing the merg­er deal — par­tic­u­lar­ly trad­ing activ­i­ty that took place before the com­pa­nies announced their agree­ment on Oct. 20 — war­rants could be under a micro­scope.

    ...

    Few ana­lysts close­ly track trad­ing in war­rants, so ana­lyz­ing trad­ing pat­terns can be dif­fi­cult. Data com­piled by Fact­Set shows that, on aver­age, about 200,000 war­rants in Dig­i­tal World were trad­ed dai­ly dur­ing the three weeks before the merg­er was announced. That’s in line with how war­rants in oth­er SPACs trad­ed after decou­pling from their shares.

    But there were unusu­al spikes in the trad­ing of Dig­i­tal World’s war­rants: 2.5 mil­lion on Oct. 4, 900,000 on Oct. 7 and one mil­lion on Oct. 20, the day of the merg­er announce­ment, which hap­pened after the mar­ket closed for the day.

    Trad­ing in actu­al shares of Dig­i­tal World was far more tepid over that same peri­od: Dai­ly vol­ume exceed­ed 600,000 shares just twice, and few­er than 50,000 trad­ed hands on some days. Dig­i­tal World’s high­est vol­ume in stock trad­ing before the announce­ment was 1.3 mil­lion shares on Sept. 16, before the war­rants could be trad­ed on their own.

    Mike Stege­moller, a finance pro­fes­sor at Bay­lor Uni­ver­si­ty who stud­ies SPACs, said the trad­ing vol­ume in war­rants on Oct. 4 was “par­tic­u­lar­ly abnor­mal.” That may not indi­cate any wrong­do­ing, he said, but the hand­ful of high-vol­ume days cou­pled with the ear­ly deal dis­cus­sions “are rea­son enough for FINRA to take a look.”
    ...

    And again, note how we had an announced decou­pling of the war­rant and share trad­ing announced on Sep­tem­ber 27, to com­mence on Sep­tem­ber 30, right around the same time of the secret for­mal talks with Trump Media. In the end, those war­rants turned out to be far bet­ter invest­ment than the shares. It rais­es an inter­est­ing addi­tion­al ques­tion of who sold and who bought the war­rants. Was it small investors sell­ing to insid­ers dur­ing this ini­tial peri­od? The fact that Dig­i­tal World was already pub­lic sug­gest­ed con­vinc­ing the pub­lic to sell its war­rants for cheap back to insid­ers would have been a tempt­ing tar­get:

    ...
    When a SPAC goes pub­lic, its shares and war­rants ini­tial­ly trade as a sin­gle secu­ri­ty, unless a com­pa­ny decides to trade them sep­a­rate­ly. Dig­i­tal World announced its plan to sep­a­rate them on Sept. 27, the same day it signed a let­ter of intent for­mal­iz­ing the merg­er talks, a per­son who was briefed on the mat­ter said. The announce­ment did not men­tion the talks.

    ...

    The trad­ing in war­rants of Dig­i­tal World has often been even more fren­zied than the company’s stock.

    On Oct. 21, the day after Dig­i­tal World announced its merg­er deal, the stock rose more than 350 per­cent. But its war­rants went from about 50 cents to $7 — a near­ly 1,300 increase.
    ...

    So at rough­ly the same time Dig­i­tal World makes an unusu­al rule change that allows for the max­i­mal prof­it in war­rant sales, there’s a secret meet­ing with Trump Media. A few days lat­er, the trad­ing of war­rants and shares is allowed. A few days after that, on Oct 4, there’s an anom­alous surge in war­rant trad­ing observed. Then on Oct 20, Trump Media announces to the world that it’s com­mit­ted to this SPAC and the next chap­ter in polit­i­cal grift was upon us.

    But as the fol­low­ing arti­cle reminds us, the con­cern here should­n’t sim­ply be that Trump has found a new way to fleece the pub­lic and cheat the sys­tem for his per­son­al ben­e­fit. As some­one run­ning in 2024 and very pos­si­bly the next Pres­i­dent, this SPAC has cre­at­ed a remark­able mech­a­nism for a kind of back­door IOU. The kind of IOU where it’s Trump who ends up indebt­ed to these ‘investors’, who will be ‘paid back’ after Trump is back in office. Investors that could include Sau­di Princes, mob­sters, and all the oth­er cast of shady char­ac­ters the first Trump admin­is­tra­tion intro­duced us to...any one of them could be ‘investors’ in Trump’s new high­ly lucra­tive media ven­ture. A high­ly lucra­tive media ven­ture that does­n’t actu­al­ly do any­thing yet oth­er than make mon­ey:

    Bloomberg Opin­ion

    Who Just Gave Trump $1 Bil­lion? Let’s Find Out.
    Invest­ments in a blank-check com­pa­ny back­ing the for­mer pres­i­dent could turn out to be IOUs if he wins back the White House.

    By Tim­o­thy L. O’Brien
    Decem­ber 6, 2021, 4:00 AM CST Updat­ed on Decem­ber 6, 2021, 10:05 AM CST

    Don­ald Trump’s new social media enter­prise announced on Sat­ur­day that the blank-check com­pa­ny it set up to mon­e­tize the for­mer president’s dig­i­tal and polit­i­cal mojo has raised $1 bil­lion — with­out iden­ti­fy­ing the mem­bers of the “diverse group of insti­tu­tion­al investors” back­ing him.

    ...

    But there is a anoth­er and more con­se­quen­tial wor­ry in all of this. Trump is a for­mer occu­pant of the Oval Office and is like­ly to make anoth­er pres­i­den­tial bid in 2024. He had his hands on the nation­al secu­ri­ty appa­ra­tus once before and may well again. The iden­ti­ties of the investors who just tossed $1 bil­lion his way are of inter­est because any­one able to buy their way into Trump’s good graces by plop­ping a bag of mon­ey on his desk could sway pub­lic pol­i­cy — which makes Trump a nation­al secu­ri­ty threat.

    What might it mean, for exam­ple, if coun­tries such as Sau­di Ara­bia or oth­ers in the Mid­dle East have decid­ed to invest in his ven­ture? That’s not an entire­ly hypo­thet­i­cal ques­tion.

    For­mer Trea­sury Sec­re­tary Steven Mnuchin recent­ly launched an invest­ment firm, Lib­er­ty Strate­gic Cap­i­tal, with fund­ing from the Sau­di gov­ern­ment and oth­er coun­tries in the Per­sian Gulf region. Mnuchin close­ly court­ed those same coun­tries when he was one of the most pow­er­ful U.S. finan­cial reg­u­la­tors in the Trump admin­is­tra­tion, but avoid­ing finan­cial con­flicts of inter­est was nev­er a pri­or­i­ty for Mnuchin, Trump and many oth­ers on that team.

    The Trump admin­is­tra­tion indulged Sau­di Ara­bia even after evi­dence sur­faced that the coun­try orches­trat­ed the mur­der of jour­nal­ist Jamal Khashog­gi. Mnuchin met per­son­al­ly with Sau­di Crown Prince Mohammed Bin Salman after the killing. Bin Salman is chair­man of the Sau­di fund that has invest­ed in Lib­er­ty Strate­gic Cap­i­tal. Trump’s White House also went out of its way to sup­port arms deals with the Saud­is and the Unit­ed Arab Emi­rates, despite con­gres­sion­al oppo­si­tion, and it backed both coun­tries pub­licly in their con­tro­ver­sial inter­ven­tions in Yemen’s civ­il war.

    Jared Kush­n­er, Trump’s son-in-law and an enthu­si­as­tic envoy to the Mid­dle East when he was a senior White House advis­er, is also try­ing to open an invest­ment firm, with offices in the U.S. and Israel. He has report­ed­ly drawn inter­est from the Saud­is for his new ven­ture, although Qatar and the Unit­ed Arab Emi­rates are said to have passed. Maybe they’ll cir­cle back if Trump’s prox­im­i­ty to the White House grows clos­er.

    Trump him­self has already been scram­bling to pare down more than $1 bil­lion in debt that hung over his pan­dem­ic-bat­tered real estate and resort hold­ings when he lost the pres­i­den­tial elec­tion in 2020. He recent­ly agreed to sell his prized but mon­ey-los­ing Wash­ing­ton hotel for $375 mil­lion, which would pro­vide the Trump Orga­ni­za­tion with a $100 mil­lion gain, accord­ing to the Wash­ing­ton Post. That mon­ey helps, par­tic­u­lar­ly with pay­ing off at least $421 mil­lion in debt that Trump per­son­al­ly guar­an­teed and comes due in the next sev­er­al years, accord­ing to the New York Times.

    Trump’s indebt­ed­ness, his reliance on income from over­seas and his refusal to authen­ti­cal­ly dis­tance him­self from his hodge­podge of busi­ness­es made him a nation­al secu­ri­ty threat as pres­i­dent. That threat will reemerge if he seeks reelec­tion in 2024.

    In the mean­time, and with Trump still hunt­ing for cash, the $1 bil­lion he just raised through a “pri­vate invest­ment in pub­lic equi­ty” (or PIPE) must be hap­py news for the for­mer pres­i­dent. After all, it is a sig­nif­i­cant mul­ti­ple of the $293 mil­lion DWAC raised when it went pub­lic in Sep­tem­ber. Per­haps that $1 bil­lion mere­ly sig­nals that some investors believe Truth Social is going to be a big hit. Or maybe they’re buy­ing access to Trump. Either way, let’s find out who they are.

    ———–

    “Who Just Gave Trump $1 Bil­lion? Let’s Find Out.” by Tim­o­thy L. O’Brien; Bloomberg Opin­ion; 12/06/2021

    “Trump’s indebt­ed­ness, his reliance on income from over­seas and his refusal to authen­ti­cal­ly dis­tance him­self from his hodge­podge of busi­ness­es made him a nation­al secu­ri­ty threat as pres­i­dent. That threat will reemerge if he seeks reelec­tion in 2024.”

    It’s not like we can play inno­cent this time. We know who Trump is and what he does. A sec­ond Trump term is going to be an orgy of cor­rup­tion. This SPAC is just one of what will be many avenues for facil­i­tat­ing. But giv­en how this is tem­plate that can be repli­cat­ed, this could end up being a par­tic­u­lar­ly impor­tant avenue. It’s hard to imag­ine this is the last ‘Trump’ brand­ed SPAC. Bar­ring, of course, a nasty inves­tiga­tive out­come:

    ...
    But there is a anoth­er and more con­se­quen­tial wor­ry in all of this. Trump is a for­mer occu­pant of the Oval Office and is like­ly to make anoth­er pres­i­den­tial bid in 2024. He had his hands on the nation­al secu­ri­ty appa­ra­tus once before and may well again. The iden­ti­ties of the investors who just tossed $1 bil­lion his way are of inter­est because any­one able to buy their way into Trump’s good graces by plop­ping a bag of mon­ey on his desk could sway pub­lic pol­i­cy — which makes Trump a nation­al secu­ri­ty threat.

    What might it mean, for exam­ple, if coun­tries such as Sau­di Ara­bia or oth­ers in the Mid­dle East have decid­ed to invest in his ven­ture? That’s not an entire­ly hypo­thet­i­cal ques­tion.

    ...

    In the mean­time, and with Trump still hunt­ing for cash, the $1 bil­lion he just raised through a “pri­vate invest­ment in pub­lic equi­ty” (or PIPE) must be hap­py news for the for­mer pres­i­dent. After all, it is a sig­nif­i­cant mul­ti­ple of the $293 mil­lion DWAC raised when it went pub­lic in Sep­tem­ber. Per­haps that $1 bil­lion mere­ly sig­nals that some investors believe Truth Social is going to be a big hit. Or maybe they’re buy­ing access to Trump. Either way, let’s find out who they are.
    ...

    What shady for­eign rela­tion­ships are being set up as part of this already cor­rupt Trump Media fias­co? Let’s hope the SEC or FINRA can get to the bot­tom of it. Because oth­er­wise we’ll have to wait for Trump to run and win in 2024 and we can learn about these shady rela­tions in the upcom­ing Trump Admin II scan­dal-palooza. It will be a lot like the Trump I scan­dal-palooza, but with IPOs so you can own a piece of it.

    Posted by Pterrafractyl | December 12, 2021, 11:26 pm
  26. Will increas­ing the poten­tial prof­its of for-prof­it health­care providers save Medicare? It seems like a rather absurd propo­si­tion. And yet that appears to be the grand strat­e­gy behind an exper­i­men­tal pro­gram the Biden admin­is­tra­tion just extend­ed through 2026. The pro­gram is cen­tered around so called direct con­tract­ing enti­ties (DCEs), which are tasked with pro­vid­ing care to Medicare patients under a mod­el that pays them a fixed amount per patient from the gov­ern­ment but allows the DCI to keep left over pay­ments as prof­its if the DCE can pro­vide ade­quate care for less cost.

    The pitch behind the scheme is that by incen­tiviz­ing these care providers with more prof­its through low­er spend­ing, new­er more effi­cient mod­els for care can be devel­oped. In that sense the DCE sounds a lot like the exist­ing pri­vate­ly man­aged Medicare Advan­tage plans. And as we already know, Medicare Advan­tage costs both patients and the gov­ern­ment more. It’s a giant for-prof­it scam.

    But the DCE scheme dif­fers from Medicare Advan­tage in one key way: patients have to be con­vinced to sign up for a Medicare Advan­tage plan. But under this new DCE mod­el, Medicare patients could be trans­ferred to a DCE with­out their con­sent. Yep, if you want to stick with a clas­sic Medicare plan you might have to find a new doc­tor.

    So this new ‘exper­i­ment’ in con­trol­ling Medicare costs appears to be a stealth move to actu­al­ly expand the scam­my pri­va­tized Medicare Advan­tage mod­el by forc­ing patients onto it. And that’s what the Biden admin­is­tra­tion extend­ed to 2026 back in Feb­ru­ary in the face of intense indus­try lob­by­ing to keep the pro­gram going.

    But it’s impor­tant to point out that when the Biden admin­is­tra­tion extend­ed the pro­gram — rebrand­ing it as the the Account­able Care Orga­ni­za­tion Real­iz­ing Equi­ty, Access, and Com­mu­ni­ty Health pro­gram, or “ACO REACH” — the admin­is­tra­tion did actu­al­ly sig­nif­i­cant­ly pare back the Trump admin­is­tra­tion’s orig­i­nal design. The orig­i­nal scheme involved mass enrolling entire geo­graph­ic regions all at once. That ‘geo stream­ing’ pro­vi­sion is no longer in place. So the invol­un­tary shift­ing of Medicare patients into these for-prof­it schemes will con­tin­ue for anoth­er four years, but not quite as exten­sive­ly as the Trump admin­is­tra­tion planned.

    It’s also worth not­ing the tim­ing of the orig­i­nal announce­ments for this plan by the Trump admin­is­tra­tion: Decem­ber of 2020, which would have been right in the mid­dle of the Trump team’s efforts to over­turn the elec­tion. It’s a reminder that these mas­sive­ly con­tro­ver­sial changes to the safe­ty net don’t have to be delib­er­at­ed in pub­lic or even passed by Con­gress before they hap­pen. The White House as the pow­er to effec­tive­ly pri­va­tize Medicare on its own. And since the Biden admin­is­tra­tion extend­ed the pro­gram through 2026, it also means that a reim­po­si­tion of those ‘geo stream­ing’ rules is a vir­tu­al cer­tain­ty should the GOP win back the White House in 2024.

    Oh, and guess which sec­tor of the econ­o­my is already a major play­ing in this DCE mar­ket­place: pri­vate equi­ty. Yes, it turns out that pri­vate equi­ty firms are major investors or own­ers of a quar­ter of the com­pa­nies licensed to pro­vide these DCE ser­vices. So the indus­try noto­ri­ous for gut­ting com­pa­nies and slash­ing cus­tomer ser­vice and qual­i­ty in the search of prof­its is already a major part of this grand exper­i­ment in using the prof­it motive to dis­cov­er new effi­cien­cies in pro­vid­ing health­care. Because of course:

    Jacobin

    The Stealth Pri­va­ti­za­tion of Medicare Is a Big Boon to Wall Street

    By Matthew Cun­ning­ham-Cook
    05.11.2022

    The Biden admin­is­tra­tion recent­ly expand­ed on Don­ald Trump’s efforts to pri­va­tize Medicare. Now patients are being assigned to new pri­vate plans with­out their con­sent, and pri­vate equi­ty firms and major health care com­pa­nies are the ones prof­it­ing.

    The Joe Biden administration’s recent entrench­ment and expan­sion of the Don­ald Trump administration’s efforts to pri­va­tize Medicare is help­ing a shad­owy set of big-busi­ness ben­e­fi­cia­ries: pri­vate equi­ty firms and major health care com­pa­nies, includ­ing one that pre­vi­ous­ly employed the gov­ern­ment offi­cial over­see­ing the pri­va­ti­za­tion plan, a new analy­sis from us shows.

    In April last year, the Biden admin­is­tra­tion con­tract­ed with fifty-three third-par­ty com­pa­nies to man­date pri­va­tized health care plans through Medicare. The result­ing health care options are effec­tive­ly Medicare Advan­tage plans, or pri­vate cov­er­age offered through the nation­al health insur­ance pro­gram for seniors and peo­ple with dis­abil­i­ties — but with one wrin­kle: Patients are being assigned to these new plans with­out their con­sent.

    The fifty-three par­tic­i­pat­ing com­pa­nies — called “direct con­tract­ing enti­ties,” or DCEs — are allowed to offer ben­e­fits beyond tra­di­tion­al Medicare, like gym mem­ber­ship cov­er­age. But as for-prof­it busi­ness­es that receive a set pay­ment from Medicare no mat­ter how much care they approve, these DCEs are incen­tivized to lim­it the care that patients receive, espe­cial­ly when they are very sick. The first DCEs were launched by Pres­i­dent Don­ald Trump in 2019, and so far, at least 350,000 seniors have already been moved onto these pri­va­tized Medicare plans.

    Now, a new analy­sis by us of the fifty-three DCEs found addi­tion­al cause for con­cern: fif­teen of these enti­ties, or slight­ly more than a quar­ter, are backed by pri­vate equi­ty firms, which are known for extract­ing prof­its at the expense of work­ers, the envi­ron­ment, and even their own pen­sion fund investors. The firms include big-name firms like the Car­lyle Group, Gen­er­al Atlantic, Clay­ton, Dubili­er & Rice, Bench­mark Cap­i­tal, and War­burg Pin­cus. What’s more, anoth­er fif­teen DCEs are linked to big health care com­pa­nies — includ­ing one with a direct con­nec­tion to the Biden appointee in charge of the new pri­va­tized Medicare scheme.

    Wall Street’s encroach­ment into Medicare is the lat­est exam­ple of pri­vate equity’s aggres­sive expan­sion into health care, which has ranged from hos­pi­tals to ER doc­tor groups. In 2021, pri­vate equi­ty man­agers deployed $172 bil­lion in cap­i­tal in the health care sec­tor — near­ly four times the total bud­get of the Nation­al Insti­tutes of Health.

    Biden him­self has lam­bast­ed the for-prof­it industry’s takeover of elder­care ser­vices, not­ing dur­ing his State of the Union address in March: “As Wall Street firms take over more nurs­ing homes, qual­i­ty in those homes has gone down and costs have gone up. That ends on my watch.”

    Biden appar­ent­ly doesn’t have the same con­cerns about Wall Street’s grow­ing role in Medicare — a devel­op­ment that could lead to high­er med­ical bills for patients. The finan­cial indus­try has already demon­strat­ed its will­ing­ness to take a force­ful approach to gen­er­at­ing health care prof­its; pri­vate equi­ty waged an aggres­sive cam­paign to derail leg­is­la­tion designed to stop so-called “sur­prise” med­ical bills, which formed a sig­nif­i­cant part of their hos­pi­tal staffing firms’ bot­tom line.

    Now, as pri­vate equi­ty mus­cles into pri­va­tized Medicare, indus­try lob­by­ists are like­ly to push for more gen­er­ous pay­ment struc­tures that ben­e­fit for-prof­it firms at the expense of Medicare patients. The Medicare Pay­ment Advi­so­ry Com­mis­sion, an inde­pen­dent body that advis­es Con­gress on Medicare, hint­ed at this sce­nario while dis­cussing pri­vate equity’s role in the Medicare Advan­tage space at an April 2021 hear­ing.

    “The end result might or might not be bet­ter for con­sumers, but I think that it does have an impact on Medicare pay­ment pol­i­cy,” said com­mis­sion­er Pat Wang.

    ...

    “We have lots of evi­dence from many oth­er sit­u­a­tions in which pri­vate equi­ty puts prof­its before patients,” said Eileen Appel­baum, codi­rec­tor of the Cen­ter for Eco­nom­ic and Pol­i­cy Research and coau­thor of Pri­vate Equi­ty at Work: When Wall Street Man­ages Main Street. “They are look­ing for a place where it’s easy to make mon­ey — and it’s easy to make mon­ey when it’s the tax­pay­er foot­ing the bill.”

    Big Play­ers, Big Prof­its, and a Big Con­flict

    While the DCE pro­gram was launched under Pres­i­dent Trump, Biden expand­ed the effort in Feb­ru­ary under a new name: the Account­able Care Orga­ni­za­tion Real­iz­ing Equi­ty, Access, and Com­mu­ni­ty Health pro­gram, or “ACO REACH.” Now, hos­pi­tal-backed for-prof­it health ben­e­fit pro­grams are also allowed to auto­mat­i­cal­ly enroll Medicare patients into their health care plans.

    Like providers of Medicare Advan­tage plans, these new firms receive a set pay­ment from Medicare for their offer­ings, sup­pos­ed­ly to incen­tivize more holis­tic and bet­ter care. In exchange, these firms acquire Medicare patients in their plans — often with­out the patients real­iz­ing what is hap­pen­ing.

    ...

    Along with the fif­teen pri­vate equi­ty-backed com­pa­nies, the list of approved DCEs the Biden admin­is­tra­tion released in April 2021 includes fif­teen oper­a­tions owned by health care giants, such as insur­ers Humana, Unit­ed­Health, and Anthem, the phar­ma­cy chain Wal­greens, and the dial­y­sis provider DaVi­ta.

    Experts say these con­nec­tions raise seri­ous ques­tions about con­flicts of inter­est. For exam­ple, the DCE pro­gram is being led by a lit­tle-known fed­er­al enti­ty, the Cen­ters for Medicare & Med­ic­aid Ser­vices’ (CMS) Inno­va­tion Cen­ter, head­ed by Liz Fowler — the for­mer vice pres­i­dent of pub­lic pol­i­cy for the insur­er Well­Point, now known as Anthem.

    ...

    Crit­ics say Fowler has a his­to­ry of craft­ing pol­i­cy to help her pri­vate sec­tor con­tacts.

    “Hon­est­ly this just seems to add to the pat­tern we’ve observed with Liz Fowler,” said Fatou Ndi­aye, a research assis­tant with the Revolv­ing Door Project, which mon­i­tors the revolv­ing door between the pub­lic and pri­vate sec­tor.

    Ndi­aye point­ed out that before she lob­bied for Well­Point, Fowler worked for Sen­a­tor Max Bau­cus (D‑MT), where she helped draft Medicare Part D, a pro­gram crit­ics said was a huge give­away to the phar­ma­ceu­ti­cal indus­try because it cre­at­ed mas­sive new drug ben­e­fits with­out con­trol­ling prices.

    After work­ing for Well­point from 2006 to 2008, Fowler rejoined Baucus’s staff, where she helped draft a ver­sion of the Afford­able Care Act (ACA) that exclud­ed the pub­lic health insur­ance option promised by Democ­rats, result­ing in huge prof­its and no pub­lic sec­tor com­pe­ti­tion for pri­vate insur­ers.

    “A year after [ACA’s] pas­sage, Wellpoint’s prof­its increased by 91 per­cent to $2.3 bil­lion,” said Ndi­aye.

    Pri­vate Equi­ty Mus­cles In

    The fact that pri­vate equi­ty now backs more than a quar­ter of all com­pa­nies in the DCE space stands in stark con­trast to the fact that pri­vate equi­ty owns just 2 per­cent of all for-prof­it Medicare Advan­tage pro­grams.

    While Medicare Advan­tage options have been crit­i­cized by health advo­cates because of their extreme­ly high costs, the fact that pri­vate equi­ty is focus­ing its atten­tion on this new kind of non­vol­un­tary pri­va­tized Medicare scheme sug­gests that Fowler and the Biden admin­is­tra­tion could be set­ting the stage for sub­stan­tial­ly larg­er pri­vate equi­ty involve­ment in the nation­al health insur­ance pro­gram.

    Exam­ples abound of prob­lems aris­ing when pri­vate equi­ty takes over health care oper­a­tions. Just last month, Buz­zfeed News report­ed that Bright­Spring, a group home oper­a­tor acquired by pri­vate equi­ty megafirm KKR in 2019, has since been plagued by seri­ous prob­lems at its group homes for peo­ple with dis­abil­i­ties, lead­ing to res­i­dents being seri­ous­ly injured and in some cas­es dying.

    The Car­lyle Group, which has an own­er­ship stake in OneMed­ical, the par­ent com­pa­ny of Iora Health, has a par­tic­u­lar­ly dis­turb­ing his­to­ry in health care. After Car­lyle acquired HCR Manor­care, a nurs­ing home chain, the com­pa­ny was plagued by seri­ous laps­es in stan­dards of care until it went bank­rupt eleven years lat­er.

    Oth­er pri­vate equity–backed oper­a­tions approved for the new DCE pro­gram have major con­nec­tions to the Demo­c­ra­t­ic Par­ty estab­lish­ment. The pri­vate equi­ty firm War­burg Pin­cus, which backs a DCE called Excel­era, was cofound­ed by the father of cur­rent sec­re­tary of state Antony Blinken and boasts for­mer Barack Oba­ma trea­sury sec­re­tary Tim Gei­th­n­er as its pres­i­dent.

    Lau­ra Katz Olson, a pro­fes­sor at Lehigh Uni­ver­si­ty and author of the recent­ly pub­lished Eth­i­cal­ly Chal­lenged: Pri­vate Equi­ty Storms US Health Care, said that pri­vate equity’s role in Medicare pri­va­ti­za­tion rais­es sig­nif­i­cant con­cerns.

    “If you under­stand the pri­vate equi­ty play­book, the dan­gers are fair­ly obvi­ous,” said Katz Olson. “They’re bor­row­ing mon­ey so they have to pay off debt. They’re tak­ing mon­ey into their pock­ets through fees. You would have to be a magi­cian to keep up qual­i­ty of care doing all of these things.”

    She added, “Pri­vate equi­ty is bad for health care, peri­od, so I can’t imag­ine that it would be good for Medicare Advan­tage. I’m actu­al­ly in a state of sur­prise that they’re even think­ing about it.”

    ———-

    “The Stealth Pri­va­ti­za­tion of Medicare Is a Big Boon to Wall Street” by Matthew Cun­ning­ham-Cook; Jacobin; 05/11/2022

    “While the DCE pro­gram was launched under Pres­i­dent Trump, Biden expand­ed the effort in Feb­ru­ary under a new name: the Account­able Care Orga­ni­za­tion Real­iz­ing Equi­ty, Access, and Com­mu­ni­ty Health pro­gram, or “ACO REACH.” Now, hos­pi­tal-backed for-prof­it health ben­e­fit pro­grams are also allowed to auto­mat­i­cal­ly enroll Medicare patients into their health care plans.”

    This exper­i­men­tal “direct con­tract­ing enti­ties” (DCE) pro­gram was announced in the final months of Don­ald Trump’s term, but it was up to the Biden admin­is­tra­tion as to whether or it would be con­tin­ued. That deci­sion was made in Feb­ru­ary with the announce­ment of the new name for the pro­gram: the Account­able Care Orga­ni­za­tion Real­iz­ing Equi­ty, Access, and Com­mu­ni­ty Health pro­gram, or “ACO REACH.” In oth­er words, this Medicare exper­i­ment — an exper­i­ment in invol­un­tar­i­ly shunt­ing Medicare patients into these pri­vate­ly-man­aged for-prof­it sys­tems — is going to con­tin­ue. Which means pri­vate equi­ty’s grip on pro­vid­ing Medicare ser­vices is only going to con­tin­ue too. Experts aren’t sure what impact this will have on the qual­i­ty of care, but they’re sure about one thing: it’s going to reduce the qual­i­ty of patient care in the pur­suit of high­er prof­its. That’s lit­er­al­ly how the incen­tives are struc­tured:

    ...
    In April last year, the Biden admin­is­tra­tion con­tract­ed with fifty-three third-par­ty com­pa­nies to man­date pri­va­tized health care plans through Medicare. The result­ing health care options are effec­tive­ly Medicare Advan­tage plans, or pri­vate cov­er­age offered through the nation­al health insur­ance pro­gram for seniors and peo­ple with dis­abil­i­ties — but with one wrin­kle: Patients are being assigned to these new plans with­out their con­sent.

    The fifty-three par­tic­i­pat­ing com­pa­nies — called “direct con­tract­ing enti­ties,” or DCEs — are allowed to offer ben­e­fits beyond tra­di­tion­al Medicare, like gym mem­ber­ship cov­er­age. But as for-prof­it busi­ness­es that receive a set pay­ment from Medicare no mat­ter how much care they approve, these DCEs are incen­tivized to lim­it the care that patients receive, espe­cial­ly when they are very sick. The first DCEs were launched by Pres­i­dent Don­ald Trump in 2019, and so far, at least 350,000 seniors have already been moved onto these pri­va­tized Medicare plans.

    Now, a new analy­sis by us of the fifty-three DCEs found addi­tion­al cause for con­cern: fif­teen of these enti­ties, or slight­ly more than a quar­ter, are backed by pri­vate equi­ty firms, which are known for extract­ing prof­its at the expense of work­ers, the envi­ron­ment, and even their own pen­sion fund investors. The firms include big-name firms like the Car­lyle Group, Gen­er­al Atlantic, Clay­ton, Dubili­er & Rice, Bench­mark Cap­i­tal, and War­burg Pin­cus. What’s more, anoth­er fif­teen DCEs are linked to big health care com­pa­nies — includ­ing one with a direct con­nec­tion to the Biden appointee in charge of the new pri­va­tized Medicare scheme.

    ...

    Now, as pri­vate equi­ty mus­cles into pri­va­tized Medicare, indus­try lob­by­ists are like­ly to push for more gen­er­ous pay­ment struc­tures that ben­e­fit for-prof­it firms at the expense of Medicare patients. The Medicare Pay­ment Advi­so­ry Com­mis­sion, an inde­pen­dent body that advis­es Con­gress on Medicare, hint­ed at this sce­nario while dis­cussing pri­vate equity’s role in the Medicare Advan­tage space at an April 2021 hear­ing.

    “The end result might or might not be bet­ter for con­sumers, but I think that it does have an impact on Medicare pay­ment pol­i­cy,” said com­mis­sion­er Pat Wang.
    ...

    But the pro­gram isn’t just being extend­ed. This is a dynam­ic process, with plen­ty of oppor­tu­ni­ties for addi­tion­al revi­sions to the pro­gram. That’s part of why crit­ics are quick to point out that the gov­ern­ment offi­cial over­see­ing the pro­gram, the Cen­ters for Medicare & Med­ic­aid Ser­vices’ (CMS) Inno­va­tion Cen­ter, is head­ed by none oth­er than Liz Fowler. Not only has Fowler worked as the vice pres­i­dent for pub­lic pol­i­cy for Anthem, one of the health care giants par­tic­i­pat­ing in the DCE pro­gram, but she was lit­er­al­ly the Demo­c­ra­t­ic staffer who stripped out the pub­lic option from the orig­i­nal Oba­macare health care over­haul back in 2009. So the per­son with the most direct influ­ence over how this pro­gram evolves has an exten­sive track record of doing the indus­try’s bid­ding both in and out of gov­ern­ment:

    ...
    Along with the fif­teen pri­vate equi­ty-backed com­pa­nies, the list of approved DCEs the Biden admin­is­tra­tion released in April 2021 includes fif­teen oper­a­tions owned by health care giants, such as insur­ers Humana, Unit­ed­Health, and Anthem, the phar­ma­cy chain Wal­greens, and the dial­y­sis provider DaVi­ta.

    Experts say these con­nec­tions raise seri­ous ques­tions about con­flicts of inter­est. For exam­ple, the DCE pro­gram is being led by a lit­tle-known fed­er­al enti­ty, the Cen­ters for Medicare & Med­ic­aid Ser­vices’ (CMS) Inno­va­tion Cen­ter, head­ed by Liz Fowler — the for­mer vice pres­i­dent of pub­lic pol­i­cy for the insur­er Well­Point, now known as Anthem.

    ...

    Crit­ics say Fowler has a his­to­ry of craft­ing pol­i­cy to help her pri­vate sec­tor con­tacts.

    “Hon­est­ly this just seems to add to the pat­tern we’ve observed with Liz Fowler,” said Fatou Ndi­aye, a research assis­tant with the Revolv­ing Door Project, which mon­i­tors the revolv­ing door between the pub­lic and pri­vate sec­tor.

    Ndi­aye point­ed out that before she lob­bied for Well­Point, Fowler worked for Sen­a­tor Max Bau­cus (D‑MT), where she helped draft Medicare Part D, a pro­gram crit­ics said was a huge give­away to the phar­ma­ceu­ti­cal indus­try because it cre­at­ed mas­sive new drug ben­e­fits with­out con­trol­ling prices.

    After work­ing for Well­point from 2006 to 2008, Fowler rejoined Baucus’s staff, where she helped draft a ver­sion of the Afford­able Care Act (ACA) that exclud­ed the pub­lic health insur­ance option promised by Democ­rats, result­ing in huge prof­its and no pub­lic sec­tor com­pe­ti­tion for pri­vate insur­ers.

    “A year after [ACA’s] pas­sage, Wellpoint’s prof­its increased by 91 per­cent to $2.3 bil­lion,” said Ndi­aye.
    ...

    But as the fol­low­ing Buz­zFeed arti­cle from back in Jan­u­ary points out, the biggest red flag about the poten­tial that this DCE exper­i­ment has to pri­va­tize Medicare en mass isn’t the fact that indus­try shills like Liz Fowler are head­ing the pro­gram. It’s the fact that the orig­i­nal Trump admin­is­tra­tion plan for the pro­gram involved the mass pri­va­ti­za­tion for entire geo­graph­ic regions of the US under the ‘geo stream­ing’ pro­gram announced by the Trump admin­is­tra­tion in Decem­ber of 2020. That part of the pro­gram was halt­ed by the Biden admin­is­tra­tion back in March of 2021. But that was the GOP’s plan: mass Medicare pri­va­ti­za­tions for entire geo­graph­ic regions. So when the Biden admin­is­tra­tion decid­ed to extent the DCE pro­gram through 2026, it implic­it­ly left in the place the option to reim­ple­ment that ‘geo stream­ing’ mass pri­va­ti­za­tion pro­vi­sion should the GOP win back the White House in 2024:

    Buz­zFeed News

    Trump Cre­at­ed A Pro­gram To Pri­va­tize Medicare With­out Patients’ Con­sent. Biden Is Keep­ing It Going.

    Under the pro­gram, insur­ers and doc­tors can nego­ti­ate to move patients to a pri­vate insur­ance stream. Patients don’t get a say.

    Paul McLeod
    Buz­zFeed News Reporter
    Map of Wash­ing­ton, DC

    Report­ing From
    Wash­ing­ton, DC
    Post­ed on Jan­u­ary 28, 2022, 8:42 am

    WASHINGTON — The Biden admin­is­tra­tion is qui­et­ly con­tin­u­ing a lit­tle-known Trump-era pilot pro­gram that clears the way for doc­tors and pri­vate health insur­ers to switch patients from Medicare to pri­vate­ly run insur­ance. Though there has been lit­tle pub­lic dis­cus­sion of the pro­gram, it has the poten­tial to expand to the whole­sale pri­va­ti­za­tion of Medicare.

    Pro­gres­sive law­mak­ers and doc­tor and patient groups are now scru­ti­niz­ing the pro­gram, after a year of it fly­ing under the radar.

    “I think there’s a lot of inter­est in stop­ping this,” Rep. Jan Schakowsky said. “To pri­va­tize Medicare with­out the knowl­edge of peo­ple who chose Medicare is scan­dalous. We can’t let that hap­pen.”

    Despite calls to shut down the pilot project, the Biden admin­is­tra­tion has no plans to do so. The cur­rent plan is to run the pro­gram through the end of Biden’s term, poten­tial­ly allow­ing a future pres­i­dent to expand its scope and fur­ther erode Medicare, the pil­lar of pub­lic health­care in Amer­i­ca.

    The pilot pro­gram, known as direct con­tract­ing, allows for doc­tors to trans­fer their patients off of core Medicare to a pri­vate mod­el, where a third par­ty is paid a fee to man­age their ben­e­fits. The gov­ern­ment says it will pre­serve patient ben­e­fits while exper­i­ment­ing with new ways to “pro­duce val­ue and high qual­i­ty health care.” Oppo­nents say it is a back­door method of pri­va­tiz­ing Medicare against the desire or con­sent of patients.

    For decades, pri­vate insur­ers have pushed to get a piece of Medicare, the pub­lic health insur­ance pro­gram cre­at­ed in 1965 for peo­ple age 65 and old­er. The gov­ern­ment cre­at­ed a pri­vate Medicare stream in 1997, now called Medicare Advan­tage, and com­pa­nies spend a great deal of mon­ey adver­tis­ing such plans. They’ve won over more than 26 mil­lion enrollees, mak­ing up more than 40% of the Medicare pop­u­la­tion, to the over 3,500 Medicare Advan­tage plans, accord­ing to the Kaiser Fam­i­ly Foun­da­tion.

    The pri­va­ti­za­tion of Medicare has been lucra­tive for the indus­try. Medicare Advan­tage plans are more expen­sive but have not been shown to pro­vide bet­ter health out­comes. That dis­par­i­ty grows wider every year. The added costs born by the pub­lic to fund the pro­gram are believed to add up to tens of bil­lions of dol­lars. At a time when Medicare is fac­ing insol­ven­cy in the near future, the more expen­sive Medicare Advan­tage plans are pro­ject­ed to soon over­take tra­di­tion­al Medicare.

    But there remains one major hur­dle to Medicare Advan­tage expan­sion: You have to con­vince enrollees to active­ly switch out of the default pub­lic plan.

    In the wan­ing months of his admin­is­tra­tion, then-pres­i­dent Don­ald Trump launched a pro­gram, lob­bied for by pri­vate indus­try, to cir­cum­vent this. It would allow insur­ers to bypass the will of patients alto­geth­er. For­mal­ly known as the Glob­al and Pro­fes­sion­al Direct Con­tract­ing Mod­el, the pro­gram allows insur­ers to nego­ti­ate with doc­tors to move their patients from straight Medicare plans to pri­vate­ly run insur­ance.

    Direct con­tract­ing flips the onus. Instead of patients hav­ing to active­ly choose to leave core Medicare, they are trans­ferred by their doc­tor and only need to be told in an annu­al noti­fi­ca­tion. They may have to switch doc­tors to opt out.

    The tac­tic is an exper­i­ment in find­ing new ways to low­er costs at a time when Medicare is fac­ing insol­ven­cy. It also opens up a new front for pri­va­tiz­ing Medicare. On the front end, insur­ers can buy ads adver­tis­ing their plans to Medicare enrollees. On the back end, they can try to sell doc­tors on mov­ing their patients to pri­vate plans.

    When Biden took office, his admin­is­tra­tion faced the choice of what to do about direct con­tract­ing. At the time it had not yet launched and was set to be far more sweep­ing.

    The Trump administration’s plan was for mass pri­va­ti­za­tion of Medicare, with whole geo­graph­ic regions being shift­ed from pub­lic to pri­vate plans with no patient input or abil­i­ty to opt out. The Biden White House shut down the so-called geo­graph­ic stream. But when it came to the rest of the direct con­tract­ing pro­gram, the Biden admin­is­tra­tion allowed it to go ahead.

    One Demo­c­ra­t­ic Sen­ate aide said that because com­pa­nies had already spent a sub­stan­tial amount of mon­ey prepar­ing for the pro­gram, his admin­is­tra­tion would have faced fierce indus­try back­lash if they shut it down.

    The Cen­ters for Medicare and Med­ic­aid Ser­vices (CMS) approved 53 com­pa­nies across 38 states to kick­start direct con­tract­ing in 2021. CMS is not say­ing how many peo­ple have been fil­tered into the direct con­tract­ing mod­el but said that infor­ma­tion will be released in the sec­ond quar­ter of 2022.

    The Biden admin­is­tra­tion essen­tial­ly chose a mid­dle ground. Med­ical indus­try com­pa­nies were dis­ap­point­ed because new com­pa­nies apply­ing to be part of the pro­gram were frozen out. On the oth­er side, the group Physi­cians for a Nation­al Health Pro­gram want­ed the pro­gram to be shut down alto­geth­er.

    By nei­ther clos­ing nor expand­ing the pro­gram, the White House was able to most­ly avoid high-pro­file scorn of indus­try and pro­gres­sives for a year. But that is start­ing to change.

    Ear­li­er this month, more than 50 pro­gres­sive mem­bers of Con­gress signed a let­ter to CMS ask­ing for the pro­gram to be shut down and patients to be returned to the tra­di­tion­al Medicare mod­el by July 1, 2022.

    The pro­gram is set to run for five years, from 2021 until 2026. Cru­cial­ly, that extends its life past Biden’s cur­rent term. If a Repub­li­can wins in 2024 and is look­ing to increas­ing­ly pri­va­tize Medicare, they would not need to come up with a plan from scratch. They could sim­ply expand the direct con­tract­ing mod­el, which by then would be well estab­lished.

    “I don’t think there’s any ques­tion that that would be part of the agen­da if that hap­pened. It’s a good rea­son why this pilot pro­gram should not even be allowed to take off,” Schakowsky said. “It’s time for us to stop it before it real­ly gets going.”

    So far, that isn’t hap­pen­ing.

    Asked about the future of direct con­tract­ing, CMS spokesper­son Ray­mond Thorn said his orga­ni­za­tion is con­sid­er­ing pub­lic input. “The CMS Inno­va­tion Cen­ter is active­ly lis­ten­ing to the com­ments being made about the Glob­al and Pro­fes­sion­al Direct Con­tract­ing Mod­el,” he said. “This feed­back is invalu­able as we con­sid­er the future of the mod­el.”

    Thorn defend­ed the pilot project by say­ing CMS was exper­i­ment­ing with “oppor­tu­ni­ties to improve Orig­i­nal Medicare.” He described direct con­tract­ing enti­ties as “doc­tors, hos­pi­tals, and oth­er health care providers that work togeth­er to improve qual­i­ty of care and patient expe­ri­ence.”

    Under reg­u­lar Medicare, doc­tors are paid a fee for pro­vid­ing care to patients. Under direct con­tract­ing, CMS pays a per-patient rate to what is known as a direct con­tract enti­ty to man­age care. If these enti­ties can deliv­er care at a cheap­er cost, they reap a prof­it. If not, they break even or take a loss. Enti­ties can opt to take on 100% of the profit/loss risk or split it 50/50 with the gov­ern­ment.

    ...

    Direct con­tract­ing is an expan­sion of an ear­li­er exper­i­ment to allow doc­tors, hos­pi­tals, and oth­er providers to coor­di­nate care by join­ing up into net­works. So far that pro­gram has been a mod­est suc­cess, show­ing some improve­ments in cus­tomer care.

    The key dif­fer­ence in direct con­tract­ing is that many of the com­pa­nies are con­trolled by investors, rather than providers. This brings an added prof­it incen­tive akin to the pri­vate health care mar­ket most peo­ple deal with.

    One direct con­trac­tor, Clover Health, is a pri­vate equi­ty-backed com­pa­ny that derives almost all of its rev­enue from Medicare. Last year short-sell­ing firm Hin­den­burg Research accused Clover of decep­tive adver­tis­ing to seniors and hid­ing from investors that it was the tar­get of a Depart­ment of Jus­tice inves­ti­ga­tion look­ing into at least a dozen issues. Clover’s stock fell but then became a meme stock on Red­dit and was buoyed by a wave of small investors.

    Clover recent­ly told investors that it expects its num­ber of direct con­tract­ing patients to grow sig­nif­i­cant­ly from its cur­rent 62,000, and for prof­it mar­gins on those cus­tomers to also improve.

    Direct con­trac­tor Oak Street Health told ana­lysts on an earn­ings call that it expects direct con­tract­ing patients to bring in high­er pay­ments from the gov­ern­ment than oth­er Medicare patients. Align­ment Health told investors it was encour­aged by the finan­cial upside but wor­ried about the strength of the pro­gram.

    If direct con­tract­ing ends up last­ing, and expand­ing, com­pa­nies that have a piece of the pie will become attrac­tive tar­gets for acqui­si­tion or pri­vate equi­ty back­ing, at a time when the health indus­try is already see­ing a fren­zy of con­sol­i­da­tion.

    Whether the pro­gram ends up as a short-lived exper­i­ment or the Tro­jan horse that leads to the whole­sale pri­va­ti­za­tion of Medicare may depend on what the Biden admin­is­tra­tion does between now and 2024. With one side call­ing for the pro­gram to be shut down and the oth­er call­ing for it to be expand­ed, the cur­rent plan remains to keep it going as is and see how it goes.

    ———

    “Trump Cre­at­ed A Pro­gram To Pri­va­tize Medicare With­out Patients’ Con­sent. Biden Is Keep­ing It Going.” by Paul McLeod; Buz­zFeed News; 01/28/2022

    “Whether the pro­gram ends up as a short-lived exper­i­ment or the Tro­jan horse that leads to the whole­sale pri­va­ti­za­tion of Medicare may depend on what the Biden admin­is­tra­tion does between now and 2024. With one side call­ing for the pro­gram to be shut down and the oth­er call­ing for it to be expand­ed, the cur­rent plan remains to keep it going as is and see how it goes.”

    Yes, The Biden admin­is­tra­tion’s deci­sion to extend the DCE pro­gram in Feb­ru­ary was actu­al­ly the com­pro­mise posi­tion. On one side you had the pro­gres­sive Demo­c­ra­t­ic cau­cus that wants to end the pro­gram entire­ly. But on the oth­er side was the orig­i­nal Trump admin­is­tra­tion plans for the pro­gram, which was a dra­mat­ic expan­sion that would push entire geo­graph­ic regions of the US into this DCE pri­va­tized Medicare mod­el. Yep, Trump actu­al­ly sin­gle-hand­ed­ly put in place a scheme that would have effec­tive­ly pri­va­tized Medicare entire­ly for regions of the US by now had he won sec­ond term in office. So while the Biden admin­is­tra­tion is extend­ing the DCE pro­gram, it’s actu­al­ly pared back its scope sig­nif­i­cant­ly from what the Trump admin­is­tra­tion had planned for 2022. The mass pri­va­ti­za­tion was sup­posed to be already under­way. Instead, we’re left with an ongo­ing loom­ing threat of a mass pri­va­ti­za­tion as this exper­i­ment is con­tin­ued through 2026. In oth­er words, a repub­li­can win the white House in 2024 means the mass pri­va­ti­za­tion of Medicare is basi­cal­ly assured:

    ...
    When Biden took office, his admin­is­tra­tion faced the choice of what to do about direct con­tract­ing. At the time it had not yet launched and was set to be far more sweep­ing.

    The Trump administration’s plan was for mass pri­va­ti­za­tion of Medicare, with whole geo­graph­ic regions being shift­ed from pub­lic to pri­vate plans with no patient input or abil­i­ty to opt out. The Biden White House shut down the so-called geo­graph­ic stream. But when it came to the rest of the direct con­tract­ing pro­gram, the Biden admin­is­tra­tion allowed it to go ahead.

    One Demo­c­ra­t­ic Sen­ate aide said that because com­pa­nies had already spent a sub­stan­tial amount of mon­ey prepar­ing for the pro­gram, his admin­is­tra­tion would have faced fierce indus­try back­lash if they shut it down.

    ...

    The pro­gram is set to run for five years, from 2021 until 2026. Cru­cial­ly, that extends its life past Biden’s cur­rent term. If a Repub­li­can wins in 2024 and is look­ing to increas­ing­ly pri­va­tize Medicare, they would not need to come up with a plan from scratch. They could sim­ply expand the direct con­tract­ing mod­el, which by then would be well estab­lished.

    “I don’t think there’s any ques­tion that that would be part of the agen­da if that hap­pened. It’s a good rea­son why this pilot pro­gram should not even be allowed to take off,” Schakowsky said. “It’s time for us to stop it before it real­ly gets going.”

    So far, that isn’t hap­pen­ing.
    ...

    And we don’t have to ask whether or not the pri­vate equi­ty-owned enti­ties par­tic­i­pat­ing in this pro­gram are expect­ing to see their per-patient prof­its increase as time goes on. They’re open­ly telling investors that’s what they’re expect­ing. High­er prof­its, but also high­er pay­ments from the gov­ern­ment com­pared to oth­er Medicare patients. So if these DCEs are pro­ject­ing that they’re going to ulti­mate­ly receive high­er per-patient pay­ments from the gov­ern­ment, it rais­es the ques­tion of what exact­ly the pur­pose of this pri­va­ti­za­tion pro­gram is in the first place. Was­n’t reduc­ing gov­ern­ment costs the whole point?

    ...
    One direct con­trac­tor, Clover Health, is a pri­vate equi­ty-backed com­pa­ny that derives almost all of its rev­enue from Medicare. Last year short-sell­ing firm Hin­den­burg Research accused Clover of decep­tive adver­tis­ing to seniors and hid­ing from investors that it was the tar­get of a Depart­ment of Jus­tice inves­ti­ga­tion look­ing into at least a dozen issues. Clover’s stock fell but then became a meme stock on Red­dit and was buoyed by a wave of small investors.

    Clover recent­ly told investors that it expects its num­ber of direct con­tract­ing patients to grow sig­nif­i­cant­ly from its cur­rent 62,000, and for prof­it mar­gins on those cus­tomers to also improve.

    Direct con­trac­tor Oak Street Health told ana­lysts on an earn­ings call that it expects direct con­tract­ing patients to bring in high­er pay­ments from the gov­ern­ment than oth­er Medicare patients. Align­ment Health told investors it was encour­aged by the finan­cial upside but wor­ried about the strength of the pro­gram.
    ...

    Final­ly, while only 25 per­cent of the cur­rent DCE providers have pri­vate equi­ty own­er­ship, keep in mind that there’s absolute­ly stop­ping fur­ther pri­vate equi­ty buy­outs in the DCE sec­tor. But beyond that, there’s the real­i­ty that the DCE providers that do the best job on behalf of their patients — pri­or­i­tiz­ing patient out­comes over prof­its — are the com­pa­nies that are going to present the most tempt­ing takeover tar­gets for pri­vate equi­ty. Because those are going to be the com­pa­nies with the most prof­it ‘poten­tial’. Poten­tial in the form of cut­ting back on patient ser­vices:

    ...
    If direct con­tract­ing ends up last­ing, and expand­ing, com­pa­nies that have a piece of the pie will become attrac­tive tar­gets for acqui­si­tion or pri­vate equi­ty back­ing, at a time when the health indus­try is already see­ing a fren­zy of con­sol­i­da­tion.
    ...

