Elizabeth Warren has a plan that is already making vulture capitalists cry

Mark Sumner
and
Daily Kos
18 July 2019

Elizabeth Warren has turned her skills in economics and finance into a plan that stops private equity firms from using their power to raid companies and rip them apart for short-term profit. Equity firms often work in a way that sees them use a leveraged buyout to gain marginal control of a company. At that point, they sell off the company’s most valuable assets, load the remaining shell up with debt, including the debt from their buyout, and … walk away. It’s a process that turns a tidy profit for those invested in the equity fund, along with some paper losses that look good on taxes. And it generates an absolute disaster for the workers at the companies that funds dismember.

As The Washington Post reports, piratical equity funds were behind the collapse of companies as diverse as Friendly’s restaurants and HCR ManorCare nursing homes. And they were responsible for the destruction of iconic American brands, including Toys R Us. In each case, an equity firm moved on a company whose stock price was depressed following recent losses, used debt to grab a controlling interest, and proceeded to convert decades of work by thousands of workers into a quick payday.

Warren’s plan consists of a series of steps that would make it harder for equity firms to dice up troubled companies. It includes measures that would stop them from selling off real estate and manufacturing assets and generally limit the speed with which firms could raid companies for valuable patents, property, and cash. And it would prohibit equity firms from dumping the debt they accumulated in a leveraged buyout onto the company they bought.

As might be expected, investment firms are already screaming that they’re actually doing the world a favor by destroying “inefficient” firms, and that Warren represents the face of big government getting in the way of the market. In some cases they might even be right. There genuinely are instances where a poorly managed old firm still holds assets that could generate more jobs and drive more economic activity if they were cut loose. So maybe the fund managers have a point.

Or they would. Except Elizabeth Warren already has a plan for that, too.

The line “Elizabeth Warren has a plan for that” has already become a running joke. But it’s a good joke—good in the sense that it leaves people smiling because she probably does. In this case, it’s a plan that would stop the vultures from picking over the bones of a company in temporary trouble and promote investment by those who want to save the company rather than destroy it.

It’s not a surprise that the investment firms are complaining. It’s much, much simpler to simply sell off the assets of a company in trouble than it is to find a new business model or approach that brings that company back to health. Not just easier—but also far quicker. Saving a company can be an endeavor that takes years. Dissecting one can be done in weeks.

Even when the companies are protected by state or federal laws that would seem to safeguard against an immediate raid of bank accounts, the vultures have a way around it. For example, they can force a company to sell all its stores to the equity firm for a song, with the equity firm then charging the company a huge amount of rent for the stores it already occupies—creating a direct pipeline from the accounts of the purchased company into the pockets of the equity firm’s investors.

Right now, private equity firms have no reason to care about the companies they’ve purchased, and every reason to show disdain toward those companies and their workers. After all, a private equity investment can turn a huge profit while driving a company into quick bankruptcy. It’s one of the most perverse of perverse incentives.

Warren’s plan would end the ability of equity firms to drop their debt on the companies they purchase and would plug the holes they use to siphon off the value. It wouldn’t really stop investors from selling off assets or breaking up companies, but it would eliminate the incentive to do so in a way that values an immediate payday over long-term growth. Warren’s plan wouldn’t punish those who legitimately invested in a company because they saw value in it—even if that value was ultimately in breaking it into multiple assets. But it would stop those who roll from one company to the next, exploiting their weakness for profit.

Of course, private equity firms are probably sitting on other schemes they can use for a quick buck at society’s expense. But then … Warren has probably already planned for that.