Commentary on Political Economy

Friday 28 April 2023


Private Equity Is Gutting America — and Getting Away With It

A drawing of three vultures flying in a circle above four decrepit buildings.
Credit...Tim Enthoven
A drawing of three vultures flying in a circle above four decrepit buildings.

Mr. Ballou is an attorney and the author of the forthcoming “Plunder: Private Equity’s Plan to Pillage America,” from which this essay is adapted.

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“Private equity” is a term we’ve all heard but which, if we’re honest, few of us understand. The basic idea is simple: Private equity firms make their money by buying companies, transforming them and selling them — hopefully for a profit. But what sounds simple often leads to disaster.

Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone. In nursing homes, where the firms have been particularly active, private equity ownership is responsible for an estimated — and astounding — 20,000 premature deaths over a 12-year period, according to a recent working paper from the National Bureau of Economic Research. Similar tales of woe abound in mobile homesprison health careemergency medicineambulancesapartment buildings and elsewhere. Yet private equity and its leaders continue to prosper, and executives of the top firms are billionaires many times over.

Why do private equity firms succeed when the companies they buy so often fail? In part, it’s because firms are generally insulated from the consequences of their actions, and benefit from hard-fought tax benefits that allow many of their executives to often pay lower rates than you and I do. Together, this means that firms enjoy disproportionate benefits when their plans succeed, and suffer fewer consequences when they fail.

Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back. As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.

ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked. People suffered. The daughter of one resident told The Washington Post that “my mom would call us every day crying when she was in there” and that “it was dirty — like a run-down motel. Roaches and ants all over the place.”

In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees. (In statements to The Washington Post, ManorCare denied that the quality of its care had declined, while Carlyle claimed that changes in how Medicare paid nursing homes, not its own actions, caused the chain’s bankruptcy.)

Carlyle managed to avoid any legal liability for its actions. How it did so explains why this industry often has such poor outcomes for the businesses it buys.

The family of one ManorCare resident, Annie Salley, sued Carlyle after she died in a facility that the family said was understaffed. According to the lawsuit, despite needing assistance walking to the bathroom, Ms. Salley was forced to do so alone, and hit her head on a bathroom fixture. Afterward, nursing home staff reportedly failed to order a head scan or refer her to a doctor, even though she exhibited confusion, vomited and thrashed around. Ms. Salley eventually died from bleeding around her brain.

Yet when Ms. Salley’s family sued for wrongful death, Carlyle managed to get the case against it dismissed. As a private equity firm, Carlyle claimed, it did not technically own ManorCare. Rather, Carlyle merely advised a series of investment funds with obscure names that did. In essence, Carlyle performed a legal disappearing act.

In this case, as in nearly every private equity acquisition, private equity firms benefit from a legal double standard: They have effective control over the companies their funds buy, but are rarely held responsible for those companies’ actions. This mismatch helps to explain why private equity firms often make such risky or shortsighted moves that imperil their own businesses. When firms, through their takeovers, load companies up with debt, extract onerous fees or cut jobs or quality of care, they face big payouts when things go well, but generally suffer no legal consequences when they go poorly. It’s a “heads I win, tails you lose” sort of arrangement — one that’s been enormously profitable.

But it isn’t just that firms benefit from the law: They take great pains to shape it, too. Since 1990, private equity and investment firms have given over $900 million to federal candidates and have hired an untold number of senior government officials to work on their behalf. These have included cabinet members, speakers of the House, generals, a C.I.A. director, a vice president and a smattering of senators. Congressional staff members have found their way to private equity, too: Lobbying disclosure forms for the largest firms are filled with the names of former chiefs of staff, counsels and legislative directors. Carlyle, for instance, at various times employed two former F.C.C. chairmen, a former S.E.C. chair, a former NATO supreme allied commander, a former secretary of state and a former British prime minister, among others.

Such investments have paid off, as firms have lobbied to protect favored tax treatments, which in turn have given them disproportionate benefits when their investments succeed. The most prominent of these benefits is the carried interest loophole, which allows private equity executives to pay such low tax rates. The issue has been on the national agenda since at least 2006, and three presidents have tried to close the loophole. All three have failed.

Most recently, in 2021, as part of his first budget, President Biden proposed to end the benefit for people with very high incomes. But as he made his pitch, private equity opposition surged, and the largest firms each spent $3 million to $7 million on lobbying that year alone. One firm, Apollo Global Management, employed the former general counsel to the House Republican caucus, a former senior adviser to a past speaker of the House, a former chief of staff to another speaker and a former senator, plus more than a dozen other former officials.

