PDF Summary:These Are the Plunderers, by Gretchen Morgenson and Joshua Rosner

In These Are the Plunderers, authors Gretchen Morgenson and Joshua Rosner expose how private equity firms exploit acquired companies, employees, and surrounding communities through aggressive financial tactics aimed at maximizing profits for their own benefit. The authors reveal the sector's expansion from corporate raiders utilizing junk bonds in the 1980s to its current influence over crucial industries like healthcare, manufacturing, and retail.

Morgenson and Rosner illuminate how private equity maneuvers, such as loading companies with debt, cutting costs by eliminating jobs and decreasing worker benefits, and extracting fees through financial schemes siphon wealth from businesses while shielding the firms from responsibility. The authors reveal how government deregulation, reduced oversight, and the revolving door between public service and private equity enabled these predatory practices, widening economic inequality and eroding the American middle class.

(continued)...

• With fewer competitors, companies may have less motivation to innovate or improve services, potentially leading to stagnation in quality and service delivery.
• Consolidation can lead to economies of scale, where larger companies can reduce costs. However, these savings are not always passed on to consumers, especially in less competitive markets.
• Large conglomerates may exert influence over regulatory bodies, leading to policies that favor established players and further entrench their market position, disadvantaging consumers.
• This refers to the merging of hospitals, clinics, and other healthcare providers, which can lead to fewer choices for consumers and less competitive pricing.

Regulatory policies favored wealthy individuals, promoting the use of borrowed capital in dealings with private equity.

Morgenson and Rosner highlight that tax policies have favored tycoons within the private investment fund industry, resulting in a disadvantage to the broader populace. The 1986 tax reform act essentially encouraged the use of borrowed capital for the purpose of consolidating companies and assets, while at the same time eliminating the option for individuals to write off interest expenses, except for those associated with their home mortgages. These tactics, designed to boost the competitive edge of the United States, laid the groundwork for an extended era of corporate profiteering supported by advantageous financial agreements. Another controversy involves financiers who, unlike regular American workers, lessen their tax obligations by designating their earnings as 'carried interest,' thus subjecting it to the reduced taxation applicable to capital gains.

Other Perspectives

• The ability to write off interest expenses on home mortgages remains a significant benefit for a broad range of taxpayers, not just wealthy individuals, and encourages home ownership.
• Tax policies are designed to stimulate investment and economic growth, which can benefit the entire economy, not just wealthy individuals.
• The 1986 tax reform act was intended to simplify the tax code and eliminate many tax shelters, which could be seen as reducing the use of borrowed capital for speculative purposes rather than encouraging it.
• The policy could be part of broader fiscal reforms aimed at increasing government revenue without raising taxes, which might be necessary for funding public services or reducing national debt.
• The competitive edge gained might be short-lived if it leads to economic bubbles or if other nations implement countermeasures that negate the intended advantages.
• Corporate profiteering could be a byproduct of a free market system, not solely the result of specific regulatory policies.
• There is a perspective that changing the tax treatment of carried interest could have unintended negative consequences on the economy, such as reduced investment in new businesses or markets.

Regulatory bodies failed to alleviate the harmful impact private equity inflicts upon employees and their surrounding communities.

The writers argue that the sector has broadened its reach and enhanced its earnings universally, largely as a result of the government's continuous failure to alleviate the harmful impact of private investment firms. Oversight entities and legislators have frequently been part of the issue, not only due to their lack of action but also by enacting lenient rules, supporting favorable judicial rulings, and granting significant economic benefits.

The management and enforcement of rules pertaining to healthcare activities and the protection of workers' rights were insufficient.

Regulators demonstrated their lack of intervention by neglecting to enforce state statutes designed to restrain the sway of investment groups over medical practitioners' treatment decisions, even though they had the power to moderate the sector's overindulgences. Despite abundant evidence suggesting that profit-centric models have compromised patient well-being and the integrity of the healthcare system, there has been a persistent absence of corrective action from state medical boards, along with the Justice Department and state attorneys general.

