The private equity industry has helped to create our floundering society that has increased the wage gap and destroyed housing and health affordability, and yet for some dang reason, our public pension funds continue to invest in them.
This book written by attorney Brendan Ballou who prosecuted private equity companies spells out in vivid detail how destructive this investment industry is and why we as teachers need to demand that the Chicago Teachers Pension Fund stop investing in these blood suckers that destroy pensions.
Sun Capital is a private equity firm that bought the grocer Marsh and forced the company to sell many of its stores for $260 million, and then Marsh had to lease back the stores. Sun collected transaction fees for selling the assets, $1 million annual management fee, and then Marsh filed for bankruptcy. They were then able to eliminate $62 million in pension fund obligations while a separate pension fund for its executives was fully funded. Marsh’s pension costs were taken over by the PBGC or Pension Benefit Guaranty Corporation; as a result their warehouse workers' pensions were cut by a quarter. One worker said they had given up wage increases in order to get a better pension, as teachers had done in the past during past Chicago teacher strikes.
“Problems occur when private equity turns from investment to extraction.”
Former Rolling Stone reporter Matt Taibbi who I worked with in Russia back in the 90s, wrote an explosive series entitled about Goldman Sachs, an investment bank that he equated to “a giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Today’s vampire squid is private equity.
“For me to work 12-14 hour days and barely have enough to pay increasing rents to a multi-billion dollar Wall Street giant, it’s like sharecropping all over again,” said a tenant of Colony subsidiary.
Private equity has made housing unaffordable! They have become the largest private sector property owner in America. The State of California said Blackstone-owned Colony charged excessive late fees to its residents. When Blackstone bought up affordable housing units they charged tenants new landscaping, pets, smart lock and pool fees. They even had to pay utilities and a conveyance fee of $9.95 for each bill. The private equity landlord placed the burden of maintenance on the tenants with deceptive rent to own agreements. Colony sent eviction notices to one-third of its renters.
Researchers in Detroit found homes owned by large investors had more chance of lead in blood than other homes. Plus their rent keeps going up, but it's expensive to move out. In 2000 over 70 percent owned homes, but today only 63 percent and black homeowner rates have fallen to levels from the 1960s. After Sunrise Capital bought a mobile park in Akron, Ohio, it tried to double residents’ lot rents. One said they’re like slumlords.
Even the government is in on the private equity housing scam. In 2016 state entity Fannie May helped provide $1 billion in financing to help Stockbridge Capital buy up more mobile homes and did not limit how often they could raise the rent. The irony was the mission of Fannie Mae and Freddie Mac was to help preserve affordable housing.
“And they’re doing the opposite by helping investors come in and make the most affordable housing in the U.S. less affordable all the time,” Ballou wrote.
Why did Sun Capital make Friendly's declare bankruptcy after closing 63 Friendly’s restaurants? Because Friendly’s had $115 million in pension liabilities.
By selling Friendly’s to one of Sun’s affiliates, Sun Capital, it was able to reacquire its own company free of pension liabilities. The pension obligation was sent to PBGC, a government insurance program for private pension plans, which was supposed to be a last resort, not for strategic bankruptcy reorganizations. This has a ripple effect on private pension plans that are more responsible because they get increased premiums to pay to the PBGC.
Private equity like any criminal enterprise is good at hiding assets. After one $110 million verdict against two private equity owned nursing homes in Florida, the nursing homes shifted their liabilities to a related company with no assets, while creating a solvent nursing home chain that was nominally protected from judgment. So now the plaintiffs had a judgment to collect money from a company that had no money. “Despite the seemingly obvious game to avoid paying, more than a decade after the case began, the litigation remains ongoing.” In another case jurors awarded $350 million in damages for Ruckh, a nurse with 20 years experience who said conditions at the nursing home were abysmal. She said they were understaffed, noting one resident had an untreated wound with a note from a nurse that they had no time to treat it. Some residents were denied critical care because they were on Medicaid which provided less money for services than Medicare or other private insurance. Despite these fraudulent practices, a lower court found that the plaintiff failed to demonstrate that the nursing home management private equity company was liable for actions of individual homes. An appellate court reversed the judge's findings, and then after still owing $257 million in damages, the private equity controlled nursing home declared bankruptcy and the nursing home was able to discharge almost all the damages. So in the end Ruckh got $1 million for fraud that cost taxpayers $80 million and the private equity firm that owned the nursing homes, Formation, continues to thrive with $2 billion in assets under management and investments in almost 2 dozen companies.