    So as we can see, the pri­va­ti­za­tion of Medicare is indeed hap­pen­ing. More slow­ly than it would have under a sec­ond Trump term, but hap­pen­ing nonethe­less. We’ll see if this ongo­ing stealth pri­va­ti­za­tion scheme ends up becom­ing an issue in the 2024 pres­i­den­tial elec­tions. Either way, try not to be super shocked if the Medicare sys­tem sud­den­ly devel­ops all sorts of inno­v­a­tive new pri­vate equi­ty-inspired effi­cien­cies over the next four years. Not nec­es­sar­i­ly effi­cien­cies in pro­vid­ing bet­ter care. But the new effi­cien­cies in max­i­miz­ing prof­its should be extra­or­di­nary.

    Posted by Pterrafractyl | May 15, 2022, 6:51 pm
  27. Mod­ern cap­i­tal­ism has long had a Ponzi-like feel to it. The seem­ing­ly end­less need for growth and ever high­er asset val­u­a­tion does indeed have a Ponzi dynam­ic, after all. So on one lev­el it prob­a­bly should­n’t be too sur­pris­ing to learn that Europe’s largest asset man­ag­er, Amun­di Asset Man­age­ment, is pub­licly warn­ing that the parts of the mar­ket are com­ing to resem­ble a Ponzi scheme. Specif­i­cal­ly, parts of the pri­vate equi­ty mar­kets, where pri­vate equi­ty’s lack of trans­paren­cy poten­tial­ly allows fund man­age­ment to obscure from investors changes in the val­u­a­tions of the under­ly­ing assets. In oth­er words, if a pri­vate equi­ty firm over-pays for one of the com­pa­ny’s it bought, that fact can be effec­tive­ly hid­den from investors. And when you hide bad news from investors in the pri­vate equi­ty indus­try you’re basi­cal­ly encour­ag­ing them to invest more. That’s part of the Ponzi-like dynam­ic Amun­di is warn­ing about.

    But there’s anoth­er very dis­turb­ing aspect to this warn­ing that makes poten­tial­ly sound like pre­lude to a dot-com-style mar­ket melt­down: it appears that part of what is dri­ving this Ponzi-like dynam­ic is the assump­tion with­in the pri­vate equi­ty indus­try that there’s always going to be anoth­er pri­vate equi­ty firm to buy up their over­val­ued assets. It’s like a vari­a­tion of the ‘greater fool’ assump­tion that has long dri­ven asset bub­bles: it’s the ‘great pri­vate equi­ty fool’ assump­tion. And it sounds like this assump­tion has been dri­ven by the fact that there real­ly has been anoth­er pri­vate equi­ty ‘greater fool’ will­ing to pay an even high­er price, dri­ving prices ever high­er. In oth­er words, these warn­ings of Ponzi-like behav­ior in the pri­vate equi­ty mar­kets dou­ble as a warn­ing about asset bub­bles.

    Beyond that, pri­vate equi­ty firms are increas­ing­ly sell­ing assets to them­selves. In 2021, $42bn worth of deals involved these kinds of sales.

    And as we’ll see in the sec­ond except below from last year, these warn­ings of Ponzi-like behav­ior in the pri­vate equi­ty sec­tor aren’t lim­it­ed to Ponzi-like asset bub­bles. One of the most respect­ed pri­vate equi­ty firms in the world, Abraaj, was caught lit­er­al­ly oper­at­ing a Ponzi scheme root­ed in fraud. Finan­cial state­ments were manip­u­lat­ed, loans were tak­en out to cov­er the loss­es, and new invest­ments came in to tem­porar­i­ly fill in the gap.

    As we’ll also see, it sounds like the investors in Abraaj had plen­ty of warn­ings, includ­ing a whistle­blow­er. But those warn­ings were ignored. And accord­ing to the finan­cial jour­nal­ists who uncov­ered this sto­ry, the indus­try as a whole was con­tin­u­ing to large­ly ignore the lessons.

    Anoth­er fac­tor to keep in mind in this sto­ry is the grow­ing role of pen­sion funds as pri­vate equi­ty investors. Any qual­i­ty Ponzi scheme requires dupes who end up hold­ing the bag and we can be pret­ty con­fi­dent who those dupes are going to be if pen­sion funds are involved.

    And then there’s the pos­si­bil­i­ty that pri­vate equi­ty firms will actu­al­ly use the pen­sion funds of the com­pa­nies they buy to fuel more pur­chas­es. Recall how Alden Cap­i­tal was doing this exact thing to finance its rapa­cious buy­out of the US local land­scape. The oppor­tu­ni­ties for Ponzi-like behav­ior abound.

    So the next time you read a head­line about a giant Ponzi scheme threat­en­ing the finan­cial sec­tor, don’t assume that head­line is nec­es­sar­i­ly refer­ring to cryp­to. And also don’t assume that any­thing is real­ly being done about it. After all, we’ve been warned. Repeat­ed­ly:

    The Finan­cial Times

    Amun­di warns that parts of pri­vate equi­ty mar­ket resem­ble ‘Ponzi schemes’
    PE funds are sell­ing assets to each oth­er in ‘cir­cu­lar’ fash­ion, asset manager’s invest­ment chief says

    Katie Mar­tin in Lon­don
    June 1, 2022 7:35 am

    Europe’s largest asset man­ag­er has likened parts of the pri­vate equi­ty indus­try to a “Ponzi scheme” that will face a reck­on­ing in the com­ing years.

    “Some parts of pri­vate equi­ty look like a pyra­mid scheme in a way,” Amun­di Asset Management’s chief invest­ment offi­cer Vin­cent Morti­er said in a pre­sen­ta­tion on Wednes­day. “You know you can sell [assets] to anoth­er pri­vate equi­ty firm for 20 or 30 times earn­ings. That’s why you can talk about a Ponzi. It’s a cir­cu­lar thing.”

    Pub­lic stock and bond mar­kets leave lit­tle room for typ­i­cal invest­ment man­agers like Amun­di, which has €2tn in assets, to hide their per­for­mance, as fluc­tu­a­tions in asset prices are easy to track dai­ly or even in real time — a process known as mark­ing to mar­ket.

    Pri­vate equi­ty hous­es, by con­trast, typ­i­cal­ly lock up investors’ mon­ey for a peri­od of sev­er­al years, and infor­ma­tion about whether their tar­get com­pa­nies have gained or shrunk in val­ue becomes pub­lic only if they list the busi­ness or choose to dis­close the price they sold it for to anoth­er buy­er.

    In the mean­time, quar­ter­ly assess­ments are often sophis­ti­cat­ed guess­work based on rough­ly equiv­a­lent assets in pub­lic mar­kets, and shared pri­vate­ly with investors.

    Often, pri­vate equi­ty groups sell assets to oth­er pri­vate equi­ty groups. In 2021, they even struck $42bn worth of deals in which they sold port­fo­lio com­pa­nies to them­selves.

    Morti­er said the incen­tives are for pri­vate equi­ty firms to trans­fer assets between each oth­er at inflat­ed prices.

    “Just because there’s no mark to mar­ket doesn’t mean there’s no risk,” said Morti­er. “There are some very, very good oppor­tu­ni­ties, but there are no mir­a­cles. Even­tu­al­ly there will be casu­al­ties, but that might not be for three, four or five years.”

    Pri­vate equi­ty firms have been flush with cash in recent years as they have been able to bor­row at low inter­est rates, giv­ing them enor­mous fire­pow­er to snap up com­pa­nies. Glob­al­ly, the pri­vate equi­ty indus­try has more than $6tn in assets under man­age­ment, accord­ing to a McK­in­sey report pub­lished in March.

    They enjoyed their strongest ever start to a year in 2022 as they deployed vast cash piles accu­mu­lat­ed dur­ing the pan­dem­ic. Buy­out groups backed $288bn worth of deals in the first quar­ter, a 17 per cent rise com­pared with the first three months of 2021.

    More main­stream investors, mean­while, have been keen to find lucra­tive oppor­tu­ni­ties in this space as some parts of pub­lic stock mar­kets have appeared over­val­ued, and bond yields have been his­tor­i­cal­ly low.

    ...

    ———-

    “Amun­di warns that parts of pri­vate equi­ty mar­ket resem­ble ‘Ponzi schemes’” by Katie Mar­tin in Lon­don; The Finan­cial Times; 06/01/2022

    ““Some parts of pri­vate equi­ty look like a pyra­mid scheme in a way,” Amun­di Asset Management’s chief invest­ment offi­cer Vin­cent Morti­er said in a pre­sen­ta­tion on Wednes­day. “You know you can sell [assets] to anoth­er pri­vate equi­ty firm for 20 or 30 times earn­ings. That’s why you can talk about a Ponzi. It’s a cir­cu­lar thing.””

    There’s always a big­ger suck­er. That assump­tion has appar­ent­ly been dri­ving how the pri­vate equi­ty indus­try has been oper­at­ing in recent years. And on one lev­el it’s not sur­pris­ing to learn that the mar­kets are oper­at­ing under a ‘greater fool’ par­a­digm. What is sur­pris­ing is that this ‘greater fool’ dynam­ic is play­ing out inside the pri­vate equi­ty indus­try itself. It’s the kind of trend that’s trou­bling for a num­ber of rea­sons. But it’s the facts that the indus­try has been flush with cash, does­n’t have the same trans­paren­cy require­ments as its pub­lic coun­ter­parts, and can hide loss­es from investors that makes this warn­ing from Amun­di Asset Man­age­ment espe­cial­ly omi­nous. Pri­vate Equi­ty firms are basi­cal­ly mak­ing high risk bets on the assump­tion that the moment that has pro­pelled the indus­try thus far will con­tin­ue indef­i­nite­ly and anoth­er pri­vate equi­ty firm will inevitably come along and assume those risks. Which has indeed been hap­pen­ing. But what hap­pens when that stops?

    Even worse, it appears that pri­vate equi­ty firms aren’t just play­ing hot pota­to with each oth­er with these over­val­ued assets. In 2021, $42 bil­lion worth of deals in were made where they sold port­fo­lio com­pa­nies to them­selves. Nice work if you can get it:

    ...
    Pub­lic stock and bond mar­kets leave lit­tle room for typ­i­cal invest­ment man­agers like Amun­di, which has €2tn in assets, to hide their per­for­mance, as fluc­tu­a­tions in asset prices are easy to track dai­ly or even in real time — a process known as mark­ing to mar­ket.

    Pri­vate equi­ty hous­es, by con­trast, typ­i­cal­ly lock up investors’ mon­ey for a peri­od of sev­er­al years, and infor­ma­tion about whether their tar­get com­pa­nies have gained or shrunk in val­ue becomes pub­lic only if they list the busi­ness or choose to dis­close the price they sold it for to anoth­er buy­er.

    In the mean­time, quar­ter­ly assess­ments are often sophis­ti­cat­ed guess­work based on rough­ly equiv­a­lent assets in pub­lic mar­kets, and shared pri­vate­ly with investors.

    Often, pri­vate equi­ty groups sell assets to oth­er pri­vate equi­ty groups. In 2021, they even struck $42bn worth of deals in which they sold port­fo­lio com­pa­nies to them­selves.

    Morti­er said the incen­tives are for pri­vate equi­ty firms to trans­fer assets between each oth­er at inflat­ed prices.
    ...

    It’s an omi­nous warn­ing for a glob­al econ­o­my that’s already look­ing rather strained. Espe­cial­ly omi­nous when you fac­tor in the grow­ing role pen­sion funds have played in this indus­try. They per­fect pat­sies.

    But as the fol­low­ing Axios piece from last fall reminds us, it’s not like we should just be con­cerned about Ponzi-like activ­i­ty in this sec­tor. The same lack of trans­paren­cy and poor­ly aligned incen­tives that encour­age the indus­try to mutu­al­ly inflate asset prices in a in a Ponzi-like man­ner also act as incen­tives for actu­al Ponzi schemes. That’s what the pri­vate equi­ty world was remind­ed up when Abraaj, one of the world’s most respect­ed pri­vate equi­ty firms, end­ed up implod­ing in an actu­al Ponzi scheme car­ried out with fal­si­fied state­ments and con­ve­nient loans intend­ed to make the firm look ‘whole’ when reports where sent out to the “lim­it­ed part­ner” (LP) investors.

    And it gets worse. Because it also turns out that Abraa­j’s implo­sion did­n’t come out of nowhere. There were all sorts of red flags, includ­ing a whistle­blow­er. But the LPs ignored those red flags, with the kind of dis­as­trous con­se­quences one expects from a Ponzi scheme.

    And it gets even worse. Because it’s not just the case that LPs were ignor­ing a whistle­blow­er try­ing to warn them about how the firm was steal­ing their mon­ey. The entire tale of Abraa­j’s malfea­sance was told in a book pub­lished by British jour­nal­ists Simon Clark and Will Louch last year, and the indus­try has large­ly ignored the impli­ca­tions of that book, accord­ing to Clark and Louch. So when we’re try­ing to assess the poten­tial impact of Ponzi-like behav­ior in the pri­vate equi­ty indus­try, the fact that the indus­try appears to be active­ly ignor­ing these red flags is some­thing to keep in mind:

    Axios

    Pri­vate equity’s biggest Ponzi scheme

    Dan Pri­mack, author of Axios Pro Rata
    Nov 29, 2021 — Econ­o­my & Busi­ness

    Simon Clark is frus­trat­ed. The Wall Street Jour­nal reporter is five months removed from the pub­li­ca­tion of his well-received book on Abraaj Group, a pri­vate equi­ty pio­neer turned Ponzi scheme, but tells me the indus­try has turned a blind eye to the cau­tion­ary tale he co-authored with Will Louch.

    What he’s say­ing: “The book has been wide­ly read. I’ve been invit­ed by aca­d­e­m­ic insti­tu­tions to talk about the issues raised, and one of the major lim­it­ed part­ners has pri­vate­ly asked for a con­ver­sa­tion. But, large­ly, the pri­vate equi­ty and impact invest­ing indus­tries still don’t want to even utter the word ‘Abraaj,’ ... ostrich­es with their heads in the sand, hop­ing to whole thing will go away.”

    Back­sto­ry: Abraaj was one of the world’s most cel­e­brat­ed PE firms. Back­ers includ­ed the U.S. and U.K. gov­ern­ments. Its leader, Arif Naqvi, was a Davos reg­u­lar who preached the gospel of impact invest­ing in emerg­ing mar­kets; almost always with a men­tion of his own rags-to-rich­es bio, a jet-set­ting bil­lion­aire born of very mod­est means in Pak­istan.

    * Naqvi also appears to have been a crook, alleged­ly steal­ing mon­ey from Abraaj and its investors. He’d fill the holes he cre­at­ed by rais­ing new cap­i­tal, with fundrais­ing bol­stered by fal­si­fied val­u­a­tions. If that failed, he’d sur­rep­ti­tious­ly bor­row mon­ey so that Abraa­j’s bank accounts looked “full” in quar­ter­ly state­ments sent to LPs.

    * Naqvi’s con was first called by an invest­ment offi­cer named Andrew Far­num at the Bill and Melin­da Gates Foun­da­tion, which had com­mit­ted $100 mil­lion to an Abraaj health­care fund. In short, Far­num noticed that cap­i­tal calls weren’t being matched by actu­al invest­ments, and he then caught Abraaj in a lie about where they mon­ey was being kept.

    * Clark and Louch also played a major role, enabled by a whistle­blow­er who was seem­ing­ly ignored by LPs.

    Two big take­aways from the book, a page-turn­er that could be stuffed into stock­ings:

    1. A lot of LPs fell down on the job. If Far­num found the fraud, oth­ers could have too. It’s a big reminder of how so much of pri­vate equi­ty is based on trust, despite the bil­lions of dol­lars at risk. The lack of oth­er large-scale frauds may be more by luck than by design.

    2. Naqvi’s key insight was that many investors are uncom­fort­able with the amoral nature of text­book cap­i­tal­ism. He promised that Abraaj would make mon­ey while doing good, a com­bo so intox­i­cat­ing that red flags were ignored.

    The fall­out: Abraaj investors have stayed qui­et, con­tribut­ing to Simon Clark’s con­ster­na­tion. Some of it is sure­ly due to embar­rass­ment. Some is at the request of law enforce­ment, includ­ing Amer­i­can offi­cials who have spent years try­ing to get Naqvi extra­dit­ed from the U.K., where he’s under house arrest.

    * One tan­gi­ble indus­try change, per a source famil­iar, is that LPs are now pay­ing much more atten­tion to the indi­vid­ual rela­tion­ships between pri­vate equi­ty and account­ing firms. There were some per­son­al ties between Abraaj and KPMG, although the account­ing giant insists that it too was defraud­ed.

    ...

    ———–

    “Pri­vate equity’s biggest Ponzi scheme” by Dan Pri­mack; Axios; 11/29/2021

    “Naqvi also appears to have been a crook, alleged­ly steal­ing mon­ey from Abraaj and its investors. He’d fill the holes he cre­at­ed by rais­ing new cap­i­tal, with fundrais­ing bol­stered by fal­si­fied val­u­a­tions. If that failed, he’d sur­rep­ti­tious­ly bor­row mon­ey so that Abraa­j’s bank accounts looked “full” in quar­ter­ly state­ments sent to LPs.

    A lit­er­al Ponzi scheme. That was the scan­dal that rocked the pri­vate equi­ty world last fall when Arif Naqvi was found to have been fal­si­fy­ing val­u­a­tions and bor­row­ing mon­ey to hide holes while he raised more cap­i­tal. But this was­n’t just a pri­vate equi­ty firm get­ting caught in a Ponzi scheme. This was a high­ly respect­ed pri­vate equi­ty investor who reg­u­lar­ly appeared and Davos and ped­dled his fund as an eth­i­cal alter­na­tive to the bru­tal­i­ties of cap­i­tal­ism. But beyond that, the scan­dal high­light the shaky nature of the assump­tion that investors will be on the look­out for this kind of fraud. The lim­it­ed part­ners (LPs) just kept ignor­ing the red flags. even when a whistle­blow­er was wav­ing them:

    ...
    * Clark and Louch also played a major role, enabled by a whistle­blow­er who was seem­ing­ly ignored by LPs.

    Two big take­aways from the book, a page-turn­er that could be stuffed into stock­ings:

    1. A lot of LPs fell down on the job. If Far­num found the fraud, oth­ers could have too. It’s a big reminder of how so much of pri­vate equi­ty is based on trust, despite the bil­lions of dol­lars at risk. The lack of oth­er large-scale frauds may be more by luck than by design.

    ...

    2. Naqvi’s key insight was that many investors are uncom­fort­able with the amoral nature of text­book cap­i­tal­ism. He promised that Abraaj would make mon­ey while doing good, a com­bo so intox­i­cat­ing that red flags were ignored.
    ...

    Yes, it’s all a big reminder of how much pri­vate equi­ty is based on trust. Trust on the part of investors that the man­agers are han­dling investor mon­ey respon­si­bly. And on the part of the man­agers that there’s always enough fools out there to cov­er for their fraud and mis­takes. The kind of fraud/trust scheme that could keep itself going indef­i­nite­ly. Until it can’t and implodes.

    All in all, there’s no short­age of ques­tions loom­ing over these warn­ings. Mas­sive ques­tions like just Ponzi schemes are there cur­rent oper­at­ing in the pri­vate equi­ty sec­tor? But per­haps the biggest ques­tion is just how inter­twined are these Ponzi schemes? Don’t for­get the big les­son from 2008: when whole sec­tors of finance get cor­rupt­ed simul­ta­ne­ous­ly, the entire sys­tem can become a House of Cards.

    And then there was the oth­er major les­son from 2008: when the whole sys­tem becomes a House of Cards, the expect­ed response is mas­sive bailouts. So try not to be sur­prised if we learn that the pri­vate equi­ty sec­tor real­ly has turned itself into a Ponzi scheme large enough to threat­en the entire glob­al econ­o­my and on verge of col­lapse. And also try not to be super shocked when the indus­try gets bailed out as pun­ish­ment and we’re all assured that lessons have been learned and we can trust the indus­try again. Because there’s always anoth­er fool. Some­times a whole plan­et full of them.

    Posted by Pterrafractyl | June 2, 2022, 10:21 pm
  28. It’s been quite a week for Democ­rats. There was the his­toric FBI seizure of clas­si­fied doc­u­ments from Don­ald Trump’s Mar-a-Lago com­pound, poten­tial­ly sig­nalling the open­ing sal­vo in a long-over­due crim­i­nal pros­e­cu­tion for at least one of the crimes com­mit­ted by the for­mer Rogue in Chief. But that his­toric event was pre­ced­ed by a Vote-o-Rama that cul­mi­nat­ed in the pas­sage of the Infla­tion Reduc­tion Act in Con­gress, which promis­es to take unprece­dent­ed steps to address major chal­lenges like cli­mate change. The unprece­dent­ed crim­i­nal inves­ti­ga­tion of a crim­i­nal ex-pres­i­dent and an unprece­dent­ed plan to take major long-term chal­lenges fac­ing the US. It the kind of week that isn’t sup­posed to hap­pen in the polit­i­cal­ly bro­ken con­tem­po­rary US. It was like we got the priv­i­lege of liv­ing with ‘Bizarro DC’ for a week.

    But, of course, there were still plen­ty of signs of Old DC. For exam­ple, as the fol­low­ing pair of arti­cles describe, the push to mod­i­fy a loop­hole that’s become sym­bol­ic of the over­ar­ch­ing pow­er of finan­cial inter­ests ulti­mate­ly had to be shelved when Ari­zona Demo­c­rat Kyrsten Sine­ma — one of the two long-stand­ing Demo­c­ra­t­ic hold­outs on this leg­is­la­tion along with Sen­a­tor Joe Manchin — refused to sup­port the bill unless the mod­i­fi­ca­tion was removed. That “car­ried inter­est” loop­hole basi­cal­ly exists to allow the invest­ment man­agers at pri­vate equi­ty firms and hedge funds to have their com­pen­sa­tion taxed at the 20 per­cent cap­i­tal gains tax rate instead of the 37 per­cent top per­son­al income tax rate. A sleazy loop­hole to allow some of the most over­paid peo­ple on the plan­et pay less in tax­es

    And that was just one of the pri­vate equi­ty indus­try’s last-minute wins. Under pres­sure from pri­vate equi­ty lob­by­ists, Sen­a­tor Sine­ma also man­aged to block a change in how the new 15 per­cent min­i­mum cor­po­rate tax was applied: Under the orig­i­nal ver­sion of the bill, com­pa­nies with a “book income” of more than $1 bil­lion have to pay the new 15 per­cent min­i­mum tax. But what about com­pa­nies that own oth­er com­pa­nies? Because that’s basi­cal­ly how the pri­vate equi­ty indus­try work. Well, orig­i­nal­ly, the small and medi­um-sized busi­ness owned by pri­vate equi­ty com­pa­nies would still have to pay the 15 per­cent tax as long as they were own by a com­pa­ny that has a com­bined book income of $1 bil­lion across all the com­pa­nies they own. In oth­er words, small busi­ness owned by giant busi­ness could­n’t pre­tend to actu­al­ly be small busi­ness­es under the orig­i­nal ver­sion of the bill. But that had to be tossed from the bill in the end. Small and medi­um-sized busi­ness owned by pri­vate equi­ty giants could still avoid pay­ing tax­es.

    The more things change, the more they stay the same. That’s the big sto­ry here. The pri­vate equi­ty indus­try won out on mul­ti­ple fronts even in the face of what was a gen­uine his­toric leg­isla­tive vic­to­ry that almost nev­er hap­pens in DC. It’s a reminder that the US won’t every tru­ly be allowed to gov­ern itself until big mon­ey can no longer buy leg­is­la­tors:

    The New York Times

    The Car­ried Inter­est Loop­hole Sur­vives Anoth­er Polit­i­cal Bat­tle

    The lat­est effort to nar­row the pref­er­en­tial tax treat­ment used by pri­vate equi­ty exec­u­tives failed after Sen­a­tor Kyrsten Sine­ma object­ed.

    By Alan Rappe­port, Emi­ly Flit­ter and Kate Kel­ly
    Aug. 5, 2022

    WASHINGTON — Once again, car­ried inter­est car­ried the day.

    The last-minute removal by Sen­ate Democ­rats of a pro­vi­sion in the cli­mate and tax leg­is­la­tion that would nar­row what is often referred to as the “car­ried inter­est loop­hole” rep­re­sents the lat­est win for the pri­vate equi­ty and hedge fund indus­tries. For years, those busi­ness­es have suc­cess­ful­ly lob­bied to kill bills that aimed to end or lim­it a quirk in the tax code that allows exec­u­tives to pay low­er tax rates than many of their salaried employ­ees.

    In recent weeks, it appeared that the ben­e­fit could be scaled back, but a last-minute inter­ven­tion by Sen­a­tor Kyrsten Sine­ma, the Ari­zona Demo­c­rat, elim­i­nat­ed what would have been a $14 bil­lion tax increase tar­get­ing pri­vate equi­ty.

    Law­mak­ers’ inabil­i­ty to address a tax break that Democ­rats and some Repub­li­cans have called unfair under­scores the influ­ence of lob­by­ists for the finance indus­try and how dif­fi­cult it can be to change the tax code.

    In addi­tion to doing away with the car­ried inter­est pro­vi­sion, the deal Demo­c­ra­t­ic lead­ers cut with Ms. Sine­ma includ­ed a 1 per­cent excise tax on stock buy­backs and changes to a min­i­mum cor­po­rate tax of 15 per­cent that favored man­u­fac­tur­ers.

    On Fri­day, the pri­vate equi­ty and hedge fund indus­tries applaud­ed the devel­op­ment, describ­ing it as a win for small busi­ness.

    “The pri­vate equi­ty indus­try direct­ly employs over 11 mil­lion Amer­i­cans, fuels thou­sands of small busi­ness­es and deliv­ers the strongest returns for pen­sions,” said Drew Mal­oney, the chief exec­u­tive of the Amer­i­can Invest­ment Coun­cil, a lob­by­ing group. “We encour­age Con­gress to con­tin­ue to sup­port pri­vate cap­i­tal invest­ment in every state across our coun­try.”

    Bryan Cor­bett, the chief exec­u­tive of the Man­aged Funds Asso­ci­a­tion, said: “We’re hap­py to see that there is bipar­ti­san recog­ni­tion of the role that pri­vate cap­i­tal plays in grow­ing busi­ness­es and the econ­o­my.”

    Car­ried inter­est is the per­cent­age of an investment’s gains that a pri­vate equi­ty part­ner or hedge fund man­ag­er takes as com­pen­sa­tion. At most pri­vate equi­ty firms and hedge funds, the share of prof­its paid to man­agers is about 20 per­cent.

    Under exist­ing law, that mon­ey is taxed at a cap­i­tal-gains rate of 20 per­cent for top earn­ers. That’s about half the rate of the top indi­vid­ual income tax brack­et, which is 37 per­cent. A tax law passed by Repub­li­cans in 2017 large­ly left the treat­ment of car­ried inter­est intact, after an intense lob­by­ing cam­paign, but it did nar­row the exemp­tion by requir­ing exec­u­tives to hold their invest­ments for at least three years in order to enjoy pref­er­en­tial tax treat­ment.

    An agree­ment reached last week by Sen­a­tor Joe Manchin III, Demo­c­rat of West Vir­ginia, and Sen­a­tor Chuck Schumer of New York, the major­i­ty leader, would have extend­ed that hold­ing peri­od to five years from three, while chang­ing the way the peri­od is cal­cu­lat­ed in hopes of reduc­ing tax­pay­ers’ abil­i­ty to take advan­tage of the low­er 20 per­cent tax rate.

    But Ms. Sine­ma, who has received polit­i­cal dona­tions from wealthy financiers who usu­al­ly donate to Repub­li­cans and who was cool to the idea of tar­get­ing car­ried inter­est last year, object­ed.

    In the past five years, the sen­a­tor has received $2.2 mil­lion in cam­paign con­tri­bu­tions from invest­ment indus­try exec­u­tives and polit­i­cal action com­mit­tees, accord­ing to OpenSe­crets, a non­prof­it group that tracks mon­ey in pol­i­tics. The indus­try was sec­ond only to retired indi­vid­u­als in giv­ing to Ms. Sine­ma and just ahead of the legal pro­fes­sion, which gave her $1.8 mil­lion.

    For years, car­ried inter­est has been a tax pol­i­cy piña­ta that nev­er cracks open.

    Dur­ing the 2016 pres­i­den­tial cam­paign, Don­ald J. Trump said, “We will elim­i­nate the car­ried inter­est deduc­tion, well-known deduc­tion, and oth­er spe­cial-inter­est loop­holes that have been so good for Wall Street investors and for peo­ple like me but unfair to Amer­i­can work­ers.”

    When Pres­i­dent Biden ran for pres­i­dent in 2020, his cam­paign said he would “elim­i­nate spe­cial tax breaks that reward spe­cial inter­ests and get rid of the cap­i­tal gains loop­hole for mul­ti­mil­lion­aires.” To do that, he said, he would tax long-term cap­i­tal gains at the ordi­nary top income tax rate, essen­tial­ly wip­ing away the spe­cial treat­ment of car­ried inter­est.

    A sim­i­lar pro­pos­al appeared in Mr. Biden’s bud­get last spring, but, as Democ­rats tried unsuc­cess­ful­ly to pass their Build Back Bet­ter leg­is­la­tion in the sum­mer and fall, car­ried inter­est dis­ap­peared.

    Jared Bern­stein, a mem­ber of the White House’s Coun­cil of Eco­nom­ic Advis­ers, lament­ed that out­come. “This is a loop­hole that absolute­ly should be closed,” Mr. Bern­stein told CNBC last Sep­tem­ber. “When you go up to Capi­tol Hill and you start nego­ti­at­ing on tax­es, there are more lob­by­ists in this town on tax­es than there are mem­bers of Con­gress.”

    Ms. Sine­ma has long been a defend­er of the pri­vate equi­ty indus­try, going back to her time in the House. In recent weeks, rep­re­sen­ta­tives from small busi­ness, ven­ture cap­i­tal and the renew­able ener­gy sec­tor blan­ket­ed Ms. Sine­ma and her staff with infor­ma­tion about their pres­ence in and impor­tance to Ari­zona, accord­ing to a lob­by­ist famil­iar with the effort.

    “Sen­a­tor Sine­ma makes every deci­sion based on one cri­te­ria: what’s best for Ari­zona,” said her spokes­woman, Han­nah Hur­ley.

    The Amer­i­can Invest­ment Coun­cil said that ven­ture cap­i­tal and pri­vate equi­ty firms invest­ed $67 bil­lion in Ari­zona from 2016 to 2020, and that busi­ness­es backed by pri­vate equi­ty employ near­ly 230,000 work­ers in the state. Sev­er­al promi­nent pri­vate equi­ty firms, like Black­stone, KKR and War­burg Pin­cus own busi­ness­es in the state.

    Exec­u­tives of some of those firms have made cam­paign con­tri­bu­tions to Ms. Sine­ma, includ­ing George Roberts, Hen­ry Kravis and Joseph Bae at KKR and Sean Klim­czak and Eli Nagler at Black­stone.

    Opin­ions on the car­ried inter­est tax treat­ment vary even with­in the finan­cial indus­try. In posts on Twit­ter in late July, Bill Ack­man, the founder of Per­sh­ing Square Cap­i­tal Man­age­ment, a New York hedge fund, said that while “favor­able tax treat­ment” for the founders of new busi­ness­es was essen­tial, peo­ple who man­age funds that own many com­pa­nies should not be enti­tled to the same ben­e­fit.

    “The car­ried inter­est loop­hole is a stain on the tax code,” he wrote in one post. “It does not help small busi­ness­es, pen­sion funds, oth­er investors in hedge funds or pri­vate equi­ty and every­one in the indus­try knows it. It is an embar­rass­ment and it should end now.”

    Some ana­lysts were skep­ti­cal all along that law­mak­ers would actu­al­ly change the car­ried inter­est tax treat­ment in the final bill. While it has become a high-pro­file tar­get, the change Democ­rats were seek­ing would have raised lit­tle tax rev­enue com­pared with oth­er pro­vi­sions in the leg­is­la­tion, known as the Infla­tion Reduc­tion Act.

    “Car­ried inter­est has become the MacGuf­fin of the I.R.A. saga,” said James Luci­er, an ana­lyst at Cap­i­tal Alpha Part­ners, a pol­i­cy research firm in Wash­ing­ton, describ­ing it as a lit­er­ary device that authors include mere­ly to make plots more inter­est­ing. “The MacGuf­fin dis­tract­ed atten­tion from the real­ly impor­tant things going on in the sto­ry to make the star­tling con­clu­sion even more sur­pris­ing in the end.”

    On Fri­day, some pro­gres­sive pol­i­cy experts shrugged off the elim­i­na­tion of the car­ried inter­est pro­vi­sion, which they con­sid­ered only a mod­est improve­ment over cur­rent law.

    “The pro­pos­al that was in the bill until last night made a tech­ni­cal adjust­ment in the hold­ing peri­od for assets that qual­i­fied for car­ried inter­est treat­ment,” said Jean Ross, a senior fel­low at the Cen­ter for Amer­i­can Progress, a lib­er­al research group in Wash­ing­ton. “A bet­ter approach would tack­le the issue head-on and say that com­pen­sa­tion for ser­vices man­ag­ing an invest­ment fund should be taxed like work and sub­ject to ordi­nary tax rates.”

    Ms. Ross added that she was pleased by the addi­tion of the tax on stock buy­backs, which some Democ­rats and their allies have long sup­port­ed, argu­ing that com­pa­nies are spend­ing too much mon­ey buy­ing back their own shares, rather than invest­ing in research and devel­op­ment or giv­ing work­ers rais­es.

    ...

    ———–

    “The Car­ried Inter­est Loop­hole Sur­vives Anoth­er Polit­i­cal Bat­tle” By Alan Rappe­port, Emi­ly Flit­ter and Kate Kel­ly; The New York Times; 08/05/2022

    “On Fri­day, the pri­vate equi­ty and hedge fund indus­tries applaud­ed the devel­op­ment, describ­ing it as a win for small busi­ness.

    Yes, the pri­vate equi­ty indus­try tout­ed its vic­to­ry as a win for small busi­ness­es. It’s more than a lit­tle rich.

    So what exact­ly what this grand vic­to­ry for small busi­ness­es? Well, the invest­ment man­agers at the pri­vate equi­ty giants that own these small busi­ness­es will con­tin­ue to only have to hold their invest­ments for three years instead of five years in order to con­tin­ue qual­i­fy­ing for the “car­ried inter­est” loop­hole that allows them to have their incomes tax­es at the low­er 20 per­cent cap­i­tal gains tax rate instead of the 37 per­cent top per­son­al tax brack­et. That’s the big vic­to­ry for ‘small busi­ness’ that Sen­a­tor Sine­ma deliv­ered for her finan­cial back­ers:

    ...
    Car­ried inter­est is the per­cent­age of an investment’s gains that a pri­vate equi­ty part­ner or hedge fund man­ag­er takes as com­pen­sa­tion. At most pri­vate equi­ty firms and hedge funds, the share of prof­its paid to man­agers is about 20 per­cent.

    Under exist­ing law, that mon­ey is taxed at a cap­i­tal-gains rate of 20 per­cent for top earn­ers. That’s about half the rate of the top indi­vid­ual income tax brack­et, which is 37 per­cent. A tax law passed by Repub­li­cans in 2017 large­ly left the treat­ment of car­ried inter­est intact, after an intense lob­by­ing cam­paign, but it did nar­row the exemp­tion by requir­ing exec­u­tives to hold their invest­ments for at least three years in order to enjoy pref­er­en­tial tax treat­ment.

    An agree­ment reached last week by Sen­a­tor Joe Manchin III, Demo­c­rat of West Vir­ginia, and Sen­a­tor Chuck Schumer of New York, the major­i­ty leader, would have extend­ed that hold­ing peri­od to five years from three, while chang­ing the way the peri­od is cal­cu­lat­ed in hopes of reduc­ing tax­pay­ers’ abil­i­ty to take advan­tage of the low­er 20 per­cent tax rate.

    But Ms. Sine­ma, who has received polit­i­cal dona­tions from wealthy financiers who usu­al­ly donate to Repub­li­cans and who was cool to the idea of tar­get­ing car­ried inter­est last year, object­ed.

    In the past five years, the sen­a­tor has received $2.2 mil­lion in cam­paign con­tri­bu­tions from invest­ment indus­try exec­u­tives and polit­i­cal action com­mit­tees, accord­ing to OpenSe­crets, a non­prof­it group that tracks mon­ey in pol­i­tics. The indus­try was sec­ond only to retired indi­vid­u­als in giv­ing to Ms. Sine­ma and just ahead of the legal pro­fes­sion, which gave her $1.8 mil­lion.
    ...

    And note how even Repub­li­cans, includ­ing Don­ald Trump, have cam­paigned against the “car­ried inter­est” loop­hole. It’s basi­cal­ly the high­est-com­pen­sate peo­ple in the world shout­ing “Pay us MORE! We are worth it!” It’s the worst impuls­es from the greed­i­est par­a­sites on the plan­et man­i­fest­ing as an iron grip on the demo­c­ra­t­ic process­es. Which is reminder that this isn’t just a sto­ry about the long-stand­ing gross excess­es of the pri­vate equi­ty indus­try and the grow­ing pow­er of that sec­tor over soci­ety. It’s also about the long-stand­ing gross exces­sive pow­er mon­eyed-inter­ests wield in the US’s bro­ken cam­paign finance sys­tem dom­i­nat­ed by cor­po­rate cash. Both par­ties agree the loop­hole should be closed and yet the indus­try wins out every time:

    ...
    For years, car­ried inter­est has been a tax pol­i­cy piña­ta that nev­er cracks open.

    Dur­ing the 2016 pres­i­den­tial cam­paign, Don­ald J. Trump said, “We will elim­i­nate the car­ried inter­est deduc­tion, well-known deduc­tion, and oth­er spe­cial-inter­est loop­holes that have been so good for Wall Street investors and for peo­ple like me but unfair to Amer­i­can work­ers.”

    When Pres­i­dent Biden ran for pres­i­dent in 2020, his cam­paign said he would “elim­i­nate spe­cial tax breaks that reward spe­cial inter­ests and get rid of the cap­i­tal gains loop­hole for mul­ti­mil­lion­aires.” To do that, he said, he would tax long-term cap­i­tal gains at the ordi­nary top income tax rate, essen­tial­ly wip­ing away the spe­cial treat­ment of car­ried inter­est.

    A sim­i­lar pro­pos­al appeared in Mr. Biden’s bud­get last spring, but, as Democ­rats tried unsuc­cess­ful­ly to pass their Build Back Bet­ter leg­is­la­tion in the sum­mer and fall, car­ried inter­est dis­ap­peared.
    ...

    Even Bill Ack­man — the guy who became the liv­ing emblem of finan­cial excess when he pulled off what was arguably the most prof­itable trade in his­to­ry in March of 2020 at the height of the pan­dem­ic-pan­ic — calls the car­ried inter­est loop­hole a “stain on the tax code”. Because it is a stain. An utter­ly inde­fen­si­ble loop­hole that the indus­try itself only defends by mis­char­ac­ter­iz­ing it as a ben­e­fit to ‘small busi­ness’:

    ...
    Opin­ions on the car­ried inter­est tax treat­ment vary even with­in the finan­cial indus­try. In posts on Twit­ter in late July, Bill Ack­man, the founder of Per­sh­ing Square Cap­i­tal Man­age­ment, a New York hedge fund, said that while “favor­able tax treat­ment” for the founders of new busi­ness­es was essen­tial, peo­ple who man­age funds that own many com­pa­nies should not be enti­tled to the same ben­e­fit.

    “The car­ried inter­est loop­hole is a stain on the tax code,” he wrote in one post. “It does not help small busi­ness­es, pen­sion funds, oth­er investors in hedge funds or pri­vate equi­ty and every­one in the indus­try knows it. It is an embar­rass­ment and it should end now.”
    ...

    And as the senior fel­low from the Cen­ter for Amer­i­can Progress reminds us, it’s not like the loop­hole was going to be closed under the pro­posed leg­is­la­tion. They were mere­ly going to increase the manda­to­ry hold­ing peri­od for the pri­vate equi­ty fund man­agers to hold their invest­ments before sell­ing. The car­ried inter­est loop­hole was nev­er real­ly at risk:

    ...
    Some ana­lysts were skep­ti­cal all along that law­mak­ers would actu­al­ly change the car­ried inter­est tax treat­ment in the final bill. While it has become a high-pro­file tar­get, the change Democ­rats were seek­ing would have raised lit­tle tax rev­enue com­pared with oth­er pro­vi­sions in the leg­is­la­tion, known as the Infla­tion Reduc­tion Act.

    “Car­ried inter­est has become the MacGuf­fin of the I.R.A. saga,” said James Luci­er, an ana­lyst at Cap­i­tal Alpha Part­ners, a pol­i­cy research firm in Wash­ing­ton, describ­ing it as a lit­er­ary device that authors include mere­ly to make plots more inter­est­ing. “The MacGuf­fin dis­tract­ed atten­tion from the real­ly impor­tant things going on in the sto­ry to make the star­tling con­clu­sion even more sur­pris­ing in the end.”

    On Fri­day, some pro­gres­sive pol­i­cy experts shrugged off the elim­i­na­tion of the car­ried inter­est pro­vi­sion, which they con­sid­ered only a mod­est improve­ment over cur­rent law.

    The pro­pos­al that was in the bill until last night made a tech­ni­cal adjust­ment in the hold­ing peri­od for assets that qual­i­fied for car­ried inter­est treat­ment,” said Jean Ross, a senior fel­low at the Cen­ter for Amer­i­can Progress, a lib­er­al research group in Wash­ing­ton. “A bet­ter approach would tack­le the issue head-on and say that com­pen­sa­tion for ser­vices man­ag­ing an invest­ment fund should be taxed like work and sub­ject to ordi­nary tax rates.”
    ...

    And that car­ried inter­est loop­hole preser­va­tion was just one of the pri­vate equi­ty indus­try’s wins dur­ing this final round of nego­ti­a­tions deliv­ered by Sen­a­tor Sine­ma. As the fol­low­ing arti­cle describes, the indus­try got to also tout its big vic­to­ry for ‘small busi­ness’. Specif­i­cal­ly, small and medi­um-sized busi­ness­es that hap­pen to be owned by pri­vate equi­ty giants:

    The New York Times

    How a Last-Minute Lob­by­ing Blitz Watered Down a Cli­mate Bill Tax

    The new cor­po­rate min­i­mum tax is not law yet and is already rife with excep­tions for the busi­ness­es that might have to pay it.

    By Alan Rappe­port
    Aug. 8, 2022, 6:54 p.m. ET

    WASHINGTON — An hour after Democ­rats released the text of their cli­mate and tax leg­is­la­tion, Wash­ing­ton lob­by­ists for the pri­vate equi­ty indus­try sprang into action.

    With a final Sen­ate vote near­ing on the major pack­age on Sun­day, a late addi­tion would have sub­ject­ed com­pa­nies con­trolled by pri­vate invest­ment funds to a new 15 per­cent cor­po­rate min­i­mum tax in the leg­is­la­tion that was sup­posed to apply to America’s biggest cor­po­ra­tions.

    But a last-minute mobi­liza­tion of polit­i­cal mus­cle and direct pleas to Sen­a­tor Kyrsten Sine­ma, the Ari­zona Demo­c­rat who oppos­es tax increas­es and is sym­pa­thet­ic to pri­vate equi­ty, got the mea­sure scrapped. The blitz was emblem­at­ic of the messy nature of tax pol­i­cy­mak­ing and how poli­cies meant to curb tax avoid­ance can spring new carve-outs on the fly.

    The issue stems from how pri­vate equi­ty firms work: They typ­i­cal­ly invest in a port­fo­lio of com­pa­nies. Under the pro­vi­sion that was the point of con­tention, if the com­bined “book income” of com­pa­nies con­trolled by the same pri­vate equi­ty fund exceed­ed $1 bil­lion, all of those com­pa­nies, even if they were small or medi­um-size, would be liable to pay the new 15 per­cent tax on the income they report­ed to their share­hold­ers.

    “Looks like some­one is try­ing sneak one past every­one,” Neil Bradley, chief pol­i­cy offi­cer at the U.S. Cham­ber of Com­merce, said on Twit­ter on Sat­ur­day.

    Free­dom Works, a con­ser­v­a­tive orga­ni­za­tion that lob­bies for low­er tax­es, blared out warn­ings on its Twit­ter feed, claim­ing that Democ­rats were tar­get­ing small firms that rely on cap­i­tal invest­ment to expand.

    NEW Par­don The Disruption!Join the crew as we dis­cuss, Van­i­ty Plates, The Big Bad Bill, Rich Cana­di­an Taste Testers, and more! #ampFW [??] ?? https://t.co/OtKEkrrrNz pic.twitter.com/EPDJJIVkfW— Free­dom­Works (@FreedomWorks) August 8, 2022

    Pri­vate equi­ty indus­try groups cir­cu­lat­ed oppo­si­tion research on what they called a “stealth” tax, which they said would hit more than 18,000 com­pa­nies.

    At the urg­ing of Ms. Sine­ma, the mea­sure was removed after hours of horse-trad­ing over how to replace an esti­mat­ed $35 bil­lion in gov­ern­ment rev­enue that would be lost by tak­ing out of the pro­pos­al. Ulti­mate­ly, law­mak­ers opt­ed to extend a rule lim­it­ing deduc­tions that com­pa­nies can take on busi­ness loss­es that Repub­li­cans enact­ed in 2017.

    The new cor­po­rate min­i­mum tax had already been whit­tled down before the changes over the week­end. Ms. Sine­ma pushed last week to pre­serve deduc­tions that man­u­fac­tur­ers use to off­set the cost of equip­ment pur­chas­es, and law­mak­ers decid­ed to keep a deduc­tion for wire­less spec­trum pur­chas­es that telecom­mu­ni­ca­tions com­pa­nies said was impor­tant for the roll­out of high-speed broad­band.

    The big win for pri­vate equity’s lob­by­ists was on so-called car­ried inter­est. Democ­rats had pro­posed curb­ing the spe­cial tax treat­ment that hedge fund man­agers and pri­vate equi­ty exec­u­tives get on the invest­ment gains they take as com­pen­sa­tion. After Ms. Sine­ma object­ed, the curb on car­ried inter­est was replaced with a 1 per­cent excise tax on cor­po­rate stock repur­chas­es.

    Tax experts were already skep­ti­cal about the cor­po­rate min­i­mum tax, say­ing com­pa­nies would be able to maneu­ver their way around pay­ing it.

    “The min­i­mum tax has always been like a 10th-best solu­tion, and when you start tak­ing out more ele­ments, is it now the 12th-best solu­tion?” said Steven M. Rosen­thal, a senior fel­low at the Urban-Brook­ings Tax Pol­i­cy Cen­ter, not­ing that rel­a­tive­ly few com­pa­nies would now face the new tax. “There may be more gov­ern­ment staff ded­i­cat­ed to audit­ing these com­pa­nies than there are com­pa­nies sub­ject to the tax.”

    The Joint Com­mit­tee on Tax­a­tion had esti­mat­ed that the new cor­po­rate min­i­mum tax would apply to 150 com­pa­nies, but that was before more excep­tions were added to the leg­is­la­tion. The tax was pro­ject­ed to raise more than $300 bil­lion in new rev­enue over a decade, but the slimmed-down ver­sion is like­ly to raise just over $200 bil­lion.

    “There’s still the issue that com­pa­nies are going to end up pay­ing lit­tle tax under this any­way,” said Kyle Pomer­leau, a senior fel­low at the Amer­i­can Enter­prise Insti­tute.

    Mr. Pomer­leau also lament­ed that by tax­ing book income, Con­gress was ced­ing some con­trol over tax pol­i­cy to the Finan­cial Account­ing Stan­dards Board, an inde­pen­dent orga­ni­za­tion that sets account­ing rules. Book income is the prof­it that com­pa­nies report to share­hold­ers and investors on their income state­ments, which are gen­er­al­ly gov­erned by those account­ing rules.

    The new tax is intend­ed to tar­get big com­pa­nies, like Ama­zon and Meta, that have for years found ways to low­er their tax rates by cap­i­tal­iz­ing on deduc­tions in the tax code. Tax experts gen­er­al­ly favor increas­ing tax rates — the cur­rent cor­po­rate rate is 21 per­cent — or scal­ing back deduc­tions. But because Repub­li­cans were unit­ed against that approach, and Democ­rats did not have enough votes for it, they set­tled on the cor­po­rate min­i­mum tax.

    Pro­gres­sives expressed dis­ap­point­ment after Democ­rats removed the mea­sure that would have affect­ed busi­ness­es that are con­trolled by pri­vate equi­ty and accused Ms. Sine­ma of being behold­en to Wall Street and lob­by­ists.

    “What­ev­er job she gets with Wall Street after los­ing her pri­ma­ry, they can’t pay her enough,” Adam Green, co-founder of the Pro­gres­sive Change Cam­paign Com­mit­tee, wrote on Twit­ter.

    ...

    Mark Mazur, a for­mer deputy assis­tant sec­re­tary for tax pol­i­cy at the Trea­sury Depart­ment, said that the cor­po­rate min­i­mum tax was “not the best pol­i­cy” and that account­ing firms were like­ly comb­ing through the leg­is­la­tion to deter­mine how their clients could avoid the new levy.

    “It’s almost an admis­sion that Con­gress can’t do the right thing and claw back the tax breaks that were giv­en, and so it has to do it in a back­door way,” said Mr. Mazur, who left the Trea­sury Depart­ment in Octo­ber and held senior roles in the fed­er­al gov­ern­ment for near­ly 30 years.

    Pre­dict­ing that com­pa­nies would find new ways to low­er their tax bills, he added: “There are options to do things, and you can expect at least aggres­sive tax­pay­ers to explore those options.”

    ———–

    “How a Last-Minute Lob­by­ing Blitz Watered Down a Cli­mate Bill Tax” by Alan Rappe­port; The New York Times; 08/08/2022

    “The issue stems from how pri­vate equi­ty firms work: They typ­i­cal­ly invest in a port­fo­lio of com­pa­nies. Under the pro­vi­sion that was the point of con­tention, if the com­bined “book income” of com­pa­nies con­trolled by the same pri­vate equi­ty fund exceed­ed $1 bil­lion, all of those com­pa­nies, even if they were small or medi­um-size, would be liable to pay the new 15 per­cent tax on the income they report­ed to their share­hold­ers.

    Yep, the pri­vate-equi­ty giants with port­fo­lios exceed­ing $1 bil­lion denounced pro­posed 15 per­cent min­i­mum cor­po­rate income tax as an attack on small and medi­um-sized busi­ness­es. That was part of the spin, although in the end it was real­ly the pri­vate equi­ty indus­try’s grip on Sen­a­tor Sine­ma that real­ly made gave the indus­try lever­age in these nego­ti­a­tions. In the end, pri­vate equi­ty won out and all of those pri­vate-equi­ty-owned firms get to con­tin­ue pay­ing lit­tle to no tax­es. Because of course. Might still makes right in con­tem­po­rary Amer­i­ca and will con­tin­ue to do so as long as politi­cians can be legal­ly bought off with unlim­it­ed cam­paign cash:

    ...
    With a final Sen­ate vote near­ing on the major pack­age on Sun­day, a late addi­tion would have sub­ject­ed com­pa­nies con­trolled by pri­vate invest­ment funds to a new 15 per­cent cor­po­rate min­i­mum tax in the leg­is­la­tion that was sup­posed to apply to America’s biggest cor­po­ra­tions.

