These are the Plunderers: How Private Equity Runs - and Wrecks - America by Gretchen Morgenson and Joshua Rosner
Book Review
I already reviewed a book about the evils of private equity.
So why review a second book about the industry that destroys our economy to enrich the very rich by slashing pensions, health care costs and jobs?
Because it’s the gift that keeps on giving. I continue to wonder why our public pension funds still entrust our hard-earned retirement money with these monsters.
These are the Plunderers written by NY Times journalist and Pulitzer Prize winner Gretchen Morgenson and Joshua Rosner made me once again jump out of my seat while reading the book.
They too wonder why any self-respecting pension fund would invest with these con artists.
They write that the Pennsylvania Public School Employees’ Retirement System invested $100 million in Apollo just after this private equity firm had paid a $30,000 fine because it did not advise the pension fund about its monitoring fee extraction.
Then this whopper:
“According to Philadelphia Inquirer columnist Joseph DiStefano, Apollo returns for pension funds were less than 3 percent annually over 19 years. Far below, in other words, what stock market returns had been.”
I quickly checked to see if the Chicago Teachers Pension Fund invested with Apollo since they have handed over 8 percent of our pension money to private equity. Nope, but the Teachers Retirement System of Illinois or TRS does!
That’s like paying over a hundred grand for a clunker that they promise will run like a Mercedes.
Private Equity charges enormous fees to public pensions. In 2020, Harvard and Stanford academics studied $500 billion of investments by 200 public pension funds and between 1990 and 2018, fees in investments depleted the pensions’ returns by $45 billion, or almost 10 percent of the dollar amount. The State Teachers Retirement System of Ohio pays fees on committed capital - money for nothing - of as much as 2 percent of PE investment, which translates to a wealth transfer of about $143 billion from pensioners to profiteers or $1,067 each of the 134,000 retirees receiving benefits from pension in 2021. Recently Ohio teachers received no cost-of-living increases because they claim they didn’t have enough assets to cover future liabilities. “And yet, the $143 million in ‘money for nothing’ fees to the financiers would have covered the entire cost of living increase they had eliminated each year,” the authors noted.
The Pennsylvania Pension Fund’s decision to keep investing with Apollo mirrored similar actions taken by public funds across the country. They throw beneficiaries’ money into high-cost investments rewarding the very same plunderers who fire lower and middle-class workers and diminish government revenues through tax loopholes. As such, these pensions are among the chief contributors to the widening wealth gap in the U.S., a gulf that harms the very people the pensions are supposed to benefit.
Not only is private equity a horrible industry that guts companies and ruins people’s lives - or literally kills them when there are 10 percent more deaths in private equity owned nursing homes for example - but despite their high and secret fees because of their so-called fabulous returns, over the years they all underperform the market.
Why are our pension fund trustees not asking more questions?
If we are serious about the environment, then we would not only divest from oil and gas, but private equity as well. Between 2010 and 2020 Private Equity (PE) firms committed almost $2 trillion to energy investments, with almost $1.2 trillion invested in refineries, pipelines and fossil fuel plants, compared to $732 billion in renewables like solar and wind power, a 60-40 split. As of Oct 2021, ten of the top PE firms held 80 percent of energy investments in fossil fuel assets.
“Despite this dismal record, KKR continues to win investments from CalPERs and other large public pension funds who claim to care about the environment and social issues. The plunderers depend on their hypocrisy,” Gretchenson writes.
Last I checked, KKR invests CTPF pension money.
In health care, private equity is baaad..
PE backed Apria submitted thousands of false claims to federal health programs and got millions in improper payments. Their sales people would look through medical records for customers using cheaper equipment then try to place the patients on costlier ventilators and billed Medicare even though there was cheaper gear and then had to pay $40.5 million, but they did not have to admit any of its conduct was illegal or improper.
The biggest private equity firms today are Apollo, Blackstone, Carlyle Group and Kohlberg Kravis Roberts. They buy companies and load them with debt while bleeding them of assets and profits. A few years later they sell the company and make a profit, and often the companies they buy collapse in bankruptcy after being loaded up with debt. Some say they are saviors of troubled businesses to make them more efficient and keep workers employed, some add value to the companies, but many acquire relatively healthy companies and finance the purchase with so much debt that it sickens them. They need to sell assets to finance the debt, then cut costs by laying off employees and eliminating health care and retirement benefits.
