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Speaker 1: Welcome to Stuff You Should Know, a production of iHeartRadio.

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Speaker 2: Hey, and welcome to the podcast. I'm Josh, and there's

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Speaker 2: Chuck and Jerry's here too, and this is Stuff you

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Speaker 2: should know the podcast.

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Speaker 1: Oh wow, fancy.

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Speaker 2: Yeah. I wanted to dress it up a little bit

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Speaker 2: because it's our job, Chuck, to yank what could be

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Speaker 2: a bone dry, boring economics lesson from the maw of

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Speaker 2: well boredom. Shake it up a little bit by the caller,

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Speaker 2: look it in the eye, and say you will not

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Speaker 2: be boring today, and then do all that. All right, Okay,

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Speaker 2: we can do it, Chuck. We're professionals.

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Speaker 1: I'm glad you feel good about it.

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Speaker 2: I do, and I'm going to make you feel good

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Speaker 2: about it too, because while we're talking about today is

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Speaker 2: no mere typical economics. And we're famous for having trouble

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Speaker 2: wrapping our heads around economics. This one can be that

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Speaker 2: way too. We're talking about private equity today. We'll explain

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Speaker 2: all about it. The reason it can be hard to

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Speaker 2: wrap your head around is because it's so insanely unfair

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Speaker 2: the structure of it, that it just doesn't make sense.

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Speaker 2: So you just kind of have to accept it on

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Speaker 2: its face that this is actually how it is.

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Speaker 1: Yeah, I would agree, it's nuts.

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Speaker 2: So private equity, I guess we should probably start out

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Speaker 2: with a little bit of a definition, Charles. It's an

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Speaker 2: alternative investment vehicle. And essentially what it is is it's

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Speaker 2: a fund, a private fund. You have to basically be

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Speaker 2: in the club to even invest in this, at least traditionally.

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Speaker 2: That kind of open it up a little more, and

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Speaker 2: private equity goes around and essentially either buys huge controlling

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Speaker 2: interests in companies or just buys the company's outright, trims

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Speaker 2: them down, makes them lean, mean and efficient, and if

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Speaker 2: ideally turns them around for a healthy profit, walks away

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Speaker 2: does it again. Everybody who invested gets even richer than

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Speaker 2: they already were. And that's the basics, the very most

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Speaker 2: basic definition of private equity.

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Speaker 1: Yeah, it's something that has become much more popular in

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Speaker 1: the past, you know, twenty ish years, but really kind

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Speaker 1: of started in the seventies, as we'll see. And it's

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Speaker 1: an alternative investment, so it's not like stocks or bonds

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Speaker 1: or anything. It's generally a little riskier. There's less oversight,

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Speaker 1: there's less transparency, and they want to keep it that way.

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Speaker 2: Yeah, Yeah, they've actually gone to great links to make

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Speaker 2: sure that it's much less transparent. One reason why the government,

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Speaker 2: who is in charge of regulating stuff to make it

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Speaker 2: transparent like stocks and bonds and disclosures and all that,

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Speaker 2: is that you or I or anybody could walk or

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Speaker 2: walk along, open up a brokerage account, start buying stocks

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Speaker 2: and bonds. I don't have to be savvy at all

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Speaker 2: to invest in private equity because of the risk, because

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Speaker 2: it's just so different from traditional stocks and bonds and

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Speaker 2: normal investments. The government says you're on your own. As

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Speaker 2: a matter of fact, you have to register as an

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Speaker 2: accredited investor, which says that you either know what you're

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Speaker 2: doing so much that we don't have to worry about

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Speaker 2: you losing your shirt, like you're going to just deal

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Speaker 2: with it if that happens, or you have so much

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Speaker 2: money it's not really going to matter if you lose

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Speaker 2: your investment. Those are the people who can invest in

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Speaker 2: private equity, and usually they're what institutional investors, right, like

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Speaker 2: huge massive funds or college endowments or something.

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Speaker 1: Yeah, and the people who really come out on top

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Speaker 1: are the people that manage these If you're a managing

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Speaker 1: partner there's a formula known as two and twenty where

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Speaker 1: the company that you're managing that you have taken over,

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Speaker 1: they pay you two percent of the total assets of

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Speaker 1: that company plus twenty percent of the profits above whatever

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Speaker 1: threshold that you agree on, I guess. And then there's

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Speaker 1: all sorts of other ways that they can make money,

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Speaker 1: as we'll see, like you know, selling the land that

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Speaker 1: the business sits on, maybe to yourself and then renting

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Speaker 1: it back to that same company at a higher rate.