As the plan wound its way through Congress, it grew weaker, and by the fall of 2021, the proposal to end the benefit was no longer a part of Mr. Biden’s budget negotiations. Instead, Congress approved an amendment that largely exempted small and midsize companies owned by private equity firms from a new corporate minimum tax. It was an obscure but important consideration, and with it, private equity firms managed not just to protect a preferred tax advantage — the carried interest loophole, which benefited people like Blackstone’s Stephen Schwarzman, whose income in 2022 was 50 times that of the chief executive of Goldman Sachs — but also to win a new one.

The story further explains why the actions of private equity firms often have such sorry consequences for everyone except themselves. By protecting favored tax benefits, firms receive disproportionate gains when their strategies succeed. But, insulated from liability, they face little consequence if those plans fail. It’s an incentive system that encourages risky, even reckless behavior like that at ManorCare, and is designed to work for private equity firms and no one else.

But if private equity firms are powerful, so too are ordinary people, who’ve had surprising success confronting firms regarding unaffordable prison phone calls and surprise medical bills, among other issues. Even if we’re unlikely to fix our tax code soon, activists and others can still push to update our laws and hold private equity responsible for its actions. Congress can clarify that firms can be sued for wrongs committed by companies they effectively control. States and cities can do the same when portfolio companies are based in their jurisdictions. By making private equity firms responsible for their own actions, we can build a better — and fairer — economy, and make tragedies like that at ManorCare less likely. All we need is the courage to act.

Thursday 27 April 2023


Papal ‘mea culpa’ only weakens the West

Pope Francis speaks from the window of the apostolic palace overlooking St. Peter's square this month.
Pope Francis speaks from the window of the apostolic palace overlooking St. Peter's square this month.

A few weeks ago, in one of those outbursts of self-flagellation that characterise the age, the Papacy formally apologised for its role in promulgating the “Doctrine of Discovery”.

Issued jointly by the Papal ­Dicasteries for Culture and Education and for Promoting Integral Human Development, the apology, which purports to reflect “respect for the facts of history”, referred to the contention that “the basis of the ‘doctrine’ is to be found in several papal documents, such as the Bulls Dum Diversas (1452), Romanus Pontifex (1455) and Inter Caetera (1493)”.

While claiming that those “documents have never been considered expressions of the Catholic faith”, the Dicasteries castigated them for “not adequately reflecting the equal dignity and rights of indigenous people”.

Pope Francis waves as he arrives at St Peters’ square in the Vatican, on April 26, 2023.
Pope Francis waves as he arrives at St Peters’ square in the Vatican, on April 26, 2023.

Now, were the Dicasteries to remorsefully condemn every statement the Papacy made in the Middle Ages that offends contemporary standards, they would be fully occupied until the end of time. But even putting that aside, the most startling ­feature of the apology is its failure to properly grasp the significance of the doctrine, and of the debate it provoked.

The doctrine, which the Dictaseries describe incorrectly, centred on the principle that the discoverer of a new land is entitled to its possession, with the papal bulls attributing those rights in the Americas partly to the Portuguese crown but mainly to that of Spain.

The bulls, in other words, defined a general legal principle, derived from the Roman law of property, and used it to determine the legitimacy and allocation of European dominion over the new world.

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That was surely remarkable. After all, medieval Islamic law regarded the conquest and subjection of non-Islamic territory (that is, of territory in the “dar al-harb” or “house of war”) as not merely legitimate but as each Muslim’s duty. In contrast, the bulls reflected the belief that every action of a Christian sovereign, including territorial expansion, had to rest on a rational legal basis.

Yet remarkable as that was, even more remarkable was the fact that the period’s most eminent scholars savaged the papacy’s proposed justification.

St. Peter's Basilica in Vatican City. Rome, Italy.
St. Peter's Basilica in Vatican City. Rome, Italy.

As early as 1511, barely two decades after Europeans had arrived on the island of Hispaniola, the Dominican Antonio de Montesinos delivered a sermon in which he told the incredulous settlers that by violating the rights of the Indians they had jeopardised their immortal souls. But de Montesinos’ criticisms paled compared to those of the towering theologians and lawyers of the University of Salamanca, which was the unquestioned centre of Catholic learning.

Led by Francisco de Vitoria (1483-1546), they derided as “worthy of laughter and mockery” the contention that the new world was in the pope’s gift. As for the doctrine of discovery, it was patently absurd, since it implied that the American Indians could have legitimately seized Europe, and dispossessed its inhabitants, “if instead of discovering them, they had discovered us”.

Rather, the learned doctors said, the extension of Spanish dominion would only have been legally justified if the new territory was completely unoccupied (in which case it could, under Roman law, be considered “res nullius”) or, failing that, populated by creatures devoid of reason. Both propositions, they noted, were obviously false, given the presence in the Americas of human beings who, even if some lived in primitive tribes, had undeniably been made in God’s image.

