“Let’s call this what it is: legalized looting — looting that makes a handful of Wall Street managers very rich while costing thousands of people their jobs…” – Elizabeth Warren on the private equity industry.

Sen. Elizabeth Warren’s plan for sweeping economic reform took aim at the private equity industry on Thursday, as the Massachusetts senator delivered a detailed proposal on how to regulate an industry she calls the “poster child for financial firms that suck value out of the economy.”

Warren laid out the specifics of her “Stop Wall Street Looting Act of 2019” in a Medium post:

“Here’s the problem with the belief that helping Wall Street always helps the economy: it isn’t true. In recent decades, Wall Street has grown bigger and financial sector profits have gone from 10% to 25% of total corporate profits, but everyone else in America has lived through a generation of stagnant wages and sluggish economic growth. Even today, big banks are making record profits and handing out huge bonuses as average wages barely budge.

“The truth is that Washington has it backwards. For a long time now, Wall Street’s success hasn’t helped the broader economy — it’s come at the expense of the rest of the economy. Wall Street is looting the economy and Washington is helping them do it.”

Private Equity – Loot & Run

Warren singles out private equity as the first priority of her economic agenda. Private equity firms buy up other businesses with the goal of turning a profit. Supporters argue these investment firms buy troubled companies with the intention of turning them around, but critics point to numerous cases of private equity taking healthy companies and driving them into bankruptcy while looting their assets for profit.

Private equity firms typically borrow money to buy their target companies in what is called a “leveraged buyout.” They then transfer the responsibility for repaying the acquisition debt onto the newly bought company, forcing it to cut costs in order to pay back the debt used to acquire it.

Because private equity firms own the target company, they often pay themselves lavish dividends and consulting and management fees, while laying off swathes of workers and selling off assets like real estate that lead to the target company’s long term decline and bankruptcy. Private equity firms often take advantage of the bankruptcy process to extract any remaining value from the target company while leaving workers out to dry, as was the case with Sears Roebuck and Toys R Us.

Critics blame private equity for having a destructive impact on industries as diverse as retail, local newspapers, grocery stores, and even nursing homes.

The Carlyle Group, one of the world’s biggest private equity firms, bought the nursing home chain ManorCare for $6.1 billion in 2007. Of the $6.1 billion total, $4.8 billion was borrowed and loaded onto ManorCare, which had to cut costs to pay back its huge new debt burden and management fees to the Carlyle Group. ManorCare, which served 25,000 residents, filed for bankruptcy in 2018 after years of cutting costs led to a 26 percent spike in health care violations from 2013 to 2017, three times the industry average.

“Workers have been abused by many facets of today’s American capitalism. But if you see a company with particularly brutal layoffs, pay cuts, and scams to loot pension funds, the owner is often a private equity firm,” wrote the American Prospect’s Robert Kuttner.

Warren’s Plan to Hold Private Equity Accountable

Warren’s plan would tame the industry by making private equity firms responsible for the debt they use to buy other companies. It would also limit private equity’s ability to demand dividends and monitoring and consulting fees from the target company within two years of acquisition, impeding the “strip and flip” strategy of looting assets and stressing the target company immediately after purchase.

The plan would also shift the balance of bankruptcy law to help workers get pay and retirement funds instead of allowing executives to take exorbitant bonuses despite leading their companies into bankruptcy. It would also close the carried interest loophole, which allows investors to pay the reduced capital gains rate on their taxes rather than the standard income tax rate paid by wage earners.

“Warren reverse-engineered the private equity industry, and blocked each of its techniques, one by one. The Act’s several provisions provide a useful guide to the industry’s serious abuses,” wrote Kuttner.

Critics such as Blackstone’s Byron Wein argue progressive candidates like Elizabeth Warren are “terrifying to the market,” as her economic policies would have a negative impact on his company’s profits.

Meanwhile, United Nations Housing Adviser Leilani Farha argues that Blackstone, a private equity mammoth and the largest real estate management firm in the world, represents the worldwide consequences of private equity’s growing involvement in the residential real estate market. Blackstone and its subsidiaries own hundreds of thousands of properties throughout the world, inflating rents and employing “aggressive evictions” that fuel the global housing crisis and contribute to rising homelessness, according to Farha.

“If the markets are an ocean,” wrote Financial Times columnist Rana Foroohar, “private equity firms like Blackstone are the great white sharks that have perfected the use of debt, leverage, asset stripping, tax avoidance, and legal machinations to maximize profits for themselves at the expense of almost everyone else— their investors, their limited partners, their portfolio companies and the workers in them, and certainly society at large.”

Has the Role of a Corporation Changed?

Eileen Appelbaum, of the Center for Economic and Policy Research (CEPR), and Cornell University professor Rosemary Batt argue the rise of private equity is symptomatic of a deeper philosophical shift on the role of corporations in society. In the 1980s, the “shareholder maximization theory” of corporate philosophy went mainstream, which holds that a corporation’s purpose is to benefit shareholders rather than broader society.

In their co-authored book, Private Equity at Work: When Wall Street Manages Main Street, Applebaum and Batt describe private equity as representing “a fundamental shift in the concept of the American corporation— from a view of it as a productive enterprise and stable institution serving the needs of a broad spectrum of stakeholders to a view of it as a bundle of assets to be bought and sold with an exclusive goal of maximizing shareholder value.”

Private equity executives have taken notice of Sen. Warren’s plans to regulate Wall Street, with billionaire investor and Trump supporter Peter Thiel telling Fox News’ Tucker Carlson that Warren is the presidential candidate he fears most.

“I’m most scared by Elizabeth Warren,” said Thiel. “She’s the one that’s actually talking about the economy, which is the thing that matters most.”

Having already led the creation of the Consumer Financial Protection Bureau, Warren hopes to separate herself from other Democratic presidential candidates with her detailed proposals on reforming American capitalism.

“Let’s call this what it is: legalized looting,” Warren wrote in her Medium post. “Looting that makes a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business, and hurting communities across the country.”