Elizabeth Warren: Everything is Wrong with Private Equity, Everything
The Democrat has no love for Wall Street. The feeling is mutual.
The “Elizabeth Warren War on Private Equity” hit a new stride after the Democratic candidate took aim at PE firms that own or back for-profit colleges.
Recently, Senator Warren (D-Mass) and Representative Mark Pocan (D-Wisc.) co-signed a 30-page letter to six private equity firms about investment in these colleges. The Democrats asked several questions about the schools’ marketing, tuition costs, federal aid practices, profits, graduation rates, and related legal actions.
“The continued spread of private equity in the for-profit higher education sector, and thus the maximizing of short-term profits at the detriment of students, presents a serious concern for both students and taxpayers,” the lawmakers wrote in their letter.
“We have broad concerns about the effect of private equity firms on a variety of industries and have introduced legislation to address these concerns. But we have particular concerns about the effects of private equity takeovers in colleges and universities.”
The lawmakers addressed the letter – dated September 10 – to Sterling Partners, Atlas Capital Partners, Vistria, Leeds Equity, KKR, and Apollo Global Management.
Warren and Pocan Demand a Response
The authors also referenced a 2018 research paper by professors at three major universities. The paper concluded that private-equity-backed colleges had “higher tuition, higher per-student debt, lower graduation rates, lower student loan repayment rates, and lower earnings among graduates.”
Meanwhile, the lawmakers asked the firms to respond to the letter by September 24. None of the private equity firms have responded to press requests on the letters or their subject. Naturally, Warren and Pocan knew that would happen.
That’s because the letter is about more than the practices of for-profit colleges.
Warren was making a statement about the broader private equity industry in the wake of the recent Democratic debate.
She’ll use the firms’ silence on this issue as ammunition on the Presidential stump to heighten her demand for industry reform.
The Elizabeth Warren War on Private Equity
In a blistering release on the Senator’s government webpage, Warren highlighted the key issues around private equity and for-profit schools.
Her team then laid out the campaign argument for the Senator’s signature, market reform bill, The Stop Wall Street Looting Act.
Warren is a long-time critic of Wall Street. In 2007, the then-professor at Harvard University proposed and established the Consumer Financial Protection Bureau. In recent years, she watched as Republicans and Wall Street suffocated the agency’s mandate in a bathtub. Her candidacy is largely based on a promise to finish what she started.
But as bad as she wants to punish “bad banks,” she has a very special place in Hades for private equity companies.
Draped in a banner of “economic patriotism,” The Stop Wall Street Looking Act blames private equity fo the bankruptcies of Toys R Us, Shopko, Payless and other targets of leveraged buyouts. The bill would do four primary things:
- Dramatically reduce cash extraction on firms by slapping a 100% tax on fees paid from companies to the PE firms and eliminating dividends or other cash extractions for two years.
- Make PE firms liable for part of the debt that they inherit when they buy out a company.
- Hike tax rates on the compensation of PE managers.
- Enable workers to obtain payouts from the PE shops if their companies do go bankrupt.
Warren Remains Undeterred from Criticism
The bill has garnered support in Washington. Commentators and fund managers have poked holes in the bill, arguing that it will create additional liabilities for American companies or destroy private equity in general.
AQQ’s former Chief Risk Manager Aaron Brown wrote a simple rebuttal in July to Warren’s bill in three quick points.
First, taxing fees to the maximum would likely lead to the billing of investors or would incentivize the sale of more assets (the latter a factor that Warren claims she is trying to prevent.)
Second, putting firms on the hook for the liabilities makes struggling companies “radioactive.” Companies with questionable pensions, uncertainty around liabilities, or other unknown, unknowns – would probably be left to die.
Finally, bankruptcies aren’t failures if you believe in free markets. And the end of one company doesn’t alter the total market demand for products or jobs… and reallocates capital, resources, real estate and so on to other, perhaps more effective alternatives.
Warren isn’t likely going to change her stance.
Remember, there’s the argument that private equity firms are “like vampires.”