Because anti-trust is rarely enforced there are just four leading airlines, three major cell phone companies, and two leading drug stores. “Plausibly no one benefited from this decline of antitrust more than the private equity industry, particularly in health care. The private focus on health care on short-term profits over long-term care, (and) disregard for customers and patients.”
The biggest firms don’t call themselves private equity anymore; they are ‘alternative asset managers.’ And now they are like the banks Too Big to Fail so the biggest ones may take ever-greater risks assuming they will be bailed out. Goldman Sachs was perhaps the most coveted firm to work for on Wall Street, but now pay there has fallen in half and private equity firms like Blackstone have taken its place. “Blackstone reminded me of Goldman Sachs in the 1990s - every time you see a new business that is growing, that is where they are.” More than one-fifth of Blackstone’s employees and more than a quarter of KKR’s previously worked at Goldman Sachs or Morgan Stanley, whereas just 1 percent of Goldman Sachs worked at Blackstone. The CEO of Goldman made $24 million in 2020, but the president of Blackstone made 10 times that much. Nearly two dozen private equity executives have become multi billionaires.
The migration from investment banks to private equity firms means that the great mass of talent in finance is shifting to ever less regulated and transparent parts of the industry.
Private equity has lobbied successfully for access to 401(k) funds retirement, their money before came from the very rich, but now it comes from everyday people. 401ks never before invested in private equity because unlike stocks and bonds, investments in private equity are ‘illiquid’ - they can’t be withdrawn whenever people need them. And they often charge high fees that are difficult to comprehend and riskier investments than those in the stock market. Jay Clayton who was SEC chair and is now chair of Apollo, one of the largest private equity companies, helped to insulate private equity from lawsuits in 401k. While Clayton was head of SEC under Trump, SEC enforcement actions dropped dramatically in one year. He brought just 31 insider trading cases, the lowest level since 1996. People’s retirement accounts will be less secure after Clayton drafted a letter endorsing private equity to access 401(k)s. And less transparent.
More private equity owned companies charge prisoners for their stay in prisons. One employee was fired by private equity owned Trinity for refusing to serve rotten tomatoes and had served food with maggots in it and food contaminated with mold. Eventually the Michigan governor revoked Trinity’s license to serve prison food. In Arizona, one private equity prison served meat ‘not fit for human consumption.’
When customers try to sue lenders for violation of consumer protection laws, they are often compelled into arbitration, where private companies and not neutral courts resolve disputes. A filing fee can cost several thousands of dollars just to bring their claims. And their judges were paid by the offending business, largely supporting defendants knowing who paid their bills. And there are no precedential case laws that fellow consumers could rely on. Private equity companies forced customers in payday loans, nursing homes and single family housing rentals into arbitration agreements so they are less likely to win lawsuits they control and defeat class action lawsuits.
For example, in Kentucky beneficiaries of a state pension fund filed a class action suit against KKR and Blackstone alleging they breached their fiduciary duties by selling the pension fund financial products with enormous, hidden fees.
Alleging billions of dollars in damages. KKR and Blackstone filed a ‘writ of prohibition’ with the state appellate court arguing the plaintiffs had no standing to sue. The Appellate Court and Kentucky State Supreme Court agreed. Because the Pension fund had not yet collapsed, the plaintiffs could not sue. This was a very significant finding since the rise of lawsuits filed by beneficiaries of underfunded pensions across the country.
