. 2023. Gretchen Morgenson and Joshua Rosner. Simon & Schuster.
In 1970 Milton Friedman wrote an influential editorial It says that firms have a social responsibility: to extend profits. The Friedman doctrine focuses on managers of their role as representatives of householders. As Friedman points out, managers as individuals could have many responsibilities to their family, their country, and their community. However, in such cases, individuals are principals reasonably than agents and don’t represent the interests of others. The exception to sole responsibility for profits, Friedman points out, is when a bunch forms a charitable entity, similar to a hospital or school.
In , Gretchen Morgenson And Joshua Rosner Try to drag back the curtain on the opacity of the private equity industry. Morgenson and Rosner argue that personal equity (PE) has gone far beyond the Friedman Doctrine and even prolonged the goal of profit maximization to former nonprofit organizations. The title of the book suggests that the authors will not be concerned about depicting the nice, bad and ugly sides of the industry, but only the latter two.
Morgenson, a 2002 Pulitzer Prize winner, is a senior financial reporter for the NBC News Investigative Unit and has extensive experience in financial markets, having worked as a stockbroker and reporter for the and the . Rosner can be a Wall Street veteran and executive research director at consulting firm Graham Fisher & Co. The two previously collaborated on a book in regards to the 2008 financial crisis. .
is well-researched and includes 17 chapters and 52 pages of notes from the favored press, academic research from sources similar to the NBER and the , court records, legislative hearings, and creator interviews. Although the book covers the private equity industry as a complete, much of it’s in regards to the misdeeds of Leon Black’s Apollo Fund. Other PE funds receiving significant attention include Stephen Schwarzman’s Blackstone Group, Kohlberg Kravis Roberts (KKR), and Carlyle Group.
After a transient introduction to Michael Milken, junk bonds, and the art of the leveraged buyout, the primary half of the book sets the stage for the remaining of the book by specializing in Apollo Group’s push to buy insurance company Executive Life. Although nobody would consider an insurance company to be a charitable organization, insurance serves a more necessary social role than many other businesses.
Much of this a part of the book focuses on the victims – particularly Vince and Sue Watson. The couple used malpractice compensation for brain damage suffered by their toddler Katie to take out a policy from Executive Life to fund her care. In painstaking detail, the authors describe how Black’s Apollo Fund acquired the corporate, enriching Black and his partners and leaving policyholders with only a fraction of what they were promised. This ought to be an eye-opener for readers as most of us would expect that a structured scheme funded by an insurance pension would offer guarantees to the recipient. However, the financial commitments of the unique insurer don’t apply to the purchaser.
This disaster was made possible by the political ambitions or incompetence of then-California Insurance Commissioner John Garamendi. Garamendi decided to accumulate Executive Life although many experts believed the corporate would survive. As an affront to policyholders, Garamendi allowed Executive Life’s bond portfolio to be sold to Black and his colleagues at knockdown prices, although Wall Street advisers thought the worth was too low. Later research by Harry DeAngelo, Linda DeAngelo and Stuart C. Gilson found that the corporate’s bond portfolio would have recovered in a yr. To make matters worse, a California judge approved a motion to destroy all court documents and files within the Executive Life case.
Throughout the book, the authors tell a compelling story of greed and misdeeds. We get to know numerous characters on either side of the problem. These stories dispel the myths about private equity that the career perpetuates. This narrative holds that PE represents the very best of capitalism, an industry that takes the risks and reaps the rewards of turning around firms at risk of extinction. But Morgenson and Rosner offer examples of for-profit and nonprofit organizations which were bled dry by PE, leaving staff, pension funds, taxpayers and other stakeholders within the palm of their hands. Readers may ask, “Did the authors select a handful of egregious, substandard cases?” Throughout the book, the authors note their attempts to solicit comments from the PE funds under discussion. In most cases, their requests were ignored; in other cases, they received canned answers that presented the corporate and industry in the very best possible light.
The PE principle is all the time the identical: borrow money to accumulate the corporate, load it with debt and collect exorbitant management fees. The fees sometimes linger long after the PE firm has already sold the corporate, a move the authors call “money for nothing.” The authors illustrate this principle using the industry practice of charging pension funds for committed but unmanaged funds. In some cases, if the PE firm cannot discover a viable buyer for an exit, it could sell the corporate to certainly one of its other funds at an inflated price, in order that investors in the primary fund make a pleasant profit and investors within the acquiring fund get shares keep the bag.
Morgenson and Rosner delve deeper into private equity plunder and supply examples of how PE has a stranglehold on the healthcare industry. The authors tell of doctors and nursing home staff who were fired after raising safety concerns and other people who were banned from visiting family members because they complained in regards to the quality of care. During the COVID-19 crisis, when demand for health care services has been exceptionally high, PE-sponsored hospitals and nursing homes have often cut staff and reduced wages. The book also reports that PE-owned nursing homes provide unnecessary care to pad Medicare payments.
The book makes clear that PE’s misdeeds could only have happened with the assistance of regulators and the judiciary, who appear to have no real interest in protecting among the most vulnerable in society. Their indifference is clearly no coincidence. Morgenson and Rosner indicate that PE firms spend significant amounts of cash lobbying legislators to support laws which can be good for PE. One example is the Carlyle Group, strategically positioned in Washington, DC. The company has employed many former government officials as lobbyists. They include former President George HW Bush, former White House Chief of Staff and Treasury Secretary James Baker and current Federal Reserve Board Chairman Jerome Powell. The authors ask whether Powell’s close ties to PE influenced his decision to rent the Fed to purchase corporate bonds throughout the COVID-19 pandemic.
The story of PE is emblematic of the dark money that’s so prevalent in American politics. In the PE industry, firms use complicated structures to hide their ownership and protect themselves from liability. This practice involves forming a business with a named physician because the owner as a way to circumvent state laws that bar corporations from engaging within the practice of drugs. If private equity firms don’t cross ethical or legal boundaries of their dealings, one has to wonder why they go to such lengths to hide their ownership. Other firms wish to discover themselves with their services and products; Think of Intel and its microprocessors, Microsoft’s Windows and Amazon’s web services business. In contrast, PE firms understand that using unclear ownership structures protects them from liability and makes it harder for regulators to detect antitrust violations.
Morgenson and Rosner offer hope for the longer term and suggest that the tide might be turning. In an April 2021 hearing before the Senate Antitrust Subcommittee, unlikely allies Democrat Richard Blumenthal and Republican Josh Hawley, senators from Connecticut and Missouri, weighed in on the issues of PE ownership of healthcare firms. Additionally, House Democrats have pushed for greater disclosures within the Health Care Price Transparency Act, and current Securities and Exchange Commission (SEC) Chairman Gary Gensler is asking for brand new rules for a way private equity and hedge funds treat their investors.
is a helpful read for anyone concerned about learning more in regards to the private equity industry and its growing influence and power on the economy. The financial sector is a big growth engine for the U.S. and global economies. It helps individuals save for retirement, finance education, and finance homes and cars. Companies also benefited from the recommendation and services of economic firms. The problem for those of us in finance apart from PE is that the typical person on Main Street probably lumps all financial institutions together. Many people outside of the financial world probably won’t understand the differences between Vanguard, JPMorgan Chase and KKR. A black eye for the PE industry can a minimum of damage the repute of the financial industry and, at worst, result in calls for unnecessary scrutiny and regulation of all areas of finance.
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