Other Perspectives

• Legal experts might suggest that the enforcement of these statutes could pose legal challenges, including defining the limits of permissible influence and ensuring that any action taken by regulators is within the bounds of the law.
• There are examples of healthcare systems with profit-centric components that deliver high-quality care, suggesting that the model itself is not the problem but rather how it is implemented and controlled.
• The statement assumes that all evidence of harm is directly attributable to the influence of investment groups, which may not account for other factors affecting healthcare practices and worker protection.

The movement of individuals between public sector positions and private investment firms has hindered significant reforms in regulatory practices.

The book depicts how individuals exploit their roles within public service to personally profit and advantage their associates. Before his tenure at the Federal Reserve Board, Jay Powell was associated with The Carlyle Group, while John Garamendi, during his time as the California insurance commissioner, facilitated the transition of Executive Life to Leon Black's Apollo and now serves as a California congressional representative, subsequently aligning with a private equity firm under Ron Burkle's leadership, who often engages in joint ventures with Apollo. The shift of personnel from regulatory agencies to executive roles in the corporations they previously supervised impedes efforts to reform the system and uphold corporate accountability.

Practical Tips

• Develop a habit of submitting public records requests for contracts and spending reports related to local government projects. By analyzing these documents, you can identify if public funds are disproportionately benefiting certain groups or individuals, which could be a sign of exploitation for personal gain.
• Create a personal development plan that outlines the steps needed to transition to your new career path. Identify key skills, certifications, or experiences you need and set a timeline for achieving them. This could involve taking online courses, attending workshops, or seeking mentorship in the new field.
• Explore the history of notable financial transitions by reading case studies or articles from credible financial news sources. Focus on transitions that involved regulatory bodies and understand the steps taken, the challenges faced, and the outcomes. This will help you grasp the complexities of financial transitions and the role of oversight in ensuring they are conducted fairly and legally.

The negative impact that arises when private equity firms become involved in specific industries, such as healthcare, extends to both the broader economy and society.

This section of the narrative scrutinizes the repercussions that arise when critical industries, such as healthcare, fall under the control of corporations primarily concerned with amplifying returns for shareholders, frequently disregarding the subsequent effects. The authors provide persuasive examples of the significant harm caused by private equity firms entrenched in various sectors of the U.S. healthcare system, such as hospitals and nursing homes. The consequences extended past the medical sector, influencing broader economic and social realms.

The medical sector encountered significant obstacles, resulting in a decline in the quality of care, adverse effects on patient well-being, and unfair treatment of medical staff.

Morgenson and Rosner's research illuminates the adverse consequences that ripple through the healthcare industry and its clientele when investment groups with private equity take the reins of various components within the healthcare system. Citing academic research, journalistic investigations, and legal cases, the authors argue that the firms' push for profits has resulted in lower quality of care, patient harm, and exploitation of healthcare workers. They expose strategies used to divert assets from institutions funded by public health care, encompassing sly schemes in nursing homes to take advantage of Medicare and orchestrating hospital admissions via emergency room personnel to maximize reimbursement tactics for profit.

The consolidation of hospitals and nursing homes has led to a decrease in the variety of services provided while simultaneously allowing for cost reductions.

Morgenson and Rosner thoroughly investigate the impact of takeovers in diverse medical settings by groups primarily interested in private equity, offering detailed examples that demonstrate a common pattern: such entities emphasize swift economic returns, often at the expense of critical staff, equipment, and supplies, thus increasing risks for healthcare workers and their patients. Profit-focused investors shifted the priorities of healthcare companies, moving them away from maintaining excess capacity for public emergencies, thereby undermining their ability to respond to crises. One particularly unsettling example: a 2021 study by a group of academics, including Sabrina Howell at New York University, determined that residents of private equity-owned nursing homes were 10 percent more likely to die than those at facilities not owned by financial firms.

