What Will It Take to Stop Wall Street Looting?
Elizabeth Warren’s latest plan is a deft recognition of exploitation by private equity, but small tweaks here and there will not stop that exploitation.
Senator Elizabeth Warren seems a likely candidate for a popular champion against the robber barons of private equity firms given her previous instrumental role in passing the Dodd-Frank Act. Few will deny that Warren knows what she is talking about when describing the problem in her new Stop Wall Street Looting Act, and all the experts left-of-Krugman are quickly getting behind her. Eileen Applebaum, author of “ Private Equity at Work: When Wall Street Manages Main Street”, wrote a public letter to Warren providing all the details of Warren’s already comprehensive description of how private equity functions in our economy and under the law. The letter is one of the better descriptions of the exploitation by private equity firms that I have ever seen.
But my organizer background compels me to say “What is the ask? What is the so-what? What is to be done?” The answer with this kind of legislation (and aside from the straightforward creation of the CFPB, this was also the answer for Dodd-Frank) is often that the solution is “too technical” or “too complicated” to be summed up succinctly. And allegedly it is that complicated in order to be comprehensive, addressing nearly every pertinent statute.
I think this kind of thinking is wrong, as well as classist. And I think it is misleading, because fundamentally the “comprehensive” relief this kind of legislation provides is usually mitigating rather than transformative, tweaks rather than overhaul, decreasing rather than stopping the Wall Street looting.
We need legislation that ends private equity, rather than trying to steer it away from its worst behavior, because it is by nature exploitative and economically destabilizing. That does not mean we pass a bill that just says “Private equity is now illegal” — that is not a realistic demand under the current circumstances. But our demands should be tailored to actually stopping Wall Street looting, and we will only move towards that by building worker power as an alternative, not by piecemeal reforms.
The SWSLA has three main components to it: (1) corporate responsibility, (2) bankruptcy, and (3) taxes. There is a fourth component on fees and reporting but in my opinion this does not do that much to change the Invesment Company Act and the SEC’s interpretations of it, so to keep things as concise as possible I am skipping it.
My fellow socialists may groan at the business seminar sounding “corporate responsibility” but it is actually the part many of them will like the most. As it currently stands, private equity firms and the people that run them can essentially parachute out of responsibility for the corporations they take over and then run into the ground. Warren’s bill seeks to end the impunity and make private equity firms, and perhaps even more importantly their controllers and investors, liable for the debt and violations of the law by the company. Employees and creditors would be able to file lawsuits to void any transfers of money (what Warren and co. define as “looting”) from the acquired company to the private equity firm or the people running it. Lastly, it would expressly make people arranging corporate loan securitizations retain risk — this comes out of fears of the ballooning corporate debt being put into collateralized debt obligations in a similar way as what happened with subprime mortgages leading up the Great Recession.
The bankruptcy provisions address the problem of private equity acquired corporations filing for bankruptcy and essentially putting the burden of their debts on their workers and others harmed by their practices. The high profile cases of Toys R Us and now Blackjewel make this a hot button issue for the Left, though some like Warren have long pointed to it as a serious injustice.
The SWSLA would revise the bankruptcy code to give workers’ higher priority, basically making them closer to being first in line for getting whatever money the corporation is paying to its creditors. It would also increase the priority of employment and labor lawsuits against the company. SWSLA has some provisions making bankruptcy more difficult for the company executives as well, creating a means test for executive compensation enhancements to get through bankruptcy and prohibiting it if severance pay is being cut or decreased. Also, somewhat randomly (perhaps from some angry Toys R’ Us customers), it allows people to make claims in bankruptcy against the company up to $1,800 for gift cards.
And lastly, SWSLA would expressly incorporate the Act to start taxing transactions related to private equity. It would tax any of the “looting” done by the firm so that hypothetically if there were no creditors or workers willing to sue to stop the transfer, it would at least be taxed. And more significantly it would close the “carried interest loophole” that basically allows investment managers to be taxed 20% on their income by defining it as capital gains, whereas normally it would be taxed at 37%. While not large enough on its own to change private equity behavior, the lack of taxation does create greater profit margins that arguably are responsible for private equity’s popularity and seemingly unstoppable rise even while the global economy generally has been somewhat stagnant as to investment generally. Hypothetically if these deals were not so profitable it might steer investment towards other ventures.
To be clear, I do not oppose this bill. I think given the current political climate, it makes sense to ride the current popular animosity towards private equity to get reforms that will probably mitigate the harms being done. But the key word there is “mitigate.” I think, though there are some compelling arguments to the contrary, that Warren is “on our side” and genuinely does want to end the rampant exploitation of the working class by private equity. But as I’ve written about previously, her insistence on steering markets rather than disciplining (let alone abolishing) them is based on a fundamentally flawed analysis of power. That being said, there are glimmers of hope that Warren might understand the need for worker power to some degree, so I think it is worthwhile to critique her from the Left and hopefully push her towards proposals that are as ambitious as the titles she gives them.