And since “all men are born free and endowed with natural reason”, the Indians possessed “true dominion, both in public and private affairs” over the lands the pope purported to own and cede.

Those criticisms proved so powerful that by 1629, judge Juan de Solorzano y Pereira, Spain’s pre-eminent authority on the law of the Americas, could dismiss the doctrine of discovery as being merely “of antiquarian interest”.

The Vatican has formally repudiated the 15th-century Doctrine of Discovery, a legal and religious theory that was used for
    Vatican distances itself from concepts used to oppress Indigenous people

    It is consequently unsurprising that the Salamanca School’s assault on the doctrine resonated through the centuries, with that staunch anti-imperialist, Doctor Samuel Johnson, telling James Boswell, his faithful amanuensis, in 1763 that “I love the University of Salamanca, for when the Spaniards were in doubt as to the lawfulness of conquering America, the University of Salamanca gave it as their opinion that it was not”.

    And is unsurprising too that the school’s assertion that Christendom and the “pagan and barbarian” world had exactly the same rights in the eyes of God was a pivotal moment in the development of the “ius gentium”, the law of peoples, and its transformation into a law of nations based on equal respect.

    That principle of equal respect was uniquely European: the Confucian equivalent of the “ius gentium”, to take but one example, assumed all other nations stood in relation to China as a child stands to a father, who is owed deference, obedience and tribute.

    However, no one could claim that the process of European expansion invariably put the principle into practice: there was, on the contrary, frequent backsliding, all too often accompanied by a yawning gap between ideals and realities. That was, perhaps, inevitable: the arguments of Vitoria and his successors were moral ones, and as Vitoria well knew, rulers rarely act on moral principle. All kings, he told a correspondent, think “from hand to mouth”, responding to greed and expediency rather than morality.

    But there is more than a grain of truth in G.W.F. Hegel’s dictum that once they were unleashed upon the world, Western civilisation’s great ideals – freedom, equality, the rule of law – “found a way of making their way”, picking up the pieces after each of history’s horrors and setting out anew.

    Defining norms that opened every action to rational criticism, those ideals lifted themselves by their bootstraps, elevating our standards with them.

    That was the real significance of the Doctrine of Discovery and of the great “Debate of the Americas”. As China and much of the Islamic world slid into intellectual conformity, the papal bulls, flawed as they were, claimed legitimacy not on the basis of divine authority but of law and reason; and because they were based on those norms, the flaws could be rationally exposed and new, sounder, principles developed.

    Even so, in a society which viewed controversy with suspicion, challenging the papacy took enormous moral courage. Vitoria and his clerical colleagues found it in their faith and learning. One might have thought that and its fruits well worth celebrating, first and foremost by the church to whom they devoted their lives. Instead, in their rush to apologise, the Dicasteries ignore it completely.

    The West has no monopoly on historical sins; what it does have nowadays is an unquestionable monopoly on apologetic simplifications which, by misrepresenting the past, impoverish the future. As the vultures circle over the Western intellectual tradition, that gives only the dictators cause to rejoice.


    Autonomie stratégique : Emmanuel Macron affaiblit sa propre position

    En invitant à ne pas suivre les Etats-Unis sur la question de Taïwan au nom de l’« autonomie stratégique » des pays de l’Union européenne, le chef de l’Etat a provoqué l’incompréhension des partenaires de la France. Une sortie contre-productive alors que l’Europe compte sur l’aide américaine pour contrer la Russie en Ukraine.

    Qui trop embrasse mal étreint. Emmanuel Macron vient d’en faire une nouvelle fois l’amère expérience sur le terrain diplomatique : en quelques phrases controversées, dans son entretien du 8 avril aux Echos, à Politico ainsi qu’à France Inter, le chef de l’Etat a porté un rude coup au projet d’« autonomie stratégique » qu’il appelle de ses vœux pour permettre au continent européen de défendre ses intérêts, voire de se défendre tout court, dans un monde plus brutal et fragmenté que jamais.

    En appelant les Européens à éviter tout « suivisme » dans la confrontation entre les Etats-Unis et la Chine au sujet de Taïwan, le territoire au cœur des rivalités entre Washington et Pékin, le locataire de l’Elysée a donné de précieux arguments aux nombreux détracteurs de ce concept, que ce soient aux Etats-Unis, où l’idée est en général mal comprise, mais aussi en Europe, où elle demeure clivante, comme l’ont montré les réactions outragées que la « pensée complexe » du président a déclenchées.

    Mettre dans la balance le sort de Taïwan, dont la Chine annonce vouloir prendre le contrôle, pour justifier le souci légitime d’« autonomie stratégique » européenne est en effet particulièrement maladroit. Attribuer la responsabilité d’une partie des tensions du moment à Washington l’est tout autant, en plein exercice militaire ordonné par Pékin à proximité de l’île afin de protester contre le passage aux Etats-Unis de la présidente taïwanaise, Tsai Ing-wen.