A 2019 study showed 20 percent of companies taken over by private equity filed for bankruptcy, but the private equity owners legally insulate themselves to carry little risk if the company fails.
Between 2003 and 2020 the retailers bought by PE eliminated over half million jobs, including Sears, Kmart, Linens ‘n Things, Claire’s and Toys “R” Us. The Chicago Teachers Union CORE Caucus put out literature slamming its Members First opponent in the last CTPF trustee election by tying him to voting in favor of the private equity buyout of Toys “R” Us that slashed thousands of jobs.
Time for CTPF to slash Private Equity!
The authors wrote that these traditional retailers that were destroyed by PE leverage buyout could have built profitable businesses online, but they failed mostly because of the huge debt.
If we want more affordable housing our pension fund should stop investing in the very entity driving up housing costs. A report by Congress found a large landlord backed by PE was among 4 companies responsible for thousands of evictions.
In 1978 the US government changed the federal rule to let corporate pension funds invest in risky private equity deals.
In the 1980s the Dow Jones Industrial Average was well below the 1973 peak of 1,052 and companies shares remained relatively depressed, so that made issuers ripe for buyouts by corporate raiders funded by Drexel’s debt machine.
“When you put too much debt on a company, it becomes dysfunctional, when a company is spending its whole time trying to meet the next interest payment, it can’t concentrate on the business.”
Default rates on junk bonds in the 1970s was 2%, but in 1990 the default rate was 9%.
In 1989 Indiana passed a law requiring board members of companies to consider the impact a corporate buyout would have on all stakeholders, not just its investors, including employees, suppliers, customers, communities where the offices were located. David Ruder, the SEC Chairman at the time, ridiculed the Indiana law calling it ‘misguided interference’ in buyouts. He said federal laws should preempt these kinds of benighted state regulations. Congress did not regulate PE although it had considered it. But after the stock market crash in 1987 they did not want to do anything that might slow the equity markets. “Takeovers kept stock prices buoyant, at least initially, and that made everybody happy.”
But later the facts showed that most takeovers destroyed shareholder value.
The authors then tell the amazing story of Executive Life whose policyholders got 81 cents on the dollar on a deal orchestrated by California Insurance Commissioner John Garamendi. It was the perfect illustration of how our government works to protect Wall Street thieves. Executive Life’s assets would be transferred to Apollo-owned Altus which would invest $300 million. A second group would hold a massive junk bond portfolio and a third group would be trusted to liquidate about $700 million in real estate and other assets owned by Executive Life and distribute it to the policyholders. A little known clause said the buyers could walk away if the overall liquidation value of the bonds exceeded 55 cents for every dollar of face value (Amazing that the government actually allowed a clause to bailout an insurance company by allowing the future buyers to get out if the policyholders got a nickel more!).
Eli Broad, they called a ‘respected insurance executive in LA’ (and asshole extraordinaire who helped spearhead the privatization of public education and charter schools and funded the New Leaders for New Schools training of the new administrator in CPS schools who would treat teachers as the enemy) Broad, who ran Sun Life America, criticized the Altus deal, suggesting Garamendi reopen the bid for Executive Life to secure a better deal for policyholders, noting they just had the greatest bond market rally at the time increasing demand for junk bonds. Wall Street firms agreed the bonds could be sold for 10 percent more than Apollo-owned Altus had agreed. Broad condemned the Altus deal, alluding to ex-Drexelites’ involvement (Apollo head Leon Black worked for convicted insider trading billionaire Michael Milken at Drexel.). The bid “embodies the type of 1980s gamesmanship that caused Executive Life to default on its obligations in the first place.” But Garamendi still supported the Apollo bid, stating “most policyholders will get back 100 percent of their funds.”
Altus would ultimately receive almost $6 billion worth of bonds for around $3 billion!!! (Yes, you read that right. This took me back to my days reporting in Russia when there was the loans for shares scandal in which President Boris Yeltsin handed over multi-billion dollar oil and gas state companies for a fraction of their worth in return for their support in his re-election bid.) This deal had enriched Apollo while hammering policyholders, whose damages were $3.9 billion.
