Pluralistic: 14 May 2021

Today's links

A US $100 bill in which Ben Franklin has been replaced by a nuclear mushroom cloud, in the center of which is a dancing version of Monopoly's 'Rich Uncle Pennybags,' his cane replaced by the Grim Reaper's scythe.

A weapon of mass financial destruction (permalink)

Some things are hard to understand because they're complicated.

Some things are complicated so they'll be hard to understand.

The harder you look at the finance industry, the more evident it becomes that the complexity is deliberate, a means of baffling with bullshit.

Private equity is one of those baffling and mysterious phenomena that only gets worse with scrutiny: how is it possible that a handful of companies are able to borrow vast sums to buy up and then destroy successful businesses? Can that really be their business-model?


"Private Equity at Work," Eileen Appelbaum and Rosemary Batt's 2014 analysis of the social consequences of private equity takeovers. It identifies many destructive PE practices, but singles out one as especially deadly: "club deals."

In a club deal, "two or more PE funds join together to acquire a huge enterprise, and share ownership." The presence of multiple marquee names on the deal (like the Toys R Us acquisition, with Bain, KKR, and Vornado in a single "club") puts billions on tap from lenders.

Club deals' easy access to credit made them hugely popular, constituting 40% of leveraged buyouts in 2004. But the uncritical fortunes showered on club LBOs emboldened a series of increasingly destructive grifts that caused club deals collapse in popularity.

The "save businesses, fuck workers" Trump stimulus sent trillions of Fed dollars sloshing into the finance world, fuelling multiple asset bubbles, from cryptos to single-family dwellings – even a violent trading-card frenzy.

To that list, we can now add Club Deals 2.0, with billions being marshalled by PE alliances who are bidding against one another to acquire Medline America's largest manufacturer/distributor of medical supplies, serving hospitals and doctor's offices.

As Appelbaum writes for The American Prospect, this is cause for alarm. To the PE clubs, Medline is an asset, used to secure debt financing that can be handed out to fund managers and investors. To the rest of us, Medline is a matter of life or death.

To remind us of the awesome destructive power of PE club deals, Appelbaum provides us with a rundown of their terrifying history:

  • The 2006 $5.4b Tishman Speyer/Blackrock deal to buy Stuyvesant/Cooper Village in order to undo its rent-control status, evict its tenants, and go condo. Tenants organized, and the fund went bankrupt in 2010, dodging the $200m it owed tenants for illegal rent overcharges. Though the fund managers made out fine on that deal, its investment partners weren't so lucky: "the Church of England, the government of Singapore, and three public-employee pension funds in Florida and California, lost a total of $850 million."

  • The 2007 $48b KKR/TPG/Goldman Sachs buyout of Texas energy giant TXU (AKA Energy Future Holdings). Bankrupt by 2012. PE extracted $538m from the deal, and millions more in "fees" to oversee the company's implosion. Investors lost 95 cents for every dollar they put in.

  • The 2004 Cerberus/Sun/Lubert-Adler/Klaff buyout of Mervyn's department stores: asset stripped, bankrupt by 2008, liquidated, destroying thousands of jobs and stiffing suppliers, kicking off a wave of knock-on bankruptcies.

  • The 2006 $30.7b Apollo/TPG buyout of Harrah's (now Caesar's): eliminated much of the 30,000 unionized employee workforce and cut the IPO offering from $17/share to $9 in 2010. Investors lost 40% of their cash.

  • The 2000 Caxton-Iseman/Sentinel acquisition of Buffets Holdings (Ryan's, Hometown Buffet, Old Country Buffet, Tahoe Joe's, etc). Bankrupt by 2008 after the PE extracted more than $250m. Thousands of jobs gone, forever.

PE firms claim that they are Good at Business in ways that the people who run profitable companies that employ people in good jobs that do things other people value simply are not.

With leveraged buyouts, PE firms borrow billions by putting up the companies they're targeting as collateral (like nonconsensually buying someone else's house by taking out a mortgage that puts their house up as security!).

Credulous lenders – your pension fund, your government, even your church – put up the money, accepting deals in which the key assets of the business are immediately liquidated to pay huge management and special dividend fees to the PE company.

PE rakes in hundreds of millions – even billions – and saddles the company with vast debts whose interest payments drain its profits. Meanwhile, the company is forced to lease back the capital assets the PE company sold off, exposing it to rent shocks and price hikes.

While the PE barons who devised this Excellent Business Strategy charge the company millions more in "management and consulting fees" in exchange for yet more of this species of commercial wisdom.

It's a (terrifying) sign of just how stupid big money has become that club deals are back. A leveraged buyout of Medline puts the whole medical system in jeopardy (raising a question: why didn't antitrust regulators prevent Medline from becoming a single point of failure?).

There is no credible case for PE making Medline a better company. As Appelbaum writes, "it's a highly successful company with no low-hanging fruit in the form of operational, marketing, or business strategy improvements requiring PE’s secret sauce."

Sticking Medline with $10b in leveraged buyout debts and saddling it with millions in payments for "management and consulting" will necessitate massive junk-bond raises and a spiral towards inevitable bankruptcy.

As Appelbaum writes, that doesn't mean that the funds bidding for the company (Advent/Bain/CVC, KKR/Clayton, Blackstone/Hellman) won't make out like (literal) bandits on the deal.

For decades, we've been sold the narrative that wealth is the reward for brilliance, in a concerted effort to overturn Balzac's maxim that "behind every great fortune there is a crime."

We've been told that we're not qualified to comment on finance matters because we don't understand its complexities, the underlying, unquestionable axioms that make it somehow necessary and valorous to destroy productive businesses in the name of capitalism.

We've been told that economic malaise is the result of workers demanding a living wage (especially through unions) and "burdensome regulations" that put the incomprehensible genius of billionaire saviors in shackles, to the detriment of us all.

Reality has finally come for that self-serving myth. At a time in which American union membership is at historic lows, support for unions is at historic highs, and our trust in big business has plummeted:

Starting in 2012, and for first time in half-century the history of the American National Election Studies, public sentiment moved for unions and against business (historically, trust for unions and business rise and fall together).

The latest ANES data shows the most intense divergence ever, with all age groups and political groups hold "record or near-record positive views favoring labor over big business." Republican support of unions, which has grown since 2012, is at an all-time high.

The PRO Act, a landmark pro-union bill, is currently before the Congress, with strong support from the Biden administration. It presents the possibility that public sentiment will turn into public policy, making lasting change to our politics:

Billionaires have always been sterling exemplars of class solidarity. Even when their private equity funds result in wealthy investors losing hundreds of millions of dollars, they stick together and argue for preferential treatment for capital gains and finance deregulation.

Today, we see serious signs of class solidarity among the rest of us, the first in many decades. All it took was decades of hugely destructive financial engineering, a nation brought to the brink of collapse, and a planet on fire, all in the name of "efficiency."

This day in history (permalink)

#5yrsago Infested: an itchy, fascinating natural history of the bed bug

#5yrsago Banker implicated in one of history’s biggest frauds says boss beat him with a tiny baseball bat

#1yrago Facebook's "backfire effect" junk science

#1yrago Restaurants won't let gig drivers pee

Colophon (permalink)

Today's top sources: Naked Capitalism (

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  • A nonfiction book about excessive buyer-power in the arts, co-written with Rebecca Giblin, "The Shakedown." FINAL EDITS

  • A post-GND utopian novel, "The Lost Cause." FINISHED

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Currently reading: Analogia by George Dyson.

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