$$Kudzu$$: The Kingdom of Private Equity

These Are the Plunderers: How Private Equity Runs—and Wrecks—America by Gretchen Morgenson and Joshua Rosner. Simon & Schuster, 381 pages. 2023.

Our Lives in Their Portfolios: Why Asset Managers Own the World by Brett Christophers. Verso, 310 pages. 2023.

A specter is hauntng capitalism: the specter of financialization. Industrial capitalism—the capitalism of “dark Satanic mills”—was bad enough, but it had certain redeeming features: in a word (well, two words), people and place. Factory work may have been grueling and dangerous, but workers sometimes acquired genuine skills, and being under one roof made it easier for them to organize and strike. Factories were often tied, by custom and tradition as well as logistics, to one place, making it harder to simply pack up and move in the face of worker dissatisfaction or government regulation.

To put the contrast at its simplest and starkest: industrial capitalism made money by making things; financial capitalism makes money by fiddling with figures. Sometimes, at least, old-fashioned capitalism produced—along with pollution, workplace injuries, and grinding exploitation—useful things: food, clothing, housing, transportation, books, and other necessities of life. Financial capitalism merely siphons money upward, from the suckers to the sharps.

Marxism predicted that because of competition and technological development, it would eventually prove more and more difficult to make a profit through the relatively straightforward activity of industrial capitalism. It looked for a while—from the mid-1940s to the mid-1970s—as though capitalism had proven Marxism wrong. Under the benign guidance of the Bretton Woods Agreement, which used capital controls and fixed exchange rates to promote international economic stability and discourage rapid capital movements and currency speculation, the United States and Europe enjoyed an almost idyllic prosperity in those three decades. But then American companies began to feel the effects of European and Japanese competition. They didn’t like it, so they pressured the Nixon administration to scrap the accords. Wall Street, which the Bretton Woods rules had kept on a leash, sensed its opportunity and also lobbied hard—and successfully.

The result was a tsunami of speculation over the next few decades, enabled by wave after wave of financial deregulation. The latter was a joint product of fierce lobbying by financial institutions and the ascendancy of laissez faire ideology—also called “neoliberalism”—embraced by Ronald Reagan and Margaret Thatcher and subsequently by Bill Clinton and Tony Blair. The idiocy was bipartisan: Clinton and Obama were as clueless as their Republican counterparts.

Among these “reforms”—each of them a dagger aimed at the heart of a sane and fair economy—were: allowing commercial banks, which handle the public’s money, to take many of the same risks as investment banks, which handle investors’ money; lowering banks’ minimum reserve requirements, freeing them to use more of their funds for speculative purposes; allowing pension funds, insurance companies, and savings-and-loan associations (S&Ls) to make high-risk investments; facilitating corporate takeovers; approving new and risky financial instruments like credit default swaps, collateralized debt obligations, derivatives, and mortgage-based securities; and most important, removing all restrictions on the movement of speculative capital, while using the International Monetary Fund (IMF) to force unwilling countries to comply. Together these changes, as the noted economics journalist Robert Kuttner observed, forced governments “to run their economies less in service of steady growth, decent distribution, and full employment—and more to keep the trust of financial speculators, who tended to prize high interest rates, limited social outlays, low taxes on capital, and balanced budgets.”

Keynes, a principal architect of the Bretton Woods Agreement, warned: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.” That was indeed the position roughly fifty years after Keynes’s death, and the predictable consequences followed. S&Ls were invited to make more adventurous investments in the 1980s. They did, and within a decade a third of them failed. The cost of the bailout was $160 billion. In the 1990s, a hedge fund named Long-Term Capital Management claimed to have discovered an algorithm that would reduce investment risk to nearly zero. For four years it was wildly successful, attracting $125 billion from investors. In 1998 its luck ran out. Judging that its failure would crash the stock market and bring down dozens of banks, the government organized an emergency rescue. The 2007–2008 crisis was an epic clusterfuck, involving nearly everyone in both the financial and political systems, though special blame should be attached to supreme con man Alan Greenspan, who persuaded everyone in government to repose unlimited confidence in the wisdom of the financial markets. Through it all, the Justice Department was asleep at the wheel. During the wild and woolly ten years before the 2008 crash, bank fraud referrals for criminal prosecution decreased by 95 percent.

The Washington Consensus, embodying the neoliberal dogma of market sovereignty, was forced on the rest of the world through the mechanism of “structural adjustments,” a set of conditions tacked onto all loans by the IMF. Latin American countries were encouraged to borrow heavily from U.S. banks after the 1973 oil shock. When interest rates increased later in the decade, those countries were badly squeezed; Washington and the IMF urged still more deregulation. The continent’s economies were devastated; the 1980s are known in Latin America as the “Lost Decade.” In 1997, in Thailand, Indonesia, the Philippines, and South Korea, the same causes—large and risky debts to U.S. banks and subsequent interest-rate fluctuations—produced similar results: economic contraction, redoubled exhortations to accommodate foreign investors, and warnings not to try to regulate capital flows. By the 2000s, Europe had caught the neoliberal contagion: in the wake of the 2008 crisis, the weaker, more heavily indebted economies—Greece, Italy, Portugal, and Spain—were forced to endure crushing austerity rather than default. Financialization was a global plague.
Slash, Burn, and Churn

In the 1960s, a brave new idea was born, which ushered in a brave new world. Traders figured out how to buy things without money. More precisely, they realized that you could borrow the money to buy the thing while using the thing itself as collateral. They could buy a company with borrowed money, using the company’s assets as collateral for the loan. They then transferred the debt to the company, which in effect had to pay for its own hijacking, and eventually sold it for a tidy profit. In the 1960s, when Jerome Kohlberg, a finance executive at Bear Stearns & Co., started to see the possibilities, it was called “bootstrap financing.” By the mid-1970s, when Kohlberg set up a company with Henry Kravis and George Roberts, it was known as the leveraged buyout (LBO).

The leveraged buyout was the key to the magic kingdom of private equity. But LBOs leave casualties. To service its new debt, the acquired company often must cut costs drastically. This usually means firing workers and managers and overworking those who remain, selling off divisions, renegotiating contracts with suppliers, halting environmental mitigation, and eliminating philanthropy and community service. And even then, many companies failed—a significant proportion of companies acquired in LBOs went bankrupt.

Fortunately, it was discovered around this time that workers, suppliers, and communities don’t matter. In the wake of Milton Friedman’s famous and influential 1972 pronouncement that corporations have no other obligations than to maximize profits, several business school professors further honed neoliberalism into an operational formula: the fiduciary duty of every employee is always and only to increase the firm’s share price. This “shareholder value theory,” which exalted the interests of investors over all others—indeed recognized no other interests at all—afforded the intellectual and moral scaffolding of the private equity revolution. (...)

An academic study found that around 20 percent of large, private-equity-acquired companies were bankrupt within ten years, compared with 2 percent of all other companies. Another study looked at ten thousand companies acquired by private equity firms over a thirty-year period and found that employment declined between 13 and 16 percent. A 2019 study found that “over the previous decade almost 600,000 people lost their jobs as retailers as retail collapsed after being bought by private equity.”

by George Scialabba, The Baffler |  Read more:

Image:© Brindha Kumar
[ed. Nice capsule history, and still going strong if not accelerating. Wait until AI gets weaponized to help.]