    But a last-minute mobi­liza­tion of polit­i­cal mus­cle and direct pleas to Sen­a­tor Kyrsten Sine­ma, the Ari­zona Demo­c­rat who oppos­es tax increas­es and is sym­pa­thet­ic to pri­vate equi­ty, got the mea­sure scrapped. The blitz was emblem­at­ic of the messy nature of tax pol­i­cy­mak­ing and how poli­cies meant to curb tax avoid­ance can spring new carve-outs on the fly.

    ...

    Pri­vate equi­ty indus­try groups cir­cu­lat­ed oppo­si­tion research on what they called a “stealth” tax, which they said would hit more than 18,000 com­pa­nies.

    At the urg­ing of Ms. Sine­ma, the mea­sure was removed after hours of horse-trad­ing over how to replace an esti­mat­ed $35 bil­lion in gov­ern­ment rev­enue that would be lost by tak­ing out of the pro­pos­al. Ulti­mate­ly, law­mak­ers opt­ed to extend a rule lim­it­ing deduc­tions that com­pa­nies can take on busi­ness loss­es that Repub­li­cans enact­ed in 2017.

    The new cor­po­rate min­i­mum tax had already been whit­tled down before the changes over the week­end. Ms. Sine­ma pushed last week to pre­serve deduc­tions that man­u­fac­tur­ers use to off­set the cost of equip­ment pur­chas­es, and law­mak­ers decid­ed to keep a deduc­tion for wire­less spec­trum pur­chas­es that telecom­mu­ni­ca­tions com­pa­nies said was impor­tant for the roll­out of high-speed broad­band.
    ...

    But as frus­trat­ing as it is to read about the pri­vate equi­ty indus­try once again demon­strat­ing its iron grip on US pol­i­cy-mak­ing, note the caveats from tax experts: a cor­po­rate min­i­mum tax is basi­cal­ly already an acknowl­edge­ment of pol­i­cy fail­ure. Cor­po­ra­tions will still find ways around these min­i­mum tax­es. If you real­ly want to make cor­po­ra­tions pay, reverse all the tax breaks that result­ed in zero-tax­es in the first place. It’s one of the big lessons the US pub­lic should prob­a­bly take from this whole sto­ry. There real­ly is no viable sub­sti­tute for revers­ing the dis­as­trous 2017 GOP tax cuts:

    ...
    Tax experts were already skep­ti­cal about the cor­po­rate min­i­mum tax, say­ing com­pa­nies would be able to maneu­ver their way around pay­ing it.

    “The min­i­mum tax has always been like a 10th-best solu­tion, and when you start tak­ing out more ele­ments, is it now the 12th-best solu­tion?” said Steven M. Rosen­thal, a senior fel­low at the Urban-Brook­ings Tax Pol­i­cy Cen­ter, not­ing that rel­a­tive­ly few com­pa­nies would now face the new tax. “There may be more gov­ern­ment staff ded­i­cat­ed to audit­ing these com­pa­nies than there are com­pa­nies sub­ject to the tax.”

    The Joint Com­mit­tee on Tax­a­tion had esti­mat­ed that the new cor­po­rate min­i­mum tax would apply to 150 com­pa­nies, but that was before more excep­tions were added to the leg­is­la­tion. The tax was pro­ject­ed to raise more than $300 bil­lion in new rev­enue over a decade, but the slimmed-down ver­sion is like­ly to raise just over $200 bil­lion.

    “There’s still the issue that com­pa­nies are going to end up pay­ing lit­tle tax under this any­way,” said Kyle Pomer­leau, a senior fel­low at the Amer­i­can Enter­prise Insti­tute.

    ...

    The new tax is intend­ed to tar­get big com­pa­nies, like Ama­zon and Meta, that have for years found ways to low­er their tax rates by cap­i­tal­iz­ing on deduc­tions in the tax code. Tax experts gen­er­al­ly favor increas­ing tax rates — the cur­rent cor­po­rate rate is 21 per­cent — or scal­ing back deduc­tions. But because Repub­li­cans were unit­ed against that approach, and Democ­rats did not have enough votes for it, they set­tled on the cor­po­rate min­i­mum tax.
    ...

    Mark Mazur, a for­mer deputy assis­tant sec­re­tary for tax pol­i­cy at the Trea­sury Depart­ment, said that the cor­po­rate min­i­mum tax was “not the best pol­i­cy” and that account­ing firms were like­ly comb­ing through the leg­is­la­tion to deter­mine how their clients could avoid the new levy.

    “It’s almost an admis­sion that Con­gress can’t do the right thing and claw back the tax breaks that were giv­en, and so it has to do it in a back­door way,” said Mr. Mazur, who left the Trea­sury Depart­ment in Octo­ber and held senior roles in the fed­er­al gov­ern­ment for near­ly 30 years.

    Pre­dict­ing that com­pa­nies would find new ways to low­er their tax bills, he added: “There are options to do things, and you can expect at least aggres­sive tax­pay­ers to explore those options.”
    ...

    It’s a reflec­tion of how pro­found­ly bro­ken the US polit­i­cal and eco­nom­ic struc­tures have become over the last gen­er­a­tion of increas­ing­ly ‘pro-busi­ness’ poli­cies. A bro­ken polit­i­cal struc­ture effec­tive­ly cap­tured by a bro­ken eco­nom­ic struc­ture and pass­ing laws mak­ing that eco­nom­ic struc­ture all the more cor­rupt and bloat­ed. For all the his­toric fret­ting about ‘Big Gov­ern­ment’, there’s a shock­ing lack of con­cern in the Amer­i­can zeit­geist about ‘Big­ger Busi­ness’ cap­tur­ing that gov­ern­ment. And yet, as we can see, the polit­i­cal bat­tles being fought and lost would­n’t real­ly make a major dif­fer­ence even if they were ulti­mate­ly won and the bat­tles that would actu­al­ly address these fun­da­men­tal prob­lems are seen as effec­tive­ly unwinnable and nev­er fought. The more things change, the more they stay the same. At least when it comes to the pri­ma­cy of wealth and pow­er over democ­ra­cy in Amer­i­ca.

    Posted by Pterrafractyl | August 14, 2022, 5:44 pm
  29. Are we look­ing at the biggest pyra­mid scheme ever? That’s the tru­ly dis­turb­ing, yet pre­dictable, ques­tion raised by the fol­low­ing pair of arti­cles about the major alarms flash­ing in the finan­cial sec­tor. Specif­i­cal­ly, alarms flash­ing in the pri­vate equi­ty sec­tor flush with ever-increas­ing vol­umes of cash from pen­sion funds look­ing for high­er returns:

    First, we just got a warn­ing in the Wall Street Jour­nal about the bru­tal loss­es expe­ri­enced by pub­lic pen­sions’ pri­vate equi­ty invest­ment already record­ed for this year. Loss­es poised to grow in com­ing months since the cur­rent loss­es also reflect the enor­mous mar­ket gains from 2021. We’re expect­ed to have a bet­ter sense of those loss­es by Decem­ber and they’re only expect­ed to grow. As the arti­cle notes, pri­vate equi­ty invest­ments for pub­lic pen­sion in the US have grown from $300 bil­lion to $480 bil­lion from 2018–2021 alone. It’s a reflec­tion of how pen­sions real­ly have been the rel­a­tive late-com­ers to the pri­vate equi­ty boom that’s been going on for years. A boom that some experts see com­ing to an end giv­en the flood of new mar­ket into the mar­ket­place in recent years. In oth­er, too much mon­ey has been chas­ing the rel­a­tive­ly high returns pri­vate equi­ty has tra­di­tion­al­ly yield­ed and now those returns aren’t so high any more.

    That brings us to the sec­ond alarm flash­ing in this mar­ket: recall how, back in June, the chief invest­ment offi­cer (CIO) of French asset man­age­ment giant Amun­di Asset Man­age­ment told a con­fer­ence that some parts of the pri­vate equi­ty indus­try “look like a pyra­mid scheme in a way”. Those com­ments were echoed last week by the CIO of Dan­ish pub­lic pen­sion giant ATP, who observed that over 80 per­cent of the sales of com­pa­nies held by the pri­vate equi­ty funds that ATP has invest­ed in were either to anoth­er pri­vate equi­ty fund or were “con­tin­u­a­tion fund” deals, where a pri­vate equi­ty group pass­es it between two dif­fer­ent funds that it con­trols. In oth­er words, he was observ­ing the indus­try behav­ing like a pyra­mid scheme, and was quite explic­it about it, com­ment­ing that “This is not good busi­ness, right? This is the start of, poten­tial­ly, I’m say­ing ‘poten­tial­ly’, a pyra­mid scheme. Everybody’s sell­ing to each oth­er . . . Banks are lend­ing against it. These are the con­cerns I’ve been shar­ing.”

    Those are the twin alarms blar­ing across this indus­try. The kind of warn­ing that could sig­nal munic­i­pal finan­cial crises across the West. Loss­es for pub­lic pen­sions neces­si­tate tax hikes or some­thing to cov­er the gaps, after all. And we still don’t know yet just how big these loss­es are ulti­mate­ly going to be. But what is becom­ing increas­ing­ly clear is that the pri­vate equi­ty indus­try’s mul­ti-decade-long boom is increas­ing­ly unsus­tain­able and pen­sion funds are slat­ed to play the ‘duped bag hold­er’ role as this unsus­tain­able sto­ry plays itself out:

    The Wall Street Jour­nal

    Pen­sions Brace for Pri­vate-Equi­ty Loss­es

    Retire­ment offi­cials pre­dict grim results from invest­ments in pri­vate equi­ty and oth­er illiq­uid assets

    By Heather Gillers and Dion Rabouin
    Sept. 24, 2022 5:30 am ET

    Pub­lic pen­sion funds are already report­ing big loss­es in 2022. Things are like­ly to get ugli­er.

    That is because the funds, which man­age around $5 tril­lion in retire­ment sav­ings for the nation’s teach­ers, fire­fight­ers and oth­er pub­lic work­ers, haven’t yet fac­tored in sec­ond-quar­ter returns on pri­vate equi­ty and oth­er illiq­uid invest­ments.

    “You should expect some­time over the next three to four quar­ters to see write-downs in the illiq­uid part of the port­fo­lio,” Allan Emkin, a con­sul­tant to large pen­sion funds with Meke­ta Invest­ment Group, told the board of the $300 bil­lion Cal­i­for­nia State Teach­ers’ Retire­ment Sys­tem last month.

    The loss­es are yet anoth­er exam­ple of how the cur­rent mar­ket tumult offers almost no place to hide, and that even the invest­ments usu­al­ly con­sid­ered havens are slump­ing.. The Dow Jones Indus­tri­al Aver­age on Fri­day closed at its low­est lev­el of 2022, weighed down by con­cerns about infla­tion, weak glob­al growth and whether the Fed­er­al Reserve’s rate-rais­ing cam­paign will tip the U.S. into reces­sion.

    Pub­lic pen­sions have faced a fund­ing crunch for years. Many have increas­ing­ly turned to pri­vate equi­ty and oth­er non­tra­di­tion­al invest­ments over the past few years in hopes of plug­ging their short­falls.

    When pen­sion returns fall short of tar­gets, typ­i­cal­ly around 7% annu­al­ized, the states and cities spon­sor­ing those pen­sions pay high­er annu­al retire­ment con­tri­bu­tions to make up the dif­fer­ence. Some­times they must raise tax­es or cut ser­vices to find the extra mon­ey.

    Pub­lic pen­sions report­ed return­ing a medi­an minus 7.9% for the fis­cal year end­ed June 30, their worst loss­es since 2009, accord­ing to data from Wilshire Trust Uni­verse Com­par­i­son Ser­vice pub­lished in The Wall Street Jour­nal last month.

    But the only per­for­mance fig­ures from this year’s bru­tal sec­ond quar­ter reflect­ed in that 7.9% fig­ure are for tra­di­tion­al pub­licly trad­ed invest­ments like stocks and bonds. The pri­vate-mar­ket returns baked into that fig­ure are for the 12 months end­ed March 31, and include dou­ble-dig­it pri­vate-equi­ty gains for the sec­ond quar­ter of 2021.

    In the com­ing weeks and months, pub­lic pen­sion funds will cal­cu­late the sec­ond-quar­ter per­for­mance of their pri­vate-mar­ket assets based on esti­mates they receive from invest­ment man­agers. Warn­ing signs are already vis­i­ble in the sec­ondary mar­ket, where investors can buy and sell pri­vate-equi­ty assets mid­way through the life of the invest­ments.

    Investors who bought pri­vate-equi­ty assets on the sec­ondary mar­ket this year paid an aver­age 86% of the val­ue assigned to those assets in 2021, accord­ing to data col­lect­ed by invest­ment bank Jef­feries LLC from trans­ac­tions it worked on. While assets often sell at a dis­count in sec­ondary trad­ing, that was the low­est fig­ure since data col­lec­tion began in 2016.

    ...

    “We expect the absolute return of pri­vate equi­ty to decline in the com­ing quar­ters,” Greg Ruiz, head of pri­vate equi­ty at the $440 bil­lion Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem, told board mem­bers Mon­day.

    State and local plans held about $480 bil­lion in pri­vate equi­ty in 2021, up from $300 bil­lion in 2018, accord­ing to esti­mates based on data from ana­lyt­ics com­pa­ny Pre­qin and the Fed­er­al Reserve. Illiq­uid assets includ­ing pri­vate equi­ty rep­re­sent­ed near­ly a quar­ter of their port­fo­lios.

    Insti­tu­tions typ­i­cal­ly invest in pri­vate equi­ty by turn­ing over cash to a mon­ey man­ag­er who pools it with oth­er investors’ mon­ey and uses it to buy, over­haul and sell pri­vate com­pa­nies over a decade or so. While the investor might receive some mon­ey dur­ing that time, the over­all per­for­mance of the invest­ment won’t become clear until the final pay­out.

    In the inter­im, the investor relies on the man­ag­er to pro­vide an esti­mate each quar­ter of what the invest­ment is worth. Man­agers come up with these esti­mates by try­ing to assess the cur­rent val­ue of the pri­vate com­pa­nies they hold based on a mix of fac­tors, such as inter­nal or out­side eval­u­a­tions of the com­pa­nies’ cur­rent and future per­for­mance, and the trad­ing prices of com­pa­ra­ble pub­lic com­pa­nies.

    Andy Nick, a man­ag­ing direc­tor at Jef­feries’ pri­vate cap­i­tal advi­so­ry arm, said pri­vate-equi­ty man­agers tend to under­state both gains and loss­es dur­ing indi­vid­ual report­ing peri­ods by fac­tor­ing them over a longer peri­od. He pre­dict­ed that man­agers won’t price in the full extent of this year’s loss­es until Decem­ber, when audi­tors review their account­ing.

    “You’ll have the quar­ter­ly marks but that’s as good as the paper it’s writ­ten on,” Mr. Nick said.

    Pri­vate-equi­ty invest­ments have out­per­formed stocks over the very long term, accord­ing to a pri­vate-equi­ty index main­tained by the data ana­lyt­ics firm Bur­giss that doesn’t include ven­ture cap­i­tal. For the three decades end­ed June 30, 2021, the Bur­giss index yield­ed an annu­al return of close to 14%, about 3 per­cent­age points more than the S&P 500.

    How­ev­er, the gap has all but dis­ap­peared as more investors have crowd­ed into pri­vate equi­ty. Over the 10 years end­ed June 30, 2021, the yield was the same as the S&P 500, 14.8%.

    ————

    “Pen­sions Brace for Pri­vate-Equi­ty Loss­es” By Heather Gillers and Dion Rabouin; The Wall Street Jour­nal; 0924/2022

    Pub­lic pen­sions report­ed return­ing a medi­an minus 7.9% for the fis­cal year end­ed June 30, their worst loss­es since 2009, accord­ing to data from Wilshire Trust Uni­verse Com­par­i­son Ser­vice pub­lished in The Wall Street Jour­nal last month.”

    A ‑7.9% annu­al­ized medi­an return for the fis­cal year. The worst since 2009 for pub­lic pen­sion funds. And 2009 obvi­ous­ly was an excep­tion­al­ly awful year for invest­ments. And these loss­es are appar­ent­ly like­ly under­stat­ed and poised to grow in com­ing quar­ters:

    ...
    But the only per­for­mance fig­ures from this year’s bru­tal sec­ond quar­ter reflect­ed in that 7.9% fig­ure are for tra­di­tion­al pub­licly trad­ed invest­ments like stocks and bonds. The pri­vate-mar­ket returns baked into that fig­ure are for the 12 months end­ed March 31, and include dou­ble-dig­it pri­vate-equi­ty gains for the sec­ond quar­ter of 2021.

    In the com­ing weeks and months, pub­lic pen­sion funds will cal­cu­late the sec­ond-quar­ter per­for­mance of their pri­vate-mar­ket assets based on esti­mates they receive from invest­ment man­agers. Warn­ing signs are already vis­i­ble in the sec­ondary mar­ket, where investors can buy and sell pri­vate-equi­ty assets mid­way through the life of the invest­ments.

    Investors who bought pri­vate-equi­ty assets on the sec­ondary mar­ket this year paid an aver­age 86% of the val­ue assigned to those assets in 2021, accord­ing to data col­lect­ed by invest­ment bank Jef­feries LLC from trans­ac­tions it worked on. While assets often sell at a dis­count in sec­ondary trad­ing, that was the low­est fig­ure since data col­lec­tion began in 2016.

    ...

    “We expect the absolute return of pri­vate equi­ty to decline in the com­ing quar­ters,” Greg Ruiz, head of pri­vate equi­ty at the $440 bil­lion Cal­i­for­nia Pub­lic Employ­ees’ Retire­ment Sys­tem, told board mem­bers Mon­day.

    ...

    Andy Nick, a man­ag­ing direc­tor at Jef­feries’ pri­vate cap­i­tal advi­so­ry arm, said pri­vate-equi­ty man­agers tend to under­state both gains and loss­es dur­ing indi­vid­ual report­ing peri­ods by fac­tor­ing them over a longer peri­od. He pre­dict­ed that man­agers won’t price in the full extent of this year’s loss­es until Decem­ber, when audi­tors review their account­ing.

    “You’ll have the quar­ter­ly marks but that’s as good as the paper it’s writ­ten on,” Mr. Nick said.
    ...

    And this is all hap­pen­ing fol­low­ing a peri­od where pub­lic pen­sion funds have increas­ing­ly been pil­ing into the pri­vate equi­ty sec­tor. State and local pen­sions in the US saw their invest­ments in pri­vate equi­ty jump from $300 bil­lion to $480 bil­lion between 2018 and 2021. This is an impor­tant fac­tor to keep in mind in this sto­ry because of the illiq­uid nature of pri­vate equi­ty invest­ments, where investors are typ­i­cal­ly mak­ing invest­ments that aren’t expect­ed to pay out for at least a decade. In oth­er words, these loss­es are being expe­ri­enced this year are like­ly on rel­a­tive­ly recent invest­ments that are still years away from being liq­uid:

    ...
    Pub­lic pen­sions have faced a fund­ing crunch for years. Many have increas­ing­ly turned to pri­vate equi­ty and oth­er non­tra­di­tion­al invest­ments over the past few years in hopes of plug­ging their short­falls.

    When pen­sion returns fall short of tar­gets, typ­i­cal­ly around 7% annu­al­ized, the states and cities spon­sor­ing those pen­sions pay high­er annu­al retire­ment con­tri­bu­tions to make up the dif­fer­ence. Some­times they must raise tax­es or cut ser­vices to find the extra mon­ey.

    ...

    State and local plans held about $480 bil­lion in pri­vate equi­ty in 2021, up from $300 bil­lion in 2018, accord­ing to esti­mates based on data from ana­lyt­ics com­pa­ny Pre­qin and the Fed­er­al Reserve. Illiq­uid assets includ­ing pri­vate equi­ty rep­re­sent­ed near­ly a quar­ter of their port­fo­lios.

    ...

    Pri­vate-equi­ty invest­ments have out­per­formed stocks over the very long term, accord­ing to a pri­vate-equi­ty index main­tained by the data ana­lyt­ics firm Bur­giss that doesn’t include ven­ture cap­i­tal. For the three decades end­ed June 30, 2021, the Bur­giss index yield­ed an annu­al return of close to 14%, about 3 per­cent­age points more than the S&P 500.

    How­ev­er, the gap has all but dis­ap­peared as more investors have crowd­ed into pri­vate equi­ty. Over the 10 years end­ed June 30, 2021, the yield was the same as the S&P 500, 14.8%.
    ...

    So what can we expect pen­sion funds to do in response to this sit­u­a­tion? Well, if the fol­low­ing Finan­cial Times arti­cle from last week is any indi­ca­tion of what to expect, we’ll prob­a­bly expe­ri­ence even more stag­ger­ing loss­es in com­ing years...to the ben­e­fit of the rest of the pri­vate-equi­ty investor class. Yes, that’s the tru­ly dire warn­ing we’ve been get­ting from mul­ti­ple Chief Invest­ment Offi­cers at major Euro­pean asset man­age­ment firms. First, back in June, Amun­di Asset Management’s CIO Vin­cent Morti­er com­ment­ed that some parts of the pri­vate equi­ty indus­try “look like a pyra­mid scheme in a way”. last week, the CIO of the largest Dan­ish pub­lic pen­sion man­ag­er echoed those com­ments when he observed that more than 80 per cent of the sales of port­fo­lio com­pa­nies by the pri­vate equi­ty funds that ATP has invest­ed in were either to anoth­er buy­out group or were “con­tin­u­a­tion” deals, where a pri­vate equi­ty group pass­es the asset between two dif­fer­ent funds it con­trols. More than 80 per­cent of the sales from funds ATP invest­ed in have been these kind of deals, where one pri­vate equi­ty investor gets to secure their invest­ment returns at the expense of anoth­er investor who is now tak­ing on those asset risks. That real­ly is pyra­mid scheme behav­ior.

    And based on the peo­ple mak­ing these obser­va­tions it sounds like it’s pyra­mid scheme behav­ior where the pub­lic pen­sions are the ones typ­i­cal­ly pur­chas­ing these assets for oth­er pri­vate equi­ty funds and ulti­mate­ly left hold­ing the bag. That’s part of the con­text of the warn­ings about pub­lic pen­sions’ flail­ing pri­vate equi­ty funds: part of the rea­sons those pub­lic pen­sions pri­vate equi­ty assets are flail­ing is due to the gen­er­al mar­ket tur­moil. But the oth­er part of the sto­ry is how the pub­lic pen­sion are being used to shield the rest of the pri­vate equi­ty investors from that tur­moil. Just like a pyra­mid scheme but appar­ent­ly legal:

    The Finan­cial Times

    Pri­vate equi­ty may become a ‘pyra­mid scheme’, warns Dan­ish pen­sion fund
    Ten­den­cy for buy­out groups to sell com­pa­nies to them­selves and peers is ‘not good busi­ness’, ATP exec­u­tive says

    Kaye Wig­gins in Cannes Sep­tem­ber 20 2022

    A top exec­u­tive at Denmark’s largest pen­sion fund has com­pared the pri­vate equi­ty indus­try to a pyra­mid scheme, warn­ing buy­out groups are increas­ing­ly sell­ing com­pa­nies to them­selves and to peers on a scale that “is not good busi­ness”.

    Mikkel Sven­strup, chief invest­ment offi­cer at ATP, said he was con­cerned because last year more than 80 per cent of the sales of port­fo­lio com­pa­nies by the pri­vate equi­ty funds that ATP has invest­ed in were either to anoth­er buy­out group or were “con­tin­u­a­tion fund” deals, where a pri­vate equi­ty group pass­es it between two dif­fer­ent funds that it con­trols.

    “We’re a big fund investor, we have hun­dreds of funds and thou­sands of port­fo­lio com­pa­nies,” he said. “This is not good busi­ness, right? This is the start of, poten­tial­ly, I’m say­ing ‘poten­tial­ly’, a pyra­mid scheme. Everybody’s sell­ing to each oth­er . . . Banks are lend­ing against it. These are the con­cerns I’ve been shar­ing.”

    ATP is a major investor in pri­vate equi­ty funds. It has $119bn under man­age­ment and has com­mit­ted mon­ey to 147 buy­out funds, accord­ing to Pitch­Book data.

    Svenstrup’s com­ments, made at the IPEM pri­vate equi­ty con­fer­ence in Cannes, are sim­i­lar to those made by Amun­di Asset Management’s chief invest­ment offi­cer Vin­cent Morti­er in June. Morti­er said some parts of the pri­vate equi­ty indus­try “look like a pyra­mid scheme in a way”.

    Sven­strup said the “expo­nen­tial growth” of the pri­vate equi­ty indus­try in recent years, as investors have poured cash into its funds, would stop “at some point”, adding that this was “just a ques­tion of time”.

    ...

    ATP is cut­ting down on the num­ber of pri­vate equi­ty groups it com­mits mon­ey to, he told the con­fer­ence.

    “Obvi­ous­ly we’ve been look­ing very care­ful­ly at . . . who’s been tweak­ing [returns fig­ures by] using bridge financ­ing, lever­aged funds . . . all those tricks they do to kind of manip­u­late the IRR,” he said. IRR, or inter­nal rate of return, is a key mea­sure by which pri­vate equi­ty groups report returns to their investors.

    ———–

    “Pri­vate equi­ty may become a ‘pyra­mid scheme’, warns Dan­ish pen­sion fund” by Kaye Wig­gins; The Finan­cial Times; 09/20/2022

    “Mikkel Sven­strup, chief invest­ment offi­cer at ATP, said he was con­cerned because last year more than 80 per cent of the sales of port­fo­lio com­pa­nies by the pri­vate equi­ty funds that ATP has invest­ed in were either to anoth­er buy­out group or were “con­tin­u­a­tion fund” deals, where a pri­vate equi­ty group pass­es it between two dif­fer­ent funds that it con­trols.

    It’s quite a warn­ing to be issued by the chief invest­ment offi­cer of a giant Dan­ish pub­lic pen­sion fund ATP: more than 80% of the sales of the com­pa­nies held by the funds ATP has invest­ed in are sales between funds. That’s shady. The kind of shady activ­i­ty that one would asso­ciate with with a pyra­mid scheme. The kind of pyra­mid scheme that has the pub­lic pen­sion funds play­ing the role of the final marks left hold­ing the bag. And the CIO of ATP isn’t the only per­son mak­ing these obser­va­tion. He was echo­ing com­ment made by the CIO of French asset man­age­ment giant Amun­di Asset Man­age­ment: This mar­ket is behav­ing like a pyra­mid scheme:

    ...
    “We’re a big fund investor, we have hun­dreds of funds and thou­sands of port­fo­lio com­pa­nies,” he said. “This is not good busi­ness, right? This is the start of, poten­tial­ly, I’m say­ing ‘poten­tial­ly’, a pyra­mid scheme. Everybody’s sell­ing to each oth­er . . . Banks are lend­ing against it. These are the con­cerns I’ve been shar­ing.”

    ATP is a major investor in pri­vate equi­ty funds. It has $119bn under man­age­ment and has com­mit­ted mon­ey to 147 buy­out funds, accord­ing to Pitch­Book data.

    Svenstrup’s com­ments, made at the IPEM pri­vate equi­ty con­fer­ence in Cannes, are sim­i­lar to those made by Amun­di Asset Management’s chief invest­ment offi­cer Vin­cent Morti­er in June. Morti­er said some parts of the pri­vate equi­ty indus­try “look like a pyra­mid scheme in a way”.

    Sven­strup said the “expo­nen­tial growth” of the pri­vate equi­ty indus­try in recent years, as investors have poured cash into its funds, would stop “at some point”, adding that this was “just a ques­tion of time”.
    ...

    Those are the twin warn­ing signs we’re see­ing flash­ing red in this mar­ket­place: pen­sion funds are expe­ri­enc­ing major loss­es that have yet to be record­ed and poised to grow. And the broad­er pri­vate equi­ty indus­try is treat­ing the pen­sion funds like the bag-hold­ers in a pyra­mid scheme.

    Well, and then there’s the third warn­ing sign implic­it in this sto­ry that that we are liv­ing in a civil­ian run by and for pow­er­ful inter­ests who view the pub­lic as resources to be manip­u­lat­ed, exploit­ed, and ulti­mate­ly con­sumed and tossed away as refuse. It’s the kind of warn­ing that man­i­fests in all sorts of awful ways involv­ing unchecked sys­temic abus­es of pow­er. And here it is again.

    Posted by Pterrafractyl | September 25, 2022, 5:25 pm
  30. Set­ting up pen­sion funds to be the ‘bag hold­ers’ for the pri­vate equi­ty indus­try might seem like a win-win sit­u­a­tion for the indus­try, at least the parts of the indus­try who actu­al­ly count in this world. But treat­ing pen­sion funds like finan­cial fall guys isn’t con­se­quence free as we were remind­ed of last week by the UK. Con­se­quences that include poten­tial­ly trig­ger­ing a ‘Lehman moment’. That’s almost what hap­pened last week. A Lehman moment for the UK bond mar­kets. And a mar­ket illiq­uid­i­ty moment that almost spilled over into the rest of the mar­kets were it not for the emer­gency gilt buy­ing by the Bank of Eng­land (BOE), a rever­sal of the BOE’s pol­i­cy of sell­ing gilts to reduce infla­tion. Some­thing cat­a­stroph­ic almost hap­pened. And still might. The under­ly­ing stress­es that trig­gered the near melt­down are still very much in place. Specif­i­cal­ly, the stress­es on the bond mar­kets caused by the bud­get-bust­ing tax cuts for the rich just passed by the Truss gov­ern­ment. Rapid­ly ris­ing inter­est rates in response to all the new UK debt set off a col­lat­er­al call in the ‘Lia­bil­i­ty Dri­ven Invest­ment’ {LDI} funds used by a lot of pen­sion funds as the ris­ing inter­est rates erode the val­ue of the gilts act­ing as col­lat­er­al. Pen­sion funds short on cash were forced to raise cash fast and their gilts were one of the most liq­uid assets around. The ‘doom loop’ was formed: gilts were being sold to cov­er the falling val­ue of the gilts.

    The was anoth­er fact that helped put the doom loop in motion: As we’re going to see in the sec­ond arti­cle excerpt below, when the pen­sion funds went to their spon­sor­ing par­ent com­pa­nies ask­ing for emer­gency cash they were turned down. The mar­kets were ready to the let the bond mar­kets crash.

    And as we’re going to see, there’s a grim­ly fas­ci­nat­ing pri­vate equi­ty angle to the melt down: time was of the essence when the col­lat­er­al call on the pen­sion fund’s LDI invest­ments hit as a result of the ris­ing inter­est rates. And that meant the pri­vate equi­ty assets held by the pen­sion funds were of lit­tle use. They’re too illiq­uid. You can’t sell shares of pri­vate equi­ty invest­ments on the open mar­kets like you can with stocks and bonds. That’s part of what fueled the sell­off in gilts: so much of pen­sion funds’ assets are tied up in illiq­uid pri­vate equi­ty assets that gilts were one of the few liq­uid assets left when the col­lat­er­al calls hit. So while this was­n’t a cri­sis direct­ly in the pri­vate equi­ty mar­kets, it was indeed tied into the broad­er sto­ry of the pen­sion fund indus­try’s grow­ing reliance on pri­vate equi­ty over the past decade. Inter­est­ing­ly, it sounds like these LDI invest­ments have also been an area large growth for pen­sion funds over the last decade. So the two areas that pen­sion funds have been heav­i­ly dou­bling and tripling down on over the last decade — pri­vate equi­ty and LDI invest­ments — just helped pro­duce a ‘doom loop’ in the UK’s bond mar­kets last week.

    But we can’t for­get that it was the irre­spon­si­ble Tory tax cuts that actu­al­ly set it all in motion. Tax cuts the Truss gov­ern­ment has indi­cat­ed it has no plans on claw­ing back. No, instead the plan to deal with the tur­moil in the UK bond mar­kets result­ing from the glut of new tax-cut-caused debt is to call for all gov­ern­ment agen­cies to slash their bud­gets through 2025. Also, gov­ern­ment-backed pen­sion funds won’t get the infla­tion ‘uprat­ing’ that was planned for next year. So the tax cuts for the rich will stay in place while pen­sion­ers will effec­tive­ly get cuts. Because of course. It’s an omi­nous start for the Truss gov­ern­ment. Or as Simon Hoare, Tory MP for North Dorset, tweet­ed out “These are not cir­cum­stances beyond the con­trol of Govt/Treasury. They were authored there. This inept mad­ness can­not go on.”:

    The Finan­cial Times

    Bank of Eng­land launch­es £65bn move to calm mar­kets
    Cen­tral bank to spend £5bn a day for 13 days over ‘mate­r­i­al risk to UK finan­cial sta­bil­i­ty’ and threat to pen­sions

    Chris Giles, Emma Dunk­ley, George Park­er, Owen Walk­er, Peter Fos­ter, Josephine Cum­bo, Jim Pickard and Har­ri­et Agnew in Lon­don
    Sep­tem­ber 28, 2022, 5:54 pm

    The Bank of Eng­land took emer­gency action on Wednes­day to avoid a melt­down in the UK pen­sions sec­tor, unleash­ing a £65bn bond-buy­ing pro­gramme to stem a cri­sis in gov­ern­ment debt mar­kets.

    The cen­tral bank warned of a “mate­r­i­al risk to UK finan­cial sta­bil­i­ty” from tur­moil in the gilts mar­ket sparked by chan­cel­lor Kwasi Kwarteng’s tax cuts and bor­row­ing plan last week.

    In spite of the pro­longed mar­ket upheaval, City min­is­ter Andrew Grif­fith said the gov­ern­ment would stick to its strat­e­gy: “We think they’re the right plans because those plans make our econ­o­my com­pet­i­tive,” he said.

    The BoE sus­pend­ed a pro­gramme to sell gilts — part of an effort to get surg­ing infla­tion under con­trol — and instead pledged to buy long-dat­ed bonds at a rate of up to £5bn a day for the next 13 week­days.

    Econ­o­mists warned that the injec­tion of bil­lions of pounds of new­ly mint­ed mon­ey into the econ­o­my could fuel infla­tion. “This move will be infla­tion­ary at a time of already high infla­tion,” said Daniel Mahoney, UK econ­o­mist at Han­dels­banken.

    UK gov­ern­ment bond mar­kets recov­ered sharply after the announce­ment. The pound rose 1.4 per cent on the day and, by evening trad­ing in Lon­don, had reached $1.0877 against the dol­lar.

    The bank stressed that it was not seek­ing to low­er long-term gov­ern­ment bor­row­ing costs. Instead it want­ed to buy time to pre­vent a vicious cir­cle in which pen­sion funds have to sell gilts imme­di­ate­ly to meet demands for cash from their cred­i­tors.

    That process had put pen­sion funds at risk of insol­ven­cy, because the mass sell-offs pushed down fur­ther the price of gilts held by funds as assets, requir­ing them to stump up even more cash.

    “At some point this morn­ing I was wor­ried this was the begin­ning of the end,” said a senior Lon­don-based banker, adding that at one point on Wednes­day morn­ing there were no buy­ers of long-dat­ed UK gilts. “It was not quite a Lehman moment. But it got close.”

    The most direct­ly affect­ed groups were final-salary pen­sion schemes that have hedged to ensure their abil­i­ty to make future pay­ments — so-called lia­bil­i­ty-dri­ven invest­ment strate­gies that are very sen­si­tive to fast-mov­ing gilt yields.

    “It appears that some play­ers in the mar­ket ran out of col­lat­er­al and dumped gilts,” said Peter Har­ri­son, chief exec­u­tive of Schroders, which has $55bn in glob­al LDI busi­ness. “We were more con­ser­v­a­tive­ly posi­tioned and we had enough col­lat­er­al to meet all of our mar­gin calls.”

    But a senior exec­u­tive at a large asset man­ag­er said they had con­tact­ed the BoE on Tues­day warn­ing that it need­ed “to inter­vene in the mar­ket oth­er­wise it will seize up” — but the bank failed to act until Wednes­day. It declined to com­ment.

    ...

    “If there was no inter­ven­tion today, gilt yields could have gone up to 7–8 per cent from 4.5 per cent this morn­ing and in that sit­u­a­tion around 90 per cent of UK pen­sion funds would have run out of col­lat­er­al,” said Ker­rin Rosen­berg, Car­dano Invest­ment chief exec­u­tive. “They would have been wiped out.”

    The Trea­sury on Wednes­day tried to reas­sure mar­kets by telling gov­ern­ment depart­ments to iden­ti­fy effi­cien­cy sav­ings, stress­ing that they would have to live with­in very tight spend­ing lim­its, already set until 2025.

    Chris Philp, Trea­sury chief sec­re­tary, sug­gest­ed on Wednes­day night that he was look­ing at big sav­ings by not uprat­ing pen­sions and ben­e­fits in line with infla­tion next April. “It will be con­sid­ered in the nor­mal way,” he told ITV’s Peston.

    In June, for­mer chan­cel­lor Rishi Sunak promised that pen­sions would be uprat­ed by about 10 per cent next year, in line with infla­tion this autumn.

    The gov­ern­ment has promised a “triple lock”, where pen­sions rise by whichev­er is high­er: aver­age earn­ings, 2.5 per cent or infla­tion. Trea­sury insid­ers insist­ed that Philp was not chang­ing gov­ern­ment pol­i­cy.

    At a meet­ing with the chan­cel­lor ear­li­er on Wednes­day, bankers had urged Kwarteng not to wait until a planned state­ment on Novem­ber 23 to take action to calm the mar­kets with a new plan to cut debt.

    One per­son at the meet­ing, which includ­ed Citi, Bank of Amer­i­ca, UBS, JPMor­gan, Deutsche Bank and Stan­dard Char­tered, said that date was too far off. Kwarteng’s allies insist­ed that he was stick­ing to his timetable.

    Fol­low­ing the BoE’s inter­ven­tion, Labour leader Sir Keir Starmer called for par­lia­ment to be recalled and for Kwarteng to aban­don his plans.

    But some Con­ser­v­a­tive MPs believe Kwarteng’s rep­u­ta­tion has been shred­ded by the chaos of the past few days and can­not sur­vive as chan­cel­lor, while some argue that prime min­is­ter Liz Truss must change course.

    Kwarteng’s allies said he would not resign, while one gov­ern­ment insid­er said of Truss: “She’s very much not in the mood to budge and wants to tough it out.” Truss and Kwarteng said noth­ing pub­licly on Wednes­day.

    But Tory anger is mount­ing, with some warn­ing that Truss faces a rebel­lion on key leg­is­la­tion, includ­ing pos­si­bly on the finance bill to enact the new pack­age, when MPs return to the Com­mons in Octo­ber.

    Simon Hoare, Tory MP for North Dorset, tweet­ed: “These are not cir­cum­stances beyond the con­trol of Govt/Treasury. They were authored there. This inept mad­ness can­not go on.”

    The BoE took the emer­gency mea­sure after Kwarteng’s fis­cal pack­age last week sent the pound tum­bling and set off his­toric falls in gilt prices.

    After the announce­ment, 30-year gilt yields, which ear­li­er on Wednes­day had touched a 20-year high above 5 per cent, fell 1 per­cent­age point to 4 per cent — their biggest drop for any sin­gle day on record, accord­ing to Tradeweb data. Yields fall when prices rise. Ten-year yields slipped to 4.1 per cent from 4.59 per cent.

    ...

    ———-

    “Bank of Eng­land launch­es £65bn move to calm mar­kets” by Chris Giles, Emma Dunk­ley, George Park­er, Owen Walk­er, Peter Fos­ter, Josephine Cum­bo, Jim Pickard and Har­ri­et Agnew; The Finan­cial Times; 09/28/2022

    “The cen­tral bank warned of a “mate­r­i­al risk to UK finan­cial sta­bil­i­ty” from tur­moil in the gilts mar­ket sparked by chan­cel­lor Kwasi Kwarteng’s tax cuts and bor­row­ing plan last week.”

    Oops. It appears the new UK Con­ser­v­a­tive gov­ern­men­t’s extreme tax cuts for the rich almost broke the UK’s finan­cial mar­kets. Or rather, the tax cuts did actu­al­ly break the mar­kets very briefly before the BOE stepped in right when it was look­ing like the coun­try was fac­ing a ‘Lehman Moment’ in the gilts mar­ket. A moment pre­cip­i­tat­ed by pen­sion funds run­ning out of col­lat­er­al and being forced to sell off their gilts fol­low­ing the his­toric drop in the pound. A his­toric drop in the pound that was, of course, trig­gered by the fis­cal cri­sis cre­at­ed by the tax cuts:

    ...
    The BoE sus­pend­ed a pro­gramme to sell gilts — part of an effort to get surg­ing infla­tion under con­trol — and instead pledged to buy long-dat­ed bonds at a rate of up to £5bn a day for the next 13 week­days.

    ...

    UK gov­ern­ment bond mar­kets recov­ered sharply after the announce­ment. The pound rose 1.4 per cent on the day and, by evening trad­ing in Lon­don, had reached $1.0877 against the dol­lar.

    ...

    That process had put pen­sion funds at risk of insol­ven­cy, because the mass sell-offs pushed down fur­ther the price of gilts held by funds as assets, requir­ing them to stump up even more cash.

    “At some point this morn­ing I was wor­ried this was the begin­ning of the end,” said a senior Lon­don-based banker, adding that at one point on Wednes­day morn­ing there were no buy­ers of long-dat­ed UK gilts. “It was not quite a Lehman moment. But it got close.”

    ...

    “It appears that some play­ers in the mar­ket ran out of col­lat­er­al and dumped gilts,” said Peter Har­ri­son, chief exec­u­tive of Schroders, which has $55bn in glob­al LDI busi­ness. “We were more con­ser­v­a­tive­ly posi­tioned and we had enough col­lat­er­al to meet all of our mar­gin calls.”

    ...

    The BoE took the emer­gency mea­sure after Kwarteng’s fis­cal pack­age last week sent the pound tum­bling and set off his­toric falls in gilt prices.
    ...

    To get a sense of the scope of the poten­tial cri­sis that was devel­op­ing in the pen­sion mar­kets, note how around 90% of the UK’s pen­sion funds could have been forced into sell­ing gilts had the BOE neglect­ed to inter­vened:

    ...
    The bank stressed that it was not seek­ing to low­er long-term gov­ern­ment bor­row­ing costs. Instead it want­ed to buy time to pre­vent a vicious cir­cle in which pen­sion funds have to sell gilts imme­di­ate­ly to meet demands for cash from their cred­i­tors.

    ...

    The most direct­ly affect­ed groups were final-salary pen­sion schemes that have hedged to ensure their abil­i­ty to make future pay­ments — so-called lia­bil­i­ty-dri­ven invest­ment strate­gies that are very sen­si­tive to fast-mov­ing gilt yields.

    ...

    “If there was no inter­ven­tion today, gilt yields could have gone up to 7–8 per cent from 4.5 per cent this morn­ing and in that sit­u­a­tion around 90 per cent of UK pen­sion funds would have run out of col­lat­er­al,” said Ker­rin Rosen­berg, Car­dano Invest­ment chief exec­u­tive. “They would have been wiped out.”
    ...

    And note the response from trea­sury: don’t wor­ry, we’re going to be impos­ing such mas­sive bud­get cuts over the next two years that the fis­cal cri­sis cre­at­ed by the tax cuts will go away. Big sav­ings from things like not ‘uprat­ing’ pen­sion plans next year in line with infla­tion. Yes, the plan to deal with the fis­cal cri­sis that is deeply inter­twined with infla­tion fears trig­gered by the extreme tax cuts for the rich is to freeze pen­sions in the face of the infla­tion. That’s the plan and they’re stick­ing with it. At least until the next cri­sis trig­gered by the tax cuts:

    ...
    In spite of the pro­longed mar­ket upheaval, City min­is­ter Andrew Grif­fith said the gov­ern­ment would stick to its strat­e­gy: “We think they’re the right plans because those plans make our econ­o­my com­pet­i­tive,” he said.

    ...

    Econ­o­mists warned that the injec­tion of bil­lions of pounds of new­ly mint­ed mon­ey into the econ­o­my could fuel infla­tion. “This move will be infla­tion­ary at a time of already high infla­tion,” said Daniel Mahoney, UK econ­o­mist at Han­dels­banken.

    ...

    The Trea­sury on Wednes­day tried to reas­sure mar­kets by telling gov­ern­ment depart­ments to iden­ti­fy effi­cien­cy sav­ings, stress­ing that they would have to live with­in very tight spend­ing lim­its, already set until 2025.

    Chris Philp, Trea­sury chief sec­re­tary, sug­gest­ed on Wednes­day night that he was look­ing at big sav­ings by not uprat­ing pen­sions and ben­e­fits in line with infla­tion next April. “It will be con­sid­ered in the nor­mal way,” he told ITV’s Peston.

    In June, for­mer chan­cel­lor Rishi Sunak promised that pen­sions would be uprat­ed by about 10 per cent next year, in line with infla­tion this autumn.

    The gov­ern­ment has promised a “triple lock”, where pen­sions rise by whichev­er is high­er: aver­age earn­ings, 2.5 per cent or infla­tion. Trea­sury insid­ers insist­ed that Philp was not chang­ing gov­ern­ment pol­i­cy.

    At a meet­ing with the chan­cel­lor ear­li­er on Wednes­day, bankers had urged Kwarteng not to wait until a planned state­ment on Novem­ber 23 to take action to calm the mar­kets with a new plan to cut debt.

    One per­son at the meet­ing, which includ­ed Citi, Bank of Amer­i­ca, UBS, JPMor­gan, Deutsche Bank and Stan­dard Char­tered, said that date was too far off. Kwarteng’s allies insist­ed that he was stick­ing to his timetable.
    ...

    So did the UK at least resolve the imme­di­ate cri­sis? The Truss gov­ern­ment seems to think so but her fel­low con­ser­v­a­tives don’t appear to share her con­fi­dence. Con­fi­dence in her response or con­fi­dence in her gov­ern­ment in gen­er­al it seems. As one Tory MP put it, “These are not cir­cum­stances beyond the con­trol of Govt/Treasury. They were authored there. This inept mad­ness can­not go on”:

    ...
    Kwarteng’s allies said he would not resign, while one gov­ern­ment insid­er said of Truss: “She’s very much not in the mood to budge and wants to tough it out.” Truss and Kwarteng said noth­ing pub­licly on Wednes­day.

    But Tory anger is mount­ing, with some warn­ing that Truss faces a rebel­lion on key leg­is­la­tion, includ­ing pos­si­bly on the finance bill to enact the new pack­age, when MPs return to the Com­mons in Octo­ber.

    Simon Hoare, Tory MP for North Dorset, tweet­ed: “These are not cir­cum­stances beyond the con­trol of Govt/Treasury. They were authored there. This inept mad­ness can­not go on.”

    ...

    After the announce­ment, 30-year gilt yields, which ear­li­er on Wednes­day had touched a 20-year high above 5 per cent, fell 1 per­cent­age point to 4 per cent — their biggest drop for any sin­gle day on record, accord­ing to Tradeweb data. Yields fall when prices rise. Ten-year yields slipped to 4.1 per cent from 4.59 per cent.
    ...

    And if it seems like this was just a scare in the UK bond mar­kets, don’t assume a ‘Lehman event’ in the bond mar­ket is going to stay there. Fears of con­ta­gion remain and under­stand­ably so after we learn that a bunch of these pen­sion funds’ par­ent enti­ties already turned down pleas for more funds which is part of what trig­gered the mas­sive sell­off in the first place:

    Reuters

    UK pen­sion funds ask cor­po­rates for cash after gilt blow-up ‑sources

    By Car­olyn Cohn and Tom­my Wilkes
    Sep­tem­ber 30, 2022 12:24 PM CDT
    Updat­ed

    LONDON, Sept 30 (Reuters) — British pen­sion funds with big loss­es in gilt mar­ket deriv­a­tives have sought emer­gency funds from the com­pa­nies they man­age mon­ey for as they race to dump assets to raise cash, indus­try sources said on Fri­day.

    Many pen­sion funds were caught out dur­ing the surge in bond yields this week that forced the Bank of Eng­land to step in. The funds had to stump up cash to meet col­lat­er­al demands.

    Some funds crashed out of deriv­a­tive posi­tions because they could not raise the mon­ey in time, but are try­ing to put those hedges back on so they are not exposed to fur­ther volatile moves, the peo­ple said. The cash demands from lia­bil­i­ty-dri­ven invest­ment (LDI) funds that man­age the deriv­a­tives prompt­ed a cri­sis that threat­ened many of Britain’s biggest pen­sion funds. Some fear it could spread wider con­ta­gion.

    Some pen­sion funds sought help from their spon­sors, the par­ent enti­ties whose employ­ees’ pen­sions they man­age, includ­ing try­ing to open cred­it lines with banks, accord­ing to three pen­sion con­sul­tants and one pen­sion fund man­ag­er.

    The extent of the liq­uid­i­ty squeeze on pen­sion funds remained unclear after the Bank of Eng­land on Wednes­day said it would buy 65 bil­lion pounds ($72.21 bil­lion) of gilts and post­poned plans to sell bonds it already holds. “Schemes are look­ing to do what­ev­er they can to rein­state their hedges”, includ­ing seek­ing stand­by facil­i­ties with their spon­sors, said Sime­on Willis, chief invest­ment offi­cer at XPS Pen­sions Group. One pen­sion fund man­ag­er, who spoke on the con­di­tion of anonymi­ty, said his scheme had request­ed its par­ent open up a cred­it line on Wednes­day when it looked like it was run­ning out of cash but was refused. The BoE then made its announce­ment, send­ing bond yields low­er and eas­ing the pan­ic.

    The pen­sion scheme of Ser­co, the out­sourc­ing giant, request­ed a cred­it line from its par­ent, British media report­ed on Fri­day. Ser­co declined to com­ment.

    “We’ve had com­pa­nies under­stand the impor­tance of the hedge say­ing can we sup­port the pen­sion schemes, and we’ve had pen­sion funds look­ing at their short-term liq­uid­i­ty facil­i­ties,” said Calum Macken­zie, invest­ment part­ner at Aon.

    LDI strate­gies help pen­sion funds match their lia­bil­i­ties, the future pay­outs they must make to pen­sion mem­bers, and their assets.

    The mar­ket has boomed in the past decade and in Britain totals almost 1.6 tril­lion pounds in assets, accord­ing to the Invest­ment Asso­ci­a­tion. read more

    These strate­gies, sold by the likes of Black­Rock, Insight Invest­ment and Legal & Gen­er­al, are com­plex, use deriv­a­tives and lever­age, and are designed to pro­tect against volatile price swings in gilts.

    But mar­kets moved so fast this week that the strate­gies could not keep up.

    The pen­sion schemes were forced into sell­ing assets to raise cash but found every­one was doing the same, push­ing the price of those bonds even low­er and prompt­ing more calls for cash in a “doom loop” that by Wednes­day the BoE had decid­ed threat­ened finan­cial sta­bil­i­ty.

    Banks expect pen­sion funds will try to stay as liq­uid as they can, and sell oth­er assets.

