The Enemy from within …
In the second half of 2020, private equity-owned companies borrowed some $27 billion to pay for dividends or debt restructurings, according to a report by S&P Global Market Intelligence’s Leveraged Commentary & Data. That was the most active period for these loans in nearly three years.
And the borrowing hasn’t slowed down this year: $4.7 billion in the first six weeks. That was the second-highest amount for any comparable period since the firm began tracking that data in 2000.
- Private Equity Firms Are Piling On Debt to Pay Dividends, NY Times
By JM Hamilton (2-20-2021)
Imagine if America had a foreign enemy that was systematically destroying the economy, laid off workers/consumers at an alarming rate, stole & ruined the nation’s competitive & innovative capacity, and said enemy’s actions led to considerable strain on the US government, resulting in catastrophic national debt?
Well, given America’s “kill first, ask questions later” foreign policy response to every foreign adversary (as well as the moral hazard & profit motive surrounding the military industrial complex)… It’s fairly safe to assume a bankrupt United States would find a way to rally around the flag and go to war. In this instance, justifiably so.
And yet, we don’t have to imagine any of this because America has such an enemy, an enemy from within … called the private equity industry.
This industry – private equity (PE) - systematically loads perfectly viable companies up with debt, in order to pay ownership absurd amounts of financed profits, private dividends, and management fees. To pay for this, private equity lays off workforce, cuts back on customer service and R&D, outsources labor, and overworks the remaining domestic workforce (which are often stripped of benefits). And the second these private equity owned and managed companies face adversity, they often collapse, due to poorly managed debt loads. We saw plenty of this back in the ’08 financial crisis, and of course, we are seeing a large number of – job killing - bankruptcies during the pandemic, as a result of current or prior private equity ownership. In fact, private equity ownership – in the ultimate act of moral hazard – may take out swaps or derivatives bets against the very companies it owns & operates, in the ultimate act of sabotage. PE might buy its own company's debt on the cheap, and swap the debt for equity, post-bankruptcy.
Any number of PE strategies are the equivalent to selling a company short, while possessing the power to topple said company.
Of equal if not greater harm, as PE destroys companies or merges companies, this inevitably leads to consolidation, monopoly, and monopsony (not to mention, a large number of zombie corporations), which in turn, preys upon the consumer, the economy, and you guessed it, labor. You see, the profit motive means that the biggest chunk of corporate expense, labor, must be preyed upon incessantly in order to achieve – the end all, be all of the US economy – short term profit maximization.
But this enemy is slick and it’s smooth. PE has deeply infiltrated it’s, alleged, overseers within the US government; the revolving door ensures that its interests are protected, and lucrative jobs are waiting – within in the industry - for favored American heroes & VIPs within government. The enemy is so insidious it’s not a considerable leap to say, private equity and Wall Street are the government. This, in turn, ensures that fiscal, monetary, regulatory, and tax policies not only turn a blind eye to this enemy of the United States; but rather, the owned government enacts fiscal, monetary, regulatory, and tax policies that are highly favorable to private equity interests.
One of the ironies of America’s ever soaring national debt (as a result of bailouts for private equity, Wall St, and financed tax cuts for the rich), monetary policy actually caters to the industry by producing inevitably low interest rates; that is to say, highly inexpensive debt, which - along with low taxation - is the mother’s milk of the industry.
Crazier still, state pensions, union pensions, and sovereign wealth funds - desperate for earnings & yield - invest in economy and labor destruction, none other than private equity itself. Contributing fuel to the dumpster fire that is the leveraged buyout and predatory lending. And I haven’t even touched upon the vast sums of money PE donates to both political parties.
So let’s change one word and re-ask the question:
Imagine if America had a domestic enemy that was systematically destroying the economy, laid off workers/consumers at an alarming rate, stole & ruined America’s competitive & innovative capacity, and said enemy's actions led to considerable strain on the US government, resulting in catastrophic national debt?
Americas soft, white underbelly is exposed, and that underbelly is private equity, Wall Street, and our nation’s highly abused exorbitant privilege.
For the preservation of America, this domestic enemy, of course, can be fought. Merely do the opposite of what the nation is doing presently: hike up taxation on debt, capital gains, & excessive wealth; eliminate the carried interest loophole; increase regulatory scrutiny on the PE industry and cap leverage ratios on all takeovers & subsequent ownership/recaps; afford greater labor protections; and raise interest rates on corporate debt.
And above all, regulate the Federal Reserve, so that it is no longer a servant of the enemy from within.
Copyright JM Hamilton Publishing 2021