Practical Tips

• You can evaluate the services provided by your local healthcare facilities to better understand your options. Start by creating a checklist of services you or your family might need, then visit or call nearby hospitals and nursing homes to inquire about these services. This will give you a clear picture of what's available and what's lacking in your community.
• Consider volunteering at a local clinic or hospital to gain firsthand experience of how financial decisions impact patient care. While volunteering, observe and ask questions about how funding and resource allocation decisions are made. This will give you a better understanding of the real-world implications of prioritizing economic returns in healthcare.

The quest for heightened profits often placed financial interests above patient welfare.

The book examines specific instances in which private equity firms capitalize on weaknesses within Medicare and other reimbursement systems, alongside their strategies for deriving financial benefit from those in need of healthcare services. Physicians in the emergency department, who received their pay from EmCare, billed the patients in a way that implied their services were included in the hospital's insurance contracts. Patients faced steep medical charges after seeking treatment, unaware of the impending costs.

Other Perspectives

• It could be argued that the exploitation of weaknesses in Medicare and reimbursement systems is not a deliberate strategy by private equity firms but rather a consequence of a complex and often inefficient healthcare system that requires significant reform from policymakers.
• In some cases, high billing may reflect the high cost of providing emergency care, including staffing, equipment, and facility expenses, rather than a profit-driven motive.
• There are instances where insurance companies provide tools and resources for their members to estimate healthcare costs, which can help patients anticipate expenses.

The broader impacts on society and the economy arose from the deceptive tactics employed by companies focused on private investment capital.

This section of the narrative explores the widespread impact of a predatory period, highlighting the significant harm inflicted on various facets of American life by entities focused on private investment activities. The authors contend that the actions of these financial firms have done more than merely boost the wealth of their executives; they have also significantly propelled the widening gap in income distribution over the past several years.

The widening disparity between the rich and those with less wealth, as well as the erosion of middle-class wealth, is increasingly concerning and is attributed to the assertive fiscal tactics employed by private equity firms.

Morgenson and Rosner trace the arc of economic well-being and stability in the United States over the past four decades, highlighting the varied economic advancements and challenges faced by various income brackets alongside the simultaneous growth of private investment firms. They document the challenges faced by average Americans dealing with unchanging income and rising debts, observing a decline in their economic security, a stark difference compared to the significant financial gains amassed by financiers at the top of the economic pyramid. The book highlights the adverse effects on individual investors lured into allocating their pension savings into the opaque world of private equity, which is marked by hidden information, increased expenses, and intrinsic conflicts of interest.

Context

• Addressing the wealth gap may involve policy measures such as progressive taxation, increased minimum wages, and stronger labor protections to ensure more equitable distribution of wealth.
• Rising costs in healthcare and education have disproportionately affected the middle class, leading to increased debt and reduced savings.
• Private equity firms benefit from tax structures like the carried interest loophole, which allows them to pay lower tax rates on their earnings compared to ordinary income, contributing to wealth accumulation at the top.
• Over these decades, consumer debt has risen significantly, with many Americans relying on credit to maintain their standard of living amidst stagnant wages, which has implications for economic security and mobility.
• Disparities in access to quality education and higher education costs have made it difficult for lower-income individuals to improve their economic standing.
• While initially concentrated in the United States and Europe, private equity firms have expanded globally, seeking opportunities in emerging markets where they can apply their investment strategies to rapidly growing economies.
• The decline in union membership has weakened collective bargaining power, which historically helped secure better wages and benefits for workers.
• The concentration of wealth among the top earners has grown, with a significant portion of economic gains accruing to the wealthiest, leaving less for the middle and lower classes.
• Financiers often have the resources to weather economic downturns and capitalize on them by acquiring undervalued assets, positioning themselves for gains during recoveries.
• Private equity funds often charge high management and performance fees, which can significantly reduce the net returns for investors compared to traditional investment vehicles.
• Firms often consider their investment strategies and portfolio details as proprietary information, which they are reluctant to disclose, further contributing to the opacity.
• The need to comply with various regulatory requirements can add to the operational costs of private equity firms, which may be passed on to investors.
• These firms often use significant amounts of debt to acquire companies, which can increase financial risk and pressure on the acquired company to perform.