    “Fund­ing sur­plus­es will like­ly be used to reduce lever­age, rather than hunt­ing yield. Assets will be kept as liq­uid as pos­si­ble,” said Est­ian Schoonraad, who works on RBC Cap­i­tal Mar­kets’ LDI team, in an email sent to pen­sion funds on Fri­day and seen by Reuters.

    For the imme­di­ate mar­ket impli­ca­tions, I expect the sell­ing of less liq­uid assets to con­tin­ue more grad­u­al­ly as the mar­ket stress abates. Any recent forced sell­ing of gilts + link­ers could be replaced when con­di­tions allow.”

    Pen­sion funds own any­thing from gov­ern­ment and cor­po­rate bonds to stocks and less liq­uid invest­ments like those in pri­vate equi­ty.

    ...

    ———-

    “UK pen­sion funds ask cor­po­rates for cash after gilt blow-up ‑sources” By Car­olyn Cohn and Tom­my Wilkes; Reuters; 09/30/2022

    “Some funds crashed out of deriv­a­tive posi­tions because they could not raise the mon­ey in time, but are try­ing to put those hedges back on so they are not exposed to fur­ther volatile moves, the peo­ple said. The cash demands from lia­bil­i­ty-dri­ven invest­ment (LDI) funds that man­age the deriv­a­tives prompt­ed a cri­sis that threat­ened many of Britain’s biggest pen­sion funds. Some fear it could spread wider con­ta­gion.

    Wider con­ta­gion. Not the words you want hear fol­low­ing a near Lehman-like event. But that’s the real­i­ty of what hap­pened and almost hap­pened. It was a gen­uine finan­cial dis­as­ter and a nar­row­ly avert­ed mega-dis­as­ter. Less than a week ago. Had the BOE not stepped in the mega-dis­as­ter was going to hap­pen. As this report describes, there was no one else. When pen­sion funds went to their par­ent com­pa­nies and explained the sit­u­a­tion and why the pen­sion funds need­ed emer­gency cash, they were get­ting turned down. The “doom loop” mar­kets dynam­ics need­ed to let in all crash were in place:

    ...
    Some pen­sion funds sought help from their spon­sors, the par­ent enti­ties whose employ­ees’ pen­sions they man­age, includ­ing try­ing to open cred­it lines with banks, accord­ing to three pen­sion con­sul­tants and one pen­sion fund man­ag­er.
    The extent of the liq­uid­i­ty squeeze on pen­sion funds remained unclear after the Bank of Eng­land on Wednes­day said it would buy 65 bil­lion pounds ($72.21 bil­lion) of gilts and post­poned plans to sell bonds it already holds. “Schemes are look­ing to do what­ev­er they can to rein­state their hedges”, includ­ing seek­ing stand­by facil­i­ties with their spon­sors, said Sime­on Willis, chief invest­ment offi­cer at XPS Pen­sions Group. One pen­sion fund man­ag­er, who spoke on the con­di­tion of anonymi­ty, said his scheme had request­ed its par­ent open up a cred­it line on Wednes­day when it looked like it was run­ning out of cash but was refused. The BoE then made its announce­ment, send­ing bond yields low­er and eas­ing the pan­ic.

    ...

    LDI strate­gies help pen­sion funds match their lia­bil­i­ties, the future pay­outs they must make to pen­sion mem­bers, and their assets.

    ...

    These strate­gies, sold by the likes of Black­Rock, Insight Invest­ment and Legal & Gen­er­al, are com­plex, use deriv­a­tives and lever­age, and are designed to pro­tect against volatile price swings in gilts.

    But mar­kets moved so fast this week that the strate­gies could not keep up.

    The pen­sion schemes were forced into sell­ing assets to raise cash but found every­one was doing the same, push­ing the price of those bonds even low­er and prompt­ing more calls for cash in a “doom loop” that by Wednes­day the BoE had decid­ed threat­ened finan­cial sta­bil­i­ty.
    ...

    And notice this inter­est­ing detail in rela­tion to the pen­sion funds’ grow­ing reliance on pri­vate equi­ty: one of the asset class­es the pen­sion funds could­n’t sell off when the cash crunch hit was their pri­vate equi­ty hold­ings. The rel­a­tive­ly illiq­uid pri­vate invest­ments were of no use dur­ing a mar­ket emer­gency. You can’t just sell a com­pa­ny in a few hours. You can sell gilts and oth­er types of bonds, hence the pre­cip­i­tous drop in the price of gilts and cor­re­spond­ing rise in inter­est rates the trig­gered the mar­gin calls and set in motion:

    ...
    Banks expect pen­sion funds will try to stay as liq­uid as they can, and sell oth­er assets.

    ...

    For the imme­di­ate mar­ket impli­ca­tions, I expect the sell­ing of less liq­uid assets to con­tin­ue more grad­u­al­ly as the mar­ket stress abates. Any recent forced sell­ing of gilts + link­ers could be replaced when con­di­tions allow.”

    Pen­sion funds own any­thing from gov­ern­ment and cor­po­rate bonds to stocks and less liq­uid invest­ments like those in pri­vate equi­ty.
    ...

    What’s going to hap­pen to those pri­vate equi­ty invest­ments dur­ing the next cri­sis. Noth­ing, again, pre­sum­ably. It’s too illiq­uid. That’s not chang­ing. Just as the tax cuts for the rich that cre­at­ed the bond mar­ket insta­bil­i­ty in the first place isn’t chang­ing either. The under­ly­ing dynam­ic that set this doom loop in motion are all still there. It’s the BOE hold­ing this togeth­er. For now. We’ll see how will­ing the BOE is to inter­vene dur­ing the next ‘Lehman moment’. But we can be pret­ty con­fi­dent the next moment is com­ing. This inept mad­ness can go on for a lot longer than we might like to think.

    Posted by Pterrafractyl | October 2, 2022, 11:06 pm
  31. Did the Bank of Eng­land (BoE) man­age to pull the UK finan­cial mar­kets back from finan­cial brink fol­low­ing the “inept mad­ness” of the Trust admin­is­tra­tion’s tax cut fias­co? We’re about to find out with the lift­ing of the BoE’s emer­gency inter­ven­tion in the UK bond mar­kets. The last emer­gency bond pur­chase was Fri­day. Mon­day is a big day for the UK.

    And as we’re going to see, of the £65bn the BoE allo­cat­ed for the emer­gency spend­ing, only £19bn was actu­al­ly spent. So this has been a rather tepid emer­gency inter­ven­tion that just end­ed. And as the fol­low­ing arti­cle except describes, the lift­ing of the emer­gency inter­ven­tion is com­ing at the same time there appears to be a grow­ing con­sen­sus that the Truss gov­ern­men­t’s rever­sals of it rad­i­cal sup­ply-side poli­cies has­n’t gone far enough. And that’s all why the UK bond mar­ket appears to be get­ting ready for a new round of emer­gen­cies:

    The Finan­cial Times

    Gilts in fresh slide as investors say Truss U‑turn did not go far enough
    Ana­lysts say prime minister’s deci­sion to ditch £18bn cor­po­rate tax cut was not ‘enough of a piv­ot’

    Tom­my Stub­bing­ton
    Octo­ber 14 2022

    A chaot­ic gilt sell-off reignit­ed on Fri­day as investors warned that Liz Truss’s attempt to reas­sure mar­kets by scrap­ping an £18bn cor­po­rate tax cut was not enough to place the UK back on a sus­tain­able fis­cal tra­jec­to­ry.

    Investors said the lat­est U‑turn, in which the prime min­is­ter sacked chan­cel­lor Kwasi Kwarteng and ditched a cen­tre­piece of last month’s “mini” Bud­get, will not be enough to restore con­fi­dence in British mar­kets, spark­ing renewed spec­u­la­tion that the Bank of Eng­land will need to extend its emer­gency bond-buy­ing inter­ven­tion beyond Friday’s dead­line.

    Long-term gilt yields, which had tum­bled in antic­i­pa­tion of Truss tear­ing up Kwarteng’s £45bn pack­age of unfund­ed tax cuts, shot high­er on Fri­day after­noon. The 30-year yield end­ed the week at about 4.8 per cent, hav­ing ear­li­er on Fri­day sunk as low as 4.2 per cent — giant swings for a mar­ket that typ­i­cal­ly moves in much small­er incre­ments.

    “The mar­ket was hop­ing for a lot more,” said Mark Dowd­ing, chief invest­ment offi­cer at Blue­Bay Asset Man­age­ment. “It doesn’t feel like enough of a piv­ot at this stage.”

    JPMor­gan econ­o­mist Allan Monks added that “fur­ther mea­sures will be nec­es­sary to demon­strate medi­um-term fis­cal sus­tain­abil­i­ty.”

    The loss­es for UK gov­ern­ment bonds came after the BoE pur­chased just £1.4bn of gilts in the final instal­ment of its two and a half week emer­gency inter­ven­tion that had helped stem a liq­uid­i­ty cri­sis in the pen­sions indus­try.

    The £19bn of pur­chas­es over the past two and a half weeks has fall­en far short of the max­i­mum £65bn size of the pro­gramme. The low vol­umes had spooked investors, prompt­ing the BoE to widen the scope if its inter­ven­tion this week to include infla­tion-linked bonds as a fresh wave of tur­bu­lence in the gilt mar­ket sent 30-year yields soar­ing above 5 per cent.

    The BoE ini­tial­ly put the emer­gency inter­ven­tion in place on Sep­tem­ber 28, five days after Kwarteng’s “mini” Bud­get set off a pow­er­ful gilt sell-off. Falling gilt prices had prompt­ed a vicious cir­cle in which pen­sion schemes, hit with col­lat­er­al calls, were rapid­ly sell­ing gilts into a falling mar­ket. The BoE fret­ted that, had it not stepped in, pen­sion funds could have ditched up to £50bn worth of gilts in a short time­frame.

    BoE gov­er­nor Andrew Bai­ley was emphat­ic ear­li­er this week that the scheme would end on Fri­day, telling the pen­sion indus­try they had just days to sell assets to the cen­tral bank in order to replen­ish their cash buffers. Pri­vate­ly BoE offi­cials told banks pri­or to Bailey’s remarks that the bank was pre­pared to extend its bond pur­chas­es if anoth­er severe bout of tur­bu­lence hit, the Finan­cial Times report­ed ear­li­er this week.

    A senior exec­u­tive with a large pen­sion fund, who did not wish to be named, said the BoE’s gam­ble, by not extend­ing its sup­port pro­gramme, “has not paid off”.

    “We will be back to 5 per cent by Mon­day, and then the mer­ry-go-round will start again,” the per­son said, refer­ring to the 30-year gilt yield.

    ...

    ———-

    “Gilts in fresh slide as investors say Truss U‑turn did not go far enough” by Tom­my Stub­bing­ton; The Finan­cial Times; 10/14/2022

    “A senior exec­u­tive with a large pen­sion fund, who did not wish to be named, said the BoE’s gam­ble, by not extend­ing its sup­port pro­gramme, “has not paid off”.”

    The LDI time-bomb is still explod­ing. Just more slow­ly thanks to the BoE’s emer­gency inter­ven­tion in the gilts mar­kets. Inter­ven­tion that end­ed on Fri­day, fol­lowed by major swings in 30-year yields, a clear that that the mar­ket has yet to set­tle. And when we see that only £19bn of the £65bn allo­cat­ed for this emer­gency inter­ven­tion, it’s becom­ing even more clear that the BoE is high­ly inclined to give as lit­tle emer­gency sup­port as pos­si­ble, even if doing so runs the risk of extend­ing and exac­er­bat­ing the cri­sis. The cur­rent UK gov­ern­ment seems to be biased towards cri­sis:

    ...
    Long-term gilt yields, which had tum­bled in antic­i­pa­tion of Truss tear­ing up Kwarteng’s £45bn pack­age of unfund­ed tax cuts, shot high­er on Fri­day after­noon. The 30-year yield end­ed the week at about 4.8 per cent, hav­ing ear­li­er on Fri­day sunk as low as 4.2 per cent — giant swings for a mar­ket that typ­i­cal­ly moves in much small­er incre­ments.

    ...

    The loss­es for UK gov­ern­ment bonds came after the BoE pur­chased just £1.4bn of gilts in the final instal­ment of its two and a half week emer­gency inter­ven­tion that had helped stem a liq­uid­i­ty cri­sis in the pen­sions indus­try.

    The £19bn of pur­chas­es over the past two and a half weeks has fall­en far short of the max­i­mum £65bn size of the pro­gramme. The low vol­umes had spooked investors, prompt­ing the BoE to widen the scope if its inter­ven­tion this week to include infla­tion-linked bonds as a fresh wave of tur­bu­lence in the gilt mar­ket sent 30-year yields soar­ing above 5 per cent.
    ...

    So with the BoE sig­nal­ing that it’s going to be doing as lit­tle as pos­si­ble to sta­bi­lize the mar­kets, risk­ing fur­ther desta­bi­liza­tion, it’s worth not­ing the invest­ment man­age­ment com­mu­ni­ty’s to the cri­sis: we’re stick­ing with LDI, it’s still the best option avail­able:

    The Finan­cial Times

    How bond mar­ket may­hem set off a pen­sion ‘time bomb’
    A strat­e­gy to focus on retire­ment scheme lia­bil­i­ties is fac­ing tough ques­tions

    Har­ri­et Agnew, Adri­enne Klasa, Josephine Cum­bo, Chris Flood and Anjli Raval
    Octo­ber 8, 2022 2:08 am

    As they made their pitch to over­haul the pen­sion scheme of one of Britain’s biggest retail­ers, Next chief exec­u­tive Lord Simon Wolf­son remem­bers the con­sul­tants were “very sure of them­selves”.

    “Lia­bil­i­ty-dri­ven invest­ing”, the con­sul­tants promised, was a stress-free way to pro­tect the fund from swings in inter­est rates by using deriv­a­tives.

    There is one par­tic­u­lar phrase that still sticks in Wolfson’s mind from the 2017 meet­ing: “You put it in a draw­er, lock the draw­er and for­get about it.”

    But Wolf­son and his team ulti­mate­ly reject­ed the plan. “If you only took his­tor­i­cal data, it looked pret­ty robust,” said Wolf­son. “But the great les­son from the finan­cial cri­sis is that you can’t look to the past as a fool­proof way of pre­dict­ing the future. In the end, we didn’t care what the spread­sheets said: we didn’t like the smell of it, so we decid­ed not to do it.”

    Next went as far as to warn the Bank of Eng­land that LDI strate­gies, which cur­rent­ly have £1.5tn invest­ed in them in the UK, “looked like a time bomb wait­ing to go off”.

    Last week came the explo­sion. After chan­cel­lor Kwasi Kwarteng announced £45bn in unfund­ed tax cuts on Sep­tem­ber 23, the pound fell and over the next few days UK gov­ern­ment bond yields soared on the prospect of high­er bor­row­ing.

    UK defined ben­e­fit scheme lia­bil­i­ties are mea­sured against such long-term inter­est rates and, in gen­er­al, high­er yields are help­ful, since they shrink com­pa­nies’ out­stand­ing oblig­a­tions to retirees.

    But the LDI strate­gies use a vari­ety of deriv­a­tives to allow pen­sion schemes to increase their expo­sure to gilts, with­out nec­es­sar­i­ly own­ing the bonds out­right. When bond prices fall, coun­ter­par­ties demand more cash as col­lat­er­al to keep the arrange­ment in place.

    The shock fall in gilt prices led to a rush of cash calls. To raise the mon­ey, funds were forced to sell assets, includ­ing gilts, depress­ing prices fur­ther and risk­ing a “doom loop”.

    “The speed and the scale of the move in the gilts mar­ket was unprece­dent­ed,” said Simon Bent­ley, head of UK solu­tions client port­fo­lio man­age­ment at Colum­bia Thread­nee­dle. “You had almost four con­sec­u­tive ‘black swan’ days in terms of mar­ket move­ments.”

    Respond­ing to pleas for help from the pen­sions and asset man­age­ment indus­try, the BoE inter­vened last Wednes­day, promis­ing to buy up to £65bn of long-term gilts to sta­bilise the mar­ket.

    “The crunch event was not in anyone’s mod­els,” said Aoifinn Devitt, chief invest­ment offi­cer of Mon­e­ta Group, a finan­cial advis­er, “but it was not entire­ly unfore­see­able.”

    The UK’s embrace of LDI has its roots in a major account­ing change in 2000, which forced com­pa­nies to recog­nise pen­sion fund deficits on their own bal­ance sheets.

    When the rule was intro­duced, Daw­id Konotey-Ahu­lu was a man­ag­ing direc­tor at Mer­rill Lynch in Lon­don, work­ing in the bank’s pen­sions and insur­ance solu­tions group. The new account­ing stan­dard “changed the game” for UK com­pa­nies, he said, thrust­ing defined-ben­e­fit plans, which promise to pay employ­ees’ pen­sions at a fixed lev­el, some­times based on their final salary, into a “state of uncer­tain­ty”.

    “They sim­ply didn’t know whether they had suf­fi­cient assets to pay the pen­sions of all their mem­bers as they fell due”, and it also made it hard­er for their cor­po­rate spon­sors to plan or invest for the future.

    Konotey-Ahu­lu was part of a team at Mer­rill that devel­oped LDI in a bid to “immu­nise” defined-ben­e­fit schemes against large move­ments in inter­est rates and infla­tion. By 2003, he had pitched the strat­e­gy to more than 200 com­pa­nies with­out find­ing any tak­ers. Final­ly, after a long series of dis­cus­sions, finan­cial ser­vices group Friends Prov­i­dent agreed to adopt an LDI strat­e­gy for its pen­sion fund. It entered into a series of long-dat­ed infla­tion swaps with Mer­rill to insure against a reduc­tion in real yields.

    Since then an entire indus­try sell­ing, man­ag­ing and advis­ing on LDI strate­gies has grown up. For asset man­agers, includ­ing Legal and Gen­er­al Invest­ment Man­age­ment, Insight Invest­ment, Black­Rock and Schroders, it is a low-mar­gin but high-vol­ume busi­ness. The largest schemes have the bulk of their LDI assets in seg­re­gat­ed man­dates, where fees are around 0.1–0.2 per cent a year but might cov­er 80–90 per cent of a scheme’s lia­bil­i­ties. Small­er clients tend to team up togeth­er in pooled funds to get the ben­e­fit of scale and price reduc­tion. Most of the recent prob­lems have been in pooled funds where there is less agili­ty.

    Despite the recent tur­moil, Konotey-Ahu­lu remains one of LDI’s biggest pro­po­nents and says that the fun­da­men­tal con­cept is still sound. But even he acknowl­edges that its com­plex­i­ty is an issue, with tricky col­lat­er­al man­age­ment and an orches­tra of instru­ments from gilt total return swaps to gilt repo and infla­tion swaps. “Undoubt­ed­ly the prob­lem is that peo­ple don’t real­ly under­stand it,” he said. “It’s like try­ing to explain some aspects of quan­tum physics to peo­ple who aren’t real­ly physi­cists.”

    Con­sul­tants are often the prime advo­cates. “Invest­ment con­sul­tants love LDI,” said Edi Tru­ell, a for­mer chair of the Lon­don Pen­sion Fund Author­i­ty, who now runs pri­vate equi­ty group Dis­rup­tive Cap­i­tal. “It’s superbly com­plex so no one under­stands it and there­fore they can look smart and earn a fee. To about 99 per cent of trustees it’s total­ly unclear.”

    David Vallery is chief exec­u­tive offi­cer at Loth­i­an Pen­sion Fund, which has £8bn of assets in equi­ties, bonds and alter­na­tives — but no expo­sure to LDI. “We are not sophis­ti­cat­ed enough to ful­ly under­stand it,” he said. “And quite frankly we don’t have the resources to fix it if some­thing goes wrong.”

    But with­in the British pen­sion fund com­mu­ni­ty, scep­tics have large­ly been the excep­tion. LDI has become wide­ly adopt­ed by the UK’s 5,200 defined-ben­e­fit plans, which have more than 10mn mem­bers and £1.5tn under man­age­ment.

    Schemes and asset man­agers say that, in the mar­ket envi­ron­ment that has char­ac­terised the past two decades, it has proved effec­tive. A glob­al bull mar­ket for bonds pushed up prices and drove down yields, mean­ing that pen­sion funds who were unhedged against these moves would have found them­selves try­ing to gen­er­ate returns to meet ever-increas­ing lia­bil­i­ties. The lack of hedg­ing or insuf­fi­cient hedg­ing at com­pa­nies such as con­struc­tion group Car­il­lion and retail­er Arca­dia Group were con­tribut­ing fac­tors to their ensu­ing insol­ven­cy, accord­ing to pen­sions experts.

    Pro­fes­sion­al ser­vices firm PwC esti­mates that pen­sion funds have moved from a £600bn deficit a year ago to a £155bn sur­plus; lia­bil­i­ties have halved from £2.4tn to £1.2tn. More than 20 per cent of UK DB pen­sion funds were in deficit in August this year, and more than 40 per cent were a year ear­li­er, accord­ing to the BoE.

    “LDI saved schemes from unten­ably large deficits and it saved spon­sors from con­stant­ly top­ping up schemes,” said Andy Con­nell, head of solu­tions at Schroders, which has $55bn in its glob­al LDI busi­ness. “They were able to keep cash in the busi­ness for wages, invest­ment and div­i­dends. LDI strate­gies have been a great soci­etal good for UK plc and the econ­o­my.”

    Although the BoE’s inter­ven­tion calmed the mar­ket, it did not end pen­sion schemes’ dash for cash. Coun­ter­par­ties have demand­ed more col­lat­er­al to de-risk the deriv­a­tives. And there is a fear that when the BoE’s two-week bond-buy­ing pro­gramme ends next week, volatil­i­ty will return.

    “We are see­ing a lot of activ­i­ty that would nor­mal­ly take months in the pen­sion fund world being done in a mat­ter of days,” said Calum Macken­zie, an invest­ment part­ner at con­sul­tant Aon. “That’s putting a huge strain on to the sys­tem.”

    Nikesh Patel, head of client solu­tions at Van Lan­schot Kem­pen, reck­ons that pen­sion schemes in aggre­gate will have to come up with as much as £280bn to ful­ly recap­i­talise their inter­est rate and infla­tion hedges with new low­er lev­els of lever­age. This is in addi­tion to the £200bn that schemes have already had to deliv­er to meet LDI col­lat­er­al calls.

    One option is to jet­ti­son the LDI strate­gies alto­geth­er but that leaves pen­sion schemes exposed to future swings in rates and infla­tion.

    Son­ja Laud, chief invest­ment offi­cer at LGIM, says: “Ear­ly indi­ca­tions sug­gest that most of our clients want to keep their hedge ratio intact and pro­vide us with more col­lat­er­al.”

    Trustees who can be held per­son­al­ly liable for pen­sion loss­es are being asked to hur­ried­ly approve asset sales even though the exact fund­ing posi­tion of many schemes remains unclear as a result of the recent mar­ket volatil­i­ty.

    ...

    Pen­sions are con­tin­u­ing to sell return-seek­ing assets — includ­ing prop­er­ty expo­sures, cor­po­rate debt and pri­vate cred­it — and replac­ing them with cash and gilts, in order to pre­pare for liq­uid­i­ty demands. They are try­ing to avoid being forced to sell pri­vate assets at a sub­stan­tial dis­count.

    All of this is to get their port­fo­lios in order before the BoE removes its sup­port for the gilts mar­ket on Octo­ber 14. “The BoE step­ping in has not erased the issue,” said Dan Mel­ley, part­ner at Mer­cer, the con­sul­tan­cy.

    The BoE has sig­nalled that it will not pro­long the gilt-buy­ing facil­i­ty beyond next week, accord­ing to mar­ket par­tic­i­pants. Ker­rin Rosen­berg, chief exec­u­tive of Car­dano, an advi­so­ry firm and invest­ment man­ag­er, is urg­ing the BoE not to con­sid­er that “the job is done” on Octo­ber 14. “The Bank needs to be ready to take that action again, if they need to,” he says. “While the indus­try is able to bear more volatil­i­ty that is not with­out lim­it. We know from our port­fo­lio and from our clients that there is only a cer­tain amount of col­lat­er­al buffer.”

    ...

    Mean­while reg­u­la­tors, asset man­agers and pen­sion schemes glob­al­ly are look­ing at the UK as a test, try­ing to digest the poten­tial impli­ca­tions for their own mar­kets. “It’s been a real eye open­er,” said Ariel Baze­lal, fund man­ag­er at Jupiter. “Everyone’s kind of freak­ing out and ask­ing: what just hap­pened to these UK pen­sions with these LDI strate­gies? Is there some­one else out there or anoth­er coun­try that could get hit?”

    But some wor­ry that the soul-search­ing will not go far enough. “Man­agers are plug­ging into their mod­els assump­tions of a sta­tus quo that may well have evolved,” said Devitt. “I’m not sure whether we have just put a Band-Aid on the prob­lem or actu­al­ly struc­tural­ly exam­ined it . . . I’m not sure the mind­set change is occur­ring quick­ly enough as to whether this is the right solu­tion for the next regime. We tend to fight the last war.”

    ————

    “How bond mar­ket may­hem set off a pen­sion ‘time bomb’” by Har­ri­et Agnew, Adri­enne Klasa, Josephine Cum­bo, Chris Flood and Anjli Raval; The Finan­cial Times; 10/08/2022

    But Wolf­son and his team ulti­mate­ly reject­ed the plan. “If you only took his­tor­i­cal data, it looked pret­ty robust,” said Wolf­son. “But the great les­son from the finan­cial cri­sis is that you can’t look to the past as a fool­proof way of pre­dict­ing the future. In the end, we didn’t care what the spread­sheets said: we didn’t like the smell of it, so we decid­ed not to do it.””

    As Next chief exec­u­tive Lord Simon Wolf­son warned the BoE back in 2017, while the LDI invest­ment scheme pro­mot­ed by by invest­ment con­sul­tants was being sold as a safe stress-free approach to invest­ing, that’s only true as long as rates stayed at the his­toric lows. It’s the kind of con­di­tion turned LDI’s into a time bomb. Ris­ing rates was just a mat­ter of time:

    ...
    As they made their pitch to over­haul the pen­sion scheme of one of Britain’s biggest retail­ers, Next chief exec­u­tive Lord Simon Wolf­son remem­bers the con­sul­tants were “very sure of them­selves”.

    “Lia­bil­i­ty-dri­ven invest­ing”, the con­sul­tants promised, was a stress-free way to pro­tect the fund from swings in inter­est rates by using deriv­a­tives.

    There is one par­tic­u­lar phrase that still sticks in Wolfson’s mind from the 2017 meet­ing: “You put it in a draw­er, lock the draw­er and for­get about it.”

    ...

    Next went as far as to warn the Bank of Eng­land that LDI strate­gies, which cur­rent­ly have £1.5tn invest­ed in them in the UK, “looked like a time bomb wait­ing to go off”.

    Last week came the explo­sion. After chan­cel­lor Kwasi Kwarteng announced £45bn in unfund­ed tax cuts on Sep­tem­ber 23, the pound fell and over the next few days UK gov­ern­ment bond yields soared on the prospect of high­er bor­row­ing.
    ...

    And note how long LDI invest­ments had been embraced by UK pen­sions when Wolf­son made this obser­va­tion in 2017: it start­ed with an account­ing rule change back in 2000 that forced pen­sion funds to bet­ter finance their long-term lia­bil­i­ties. These new rules — which pushed pen­sions to give greater weight to fixed inter­est invest­ments like bonds — also end­ed up increas­ing the risks asso­ci­at­ed with ris­ing infla­tion or falling inter­est. LDI was cre­at­ed to address these new risks. Specif­i­cal­ly, it was cre­at­ed by Daw­id Konotey-Ahu­lu, then a man­ag­ing direc­tor at Mer­rill Lynch in Lon­don. And as we can see, Konotey-Ahu­lu remains high­ly con­fi­dent that LDI’s are still a great strat­e­gy for pen­sion funds. As far as Konotey-Ahu­lu sees it, the prob­lems are real­ly just with the pooled LDI’s that are used by small­er pen­sion funds where liq­uid­i­ty can become more com­pli­cat­ed dur­ing a cri­sis. In oth­er words, this LDI-dri­ven cri­sis isn’t a big enough cri­sis to war­rant a new strat­e­gy. LDI for­ev­er! Or as Edi Tru­ell, a for­mer chair of the Lon­don Pen­sion Fund Author­i­ty, put it, “Invest­ment con­sul­tants love LDI...It’s superbly com­plex so no one under­stands it and there­fore they can look smart and earn a fee. To about 99 per cent of trustees it’s total­ly unclear”:

    ...
    The UK’s embrace of LDI has its roots in a major account­ing change in 2000, which forced com­pa­nies to recog­nise pen­sion fund deficits on their own bal­ance sheets.

    When the rule was intro­duced, Daw­id Konotey-Ahu­lu was a man­ag­ing direc­tor at Mer­rill Lynch in Lon­don, work­ing in the bank’s pen­sions and insur­ance solu­tions group. The new account­ing stan­dard “changed the game” for UK com­pa­nies, he said, thrust­ing defined-ben­e­fit plans, which promise to pay employ­ees’ pen­sions at a fixed lev­el, some­times based on their final salary, into a “state of uncer­tain­ty”.

    “They sim­ply didn’t know whether they had suf­fi­cient assets to pay the pen­sions of all their mem­bers as they fell due”, and it also made it hard­er for their cor­po­rate spon­sors to plan or invest for the future.

    Konotey-Ahu­lu was part of a team at Mer­rill that devel­oped LDI in a bid to “immu­nise” defined-ben­e­fit schemes against large move­ments in inter­est rates and infla­tion. By 2003, he had pitched the strat­e­gy to more than 200 com­pa­nies with­out find­ing any tak­ers. Final­ly, after a long series of dis­cus­sions, finan­cial ser­vices group Friends Prov­i­dent agreed to adopt an LDI strat­e­gy for its pen­sion fund. It entered into a series of long-dat­ed infla­tion swaps with Mer­rill to insure against a reduc­tion in real yields.

    Since then an entire indus­try sell­ing, man­ag­ing and advis­ing on LDI strate­gies has grown up. For asset man­agers, includ­ing Legal and Gen­er­al Invest­ment Man­age­ment, Insight Invest­ment, Black­Rock and Schroders, it is a low-mar­gin but high-vol­ume busi­ness. The largest schemes have the bulk of their LDI assets in seg­re­gat­ed man­dates, where fees are around 0.1–0.2 per cent a year but might cov­er 80–90 per cent of a scheme’s lia­bil­i­ties. Small­er clients tend to team up togeth­er in pooled funds to get the ben­e­fit of scale and price reduc­tion. Most of the recent prob­lems have been in pooled funds where there is less agili­ty.

    Despite the recent tur­moil, Konotey-Ahu­lu remains one of LDI’s biggest pro­po­nents and says that the fun­da­men­tal con­cept is still sound. But even he acknowl­edges that its com­plex­i­ty is an issue, with tricky col­lat­er­al man­age­ment and an orches­tra of instru­ments from gilt total return swaps to gilt repo and infla­tion swaps. “Undoubt­ed­ly the prob­lem is that peo­ple don’t real­ly under­stand it,” he said. “It’s like try­ing to explain some aspects of quan­tum physics to peo­ple who aren’t real­ly physi­cists.”

    Con­sul­tants are often the prime advo­cates. “Invest­ment con­sul­tants love LDI,” said Edi Tru­ell, a for­mer chair of the Lon­don Pen­sion Fund Author­i­ty, who now runs pri­vate equi­ty group Dis­rup­tive Cap­i­tal. “It’s superbly com­plex so no one under­stands it and there­fore they can look smart and earn a fee. To about 99 per cent of trustees it’s total­ly unclear.”
    ...

    Also note the kind of finan­cial alche­my these LDI invest­ments were per­form­ing for pen­sion fund: LDIs use deriv­a­tive let pen­sion funds have expo­sure to the gilts mar­ket while pro­vid­ing pro­tec­tion against ris­ing inter­est rates moves...unless those rates rise too fast, at which point the “doom loop” we all wit­nessed will tran­spire. In oth­er words: the LDI mar­kets will smooth out the mar­kets against rel­a­tive­ly small dis­rup­tions but actu­al­ly ampli­fy and exac­er­bate those dis­rup­tions if those dis­rup­tions are too large. That’s the time bomb. The entire­ly fore­see­able time bomb that was just a mat­ter of time:

    ...
    UK defined ben­e­fit scheme lia­bil­i­ties are mea­sured against such long-term inter­est rates and, in gen­er­al, high­er yields are help­ful, since they shrink com­pa­nies’ out­stand­ing oblig­a­tions to retirees.

    But the LDI strate­gies use a vari­ety of deriv­a­tives to allow pen­sion schemes to increase their expo­sure to gilts, with­out nec­es­sar­i­ly own­ing the bonds out­right. When bond prices fall, coun­ter­par­ties demand more cash as col­lat­er­al to keep the arrange­ment in place.

    The shock fall in gilt prices led to a rush of cash calls. To raise the mon­ey, funds were forced to sell assets, includ­ing gilts, depress­ing prices fur­ther and risk­ing a “doom loop”.

    “The speed and the scale of the move in the gilts mar­ket was unprece­dent­ed,” said Simon Bent­ley, head of UK solu­tions client port­fo­lio man­age­ment at Colum­bia Thread­nee­dle. “You had almost four con­sec­u­tive ‘black swan’ days in terms of mar­ket move­ments.”

    Respond­ing to pleas for help from the pen­sions and asset man­age­ment indus­try, the BoE inter­vened last Wednes­day, promis­ing to buy up to £65bn of long-term gilts to sta­bilise the mar­ket.

    “The crunch event was not in anyone’s mod­els,” said Aoifinn Devitt, chief invest­ment offi­cer of Mon­e­ta Group, a finan­cial advis­er, “but it was not entire­ly unfore­see­able.”
    ...

    And yet, despite the fore­see­able cri­sis that is play­ing out, asset man­agers don’t seem to be scared off from LDI schemes. Instead, the plan appears to be to mud­dle through the cur­rent cri­sis by rais­ing emer­gency funds to deal with col­lat­er­al calls and just stick with the LDI strat­e­gy. It’s seen as the least worst option:

    ...
    David Vallery is chief exec­u­tive offi­cer at Loth­i­an Pen­sion Fund, which has £8bn of assets in equi­ties, bonds and alter­na­tives — but no expo­sure to LDI. “We are not sophis­ti­cat­ed enough to ful­ly under­stand it,” he said. “And quite frankly we don’t have the resources to fix it if some­thing goes wrong.”

    But with­in the British pen­sion fund com­mu­ni­ty, scep­tics have large­ly been the excep­tion. LDI has become wide­ly adopt­ed by the UK’s 5,200 defined-ben­e­fit plans, which have more than 10mn mem­bers and £1.5tn under man­age­ment.

    Schemes and asset man­agers say that, in the mar­ket envi­ron­ment that has char­ac­terised the past two decades, it has proved effec­tive. A glob­al bull mar­ket for bonds pushed up prices and drove down yields, mean­ing that pen­sion funds who were unhedged against these moves would have found them­selves try­ing to gen­er­ate returns to meet ever-increas­ing lia­bil­i­ties. The lack of hedg­ing or insuf­fi­cient hedg­ing at com­pa­nies such as con­struc­tion group Car­il­lion and retail­er Arca­dia Group were con­tribut­ing fac­tors to their ensu­ing insol­ven­cy, accord­ing to pen­sions experts.

    Pro­fes­sion­al ser­vices firm PwC esti­mates that pen­sion funds have moved from a £600bn deficit a year ago to a £155bn sur­plus; lia­bil­i­ties have halved from £2.4tn to £1.2tn. More than 20 per cent of UK DB pen­sion funds were in deficit in August this year, and more than 40 per cent were a year ear­li­er, accord­ing to the BoE.

    LDI saved schemes from unten­ably large deficits and it saved spon­sors from con­stant­ly top­ping up schemes,” said Andy Con­nell, head of solu­tions at Schroders, which has $55bn in its glob­al LDI busi­ness. “They were able to keep cash in the busi­ness for wages, invest­ment and div­i­dends. LDI strate­gies have been a great soci­etal good for UK plc and the econ­o­my.”

    ...

    Nikesh Patel, head of client solu­tions at Van Lan­schot Kem­pen, reck­ons that pen­sion schemes in aggre­gate will have to come up with as much as £280bn to ful­ly recap­i­talise their inter­est rate and infla­tion hedges with new low­er lev­els of lever­age. This is in addi­tion to the £200bn that schemes have already had to deliv­er to meet LDI col­lat­er­al calls.

    One option is to jet­ti­son the LDI strate­gies alto­geth­er but that leaves pen­sion schemes exposed to future swings in rates and infla­tion.

    Son­ja Laud, chief invest­ment offi­cer at LGIM, says: “Ear­ly indi­ca­tions sug­gest that most of our clients want to keep their hedge ratio intact and pro­vide us with more col­lat­er­al.”
    ...

    And that appar­ent resolve to stick with the LDI strat­e­gy has oth­er ask­ing whether or not the cur­rent cri­sis has scared the mar­kets enough to actu­al­ly ques­tions the same erro­neous assump­tions that that cre­at­ed this cri­sis in the first. Along with ques­tions about whether or not we can expect sim­i­lar crises else­where. It’s not like the UK is the only coun­try fac­ing ris­ing rates and under­fund­ed pen­sions:

    ...
    Mean­while reg­u­la­tors, asset man­agers and pen­sion schemes glob­al­ly are look­ing at the UK as a test, try­ing to digest the poten­tial impli­ca­tions for their own mar­kets. “It’s been a real eye open­er,” said Ariel Baze­lal, fund man­ag­er at Jupiter. “Everyone’s kind of freak­ing out and ask­ing: what just hap­pened to these UK pen­sions with these LDI strate­gies? Is there some­one else out there or anoth­er coun­try that could get hit?”

    But some wor­ry that the soul-search­ing will not go far enough. “Man­agers are plug­ging into their mod­els assump­tions of a sta­tus quo that may well have evolved,” said Devitt. “I’m not sure whether we have just put a Band-Aid on the prob­lem or actu­al­ly struc­tural­ly exam­ined it . . . I’m not sure the mind­set change is occur­ring quick­ly enough as to whether this is the right solu­tion for the next regime. We tend to fight the last war.”
    ...

    Yes, it does appear that there is a short­age of soul-search­ing in the indus­try. Although with the cri­sis still not over and at risk of flar­ing up again there still may be plen­ty of addi­tion­al time and rea­son for soul-search­ing. But as the fol­low­ing arti­cle excerpt about the ori­gins of the LDI strat­e­gy makes clear, this is going to be a hard habit to kick. LDI was first devised after a reg­u­la­to­ry change in the year 2000 forced UK pen­sions to bet­ter pre­pare for long-term lia­bil­i­ties. And giv­en the his­tor­i­cal­ly low inter­est rates of the past two decades this is been a strat­e­gy that has been seen as both nec­es­sary (to account for the low rates) and suc­cess­ful­ly (due to the per­sis­tent low rates).

    And LDI was a strat­e­gy that sur­vived the 2008 finan­cial cri­sis, although, as the arti­cle notes, there were moments were it was­n’t clear if bank­ing giants like Gold­man Sachs that were on the oth­er side of the deriv­a­tives at the core of the LDI strat­e­gy were actu­al­ly sol­vent. It’s a reminder that, while the LDI invest­ment strat­e­gy has an obvi­ous sys­temic vul­ner­a­bil­i­ty to the kind of inter­est rate shock that just tran­spired in the UK bond mar­kets, that’s far from the LDI strat­e­gy’s only sys­temic vul­ner­a­bil­i­ty:

    The Finan­cial Times

    How Goldman’s deriv­a­tives saved a pen­sion scheme
    Lia­bil­i­ty-dri­ven invest­ing has been pil­lo­ried but the strat­e­gy has worked for WHSmith

    Tom Braith­waite
    Octo­ber 14 2022

    In 2005 the head of the Gen­er­al Motors pen­sion scheme hit out at the new fash­ion for “lia­bil­i­ty-dri­ven invest­ing”.

    Encour­aged by the dot­com crash and new account­ing and tax rules, pen­sion schemes were over­haul­ing their port­fo­lios. No longer would they try to gen­er­ate a decent return from shares. Instead, they would be laser-focused on match­ing invest­ments with their oblig­a­tions to future retirees, which implied buy­ing main­ly long-dat­ed gov­ern­ment secu­ri­ties.

    ...

    Now that LDI has blown up in the UK, prompt­ing gilt yields to surge, an inter­ven­tion from the Bank of Eng­land and a fire sale of assets to fund sour­ing swaps, oth­er crit­ics have emerged. They include Next boss Lord Simon Wolf­son, who described the strat­e­gy as a “time bomb”, and Fund­smith founder Ter­ry Smith, who said it was “an explo­sive mix­ture of inap­pro­pri­ate account­ing and a mis­guid­ed invest­ment strat­e­gy”.

    But that is not the full sto­ry. At the same time as GM was rub­bish­ing LDI, UK retail­er WHSmith went all-in. The fund fired the man­agers who were heav­i­ly over­weight equi­ties and hired Gold­man Sachs.

    Like many com­pa­nies, WHSmith was incen­tivised to move to LDI because account­ing rules had begun forc­ing it to recog­nise volatile pen­sion lia­bil­i­ties on its bal­ance sheet.

    One prob­lem. “Because we were so under­fund­ed we couldn’t pos­si­bly afford to buy enough gilts in order to achieve the fund­ing sta­bil­i­ty that we want­ed,” recalls Jere­my Stone, chair of the pen­sion trustees.

    Gold­man instead brought out the finest deriv­a­tives avail­able to human­i­ty. This shiny new port­fo­lio was 94 per cent “invest­ed in infla­tion and inter­est rate hedged invest­ments” and 6 per cent in equi­ty call options.

    “This was a use­ful tech­nol­o­gy,” says Stone. “We had an immense risk . . . in that [the fund] was in sub­stan­tial deficit and also wild­ly mis­matched because it had a very equi­ty-heavy port­fo­lio. Com­ing over the hori­zon was the like­li­hood that very large amounts of mon­ey would have to be put in.” And it was unclear that the news chain could afford it.

    There were a host of com­plex­i­ties along the way. The fund had to hold cash to be able to pay col­lat­er­al on swings in val­ue of its deriv­a­tives. In 2008, it was not only wor­ry­ing for the first time about the sol­ven­cy of its coun­ter­par­ty Gold­man but also, says Stone, “we dis­cov­ered that cash in cash funds isn’t nec­es­sar­i­ly cash”. The “cash” was in “mono­line-enhanced asset-backed bonds”, which were shak­en by the cri­sis and gen­er­at­ed a tem­po­rary loss of more than £100mn, says Stone.

    It lat­er incurred anoth­er tem­po­rary £100mn hit when the “repo” or repur­chase mar­ket, where secu­ri­ties are exchanged for cash on short-term loans, froze up.

    But the strat­e­gy worked. In August this year, the WHSmith pen­sion fund was sold to Stan­dard Life in a £1bn bulk pur­chase annu­ity deal. The retire­ment income of the mem­bers is now assured.

    The WHSmith fund had peo­ple who knew what they were doing such as Stone, a banker with Roth­schild and Lazard. Funds that have been strick­en in the cur­rent cri­sis are usu­al­ly trapped in pooled LDI invest­ments where they have less con­trol and often less under­stand­ing of the strate­gies.

    ...

    ———–

    “How Goldman’s deriv­a­tives saved a pen­sion scheme” by Tom Braith­waite; The Finan­cial Times; 10/14/2022

    “But the strat­e­gy worked. In August this year, the WHSmith pen­sion fund was sold to Stan­dard Life in a £1bn bulk pur­chase annu­ity deal. The retire­ment income of the mem­bers is now assured.”

    It’s an appar­ent LDI suc­cess sto­ry. The WHSmith pen­sion fund has been using since 2005, until August of this year, when the fund was sold to Stan­dard Life. And as we can see, WHSmith is now being tout­ed as an LDI suc­cess sto­ry.

    Of course, this suc­cess sto­ry was sold to an insur­ance giant a month before the cur­rent mar­ket tumult and did­n’t actu­al­ly have to face the same stress test the rest of the LDI mar­ket just failed. And while the LDI funds did­n’t blow up dur­ing the 2008 finan­cial cri­sis, the cri­sis nonethe­less demon­strat­ed some of their vul­ner­a­bil­i­ties, like the risk of the coun­ter­par­ties for all these deriv­a­tives going under. LDI, being a deriv­a­tives-heavy invest­ment strat­e­gy, is deeply vul­ner­a­ble to the kind of sys­temic chain-reac­tions that char­ac­ter­ized the 2008 cri­sis. A cri­sis that start­ed as a liq­uid­i­ty cri­sis in the deriv­a­tives mar­ket tied to mort­gage-backed secu­ri­ties and spread from there. It’s a key point to keep in mind with this sto­ry: just because we’re now see­ing the sys­temic vul­ner­a­bil­i­ties in the LDI mar­ket in the face of spik­ing inter­est rates does­n’t mean that’s the only sys­temic vul­ner­a­bil­i­ty at risk with LDI schemes. Any­thing that risks the health of those deriv­a­tives coun­ter­par­ties like Gold­man Sachs risks blow­ing up the LDI mar­ket too.

    But it’s not hard to see why the invest­ment man­age­ment indus­try and the com­pa­nies with pen­sions under man­age­ment are hes­i­tant to drop LDI strate­gies: LDI allowed under­fund­ed pen­sion funds to ful­fill their new reg­u­la­to­ry bur­dens of ade­quate­ly account­ing for their long-term lia­bil­i­ties. LDI was seem­ing­ly finan­cial mag­ic. A gam­ble that oper­at­ed like mag­ic as long as the gam­ble did­n’t go wrong. And no one wants to give up mag­ic:

    ...
    But that is not the full sto­ry. At the same time as GM was rub­bish­ing LDI, UK retail­er WHSmith went all-in. The fund fired the man­agers who were heav­i­ly over­weight equi­ties and hired Gold­man Sachs.

    Like many com­pa­nies, WHSmith was incen­tivised to move to LDI because account­ing rules had begun forc­ing it to recog­nise volatile pen­sion lia­bil­i­ties on its bal­ance sheet.

    One prob­lem. “Because we were so under­fund­ed we couldn’t pos­si­bly afford to buy enough gilts in order to achieve the fund­ing sta­bil­i­ty that we want­ed,” recalls Jere­my Stone, chair of the pen­sion trustees.

    Gold­man instead brought out the finest deriv­a­tives avail­able to human­i­ty. This shiny new port­fo­lio was 94 per cent “invest­ed in infla­tion and inter­est rate hedged invest­ments” and 6 per cent in equi­ty call options.

    “This was a use­ful tech­nol­o­gy,” says Stone. “We had an immense risk . . . in that [the fund] was in sub­stan­tial deficit and also wild­ly mis­matched because it had a very equi­ty-heavy port­fo­lio. Com­ing over the hori­zon was the like­li­hood that very large amounts of mon­ey would have to be put in.” And it was unclear that the news chain could afford it.

    There were a host of com­plex­i­ties along the way. The fund had to hold cash to be able to pay col­lat­er­al on swings in val­ue of its deriv­a­tives. In 2008, it was not only wor­ry­ing for the first time about the sol­ven­cy of its coun­ter­par­ty Gold­man but also, says Stone, “we dis­cov­ered that cash in cash funds isn’t nec­es­sar­i­ly cash”. The “cash” was in “mono­line-enhanced asset-backed bonds”, which were shak­en by the cri­sis and gen­er­at­ed a tem­po­rary loss of more than £100mn, says Stone.

    It lat­er incurred anoth­er tem­po­rary £100mn hit when the “repo” or repur­chase mar­ket, where secu­ri­ties are exchanged for cash on short-term loans, froze up.
    ...

    Final­ly, also note the oth­er bit of com­mon wis­dom we’re see­ing emerge from this cri­sis: the idea that the prob­lem was real­ly just with pooled LDI funds cre­at­ed by small­er pen­sion funds. It’s the kind of les­son that sug­gests the pen­sion funds that end up drop­ping the LDI strat­e­gy as a result of this expe­ri­ence are going to be the small­er pen­sion funds:

    ...
    The WHSmith fund had peo­ple who knew what they were doing such as Stone, a banker with Roth­schild and Lazard. Funds that have been strick­en in the cur­rent cri­sis are usu­al­ly trapped in pooled LDI invest­ments where they have less con­trol and often less under­stand­ing of the strate­gies.
    ...

    So what are the small­er pen­sion funds going to do instead? We’ll see, but as we’ve seen, the invest­ment man­age­ment indus­try appears to be broad­ly con­vinced that the LDI strat­e­gy is still the best strat­e­gy despite the now-obvi­ous risks. There don’t appear to be bet­ter options. At least not bet­ter options of finan­cial alchem­i­cal nature. But who knows what the invest­ment man­age­ment indus­try will come up with next.

    But there is one obvi­ous solu­tion for the pen­sion funds large and small that does­n’t rely on finan­cial mag­ic and luck: bet­ter fund­ing these pen­sion in the first place. Or cut­ting them. So yeah, there’s two obvi­ous options, the lat­ter of which will pre­sum­ably be much more obvi­ous for the investors and com­pa­ny boards respon­si­ble for mak­ing these deci­sions.

    Posted by Pterrafractyl | October 16, 2022, 9:28 pm
  32. It just keeps get­ting worse. It like the meta-theme for a bro­ken mod­ern Amer­i­ca. Chron­ic prob­lems that require col­lec­tive action seem to nev­er get solved and only grow worse. So it should come as lit­tle sur­prise that the ongo­ing child­care cri­sis in the US is on track to get worse. A lot worse in two years after the emer­gency pan­dem­ic child­care fed­er­al sup­port expired. As as of now, noth­ing sub­stan­tive looks like­ly to fix the prob­lem.

    Not that some­thing sub­stan­tive was­n’t pro­posed. The Build Back Bet­ter bill that could­n’t quite muster 50 votes in the Demo­c­ra­t­i­cal­ly-con­trolled Sen­ate did actu­al­ly include a large fed­er­al solu­tion to the US’s child­care crises. A crises of acces­si­bil­i­ty and afford­abil­i­ty that got a lot worse dur­ing the pan­dem­ic and nev­er real­ly recov­ered. And as we’re going to see, one of the groups lob­by­ing to strip out those child care pro­vi­sions from Build Back Bet­ter was none oth­er than a lob­by­ing group for the grow­ing pri­vate-equi­ty-owned sec­tor of child­care. Child­care may be in cri­sis in gen­er­al in the US, but not the pri­vate-equi­ty-owned nation­al chains which have seen grow­ing prof­its, and fees, in recent. And they don’t want to see those prof­its ham­pered by the gov­ern­ment.