There’s the January 2019 interview with Cramer where she said she wanted “billionaires to stop being freeloaders.”
And there is no shortage of “clever” Tweets written by Warren staffers to criticize the industry.
Perhaps the finest is the short video of Richard Gere explaining the concept of private equity to Julia Roberts in Pretty Woman (get it, voters? Richard Gere is KKR, and you’re the uneducated prostitute).
The History of the Elizabeth Warren War on Private Equity
Warren’s advocacy against private equity firms has been extensive.
First, she and Representative Dave Loebsack (D-Iowa) opened a Congressional investigation into private equity firms and lending practices in manufactured housing communities. This story generated buzz, even earning the John Oliver treatment on HBO.
Warren later questioned (alongside Rep. Alexandria Ocasio-Cortez (D-N.Y.)) Treasury Secretary Steven Mnuchin on the decline of Sears Corporation. The firm filed for bankruptcy this year while shedding tens of thousands of jobs. Owner Eddie Lampert is trying to cut pension and healthcare from retirees under the New Sears organization.
Then, Warren questioned the role of Vornado Realty Trust about the liquidation of Toys “R” Us. The toy retailer went bankrupt and was the target of a 2005 leveraged buyout.
Now, Warren has sponsored a law that could dramatically alter the future of Wall Street, private equity, and wealth management in America.
Warren Isn’t Making Friends on Wall Street
I’ve long argued that Warren is going to win the Democratic nomination.
And I fully expect that the Elizabeth Warren War on Private Equity will continue well into next fall.
In the meantime, Jim Cramer’s recent improvisational moment on Warren will likely become a feature theme in future opinion columns everywhere.
“When you get off the desk and talk to executives, they’re more fearful of her winning,” he said on Squawk on the Street on September 10.
The CNBC anchor continued that the attitude among executives is that “She’s got to be stopped.”
As the fall months fuel consolidation in the remaining Democratic candidates, expect more financial leaders to start taking sides and speaking out against Warren.
Some have already started.
For example, on September 19, Leon Cooperman of Omega Advisors spoke at the Delivering Alpha conference in New York. During his stage time, he joked, “They won’t open the stock market if Elizabeth Warren is president.”
Cooperman later told CNBC that he was concerned about the leftward shift of Democratic candidates.
“The Democratic Party seems to be leaning towards the left on policies, which is very harmful to the economy. I don’t like the shift to the left,” he said. He noted that the stock market would open in 2021, but that the result would be quite ugly for investors.
“It would be a bear market, and then go on for a year and go down 25%,” Cooperman added. “You don’t make the poor people rich by making rich people poor.”
Where Will Wall Street Dollars Go?
Of course, Warren’s position extends beyond Wall Street.
She has pressed for a wealth tax on assets north of $50 million. Her tax plan aligns with many of the ideas championed by Thomas Piketty, a French economist who wants to abolish billionaires.
As a result, it’s doubtful that any of those wealthy donors will be sending her checks.
Right now, it remains unclear where Wall Street plans to go when it comes to the 2020 election cycle.
Yes, Trump’s Treasury Secretary is the former head of Goldman Sachs. However, Wall Street hasn’t exactly been fond of the trade war with China. And few investors like the chaotic impact of morning Tweetstorms.
Wall Street had been slinging dollars at Sen. Cory Booker.
The natural candidate would be more moderate, likely former Vice President Joe Biden. However, Biden now faces an uphill battle on the issue of Donald Trump and Ukraine. Biden could easily find himself the center of negative attention the harder impeachment drums beat.
I further expect Warren to gain in popularity and eat into Bernie Sanders’ voting support, a trend that has occurred in recent months.
I also expect Warren’s policies will continue to spur opposition to banks and private equity practices among working-class and left-of-center voters.
And, finally, I expect fundraising from Wall Street to dry up unless a more moderate candidate emerges from the field (something that doesn’t look very probable today).
Just one thing is certain: Warren approves of any fear her presidency might bring to the banks.
[- Garrett Baldwin, Editor, DailyAlts]
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