The deterioration of community economies and the depletion of tax income are consequences of the shortcomings of businesses under the management of private equity firms.

The writers argue that the negative impact of private equity firms goes further than just reducing employment and pension funds, but also influences the tax income of local governments. As companies fail, the financial support they once provided to local government budgets in the form of property taxes and other contributions comes to an end. That creates a ripple effect on local communities, hitting schools, fire departments, libraries, and parks. The bankruptcy of Noranda Aluminum, following the extraction of millions by Apollo, led to job losses, vanished pensions, and a significant reduction in tax revenue for a community in Missouri.

Context

• The financial strain on companies managed by private equity can lead to reduced orders and delayed payments to local suppliers and businesses, further impacting the local economy.
• The loss of tax revenue can lead to budget shortfalls for local governments, forcing them to cut essential services or delay infrastructure projects. This can degrade the quality of life in the community and make the area less attractive to new businesses or residents.
• Many communities rely heavily on a few large employers for economic stability. When a major employer fails, it can have a disproportionate impact on the local economy and public services.
• Parks rely on local funding for upkeep, safety, and recreational programs. Budget constraints can lead to neglected facilities, reduced programming, and decreased community use.

The participation of private equity entities in sectors notorious for significant environmental pollution and their exploitation of natural resources exerts a profound influence on ecological well-being.

The book by Morgenson and Rosner uncovers the tactics of private investment groups that acquire companies engaged in activities detrimental to the environment, such as running oil refineries or coal-burning electricity plants, thereby continuing operations that might otherwise have ceased. Corporations with public investors, swayed by environmental concerns, often divest themselves of environmentally harmful operations, which are then usually acquired and managed by private equity firms, where the focus tends to shift towards maximizing profits rather than prioritizing ecological care, potentially for extended periods.

Other Perspectives

• Private equity entities also invest in a variety of sectors, including clean technology and renewable energy, which contribute positively to environmental sustainability.
• The term "exploit" can be seen as loaded; private equity firms may argue that they are utilizing natural resources to provide essential services and products, contributing to economic development and job creation.
• The divestment of environmentally harmful operations by publicly traded corporations could be a strategic financial decision to offload underperforming assets rather than a commitment to ecological well-being.
• Private equity firms may argue that their primary responsibility is to their investors, and maximizing profits is a fundamental aspect of their fiduciary duty.
• The duration of private equity management of such operations is not necessarily extended; it can be part of a strategy to turn around, improve, and then sell the company to a more suitable operator.

Regulatory measures and transformative attempts have not significantly diminished the persistent control exerted by companies focused on private equity.

The final section of the book scrutinizes the difficulties encountered by lawmakers and regulatory agencies in their attempts to monitor the private equity industry, highlighting the frequent ineffectiveness of such efforts, which is largely attributed to the significant sway these companies hold within political circles, their skill in circumventing fresh regulations, and their capacity to shape public opinion with misleading narratives and claims of societal benefit.

Efforts to legislate and regulate have targeted the forceful strategies used by private equity-focused entities.

The book details the efforts of various regulatory agencies to address the pervasive unethical practices within the private equity industry over time. These efforts have been sporadic, and largely ineffective.

Efforts to improve openness by enforcing stricter regulations for the dissemination of information, curbing acquisitions predominantly financed by borrowing, and putting an end to practices that enable tax evasion.

Morgenson and Rosner offer a range of suggestions for regulating the industry, including the Congressional Budget Office's advice on preparing the healthcare system for a pandemic, state legislatures tackling job losses from leveraged buyouts, and the SEC's push for clearer disclosure of details concerning private equity stakes, although these initiatives often fall short. The authors argue that corporations often stifle the development of promising ideas by exerting their power to actively oppose any challenges to their dominance.