    At the same time, it’s clear that pri­vate-equi­ty isn’t part of the solu­tion, with pri­vate-equi­ty-owned chains often not accept­ing low­er-income stu­dents even when they are sub­si­dized. At the same time, pri­vate-equi­ty oppos­es the pro­pos­als to fix one of the oth­er major com­po­nents of the child­care indus­try’s cri­sis: a grow­ing short­age of employ­ees, dri­ven heav­i­ly by stub­born­ly low wages that don’t seem to rise even when oth­er indus­tries are seem healthy wage growth. As a result, child­care providers are increas­ing­ly los­ing employ­ees to fast-food chains are oth­er employ­ers who can pay more and pro­vide ben­e­fits like health insur­ance. So pri­vate-equi­ty won’t be part of a pri­vate-sec­tor solu­tion but instead exac­er­bates the prob­lem, at the same time works to block pub­lic-sec­tor solu­tions because those solu­tions might lim­it pri­vate-equi­ty’s abil­i­ty make grow­ing prof­its by pro­vid­ing more and more expen­sive child­care to the ‘haves’ in the US’s increas­ing­ly ‘haves and have nots’ child­care econ­o­my. Because of course:

    Vox

    The child care cri­sis just keeps get­ting worse

    Wait­ing lists are get­ting longer, and child care cen­ters say they’re los­ing work­ers to fast-food chains with bet­ter wages and ben­e­fits.

    By Rachel M. Cohen
    Sep 27, 2022, 8:00am EDT

    On the Sen­ate floor in ear­ly August, just two days before law­mak­ers vot­ed to pass the Infla­tion Reduc­tion Act, four senior Democ­rats came out to lament what they believed to be the bill’s biggest omis­sion: child care.

    “We can­not sim­ply vote on this pack­age and call it a day,” Sen. Pat­ty Mur­ray (D‑WA) said. “Our child care sys­tem isn’t just stretched thin; it is bro­ken.”

    Less than two months lat­er, the extent of that bro­ken­ness is clear­er than ever. Pub­lic schools are ful­ly reopened, and most pan­dem­ic-era restric­tions are relaxed. But work­ing con­di­tions for fam­i­lies with kids who need child care are not back to nor­mal. For both work­ers and par­ents, already-grim trends in child care have only got­ten worse since the pan­dem­ic began: pro­gram costs have increased, while wait­ing lists in sev­er­al states num­ber in the tens of thou­sands.

    Despite the long wait lists, near­ly 90,000 few­er peo­ple are work­ing in the child care indus­try today com­pared to Feb­ru­ary 2020. Many child care cen­ters say they are los­ing work­ers because it has become impos­si­ble to com­pete with the ris­ing wages and ben­e­fits offered by large cor­po­ra­tions like Ama­zon, Tar­get, Star­bucks, and McDonald’s.

    The pan­dem­ic, replete with par­ents work­ing over Zoom as their kids screamed in the back­ground, fueled greater recog­ni­tion of the child care cri­sis — and the need for the gov­ern­ment to do some­thing about it. Both women over­all and strong Repub­li­can-lean­ing vot­ers say they’d be more like­ly to vote for a can­di­date who sup­ports invest­ing in child care to make it more acces­si­ble and afford­able. Child care remains one of the biggest expens­es work­ing fam­i­lies shoul­der, with aver­age costs exceed­ing $10,000 per year.

    Recent employ­ment data sug­gests the lack of acces­si­ble child care is hold­ing back the eco­nom­ic recov­ery. Sen­ate Major­i­ty Leader Chuck Schumer went so far in August as to say he believes “the num­ber 1 or num­ber 2 rea­son in the whole coun­try we are short of labor is we don’t have ade­quate child care.”

    ...

    Child care faced a cri­sis dur­ing the pan­dem­ic — and it isn’t over

    The child care indus­try was hang­ing on by a thread before Covid-19. In late 2018, the lib­er­al think tank Cen­ter for Amer­i­can Progress deter­mined that half of Amer­i­cans lived in “child care deserts” — areas where just one child care option exists for every three chil­dren in need of care. The num­ber of already scarce cen­ters and home-based child care providers was declin­ing, and costs had grown twice as fast as over­all infla­tion since the 1990s. Child care work­ers also sur­vived on very low wages and often no ben­e­fits.

    But dur­ing the pan­dem­ic, sev­er­al fac­tors exac­er­bat­ed these trends, includ­ing staffing short­ages, increased costs for health and safe­ty sup­plies, and few­er chil­dren attend­ing full-time. While staff turnover had been an issue in the years pri­or, the child care sec­tor con­tin­ued to lose work­ers dur­ing the pan­dem­ic — and they weren’t com­ing back after vac­cines became avail­able.

    Between Decem­ber 2019 and March 2021, at least 8,899 child care cen­ters closed across 37 states, and 6,957 licensed home-based care cen­ters shut­tered. To try and stave off addi­tion­al clo­sures, Con­gress autho­rized $39 bil­lion for child care relief as part of its $1.9 tril­lion Amer­i­can Res­cue Plan in 2021. Near­ly half of providers report­ed using these funds to pay off debt they took on dur­ing the pan­dem­ic, and 92 per­cent said the grants helped them keep their pro­grams open.

    But find­ing work­ers to do the high­ly reg­u­lat­ed work remained a chal­lenge. “Young women in their late teens and 20s who are typ­i­cal­ly drawn to work at day-care cen­ters are opt­ing instead to take jobs as admin­is­tra­tive assis­tants, retail clerks and bank tellers,” the Wash­ing­ton Post report­ed last sum­merreport­ed last sum­mer. Oth­er vet­er­ans of the child care indus­try left entire­ly, with anec­do­tal reports from pro­gram own­ers say­ing staff were enticed by the high­er wages and ben­e­fits offered by retail­ers and fast-food chains. The medi­an wage for child care work­ers in 2021 was $13.22 per hour.

    A new analy­sis from the Cen­ter for the Study of Child Care Employ­ment at UC Berke­ley found child care employ­ment remains 8.4 per­cent below what it was in Feb­ru­ary 2020.

    ...

    How the child care short­age is affect­ing fam­i­lies and the labor mar­ket

    Almost every week, report­ing from a dif­fer­ent loca­tion across the US details how a cri­sis of child care is unfold­ing. An inves­ti­ga­tion pub­lished last month found the lack of avail­able child care in Michi­gan — at least 54,000 chil­dren on wait­ing lists — was far worse than state pol­i­cy­mak­ers had pub­licly been claim­ing. In Mass­a­chu­setts, lead­ers are grap­pling with 8,000 few­er child care slots than the state had pre-pan­dem­ic. In a sur­vey of almost 1,000 Penn­syl­va­nia child care providers, respon­dents report­ed over 7,000 staff vacan­cies, con­tribut­ing to over 32,400 Penn­syl­va­nia kids on wait­lists.

    The sta­tis­tics are sim­i­lar nation­wide. In one recent sur­vey con­duct­ed by Care.com, more than 60 per­cent of par­ents said the cost of child care had got­ten more expen­sive, and over half report­ed spend­ing more than 20 per­cent of their house­hold income on it.

    The First Five Years Fund, a child care advo­ca­cy group, report­ed last year that child care costs had increased faster than oth­er basic fam­i­ly expens­es like hous­ing and gro­ceries over the last three decades, and a sep­a­rate analy­sis from Child Care Aware affirmed that the growth in child care prices exceed­ed the annu­al rate of infla­tion in 2019 and 2020.

    The price hikes are hard­ly ben­e­fit­ing the industry’s work­ers: their infla­tion-adjust­ed wages actu­al­ly dropped between 2012 and 2019, despite ris­ing gen­er­al­ly among oth­er pri­vate-sec­tor work­ers.

    To cope with the cri­sis, experts say par­ents are tak­ing on sec­ond jobs and cob­bling togeth­er more infor­mal, and often low­er-qual­i­ty, child care arrange­ments.

    The lat­est Bureau of Labor Sta­tis­tics data released showed that women con­tin­ue to return to the labor force, with August mark­ing the 20th con­sec­u­tive month of job growth for women. How­ev­er, women as a group are still down 98,000 jobs since Feb­ru­ary 2020, though men have recov­ered their pan­dem­ic-era job loss­es. And Black women, unlike oth­er women, have been declin­ing in their labor force par­tic­i­pa­tion since May.

    Labor experts say it’s not clear what is dri­ving the decline in employ­ment for Black women, but cite the high­ly com­pet­i­tive land­scape for child care as one pos­si­ble fac­tor. In 2021 Colum­bia Uni­ver­si­ty researchers found that Black, Asian, and His­pan­ic fam­i­lies were more like­ly to be exposed to child care clo­sures than white fam­i­lies.

    What could be done to address the cri­sis

    To fix the cri­sis, most pol­i­cy experts agree the gov­ern­ment will need to increase its finan­cial sup­port of the child care indus­try. Soci­ety should also ben­e­fit over the long term from these invest­ments, researchers say, as stud­ies sug­gest long-term aca­d­e­m­ic, eco­nom­ic, and emo­tion­al ben­e­fits of ear­ly child­hood edu­ca­tion.

    There are sim­ply mar­ket lim­its to how much more a pro­gram can charge in order to attract and retain staff. “Try­ing to cov­er high­er wages with price hikes just results in more peo­ple pulling their kids out of child care due to the cost,” said Matt Bru­enig, founder of People’s Pol­i­cy Project, a left­ist think tank. “So the only real way to increase the size of the child care work­force is to increase pay with­out increas­ing child care rates, which requires pub­lic sub­sidy.”

    Bru­enig point­ed to the Nordic nations, where gov­ern­ment sub­si­dies to the child care sec­tor on aver­age con­sti­tute about 87 per­cent of the sector’s rev­enues. (Some small fees are required of high­er-income child care users, mak­ing up the remain­ing 13 per­cent.) Mon­toya, the UC Berke­ley child care researcher, said they’ve seen near­ly dou­ble the rates of staff turnover in Cal­i­for­nia pro­grams that received no pub­lic fund­ing, and that sub­si­dized pro­grams tend to have high­er wages.

    The fed­er­al pan­dem­ic child care relief expires in two years, and if gov­ern­ments can’t replace those dol­lars, experts say the sup­ply cri­sis would get even worse, since many providers used the fed­er­al aid to offer pay rais­es or bonus­es to recruit or retain teach­ers. In total, the 50 states and Wash­ing­ton, DC, will face a $48 bil­lion fis­cal cliff, just two months before the next pres­i­den­tial elec­tion. The Cen­ter for Amer­i­can Progress esti­mates the US could lose at least half of its licensed child care sup­ply if the fed­er­al gov­ern­ment doesn’t step in before that.

    ...

    In 2021, Pres­i­dent Joe Biden’s Build Back Bet­ter plan includ­ed pro­vi­sions to guar­an­tee afford­able child care by increas­ing fed­er­al sub­si­dies, and in Novem­ber 2021 the House approved the bill, which includ­ed a $390 bil­lion invest­ment in the ear­ly child­hood care sys­tem. Advo­cates said the invest­ments would be enough to reach nine out of 10 work­ing fam­i­lies with chil­dren 5 and younger.

    But the Sen­ate ver­sion of the bill, intro­duced by Mur­ray, couldn’t gain trac­tion as Sen. Joe Manchin (D‑WV) voiced con­cerns about the over­all size of the bill. Even a dra­mat­i­cal­ly scaled down ver­sion of the child care bill Mur­ray tried intro­duc­ing this past spring with Sen. Tim Kaine (D‑VA) couldn’t move Manchin. (There were also struc­tur­al con­cerns with the Democ­rats’ pro­pos­al, as Bru­enig not­ed its sub­sidy design like­ly would have hiked prices for mid­dle and upper-mid­dle class fam­i­lies.)

    Now that the Infla­tion Reduc­tion Act has passed with­out any child care pro­vi­sions, lead­ers are think­ing again about how to move for­ward on the issue.

    ...

    One like­ly pos­si­bil­i­ty is increas­ing invest­ments in the exist­ing Child Care Devel­op­ment Block Grant (CCDBG), a fed­er­al pro­gram aimed at reduc­ing child care costs for low-income fam­i­lies. There’s already bipar­ti­san sup­port for increas­ing invest­ments in the pro­gram, which has long been mas­sive­ly under­fund­ed; only a tiny frac­tion of those fam­i­lies eli­gi­ble actu­al­ly receive assis­tance.

    Still, increas­ing fund­ing for the CCDBG would not be enough, since that ignores the cri­sis of cost and access for mid­dle class fam­i­lies, and does vir­tu­al­ly noth­ing to address the low wages for child care work­ers.

    To real­ly make a dent, lead­ers are going to have to tack­le the sup­ply of child care along with its costs.

    ———-

    “The child care cri­sis just keeps get­ting worse” By Rachel M. Cohen; Vox; 09/27/2022

    Recent employ­ment data sug­gests the lack of acces­si­ble child care is hold­ing back the eco­nom­ic recov­ery. Sen­ate Major­i­ty Leader Chuck Schumer went so far in August as to say he believes “the num­ber 1 or num­ber 2 rea­son in the whole coun­try we are short of labor is we don’t have ade­quate child care.””

    Like so many of the fes­ter­ing crises in Amer­i­can, the child­care indus­try’s cri­sis isn’t just a cri­sis for all the fam­i­lies find­ing them­selves unable to find afford­able child­care. It’s a macro­eco­nom­ic cri­sis too. A cri­sis that exist­ed well before the COVID pan­dem­ic but only got worse and nev­er recov­ered:

    ...
    Despite the long wait lists, near­ly 90,000 few­er peo­ple are work­ing in the child care indus­try today com­pared to Feb­ru­ary 2020. Many child care cen­ters say they are los­ing work­ers because it has become impos­si­ble to com­pete with the ris­ing wages and ben­e­fits offered by large cor­po­ra­tions like Ama­zon, Tar­get, Star­bucks, and McDonald’s.

    ...

    The child care indus­try was hang­ing on by a thread before Covid-19. In late 2018, the lib­er­al think tank Cen­ter for Amer­i­can Progress deter­mined that half of Amer­i­cans lived in “child care deserts” — areas where just one child care option exists for every three chil­dren in need of care. The num­ber of already scarce cen­ters and home-based child care providers was declin­ing, and costs had grown twice as fast as over­all infla­tion since the 1990s. Child care work­ers also sur­vived on very low wages and often no ben­e­fits.

    But dur­ing the pan­dem­ic, sev­er­al fac­tors exac­er­bat­ed these trends, includ­ing staffing short­ages, increased costs for health and safe­ty sup­plies, and few­er chil­dren attend­ing full-time. While staff turnover had been an issue in the years pri­or, the child care sec­tor con­tin­ued to lose work­ers dur­ing the pan­dem­ic — and they weren’t com­ing back after vac­cines became avail­able.

    Between Decem­ber 2019 and March 2021, at least 8,899 child care cen­ters closed across 37 states, and 6,957 licensed home-based care cen­ters shut­tered. To try and stave off addi­tion­al clo­sures, Con­gress autho­rized $39 bil­lion for child care relief as part of its $1.9 tril­lion Amer­i­can Res­cue Plan in 2021. Near­ly half of providers report­ed using these funds to pay off debt they took on dur­ing the pan­dem­ic, and 92 per­cent said the grants helped them keep their pro­grams open.

    ...

    While staff turnover had been an issue in the years pri­or, the child care sec­tor con­tin­ued to lose work­ers dur­ing the pan­dem­ic — and they weren’t com­ing back after vac­cines became avail­able.
    ...

    And like so many of the fes­ter­ing crises in Amer­i­can, it’s a cri­sis that hits the poor and minori­ties the hard­est, as the the recent drop in labor force par­tic­i­pa­tion by Black women reminds us. While it may not be clear what exact­ly is dri­ving that trend, it’s pret­ty obvi­ous the child­care cri­sis is play­ing a role. How could it not be?

    ...
    The lat­est Bureau of Labor Sta­tis­tics data released showed that women con­tin­ue to return to the labor force, with August mark­ing the 20th con­sec­u­tive month of job growth for women. How­ev­er, women as a group are still down 98,000 jobs since Feb­ru­ary 2020, though men have recov­ered their pan­dem­ic-era job loss­es. And Black women, unlike oth­er women, have been declin­ing in their labor force par­tic­i­pa­tion since May.

    Labor experts say it’s not clear what is dri­ving the decline in employ­ment for Black women, but cite the high­ly com­pet­i­tive land­scape for child care as one pos­si­ble fac­tor. In 2021 Colum­bia Uni­ver­si­ty researchers found that Black, Asian, and His­pan­ic fam­i­lies were more like­ly to be exposed to child care clo­sures than white fam­i­lies.
    ...

    And despite this mas­sive and grow­ing supply/demand imbal­ance for child­care indus­try work­ers, the medi­an wage in the indus­try was a pal­try $13.22 an hour. Infla­tion-adjust­ed wages actu­al­ly dropped between 2012 and 2019. That’s despite the steadi­ly ris­ing prices for par­ents and despite the gen­er­al­ly ris­ing wages in oth­er indus­tries in recent years. It’s a reflec­tion of how bro­ken this indus­try is despite the obvi­ous solu­tions. Sup­pressed wages are dri­ving a work­er short­age but the indus­try refus­es to budge:

    ...
    But find­ing work­ers to do the high­ly reg­u­lat­ed work remained a chal­lenge. “Young women in their late teens and 20s who are typ­i­cal­ly drawn to work at day-care cen­ters are opt­ing instead to take jobs as admin­is­tra­tive assis­tants, retail clerks and bank tellers,” the Wash­ing­ton Post report­ed last sum­merreport­ed last sum­mer. Oth­er vet­er­ans of the child care indus­try left entire­ly, with anec­do­tal reports from pro­gram own­ers say­ing staff were enticed by the high­er wages and ben­e­fits offered by retail­ers and fast-food chains. The medi­an wage for child care work­ers in 2021 was $13.22 per hour.

    ...

    The First Five Years Fund, a child care advo­ca­cy group, report­ed last year that child care costs had increased faster than oth­er basic fam­i­ly expens­es like hous­ing and gro­ceries over the last three decades, and a sep­a­rate analy­sis from Child Care Aware affirmed that the growth in child care prices exceed­ed the annu­al rate of infla­tion in 2019 and 2020.

    The price hikes are hard­ly ben­e­fit­ing the industry’s work­ers: their infla­tion-adjust­ed wages actu­al­ly dropped between 2012 and 2019, despite ris­ing gen­er­al­ly among oth­er pri­vate-sec­tor work­ers.

    To cope with the cri­sis, experts say par­ents are tak­ing on sec­ond jobs and cob­bling togeth­er more infor­mal, and often low­er-qual­i­ty, child care arrange­ments.
    ...

    So why isn’t the indus­try rais­ing wages? Well, in part because that would like­ly come with price hikes, push­ing more and more fam­i­lies out of the mar­ket. Wages need to rise with­out prices ris­es. Because child­care isn’t a lux­u­ry for mil­lions of house­holds. It’s a neces­si­ty for the par­ents (or sin­gle par­ent) to be able to go to work and earn an income. It’s an exam­ple of house the child­care cri­sis in the US par­al­lel’s the coun­try’s health­care cri­sis: if the mar­ket child­care mar­ket, like health­care mar­ket, breaks, it breaks the rest of the econ­o­my. You can’t allow child­care to become as lux­u­ry for the wealthy. And yet, left to mar­ket dynam­ics, that’s exact­ly what we can expect to hap­pen. Fam­i­lies below some income thresh­old sim­ply won’t be offered child­care they can afford, break­ing the labor mar­ket. Gov­ern­ment sub­si­dies and reg­u­la­tions are the only real­is­tic options because reg­u­lar mar­ket dynam­ics can’t work:

    ...
    To fix the cri­sis, most pol­i­cy experts agree the gov­ern­ment will need to increase its finan­cial sup­port of the child care indus­try. Soci­ety should also ben­e­fit over the long term from these invest­ments, researchers say, as stud­ies sug­gest long-term aca­d­e­m­ic, eco­nom­ic, and emo­tion­al ben­e­fits of ear­ly child­hood edu­ca­tion.

    There are sim­ply mar­ket lim­its to how much more a pro­gram can charge in order to attract and retain staff. “Try­ing to cov­er high­er wages with price hikes just results in more peo­ple pulling their kids out of child care due to the cost,” said Matt Bru­enig, founder of People’s Pol­i­cy Project, a left­ist think tank. “So the only real way to increase the size of the child care work­force is to increase pay with­out increas­ing child care rates, which requires pub­lic sub­sidy.”

    Bru­enig point­ed to the Nordic nations, where gov­ern­ment sub­si­dies to the child care sec­tor on aver­age con­sti­tute about 87 per­cent of the sector’s rev­enues. (Some small fees are required of high­er-income child care users, mak­ing up the remain­ing 13 per­cent.) Mon­toya, the UC Berke­ley child care researcher, said they’ve seen near­ly dou­ble the rates of staff turnover in Cal­i­for­nia pro­grams that received no pub­lic fund­ing, and that sub­si­dized pro­grams tend to have high­er wages.
    ...

    It’s also going to be increas­ing­ly impor­tant to keep in mind that cri­sis is poised to explode in about two years when the fed­er­al gov­ern­men­t’s pan­dem­ic child care relief expires. And the pro­pos­als for guar­an­teed afford­able child care in Biden’s Build Back Bet­ter bill nev­er came to be thanks to Joe Manch­in’s to the over­all bill. As a result, a child­care cri­sis is sched­uled to explode three months before the 2024 elec­tion:

    ...
    The fed­er­al pan­dem­ic child care relief expires in two years, and if gov­ern­ments can’t replace those dol­lars, experts say the sup­ply cri­sis would get even worse, since many providers used the fed­er­al aid to offer pay rais­es or bonus­es to recruit or retain teach­ers. In total, the 50 states and Wash­ing­ton, DC, will face a $48 bil­lion fis­cal cliff, just two months before the next pres­i­den­tial elec­tion. The Cen­ter for Amer­i­can Progress esti­mates the US could lose at least half of its licensed child care sup­ply if the fed­er­al gov­ern­ment doesn’t step in before that.

    ...

    In 2021, Pres­i­dent Joe Biden’s Build Back Bet­ter plan includ­ed pro­vi­sions to guar­an­tee afford­able child care by increas­ing fed­er­al sub­si­dies, and in Novem­ber 2021 the House approved the bill, which includ­ed a $390 bil­lion invest­ment in the ear­ly child­hood care sys­tem. Advo­cates said the invest­ments would be enough to reach nine out of 10 work­ing fam­i­lies with chil­dren 5 and younger.

    But the Sen­ate ver­sion of the bill, intro­duced by Mur­ray, couldn’t gain trac­tion as Sen. Joe Manchin (D‑WV) voiced con­cerns about the over­all size of the bill. Even a dra­mat­i­cal­ly scaled down ver­sion of the child care bill Mur­ray tried intro­duc­ing this past spring with Sen. Tim Kaine (D‑VA) couldn’t move Manchin. (There were also struc­tur­al con­cerns with the Democ­rats’ pro­pos­al, as Bru­enig not­ed its sub­sidy design like­ly would have hiked prices for mid­dle and upper-mid­dle class fam­i­lies.)

    Now that the Infla­tion Reduc­tion Act has passed with­out any child care pro­vi­sions, lead­ers are think­ing again about how to move for­ward on the issue.
    ...

    And that lack of a polit­i­cal solu­tion is made all the more remark­able by the fact that this is one of those issues where Democ­rats and Repub­li­cans agree. At least Demo­c­rat and Repub­li­can vot­ers. But the only polit­i­cal options for which there appears to be bipar­ti­san sup­port in Con­gress are lim­it­ed to rel­a­tive­ly tepid options like expand­ing the Child Care Devel­op­ment Block Grant (CCDBG), which is tar­get­ed only at low income fam­i­lies and does noth­ing about the pover­ty wages being paid by the indus­try:

    ...
    The pan­dem­ic, replete with par­ents work­ing over Zoom as their kids screamed in the back­ground, fueled greater recog­ni­tion of the child care cri­sis — and the need for the gov­ern­ment to do some­thing about it. Both women over­all and strong Repub­li­can-lean­ing vot­ers say they’d be more like­ly to vote for a can­di­date who sup­ports invest­ing in child care to make it more acces­si­ble and afford­able. Child care remains one of the biggest expens­es work­ing fam­i­lies shoul­der, with aver­age costs exceed­ing $10,000 per year.

    ...

    One like­ly pos­si­bil­i­ty is increas­ing invest­ments in the exist­ing Child Care Devel­op­ment Block Grant (CCDBG), a fed­er­al pro­gram aimed at reduc­ing child care costs for low-income fam­i­lies. There’s already bipar­ti­san sup­port for increas­ing invest­ments in the pro­gram, which has long been mas­sive­ly under­fund­ed; only a tiny frac­tion of those fam­i­lies eli­gi­ble actu­al­ly receive assis­tance.

    Still, increas­ing fund­ing for the CCDBG would not be enough, since that ignores the cri­sis of cost and access for mid­dle class fam­i­lies, and does vir­tu­al­ly noth­ing to address the low wages for child care work­ers.

    To real­ly make a dent, lead­ers are going to have to tack­le the sup­ply of child care along with its costs.
    ...

    And as the fol­low­ing NY Times arti­cle describes, the CCDBG has a par­tic­u­lar­ly influ­en­tial fan in this debate: pri­vate-equi­ty. In par­tic­u­lar, the lob­by­ing con­sor­tium set up by the grow­ing num­ber of pri­vate-equi­ty-owned child­care chains. Extreme­ly prof­itable child­care chains that appear to have achieved these grow­ing prof­its by focus­ing on upper-mid­dle-class fam­i­lies and charg­ing much high­er fees than the small­er inde­pen­dent providers who tend to pro­vide child­care for low­er-income fam­i­lies. But this con­sor­tium lob­by was­n’t just in favor of expand­ing the CCDBG. It was also extreme­ly opposed to the much larg­er child­care pro­vi­sions in the orig­i­nal Build Back Bet­ter pack­age that ulti­mate­ly nev­er passed. Espe­cial­ly the pro­vi­sions like pro­vid­ing a liv­able wage or oth­er pro­vi­sions that might put a damper on the indus­try’s prof­its. Prof­its that are often com­ing at the expense of the small­er inde­pen­dent oper­a­tors that are often the only ones will­ing to take on larg­er or low­er-income fam­i­lies. Many pri­vate-equi­ty-owned child­care firms charge so much that they don’t even accept chil­dren on state and fed­er­al sub­si­dies because those are enough. That’s all part of the ongo­ing and grow­ing cri­sis in US child­care: pri­vate-equi­ty is find­ing it an extreme­ly prof­itable cri­sis. And the longer this goes, the prof­itable it’s going to get:

    The New York Times

    Can Child Care Be a Big Busi­ness? Pri­vate Equi­ty Thinks So.

    Some high-end chains are sur­pris­ing­ly prof­itable, and they are try­ing to shape child care pol­i­cy in Wash­ing­ton.

    By Dana Gold­stein
    Dec. 16, 2022

    The prices can rival col­lege tuition: Bright Hori­zons charges up to $44,000 a year for child care in Seat­tle; at Kinder­Care in Man­hat­tan, it is up to $40,000.

    And the ser­vices can be atten­tive. Par­ents often receive hourly updates: the exact time a baby dirt­ied a dia­per, the num­ber of rasp­ber­ries a tod­dler ate at snack time, pho­tos of 3‑year-olds at the play­ground.

    Mil­lions of Amer­i­can fam­i­lies are cop­ing with a child care short­age brought on by the coro­n­avirus pan­dem­ic. But one end of the busi­ness is thriv­ing: nation­al chains, some charg­ing sil­ver-spoon prices.

    That split real­i­ty is anoth­er mark­er of how income inequal­i­ty shapes access to basic neces­si­ties like child care, and how it has become hard­er for low­er- and mid­dle-income par­ents, usu­al­ly women, to get back into the work force after pan­dem­ic dis­rup­tions.

    And in the debate over how to fix the country’s thread­bare child care sys­tem, the big chains have lob­bied and donat­ed to politi­cians to assert their own inter­ests in Wash­ing­ton. Through a lob­by­ing con­sor­tium, they were par­tic­u­lar­ly aggres­sive in nego­ti­a­tions over Pres­i­dent Biden’s Build Back Bet­ter bill, which ulti­mate­ly did not pass. The con­sor­tium said pub­licly that it sup­port­ed the bill’s child care pro­pos­als, which would have low­ered costs for many fam­i­lies. But in lob­by­ing meet­ings, it argued to pol­i­cy­mak­ers that the bill’s num­bers did not add up.

    The expan­sion of the chain child care sec­tor as the rest of the indus­try shrinks means, “You’re going to increas­ing­ly have the haves and have-nots — child care oper­at­ing more as a lux­u­ry good and less as a pub­lic good,” said Elliot Haspel, a child care expert at Capi­ta, a fam­i­ly pol­i­cy group.

    He not­ed that the chains were gen­er­al­ly expand­ing in high­er-income neigh­bor­hoods, while the great­est need for ser­vices is else­where — par­tic­u­lar­ly in rur­al areas and low-income com­mu­ni­ties of col­or.

    The com­pa­nies, includ­ing Kinder­Care, Bright Hori­zons and Light­bridge Acad­e­my, serve about one mil­lion of the 12 mil­lion chil­dren under 5 in some form of child care.

    This year, the 50 largest for-prof­it child care chains opened or acquired 537 new cen­ters, an 8 per­cent increase from the pre­vi­ous year, accord­ing to an annu­al sur­vey by Exchange, a trade pub­li­ca­tion cov­er­ing the indus­try.

    For 2023, the biggest play­ers “have aggres­sive growth plans in place,” said Kathy Ligon, a con­sul­tant who worked on the sur­vey. And sev­er­al chains — includ­ing Bright Hori­zons, Light­bridge Acad­e­my, God­dard Sys­tems and Prim­rose Schools — have in recent years attract­ed pri­vate equi­ty investors or buy­ers.

    There is noth­ing unusu­al about child care cen­ters being run as for-prof­it busi­ness­es. But while the typ­i­cal com­mu­ni­ty-based cen­ter oper­ates with thin prof­it mar­gins, the chain cen­ters can expect annu­al prof­its of 15 per­cent to 20 per­cent of rev­enue, accord­ing to indus­try ana­lysts.

    “Pri­vate equi­ty likes this space because it’s so resilient,” said George Tong, a senior research ana­lyst at Gold­man Sachs who stud­ies the sec­tor. (Gold­man Sachs has pro­vid­ed invest­ment bank­ing ser­vices to Bright Hori­zons.)

    A com­pa­ny like Bright Hori­zons, which is pub­licly trad­ed and spe­cial­izes in pro­vid­ing employ­er-sub­si­dized care, is “prof­itable and throw­ing off cash,” Mr. Tong said, some­times rais­ing fees by as much as 7 per­cent a year. (The New York Times, like many oth­er com­pa­nies, offers employ­ees access to dis­counts and emer­gency-care ser­vices at many of these providers.)

    Mr. Tong said he expect­ed to see a num­ber of child care chains go pub­lic, begin­ning with Kinder­Care, the nation’s largest for-prof­it provider, which oper­ates 1,501 cen­ters and has filed for an ini­tial pub­lic offer­ing.

    None of the pri­vate equi­ty firms agreed to inter­views. Ms. Ligon, who con­nects mid­size child care busi­ness­es to larg­er chains for acqui­si­tion, said investors “real­ly like the benev­o­lent focus of the indus­try. They like the pub­lic good. They like what it brings to com­mu­ni­ties and fam­i­lies.”

    But by com­pet­ing for work­ers, these child care com­pa­nies can squeeze cen­ters that charge low­er rates and serve most­ly mid­dle- and low­er-income fam­i­lies.

    The Labor Cri­sis

    The pan­dem­ic illu­mi­nat­ed how access to child care affects par­ents’ abil­i­ty to work.

    When the pan­dem­ic began, “we thought we were going to shut down for two years,” Ms. Ligon said. “What actu­al­ly hap­pened was that the inter­est increased dra­mat­i­cal­ly” among investors, as they became more attuned to the con­nec­tion between the econ­o­my and child care.

    But the entire indus­try has had to nav­i­gate a work­er exo­dus. Since 2020, the child care indus­try has lost more than 80,000 work­ers — often to retail and office jobs — which has con­tributed to the clos­ing of 12,000 pro­grams.

    Child care cen­ters, where the typ­i­cal work­er makes $13 per hour, can­not eas­i­ly raise salaries, since many of their cus­tomers, work­ing par­ents, are close to tapped out.

    The high-end child care busi­ness­es have added their own eco­nom­ic pres­sures. Though they do not always pay more — offer­ing $14 to $26 an hour in cities like New York, Pitts­burgh, Seat­tle and Austin, Texas, accord­ing to job list­ings — they can use their scale and high­er prices to offer work­ers paid time off and some form of health insur­ance.

    Tay­lor Nabatoff and her hus­band were impressed when they toured a Bright Hori­zons out­post in Pitts­burgh in 2019, seek­ing care for their son, now 4.

    It was in a mod­ern, sparkling build­ing, had a warm direc­tor and lacked the signs of dis­or­der Ms. Nabatoff had seen at oth­er cen­ters, such as over­flow­ing dia­per pails. It also charged twice as much as some near­by com­peti­tors.

    Ms. Nabatoff, 31, who works in mar­ket­ing, said she thought, “Either we’re get­ting into this place or I’m not going to work until we can get into this place.”

    In Lau­rel, Md., Car­oli­na Reyes, the direc­tor of a small child care cen­ter, said she had trou­ble com­pet­ing for staff with the name-brand chains.

    ...

    Her rates, how­ev­er, are more afford­able. She charges $290 a week for a 2‑year-old. A branch of Kinder­Care in her region quot­ed a price of $350 a week for tod­dlers.

    About a quar­ter of Ms. Reyes’s stu­dents receive a state schol­ar­ship for low-income and mid­dle-class fam­i­lies, she said.

    Many nation­al child care chains do not serve large num­bers of poor fam­i­lies, since fed­er­al and state sub­si­dies can­not com­pete with the fees that wealth­i­er par­ents are able to pay.

    The per­cent­age of Bright Hori­zons stu­dents who qual­i­fy for gov­ern­ment assis­tance is a “sin­gle dig­it,” accord­ing to Stephen Kramer, the chief exec­u­tive. At Light­bridge Acad­e­my, about one-third of its 66 sites accept sub­si­dized stu­dents, said Gigi Schweik­ert, the chief exec­u­tive — and at those sites, sub­si­dized stu­dents make up 20 per­cent or less of the center’s total pop­u­la­tion.

    Kinder­Care described itself in a writ­ten state­ment as “the only nation­al provider with a ded­i­cat­ed sub­sidy team to help sup­port those fam­i­lies,” but it could not offer data on how many sub­si­dized stu­dents were enrolled.

    Chad Dunk­ley, chief exec­u­tive of New Hori­zon Acad­e­my, which has 100 cen­ters in the Mid­west and West, said that serv­ing a socioe­co­nom­i­cal­ly diverse pop­u­la­tion was a “long pas­sion” of his, cit­ing cen­ters in Min­neapo­lis and Des Moines that enroll chil­dren from low-income fam­i­lies.

    But Mr. Dunk­ley said that because of a lack of fed­er­al and state fund­ing, New Hori­zon could not afford to expand such work.

    “It’s too much to pass the cost onto oth­er fam­i­lies,” he said.

    Shap­ing Pol­i­cy in Wash­ing­ton

    In 2021, lib­er­al pol­i­cy­mak­ers and activists put their hopes on Mr. Biden’s Build Back Bet­ter leg­is­la­tion, which they saw as the best chance in a gen­er­a­tion to cre­ate a near-uni­ver­sal child care sys­tem, one that would lim­it child care pay­ments to 7 per­cent of fam­i­ly income for all but the wealth­i­est fam­i­lies.

    Under the pro­pos­al, a cou­ple with two chil­dren in New York and a house­hold income of $250,000 would have had out-of-pock­et child care costs capped at $17,500 for both chil­dren — much low­er than what the name-brand cen­ters charge for just a sin­gle child. The bill also would have required providers to raise work­ers’ pay to a “liv­ing wage.”

    The fed­er­al and state gov­ern­ments would have helped providers shoul­der the costs.

    The chain child care indus­try, through its lob­by­ing arm, the Ear­ly Care and Edu­ca­tion Con­sor­tium, said, “We strong­ly urge Con­gress to pass the Build Back Bet­ter Act.”

    But accord­ing to three Demo­c­ra­t­ic Sen­ate staffers who worked on Build Back Bet­ter and request­ed anonymi­ty because of the sen­si­tiv­i­ty of con­tin­u­ing nego­ti­a­tions about child care, the con­sor­tium in meet­ings react­ed skep­ti­cal­ly to the idea of sub­si­diz­ing tuition for upper-mid­dle-class fam­i­lies and pre­ferred a plan that could pass with Repub­li­can sup­port.

    The con­sor­tium was not the only crit­ic of the bill. The indus­try and some ana­lysts on the right and the left argued that the bill’s math rest­ed on a shaky foun­da­tion, under­es­ti­mat­ing the fed­er­al and state costs.

    Oth­er con­stituen­cies, such as some reli­gious child care providers and the U.S. Cham­ber of Com­merce, also opposed the leg­is­la­tion as writ­ten.

    Mr. Dunk­ley of New Hori­zon Acad­e­my, and co-chair­man of the consortium’s board, said that while at first he was “thrilled with the con­cept of Build Back Bet­ter,” he devel­oped con­cerns about the abil­i­ty of states to opt out of the pro­gram, and about the over­all invest­ment, which did not, in his view, equal the true cost of pro­vid­ing high-qual­i­ty care to the wide swath of par­ents who would have been eli­gi­ble.

    ...

    The con­sor­tium con­clud­ed that Build Back Bet­ter was based on “an incom­plete cost analy­sis” and that it would have phased ben­e­fits in too quick­ly for high­er-income fam­i­lies, said Rad­ha Mohan, the group’s exec­u­tive direc­tor and a lawyer at Brown­stein Hyatt Far­ber Schreck, a Wash­ing­ton lob­by­ing firm.

    Sen­ate staffers said they assured the con­sor­tium and oth­er child care groups that through the reg­u­la­to­ry process, Con­gress would pro­vide enough fed­er­al dol­lars to make the plan work­able for providers, includ­ing for the chain com­pa­nies.

    Nev­er­the­less, the leg­is­la­tion could have lim­it­ed prof­its for the big chains.

    The com­pa­nies have said as much in their finan­cial dis­clo­sures.

    In its 2021 annu­al report, Bright Hori­zons wrote that a “broad-based ben­e­fit” for child care could “place down­ward pres­sure on the tuition and fees we charge, which could adverse­ly affect our rev­enues.”

    In a Nov. 10 fil­ing with the U.S. Secu­ri­ties and Exchange Com­mis­sion for its ini­tial pub­lic offer­ing, Kinder­Care warned that expand­ed gov­ern­ment child care ben­e­fits could lessen demand for its ser­vices. “Our con­tin­ued prof­itabil­i­ty depends on our abil­i­ty to off­set our increased costs through tuition increas­es,” the com­pa­ny stat­ed.

    After Sen­a­tor Joe Manchin, a cen­trist Demo­c­rat from West Vir­ginia, essen­tial­ly killed the leg­is­la­tion by oppos­ing it, Mr. Dunk­ley and exec­u­tives from sev­er­al oth­er con­sor­tium com­pa­nies — includ­ing Bright Hori­zons, Kinder­Care, the Prim­rose School Fran­chis­ing Com­pa­ny, Light­bridge Acad­e­my and Acelero Learn­ing — made dona­tions in Jan­u­ary to Mr. Manchin’s cam­paign fund and his polit­i­cal action com­mit­tee, Coun­try Roads.

    Short­ly after, Mr. Dunk­ley and oth­er chain child care lead­ers attend­ed a din­ner with the sen­a­tor, where, accord­ing to Mr. Dunk­ley, the exec­u­tives expressed their wish for fed­er­al child care fund­ing to be includ­ed in the bill that became the Infla­tion Reduc­tion Act but said it should be tar­get­ed toward low­er-income fam­i­lies.

    In the end, the tar­get­ed fund­ing pro­pos­al also failed. The leg­is­la­tion, which was nego­ti­at­ed chiefly among Sen­a­tor Manchin, the Sen­ate major­i­ty leader Chuck Schumer and the White House, includ­ed zero dol­lars for any fam­i­ly pol­i­cy pro­grams — noth­ing for child care, pre‑K or paid parental leave.

    Sen­a­tor Manchin’s office declined to dis­cuss its rela­tion­ship with child care com­pa­nies, but in a writ­ten state­ment, Sam Run­y­on, a spokes­woman, said Mr. Manchin “clear­ly artic­u­lat­ed his pol­i­cy con­cerns with Build Back Bet­ter, which were root­ed in ris­ing infla­tion, the ongo­ing pan­dem­ic and the geopo­lit­i­cal uncer­tain­ty around the world.”

    The con­sor­tium said it remained active­ly engaged in the fight to build bipar­ti­san sup­port in Con­gress for increas­ing fund­ing by $1 bil­lion for the Child Care and Devel­op­ment Block Grant, which sub­si­dizes care for low-income fam­i­lies. The invest­ment would be less than 1 per­cent of the size of the child care pro­pos­als in the Build Back Bet­ter bill.

    “There is a chance in a year-end pack­age to get some­thing done,” Ms. Mohan said. “But it will take a mon­u­men­tal push.”

    ———-

    “Can Child Care Be a Big Busi­ness? Pri­vate Equi­ty Thinks So.” By Dana Gold­stein; The New York Times; 12/16/2022

    “Mil­lions of Amer­i­can fam­i­lies are cop­ing with a child care short­age brought on by the coro­n­avirus pan­dem­ic. But one end of the busi­ness is thriv­ing: nation­al chains, some charg­ing sil­ver-spoon prices.

    It’s an indus­try in cri­sis. But not the entire indus­try. Pri­vate-equi­ty owned child care busi­ness­es are grow­ing and thriv­ing. Thriv­ing, for a prof­it per­spec­tive. Not so much thriv­ing in terms of ful­fill­ing the US’s child­care needs, but rather thriv­ing at the expense of the rest of the indus­try. And with pri­vate-equi­ty focus­ing on expen­sive child care tar­get­ing high­er-income neigh­bor­hoods, we have a recipe for a “haves and have-nots” child­care sec­tor. Where only the wealthy get to have child­care:

    ...
    The expan­sion of the chain child care sec­tor as the rest of the indus­try shrinks means, “You’re going to increas­ing­ly have the haves and have-nots — child care oper­at­ing more as a lux­u­ry good and less as a pub­lic good,” said Elliot Haspel, a child care expert at Capi­ta, a fam­i­ly pol­i­cy group.

    He not­ed that the chains were gen­er­al­ly expand­ing in high­er-income neigh­bor­hoods, while the great­est need for ser­vices is else­where — par­tic­u­lar­ly in rur­al areas and low-income com­mu­ni­ties of col­or.

    ...

    There is noth­ing unusu­al about child care cen­ters being run as for-prof­it busi­ness­es. But while the typ­i­cal com­mu­ni­ty-based cen­ter oper­ates with thin prof­it mar­gins, the chain cen­ters can expect annu­al prof­its of 15 per­cent to 20 per­cent of rev­enue, accord­ing to indus­try ana­lysts.

    “Pri­vate equi­ty likes this space because it’s so resilient,” said George Tong, a senior research ana­lyst at Gold­man Sachs who stud­ies the sec­tor. (Gold­man Sachs has pro­vid­ed invest­ment bank­ing ser­vices to Bright Hori­zons.)
    ...

    And notice how even the pri­vate-equi­ty employ­ees often don’t real­ly get sig­nif­i­cant­ly high­er wage. But thanks to their scale, they can offer some basic ben­e­fits like health insur­ance. It’s a reminder that the $13 an wage paid to the rest of the small­er inde­pen­dent oper­a­tors in the indus­try often does­n’t come with health insur­ance either, which is pre­sum­ably part of the rea­son the inde­pen­dent oper­a­tors are los­ing so many work­ers to places like fast-food chains too:

    ...
    None of the pri­vate equi­ty firms agreed to inter­views. Ms. Ligon, who con­nects mid­size child care busi­ness­es to larg­er chains for acqui­si­tion, said investors “real­ly like the benev­o­lent focus of the indus­try. They like the pub­lic good. They like what it brings to com­mu­ni­ties and fam­i­lies.”

    But by com­pet­ing for work­ers, these child care com­pa­nies can squeeze cen­ters that charge low­er rates and serve most­ly mid­dle- and low­er-income fam­i­lies.

    ...

    Child care cen­ters, where the typ­i­cal work­er makes $13 per hour, can­not eas­i­ly raise salaries, since many of their cus­tomers, work­ing par­ents, are close to tapped out.

    The high-end child care busi­ness­es have added their own eco­nom­ic pres­sures. Though they do not always pay more — offer­ing $14 to $26 an hour in cities like New York, Pitts­burgh, Seat­tle and Austin, Texas, accord­ing to job list­ings — they can use their scale and high­er prices to offer work­ers paid time off and some form of health insur­ance.
    ...

    Adding to the “haves and have nots” dynam­ic is the fact that many pri­vate-equi­ty-own child­care chains charge so much that they won’t even accept stu­dents on fed­er­al and state sub­si­dies because the sub­si­dies aren’t enough:

    ...
    In Lau­rel, Md., Car­oli­na Reyes, the direc­tor of a small child care cen­ter, said she had trou­ble com­pet­ing for staff with the name-brand chains.

    ...

    Her rates, how­ev­er, are more afford­able. She charges $290 a week for a 2‑year-old. A branch of Kinder­Care in her region quot­ed a price of $350 a week for tod­dlers.

    About a quar­ter of Ms. Reyes’s stu­dents receive a state schol­ar­ship for low-income and mid­dle-class fam­i­lies, she said.

    Many nation­al child care chains do not serve large num­bers of poor fam­i­lies, since fed­er­al and state sub­si­dies can­not com­pete with the fees that wealth­i­er par­ents are able to pay.

    The per­cent­age of Bright Hori­zons stu­dents who qual­i­fy for gov­ern­ment assis­tance is a “sin­gle dig­it,” accord­ing to Stephen Kramer, the chief exec­u­tive. At Light­bridge Acad­e­my, about one-third of its 66 sites accept sub­si­dized stu­dents, said Gigi Schweik­ert, the chief exec­u­tive — and at those sites, sub­si­dized stu­dents make up 20 per­cent or less of the center’s total pop­u­la­tion.

    Kinder­Care described itself in a writ­ten state­ment as “the only nation­al provider with a ded­i­cat­ed sub­sidy team to help sup­port those fam­i­lies,” but it could not offer data on how many sub­si­dized stu­dents were enrolled.

    Chad Dunk­ley, chief exec­u­tive of New Hori­zon Acad­e­my, which has 100 cen­ters in the Mid­west and West, said that serv­ing a socioe­co­nom­i­cal­ly diverse pop­u­la­tion was a “long pas­sion” of his, cit­ing cen­ters in Min­neapo­lis and Des Moines that enroll chil­dren from low-income fam­i­lies.

    But Mr. Dunk­ley said that because of a lack of fed­er­al and state fund­ing, New Hori­zon could not afford to expand such work.

    “It’s too much to pass the cost onto oth­er fam­i­lies,” he said.
    ...

    So with the pri­vate-equi­ty-owned child­care indus­try point­ing its fin­ger at a lack of fed­er­al and state sub­si­dies, it would seem like the large fed­er­al sub­si­dies in the pro­posed Build Back Bet­ter pack­age. But the pri­vate-equi­ty lob­by ‘react­ed skep­ti­cal­ly’ to the idea of sub­si­dies that poten­tial­ly helped mid­dle-class fam­i­lies too. But it was parts of pack­age that poten­tial­ly lim­it­ed prof­its and the abil­i­ty to raise to tuition that was obvi­ous­ly the source of pri­vate-equi­ty’s oppo­si­tion. The gov­ern­ment inter­ven­tion required to real­ly mean­ing­ful­ly fix this indus­try and make afford­able child­care some­thing acces­si­ble to all par­ents required both gov­ern­ment sub­si­dies and scal­ing back some of the prof­its, which made it a solu­tion the indus­try won’t accept. Keep­ing child­care a cash cow prof­it cen­ter for pri­vate-equi­ty’s investors is the top pri­or­i­ty:

    ...
    And in the debate over how to fix the country’s thread­bare child care sys­tem, the big chains have lob­bied and donat­ed to politi­cians to assert their own inter­ests in Wash­ing­ton. Through a lob­by­ing con­sor­tium, they were par­tic­u­lar­ly aggres­sive in nego­ti­a­tions over Pres­i­dent Biden’s Build Back Bet­ter bill, which ulti­mate­ly did not pass. The con­sor­tium said pub­licly that it sup­port­ed the bill’s child care pro­pos­als, which would have low­ered costs for many fam­i­lies. But in lob­by­ing meet­ings, it argued to pol­i­cy­mak­ers that the bill’s num­bers did not add up.

    ...

    In 2021, lib­er­al pol­i­cy­mak­ers and activists put their hopes on Mr. Biden’s Build Back Bet­ter leg­is­la­tion, which they saw as the best chance in a gen­er­a­tion to cre­ate a near-uni­ver­sal child care sys­tem, one that would lim­it child care pay­ments to 7 per­cent of fam­i­ly income for all but the wealth­i­est fam­i­lies.

    Under the pro­pos­al, a cou­ple with two chil­dren in New York and a house­hold income of $250,000 would have had out-of-pock­et child care costs capped at $17,500 for both chil­dren — much low­er than what the name-brand cen­ters charge for just a sin­gle child. The bill also would have required providers to raise work­ers’ pay to a “liv­ing wage.”

    The fed­er­al and state gov­ern­ments would have helped providers shoul­der the costs.

    The chain child care indus­try, through its lob­by­ing arm, the Ear­ly Care and Edu­ca­tion Con­sor­tium, said, “We strong­ly urge Con­gress to pass the Build Back Bet­ter Act.”

    But accord­ing to three Demo­c­ra­t­ic Sen­ate staffers who worked on Build Back Bet­ter and request­ed anonymi­ty because of the sen­si­tiv­i­ty of con­tin­u­ing nego­ti­a­tions about child care, the con­sor­tium in meet­ings react­ed skep­ti­cal­ly to the idea of sub­si­diz­ing tuition for upper-mid­dle-class fam­i­lies and pre­ferred a plan that could pass with Repub­li­can sup­port.

    ...

    Sen­ate staffers said they assured the con­sor­tium and oth­er child care groups that through the reg­u­la­to­ry process, Con­gress would pro­vide enough fed­er­al dol­lars to make the plan work­able for providers, includ­ing for the chain com­pa­nies.

    Nev­er­the­less, the leg­is­la­tion could have lim­it­ed prof­its for the big chains.

    The com­pa­nies have said as much in their finan­cial dis­clo­sures.

    In its 2021 annu­al report, Bright Hori­zons wrote that a “broad-based ben­e­fit” for child care could “place down­ward pres­sure on the tuition and fees we charge, which could adverse­ly affect our rev­enues.”

    In a Nov. 10 fil­ing with the U.S. Secu­ri­ties and Exchange Com­mis­sion for its ini­tial pub­lic offer­ing, Kinder­Care warned that expand­ed gov­ern­ment child care ben­e­fits could lessen demand for its ser­vices. “Our con­tin­ued prof­itabil­i­ty depends on our abil­i­ty to off­set our increased costs through tuition increas­es,” the com­pa­ny stat­ed.
    ...

