As lawmakers squabble
over the “carried interest” tax rate, it’s nice to find a big picture
overview of some of the economic activity they’re discussing. I recently
read Josh Kosman’s book The
Buyout of America: How Private Equity Will Cause the Next Great Credit
Crisis, and I highly recommend it to our readers. Kosman painstakingly
describes the byzantine financial maneuvers behind marquee private
equity firms which bought “more than three thousand American companies
from 2000-2008.” He describes in detail how they resist transparency
(164) and “hurt their businesses competitively, limit their growth, cut
jobs without reinvesting the savings, and generate mediocre returns”
(195). The recipe for high earnings is simple: the firms “get large
fees up front and are largely divorced from their results if their
transactions fail” (195).
Like Kwak and Johnson’s account in 13 Bankers, Kosman offers
a political economy account of private equity’s favored treatment by
government. As he notes,
[F]our of the past eight Treasury Secretaries joined the
PE industry . . . . and they have significant influence in Washington.
President Bill Clinton, and both President Bushes, have also advised PE
firms or worked for their companies. . . . KKR retained former
Democratic House majority leader Richard Gephardt as a lobbyist and
hired former RNC chairman Kenneth
Mehlman as head of global public affairs. (196)
Having analyzed a wide array of buyouts, Kosman concludes that “PE
firms manage their businesses to satisfy short-term greed, not for
long-term survival” (51). This is a particularly dangerous attitude in
health care, an industry too long dominated by short-run thinking.
It’s precisely this mentality that FDIC Chair Sheila Bair
indicted in her testimony before the FCIC:
[W]hile the establishment of emergency backstops to
contain financial crises can help to limit damage to the wider economy
in the short-run, without needed reforms these policies will promote
financial activity and risk-taking at the expense of other sectors of
the economy. Corporate sector practices [have] had the effect of
distorting of decision-making away from long-term profitability and
stability and toward short-term gains with insufficient regard for risk.
. . .Meaningful reform of these practices will be essential to promote
better long-term decision-making in the U.S. corporate sector.
We can only hope that members of Congress keep both Bair’s and
Kosman’s insights in mind. Congratulations to Kosman for authoring a
compelling and well-researched analysis of one of the most troubling
engines of inequality in the US.