Practical Tips

• Develop a habit of cross-referencing news by using multiple sources. When you come across a significant piece of news, don't settle for one source. Look up the same story on different platforms and compare the narratives. This will help you identify inconsistencies and get a more rounded understanding of the facts.
• Develop a habit of saving a fixed percentage of your income each month to build a reserve fund for future acquisitions, whether it's property, a car, or an investment. By doing this, you'll rely less on borrowing and more on your savings. For instance, if you're planning to buy a new car in two years, calculate how much you need to save each month so you can pay for it mostly or entirely with cash.
• Volunteer with a nonprofit organization that provides tax assistance to low-income individuals, where you can help others file their taxes correctly and legally. This hands-on experience will deepen your understanding of the tax system and the importance of compliance, while also providing a community service. You'll learn about common misconceptions and mistakes that can lead to unintentional evasion and how to avoid them.
• Encourage a culture of health and safety in your community by initiating a virtual group where neighbors can share resources, such as where to find flu shots or how to access telemedicine services. This peer-to-peer support network can foster a more resilient community that's better prepared to face a healthcare crisis together.
• Consider volunteering with a non-profit organization that advocates for workers' rights and economic justice. By contributing your time and effort, you can help these organizations amplify their message and put pressure on state legislatures to address job losses associated with leveraged buyouts.
• Encourage open innovation by sharing your feedback and ideas with companies that are known for being receptive to customer input. This can be done through social media, customer surveys, or product review sections. If you have an idea that could improve a product or service, don't hesitate to share it. Your contribution could help a smaller company to innovate and compete.

The intricate nature of private equity configurations and their political influence present challenges in maintaining existing legal and regulatory norms.

The writers argue that the complex operations of these firms, coupled with their significant influence in political arenas, often render the enforcement of current regulatory measures difficult. The authors highlight the use of complex and opaque ownership structures set up to skirt laws that bar corporate participation in medical practice, and they emphasize the establishment of a regulation by the federal agency overseeing the securities industry, aimed at stopping companies from making political donations to government representatives in exchange for their business in the financial sector. While there are some exceptions, oversight organizations and the relevant industries have often neglected these standards.

Other Perspectives

• The effectiveness of political influence is difficult to measure, and attributing political outcomes to the influence of private equity firms alone ignores the complex interplay of multiple stakeholders in the political process.
• Complexity does not inherently prevent enforcement; rather, it may require regulators to invest in better training and technology to understand and oversee these operations.
• There is a perspective that the complexity in ownership structures is not unique to private equity firms but is also found in many multinational corporations and conglomerates.
• The presence of a few bad actors within private equity does not necessarily indicate a systemic issue with the industry as a whole.
• There might be a lack of transparency in how these regulations are applied and enforced, which can lead to a perception of bias or unfairness in the regulatory process.
• There are instances where industries self-regulate effectively, reducing the need for external oversight and the appearance of neglect.

The industry of private equity has continually shown adaptability and strength, maintaining its vigor even in the face of regulatory attempts at supervision.

In their book, Morgenson and Rosner meticulously document the ways in which the sector of private capital has persistently adapted to bypass obstacles to its operations, thus evading regulatory reforms and preserving its ability to maximize profits. The authors highlight the adeptness of corporate advocates in persuading lawmakers to continue channeling substantial funds from public pensions into their costly, subpar offerings by disseminating misleading information and extolling alleged community benefits.

The industry's skill in altering its methods and systems to circumvent newly established rules and regulations.

The authors illustrate how certain companies adapt their tactics, occasionally with assistance from regulatory bodies, to avoid detection, sidestep existing rules, and find new ways to derive profits from their commercial activities. In 2010, the firm Apollo was instrumental in establishing the co-investing exemption with oversight from the Securities and Exchange Commission. Apollo's approach resulted in significant changes to the regulatory framework, which allowed for the preferential provision of certain investment opportunities to select investors, possibly disadvantaging other clients who were not presented with similar options.