    So what about the Child Care and Devel­op­ment Block Grant (CCDBG) pro­pos­al that’s pitched as some sort of bipar­ti­san com­pro­mise? Well, it’s about 1 per­cent the size of the pro­pos­als in Build Back Bet­ter. And that’s an exam­ple of what the pri­vate-equi­ty con­sor­tium lob­by put for­ward as a solu­tion it could get behind. It’s a non-solu­tion-solu­tion that speaks vol­umes about how much inter­est there actu­al­ly is in fix­ing the prob­lem:

    ...
    The con­sor­tium said it remained active­ly engaged in the fight to build bipar­ti­san sup­port in Con­gress for increas­ing fund­ing by $1 bil­lion for the Child Care and Devel­op­ment Block Grant, which sub­si­dizes care for low-income fam­i­lies. The invest­ment would be less than 1 per­cent of the size of the child care pro­pos­als in the Build Back Bet­ter bill.

    “There is a chance in a year-end pack­age to get some­thing done,” Ms. Mohan said. “But it will take a mon­u­men­tal push.”
    ...

    We’ll see if that bipar­ti­san solu­tion of expand­ing the CCDBG grants even hap­pens at all. It’s kind of hard to imag­ine any­thing bipar­ti­san pass­ing in this polit­i­cal cli­mate.

    But as we saw, ‘the mar­ket’ isn’t going to pro­vide the solu­tion here. The warp­ing of the mar­ket­place by pri­vate-equi­ty is that mar­ket solu­tion. A solu­tion to more prof­its. Same solu­tion as always. If we want a dif­fer­ent solu­tion gov­ern­ment is going to have to do it. And as we also saw, this is indeed over­whelm­ing a bipar­ti­san issue, at least from the vot­ers’ per­spec­tive who want to see gov­ern­ment do some­thing. As a nation­al cri­sis impact­ing mil­lions of house­holds across the polit­i­cal spec­trum there real­ly should be the kind of polit­i­cal will to find a real com­pre­hen­sive solu­tion.

    And yet we have to admit that ‘spe­cial inter­est’ finds a way in DC. And few spe­cial inter­ests are more spe­cial than a pri­vate-equi­ty lob­by­ing con­sor­tium. So should we expect so solu­tions ever? Not nec­es­sar­i­ly. Some solu­tions will be allowed. The prob­lem is they are going to be solu­tions the ensure pri­vate-equi­ty con­tin­ues to make hefty and grow­ing prof­its for the fore­see­able future. Because pri­or­i­tiz­ing spe­cial inter­ests is more or less the US’s meta-solu­tion and has been for quite some time. It’s one of pri­vate-equi­ty’s biggest edges. Pri­or­i­tiz­ing spe­cial inter­est­ing is large­ly how the US guides itself into the future at this point. Lit­er­al­ly ‘pro­tect­ing the future’ in the case of the child­care indus­try. Of all the chron­ic prob­lems fac­ing the US, the grip of spe­cial inter­ests on DC is prob­a­bly the longest and most ‘meta’. Which has a lot to do with why all the oth­er chron­ic prob­lems fac­ing the US seem to just keeps get­ting worse. Except for the chron­ic prob­lem of exces­sive prof­its by pow­er­ful spe­cial inter­ests. Those gen­er­al­ly seem to be get­ting bet­ter, at least from pri­vate-equi­ty’s very spe­cial per­spec­tive.

    Posted by Pterrafractyl | December 19, 2022, 3:39 am
  33. We know who did and why. Those are no longer mys­ter­ies in the assas­si­na­tion of Unit­ed­Health­care CEO Bri­an Thomp­son. We also have a pret­ty good answer as to whether or not the pub­lic at large would sym­pa­thize with the young assas­sin and his motives. The shoot­er, Lui­gi Man­gione, is basi­cal­ly an Amer­i­can folk hero at this point. The big mys­tery at this point is whether or not the US is in store for a wave of copy­cat killings. Copy­cat health­care killings, in par­tic­u­lar. Because as the fol­low­ing set of arti­cles remind us, it’s not just that the state of the US health­care sec­tor is so bad that it poten­tial­ly drove Man­gione to kill a CEO as part of some sort of social jus­tice cru­sade. The state of US health­care is poised to get much worse. And fast.

    That’s the warn­ing we’re get­ting from experts regard­ing the like­ly fate of the mil­lions of Medicare enrollees. Enrollees who might be part of a gov­ern­ment run health­care pro­gram today but could eas­i­ly find them­selves switched to a pri­vate­ly run for-prof­it Medicare alter­na­tive plan tomor­row. Or maybe the switch already hap­pened and nobody told them. It’s already that bad.

    The crux of the issue has to do with a key dif­fer­ence in how Medicare oper­ates com­pared to the pri­vate­ly man­aged “Medicare Advan­tage” alter­na­tives. While Medicare basi­cal­ly cov­ers what needs to be cov­ered for a patient, the Medicare Advan­tage plans oper­ate on a mod­el where they receive a fixed pay­ment per patient and make their prof­its based on pro­vid­ing less ser­vices than the costs of those pay­ments. In oth­er words, the Medicare Advan­tage providers max­i­mize prof­its by min­i­miz­ing care. It’s that sim­ple. And as we should expect, those keen on cut­ting gov­ern­ment spend­ing are see­ing the trans­fer of as many Medicare patients onto Medicare Advan­tage as pos­si­ble. Includ­ing Dr Mehmet Oz, the per­son tapped by Don­ald Trump to be the next head of the Cen­ters for Medicare and Med­ic­aid Ser­vices. As we’re going to see, not only did Oz pro­posed expand­ing Medicare Advan­tage back in 2022 when he was run­ning for the US Sen­ate, but he actu­al­ly pro­posed trans­fer­ring all Medicare enrollees onto Medicare Advan­tage plans back in 2020. That’s the guy like­ly to be man­ag­ing Medicare under a sec­ond Trump term.

    But the con­cerns about Oz’s qual­i­fi­ca­tions aren’t lim­it­ed to con­cerns over the impact his Medicare Advan­tage plans might have for Amer­i­can seniors. There’s also con­flict of inter­est con­cerns over the fact that Oz owns around $550,000 in Unit­ed­Health stock and Unit­ed­Health hap­pens to be one of the largest play­ers in the Medicare Advan­tage mar­ket. Yes, that’s anoth­er angle to the Unit­ed­Health assas­si­na­tion sto­ry: Unit­ed­Health isn’t just the largest health insur­er in the US. Unit­ed­Health is also poised to see its mar­ket share grow sig­nif­i­cant­ly as this Medicare pri­va­ti­za­tion trend plays out.

    And, as we prob­a­bly should expect, this isn’t a pure­ly par­ti­san issue. We we’ve seen, it turns out the Biden admin­is­tra­tion has been tur­bo charg­ing a kind of stealth Medicare pri­va­ti­za­tion scheme ini­tial­ly launched under the first Trump admin­is­tra­tion: Under a sys­tem launched in 2019, com­pa­nies are tapped to serve as “direct con­tract­ing enti­ties” (DCEs) that are allowed to offer ben­e­fits — like gym mem­ber­ships — beyond tra­di­tion Medicare cov­er­age. The catch is they just receive a fixed pay­ment from the gov­ern­ment per patient, mean­ing this is basi­cal­ly the same Medicare Advan­tage, where the same for-prof­it incen­tives exist to min­i­mize the amount of care pro­vid­ed. It’s just a dif­fer­ent name. Then, in April of 2021, the Biden admin­is­tra­tion dou­ble down on this pro­gram, select­ing 53 com­pa­nies to serve as DCEs, and grant­ed them an incred­i­ble new abil­i­ty: the abil­i­ty to switch patients out of Medicare onto these new DCEs with­out their con­sent.

    And as we also saw, while the Biden admin­is­tra­tion did strip out one of the more trou­bling parts of the orig­i­nal Trump plan, there’s going to be noth­ing pre­vent­ing a sec­ond Trump admin­is­tra­tion from putting it back in place: the pol­i­cy of mass enrolling Medicare patients into these DCEs based on region. Yes, every in select­ed regions were to be enrolled in these DCE plans with­out their con­sent under the orig­i­nal plan. It real­ly was a the com­plete pri­va­ti­za­tion of Medicare. A mass stealth pri­va­ti­za­tion, set to take place one region of the US at a time. What are the odds Dr Oz does­n’t put those loca­tion-based mass enroll­ment poli­cies back in place?

    That’s the hor­rif­ic stealth trend already play­ing out in the Medicare sec­tor. A trend that is almost guar­an­teed to explode under the ‘Dr Oz’ era of Medicare. But as we’re also going to see, there’s an addi­tion­al dark twist to this sto­ry: while a large num­ber of these DCEs are health­care behe­moths like Unit­ed­Health, the pri­vate-equi­ty indus­try has also been aggres­sive­ly mov­ing into this space. And as we’ve seen, if there’s one thing we can be con­fi­dent of when the pri­vate-equi­ty indus­try moves into a sec­tor it’s that the qual­i­ty of ser­vices will decline, like­ly pre­cip­i­tous­ly. It’s a busi­ness mod­el based on lever­age debt and cut­ting costs as much as pos­si­ble, after all. So if you though Unit­ed­Health was a mer­ci­less enti­ty with its life-and-death for-prof­it pow­ers, get ready for pri­vate-equi­ty.

    That’s all part of the grim con­text of the Unit­ed­Health assas­si­na­tion sto­ry: we can be con­fi­dent the shoot­er isn’t going to be shoot­ing any­one else any­time soon. But when it comes to the ques­tion of whether or not we should expect copy­cat killings now that ‘the cat is out of the bag’ when it comes to the tar­get­ing of health­care CEOs, it seems like the big ques­tion is less whether or not we’re going to see more shoot­ings of this nature and more a ques­tion of whether or not the next shoot­er is a retiree forced off their Medicare:

    4sightHealth

    From Ben­e­fit to Busi­ness: Did Medicare Pri­va­ti­za­tion Lead to Mur­der?

    by David Bur­da
    Decem­ber 11, 2024

    The brazen assas­si­na­tion of health­care insur­ance exec­u­tive Bri­an Thomp­son, CEO of Unit­ed­Health­care, has every­one com­ment­ing on the deep­er mean­ing of the public’s lack of empa­thy for his mur­der. Since I’m part of every­one, here’s my 2 cents: It’s the government’s fault.

    It’s the government’s fault because it pri­va­tized Medicare with the pas­sage of the Bal­anced Bud­get Act of 1997 when Bill Clin­ton was pres­i­dent. The BBA cre­at­ed Medicare Part C, which became the Medicare Advan­tage (MA) pro­gram. Medicare Advan­tage plans, which are run by com­mer­cial insur­ance com­pa­nies like Unit­ed under con­tract with the gov­ern­ment, have a two-part busi­ness mod­el: exag­ger­ate how sick their mem­bers are to inflate pay­ment rates from the gov­ern­ment, and min­i­mize how sick their mem­bers are to deny ben­e­fits, claims and cov­er­age.

    ...

    The gov­ern­ment pri­va­tizes gov­ern­ment pro­grams and ser­vices like Medicare because some­one in the gov­ern­ment — usu­al­ly many some­ones with ties to the pri­vate sec­tor that would ben­e­fit — thinks the pri­vate sec­tor can do the job bet­ter, faster and more effi­cient­ly than the gov­ern­ment. Maybe that’s true, but pri­va­ti­za­tion comes with big risks for tax­pay­ers who rely on those pro­grams and ser­vices. Unless the gov­ern­ment keeps a close eye on pri­vate com­pa­nies that take over gov­ern­ment pro­grams and ser­vices, the pri­vate com­pa­nies and their busi­ness­peo­ple are going to do their thing to max­i­mize prof­its. Those things usu­al­ly don’t ben­e­fit tax­pay­ers, cus­tomers or con­sumers.

    Hey, we’ll give you a free health club mem­ber­ship! But sor­ry, we won’t cov­er your life-sav­ing med­ica­tion.

    The crazy thing is every­one knows that. But the gov­ern­ment prod­ded by spe­cial inter­ests keeps doing it any­way. You can expect more of that under the upcom­ing Trump admin­is­tra­tion.

    That’s a long walk around the block to argue that the gov­ern­ment is respon­si­ble for Thompson’s death, assum­ing his killer was mak­ing a state­ment about United’s claims-pay­ing busi­ness prac­tices. The feds’ fail­ure to pro­tect con­sumers from the dan­gers of Medicare pri­va­ti­za­tion is to blame.

    Pri­va­ti­za­tion is dead­ly with­out ade­quate con­sumer pro­tec­tions.

    ————

    “From Ben­e­fit to Busi­ness: Did Medicare Pri­va­ti­za­tion Lead to Mur­der?” by David Bur­da; 4sightHealth; 12/11/2024

    “Pri­va­ti­za­tion is dead­ly with­out ade­quate con­sumer pro­tec­tions.”

    Pri­va­ti­za­tion kills. At least when it’s the pri­va­ti­za­tion of ser­vices with life and death con­se­quences attached. It’s a les­son Amer­i­cans have learned in one sec­tor of the econ­o­my after anoth­er in recent decades but no sec­tor makes this clear­er than health care. And while it’s unclear if Lui­gi Man­gione was at all ani­mat­ed over anger over the pri­va­ti­za­tion of Medicare, it’s Medicare that is cur­rent­ly fac­ing the great­est risk of a new round of mass pri­va­ti­za­tion. If COVID did­n’t kill off grand­ma and grand­pa, the prof­it-motive should do the trick this time. We don’t yet know how this process is going to play out under the Trump admin­is­tra­tion. But we know it’s going to hap­pen. And peo­ple are going to die as a result. With for-prof­it health care investors mak­ing more and more mon­ey as a result. That’s the social pow­derkeg still sit­ting there after Unit­ed­Health shoot­ing. A grow­ing pow­derkeg wait­ing for the right spark:

    ...
    It’s the government’s fault because it pri­va­tized Medicare with the pas­sage of the Bal­anced Bud­get Act of 1997 when Bill Clin­ton was pres­i­dent. The BBA cre­at­ed Medicare Part C, which became the Medicare Advan­tage (MA) pro­gram. Medicare Advan­tage plans, which are run by com­mer­cial insur­ance com­pa­nies like Unit­ed under con­tract with the gov­ern­ment, have a two-part busi­ness mod­el: exag­ger­ate how sick their mem­bers are to inflate pay­ment rates from the gov­ern­ment, and min­i­mize how sick their mem­bers are to deny ben­e­fits, claims and cov­er­age.

    ...

    Hey, we’ll give you a free health club mem­ber­ship! But sor­ry, we won’t cov­er your life-sav­ing med­ica­tion.

    The crazy thing is every­one knows that. But the gov­ern­ment prod­ded by spe­cial inter­ests keeps doing it any­way. You can expect more of that under the upcom­ing Trump admin­is­tra­tion.

    That’s a long walk around the block to argue that the gov­ern­ment is respon­si­ble for Thompson’s death, assum­ing his killer was mak­ing a state­ment about United’s claims-pay­ing busi­ness prac­tices. The feds’ fail­ure to pro­tect con­sumers from the dan­gers of Medicare pri­va­ti­za­tion is to blame.
    ...

    And that grow­ing socioe­co­nom­ic pow­derkeg brings us to Don­ald Trump’s pro-Medicare-pri­va­ti­za­tion pick to lead the Cen­ters for Medicare and Med­ic­aid Ser­vices (CMS): Dr Oz. Not only did Oz call for expand­ing the pri­va­tized Medicare Advan­tage plans dur­ing his Sen­ate run back in 2022, but he called for mov­ing ALL seniors from Medicare to Medicare Advan­tage back in 2020. And now he’s set to man­age Medicare.

    It also appears Dr Oz’s stock own­er­ship has cre­at­ed some con­cerns about a con­flict of inter­est as this Medicare pri­va­ti­za­tion process plays out. Because it turns out that, as of his 2022 sen­ate run, Oz owned more thant $550,000 in Unit­ed­Health stock. And Unit­ed­Health hap­pens to be the largest pri­vate insur­er in Medicare Advan­tage:

    NBC News

    Democ­rats demand answers from Trump pick Mehmet Oz on ‘Medicare pri­va­ti­za­tion’

    In a new let­ter, sev­en Demo­c­ra­t­ic law­mak­ers probed “Dr. Oz” on his past sup­port for putting all seniors in Medicare Advan­tage and ques­tioned whether he has con­flicts of inter­est.

    Dec. 10, 2024, 3:00 PM UTC
    By Sahil Kapur

    WASHINGTON — Key Demo­c­ra­t­ic sen­a­tors are demand­ing answers from Mehmet Oz on his “pre­vi­ous advo­ca­cy for Medicare pri­va­ti­za­tion,” refer­ring to his call in 2020 for putting all seniorss into pri­vate insur­ance plans under Medicare Advan­tage.

    They’re seek­ing clar­i­ty from the physi­cian and TV per­son­al­i­ty known as “Dr. Oz” in a let­ter Tues­day, led by Sen. Eliz­a­beth War­ren, D‑Mass., after Pres­i­dent-elect Don­ald Trump picked him to run the Cen­ters for Medicare and Med­ic­aid Ser­vices (CMS).

    “In the wake of that nom­i­na­tion, we write regard­ing our con­cerns about your advo­ca­cy for the elim­i­na­tion of Tra­di­tion­al Medicare and your deep finan­cial ties to pri­vate health insur­ers,” reads the let­ter, which was first obtained by NBC News.

    ...

    The Finance Com­mit­tee over­sees the CMS nom­i­na­tion and its mem­bers, which include War­ren, will get to ques­tion Oz. The let­ter serves as a pre­view of what Oz will face dur­ing the con­fir­ma­tion process, at least from Democ­rats. Repub­li­cans will hold a 53–47 seat major­i­ty and need 50 sen­a­tors to con­firm a nom­i­na­tion, mean­ing Democ­rats could­n’t derail the pick with­out per­suad­ing at least four Repub­li­cans to vote against him.

    The Democ­rats referred to a 2020 opin­ion piece that Oz co-wrote call­ing for putting all Amer­i­cans into Medicare Advan­tage, effec­tive­ly replac­ing the tra­di­tion­al Medicare pro­gram in which the gov­ern­ment direct­ly insures Amer­i­cans 65 and old­er in tan­dem with pri­vate insur­ance plans.

    “Indeed, pri­vate insur­ers that run the Medicare Advan­tage pro­gram dras­ti­cal­ly over­charge for care,” the sen­a­tors wrote, cit­ing analy­sis from the non­par­ti­san Medicare Pay­ment Advi­so­ry Com­mit­tee.

    In 2022, when Oz unsuc­cess­ful­ly ran for Sen­ate in Penn­syl­va­nia, he offered a more mod­est plat­form that didn’t call for end­ing tra­di­tion­al Medicare, although he main­tained his sup­port for boost­ing Medicare Advan­tage. “We can expand Medicare Advan­tage plans,” he wrote in an AARP ques­tion­naire, call­ing the plans “pop­u­lar among seniors” and argu­ing they “pro­vide qual­i­ty care” with the right cost incen­tives.

    ...

    “Your advo­ca­cy for elim­i­nat­ing the Tra­di­tion­al Medicare pro­gram and replac­ing it with Medicare Advan­tage also rais­es ques­tions about your own finan­cial con­flicts of inter­est,” the Democ­rats wrote in the let­ter. “In your finan­cial dis­clo­sures from your 2022 Sen­ate run, you report­ed own­ing over $550,000 of stock in Unit­ed­Health, the largest pri­vate insur­er in Medicare Advan­tage and largest employ­er of physi­cians in the nation.”

    “The com­pa­ny is cur­rent­ly under a sprawl­ing antitrust inves­ti­ga­tion by the Depart­ment of Jus­tice — includ­ing for its role in aggres­sive­ly upcod­ing Medicare Advan­tage enrollees to secure high­er pay­ments from CMS — and has been sued on mul­ti­ple occa­sions for Medicare fraud. Under your plan, UnitedHealth’s rev­enue from Medicare Advan­tage would rough­ly dou­ble to $274 bil­lion annu­al­ly.

    Unit­ed­Health­care CEO Bri­an Thomp­son was killed last week in a shoot­ing that has cap­tured the nation’s atten­tion.

    The Demo­c­ra­t­ic law­mak­ers asked Oz a series of ques­tions, includ­ing whether he’ll “con­tin­ue to sup­port poli­cies that would elim­i­nate Tra­di­tion­al Medicare” if con­firmed to lead CMS and whether he’ll “com­mit to oppos­ing any and all efforts to pri­va­tize or cut Medicare.”

    They also asked if he’ll “com­mit to ful­ly divest­ing of any and all finan­cial hold­ings relat­ed to the insur­ance indus­try if you are con­firmed as Admin­is­tra­tor.”

    Trump’s tran­si­tion team did­n’t imme­di­ate­ly return a request for com­ment.

    ————-

    “Democ­rats demand answers from Trump pick Mehmet Oz on ‘Medicare pri­va­ti­za­tion’ ” by Sahil Kapur; NBC News; 12/10/2024

    “The Democ­rats referred to a 2020 opin­ion piece that Oz co-wrote call­ing for putting all Amer­i­cans into Medicare Advan­tage, effec­tive­ly replac­ing the tra­di­tion­al Medicare pro­gram in which the gov­ern­ment direct­ly insures Amer­i­cans 65 and old­er in tan­dem with pri­vate insur­ance plans.”

    Is Dr Oz still an pro­po­nent of mov­ing all seniors onto Medicare Advan­tage? Either way, it seems high­ly like­ly he’s going to take steps to expand Medicare Advan­tage like he pro­posed in 2022. Much to the ben­e­fit of Unit­ed­Health and the oth­er major play­ers in this space. And yes, Unit­ed­Health is cur­rent­ly fac­ing inves­ti­ga­tions for antitrust vio­la­tions as well as aggres­sive­ly upcod­ing Medicare Advan­tage enrollees to secure high­er pay­ments. But that’s not the kind of thing that’s going to pre­vent the com­pa­ny from mak­ing hun­dreds of bil­lions of dol­lars more in prof­it as the Medicare Advan­tage expan­sions play out. Which, again, is part of the con­text of the Lui­gi Man­gione plot: com­pa­nies like Unit­ed­Health real­ly can oper­ate with de fac­to impuni­ty. Sure, maybe there’s a fine here and there. But that’s just the cost of doing busi­ness. A wild­ly prof­itable busi­ness, where the less health­care deliv­ered the high­er the prof­its:

    ...
    In 2022, when Oz unsuc­cess­ful­ly ran for Sen­ate in Penn­syl­va­nia, he offered a more mod­est plat­form that didn’t call for end­ing tra­di­tion­al Medicare, although he main­tained his sup­port for boost­ing Medicare Advan­tage. “We can expand Medicare Advan­tage plans,” he wrote in an AARP ques­tion­naire, call­ing the plans “pop­u­lar among seniors” and argu­ing they “pro­vide qual­i­ty care” with the right cost incen­tives.

    ...

    “Your advo­ca­cy for elim­i­nat­ing the Tra­di­tion­al Medicare pro­gram and replac­ing it with Medicare Advan­tage also rais­es ques­tions about your own finan­cial con­flicts of inter­est,” the Democ­rats wrote in the let­ter. “In your finan­cial dis­clo­sures from your 2022 Sen­ate run, you report­ed own­ing over $550,000 of stock in Unit­ed­Health, the largest pri­vate insur­er in Medicare Advan­tage and largest employ­er of physi­cians in the nation.”

    “The com­pa­ny is cur­rent­ly under a sprawl­ing antitrust inves­ti­ga­tion by the Depart­ment of Jus­tice — includ­ing for its role in aggres­sive­ly upcod­ing Medicare Advan­tage enrollees to secure high­er pay­ments from CMS — and has been sued on mul­ti­ple occa­sions for Medicare fraud. Under your plan, UnitedHealth’s rev­enue from Medicare Advan­tage would rough­ly dou­ble to $274 bil­lion annu­al­ly.

    ...

    They also asked if he’ll “com­mit to ful­ly divest­ing of any and all finan­cial hold­ings relat­ed to the insur­ance indus­try if you are con­firmed as Admin­is­tra­tor.”

    Trump’s tran­si­tion team did­n’t imme­di­ate­ly return a request for com­ment.
    ...

    And as the fol­low­ing Jacobin piece from 2022 reminds us, the com­ing pri­va­ti­za­tion of Medicare isn’t a process that’s going to sud­den­ly start under a sec­ond Trump term. It’s already start­ed under the Biden admin­is­tra­tion, with patients some­times get­ting switched to Medicare Advan­tage plans with­out their con­sent. So while the forced move of every­one off of Medicare onto Medicare Advan­tage plans may not hap­pen all at once, don’t be sur­prise to find out it even­tu­al­ly hap­pens slow­ly, with­out con­sent, and with­out every­one real­iz­ing what hap­pened. And with Unit­ed­Health as one of the biggest play­ers in this DCE mar­ket, also try not to be sur­prised to dis­cov­er that Unit­ed­Health was one of the biggest ben­e­fi­cia­ries of this ongo­ing stealth pri­va­ti­za­tion scheme:

    Jacobin

    The Stealth Pri­va­ti­za­tion of Medicare Is a Big Boon to Wall Street

    The Biden admin­is­tra­tion recent­ly expand­ed on Don­ald Trump’s efforts to pri­va­tize Medicare. Now patients are being assigned to new pri­vate plans with­out their con­sent, and pri­vate equi­ty firms and major health care com­pa­nies are the ones prof­it­ing.

    By Matthew Cun­ning­ham-Cook
    05.11.2022

    The Joe Biden administration’s recent entrench­ment and expan­sion of the Don­ald Trump administration’s efforts to pri­va­tize Medicare is help­ing a shad­owy set of big-busi­ness ben­e­fi­cia­ries: pri­vate equi­ty firms and major health care com­pa­nies, includ­ing one that pre­vi­ous­ly employed the gov­ern­ment offi­cial over­see­ing the pri­va­ti­za­tion plan, a new analy­sis from us shows.

    In April last year, the Biden admin­is­tra­tion con­tract­ed with fifty-three third-par­ty com­pa­nies to man­date pri­va­tized health care plans through Medicare. The result­ing health care options are effec­tive­ly Medicare Advan­tage plans, or pri­vate cov­er­age offered through the nation­al health insur­ance pro­gram for seniors and peo­ple with dis­abil­i­ties — but with one wrin­kle: Patients are being assigned to these new plans with­out their con­sent.

    The fifty-three par­tic­i­pat­ing com­pa­nies — called “direct con­tract­ing enti­ties,” or DCEs — are allowed to offer ben­e­fits beyond tra­di­tion­al Medicare, like gym mem­ber­ship cov­er­age. But as for-prof­it busi­ness­es that receive a set pay­ment from Medicare no mat­ter how much care they approve, these DCEs are incen­tivized to lim­it the care that patients receive, espe­cial­ly when they are very sick. The first DCEs were launched by Pres­i­dent Don­ald Trump in 2019, and so far, at least 350,000 seniors have already been moved onto these pri­va­tized Medicare plans.

    Now, a new analy­sis by us of the fifty-three DCEs found addi­tion­al cause for con­cern: fif­teen of these enti­ties, or slight­ly more than a quar­ter, are backed by pri­vate equi­ty firms, which are known for extract­ing prof­its at the expense of work­ers, the envi­ron­ment, and even their own pen­sion fund investors. The firms include big-name firms like the Car­lyle Group, Gen­er­al Atlantic, Clay­ton, Dubili­er & Rice, Bench­mark Cap­i­tal, and War­burg Pin­cus. What’s more, anoth­er fif­teen DCEs are linked to big health care com­pa­nies — includ­ing one with a direct con­nec­tion to the Biden appointee in charge of the new pri­va­tized Medicare scheme.

    Wall Street’s encroach­ment into Medicare is the lat­est exam­ple of pri­vate equity’s aggres­sive expan­sion into health care, which has ranged from hos­pi­tals to ER doc­tor groups. In 2021, pri­vate equi­ty man­agers deployed $172 bil­lion in cap­i­tal in the health care sec­tor — near­ly four times the total bud­get of the Nation­al Insti­tutes of Health.

    Biden him­self has lam­bast­ed the for-prof­it industry’s takeover of elder­care ser­vices, not­ing dur­ing his State of the Union address in March: “As Wall Street firms take over more nurs­ing homes, qual­i­ty in those homes has gone down and costs have gone up. That ends on my watch.”

    Biden appar­ent­ly doesn’t have the same con­cerns about Wall Street’s grow­ing role in Medicare — a devel­op­ment that could lead to high­er med­ical bills for patients. The finan­cial indus­try has already demon­strat­ed its will­ing­ness to take a force­ful approach to gen­er­at­ing health care prof­its; pri­vate equi­ty waged an aggres­sive cam­paign to derail leg­is­la­tion designed to stop so-called “sur­prise” med­ical bills, which formed a sig­nif­i­cant part of their hos­pi­tal staffing firms’ bot­tom line.

    Now, as pri­vate equi­ty mus­cles into pri­va­tized Medicare, indus­try lob­by­ists are like­ly to push for more gen­er­ous pay­ment struc­tures that ben­e­fit for-prof­it firms at the expense of Medicare patients. The Medicare Pay­ment Advi­so­ry Com­mis­sion, an inde­pen­dent body that advis­es Con­gress on Medicare, hint­ed at this sce­nario while dis­cussing pri­vate equity’s role in the Medicare Advan­tage space at an April 2021 hear­ing.

    “The end result might or might not be bet­ter for con­sumers, but I think that it does have an impact on Medicare pay­ment pol­i­cy,” said com­mis­sion­er Pat Wang.

    ...

    “We have lots of evi­dence from many oth­er sit­u­a­tions in which pri­vate equi­ty puts prof­its before patients,” said Eileen Appel­baum, codi­rec­tor of the Cen­ter for Eco­nom­ic and Pol­i­cy Research and coau­thor of Pri­vate Equi­ty at Work: When Wall Street Man­ages Main Street. “They are look­ing for a place where it’s easy to make mon­ey — and it’s easy to make mon­ey when it’s the tax­pay­er foot­ing the bill.”

    Big Play­ers, Big Prof­its, and a Big Con­flict

    While the DCE pro­gram was launched under Pres­i­dent Trump, Biden expand­ed the effort in Feb­ru­ary under a new name: the Account­able Care Orga­ni­za­tion Real­iz­ing Equi­ty, Access, and Com­mu­ni­ty Health pro­gram, or “ACO REACH.” Now, hos­pi­tal-backed for-prof­it health ben­e­fit pro­grams are also allowed to auto­mat­i­cal­ly enroll Medicare patients into their health care plans.

    Like providers of Medicare Advan­tage plans, these new firms receive a set pay­ment from Medicare for their offer­ings, sup­pos­ed­ly to incen­tivize more holis­tic and bet­ter care. In exchange, these firms acquire Medicare patients in their plans — often with­out the patients real­iz­ing what is hap­pen­ing.

    In March, we report­ed on how one Medicare ben­e­fi­cia­ry who was qui­et­ly assigned to a DCE ini­tial­ly mis­in­ter­pret­ed a mes­sage she received about the shift as a health-relat­ed com­mu­ni­ca­tion from her doc­tor — despite being an expe­ri­enced health pol­i­cy expert.

    Along with the fif­teen pri­vate equi­ty-backed com­pa­nies, the list of approved DCEs the Biden admin­is­tra­tion released in April 2021 includes fif­teen oper­a­tions owned by health care giants, such as insur­ers Humana, Unit­ed­Health, and Anthem, the phar­ma­cy chain Wal­greens, and the dial­y­sis provider DaVi­ta.

    Experts say these con­nec­tions raise seri­ous ques­tions about con­flicts of inter­est. For exam­ple, the DCE pro­gram is being led by a lit­tle-known fed­er­al enti­ty, the Cen­ters for Medicare & Med­ic­aid Ser­vices’ (CMS) Inno­va­tion Cen­ter, head­ed by Liz Fowler — the for­mer vice pres­i­dent of pub­lic pol­i­cy for the insur­er Well­Point, now known as Anthem.

    In response to our request for com­ment, a CMS spokesper­son said that Fowler was not involved in the approval process for DCEs. They addi­tion­al­ly assert­ed that many of the enti­ties iden­ti­fied by us are not pri­vate equity–backed because they are pub­lic com­pa­nies.

    But sev­er­al of these pub­lic com­pa­nies have received sub­stan­tial invest­ments from pri­vate equi­ty firms, also known as “pri­vate invest­ment in pub­lic equi­ty.” For exam­ple, while 1LifeHealthcare — a pri­ma­ry care provider that owns one of the DCEs, One Medical’s Iora Health — is pub­licly trad­ed, the major pri­vate equi­ty firm Car­lyle Group owns more than 7 per­cent of its shares.

    ...

    “Hon­est­ly this just seems to add to the pat­tern we’ve observed with Liz Fowler,” said Fatou Ndi­aye, a research assis­tant with the Revolv­ing Door Project, which mon­i­tors the revolv­ing door between the pub­lic and pri­vate sec­tor.

    Ndi­aye point­ed out that before she lob­bied for Well­Point, Fowler worked for Sen­a­tor Max Bau­cus (D‑MT), where she helped draft Medicare Part D, a pro­gram crit­ics said was a huge give­away to the phar­ma­ceu­ti­cal indus­try because it cre­at­ed mas­sive new drug ben­e­fits with­out con­trol­ling prices.

    After work­ing for Well­point from 2006 to 2008, Fowler rejoined Baucus’s staff, w8here she helped draft a ver­sion of the Afford­able Care Act (ACA) that exclud­ed the pub­lic health insur­ance option promised by Democ­rats, result­ing in huge prof­its and no pub­lic sec­tor com­pe­ti­tion for pri­vate insur­ers.

    “A year after [ACA’s] pas­sage, Wellpoint’s prof­its increased by 91 per­cent to $2.3 bil­lion,” said Ndi­aye.

    Pri­vate Equi­ty Mus­cles In

    The fact that pri­vate equi­ty now backs more than a quar­ter of all com­pa­nies in the DCE space stands in stark con­trast to the fact that pri­vate equi­ty owns just 2 per­cent of all for-prof­it Medicare Advan­tage pro­grams.

    While Medicare Advan­tage options have been crit­i­cized by health advo­cates because of their extreme­ly <a href=“https://www.kff.org/medicare/issue-brief/higher-and-faster-growing-spending-per-medicare-advantage-enrollee-adds-to-medicares-solvency-and-affordability-challenges/”>high costs, the fact that pri­vate equi­ty is focus­ing its atten­tion on this new kind of non­vol­un­tary pri­va­tized Medicare scheme sug­gests that Fowler and the Biden admin­is­tra­tion could be set­ting the stage for sub­stan­tial­ly larg­er pri­vate equi­ty involve­ment in the nation­al health insur­ance pro­gram.

    Exam­ples abound of prob­lems aris­ing when pri­vate equi­ty takes over health care oper­a­tions. Just last month, Buz­zfeed News report­ed that Bright­Spring, a group home oper­a­tor acquired by pri­vate equi­ty megafirm KKR in 2019, has since been plagued by seri­ous prob­lems at its group homes for peo­ple with dis­abil­i­ties, lead­ing to res­i­dents being seri­ous­ly injured and in some cas­es dying.

    ...

    Oth­er pri­vate equity–backed oper­a­tions approved for the new DCE pro­gram have major con­nec­tions to the Demo­c­ra­t­ic Par­ty estab­lish­ment. The pri­vate equi­ty firm War­burg Pin­cus, which backs a DCE called Excel­era, was cofound­ed by the father of cur­rent sec­re­tary of state Antony Blinken and boasts for­mer Barack Oba­ma trea­sury sec­re­tary Tim Gei­th­n­er as its pres­i­dent.

    Lau­ra Katz Olson, a pro­fes­sor at Lehigh Uni­ver­si­ty and author of the recent­ly pub­lished Eth­i­cal­ly Chal­lenged: Pri­vate Equi­ty Storms US Health Care, said that pri­vate equity’s role in Medicare pri­va­ti­za­tion rais­es sig­nif­i­cant con­cerns.

    “If you under­stand the pri­vate equi­ty play­book, the dan­gers are fair­ly obvi­ous,” said Katz Olson. “They’re bor­row­ing mon­ey so they have to pay off debt. They’re tak­ing mon­ey into their pock­ets through fees. You would have to be a magi­cian to keep up qual­i­ty of care doing all of these things.”

    She added, “Pri­vate equi­ty is bad for health care, peri­od, so I can’t imag­ine that it would be good for Medicare Advan­tage. I’m actu­al­ly in a state of sur­prise that they’re even think­ing about it.”

    ———–

    “The Stealth Pri­va­ti­za­tion of Medicare Is a Big Boon to Wall Street” By Matthew Cun­ning­ham-Cook; Jacobin; 05/11/2022

    “In April last year, the Biden admin­is­tra­tion con­tract­ed with fifty-three third-par­ty com­pa­nies to man­date pri­va­tized health care plans through Medicare. The result­ing health care options are effec­tive­ly Medicare Advan­tage plans, or pri­vate cov­er­age offered through the nation­al health insur­ance pro­gram for seniors and peo­ple with dis­abil­i­ties — but with one wrin­kle: Patients are being assigned to these new plans with­out their con­sent.

    That’s quite a wrin­kle: patients are get­ting switched to these pri­vate plans with­out their con­sent. That’s appar­ent­ly legal now after the Biden admin­is­tra­tion con­tract­ed with 53 third-par­ty com­pa­nies to man­age these plans. Which are effec­tive­ly Medicare Advan­tage plans even if they aren’t tech­ni­cal­ly called that. It’s all part of a process that was start­ed under Trump’s first term but got a boost under Biden. The trend is clear: Medicare is anoth­er Wall Street prof­it-cen­ter. Prof­its that can only real­is­ti­cal­ly be achieved through the with­hold­ing of as much care as pos­si­ble:

    ...
    The fifty-three par­tic­i­pat­ing com­pa­nies — called “direct con­tract­ing enti­ties,” or DCEs — are allowed to offer ben­e­fits beyond tra­di­tion­al Medicare, like gym mem­ber­ship cov­er­age. But as for-prof­it busi­ness­es that receive a set pay­ment from Medicare no mat­ter how much care they approve, these DCEs are incen­tivized to lim­it the care that patients receive, espe­cial­ly when they are very sick. The first DCEs were launched by Pres­i­dent Don­ald Trump in 2019, and so far, at least 350,000 seniors have already been moved onto these pri­va­tized Medicare plans.

    ...

    Biden him­self has lam­bast­ed the for-prof­it industry’s takeover of elder­care ser­vices, not­ing dur­ing his State of the Union address in March: “As Wall Street firms take over more nurs­ing homes, qual­i­ty in those homes has gone down and costs have gone up. That ends on my watch.”

    Biden appar­ent­ly doesn’t have the same con­cerns about Wall Street’s grow­ing role in Medicare — a devel­op­ment that could lead to high­er med­ical bills for patients. The finan­cial indus­try has already demon­strat­ed its will­ing­ness to take a force­ful approach to gen­er­at­ing health care prof­its; pri­vate equi­ty waged an aggres­sive cam­paign to derail leg­is­la­tion designed to stop so-called “sur­prise” med­ical bills, which formed a sig­nif­i­cant part of their hos­pi­tal staffing firms’ bot­tom line.

    ...

    While the DCE pro­gram was launched under Pres­i­dent Trump, Biden expand­ed the effort in Feb­ru­ary under a new name: the Account­able Care Orga­ni­za­tion Real­iz­ing Equi­ty, Access, and Com­mu­ni­ty Health pro­gram, or “ACO REACH.” Now, hos­pi­tal-backed for-prof­it health ben­e­fit pro­grams are also allowed to auto­mat­i­cal­ly enroll Medicare patients into their health care plans.

    Like providers of Medicare Advan­tage plans, these new firms receive a set pay­ment from Medicare for their offer­ings, sup­pos­ed­ly to incen­tivize more holis­tic and bet­ter care. In exchange, these firms acquire Medicare patients in their plans — often with­out the patients real­iz­ing what is hap­pen­ing.
    ...

    And as we should expect, it’s pri­vate-equi­ty, the sec­tor noto­ri­ous for utter­ly ruth­less prof­it-at-all-costs busi­ness mod­els, play­ing a major role in this new “direct con­tract­ing enti­ties” pri­va­tized Medicare mar­ket. It’s not a mys­tery regard­ing what to expect. Every­one knows what’s going to hap­pen. Every­one, except maybe the patients who were unwit­ting­ly shift­ed to these new plans:

    ...
    Now, a new analy­sis by us of the fifty-three DCEs found addi­tion­al cause for con­cern: fif­teen of these enti­ties, or slight­ly more than a quar­ter, are backed by pri­vate equi­ty firms, which are known for extract­ing prof­its at the expense of work­ers, the envi­ron­ment, and even their own pen­sion fund investors. The firms include big-name firms like the Car­lyle Group, Gen­er­al Atlantic, Clay­ton, Dubili­er & Rice, Bench­mark Cap­i­tal, and War­burg Pin­cus. What’s more, anoth­er fif­teen DCEs are linked to big health care com­pa­nies — includ­ing one with a direct con­nec­tion to the Biden appointee in charge of the new pri­va­tized Medicare scheme.

    Wall Street’s encroach­ment into Medicare is the lat­est exam­ple of pri­vate equity’s aggres­sive expan­sion into health care, which has ranged from hos­pi­tals to ER doc­tor groups. In 2021, pri­vate equi­ty man­agers deployed $172 bil­lion in cap­i­tal in the health care sec­tor — near­ly four times the total bud­get of the Nation­al Insti­tutes of Health.

    ...

    The fact that pri­vate equi­ty now backs more than a quar­ter of all com­pa­nies in the DCE space stands in stark con­trast to the fact that pri­vate equi­ty owns just 2 per­cent of all for-prof­it Medicare Advan­tage pro­grams.

    While Medicare Advan­tage options have been crit­i­cized by health advo­cates because of their extreme­ly <a href=“https://www.kff.org/medicare/issue-brief/higher-and-faster-growing-spending-per-medicare-advantage-enrollee-adds-to-medicares-solvency-and-affordability-challenges/”>high costs, the fact that pri­vate equi­ty is focus­ing its atten­tion on this new kind of non­vol­un­tary pri­va­tized Medicare scheme sug­gests that Fowler and the Biden admin­is­tra­tion could be set­ting the stage for sub­stan­tial­ly larg­er pri­vate equi­ty involve­ment in the nation­al health insur­ance pro­gram.
    ...

    And final­ly, of course, we find the health insur­ance giants like Unit­ed­Health are also major play­ers in this new DCE mar­ket, which has raised fur­ther con­flict of inter­est con­cerns giv­en the fact that this DCE mar­ket is being led by the Cen­ters for Medicare & Med­ic­aid Ser­vices’ (CMS) Inno­va­tion Cen­ter, head­ed under Biden by Liz Fowler, some­one appar­ent­ly wide­ly seen as a health insur­ance indus­try crony. Yes, Fowler is pre­sum­ably going to be replaced by Trump. And pre­sum­ably with some­one even more cor­rupt:

    ...
    Along with the fif­teen pri­vate equi­ty-backed com­pa­nies, the list of approved DCEs the Biden admin­is­tra­tion released in April 2021 includes fif­teen oper­a­tions owned by health care giants, such as insur­ers Humana, Unit­ed­Health, and Anthem, the phar­ma­cy chain Wal­greens, and the dial­y­sis provider DaVi­ta.

    Experts say these con­nec­tions raise seri­ous ques­tions about con­flicts of inter­est. For exam­ple, the DCE pro­gram is being led by a lit­tle-known fed­er­al enti­ty, the Cen­ters for Medicare & Med­ic­aid Ser­vices’ (CMS) Inno­va­tion Cen­ter, head­ed by Liz Fowler — the for­mer vice pres­i­dent of pub­lic pol­i­cy for the insur­er Well­Point, now known as Anthem.

    In response to our request for com­ment, a CMS spokesper­son said that Fowler was not involved in the approval process for DCEs. They addi­tion­al­ly assert­ed that many of the enti­ties iden­ti­fied by us are not pri­vate equity–backed because they are pub­lic com­pa­nies.

    But sev­er­al of these pub­lic com­pa­nies have received sub­stan­tial invest­ments from pri­vate equi­ty firms, also known as “pri­vate invest­ment in pub­lic equi­ty.” For exam­ple, while 1LifeHealthcare — a pri­ma­ry care provider that owns one of the DCEs, One Medical’s Iora Health — is pub­licly trad­ed, the major pri­vate equi­ty firm Car­lyle Group owns more than 7 per­cent of its shares.

    ...

    “Hon­est­ly this just seems to add to the pat­tern we’ve observed with Liz Fowler,” said Fatou Ndi­aye, a research assis­tant with the Revolv­ing Door Project, which mon­i­tors the revolv­ing door between the pub­lic and pri­vate sec­tor.

    Ndi­aye point­ed out that before she lob­bied for Well­Point, Fowler worked for Sen­a­tor Max Bau­cus (D‑MT), where she helped draft Medicare Part D, a pro­gram crit­ics said was a huge give­away to the phar­ma­ceu­ti­cal indus­try because it cre­at­ed mas­sive new drug ben­e­fits with­out con­trol­ling prices.

    After work­ing for Well­point from 2006 to 2008, Fowler rejoined Baucus’s staff, w8here she helped draft a ver­sion of the Afford­able Care Act (ACA) that exclud­ed the pub­lic health insur­ance option promised by Democ­rats, result­ing in huge prof­its and no pub­lic sec­tor com­pe­ti­tion for pri­vate insur­ers.

    “A year after [ACA’s] pas­sage, Wellpoint’s prof­its increased by 91 per­cent to $2.3 bil­lion,” said Ndi­aye.
    ...

    It’s hard to imag­ine the health­care sec­tor isn’t going to be get­ting every­thing it pos­si­ble could want from a Trump admin­is­tra­tion, and then some. It’s an awful sit­u­a­tion that’s only get­ting worse. An awful, wors­en­ing, life and death sit­u­a­tion that’s going to make a few peo­ple A LOT of mon­ey. Not a great sta­tus quo when it comes to copy­cat revenge assas­si­na­tions.

    Posted by Pterrafractyl | December 16, 2024, 7:48 pm
  34. It’s starts with the mass fir­ings. But it’s not end­ing there. The evis­cer­a­tion of the US fed­er­al gov­ern­ment isn’t just about Don­ald Trump inflict­ing his vengeance on the fed­er­al bureau­cra­cy. Pri­va­ti­za­tion is the end goal. Pri­va­ti­za­tion and mas­sive prof­its.

    It’s already hap­pen­ing. At least the pri­va­ti­za­tion chat­ter has already begun. In some cas­es, like the Fed­er­al Avi­a­tion Admin­is­tra­tion (FAA), the pri­va­ti­za­tion chat­ter has come in the form of Elon Musk lend­ing some of his SpaceX employ­ees to the agency. The SpaceX employ­ees are now serv­ing as senior FAA advi­sors. At the same time, Musk’s Depart­ment of Gov­ern­ment Effi­cien­cy (DOGE) has engaged in the same kind of fir­ing spree that’s impact­ed the rest of the fed­er­al gov­ern­ment. Fir­ings that have report­ed­ly raised a num­ber of safe­ty issues. Like lay­offs from the legal teams tasked with keep­ing pilots of with crim­i­nal records or sub­stance abuse his­to­ries out of the cock­pit. And while we haven’t hard the Trump admin­is­tra­tion explic­it­ly announce plans to FAA yet, keep in mind that Trump did announce those FAA pri­va­ti­za­tion plans back in June of 2017 dur­ing his first term. It’s not hard to see what this is head­ing. Espe­cial­ly with the Her­itage Foun­da­tion — one of the key enti­ties behind Project 2025 — already open­ly behind the idea.

    And that brings us to the overt calls for mass pri­va­ti­za­tion that we’re already hear­ing. The pri­va­ti­za­tion of the US Postal Ser­vice. Like the FAA, plans to pri­va­tize the Postal Ser­vice is noth­ing new. That was the big con­cern after Trump select­ed Louis DeJoy to lead the agency dur­ing his first term, after all. Recall how, DeJoy was ini­tial­ly tapped by Trump to lead the postal ser­vice, his ‘mod­ern­iza­tion’ plan end­ed up erod­ing over­all ser­vice and seem­ing­ly set the postal ser­vice up for pri­va­ti­za­tion. And DeJoy — a long-time Repub­li­can mega-donor AND some­one with major invest­ments in the mail pro­cess­ing pri­vate con­trac­tor XPO Logis­tics — was pre­cise­ly the kind of per­son who stood to prof­it hand­some­ly from a pri­va­ti­za­tion of the postal ser­vice. Mail-in vot­ing, and things like the num­ber and loca­tion of postal drop box­es, was also direct­ly impact­ed by DeJoy’s mod­ern­iza­tion plan. DeJoy even made the still inex­plic­a­ble deci­sion to remove hun­dreds of mail-sort­ing machines — crit­i­cal for the time­ly process of all those mail-in votes — in the months lead­ing up to the 20220 elec­tion in key swing states.

    DeJoy was a loy­al Trump crony. And yet, as we’re going to see, he’s now be derid­ed by the Trump White House and Repub­li­cans as some sort of holdover from the Biden admin­is­tra­tion who is stand­ing in the way of Trump’s effi­cien­cy purge. At least that’s nar­ra­tive we’re hear­ing that appears to be serv­ing as the pre­text for the lat­est Trump admin­is­tra­tion pow­er grab: the dis­so­lu­tion of the US Postal Sys­tem’s board of gov­er­nors and the absorp­tion of the entire inde­pen­dent agency into the Com­merce Depart­ment. Keep in mind that the postal sys­tem’s board of gov­er­nors is bipar­ti­san and com­prised of nom­i­nees select­ed by the pres­i­dent and con­firmed by the sen­ate. In oth­er words, a few more checks and bal­ances are being tossed out the win­dow, in keep­ing with the Uni­tary Exec­u­tive the­o­ry that has been guid­ing the Trump admin­is­tra­tion’s actions to date. But the plans for the postal ser­vice aren’t lim­it­ed to a White House takeover. Trump is already open­ly talk­ing about pri­va­tiz­ing the whole thing.

    And, of course, the pri­va­ti­za­tion push isn’t going to end with the FAA and Postal Ser­vice. Pri­va­ti­za­tion is, in many respects, the ulti­mate ful­fill­ment of Project 2025. After all, undo­ing the dam­age done by Project 2025 is going to be exceed­ing­ly dif­fi­cult for agen­cies that are entire­ly dis­solved and hand­ed over to for-prof­it enti­ties. And this sec­ond Trump admin­is­tra­tion is very intent on doing as much irre­versible dam­age as pos­si­ble. Pri­va­ti­za­tion is the log­i­cal goal for both the short and long-term agen­da dri­ving these poli­cies.

    But that long-term agen­da isn’t just ide­o­log­i­cal. Mak­ing ungod­ly amounts of prof­it off the pub­lic’s back is a key goal too. And that brings us to the third arti­cle below about an extreme­ly unpleas­ant recent reminder of what the pub­lic can real­is­ti­cal­ly expect when crit­i­cal ser­vices are being han­dled by the for-prof­it sec­tor. Because as the arti­cle reminds us, the pri­vate sec­tor in the US today isn’t some sort of cap­i­tal­ist utopi­an ide­al. It’s a cor­po­rate land­scape dom­i­nat­ed by monop­o­lies and oli­gop­o­lies that have mas­tered the art of exploit­ing their mar­ket posi­tions to deliv­er as few ser­vices as pos­si­ble for the max­i­mum prof­it. Even when it comes to the ser­vice of man­u­fac­tur­ing and main­tain­ing firetrucks. Yes, it turns out the US’s munic­i­pal firetruck man­u­fac­tur­ing sec­tor has been cap­tured by a hand­ful of pri­vate-equi­ty firms oper­at­ing in prof­it-max­i­miza­tion mode. The kind of prof­it-max­i­miz­ing mode only an oli­gop­oly can man­age, where reduced avail­abil­i­ty of firetrucks and big delays in deliv­ers come hand in hand with extra-high prices. With bru­tal con­se­quences for the com­mu­ni­ties that find them­selves with­out the firetrucks they need. Com­mu­ni­ties like Los Ange­les. Yes, it turns out the his­toric LA fires were fueled, in part, by large num­bers of out-of-ser­vice firetrucks thanks to the pri­vate-equi­ty cap­ture of this sec­tor of the econ­o­my.