The federal government has teamed up with the private equity people on the scam of for-profit colleges allowing them to flourish and subsidized them (just like charters) between 2006 - 2016. Ashford University in Clinton, Ohio, is a textbook case. The private equity firm Warburg Pincus bought Ashford and turned it into for-profit college, inheriting the college’s accreditation which gave it access to federal financial aid so enrollment went up, from 332 students in 2005 to 83,000 six yrs later and revenue. It went from $7.9 million in 2005 to $968 million in 2012. With over 70,000 enrollees, its online degree program allegedly had only seven full time faculty. The school had over 1700 recruiters, but only one employee devoted to helping its graduates find jobs. One student applied to over 100 jobs and years later still can’t find a job in their field. Another said they felt they wasted 4 years at the school. Over half their graduates were either unemployed or in a completely different field and less than a quarter of students paid any money toward the principal balance of student loans. “An education at Ashford was almost worthless; it was also overpriced.” A 4 year online bachelors degree cost $60k while the average cost of public 4 year college in person including room and board was less than half. They told prospective students federal financial aid would cover all their costs plus extra can buy cars and vacations. California lawsuit against the school in 2017 alleged students owed billions to the government in loans and hundreds of millions to Ashford. Recruiters under enormous pressure and sales people wer told to stand at their desks if they didn't make sales targets and prodded them to make bets on one another’s performance. “You stopped looking at students as people and you started putting numbers on people.’ California succeeded in a lawsuit against Ashford and was ordered to pay $22 million for defrauding students. Spending on instruction fell from $5k to $700 per student after Warburg Pincus bought the college. CEO Andrew Clark of Ashford made $20 million in one year, more than 20 times his counterpart at Harvard. But they never closed Ashford; it was sold to the University of Arizona. Ashford got up to 87 percent of its money from the federal government. Maybe that’s why Ashford’s head guy was President Obama’s former treasury secretary Tim Geithner.
On average over 80 percent of revenue from private equity profits came from the government. Since 1990 private equity has given over $896 million to congressional candidates and members in both parties. And they lobby on behalf of industry. During covid private equity industry got over $5 billion in federal assistance while they already had $908 billion in reserves. So what did they do? They did more deals; the ten firms with the most bailout money did 230 leveraged buyouts in just nine months. And they extracted $1.8 billion in aid in 2020.
Blue Wolf Capital was one success story where they worked with labor in 2017 and bought with most of their own money Caddo River Lumber Mill in Glenwood, Arkansas after it had closed in 2010. They revived the mill and hired over 100 workers that paid a decent $16/hour. Retirees were rehired, and this had a ripple effect on the community. The City Cafe reopened with a $7.99 buffet. It did not load up the mill with debt so they could invest in its own operations rather than just service its loans.
But the vampire is starting to eat itself. With more money and less companies to pay, they now overpay for them and they are just buying worse companies. In 2019 for the first time ever a majority of private equity investment went to unprofitable companies. With these companies forced to service the debt that private equity companies load on them, they will increase odds that they will fail.
Ballou comes up with some solutions, but they’re laughable in a capitalist system that is based on profits over people. He argues to use levers of power over private equity - federal agencies, courts, investors and state and local governments. The very agencies that help private equity plunder our country? The Department of Labor should bar 401ks from private equity. Remember, they donate to both parties equally (the Republicans get a smidge more according to Ballou). Worth Rise’s successful effort to stop or slow public pension investments in private equity buying up prison phone companies is a useful model.
Ballou is protective of the beast.
“(We) don’t need to overthrow capitalism itself (if such a thing were possible), we just need to make private equity firms, simply put, boring. We should build a better economy for all, to do this we need to organize ourselves.” He pointed to some nonprofit news and volunteer organizations like the Prison Policy Initiative which has excellent reporting on private equity’s purchase of prison phone services. He writes we also need a database of private equity portfolio companies, their owners and institutional investors that support private equity.