Other Perspectives

• Regulatory bodies are designed to enforce compliance, not to assist companies in evading the rules.
• The preferential provision of investment opportunities to select investors might be a common practice in the industry, and not unique to Apollo's use of the co-investing exemption.
• It's possible that the regulatory changes were already under consideration, and Apollo's actions simply coincided with the timing of these changes, rather than causing them.
• Regulators like the SEC often allow for certain exemptions to encourage investment and innovation in the market, which can benefit the economy as a whole.
• The regulatory framework may include safeguards that require firms to act in the best interest of all clients, which could mitigate the potential for disadvantage.

The substantial lobbying power and persuasive efforts of private equity firms have hindered significant changes in regulation.

Morgenson and Rosner argue that the significant sway held by the private equity sector in convincing lawmakers across different levels of government has successfully stifled efforts to reform that could result in more stringent supervision of the sector's predatory strategies. They outline how entities such as Apollo and Blackstone implement tactics that include recruiting a host of lobbyists and forging connections with high-level government officials. Their sway enables them to mold public perception using misleading assertions regarding their contribution to society. The book emphasizes the 2021 initiative titled the "Stop Wall Street Looting Act," aimed at curbing a variety of predatory practices utilized by investment firms specializing in private equity, but it faced swift reversal as a result of vigorous campaigning by powerful figures in the sector.

Practical Tips

• Engage in shareholder activism if you own stocks, even in small amounts, by submitting proposals or voting on initiatives related to private equity influence. Many companies allow shareholders to vote on certain decisions or propose actions for the company to take. You can use this right to influence companies to disclose their relationships with private equity firms or to adopt policies that mitigate the impact of lobbying on their business decisions.
• You can analyze the influence of persuasive efforts on your own decision-making by keeping a journal of instances where you feel swayed by external arguments. Note down situations where you encounter persuasive tactics, such as advertising, political campaigns, or even discussions with friends and family. Reflect on how these instances might be similar to the way private equity firms lobby against regulation changes. This self-awareness can help you recognize and critically evaluate persuasive efforts in various contexts.
• You can educate yourself on the legislative process to understand how laws are made and reformed. Start by visiting the official websites of your local and national legislative bodies to learn about the process, current bills, and the committees responsible for them. This knowledge will help you identify key moments when public opinion can influence lawmakers' decisions.
• Engage in mindful consumption by researching the ownership of companies before making significant purchases or investments. Use tools like company transparency reports, ethical consumer guides, or investment apps that highlight company ownership and practices, to make decisions that align with your values and awareness of predatory strategies.
• Create a discussion group focused on policy and governance to foster a deeper understanding of how decisions are made at different levels of government. Invite guest speakers, such as local politicians, activists, or academics, to share their experiences and insights. This can help you and your group members become more informed and engaged citizens, better equipped to interact with government officials and advocate for change.
• Develop a habit of questioning the source by checking the background of any article or report praising private equity firms. Whenever you come across positive coverage, investigate who wrote it and whether they might have a vested interest in the firm's success, such as being an employee, partner, or beneficiary of the firm's investments. This will help you assess the objectivity of the information presented.
• Develop a habit of supporting local businesses to counteract the impact of large private equity-owned chains. By choosing to spend your money at small, locally-owned businesses, you're helping to keep profits within the community and supporting an economic structure that's less susceptible to predatory practices. Make a list of local alternatives for goods and services you regularly use and commit to making the switch.
• Start a blog or social media page dedicated to discussing and dissecting policy changes in your sector of interest, focusing on the 'behind-the-scenes' actions of influential figures. This platform can serve as a case study for others to see how advocacy and campaigning can alter legislative outcomes. For instance, if you're interested in education policy, post analyses of how certain educational reforms were pushed through or rolled back due to advocacy efforts, without needing to be an expert in the field.