A deep dive into Elizabeth Warren's plan to tame private equity

Yesterday, I published a brief analysis of Elizabeth Warren's plan to close the loopholes that allows private equity to defraud investors, creditors and workers to make billions while destroying the real economy.

Today, I'm going to suggest that you read Yves Smith's analysis of the proposal on Naked Capitalism. Private equity is one of the most politically and economically consequential forces in the USA and the world today, behind much of our inequality, looting, and policy dysfunctions.

Private equity is a bezzle, protected by deliberately dull layers of obfuscation and complexity that allows its practicioners to claim that the reason they seem to be out-and-out crooks is that none of us are smart enough to figure out what they're doing.

Warren isn't buying it. Her proposal builds on the scholarly investigations of Eileen Appelbaum and Rosemary Batt (here's some of Appelbaum's commentary on the proposal) to fashion a series of killing blows aimed at the industry's soft, vulnerable spots, from a two-year ban on dividends after PE acquisitions to giving worker pay and pensions bankruptcy priority, to treating gift cards as consumer deposits for bankruptcy purses.

As Smith says, there's no chance that the current Congress and Senate would pass this, but that's not the point. The point -- as with Sanders' 2016 Medicare for All proposal -- is to shift the political center, normalizing ideas that sound impossible as part of our daily political discourse.

If it's one thing the whole progressive wing of the Democrats have gotten good at in the past four years, it's changing the width of the Overton Window, from Warren to Sanders to AOC.

This is a bold set of proposals that targets abuses that hurt workers and investors. Most readers may not appreciate the significance of the two-year restriction on dividends. One return-goosing strategy that often leaves companies crippled or bankrupt in its wake is the “dividend recap” in which the acquired company takes on yet more debt for the purpose of paying a special dividend to its investors. Another strategy that Appelbaum and Batt have discussed at length is the “op co/prop co.” Here the new owners take real estate owned by the company, sell it to a new entity with the former owner leasing it. The leases are typically set high so as to allow for the “prop co” to be sold at a richer price. This strategy is often a direct contributor to the death of businesses, since ones that own their real estate usually do so because they are in cyclical industries, and not having lease payments enables the to ride out bad times. The proceeds of sale of the real estate is usually dividended out to the investors, hence the dividend restriction would also pour cold water on this approach.

The bill also seeks to help workers by making the private equity firms liable for pension looting, and for giving unpaid wages and other employee consideration much higher status in bankruptcy.

Elizabeth Warren Seeks to Cut Private Equity Down to Size [Yves Smith/Naked Capitalism]

(Image: Adam Jones, CC-BY-SA, cropped)