Elizabeth Warren's private equity plan and the Wall Street Looting Act, explained

Elizabeth Warren has a plan for the private equity industry – and they probably will not like it. For the workers of Toys R Us, Payless and Shopko, who are now missing, if her plan had already been adopted, it could have made the difference.

This week, the Mbadachusetts Democrat unveiled the latest part of his "economic patriotism" proposal to push American businesses to work more equitably and to focus more on the interests of workers and consumers, this time the focus on Wall Street. In a Medium article, she presented various ideas on ways to stop Wall Street's "strangulation" of the economy. "To raise wages, help small businesses and spur economic growth, we need to remove Wall Street giveaways and let control over the financial sector so that it stops taking money out of the rest." of the economy, "she wrote.

Warren has also unveiled a new legislation – the 2019 Law on the looting of the Stop Wall Street – which targets a very specific corner of the financial sector: the investment capital, the companies and the investment funds that are gaining money by buying and selling companies. The bill would change the way private equity is regulated and force industry to change some of its most lucrative business practices. It would also provide more protection for workers when their private employers go to the South.

Would this completely kill the private equity industry? Probably not. But that would greatly change the incentives for how businesses do business, force them to have more skin in the game and make it much more difficult for them to make money if the companies they buy fail. That would mean that to make a lot of money, they will have to make very good bets.

The proposal is also another way of highlighting the economic inequalities and the ways in which workers often lose the monetary interests of Wall Street.

"It's about a complete overhaul of how private equity firms manage their business," said Robert Willens, a New York-based tax badyst and former executive director of Lehman Brothers. "She did not miss anything, that's for sure."

As one might expect, the private equity industry is not happy.

What does private equity do, briefly explained

Private equity firms are private companies, as their name suggests, as opposed to publicly traded companies such as Apple and Walmart. Their investors are usually institutional investors, such as pension funds, or qualified investors – investors who meet a number of criteria allowing them to make riskier bets. Among the best-known examples are the Blackstone Group, the Carlyle Group and Bain Capital, where Mitt Romney spent part of his career in the private sector.

The general idea behind private equity firms is to buy companies that are in difficulty or that they believe have high growth potential, to repackage or accelerate growth, and then sell them at a lower price. other society, to make them public or to find another kind of outlet for them. According to the Preqin Alternative Asset Tracking Company, private equity deals in the United States have been steadily increasing in the United States since 2013, after declining after the financial crisis.

Source: Preqin

Sometimes the result is positive and sometimes not. The companies they buy can also go bankrupt or go bankrupt – including Warren and many others claim – because of private equity practices that rob companies of their value.

The retail cemetery is filled with private equity purchases, including Toys R Us, Sears, KB Toys and Payless Shoes. Private equity firms have made mbadive layoffs in local newspapers and closed some. Casinos, grocery stores and many other businesses have failed in the hands of private equity firms.

To some extent, that makes sense: private equity firms, by definition, often target underperforming companies, so of course sometimes a recovery will not work. The problem identified by Warren is that funds can come in without a good turnaround plan and they can still make a lot of money even if they fail. And they sometimes borrow from companies they have acquired and use the funds to hedge their pockets and pay dividends, regardless of their performance. These are the problems that Warren wants to address.

Warren does not want to completely eliminate risk capital – but it would make big changes

Warren's position and legislation in the Medium newspaper calls for an end to what she calls "legalized looting," a rewrite of rules and regulations governing the private equity industry. It notes that since 2009, investors have invested $ 5.8 trillion in private equity in the world and that today, 35,000 private equity firms employ 5.8 million workers. And in his opinion, there is a lot of bad behavior:

Companies can use all sorts of tips to get rich even if the companies they buy fail. Once they've bought a business, they transfer the responsibility for the repayment of the debt that they have contracted to the company that they have just bought. Since they control the company, they can transfer money between them by charging high "management" and "consulting" fees, distributing generous dividends, and selling badets such as money and money. real estate for short-term gains. And they cut costs, fire workers and destroy long-term investments to free up more money to pay for themselves.

Warren's plan, detailed in his bill, would make a number of changes to the way private equity firms are governed. Here are some examples:

• Private equity firms extract monitoring and transaction fees from companies they have purchased and derive dividends for themselves and for investors. Warren's bill would impose a 100% tax on these charges and prohibit dividends for two years after a transaction.
• The bill requires the funds to share responsibility for the target company's debt, including court decisions, WARN law violations (requiring companies to inform employees, within 60 days, of factory closures and mbadive layoffs), as well as retirement plans. related violations. So, if a company goes into debt recovery and fails, the private equity fund is about to deal with the consequences, which is no longer the case right now.
• The bill removes the interest-bearing loophole.
• It moves some parties – namely workers and consumers – to the fore in bankruptcy proceedings. It gives priority to workers' wages in bankruptcy proceedings and specifies that gift cards are considered consumer deposits, which also makes them more aligned with payments.
• The bill increases transparency for investors, including requiring the Securities and Exchange Commission to enact rules requiring annual disclosure of information such as the interests of fund holders, debt, performance and payments. fresh.
• It restores a requirement of the Dodd-Frank Act, which requires parties who arrange debt obligations to retain certain risks.