    It was­n’t always like this. There used to be a large num­ber of small man­u­fac­tur­ers who pro­vid­ed US com­mu­ni­ties with the firetrucks they need as a rea­son­able price. And the antitrust law are already on the books to address the cap­ture of key mar­ket by a hand­ful of play­ers. But just because laws are on the books does­n’t mean they are enforced. That’s also part of this sto­ry: unused anti-trust laws have ensure that one sec­tor of the US econ­o­my after anoth­er is now dom­i­nat­ed by a hand­ful of play­ers capa­ble to wield immense mar­ket pow­er for prof­it-max­i­miz­ing ends. It’s that oli­gop­o­lis­tic mod­ern US cor­po­rate sec­tor that is poised to now engorge itself on the buf­fet of fed­er­al ser­vices soon to be pri­va­tized under this admin­is­tra­tion:

    The Rolling Stone

    Trump and Elon’s ‘Point­less Blood­bath’ at the FAA Is Even Worse Than You Think

    The Trump admin­is­tra­tion fired sev­er­al FAA lawyers tasked with help­ing keep reck­less and drunk pilots out of the skies — and offi­cials are baf­fled

    By Asaw­in Sueb­saeng, Tim Dick­in­son, Andrew Perez
    Feb­ru­ary 21, 2025

    Late last week, just as Pres­i­dents’ Day week­end was start­ing, Don­ald Trump and Elon Musk purged hun­dreds of Fed­er­al Avi­a­tion Admin­is­tra­tion employ­ees — includ­ing mul­ti­ple lawyers whose job was to help pre­vent pilots with drug and alco­hol prob­lems from get­ting in the cock­pit, knowl­edge­able sources tell Rolling Stone.

    Accord­ing to a per­son famil­iar with the mat­ter and anoth­er source briefed on it, the mass job cuts at the FAA hit mul­ti­ple legal offices at the agency, which is part of the Depart­ment of Trans­porta­tion. Dif­fer­ent kinds of lawyers were abrupt­ly let go, blind­sid­ing numer­ous staffers and offi­cials who could not see much rhyme or rea­son to these dis­missals.

    ...

    Musk and his team at the so-called Depart­ment of Gov­ern­ment Effi­cien­cy (DOGE) have axed pro­ba­tion­ary employ­ees across the fed­er­al work­force, as part of Trump’s law­less clam­p­down. Such employ­ees are typ­i­cal­ly new hires, though they can also be long­time work­ers who received pro­mo­tions; either way, these work­ers have low­er work­place pro­tec­tions for a year, mak­ing them attrac­tive tar­gets for Trump’s brute-force strat­e­gy to shrink the gov­ern­ment.

    The Musk fir­ing offen­sive has already cre­at­ed sig­nif­i­cant prob­lems. Those axed includ­ed fed­er­al employ­ees respon­si­ble for nuclear weapons safe­ty and work­ers lead­ing the Agri­cul­ture Department’s response to the bird flu. (Those agen­cies have report­ed­ly attempt­ed to rehire the crit­i­cal employ­ees.)

    Regard­ing their FAA cuts, Musk and the Trump White House have tried to argue they skipped over any­one whose role might be con­sid­ered safe­ty-crit­i­cal. “It’s a bunch of bullsh it,” one cur­rent FAA work­er tells Rolling Stone. “The def­i­n­i­tion of ‘crit­i­cal’ can be fuc ked around with as much as they’d like. We were already an under­fund­ed and under­staffed agency.

    While air traf­fic con­trollers were sup­pos­ed­ly immune from the purge, some air traf­fic con­trol sup­port work­ers were ter­mi­nat­ed, the FAA work­er says. Rolling Stone sep­a­rate­ly spoke with a fired FAA employ­ee whose job involved ensur­ing flight paths account for haz­ards like cranes and new build­ings, as well as anoth­er ter­mi­nat­ed FAA staffer who ensured that pilots are med­ical­ly able and cleared to fly. No one wants their plane to cross paths with a crane, of course, but the lat­ter role is impor­tant, too, giv­en the nation’s ongo­ing pilot short­age.

    One par­tic­u­lar­ly con­found­ing round of fir­ings last week — one that con­fused even agency per­son­nel who were antic­i­pat­ing a Trumpian blood­let­ting — includ­ed sev­er­al attor­neys who work to ensure that licensed pilots in the Unit­ed States aren’t putting the broad­er pub­lic in dan­ger or hid­ing crim­i­nal records, health con­cerns, or seri­ous addic­tions, accord­ing to the sources.

    ...

    Across the coun­try, the FAA employs just dozens of these types of lawyers who han­dle this kind of enforce­ment. Last week, Trump and Musk abrupt­ly got rid of sev­er­al of them, which some esti­mat­ed to be upwards of 10 per­cent of an already over­worked legal team. This was han­dled so chaot­i­cal­ly by the Trump admin­is­tra­tion and Musk’s DOGE that some of these fired lawyers’ boss­es were caught off guard entire­ly by the news.

    The ter­mi­nat­ed FAA staffer, who worked to med­ical­ly cer­ti­fy pilots, sim­i­lar­ly says their own fir­ing came as a sur­prise giv­en “all the avi­a­tion crash­es and things going on” — though they note that since Trump took office, “it’s just been one shit­storm after the oth­er.”

    ...

    Trans­porta­tion Sec­re­tary Sean Duffy, a for­mer Real World cast mem­ber, was booed at an event in Los Ange­les on Thurs­day as he attempt­ed to defend the mass fir­ings. Duffy said the fired employ­ees were pro­ba­tion­ary and thus “not the high­est-skilled of the FAA,” and that the depart­ment “exempt­ed peo­ple who work in crit­i­cal safe­ty posi­tions.” He added that if any­one argues the job cuts will “have an impact on air trav­el, that’s a polit­i­cal game that is being played.”

    ...

    In the first month of Trump’s sec­ond term, there has been a series of ter­ri­fy­ing plane acci­dents, start­ing with a dead­ly mid-air col­li­sion out­side Wash­ing­ton, D.C., between a U.S. army heli­copter and an Amer­i­can Air­lines region­al jet. There was also a fatal plane crash in Penn­syl­va­nia, a fatal plane crash off the coast of Alas­ka, a plane acci­dent in Toron­to involv­ing a plane trav­el­ing from Min­neapo­lis, and a mid-air col­li­sion between two small planes in Ari­zona.

    While the cur­rent and for­mer FAA staffers do not blame Trump and Musk’s purge or their crack­down on diver­si­ty pro­grams for any of these acci­dents, they all say that the administration’s mass fir­ings and need­less­ly sham­bol­ic man­age­ment could make it more dif­fi­cult for an already stretched-thin work­force to do its job and keep Amer­i­cans safe.

    Not to wor­ry: Musk offered up the ser­vices of his aero­space com­pa­ny, SpaceX, to the FAA to “help make air trav­el safer” — and some of Musk’s SpaceX engi­neers have already been brought on board as senior advi­sors to the FAA’s act­ing admin­is­tra­tor. (The agency’s pre­vi­ous admin­is­tra­tor depart­ed when Trump became pres­i­dent; Musk had demand­ed his res­ig­na­tion after the FAA fined SpaceX for reg­u­la­to­ry and safe­ty vio­la­tions.)

    ...

    ———–

    “Trump and Elon’s ‘Point­less Blood­bath’ at the FAA Is Even Worse Than You Think” By Asaw­in Sueb­saeng, Tim Dick­in­son, Andrew Perez; The Rolling Stone; 02/21/2025

    “While the cur­rent and for­mer FAA staffers do not blame Trump and Musk’s purge or their crack­down on diver­si­ty pro­grams for any of these acci­dents, they all say that the administration’s mass fir­ings and need­less­ly sham­bol­ic man­age­ment could make it more dif­fi­cult for an already stretched-thin work­force to do its job and keep Amer­i­cans safe.”

    The Musk-led Project 2025 purge of the FAA did­n’t cause all these plane acci­dents that alarm­ing­ly took place over the last month. They just made acci­dents more like­ly to hap­pen going for­ward. No harm done. Yet. But it’s com­ing. That’s the mes­sage from these cur­rent and for­mer FAA staffers anony­mous­ly talk­ing to the press. And as they warn, the obvi­ous­ly dan­ger­ous cuts include cuts to the legal teams in charge of look­ing out for pilots with crim­i­nal records or oth­er con­cerns. Qual­i­ty con­trol legal teams. Prob­a­bly not the place you want to be cut­ting. But that’s what’s get­ting cut. Along with all the oth­er cuts that pre­sum­ably aren’t help­ing mak­ing fly­ing safer

    ...
    Accord­ing to a per­son famil­iar with the mat­ter and anoth­er source briefed on it, the mass job cuts at the FAA hit mul­ti­ple legal offices at the agency, which is part of the Depart­ment of Trans­porta­tion. Dif­fer­ent kinds of lawyers were abrupt­ly let go, blind­sid­ing numer­ous staffers and offi­cials who could not see much rhyme or rea­son to these dis­missals.

    ...

    One par­tic­u­lar­ly con­found­ing round of fir­ings last week — one that con­fused even agency per­son­nel who were antic­i­pat­ing a Trumpian blood­let­ting — includ­ed sev­er­al attor­neys who work to ensure that licensed pilots in the Unit­ed States aren’t putting the broad­er pub­lic in dan­ger or hid­ing crim­i­nal records, health con­cerns, or seri­ous addic­tions, accord­ing to the sources.includ­ed sev­er­al attor­neys who work to ensure that licensed pilots in the Unit­ed States aren’t putting the broad­er pub­lic in dan­ger or hid­ing crim­i­nal records, health con­cerns, or seri­ous addic­tions, accord­ing to the sources

    ...

    Across the coun­try, the FAA employs just dozens of these types of lawyers who han­dle this kind of enforce­ment. Last week, Trump and Musk abrupt­ly got rid of sev­er­al of them, which some esti­mat­ed to be upwards of 10 per­cent of an already over­worked legal team. This was han­dled so chaot­i­cal­ly by the Trump admin­is­tra­tion and Musk’s DOGE that some of these fired lawyers’ boss­es were caught off guard entire­ly by the news.
    ...

    And note how Musk and Trump have claimed that it’s just pro­ba­tion­ary work­ers who have been on the job for less than a year who have been impact­ed by these mass indis­crim­i­nate ini­tial cuts. But as we can see, pro­ba­tion­ary employ­ees also include peo­ple who have been recent­ly pro­mot­ed. Who are obvi­ous­ly val­ued employ­ees. So they are indis­crim­i­nate­ly fir­ing new employ­ees and val­ued recent­ly pro­mot­ed employ­ees. For ‘effi­cien­cy’:

    ...
    Musk and his team at the so-called Depart­ment of Gov­ern­ment Effi­cien­cy (DOGE) have axed pro­ba­tion­ary employ­ees across the fed­er­al work­force, as part of Trump’s law­less clam­p­down. Such employ­ees are typ­i­cal­ly new hires, though they can also be long­time work­ers who received pro­mo­tions; either way, these work­ers have low­er work­place pro­tec­tions for a year, mak­ing them attrac­tive tar­gets for Trump’s brute-force strat­e­gy to shrink the gov­ern­ment.

    The Musk fir­ing offen­sive has already cre­at­ed sig­nif­i­cant prob­lems. Those axed includ­ed fed­er­al employ­ees respon­si­ble for nuclear weapons safe­ty and work­ers lead­ing the Agri­cul­ture Department’s response to the bird flu. (Those agen­cies have report­ed­ly attempt­ed to rehire the crit­i­cal employ­ees.)

    Regard­ing their FAA cuts, Musk and the Trump White House have tried to argue they skipped over any­one whose role might be con­sid­ered safe­ty-crit­i­cal. “It’s a bunch of bullsh it,” one cur­rent FAA work­er tells Rolling Stone. “The def­i­n­i­tion of ‘crit­i­cal’ can be fuc ked around with as much as they’d like. We were already an under­fund­ed and under­staffed agency.

    ...

    Trans­porta­tion Sec­re­tary Sean Duffy, a for­mer Real World cast mem­ber, was booed at an event in Los Ange­les on Thurs­day as he attempt­ed to defend the mass fir­ings. Duffy said the fired employ­ees were pro­ba­tion­ary and thus “not the high­est-skilled of the FAA,” and that the depart­ment “exempt­ed peo­ple who work in crit­i­cal safe­ty posi­tions.” He added that if any­one argues the job cuts will “have an impact on air trav­el, that’s a polit­i­cal game that is being played.”
    ...

    And then we get to heart of the mat­ter: pri­va­ti­za­tion. In par­tic­u­lar, pri­va­ti­za­tion to SpaceX. It’s starts with ‘lend­ing some SpaceX engi­neers to fix gov­ern­ment’, and ends with ‘why not just have SpaceX do it for cheap­er?’ and Musk’s takeover of air trav­el safe­ty. The stars are align­ing for cor­rup­tion on that kind kind of scale:

    ...
    Not to wor­ry: Musk offered up the ser­vices of his aero­space com­pa­ny, SpaceX, to the FAA to “help make air trav­el safer” — and some of Musk’s SpaceX engi­neers have already been brought on board as senior advi­sors to the FAA’s act­ing admin­is­tra­tor. (The agency’s pre­vi­ous admin­is­tra­tor depart­ed when Trump became pres­i­dent; Musk had demand­ed his res­ig­na­tion after the FAA fined SpaceX for reg­u­la­to­ry and safe­ty vio­la­tions.)
    ...

    And that’s just the FAA. One of a num­ber of fed­er­al agen­cies ripe for some sort of cor­rupt pri­va­ti­za­tion scheme. Which brings us to the per­il now loom­ing over the US Postal Ser­vice. Per­il that isn’t new. The head of the US Postal Ser­vice is Louis DeJoy, a Trump appointee from his first term, after all. As we’ve seen, DeJoy’s tenure has involved a ‘mod­ern­iza­tion’ scheme that was effec­tive­ly set­ting the stage for pri­va­ti­za­tion. And here we are, with the Trump admin­is­tra­tion and Repub­li­cans now attack­ing DeJoy as some­how being some sort of Demo­c­ra­t­ic stal­wart who needs to go. But they aren’t plan­ning on sim­ply jet­ti­son­ing DeJoy and replac­ing him with a more up-to-date crony. The Trump admin­is­tra­tion is instead plan­ning on dis­solv­ing the bipar­ti­san, sen­ate-con­firm postal board of gov­er­nors and seiz­ing con­trol of the entire agency itself...while open­ly talk­ing about pri­va­ti­za­tion plans:

    The Wash­ing­ton Post

    Trump expect­ed to take con­trol of USPS, fire postal board, offi­cials say

    Experts say the move would like­ly vio­late the law. Trump said Fri­day that Com­merce Sec­re­tary Howard Lut­nick would be “look­ing at” the mail agency.

    Updat­ed 02/21/2025 at 5:17 p.m. EST
    By Jacob Bogage

    Pres­i­dent Don­ald Trump is prepar­ing to dis­solve the lead­er­ship of the U.S. Postal Ser­vice and absorb the inde­pen­dent mail agency into his admin­is­tra­tion, poten­tial­ly throw­ing the 250-year-old mail provider and tril­lions of dol­lars of e‑commerce trans­ac­tions into tur­moil.

    Trump is expect­ed to issue an exec­u­tive order as soon as this week to fire the mem­bers of the Postal Service’s gov­ern­ing board and place the agency under the con­trol of the Com­merce Depart­ment and Sec­re­tary Howard Lut­nick, accord­ing to six peo­ple famil­iar with the plans, who spoke on the con­di­tion of anonymi­ty out of fear of reprisals.

    ...

    The board is plan­ning to fight Trump’s order, three of those peo­ple told The Wash­ing­ton Post. In an emer­gency meet­ing Thurs­day, the board retained out­side coun­sel and gave instruc­tions to sue the White House if the pres­i­dent were to remove mem­bers of the board or attempt to alter the agency’s inde­pen­dent sta­tus.

    Two of the group’s GOP mem­bers — Derek Kan, a for­mer Trump admin­is­tra­tion offi­cial, and Mike Dun­can, a for­mer chair of the Repub­li­can Nation­al Com­mit­tee — were not in atten­dance, accord­ing to a per­son famil­iar with the gath­er­ing. The two did not imme­di­ate­ly respond to requests for com­ment.

    Trump’s order to place the Com­merce Depart­ment in charge of the Postal Ser­vice would prob­a­bly vio­late fed­er­al law, accord­ing to postal experts. Anoth­er exec­u­tive order ear­li­er this week instruct­ed inde­pen­dent agen­cies to align more close­ly with the White House, though that order is like­ly to prompt court chal­lenges and the Postal Ser­vice by law is gen­er­al­ly exempt from exec­u­tive orders.

    Mem­bers of the Postal Service’s bipar­ti­san board are appoint­ed by the pres­i­dent and con­firmed by the Sen­ate.

    Trump, at Lutnick’s urg­ing, has mused about pri­va­tiz­ing the Postal Ser­vice, and Trump’s pres­i­den­tial tran­si­tion team vet­ted can­di­dates to replace Post­mas­ter Gen­er­al Louis DeJoy, a retired logis­tics exec­u­tive and GOP fundrais­ing offi­cial who took office in 2020 dur­ing Trump’s first term.

    “There is a lot of talk about the Postal Ser­vice being tak­en pri­vate,” Trump said in Decem­ber. “It’s a lot dif­fer­ent today, between Ama­zon and UPS and FedEx and all the things that you didn’t have. But there is talk about that. It’s an idea that a lot of peo­ple have liked for a long time.”

    DeJoy ear­li­er this week announced plans to resign.

    This is a some­what regal approach that says the king knows bet­ter than his sub­jects and he will do his best for them. But it also removes any sense that there’s over­sight, impar­tial­i­ty and fair­ness and that some states wouldn’t be treat­ed bet­ter than oth­er states or cities bet­ter than oth­er cities,” said James O’Rourke, who stud­ies the Postal Ser­vice at the Uni­ver­si­ty of Notre Dame’s Men­doza Col­lege of Busi­ness. “The anx­i­ety over the Postal Ser­vice is not only three-quar­ters of a mil­lion work­ers. It’s that this is some­thing that does not belong to the pres­i­dent or the White House. It belongs to the Amer­i­can peo­ple.

    After this sto­ry was pub­lished, a White House spokesper­son said no such exec­u­tive order was planned. A rep­re­sen­ta­tive for Postal Ser­vice did not respond to a request for com­ment.

    The imme­di­ate effects of mov­ing the Postal Ser­vice into the Com­merce Depart­ment are uncer­tain. The Postal Reg­u­la­to­ry Com­mis­sion has direct over­sight of the mail sys­tem and close­ly watch­es for geo­graph­ic dis­crim­i­na­tion in deliv­ery ser­vice and prices. It is unclear if Trump’s order will affect that group, as well.

    From its found­ing in 1775 until 1970, the U.S. mail sys­tem was a polit­i­cal organ of the White House. Pres­i­dents were known to appoint their polit­i­cal allies or cam­paign lead­ers as post­mas­ter gen­er­al, and the mail chief was often a key White House nego­tia­tor with Con­gress.

    But the Postal Reor­ga­ni­za­tion Act of 1970, the prod­uct of a crip­pling nation­wide mail strike, led Con­gress to split the agency off into a free­stand­ing orga­ni­za­tion, pur­pose­ful­ly walling it off from polit­i­cal tin­ker­ing.

    Amer­i­cans con­sis­tent­ly rank the Postal Ser­vice among their most-beloved gov­ern­ment agen­cies, sec­ond only to the Nation­al Park Ser­vice. A 2024 study by the Pew Research Cen­ter found more than 70 per­cent of Amer­i­cans had a favor­able view of the agency, a view that was sim­i­lar among Democ­rats and Repub­li­cans.

    Trump’s first admin­is­tra­tion sought to test the agency’s inde­pen­dence. Steven Mnuchin, Trump’s first-term trea­sury sec­re­tary, attempt­ed to con­trol the 2020 hir­ing process that brought DeJoy to the Postal Ser­vice, and a task force run out of Mnuchin’s depart­ment rec­om­mend­ed dra­mat­i­cal­ly shrink­ing the scope of the agency and prepar­ing it for pri­va­ti­za­tion via an ini­tial pub­lic offer­ing.

    ...

    Trump has long had a tense rela­tion­ship with the mail agency. He once derid­ed it from the Oval Office as “a joke” and in a social media post as Amazon’s “Deliv­ery Boy.” In the ear­ly days of the coro­n­avirus pan­dem­ic, Trump threat­ened to with­hold emer­gency assis­tance from the Postal Ser­vice unless it quadru­pled pack­age prices, and Mnuchin autho­rized a loan for the mail agency only in exchange for access to its con­fi­den­tial con­tracts with top cus­tomers. (Ama­zon founder Jeff Bezos owns The Post.)

    Ahead of the 2020 elec­tion, Trump said the Postal Ser­vice was inca­pable of facil­i­tat­ing mail-in vot­ing because the agency could not access the emer­gency fund­ing he was block­ing. The Postal Ser­vice ulti­mate­ly deliv­ered 97.9 per­cent of bal­lots from vot­ers to elec­tion offi­cials with­in three days. The suc­cess­ful deliv­ery of bal­lots turned Trump’s opin­ion of DeJoy, The Post has pre­vi­ous­ly report­ed.

    The post­mas­ter is in the midst of a 10-year cost-cut­ting and mod­ern­iza­tion plan for the agency that last month bore its most promis­ing results. It post­ed a prof­it — exclud­ing expens­es on pen­sion and health-care pay­ments — in the quar­ter that end­ed Dec. 31, its first prof­itable peri­od since the height of the pan­dem­ic.

    But on-time deliv­ery ser­vice has strug­gled under DeJoy’s tenure, and the rocky roll­out of his “Deliv­er­ing for Amer­i­ca” plan has cost him and Postal Ser­vice allies on Capi­tol Hill. Sen. Josh Haw­ley (R‑Missouri) pledged to “do every­thing I can to kill” DeJoy’s plan dur­ing a Decem­ber hear­ing.

    ...

    Repub­li­cans have grown wary of DeJoy and the Postal Service’s close ties to the Biden admin­is­tra­tion. The two part­nered to deliv­er near­ly 1 bil­lion coro­n­avirus test kits, the largest expan­sion of postal capa­bil­i­ties in a gen­er­a­tion, and to fund a fleet of more than 60,000 elec­tric mail deliv­ery vehi­cles, though those were plagued by deliv­ery delays.

    ————-

    “Trump expect­ed to take con­trol of USPS, fire postal board, offi­cials say” By Jacob Bogage; The Wash­ing­ton Post; 02/21/2025

    “Trump is expect­ed to issue an exec­u­tive order as soon as this week to fire the mem­bers of the Postal Service’s gov­ern­ing board and place the agency under the con­trol of the Com­merce Depart­ment and Sec­re­tary Howard Lut­nick, accord­ing to six peo­ple famil­iar with the plans, who spoke on the con­di­tion of anonymi­ty out of fear of reprisals.”

    The exec­u­tive order is expect­ed as soon as this week. A order to dis­solve the US Postal Ser­vices gov­ern­ing board — a bipar­ti­san board con­sist­ing of mem­bers nom­i­nat­ed by the pres­i­dent and con­firmed by the Sen­ate. Trump is get­ting rid of that board and tak­ing uni­lat­er­al con­trol of the whole thing. No more bipar­ti­san boards or Sen­ate con­fir­ma­tions:

    ...
    The board is plan­ning to fight Trump’s order, three of those peo­ple told The Wash­ing­ton Post. In an emer­gency meet­ing Thurs­day, the board retained out­side coun­sel and gave instruc­tions to sue the White House if the pres­i­dent were to remove mem­bers of the board or attempt to alter the agency’s inde­pen­dent sta­tus.

    Two of the group’s GOP mem­bers — Derek Kan, a for­mer Trump admin­is­tra­tion offi­cial, and Mike Dun­can, a for­mer chair of the Repub­li­can Nation­al Com­mit­tee — were not in atten­dance, accord­ing to a per­son famil­iar with the gath­er­ing. The two did not imme­di­ate­ly respond to requests for com­ment.

    Trump’s order to place the Com­merce Depart­ment in charge of the Postal Ser­vice would prob­a­bly vio­late fed­er­al law, accord­ing to postal experts. Anoth­er exec­u­tive order ear­li­er this week instruct­ed inde­pen­dent agen­cies to align more close­ly with the White House, though that order is like­ly to prompt court chal­lenges and the Postal Ser­vice by law is gen­er­al­ly exempt from exec­u­tive orders.

    Mem­bers of the Postal Service’s bipar­ti­san board are appoint­ed by the pres­i­dent and con­firmed by the Sen­ate.

    ...

    After this sto­ry was pub­lished, a White House spokesper­son said no such exec­u­tive order was planned. A rep­re­sen­ta­tive for Postal Ser­vice did not respond to a request for com­ment.

    ...

    From its found­ing in 1775 until 1970, the U.S. mail sys­tem was a polit­i­cal organ of the White House. Pres­i­dents were known to appoint their polit­i­cal allies or cam­paign lead­ers as post­mas­ter gen­er­al, and the mail chief was often a key White House nego­tia­tor with Con­gress.

    But the Postal Reor­ga­ni­za­tion Act of 1970, the prod­uct of a crip­pling nation­wide mail strike, led Con­gress to split the agency off into a free­stand­ing orga­ni­za­tion, pur­pose­ful­ly walling it off from polit­i­cal tin­ker­ing.
    ...

    And as experts warn, the return of a par­ti­sans postal ser­vice under some­one like Trump is effec­tive­ly a recipe for polit­i­cal games­man­ship and ret­ri­bu­tion to play out. Geo­graph­ic regions (like Blue cities) could see their ser­vices selec­tive­ly slowed or med­dled with. In oth­er words, Blue state mail in vot­ing in about to get a lot more incon­ve­nient:

    ...
    DeJoy ear­li­er this week announced plans to resign.

    This is a some­what regal approach that says the king knows bet­ter than his sub­jects and he will do his best for them. But it also removes any sense that there’s over­sight, impar­tial­i­ty and fair­ness and that some states wouldn’t be treat­ed bet­ter than oth­er states or cities bet­ter than oth­er cities,” said James O’Rourke, who stud­ies the Postal Ser­vice at the Uni­ver­si­ty of Notre Dame’s Men­doza Col­lege of Busi­ness. “The anx­i­ety over the Postal Ser­vice is not only three-quar­ters of a mil­lion work­ers. It’s that this is some­thing that does not belong to the pres­i­dent or the White House. It belongs to the Amer­i­can peo­ple.

    ...

    The imme­di­ate effects of mov­ing the Postal Ser­vice into the Com­merce Depart­ment are uncer­tain. The Postal Reg­u­la­to­ry Com­mis­sion has direct over­sight of the mail sys­tem and close­ly watch­es for geo­graph­ic dis­crim­i­na­tion in deliv­ery ser­vice and prices. It is unclear if Trump’s order will affect that group, as well.

    ...

    Trump has long had a tense rela­tion­ship with the mail agency. He once derid­ed it from the Oval Office as “a joke” and in a social media post as Amazon’s “Deliv­ery Boy.” In the ear­ly days of the coro­n­avirus pan­dem­ic, Trump threat­ened to with­hold emer­gency assis­tance from the Postal Ser­vice unless it quadru­pled pack­age prices, and Mnuchin autho­rized a loan for the mail agency only in exchange for access to its con­fi­den­tial con­tracts with top cus­tomers. (Ama­zon founder Jeff Bezos owns The Post.)

    Ahead of the 2020 elec­tion, Trump said the Postal Ser­vice was inca­pable of facil­i­tat­ing mail-in vot­ing because the agency could not access the emer­gency fund­ing he was block­ing. The Postal Ser­vice ulti­mate­ly deliv­ered 97.9 per­cent of bal­lots from vot­ers to elec­tion offi­cials with­in three days. The suc­cess­ful deliv­ery of bal­lots turned Trump’s opin­ion of DeJoy, The Post has pre­vi­ous­ly report­ed.
    ...

    Also note how the Trump admin­is­tra­tion’s demo­niza­tion of the job the postal ser­vice is doing — demo­niza­tion that is fun­da­men­tal to the Project 2025 nar­ra­tive — is hap­pen­ing at the same time the postal ser­vice is earn­ing a prof­it. And let’s not for­get that its leader, Louis DeJoy, was Trump’s pick. He’s not some Biden crony. He was already a Trump crony. This nar­ra­tive about DeJoy devel­op­ing ‘close ties to the Biden admin­is­tra­tion’ is just part of the bad faith nar­ra­tive. A say-and-do-what­ev­er-is-nec­es­sary strat­e­gy to attack­ing and destroy­ing the postal ser­vice as an insti­tu­tion:

    ...
    The post­mas­ter is in the midst of a 10-year cost-cut­ting and mod­ern­iza­tion plan for the agency that last month bore its most promis­ing results. It post­ed a prof­it — exclud­ing expens­es on pen­sion and health-care pay­ments — in the quar­ter that end­ed Dec. 31, its first prof­itable peri­od since the height of the pan­dem­ic.

    But on-time deliv­ery ser­vice has strug­gled under DeJoy’s tenure, and the rocky roll­out of his “Deliv­er­ing for Amer­i­ca” plan has cost him and Postal Ser­vice allies on Capi­tol Hill. Sen. Josh Haw­ley (R‑Missouri) pledged to “do every­thing I can to kill” DeJoy’s plan dur­ing a Decem­ber hear­ing.

    ...

    Repub­li­cans have grown wary of DeJoy and the Postal Service’s close ties to the Biden admin­is­tra­tion. The two part­nered to deliv­er near­ly 1 bil­lion coro­n­avirus test kits, the largest expan­sion of postal capa­bil­i­ties in a gen­er­a­tion, and to fund a fleet of more than 60,000 elec­tric mail deliv­ery vehi­cles, though those were plagued by deliv­ery delays.
    ...

    And, of course, all of this in the ser­vice of one goal: the pri­va­ti­za­tion of the US postal ser­vice. The same goal in mind for the FAA. And as much of the rest of the gov­ern­ment as they can get away with. Which rais­es the ques­tion of how Musk will prof­it from a pri­vate postal sys­tem too:

    ...
    Trump, at Lutnick’s urg­ing, has mused about pri­va­tiz­ing the Postal Ser­vice, and Trump’s pres­i­den­tial tran­si­tion team vet­ted can­di­dates to replace Post­mas­ter Gen­er­al Louis DeJoy, a retired logis­tics exec­u­tive and GOP fundrais­ing offi­cial who took office in 2020 dur­ing Trump’s first term.

    “There is a lot of talk about the Postal Ser­vice being tak­en pri­vate,” Trump said in Decem­ber. “It’s a lot dif­fer­ent today, between Ama­zon and UPS and FedEx and all the things that you didn’t have. But there is talk about that. It’s an idea that a lot of peo­ple have liked for a long time.”

    ...

    Trump’s first admin­is­tra­tion sought to test the agency’s inde­pen­dence. Steven Mnuchin, Trump’s first-term trea­sury sec­re­tary, attempt­ed to con­trol the 2020 hir­ing process that brought DeJoy to the Postal Ser­vice, and a task force run out of Mnuchin’s depart­ment rec­om­mend­ed dra­mat­i­cal­ly shrink­ing the scope of the agency and prepar­ing it for pri­va­ti­za­tion via an ini­tial pub­lic offer­ing.
    ...

    The writ­ing isn’t just on the wall. It’s com­ing out of Trump’s mouth. The US Postal Ser­vice is going to be pri­va­tized through one means or anoth­er. Although break­ing the ser­vice some­how, pos­si­bly dur­ing an elec­tion and screw­ing up mail-in vot­ing, will like­ly come first. And, again, there’s more fed­er­al agen­cies ripe for pri­va­ti­za­tion than just the FAA and Postal Ser­vice. This is just the low-hang­ing fruit.

    So with mass pri­va­ti­za­tion slat­ed to be the future of fed­er­al ser­vices for the Unit­ed States, here’s a reminder that, for all the hoopla about the ‘effi­cien­cy’ and ‘pro­duc­tiv­i­ty’ of the US pri­vate sec­tor, the sad real­i­ty is that pri­va­ti­za­tion in the con­tem­po­rary US is basi­cal­ly a request for a new monop­oly. Or maybe an oli­gop­oly at best. After all, for many ser­vices it’s not logis­ti­cal­ly pos­si­ble to real­ly have many com­peti­tors. And even those ser­vices for which is it pos­si­ble for healthy com­pe­ti­tion to keep prices down and ser­vices robust, we can’t assume com­pe­ti­tion is actu­al­ly going to be enforced in today’s econ­o­my. Because while the US does have antitrust laws and reg­u­la­tions, those haven’t real­ly been enforced for many years. And as a result, pri­va­ti­za­tion is basi­cal­ly replac­ing gov­ern­ment bureau­crats with For-prof­it oli­gop­o­lies that pri­or­i­tize prof­its over all else. Maybe that results in over­prices poor ser­vice when it comes to some­thing like postal deliv­ery. Or maybe, when it comes to the pri­vate-equi­ty-dom­i­nat­ed firetruck man­u­fac­tur­ing sec­tor, it results in chron­ic short­ages for extra-expen­sive trucks that won’t be avail­able when the city burns down:

    The Big Newslet­ter

    Did a Pri­vate Equi­ty Fire Truck Roll-Up Wors­en the L.A. Fires?

    Dur­ing the LA fires, dozens of fire trucks sat in the bone­yard, wait­ing for repairs the city could­n’t afford. Why? A pri­vate equi­ty roll-up made replac­ing and repair­ing those trucks much prici­er.

    Basel Mushar­bash
    Jan 25, 2025

    Today’s piece is writ­ten by antitrust lawyer Basel Mushar­bash

    One of the rea­sons that the recent Los Ange­les wild­fires were so hard to con­tain, accord­ing to Los Ange­les Fire Depart­ment (LAFD) Chief Kristin Crow­ley, is that more than half of the LAFD’s fire trucks have been out of ser­vice. It’s become a bit of a scan­dal; while fires burned through Pal­isades and Eaton neigh­bor­hoods, more than 100 of the LAFD’s 183 fire trucks were appar­ent­ly side­lined.

    Why couldn’t the LAFD keep its equip­ment in work­ing order? A lot of peo­ple blame bud­get cuts, but there’s anoth­er root issue — increas­ing prices and metas­ta­siz­ing pro­duc­tion delays for these vehi­cles. The cost of fire trucks has sky­rock­et­ed in recent years––going from around $300 ‑500,000 for a pumper truck and $750–900,000 for a lad­der truck in the mid-2010s, to around $1 mil­lion for a pumper truck and $2 mil­lion for a lad­der truck in the last cou­ple years. Mean­while, the time it takes to get a fire truck deliv­ered has grown dra­mat­i­cal­ly, from less than a year before the pan­dem­ic to any­where between 2 and 4.5 years today. (It’s not just trucks, all fire equip­ment is increas­ing quick­ly in price, from air sup­ply packs to main­te­nance con­tracts.)

    ...

    What I’ll show you in this piece is that the increas­ing price is a result of a pri­vate equi­ty firm, Amer­i­can Indus­tri­al Part­ners, con­sol­i­dat­ing the fire truck indus­try and forc­ing up prices across the board. For decades before the 2010s, the fire appa­ra­tus indus­try was char­ac­ter­ized by rel­a­tive­ly sta­ble (infla­tion-adjust­ed) prices and ample pro­duc­tion capac­i­ty.

    Then, how­ev­er, AIP bought mul­ti­ple fire-truck man­u­fac­tur­ers and rolled them up into con­glom­er­ate called the REV Group. Although AIP ini­tial­ly made a show of allow­ing these man­u­fac­tur­ers and their dis­trib­u­tors to con­tin­ue oper­at­ing inde­pen­dent­ly, under the sur­face it quick­ly moved to oper­ate them as a sin­gle firm, like a food con­glom­er­ate sell­ing a bunch of dif­fer­ent brands that all appear to be dif­fer­ent com­pa­nies. As one indus­try exec­u­tive has observed, “There are now times when all ven­dors at a bid table, each with a ‘dif­fer­ent’ prod­uct, are all owned and man­aged by the same par­ent com­pa­ny. How is that com­pet­i­tive for the pur­chas­er?” The answer, of course, is that it isn’t. And you don’t need to take my word for it. REV Fire Group Vice Pres­i­dent of Sales Mike Virnig made it clear in 2020: “What I won’t tol­er­ate is neg­a­tive sell­ing,” he said. “I won’t tol­er­ate it with our com­peti­tors, and I won’t tol­er­ate it with­in the group. If I even get a hint or see any­thing like a deal­er tak­ing a shot at anoth­er deal­er, we step in and say, ‘Stop it.’”

    Before get­ting to how AIP oper­ates, I want to note that high­er costs of trucks are not just an LA prob­lem. The Seat­tle Fire Depart­ment is also strug­gling to replace and main­tain an aging fire truck fleet. So is the Hous­ton Fire Depart­ment, and the Atlanta Fire Depart­ment. Across the coun­try, in com­mu­ni­ties large and small, head­lines about fire depart­ments strug­gling to cope with metas­ta­siz­ing fire-truck prices and bot­tle­necks in fire appa­ra­tus sup­ply chain have become com­mon­place.Wait­ing Lists and High­er Prices Add Up to Long Delays for New Fire Trucks,” says the Con­necti­cut Exam­in­er. “Why did that fire truck cost $1.9 mil­lion? Because it just does,” says a small-town news web­site in Kansas. “Despite FIRE Act grant,” the Tri­bune-Review of Penn­syl­va­nia reports, “Export, PA, fire depart­ment says ris­ing fire appa­ra­tus costs a chal­lenge.”

    Even when fire depart­ments can put togeth­er these large sums of mon­ey for new trucks, they can’t seem to get the dang things because of steep delays in pro­duc­tion. Since 2019, “[T]he lead times for deliv­ery from [the] date the order is placed [for a new a fire truck] to final inspec­tion has gone from 10–12 months to greater than 2 years in many cas­es and in some cas­es approach­ing 3 years.” The Seat­tle Fire Depart­ment says it faces even longer wait times, with lad­der trucks orders tak­ing 54 months — 4.5 years — to be ful­filled. In an emer­gency, Evanston, Illi­nois, spent over $2.3 mil­lion to try to get a fire truck in a year and a half — and it was a demo vehi­cle pre­vi­ous­ly ordered by a deal­er and passed down to the city as a favor, with­out any of the cus­tomiza­tions that fire depart­ments typ­i­cal­ly require.

    The Eco­nom­ic Ter­mite That Ate Up the Fire Appa­ra­tus Indus­try

    The mod­ern fire appa­ra­tus and emer­gency vehi­cle man­u­fac­tur­ing indus­try came into its own in the post-war decades of the 1950s and 1960s. Aid­ed by antitrust enforce­ment actions that pro­tect­ed small man­u­fac­tur­ers from exclu­sion­ary prac­tices and ensured they could source nec­es­sary sup­plies (like steel) at the same dis­counts as large firms, small and mid­sized fire appa­ra­tus manufacturers––typically fam­i­ly-owned operations––appeared in every region of the coun­try to pro­duce emer­gency vehi­cles tai­lored to the needs of local fire depart­ment. Com­pe­ti­tion among these small­er firms served to keep fire truck prices near costs, and the exis­tence of a large num­ber of man­u­fac­tur­ers ensured there was always plen­ty of redun­dant man­u­fac­tur­ing capac­i­ty to meet demand.

    This remained the case well into the 2000s. Then, the Great Finan­cial Cri­sis dec­i­mat­ed munic­i­pal bud­gets, which in turn dec­i­mat­ed demand for new fire trucks. The num­ber of fire truck’s ordered plum­met­ed from 5,000–6,000 a year to around 3,000 a year. At the same time, many of the man­u­fac­tur­ers in the indus­try began fac­ing lead­er­ship suc­ces­sion ques­tions, as founders were aging and con­sid­er­ing their options for retire­ment. That’s when a pri­vate equi­ty group, Amer­i­can Indus­tri­al Part­ners (AIP), took an inter­est in rolling up the indus­try.

    AIP’s ini­tial the­o­ry was that, with sales depressed and suc­ces­sion issues on the hori­zon, the own­ers of fire appa­ra­tus man­u­fac­tur­ers could be con­vinced to sell on the cheap. That the­o­ry turned out to be most­ly wrong––the fam­i­ly-owned play­ers in the indus­try were resilient. The only fire appa­ra­tus com­pa­ny that AIP was able to nab at the bot­tom of the mar­ket was a large, investor-owned man­u­fac­tur­er of fire trucks and ambu­lances, Fed­er­al Signal/E‑ONE. As late as 2015, there were still “approx­i­mate­ly two-dozen com­pa­nies pro­duc­ing motor­ized fire appa­ra­tus in the Unit­ed States,” includ­ing “nine full-line man­u­fac­tur­ers pro­duc­ing their own chas­sis for pumper and lad­der trucks,” and “fif­teen lim­it­ed-line man­u­fac­tur­ers pro­duc­ing only pumpers based on pur­chased chas­sis.” All twen­ty-four man­u­fac­tur­ers were either inde­pen­dent or owned by a sep­a­rate par­ent com­pa­ny.

    Nonethe­less, AIP’s acqui­si­tion of E‑ONE gave it a beach­head in the fire appa­ra­tus indus­try — one on which it would build as demand returned. By 2016, state and local bud­gets had most­ly recov­ered from the Great Reces­sion. Demand for fire trucks went up, reach­ing 4,000–5,000 orders annu­al­ly. That’s when AIP’s offers became too good to refuse. One by one, lead­ing fire appa­ra­tus man­u­fac­tur­ers around the coun­try fell under AIP’s con­trol: KME, a large, 70-year-old man­u­fac­tur­er in the Mid-Atlantic region that sup­plied engines to the Los Ange­les Fire Depart­ment, was acquired in 2016. Fer­rara, E‑ONE’s direct com­peti­tor in the South, was acquired in 2017. Spar­tan and Smeal, two Mid­west stal­warts, came into AIP’s fold in 2019. Lad­der Tow­er, based out of Penn­syl­va­nia, was bought in 2020. Over the same decade, these were paired with acqui­si­tions of a large port­fo­lio of ambu­lance, bus, recre­ation­al, and oth­er spe­cial­ty vehi­cle man­u­fac­tur­ers, which AIP ulti­mate­ly bun­dled into a con­glom­er­ate hold­ing com­pa­ny called the “REV Group.”

    ...

    By 2021, REV Group stopped even pre­tend­ing to sup­port sub­sidiary inde­pen­dence. In Sep­tem­ber of that year, KME’s plants — which were impor­tant sup­pli­ers of fire trucks to Cal­i­for­nia munic­i­pal­i­ties before KME’s acqui­si­tion in 2016 — were shut down pur­suant to a new “plat­form­ing” and “chan­nel man­age­ment” strat­e­gy. A REV Group investor pre­sen­ta­tion around the same time showed that strat­e­gy called for REV Group’s sub­sidiaries to “[c]onverge on com­mon designs that can be shared across brands,” and to use Spartan’s Metro Star chassis/cab as the “plat­form” for their offer­ings. It also called for the elim­i­na­tion of geo­graph­ic over­laps between the mar­ket­ing of its dif­fer­ent fire-truck brands and deal­ers. The mask was offi­cial­ly off: REV Group’s fire appa­ra­tus oper­a­tions were now offi­cial­ly “cen­ter-led,” with REV Group dic­tat­ing and man­ag­ing the exe­cu­tion of “mar­gin improve­ment actions” across its sub­sidiaries.

    The After­math

    As a result of AIPs roll-up of fire truck and emer­gency vehi­cle man­u­fac­tur­ers into the REV Group over the past decade, the over­whelm­ing major­i­ty of the industry’s sales and capac­i­ty are now con­cen­trat­ed among three dom­i­nant man­u­fac­tur­ers: REV Group, Oshkosh, and Rosen­bauer. Out of rough­ly $3 bil­lion in fire truck sales made in the Unit­ed States annu­al­ly, the avail­able data sug­gests that REV Group cap­tures around $1 bil­lion (or 33%), Oshkosh takes around $750 mil­lion (or 25%), and Rosen­bauer takes “only” $250 mil­lion (or 8%) — giv­ing these dom­i­nant firms two-thirds of the nation­al mar­ket, and undoubt­ed­ly even more mar­ket share in some regions of the coun­try where few­er man­u­fac­tur­ers oper­ate. And the acqui­si­tion sprees do not appear to be slow­ing down: in 2021 and 2022, Oshkosh respond­ed to REV Group’s roll-up by mak­ing acqui­si­tions of its own, includ­ing Maxi-Met­al in Cana­da and Boise Mobile Equip­ment in Ida­ho –– the lat­ter being an impor­tant sup­pli­er of wild­land fire­fight­ing appa­ra­tus to the Cal­i­for­nia, Ore­gon, Ida­ho, and Mon­tana mar­kets.

    In con­junc­tion with this con­sol­i­da­tion, we’ve also seen a reduc­tion in indus­try capac­i­ty from actions like REV Group’s shut­down of its KME plants. What is curi­ous about that shut­down in par­tic­u­lar is that it came in the face of rapid­ly increas­ing demand: As fed­er­al COVID-19 assis­tance filled state and local gov­ern­ment cof­fers, fire truck orders grew approx­i­mate­ly 50% from 2020 to 2022, reach­ing rough­ly 6,000 for the first time since 2008. Since then, order activ­i­ty has remained strong, hov­er­ing between 5,500 and 6,500. As a result, both REV Group and Oshkosh have seen their back­logs sky­rock­et over the last two years. The lat­est avail­able data shows that REV Group had a $4.2 bil­lion back­log on fire and emer­gency vehi­cle orders in the Unit­ed States as of Octo­ber 2024, while Oshkosh had a $5.3 bil­lion back­log on fire appa­ra­tus orders glob­al­ly as of June 2024. And yet, nei­ther com­pa­ny appears to be mak­ing sig­nif­i­cant invest­ments in addi­tion­al man­u­fac­tur­ing capac­i­ty to rapid­ly cut down its back­log — or even con­cerned that mul­ti-year delays in deliv­ery might lead cus­tomers to bail on their orders.

    Indeed, it appears that the dom­i­nant man­u­fac­tur­ers have man­aged to turn their deliv­ery fail­ures into finan­cial advan­tage. Using the pur­port­ed dif­fi­cul­ty of pro­ject­ing mate­r­i­al costs over a 2–3‑year lead time as an excuse, they have imposed “float­ing” price claus­es onto their cus­tomers — allow­ing them to increase the final price of a rig when it final­ly goes into pro­duc­tion. In effect, the bot­tle­neck in fire truck pro­duc­tion that REV Group, Oshkosh, and to a less­er extent, Rosen­bauer cre­at­ed with their M&A and oper­at­ing strate­gies are giv­ing them even more bar­gain­ing pow­er vis-à-vis fire depart­ments. Not only that but, accord­ing to REV Group’s SEC reports, the twen­ty-four-month back­log it is run­ning is lit­er­al­ly enhanc­ing its val­ue to share­hold­ers — AIP being the largest among them — by giv­ing the com­pa­ny “strong vis­i­bil­i­ty into future net sales.”

    Alto­geth­er, these facts paint an alarm­ing pic­ture. A hand­ful of financiers have been allowed to trans­form a crit­i­cal, once-vibrant indus­try into a rent-extract­ing rack­et. By con­sol­i­dat­ing the fire-appa­ra­tus indus­try through ser­i­al acqui­si­tions, REV Group and Oshkosh appear to have con­sol­i­dat­ed the pow­er to raise prices and throt­tle out­put of life­sav­ing equip­ment with impuni­ty. Using that pow­er, they have imposed years-long delays in deliv­ery on their cus­tomers and exor­bi­tant pay­ment terms that will enable them to pass on pro­duc­tion costs almost at will — leav­ing them lit­tle incen­tive to invest in new capac­i­ty or greater effi­cien­cy to relieve the bot­tle­neck in the fire truck sup­ply chain. They can reap ris­ing stock prices and “attrac­tive lev­els of return on invest­ed cap­i­tal” for their share­hold­ers just by sit­ting pret­ty — all while fire depart­ments across the coun­try strug­gle to replace aging fire trucks, have to spend more on main­te­nance for old­er vehi­cles, and are forced to shirk on oth­er bud­get items, like fire­fight­er salaries, to get what equip­ment they can. But the ulti­mate harm of AIP’s monop­o­liza­tion of the fire appa­ra­tus indus­try, of course, is not some­thing that can be mea­sured on a spread­sheet. It’s a hun­dred fire trucks sit­ting out of com­mis­sion while a dis­as­trous wild­fire burns whole neigh­bor­hoods of Los Ange­les to the ground. It’s lives lost, homes destroyed, com­mu­ni­ties gut­ted.

    Where Do We Go From Here

    While AIP’s con­sol­i­da­tion of eco­nom­ic pow­er over fire truck man­u­fac­tur­ing is appalling, it is not some unsolv­able, intractable prob­lem we just have to live with. State and fed­er­al antitrust laws already pro­hib­it the kind of monop­o­lis­tic roll-up that AIP per­pe­trat­ed — they just need to be enforced. State AGs can bring law­suits to force REV Group to divest the man­u­fac­tur­ers it ille­gal­ly acquired and to pay dam­ages to fire depart­ments for the harm that its (attempt­ed) monop­o­liza­tion of the fire-truck indus­try has caused. Fire depart­ments and oth­er fire-appa­ra­tus pur­chasers can bring their own law­suits to do the same. So can the FTC and the DOJ’s Antitrust Divi­sion. If state leg­is­la­tors or mem­bers of Con­gress want to pave the way for such law­suits, they can launch their own inves­ti­ga­tions into the fire appa­ra­tus indus­try. And if any­one wants guid­ance on what a law­suit against AIP could look like, Lina Khan left us a roadmap just before she stepped down from the FTC last week — when she sued pri­vate-equi­ty giant Welsh Car­son for rolling up Texas anes­the­si­ol­o­gy prac­tices to dri­ve up the price of anes­the­sia ser­vices to Texas patients.

    ...

    ———–

    “Did a Pri­vate Equi­ty Fire Truck Roll-Up Wors­en the L.A. Fires?” by Basel Mushar­bash; The Big Newslet­ter; 01/25/2025

    “Why couldn’t the LAFD keep its equip­ment in work­ing order? A lot of peo­ple blame bud­get cuts, but there’s anoth­er root issue — increas­ing prices and metas­ta­siz­ing pro­duc­tion delays for these vehi­cles. The cost of fire trucks has sky­rock­et­ed in recent years––going from around $300 ‑500,000 for a pumper truck and $750–900,000 for a lad­der truck in the mid-2010s, to around $1 mil­lion for a pumper truck and $2 mil­lion for a lad­der truck in the last cou­ple years. Mean­while, the time it takes to get a fire truck deliv­ered has grown dra­mat­i­cal­ly, from less than a year before the pan­dem­ic to any­where between 2 and 4.5 years today. (It’s not just trucks, all fire equip­ment is increas­ing quick­ly in price, from air sup­ply packs to main­te­nance con­tracts.)”