When they got outbid by NOLHGA, Apollo began negotiating with them and promised them an interest in the new insurer, Aurora, and future profits, and recoveries from a real estate plan that was set up to liquidate assets and deliver proceeds to policyholders. The rehabilitation plan included paying NOLHGA’s expenses related to the Executive Life deal; these giveaways seemed designed to neutralize NOLHGA as a competitive bidder. The authors noted that the money that went to NOLHGA could have gone into policyholders’ pockets instead.
A deal later to bring in multi-billionaire Eli Broad as an Aurora investor would have inoculated Apollo against another threat after Broad advised Garamendi he had sold too cheaply and called to rescind the Executive Life deal.
Aurora was so profitable so early because Executive Life was sold too cheaply and Executive Life policyholders were receiving significantly reduced benefits under the deal (This reminded me of the disastrous parking meter privatization scam that cost Chicago taxpayers $3 billion!). California law barred policyholders from bringing their own lawsuits when an insurer failed; the insurance department that came up with the corrupt deal from Garamendi was the only entity that could sue on behalf of policyholders.
One early investor in the Apollo Investment Fund III was the California Public Employees Retirement System or CalPERS, the nation’s largest public workers pension fund. Other pension funds would copy. CalPERS had traditionally bought stocks, high quality bonds and real estate, but in 1990 they started to invest in ‘alternative’ investments like Apollo by investing $1 billion. It gave Black and other ex-Drexel criminals ‘much needed legitimacy.’ “Sure its returns were tantalizing, but what about Black’s immersion in Drexel’s sharp dealings? What about the savings and loan failures, the corporate bankruptcies and Milken’s jail time?”
“Scrubbing this stain from their backgrounds was vital if the ex-Drexelites were going to attract money from other institutional investors. Public pensions were where the big fees would come from.”
CalPERS board members had found photocopied sections from Den of Thieves, James B Stewart’s virtuoso account of Drexel’s collapse and Mike Milken’s misdeeds. (I highly recommend this book.) “As it turned out, the new Apollo fund was just an average performer among its peers.” (see above!)
More than 800 bank officials went to jail after the Drexel junk bond disaster insider trading, but in the 1990s and on “the accountability stance of the late 1980s became an anomaly. The government's failure to pursue future financial miscreants sent a clear signal that crime can pay.”
Then there was the 1998 pay to play scandal of a Connecticut state pension plan orchestrated by State Treasurer Paul Silvester, a former investment banker, who made investment decisions for the $19 billion State Employees’ Pension Fund that invested heavily in risky and illiquid private equity deals. Silvester admitted to getting kickbacks in return for certain investments. He testified at his trial that he handed out state funds to help friends get jobs or receive big finders’ fees. He was sentenced to 51 months in prison for racketeering and money laundering. And one of the funds involved was of course Apollo Real Estate Advisors.
One Apollo executive agreed to hold a fundraiser for Governor Rowland at his Manhattan apartment if the state invested with Apollo. They raised $50k in donations for Rowland, and later Apollo got the $75 million state fund investment authorized by Silvester, who the Governor named to be state treasurer. Yet Apollo wasn’t prosecuted as part of the scheme!
Low interest rates helped fuel Apollo and other PE buyouts and eased the way for the PE takeover of companies.
The Detroit Police and Fire Pension participants filed a lawsuit in 2007 that contended some of the top PE firms conspired to keep the share prices of companies they took over in 27 deals unnaturally low - including KKR, TPG, Blackstone and Bain & Company. The Detroit Pension had owned shares in these companies acquired in those deals and they argued that these PE firms had colluded to keep the prices low, secretly agreeing they would not compete so their ‘rival’ could acquire the firms at a cheaper price. The pension fund got lower prices than if it had been competitive. “It was reminiscent of the Executive Life deal, in which Apollo had been, for all practical purposes, the only bidder.” A Blackstone executive email to KKR read, “We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money.” Before the trial the firms agreed to pay $590 million to settle the suit, but they neither admitted nor denied the allegations.