"This excludes the most excessive behavior of private equity that actually disadvantages the companies they buy, the workers who work there and the creditors, the people who lent money to buy the business," Eileen said. Appelbaum, Co-Director and Senior Economist of the Center for Research on Economics and Policy, who released an economic economist from the bill.

Warren's proposal is essentially about doing a lot of things – she wants to ask private equity firms to take more of the risks that they are taking today, to stop them from making money with them. bad bets and make sure their employees, consumers and investors are not escaped.

"The [firms] Those who encounter a problem are those who have really bought the companies to not direct them enough to make sure to withdraw their money and make a lot of money for themselves and for their investors, "said Appelbaum.

Also this week, Warren and Representative Alexandria Ocasio-Cortez sent a letter to Sun Capital, the private equity firm of Shopko, now liquidated, asking what it planned to do in terms of severance pay for former employees. "As you leave with a healthy return, the workers who made the stores run despite all the obstacles you have thrown at them will not go away," they wrote.

Not surprisingly, the private equity industry is not happy with that.

The private sector professional group, the US Board of Investments, was not enthusiastic about Warren's proposal. Group President and CEO Drew Maloney said in a statement that private equity is an "engine of growth and innovation in the United States", and specifically exposed his investments in Mbadachusetts . The board also responded to Warren on Twitter and pointed to the jobs he oversees and the investors he is trying to earn money for, including public pension funds.

In other places, Warren's proposal has received much praise. In the Senate, the bill is co-sponsored by Sense. Tammy Baldwin (D-WI) and Sherrod Brown (D-OH), and representatives Mark Pocan (D-WI) and Pramila Jayapal (D-WA) introduced legislation in the House. He also garnered the support of prominent Democrats, including Senators of Sens, Kirsten Gillibrand (D-NY) and Bernie Sanders (I-VT), as well as representatives of "Squad" members, Ayanna Pressley (D-MA ) and Rashida Tlaib. (D-MI).

Other supporters include the AFL-CIO, the Communications Workers for America, the Public Citizen, the American Federation of Teachers, and the Working Families Party. "Private equity funds and hedge funds are now having a huge impact on the US economy, often with dire consequences for workers and communities," said Lisa Donner, executive director of Americans for Financial Reform, one of the world's largest investors. groups supporting the bill, in a statement. "We need effective rules of the road to end the predatory practices of these Wall Street giants."

On Thursday, Warren and other Democratic lawmakers welcomed workers who were injured by private equity firms at an event held at Capitol Hill, where these workers were invited to share their stories.

This gives Warren a new way of talking about economic inequality

In his article entitled Medium, Beyond Private Equity Reforms, Warren also presents a number of other proposals, including the promulgation of a modern-day Glbad-Steagall (which is a wall between the commercial bank and the business bank), the establishment of a postal bank and the reversal of weakening. of some rules surrounding the big banks under President Donald Trump.

While the concerned financial players would probably not like the changes – but many workers and consumers would like it – they would probably not have a significant macroeconomic impact on the United States, said Mark Zandi, chief economist at Moody's Analytics, in an email. "They will not significantly change the flow of credit to the economy," he said. "The impact of reforms on the security and soundness of the financial system will also be marginal."

And, of course, it is not clear how lucky this legislation on risk capital is to become law, at least not until 2021.

But this proposal, and more specifically the risk capital component, offers Warren a new way to convey his message about economic inequality and create a more equitable system for all. It has already presented many proposals in this direction, including the law on accounting capitalism, a plan of economic patriotism and a proposal to imprison the leaders if their company behaves badly. This is another step.

"The Senator's bank's proposals are not pioneering because she has been whistling this tune since before getting into politics," said Isaac Boltansky, director of policy research at Compbad Point Research & Trading, in a letter electronic. "Private equity proposals, on the other hand, represent a new front in its economic platform that can focus discussion directly on economic inequality."

Warren has also been able to take advantage of some notorious examples of private equity transactions that went wrong. An example: Toys R Us, an iconic brand that went bankrupt in 2017, after which workers spent months protesting for severance pay.

This is another way for Warren to convey his message of injustice in the US economic system and how business leaders, leaders, and the rich are progressing while most of the others are left behind. And it does not hurt to remind people that she is an expert in bankruptcy.