    Pas très opportun envers les Etats-Unis

    L’argumentaire n’est pas de nature à convaincre ceux qui soupçonneraient, à tort, le président Macron d’être à équidistance entre Washington et Pékin. La ministre allemande des affaires étrangères, Annalena Baerbock, s’est d’ailleurs empressée, lors d’un passage à Pékin quelques jours après la visite d’Etat du président français, de considérer qu’au contraire « une escalade militaire dans le détroit de Taïwan, où transite chaque jour 50 % du commerce mondial, serait un scénario catastrophe pour le monde entier ».

    Certes, le chef de l’Etat s’inscrit dans une vision gaullo-mitterrandienne : la France est sans aucun doute un pays allié des Etats-Unis, mais elle entend rester « non alignée ». « Etre allié ne veut pas dire être vassal », estime le chef de l’Etat. Assurer pour autant que le sort de Taïwan ne concernerait pas l’Europe, comme l’a suggéré M. Macron, n’est cependant pas très opportun envers les Etats-Unis, au moment où ceux-ci se mobilisent, aux côtés des Européens, pour soutenir la résistance de l’Ukraine face à l’envahisseur russe. « Vous ne pouvez pas protéger l’Ukraine aujourd’hui et demain en disant que Taïwan n’est pas votre affaire », a répliqué le premier ministre polonais, Mateusz Morawiecki, dans une allusion transparente au président français : « Si l’Ukraine tombe, si l’Ukraine est conquise, le jour d’après la Chine pourrait attaquer – peut attaquer – Taïwan », a-t-il dit.

    La démonstration présidentielle, loin d’être improvisée, est d’autant plus surprenante qu’elle survient au moment où « l’autonomie stratégique » subit un redoutable « baptême du feu » dans le contexte de la guerre en Ukraine. Si le chef de l’Etat se targue un peu vite d’avoir « gagné la bataille idéologique » sur la question, il peut néanmoins mettre à son actif le fait d’avoir popularisé l’idée, bien qu’elle suscite encore de vifs débats.

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    Plusieurs pays longtemps rétifs à cette approche, à commencer par l’Allemagne et les Pays-Bas, ont évolué en ce sens, même s’ils préfèrent parler de « souveraineté », plutôt que d’« autonomie », afin de ne pas froisser l’allié américain. A son retour de Pékin, la visite d’Etat d’Emmanuel Macron à Amsterdam a permis de le constater : le président français s’est offert le luxe de prôner dans cet Etat très libéral la nécessité de doter l’Europe d’une politique industrielle solide et d’une politique commerciale plus protectrice face aux concurrents américains et chinois.

    Nécessité de l’autonomie validée par la guerre

    Sur le plan collectif, les Vingt-Sept ont fait de remarquables progrès. Qui aurait imaginé que quelques jours après le déclenchement de l’invasion russe de l’Ukraine, l’Union européenne décide d’activer sa Facilité pour la paix pour financer les livraisons d’armes à Kiev ? Ou, après les commandes en commun de vaccins pendant la pandémie de Covid-19, qu’elle se lance dans des achats groupés de munitions pour soutenir la résistance ukrainienne ? « La meilleure façon de réaliser l’autonomie stratégique est de ne pas trop en parler », suggèrent cependant plusieurs responsables français impliqués dans les questions européennes.

    Car le conflit qui lamine la sécurité du continent a un effet paradoxal dans les débats concernant son « autonomie stratégique ». Sur le papier, l’invasion russe de l’Ukraine en valide la nécessité, à mesure que les Vingt-Sept prennent conscience de leur vulnérabilité et de leurs dépendances à l’égard de voisins belliqueux, comme la Russie, ou d’alliés exigeants, comme les Etats-Unis. Après avoir quasiment stoppé ses importations de pétrole et de gaz russe, l’UE cherche à « réduire les risques » d’une trop grande addiction aux échanges avec la Chine, en particulier dans le domaine des composants stratégiques.

    Cependant, la guerre en Ukraine vient renforcer les partisans, en Europe, d’une alliance toujours plus étroite avec les Etats-Unis. La défense du continent est plus que jamais fondée sur le retour en grâce de l’Organisation du traité de l’Atlantique Nord (OTAN), que l’agression russe est venue relancer. La Pologne, les Etats baltes et les pays scandinaves, mais aussi l’Allemagne, sont peu enclins de ce fait à développer l’autonomie du continent par rapport à Washington. Que ce soit pour se protéger de la Russie, ou pour endiguer la montée en puissance de la Chine.