That same year in 2007 there was strong demand for aluminum, and Apollo made a $1.5 billion bid for Noranda, an aluminum manufacturer smelter based in Missouri. Three weeks after the purchase Noranda issued $220 million in new debt, but instead of spending the money on new equipment it just went into Apollo’s pockets, called a dividend recapitalization, and in three weeks Apollo recovered its entire $214 million investment in Noranda, as the company struggled under the new debt. Noranda had to also pay the costs to Apollo when it acquired Noranda. The financial crisis of 2008 marked a slowdown in aluminum demand, but Apollo still sucked an additional $101 million from the company that year. Apollo wanted Noranda to be profitable in order to continue to milk the company, but its heavy debt made that difficult. So Apollo asked the state to reduce its electricity costs at the smelter which would mean the taxpayers would pay more. Apollo said it needed the reduced electric rate to compete with other aluminum smelters in the US, but they didn’t mention the heavy debt it piled on to bleed the company of cash. The public utility board turned them down, and then Apollo sucked out another $54 million in cash after Noranda issued $550 million in fresh debt. Apollo - not Noranda - also made $108 million when it sold new shares to the public. Apollo had made more than $400 million in dividends and $13 million in fees. In 2013 they announced 190 layoffs for an estimated savings of $225 million over two years. But despite all this, Apollo kept pushing for a $25 million electric bill reduction that other ratepayers would have to cover. Apollo then made $250k in contributions to state officials in 2014, and slashed another 200 jobs. They then got their rate reduction, and the other 1.2 million electric retail customers had to pay $1 per month more. “It’s a direct transfer of wealth from our customers' pockets to Noranda’s equity and bondholders,” one executive said. Apollo agreed to keep 850 jobs and issued no more dividends to the investors (in other words they agreed to stop bleeding the company). Apollo then sold its remaining shares and Noranda’s stock tanked to below $1 each forcing them to file for bankruptcy in 2016. Its $50 million payroll vanished from the town’s economy and the taxes it paid; the New Madrid County School District had to cut 17 percent of the district’s revenue and cut $3.1 million from the school budget, forcing the school district to freeze salaries, offering retirement incentives and asking staff to start paying 20 percent of their health insurance premiums. After the Noranda plant closed, the average household income dropped by $6k, where one in five county residents lived in poverty. When Noranda went bankrupt its five pension plans collapsed and the PBGC backed by US taxpayers had to take over the 4,260 participants whose pension was underfunded by $219 million.
In 2022, almost 400,000 corporate retirees had trusted Athene to provide them a prosperous retirement, but their former companies sold their pensions to Athene, controlled by Apollo. The benefit to their companies was ‘a short-term monetary gain paid to them by Athene and the long-term benefit of not having to cover the payments they’d promised their retirees.’
The Athene shareholders filed a lawsuit against Apollo by contending that their pension fund was paying Apollo “extravagant and expensive” fees. But the lawsuit was dismissed by a judge who said its Bermuda location made Athene unreachable for the plaintiffs. PE firms make their dealings off-limits to domestic regulators and secret because Bermuda does not require its insurers to make extensive public disclosures.
PE firms are also models of white male dominance, with “operations that remain in the Stone Age.” They have far fewer programs to promote diversity, and far more discrimination complaints filed against them than at public companies.
In its search for lush profits, PE firms pursue industries such as healthcare and education that had long been understood to serve a social function. These industries are expected to have inefficiencies and lower profits because they serve society, so they need excess capital or more inventory which costs more. Their for-profit schools gouged students they did not educate and their efficiencies in healthcare eliminated ‘excess’ hospital beds, nurses and ventilators and undermined personal relationships with family physicians - leading to excess Covid deaths. PE-owned nursing homes recorded 10 percent more deaths than their peers.
“Public pension funds and university endowments are a prime example - the billions of dollars flowing from these funds to the firms each year is their oxygen. If these investors cut off the flow, they would vastly diminish the damage these operators do in the future. It has long been a mystery why public pensions - whose workers are hurt most by the industry’s predation - are in such thrall to them. And given the reduced returns these funds generate now - in comparison to an S&P 500 Index Fund - jettisoning private equity should not be that controversial a decision.”
The Chicago Teachers Union and the Chicago Teachers Pension Fund must stop investing our pension money with these thieves!
Same with Ohio.