    High­er prices with more delays. That’s been the real-world con­se­quence of the pri­vate-equi­ty cap­ture of firetruck man­u­fac­tur­ing sec­tor in the US. A sec­tor that, for decades, had been com­prised of many com­pet­ing small firms that man­aged to serve US munic­i­pal­i­ties for decades. A few pri­vate-equi­ty firms — led by Amer­i­can Indus­tri­al Part­ners (AIP) — come to dom­i­nate the sec­tor and all of a sud­den work­ing firetrucks are in short sup­ply and very expen­sive to pro­cure even if you’re will­ing to pay the pri­vate-equi­ty pre­mi­um prices. Sure, AIP ini­tial pledged that it would allow its many sub­sidiaries to com­pete with each oth­er to ensure its growth did­n’t lead to unfair anti­com­pet­i­tive prac­tices. But that turned out to not be true. Imag­ine that:

    ...
    What I’ll show you in this piece is that the increas­ing price is a result of a pri­vate equi­ty firm, Amer­i­can Indus­tri­al Part­ners, con­sol­i­dat­ing the fire truck indus­try and forc­ing up prices across the board. For decades before the 2010s, the fire appa­ra­tus indus­try was char­ac­ter­ized by rel­a­tive­ly sta­ble (infla­tion-adjust­ed) prices and ample pro­duc­tion capac­i­ty.

    Then, how­ev­er, AIP bought mul­ti­ple fire-truck man­u­fac­tur­ers and rolled them up into con­glom­er­ate called the REV Group. Although AIP ini­tial­ly made a show of allow­ing these man­u­fac­tur­ers and their dis­trib­u­tors to con­tin­ue oper­at­ing inde­pen­dent­ly, under the sur­face it quick­ly moved to oper­ate them as a sin­gle firm, like a food con­glom­er­ate sell­ing a bunch of dif­fer­ent brands that all appear to be dif­fer­ent com­pa­nies. As one indus­try exec­u­tive has observed, “There are now times when all ven­dors at a bid table, each with a ‘dif­fer­ent’ prod­uct, are all owned and man­aged by the same par­ent com­pa­ny. How is that com­pet­i­tive for the pur­chas­er?” The answer, of course, is that it isn’t. And you don’t need to take my word for it. REV Fire Group Vice Pres­i­dent of Sales Mike Virnig made it clear in 2020: “What I won’t tol­er­ate is neg­a­tive sell­ing,” he said. “I won’t tol­er­ate it with our com­peti­tors, and I won’t tol­er­ate it with­in the group. If I even get a hint or see any­thing like a deal­er tak­ing a shot at anoth­er deal­er, we step in and say, ‘Stop it.’”

    ...

    By 2021, REV Group stopped even pre­tend­ing to sup­port sub­sidiary inde­pen­dence. In Sep­tem­ber of that year, KME’s plants — which were impor­tant sup­pli­ers of fire trucks to Cal­i­for­nia munic­i­pal­i­ties before KME’s acqui­si­tion in 2016 — were shut down pur­suant to a new “plat­form­ing” and “chan­nel man­age­ment” strat­e­gy. A REV Group investor pre­sen­ta­tion around the same time showed that strat­e­gy called for REV Group’s sub­sidiaries to “[c]onverge on com­mon designs that can be shared across brands,” and to use Spartan’s Metro Star chassis/cab as the “plat­form” for their offer­ings. It also called for the elim­i­na­tion of geo­graph­ic over­laps between the mar­ket­ing of its dif­fer­ent fire-truck brands and deal­ers. The mask was offi­cial­ly off: REV Group’s fire appa­ra­tus oper­a­tions were now offi­cial­ly “cen­ter-led,” with REV Group dic­tat­ing and man­ag­ing the exe­cu­tion of “mar­gin improve­ment actions” across its sub­sidiaries.

    ...

    As a result of AIPs roll-up of fire truck and emer­gency vehi­cle man­u­fac­tur­ers into the REV Group over the past decade, the over­whelm­ing major­i­ty of the industry’s sales and capac­i­ty are now con­cen­trat­ed among three dom­i­nant man­u­fac­tur­ers: REV Group, Oshkosh, and Rosen­bauer. Out of rough­ly $3 bil­lion in fire truck sales made in the Unit­ed States annu­al­ly, the avail­able data sug­gests that REV Group cap­tures around $1 bil­lion (or 33%), Oshkosh takes around $750 mil­lion (or 25%), and Rosen­bauer takes “only” $250 mil­lion (or 8%) — giv­ing these dom­i­nant firms two-thirds of the nation­al mar­ket, and undoubt­ed­ly even more mar­ket share in some regions of the coun­try where few­er man­u­fac­tur­ers oper­ate. And the acqui­si­tion sprees do not appear to be slow­ing down: in 2021 and 2022, Oshkosh respond­ed to REV Group’s roll-up by mak­ing acqui­si­tions of its own, includ­ing Maxi-Met­al in Cana­da and Boise Mobile Equip­ment in Ida­ho –– the lat­ter being an impor­tant sup­pli­er of wild­land fire­fight­ing appa­ra­tus to the Cal­i­for­nia, Ore­gon, Ida­ho, and Mon­tana mar­kets.
    ...

    And as we can see, it appears that AIP used its dom­i­nant posi­tion to effec­tive­ly exploit man­u­fac­tur­ing bot­tle­necks as prof­it-max­i­miz­ing oppor­tu­ni­ties. In oth­er words, the worse the ser­vice, the high­er the prof­its, thanks to the ‘float­ing’ price struc­ture and the extend­ed delays. And the high­er the prob­a­bil­i­ty that dis­as­ters like the LA cat­a­stro­phe will hap­pen again:

    ...
    In con­junc­tion with this con­sol­i­da­tion, we’ve also seen a reduc­tion in indus­try capac­i­ty from actions like REV Group’s shut­down of its KME plants. What is curi­ous about that shut­down in par­tic­u­lar is that it came in the face of rapid­ly increas­ing demand: As fed­er­al COVID-19 assis­tance filled state and local gov­ern­ment cof­fers, fire truck orders grew approx­i­mate­ly 50% from 2020 to 2022, reach­ing rough­ly 6,000 for the first time since 2008. Since then, order activ­i­ty has remained strong, hov­er­ing between 5,500 and 6,500. As a result, both REV Group and Oshkosh have seen their back­logs sky­rock­et over the last two years. The lat­est avail­able data shows that REV Group had a $4.2 bil­lion back­log on fire and emer­gency vehi­cle orders in the Unit­ed States as of Octo­ber 2024, while Oshkosh had a $5.3 bil­lion back­log on fire appa­ra­tus orders glob­al­ly as of June 2024. And yet, nei­ther com­pa­ny appears to be mak­ing sig­nif­i­cant invest­ments in addi­tion­al man­u­fac­tur­ing capac­i­ty to rapid­ly cut down its back­log — or even con­cerned that mul­ti-year delays in deliv­ery might lead cus­tomers to bail on their orders.

    Indeed, it appears that the dom­i­nant man­u­fac­tur­ers have man­aged to turn their deliv­ery fail­ures into finan­cial advan­tage. Using the pur­port­ed dif­fi­cul­ty of pro­ject­ing mate­r­i­al costs over a 2–3‑year lead time as an excuse, they have imposed “float­ing” price claus­es onto their cus­tomers — allow­ing them to increase the final price of a rig when it final­ly goes into pro­duc­tion. In effect, the bot­tle­neck in fire truck pro­duc­tion that REV Group, Oshkosh, and to a less­er extent, Rosen­bauer cre­at­ed with their M&A and oper­at­ing strate­gies are giv­ing them even more bar­gain­ing pow­er vis-à-vis fire depart­ments. Not only that but, accord­ing to REV Group’s SEC reports, the twen­ty-four-month back­log it is run­ning is lit­er­al­ly enhanc­ing its val­ue to share­hold­ers — AIP being the largest among them — by giv­ing the com­pa­ny “strong vis­i­bil­i­ty into future net sales.”

    Alto­geth­er, these facts paint an alarm­ing pic­ture. A hand­ful of financiers have been allowed to trans­form a crit­i­cal, once-vibrant indus­try into a rent-extract­ing rack­et. By con­sol­i­dat­ing the fire-appa­ra­tus indus­try through ser­i­al acqui­si­tions, REV Group and Oshkosh appear to have con­sol­i­dat­ed the pow­er to raise prices and throt­tle out­put of life­sav­ing equip­ment with impuni­ty. Using that pow­er, they have imposed years-long delays in deliv­ery on their cus­tomers and exor­bi­tant pay­ment terms that will enable them to pass on pro­duc­tion costs almost at will — leav­ing them lit­tle incen­tive to invest in new capac­i­ty or greater effi­cien­cy to relieve the bot­tle­neck in the fire truck sup­ply chain. They can reap ris­ing stock prices and “attrac­tive lev­els of return on invest­ed cap­i­tal” for their share­hold­ers just by sit­ting pret­ty — all while fire depart­ments across the coun­try strug­gle to replace aging fire trucks, have to spend more on main­te­nance for old­er vehi­cles, and are forced to shirk on oth­er bud­get items, like fire­fight­er salaries, to get what equip­ment they can. But the ulti­mate harm of AIP’s monop­o­liza­tion of the fire appa­ra­tus indus­try, of course, is not some­thing that can be mea­sured on a spread­sheet. It’s a hun­dred fire trucks sit­ting out of com­mis­sion while a dis­as­trous wild­fire burns whole neigh­bor­hoods of Los Ange­les to the ground. It’s lives lost, homes destroyed, com­mu­ni­ties gut­ted.
    ...

    And as the arti­cle reminds us, when it comes to the ques­tion of what can be done to address the neg­a­tive con­se­quences of the pri­vate-equi­ty cap­ture of the US firetruck indus­try, it can start with the enforce­ment of exist­ing antitrust laws and reg­u­la­tions:

    ...
    The mod­ern fire appa­ra­tus and emer­gency vehi­cle man­u­fac­tur­ing indus­try came into its own in the post-war decades of the 1950s and 1960s. Aid­ed by antitrust enforce­ment actions that pro­tect­ed small man­u­fac­tur­ers from exclu­sion­ary prac­tices and ensured they could source nec­es­sary sup­plies (like steel) at the same dis­counts as large firms, small and mid­sized fire appa­ra­tus manufacturers––typically fam­i­ly-owned operations––appeared in every region of the coun­try to pro­duce emer­gency vehi­cles tai­lored to the needs of local fire depart­ment. Com­pe­ti­tion among these small­er firms served to keep fire truck prices near costs, and the exis­tence of a large num­ber of man­u­fac­tur­ers ensured there was always plen­ty of redun­dant man­u­fac­tur­ing capac­i­ty to meet demand.

    This remained the case well into the 2000s. Then, the Great Finan­cial Cri­sis dec­i­mat­ed munic­i­pal bud­gets, which in turn dec­i­mat­ed demand for new fire trucks. The num­ber of fire truck’s ordered plum­met­ed from 5,000–6,000 a year to around 3,000 a year. At the same time, many of the man­u­fac­tur­ers in the indus­try began fac­ing lead­er­ship suc­ces­sion ques­tions, as founders were aging and con­sid­er­ing their options for retire­ment. That’s when a pri­vate equi­ty group, Amer­i­can Indus­tri­al Part­ners (AIP), took an inter­est in rolling up the indus­try.

    ...

    While AIP’s con­sol­i­da­tion of eco­nom­ic pow­er over fire truck man­u­fac­tur­ing is appalling, it is not some unsolv­able, intractable prob­lem we just have to live with. State and fed­er­al antitrust laws already pro­hib­it the kind of monop­o­lis­tic roll-up that AIP per­pe­trat­ed — they just need to be enforced. State AGs can bring law­suits to force REV Group to divest the man­u­fac­tur­ers it ille­gal­ly acquired and to pay dam­ages to fire depart­ments for the harm that its (attempt­ed) monop­o­liza­tion of the fire-truck indus­try has caused. Fire depart­ments and oth­er fire-appa­ra­tus pur­chasers can bring their own law­suits to do the same. So can the FTC and the DOJ’s Antitrust Divi­sion. If state leg­is­la­tors or mem­bers of Con­gress want to pave the way for such law­suits, they can launch their own inves­ti­ga­tions into the fire appa­ra­tus indus­try. And if any­one wants guid­ance on what a law­suit against AIP could look like, Lina Khan left us a roadmap just before she stepped down from the FTC last week — when she sued pri­vate-equi­ty giant Welsh Car­son for rolling up Texas anes­the­si­ol­o­gy prac­tices to dri­ve up the price of anes­the­sia ser­vices to Texas patients.
    ...

    “State and fed­er­al antitrust laws already pro­hib­it the kind of monop­o­lis­tic roll-up that AIP per­pe­trat­ed — they just need to be enforced.”

    Take that in. State and fed­er­al laws already pro­hib­it the slow-motion cap­ture of the US firetruck sec­tor that’s been play­ing out over the last decade. That’s the bro­ken state of affair for the US econ­o­my. Ille­gal monop­o­lies are just allowed to form with­out any legal con­se­quence. Even after one of the largest cities in the coun­try burns down as a result. It’s been a prof­it bonan­za for the pri­vate-equi­ty firetruck sec­tor. What kind of prof­it bonan­za is there await­ing the postal and air traf­fic con­trol ser­vice sec­tors? We’ll find out. Or at least the investors of the firms allowed to cap­ture these sec­tors will find out. The pub­lic will most­ly just get to find out about all the hor­ri­ble con­se­quences.

    Posted by Pterrafractyl | February 24, 2025, 6:06 pm
  35. The State of the Union is kind of joke at the moment. But that does­n’t mean it can’t become an even big­ger joke. After all, as we’ve seen, undo­ing the fed­er­al civ­il ser­vice and return­ing to the spoils sys­tem that pre­ced­ed it was a core goal of the entire Sched­ule F/Project 2025 plot. With with Project 2025 in full swing, it’s pret­ty clear that the spoils sys­tem is back. Back and already turn­ing out to be laugh­ably cor­rupt.

    And it’s just get­ting start­ed. There’s still plen­ty of loot­ing yet to be done. Which brings us to the ongo­ing his­toric loot­ing of the fed­er­al gov­ern­ment cur­rent­ly under­way under the guise of Elon Musk’s ‘Depart­ment of Gov­ern­ment Effi­cien­cy’ (DOGE) scheme. A scheme that, in one sense, appears to be fol­low­ing the pri­vate-equi­ty mod­el of gut­ting com­pa­nies in the name of ‘cost cut­ting’ and ‘effi­cien­cy’ but real­ly in the name of short-term prof­its and trans­fer­ring risks and lia­bil­i­ties onto employ­ees and the pub­lic. Except, of course, as we keep see­ing with so many of these dis­as­trous DOGE cuts, there isn’t actu­al­ly any short-term prof­it. Instead, DOGE is effec­tive­ly Project 2025 under a new name. A scheme to not just gut the fed­er­al gov­ern­ment but replace it with pri­vate con­trac­tors wher­ev­er pos­si­ble. Includ­ing at the Fed­er­al Avi­a­tion Admin­is­tra­tion (FAA), where Musk has already ‘vol­un­teered’ SpaceX’s ser­vices to “help make air trav­el safer” with some SpaceX employ­ees already ‘join­ing’ the FAA. As we’re going to see, it looks like the plans for SpaceX’s ‘fix­ing’ of the FAA has already moved on to the next step, with SpaceX’s Star­link ser­vice poised to be tapped to play a major role in the FAA’s oper­a­tions.

    Now, as we’ve seen, Star­link has already received incred­i­bly favor­able treat­ment by the US gov­ern­ment, with what amounts to a free pass grant­ed to Star­link to turn the Earth­’s low­er orbits into a giant ‘Kessler syn­drome’ dis­as­ter wait­ing to hap­pen. And it appears more incred­i­bly favor­able treat­ment for Star­link is set to hap­pen at the FAA. Because the new role Star­link is set to play at the FAA does­n’t just entail the obvi­ous con­flicts of inter­est inher­ent in Star­link get­ting new FAA con­tracts as a con­se­quence of the FAA’s DOGE ‘audit’. It appears that an exist­ing $2.4 bil­lion con­tract with Ver­i­zon that per­formed sim­i­lar ser­vices will also be can­celed, at the rec­om­men­da­tion of DOGE and Musk. In fact, accord­ing to Musk’s social media posts, the Ver­i­zon com­mu­ni­ca­tion sys­tem at the FAA is “break­ing down very rapid­ly” and that the “FAA assess­ment is sin­gle dig­it months to cat­a­stroph­ic fail­ure, putting air trav­el­er safe­ty at seri­ous risk.” Musk has also offered to send Star­link ter­mi­nals to the FAA on an emer­gency basis for no cost in order to fix the sit­u­a­tion. And, of course, no evi­dence for the appar­ent­ly loom­ing avi­a­tion cat­a­stro­phe that Musk warned about has been pre­sent­ed.

    Now, while it remains unclear if the Ver­i­zon con­tract can­cel­la­tion will indeed hap­pen, we’re also get­ting reports that the FAA has qui­et­ly ordered staff to some­how find tens of mil­lions of dol­lars to be made avail­able for fund­ing con­tracts with Star­link. Very qui­et­ly ordered. In fact, anony­mous sources are telling reporters that the orders to find the tens of mil­lions of dol­lars were issued ver­bal­ly, which is described as high­ly unusu­al. As the source puts it, its as though “some­one does not want a paper trail.”

    Oh, but get this: it turns out we don’t have to wor­ry about these glar­ing con­flicts of inter­est because Elon Musk has already promised to remove him­self from any sit­u­a­tions that pose so as con­flict. The Trump White House has already cit­ed those assur­ances by Elon as a rea­son to not be con­cerned. Yep.

    At the same time, we’re also learn­ing that some of the SpaceX employ­ees who have arrived at the FAA as part of this DOGE scheme were issued tem­po­rary con­flict-of-inter­est waivers so they could go about their jobs with­out vio­lat­ing fed­er­al con­flict of inter­est laws. So we have to ask: did Elon get a sim­i­lar waiv­er? Or is he just self-polic­ing him­self through this entire scam? Who knows. Either way, one of the most con­flict­ed ‘audits’ imag­in­able is still under­way, and only get­ting more cor­rupt with each pass­ing week.

    And that’s just the FAA. NASA employ­ees are already sound­ing the alarm about the many obvi­ous con­flicts of inter­est inher­ent in hav­ing SpaceX employ­ees review NASA con­tracts and make rec­om­men­da­tions. NASA has invest­ed $15 bil­lion in SpaceX already. How big will the invest­ments get after DOGE is done ‘mak­ing rec­om­men­da­tion’.

    Beyond that, we’re also learn­ing about NASA researchers who were plan­ning on pub­lish­ing a report on the chal­lenges AI presents to avi­a­tion safe­ty but decid­ed to with­hold the pub­li­ca­tion. Why? Because they were wor­ried about draw­ing neg­a­tive atten­tion from DOGE and Musk. Yep. And as we’ve seen, replac­ing as many fed­er­al work­ers with AI is anoth­er core DOGE goal. What kinds of AI plans do Musk and DOGE have in mind for the FAA? Time will tell, but it appears we’re all going to have to be con­tent with just hop­ing Elon polices him­self and does­n’t abuse the sit­u­a­tion. At the same time we read about one abuse after anoth­er after anoth­er:

    The Verge

    Star­link poised to take over $2.4 bil­lion con­tract to over­haul air traf­fic con­trol com­mu­ni­ca­tion

    The con­tract had already been award­ed to Ver­i­zon, but now a SpaceX-led team with­in the FAA is report­ed­ly rec­om­mend­ing it go to Star­link.

    by Andrew J. Hawkins
    Andrew J. Hawkins is trans­porta­tion edi­tor with 10+ years of expe­ri­ence who cov­ers EVs, pub­lic trans­porta­tion, and avi­a­tion. His work has appeared in The New York Dai­ly News and City & State.
    Updat­ed Feb 27, 2025, 11:17 AM CST

    While Elon Musk hacks away at the fed­er­al bureau­cra­cy in the name of “effi­cien­cy,” his com­pa­ny Star­link appears poised to steal a multi­bil­lion-dol­lar gov­ern­ment con­tract from Ver­i­zon.

    The Fed­er­al Avi­a­tion Admin­is­tra­tion is on the cusp of can­cel­ing a $2.4 bil­lion con­tract to over­haul the com­mu­ni­ca­tion sys­tem for the nation’s air traf­fic con­trol sys­tem and hand­ing it to the SpaceX sub­sidiary instead, The Wash­ing­ton Post reports, cit­ing two unnamed sources briefed on the plans. The news was also con­firmed by Bloomberg and The Asso­ci­at­ed Press.

    ...

    Musk has been sow­ing doubt about the Ver­i­zon sys­tem for sev­er­al days, claim­ing with­out evi­dence that it’s “not work­ing and so is putting air trav­el­ers at seri­ous risk.” Ear­li­er today, he post­ed on X that the Ver­i­zon com­mu­ni­ca­tion sys­tem is “break­ing down very rapid­ly” and that the “FAA assess­ment is sin­gle dig­it months to cat­a­stroph­ic fail­ure, putting air trav­el­er safe­ty at seri­ous risk.” He also claimed that Star­link ter­mi­nals would be pro­vid­ed at “NO COST to the tax­pay­er on an emer­gency basis to restore air traf­fic con­trol con­nec­tiv­i­ty.”

    This, of course, fol­lows a pat­tern, in which Musk posts on X about some­thing regard­ing the FAA and then seems to will it into exis­tence. Pre­vi­ous­ly, the bil­lion­aire called for FAA admin­is­tra­tor Michael Whitaker’s res­ig­na­tion, after the agency fined SpaceX for fail­ing to get approval for rock­et launch changes. After his repeat­ed com­ments, Whitak­er resigned on the day of Don­ald Trump’s inau­gu­ra­tion.

    A team from SpaceX, Starlink’s par­ent com­pa­ny, has been work­ing with­in the FAA in recent weeks to help mod­ern­ize the agency’s aging tech­nol­o­gy sys­tem. US Depart­ment of Trans­porta­tion Sec­re­tary Sean Duffy said they were tasked with devel­op­ing “a new, bet­ter, mod­ern and safer sys­tem.”

    Sev­er­al SpaceX employ­ees now have FAA email address­es, the Post reports. One SpaceX employ­ee post­ed a pho­to of the team on X, with the state­ment, “Work­ing to improve the safe­ty of the nation­al air space sys­tem.”

    ...

    The FAA was sched­uled to make a deci­sion to start pay­ing out the Ver­i­zon con­tract next month. But the SpaceX team report­ed­ly rec­om­mend­ed it be award­ed to Star­link instead, the Post reports, cit­ing an unnamed source with knowl­edge of the plans. So far, the for­mal process of unwind­ing one con­tract and award­ing it to anoth­er com­pa­ny has report­ed­ly not been fol­lowed. Sev­er­al senior FAA offi­cials have refused to sign the con­tract, lead­ing Musk’s team to seek help from a Trump appointee with­in the agency.

    Much of Musk’s wealth comes from gov­ern­ment largesse. Accord­ing to the Post, his com­pa­nies have received approx­i­mate­ly $38 bil­lion in gov­ern­ment con­tracts, loans, sub­si­dies, and tax cred­its over the years.

    ...

    ———–

    “Star­link poised to take over $2.4 bil­lion con­tract to over­haul air traf­fic con­trol com­mu­ni­ca­tion” by Andrew J. Hawkins; The Verge; 02/27/2025

    ” The Fed­er­al Avi­a­tion Admin­is­tra­tion is on the cusp of can­cel­ing a $2.4 bil­lion con­tract to over­haul the com­mu­ni­ca­tion sys­tem for the nation’s air traf­fic con­trol sys­tem and hand­ing it to the SpaceX sub­sidiary instead, The Wash­ing­ton Post reports, cit­ing two unnamed sources briefed on the plans. The news was also con­firmed by Bloomberg and The Asso­ci­at­ed Press.”

    As we can see, Project 2025 isn’t just about gut­ting the fed­er­al gov­ern­ment. There’s a whole new spoils sys­tem ready to be exploit­ed. With spoils that include can­cel­ing exist­ing con­tracts and hand­ing them over to Musk’s com­pa­nies. With SpaceX employ­ees appar­ent­ly mak­ing the deci­sion. Who knew the new spoils sys­tem was going to be so in-your-face about it all:

    ...
    A team from SpaceX, Starlink’s par­ent com­pa­ny, has been work­ing with­in the FAA in recent weeks to help mod­ern­ize the agency’s aging tech­nol­o­gy sys­tem. US Depart­ment of Trans­porta­tion Sec­re­tary Sean Duffy said they were tasked with devel­op­ing “a new, bet­ter, mod­ern and safer sys­tem.”

    Sev­er­al SpaceX employ­ees now have FAA email address­es, the Post reports. One SpaceX employ­ee post­ed a pho­to of the team on X, with the state­ment, “Work­ing to improve the safe­ty of the nation­al air space sys­tem.”

    ...

    The FAA was sched­uled to make a deci­sion to start pay­ing out the Ver­i­zon con­tract next month. But the SpaceX team report­ed­ly rec­om­mend­ed it be award­ed to Star­link instead, the Post reports, cit­ing an unnamed source with knowl­edge of the plans. So far, the for­mal process of unwind­ing one con­tract and award­ing it to anoth­er com­pa­ny has report­ed­ly not been fol­lowed. Sev­er­al senior FAA offi­cials have refused to sign the con­tract, lead­ing Musk’s team to seek help from a Trump appointee with­in the agency.
    ...

    And as we can see, not only has Musk been ‘greas­ing the skids’ for this con­tract cap­ture with unsourced claims on social media about how the Ver­i­zon sys­tem is “not work­ing and so is putting air trav­el­ers at seri­ous risk.” He’s also been claim­ing that Star­link ter­mi­nals would be pro­vid­ed at “NO COST to the tax­pay­er on an emer­gency basis to restore air traf­fic con­trol con­nec­tiv­i­ty.” So accord­ing to Musk’s unsourced claims, con­nect­ing the FAA to Star­link is pre­vent­ing some sort of loom­ing cat­a­stro­phe that was going to hap­pen under the Ver­i­zon con­tract. It’s entire­ly unclear how exact­ly Star­link inter­net con­nec­tions will some­how pre­vent these loom­ing cat­a­stro­phes, that’s the pub­lic claim Musk was mak­ing. It’s not a con­flict of inter­est. It’s Musk sav­ing the day. That’s the spin:

    ...
    Musk has been sow­ing doubt about the Ver­i­zon sys­tem for sev­er­al days, claim­ing with­out evi­dence that it’s “not work­ing and so is putting air trav­el­ers at seri­ous risk.” Ear­li­er today, he post­ed on X that the Ver­i­zon com­mu­ni­ca­tion sys­tem is “break­ing down very rapid­ly” and that the “FAA assess­ment is sin­gle dig­it months to cat­a­stroph­ic fail­ure, putting air trav­el­er safe­ty at seri­ous risk.” He also claimed that Star­link ter­mi­nals would be pro­vid­ed at “NO COST to the tax­pay­er on an emer­gency basis to restore air traf­fic con­trol con­nec­tiv­i­ty.”

    This, of course, fol­lows a pat­tern, in which Musk posts on X about some­thing regard­ing the FAA and then seems to will it into exis­tence. Pre­vi­ous­ly, the bil­lion­aire called for FAA admin­is­tra­tor Michael Whitaker’s res­ig­na­tion, after the agency fined SpaceX for fail­ing to get approval for rock­et launch changes. After his repeat­ed com­ments, Whitak­er resigned on the day of Don­ald Trump’s inau­gu­ra­tion.
    ...

    And while it remains unclear if Star­link will ulti­mate­ly get Ver­i­zon’s con­tract, it appears Musk has already ordered the FAA to find tens of mil­lions of dol­lars to pay for Star­link’s ser­vices. Ver­bal­ly ordered. Yes, it turns out the orders to find these Star­link funds aren’t being writ­ten down and only issued ver­bal­ly. As one source puts it, it appears as though “some­one does not want a paper trail”:

    Rolling Stone

    FAA Offi­cials Ordered Staff to Find Fund­ing for Elon Musk’s Star­link

    The Fed­er­al Avi­a­tion Admin­is­tra­tion direct­ed staff to locate tens of mil­lions of dol­lars for a Star­link deal, sources tell Rolling Stone

    By Andrew Perez, Asaw­in Sueb­saeng
    March 2, 2025

    Elon Musk’s satel­lite busi­ness Star­link may not have offi­cial­ly tak­en over Verizon’s $2.4 bil­lion con­tract with the Fed­er­al Avi­a­tion Admin­is­tra­tion yet to upgrade the sys­tems it uses to man­age America’s air­space. How­ev­er, on Fri­day, FAA offi­cials ordered staff to begin find­ing tens of mil­lions of dol­lars for a Star­link deal, accord­ing to a source with knowl­edge of the FAA and two peo­ple briefed on the sit­u­a­tion.

    The sources note that these inter­nal direc­tives have most­ly, if not entire­ly, been deliv­ered ver­bal­ly — which they say is unusu­al for a mat­ter like this. The source with knowl­edge of the FAA tells Rolling Stone that it appears as though “some­one does not want a paper trail.”

    It is unclear at this moment if the Ver­i­zon con­tract is offi­cial­ly dead, or if a Star­link deal has been for­mal­ly inked.

    ...

    Trump and Musk recent­ly direct­ed the fir­ings of hun­dreds of employ­ees at the FAA, a long under­staffed agency, rang­ing from air traf­fic con­trol sup­port staff, lawyers tasked with keep­ing drunk and reck­less pilots out of the skies, and staffers who eval­u­ate poten­tial new con­struc­tion haz­ards to inform flight paths. 

    Musk’s exceed­ing­ly pow­er­ful role lead­ing DOGE and myr­i­ad busi­ness inter­ests present obvi­ous and stag­ger­ing poten­tial con­flicts of inter­ests, which gov­ern­ment con­tract­ing rules and ethics require­ments are sup­posed to pro­hib­it. SpaceX has ben­e­fit­ed from bil­lions of dol­lars in gov­ern­ment con­tracts. And many of the gov­ern­ment agen­cies he is shred­ding reg­u­late his busi­ness­es

    The FAA, for exam­ple, fined SpaceX last year for safe­ty and reg­u­la­to­ry vio­la­tions. After­ward, Musk pub­licly demand­ed the agency’s pre­vi­ous Sen­ate-con­firmed admin­is­tra­tor, Michael Whitak­er, resign; Whitak­er depart­ed the day Trump took office. 

    The agency has also been con­duct­ing a “mishap inves­ti­ga­tion” into a SpaceX rock­et explo­sion in Jan­u­ary, which occurred days before Trump took office, that sent falling debris across the Caribbean. That hasn’t stopped Musk from gut­ting the FAA, or from offer­ing to help the agency. Last month, he vol­un­teered the ser­vices of his SpaceX engi­neers to the FAA to “help make air trav­el safer.”

    ...

    ———–

    “FAA Offi­cials Ordered Staff to Find Fund­ing for Elon Musk’s Star­link” By Andrew Perez, Asaw­in Sueb­saeng; Rolling Stone; 03/02/2025

    ” Elon Musk’s satel­lite busi­ness Star­link may not have offi­cial­ly tak­en over Verizon’s $2.4 bil­lion con­tract with the Fed­er­al Avi­a­tion Admin­is­tra­tion yet to upgrade the sys­tems it uses to man­age America’s air­space. How­ev­er, on Fri­day, FAA offi­cials ordered staff to begin find­ing tens of mil­lions of dol­lars for a Star­link deal, accord­ing to a source with knowl­edge of the FAA and two peo­ple briefed on the sit­u­a­tion.

    Well isn’t that fas­ci­nat­ing. A $2.4 bil­lion con­tract with Ver­i­zon is on the verge of being can­celled and replaced with Star­link’s ser­vices. And now FAA employ­ees are being ordered to scrounge up tens of mil­lions of dol­lars for the Star­link con­tract. Would­n’t the can­cel­la­tion of a $2.4 bil­lion con­tract free up those resources? Or are we see­ing some sort of attempt to estab­lish a Star­link foothold at the FAA before the Ver­i­zon con­tract is can­celed? It’s very unclear what we’re look­ing at here. Appar­ent­ly by design, with anony­mous sources telling reporters that they’ve only been receiv­ing ver­bal orders to find these funds, as though “some­one does not want a paper trail”:

    ...
    The sources note that these inter­nal direc­tives have most­ly, if not entire­ly, been deliv­ered ver­bal­ly — which they say is unusu­al for a mat­ter like this. The source with knowl­edge of the FAA tells Rolling Stone that it appears as though “some­one does not want a paper trail.”
    ...

    And that scan­dalous state of affairs at the FAA brings us to what is pos­si­bly the most eth­i­cal­ly grotesque twist in this whole mess: Musk has already pub­licly pledge to remove him­self from any sit­u­a­tions that might pose a con­flict of inter­est. A pledge the Trump White House has pub­licly cit­ed as a rea­son for no con­cern. So it’s par­tic­u­lar­ly inter­est­ing to also learn that some of the SpaceX employ­ee who arrived at the FAA as part of the DOGE review have already received tem­po­rary con­flict-of-inter­est waivers so they can car­ry out their duties. Which rais­es the ques­tion: how many of these con­flict-of-inter­est waivers are there get­ting issued as part of DOGE? And has Elon received any of them? At this point it’s unclear which answer would be the most scan­dalous:

    The Wash­ing­ton Post

    As Musk polices his own con­flicts, some agen­cies hear sirens going off

    The billionaire’s pri­vate inter­ests inter­sect with wide areas of gov­ern­ment work — and fed­er­al work­ers wor­ry about his pub­lic role.
    March 1, 2025
    By Faiz Sid­diqui and Han­nah Natan­son

    When the Office of Per­son­nel Man­age­ment asked fed­er­al work­ers to explain what they did last week, the email land­ed with extra weight for work­ers at NASA’s Human Land­ing Sys­tem pro­gram.

    The pro­gram has a lunar lan­der con­tract with Blue Ori­gin, the rock­et com­pa­ny owned by Wash­ing­ton Post own­er Jeff Bezos. Reply­ing to the email could reveal details of that con­tract work to Blue Origin’s pri­ma­ry com­peti­tor: Bil­lion­aire Elon Musk, now a pow­er­ful advis­er to Pres­i­dent Don­ald Trump and also the founder of the rock­et com­pa­ny SpaceX.

    ...

    The note urged work­ers to exclude pro­pri­etary or con­trac­tu­al­ly sen­si­tive infor­ma­tion. But NASA work­ers were nonethe­less rat­tled by the idea of dis­clos­ing what they were doing to OPM, an agency run by Musk’s allies — in the lat­est col­li­sion between Musk’s pub­lic role and his sprawl­ing busi­ness empire.

    Since for­mal­ly join­ing the Trump admin­is­tra­tion as a “spe­cial gov­ern­ment employ­ee,” Musk has said he would recuse him­self from tasks that might pose a con­flict of inter­est; the White House has said Musk would police those con­flicts him­self. But that hasn’t eased con­cerns in agen­cies that do busi­ness with Musk’s com­pa­nies or his com­peti­tors.

    Fed­er­al law gen­er­al­ly pro­hibits pub­lic offi­cials from work­ing on issues in which they, their fam­i­lies or their out­side employ­ers have finan­cial inter­est, and ethics offices — not the offi­cials them­selves — are sup­posed to decide what pos­es a con­flict. As a spe­cial gov­ern­ment employ­ee, Musk is sup­posed to file a finan­cial dis­clo­sure form, but it doesn’t have to be made pub­lic.

    At the Fed­er­al Avi­a­tion Admin­is­tra­tion, wor­ry over poten­tial con­flicts of inter­est spiked after rev­e­la­tions that the agency is close to shift­ing work on a $2.4 bil­lion con­tract for its com­mu­ni­ca­tions sys­tems from Ver­i­zon to Musk’s Star­link.

    “For them to come in and be award­ed the con­tract at the last minute is star­tling across the board,” said an employ­ee briefed on the agency’s delib­er­a­tions, who spoke on the con­di­tion of anonymi­ty for fear of ret­ri­bu­tion. “It’s such a clear con­flict of inter­est.”

    Mean­while, a hand­ful of SpaceX employ­ees have arrived at the FAA and got­ten tem­po­rary waivers from con­flict-of-inter­est rules so they can review its tech­nol­o­gy on behalf of the U.S. DOGE Ser­vice, a bud­get-cut­ting agency Trump cre­at­ed under Musk’s com­mand (though the White House now says Musk is mere­ly a pres­i­den­tial advis­er and that DOGE is run by admin­is­tra­tor Amy Glea­son). At least some of the SpaceX employ­ees have emerged with FAA email address­es.

    “FAA’s office of com­mer­cial space [flight] reg­u­lates SpaceX, and now we have their employ­ees inside our agency while they still serve SpaceX,” said anoth­er work­er, also speak­ing on the con­di­tion of anonymi­ty for fear of ret­ri­bu­tion.

    The work­er said that “there was some shock to the news” of pos­si­bly mov­ing the Ver­i­zon con­tract to Star­link. The inter­nal reac­tion, the per­son said, was: “Well, that can’t be good how that hap­pened.”

    White House press sec­re­tary Karo­line Leav­itt defend­ed Musk, say­ing in a writ­ten state­ment that he “is self­less­ly serv­ing Pres­i­dent Trump’s Admin­is­tra­tion as a spe­cial gov­ern­ment employ­ee, and he has abid­ed by all applic­a­ble fed­er­al laws.”

    ...

    But in the FAA, some peo­ple are uncom­fort­able about allies — or employ­ees — of Musk review­ing an agency that also grants licens­es to SpaceX and its com­peti­tors, accord­ing to a dif­fer­ent FAA staffer who also spoke on the con­di­tion of anonymi­ty for fear of reprisal.

    “It’s a fox in the hen­house sit­u­a­tion,” anoth­er FAA staffer said.

    Such wor­ries are even more preva­lent at NASA, the agency most close­ly tied to Musk’s busi­ness empire. NASA has invest­ed more than $15 bil­lion into SpaceX, accord­ing to a Post analy­sis that cit­ed an agency spokes­woman.

    With­in days of a DOGE team arriv­ing at the agency, the engi­neer­ing direc­torate at the Kennedy Space Cen­ter in Flori­da held a large ques­tion-and-answer ses­sion, accord­ing to an employ­ee, who also spoke on the con­di­tion of anonymi­ty for fear of retal­i­a­tion. One of near­ly 600 atten­dees spoke up to ask a ques­tion that had been on many staffers’ minds, the employ­ee said.

    “With Elon seem­ing­ly hav­ing his hand in every­thing and SpaceX being a major NASA con­trac­tor,” the employ­ee recalled this per­son ask­ing, “what should we do regard­ing any con­flicts of inter­est?”

    Lead­ers in the meet­ing told staff to pass any con­cerns up their nor­mal man­age­ment chain, the employ­ee said. But the response yield­ed more ques­tions than answers, accord­ing to inter­views with a half dozen NASA employ­ees, all of whom spoke on the con­di­tion of anonymi­ty for fear of retal­i­a­tion over crit­i­ciz­ing Musk pub­licly. They said Musk’s rapid entry into their agency is stir­ring alarm that he could try to use NASA data or weak­en its reg­u­la­to­ry and safe­ty func­tions to boost his company’s for­tunes.

    Even now, DOGE offi­cials can see details of pro­pos­als pre­vi­ous­ly sub­mit­ted to NASA, giv­ing them insight into top­ics and tasks the space agency is most inter­est­ed in fund­ing — as well as con­tracts SpaceX’s com­peti­tors have pre­vi­ous­ly won, the peo­ple said. Updates from NASA employ­ees could also pro­vide insights into works in progress, pro­vid­ing poten­tial­ly unfair com­pet­i­tive advan­tages if shared with Musk’s busi­ness­es.

    “We don’t talk — lit­er­al­ly ever — any­thing about SpaceX to Blue Ori­gin, or any­thing ever about Blue Ori­gin to SpaceX,” one of the peo­ple famil­iar with the mat­ter said. “That’s, like, sin No. 1. You do not cross the streams.”

    Musk’s pow­er­ful sta­tus could make work hard­er for NASA staffers charged with exam­in­ing SpaceX’s plans and flag­ging nec­es­sary revi­sions or safe­ty issues, the employ­ees said. “Fre­quent­ly we push back on SpaceX — that is our role as NASA engi­neers — and SpaceX has to go back and make changes or pro­vide more back­ing ratio­nale,” one employ­ee said. “There will be an issue if, for exam­ple, we are told not to push back any­more.”

    Oth­er con­cerns cen­ter on arti­fi­cial intel­li­gence. Musk has tout­ed the use of AI to ush­er in rev­o­lu­tion­ary change. He also has invest­ed in devel­op­ing it. But his inter­est in the tech­nol­o­gy has dis­rupt­ed some work by NASA researchers try­ing to bet­ter under­stand its poten­tial dan­gers, one employ­ee said: Last week, the authors of a forth­com­ing report on the chal­lenges AI presents to avi­a­tion safe­ty decid­ed not to pub­lish the piece lest the paper draw neg­a­tive atten­tion from Musk and DOGE.

    ...

    At the Food and Drug Admin­is­tra­tion, DOGE’s arrival pro­voked wor­ry over what Musk’s allies might do with a con­fi­den­tial drug approvals data­base, one employ­ee said, also speak­ing on the con­di­tion of anonymi­ty out of fear of ret­ri­bu­tion. That’s because Neu­ralink, Musk’s brain implant com­pa­ny, has busi­ness before the FDA, as do its com­peti­tors.

    At the Secu­ri­ties and Exchange Com­mis­sion, staffers wor­ried about how to respond to the “What did you do last week?” email, accord­ing to an employ­ee of that agency, who spoke on the con­di­tion of anonymi­ty for fear of reprisals. Musk has sparred with the finan­cial reg­u­la­tor for years, say­ing he does not respect it.

    The agency sued Musk in 2018, cul­mi­nat­ing in set­tle­ments that required him and his car com­pa­ny, Tes­la, to each pay $20 mil­lion over a tweet in which Musk false­ly claimed to have “Fund­ing secured” to take the com­pa­ny pri­vate. In the last days of the Biden admin­is­tra­tion, the agency sued Musk again, alleg­ing that he was late to pub­licly declare his stake in the social media site then known as Twit­ter, enabling him to pay $150 mil­lion less for the com­pa­ny.

    Musk has ele­vat­ed a call for “defang­ing” the SEC.

    ...

    ————

    “As Musk polices his own con­flicts, some agen­cies hear sirens going off” By Faiz Sid­diqui and Han­nah Natan­son; The Wash­ing­ton Post; 03/01/2025

    “Since for­mal­ly join­ing the Trump admin­is­tra­tion as a “spe­cial gov­ern­ment employ­ee,” Musk has said he would recuse him­self from tasks that might pose a con­flict of inter­est; the White House has said Musk would police those con­flicts him­self. But that hasn’t eased con­cerns in agen­cies that do busi­ness with Musk’s com­pa­nies or his com­peti­tors.”

    Isn’t that spe­cial. Elon pledged to remove him­self from tasks that might pose a con­flict of inter­est. A pledge that was appar­ent­ly enough to con­vince the Trump White House that all was good. Despite fed­er­al law. So when we see how some of the SpaceX employ­ees now embed­ded at the FAA have got­ten tem­po­rary con­flict-of-inter­est waivers, we have to ask: did Elon get a con­flict-of-inter­est waiv­er too?

    ...
    Fed­er­al law gen­er­al­ly pro­hibits pub­lic offi­cials from work­ing on issues in which they, their fam­i­lies or their out­side employ­ers have finan­cial inter­est, and ethics offices — not the offi­cials them­selves — are sup­posed to decide what pos­es a con­flict. As a spe­cial gov­ern­ment employ­ee, Musk is sup­posed to file a finan­cial dis­clo­sure form, but it doesn’t have to be made pub­lic.

    At the Fed­er­al Avi­a­tion Admin­is­tra­tion, wor­ry over poten­tial con­flicts of inter­est spiked after rev­e­la­tions that the agency is close to shift­ing work on a $2.4 bil­lion con­tract for its com­mu­ni­ca­tions sys­tems from Ver­i­zon to Musk’s Star­link.

    “For them to come in and be award­ed the con­tract at the last minute is star­tling across the board,” said an employ­ee briefed on the agency’s delib­er­a­tions, who spoke on the con­di­tion of anonymi­ty for fear of ret­ri­bu­tion. “It’s such a clear con­flict of inter­est.”

    Mean­while, a hand­ful of SpaceX employ­ees have arrived at the FAA and got­ten tem­po­rary waivers from con­flict-of-inter­est rules so they can review its tech­nol­o­gy on behalf of the U.S. DOGE Ser­vice, a bud­get-cut­ting agency Trump cre­at­ed under Musk’s com­mand (though the White House now says Musk is mere­ly a pres­i­den­tial advis­er and that DOGE is run by admin­is­tra­tor Amy Glea­son). At least some of the SpaceX employ­ees have emerged with FAA email address­es.

    “FAA’s office of com­mer­cial space [flight] reg­u­lates SpaceX, and now we have their employ­ees inside our agency while they still serve SpaceX,” said anoth­er work­er, also speak­ing on the con­di­tion of anonymi­ty for fear of ret­ri­bu­tion.

    The work­er said that “there was some shock to the news” of pos­si­bly mov­ing the Ver­i­zon con­tract to Star­link. The inter­nal reac­tion, the per­son said, was: “Well, that can’t be good how that hap­pened.”

    White House press sec­re­tary Karo­line Leav­itt defend­ed Musk, say­ing in a writ­ten state­ment that he “is self­less­ly serv­ing Pres­i­dent Trump’s Admin­is­tra­tion as a spe­cial gov­ern­ment employ­ee, and he has abid­ed by all applic­a­ble fed­er­al laws.”
    ...

    And as the arti­cle reminds us, the FAA is just one of a num­ber of fed­er­al agen­cies where Musk’s busi­ness empire has direct con­flicts of inter­est. Includ­ing NASA, an agency that lit­er­al­ly invest­ed over $15 bil­lion into SpaceX and has exten­sive con­tracts with the com­pa­ny. Giv­en the pow­er grab we’re already see­ing at the FAA, just imag­ine the pow­er grabs Musk has in mind for NASA:

    ...
    Such wor­ries are even more preva­lent at NASA, the agency most close­ly tied to Musk’s busi­ness empire. NASA has invest­ed more than $15 bil­lion into SpaceX, accord­ing to a Post analy­sis that cit­ed an agency spokes­woman.

    With­in days of a DOGE team arriv­ing at the agency, the engi­neer­ing direc­torate at the Kennedy Space Cen­ter in Flori­da held a large ques­tion-and-answer ses­sion, accord­ing to an employ­ee, who also spoke on the con­di­tion of anonymi­ty for fear of retal­i­a­tion. One of near­ly 600 atten­dees spoke up to ask a ques­tion that had been on many staffers’ minds, the employ­ee said.

    “With Elon seem­ing­ly hav­ing his hand in every­thing and SpaceX being a major NASA con­trac­tor,” the employ­ee recalled this per­son ask­ing, “what should we do regard­ing any con­flicts of inter­est?”

    Lead­ers in the meet­ing told staff to pass any con­cerns up their nor­mal man­age­ment chain, the employ­ee said. But the response yield­ed more ques­tions than answers, accord­ing to inter­views with a half dozen NASA employ­ees, all of whom spoke on the con­di­tion of anonymi­ty for fear of retal­i­a­tion over crit­i­ciz­ing Musk pub­licly. They said Musk’s rapid entry into their agency is stir­ring alarm that he could try to use NASA data or weak­en its reg­u­la­to­ry and safe­ty func­tions to boost his company’s for­tunes.

    Even now, DOGE offi­cials can see details of pro­pos­als pre­vi­ous­ly sub­mit­ted to NASA, giv­ing them insight into top­ics and tasks the space agency is most inter­est­ed in fund­ing — as well as con­tracts SpaceX’s com­peti­tors have pre­vi­ous­ly won, the peo­ple said. Updates from NASA employ­ees could also pro­vide insights into works in progress, pro­vid­ing poten­tial­ly unfair com­pet­i­tive advan­tages if shared with Musk’s busi­ness­es.

    “We don’t talk — lit­er­al­ly ever — any­thing about SpaceX to Blue Ori­gin, or any­thing ever about Blue Ori­gin to SpaceX,” one of the peo­ple famil­iar with the mat­ter said. “That’s, like, sin No. 1. You do not cross the streams.”

    Musk’s pow­er­ful sta­tus could make work hard­er for NASA staffers charged with exam­in­ing SpaceX’s plans and flag­ging nec­es­sary revi­sions or safe­ty issues, the employ­ees said. “Fre­quent­ly we push back on SpaceX — that is our role as NASA engi­neers — and SpaceX has to go back and make changes or pro­vide more back­ing ratio­nale,” one employ­ee said. “There will be an issue if, for exam­ple, we are told not to push back any­more.”
    ...

    Final­ly, note this incred­i­bly dis­turb­ing detail: the authors of a forth­com­ing NASA report on the chal­lenges AI presents to avi­a­tion safe­ty decid­ed not to pub­lish the piece in order to avoid the wrath of Musk and DOGE:

    ...
    Oth­er con­cerns cen­ter on arti­fi­cial intel­li­gence. Musk has tout­ed the use of AI to ush­er in rev­o­lu­tion­ary change. He also has invest­ed in devel­op­ing it. But his inter­est in the tech­nol­o­gy has dis­rupt­ed some work by NASA researchers try­ing to bet­ter under­stand its poten­tial dan­gers, one employ­ee said: Last week, the authors of a forth­com­ing report on the chal­lenges AI presents to avi­a­tion safe­ty decid­ed not to pub­lish the piece lest the paper draw neg­a­tive atten­tion from Musk and DOGE.
    ...

    That’s how much implic­it author­i­tar­i­an pow­er Musk and his DOGE team are already wield­ing. How many more inter­gov­ern­men­tal reports warn­ing about the dis­as­trous con­se­quences of this his­toric pow­er grab are there get­ting pre­emp­tive­ly cen­sured over fears of anger­ing ‘Dear Leader’? It’s hard to imag­ine this was the only one. Either way, it’s pret­ty clear Musk is going to turn the FAA into anoth­er one of his play­things. So let’s hope those NASA researchers were some­how mis­tak­en. Because when it comes to the risks asso­ci­at­ed with hap­haz­ard­ly apply­ing arti­fi­cial intel­li­gence to gov­ern­ment roles, we’re going to be find­ing out the hard way whether or not it’s a dis­as­ter. Risks to the gen­er­al pub­lic, of course. Elon Musk will be just fine, dis­as­ters or not. Fine and much, much wealth­i­er and more influ­en­tial, regard­less of the out­come. That’s how author­i­tar­i­an pow­er grabs work. An abil­i­ty to intim­i­date every­one into com­pli­ance is the only real com­pe­tence required.

    Posted by Pterrafractyl | March 5, 2025, 1:03 am

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