The corporate responsibility component of the SWSLA is by and far its most ambitious, and a necessary reform if we ever want the government to shut them down. However, as I said at the beginning, the provisions of SWSLA as to fees and transparency are largely duplication of currently existing law. Other laws like the Worker Adjustment and Retraining Notification Act (WARN) and the Employee Retirement Income Security Act (ERISA)have mostly just created a new market of private civil litigation with a mixed record of remedying, let alone deterring, harm (which I say as someone who benefits from this kind of right of private action austerity). Making the enforcement mechanism for stopping Wall Street “looting” a private right of action does not make me optimistic that the “looting” will be stopped.
Civil liability must be coupled with appropriate enforcement mechanisms. The Securities Exchange Commission has essentially been the lone watchdog of the private equity industry under the Investment Company Act, and its mission has mostly been to protect other corporations and investors defrauded by private equity. Civil enforcement by the Department of Labor and criminal enforcement by the Department of Justice must be expressly provided for. On the civil side, there should be a worker-oriented version of the Unfair Deceptive and Abusive Acts and Practices (UDAAP) statute — the statute that was broad enough to allow the CFPB to protect people from predatory finance even as its form has quickly evolved. Private equity transactions, particularly leveraged buyouts, should be prohibited if they are abusive, deceptive, or unfair to the workers of the acquired company. Rather than giving people the ability to file a lawsuit once looting has happened, we should actively seek to prevent the conditions that cause it to happen in the first place.
And as to bankruptcy, the SWSLA is simply not providing enough changes to disincentivize abuses of bankruptcy by private equity. Frankly the issue is so much larger than private equity even if it commits some of the most egregious offenses. With corporate debt at about $15.5 trillion and the dreaded inverse yield curve suggesting that a recession could be in our near future, a massive overhaul of Chapter 11 bankruptcy is needed as soon as possible. A key aspect of that overhaul should be the elimination of the presumption of continued possession by the companies filing for bankruptcy. This element is one of the most backward parts of the bankruptcy: while working people are presumed to be abusing bankruptcy, companies are presumed to be the best arbiters of their own future. It should be the opposite. Individuals deserve freedom and a “fresh start” through bankruptcy. Companies serve at the whim of the public, and when their financial precarity threatens the public, they should lose the freedom to make their own choices.
As to the issue of taxes, while this is definitely something I know relatively less about, it is clear that it does not go far enough. While I disagree with Matt Bruenig’s proposal for a sovereign wealth fund for many reasons, his funding prescription of a one-off starter tax on market capitalization, an IPO tax, a financial transactions tax, a mergers and acquisitions tax, and a tax on investment fund management itself is the kind of tax policy in general needed to end the unjust accumulation of wealth on the backs of the public without contributing to public revenue. Even if you believe in running deficits to accomplish public policy, and I very much do, “ taxes that seek to influence conduct are nothing new” as Chief Justice John Roberts wrote in his decision upholding the individual mandate of the Affordable Care Act aka Obamacare.
Lastly, if we really want to Stop Wall Street Looting, we have to cut off their access to the tools that allow them to do such Looting. While private equity firms engage in a range of transactions, the one they are most infamous for and what SWSLA is focused on is leveraged buyouts — the purchase of financially-distressed companies through taking on a lot of debt. What if someone else bought out struggling companies? What if the actual workers at the companies were given the first shot at buying out the companies, backed with financing from public banks? That’s exactly what Right to Own proposes — creating a right for workers upon the announcement of a sale to make a first bid with backing from public banks and other government aid. For decades, from labor offshoring to outright union busting, companies have used bankruptcy, factory closures, and M&A as a loophole for abusing and exploiting working people. People like Warren essentially want to close the loophole, but to stop the abuse working people need to take over the process itself. You cannot end Wall Street looting without ending Wall Street itself, and you cannot end Wall Street without building a new way to democratically govern our economy.
Critics point out that such a proposal is existentially threatening to practically the entirety of large companies in addition to private equity firms. But none of those are voting members of the public. The fact that so often such policy proposals are not even considered, despite broad popularity, because a relatively few wealthy elite oppose it shows how captured our political system is by capitalism, and yes that includes even progressive politicians like Warren.
Deciding how to regulate with a de facto prohibition of fundamentally challenging corporate power rather than attempting to force that power to stop harming people is both classist and undemocratic. You can never stop Wall Street looting by trying to steer Wall Street. Corporations are pulled by the gravitational well of the profit motive, with any deviation from profit seeking behavior either temporary (and later offset by profit seeking behavior) or the cause of that corporation’s demise due to competition.
Private equity firms only make profits by leeching the value created by the socially useful labor and production in our society. The steering-reforms of Warren will at best mitigate how much that leeching hurts the public, but it won’t stop the looting. Only people power can stop the looting, and thus our regulations must not be undemocratically beholden to the market and must empower working people so they can challenge and overthrow the dictatorship of the wealthy few over the economy.
If you liked this piece, please considering donating a few dollars for me to flesh it out in a full article for ClassCrits XII. Also Thomas Sexton of the podcast Trillbilly Worker’s Party is raising money for the former miners of all the bankrupt mining companies, you can donate to support those folks here.