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Speaker 1: So yeah, we'll dig into all that. But they're the

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Speaker 1: people that are really getting rich are the people that

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Speaker 1: are investing in these but really managing these.

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Speaker 2: Right, So if you ever hear a news story about

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Speaker 2: some guy who ran some great venerated company into the

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Speaker 2: ground and they're like, yeah, I mean even I lost

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Speaker 2: my investment, do not feel bad for them because they

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Speaker 2: made probably hundreds of millions or billions of dollars for

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Speaker 2: themselves from those fees, and those fees can't be taken back,

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Speaker 2: like because that company's in bankruptcy. Because you can show

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Speaker 2: that they did a terrible job of managing this company,

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Speaker 2: doesn't matter. They get to keep that money no matter

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Speaker 2: what the turnout is. No matter how many people lose

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Speaker 2: their jobs. That is why almost everyone in the world

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Speaker 2: hates private equity people.

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Speaker 1: Yeah, and they generally do this to private companies. Sometimes

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Speaker 1: it'll be a controlling interest in a much larger publicly

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Speaker 1: traded company, but you know, generally we're talking about private

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Speaker 1: companies here, and you know, we're going to go through

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Speaker 1: industries and different examples of specific companies in a bit,

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Speaker 1: but it's usually almost always what's called a leverage buyout,

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Speaker 1: in which the money to buy this company comes from

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Speaker 1: a huge loan that that company is also then responsible for.

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Speaker 1: So it's it's really whoever came I mean, I guess

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Speaker 1: we'll get to who basically came up with this stuff,

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Speaker 1: But it's a sort of evil financial genius on a

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Speaker 1: level that is kind of hard to comprehend that it

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Speaker 1: was ever allowed to happen.

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Speaker 2: Yeah, It's the best analogy I've been able to come

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Speaker 2: up with is it's like if you went and bought

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Speaker 2: a house. The house had to go take out a

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Speaker 2: loan in a mortgage so that you could buy and

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Speaker 2: own it, and you didn't actually care about the house

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Speaker 2: because you're planning on selling it down the road, so

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Speaker 2: you didn't keep it up and then you just decided

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Speaker 2: to walk away from the house, and the house is

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Speaker 2: responsible for paying off the loan it took out so

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Speaker 2: you could buy it. That's the best that I can

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Speaker 2: come up with.

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Speaker 1: Yeah, I mean, that's a thing, and it's a big

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Speaker 1: thing right now. Private equity firms, the companies they own

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Speaker 1: in the United States employee more than thirteen million people

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Speaker 1: and they account for about two trillion of which is

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Speaker 1: about seven percent of the GDP. And like I said,

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Speaker 1: it all started out in the seventies with a guy

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Speaker 1: named Milton Friedman from the University of Chicago, who was

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Speaker 1: I mean, it seems very sort of old hat now

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Speaker 1: to hear, but he was kind of one of the

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Speaker 1: first people to step forward and say the only thing

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Speaker 1: any corporation should ever worry about is their share holders.

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Speaker 1: The people don't matter, the product don't matter, doesn't matter,

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Speaker 1: rather English grammar doesn't matter, and the only thing that

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Speaker 1: matters is the profits that we turn for our shareholders.

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Speaker 1: And once somebody kind of said the quiet part out loud,

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Speaker 1: everybody's like, oh, well, he said it, So that's what

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Speaker 1: we're going to all try and do now.

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Speaker 2: Yeah, one of the worst ideas in the history of

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Speaker 2: the world, and it just took off. So, yeah, Friedman,

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Speaker 2: that was step one. Step two was laid well. Step

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Speaker 2: two through ten, I would say, is was laid out

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Speaker 2: by a guy named Michael Jensen, who was an economist

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Speaker 2: with Harvard Business School in the seventies and eighties, and

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Speaker 2: he basically said, traditional companies that have you know, you've

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Speaker 2: got a CEO, and you have employees, and the CEO

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Speaker 2: has paid a certain salary a year and everything's great.

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Speaker 2: That doesn't work because the CEO, the person making the

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Speaker 2: decisions and what moves the company makes, they might be

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Speaker 2: in conflict with the share they might be spending a

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Speaker 2: bunch of money, and they don't care. They don't care

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Speaker 2: about the shareholders, the investors, who, again, as Melton Friedman said,

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Speaker 2: the entire purpose of the corporation is to enrich the shareholders.

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Speaker 2: So how can you bring a CEO in line? And

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Speaker 2: you said a couple of things. One, you can pay

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Speaker 2: them in stock. So that whole thing about how CEOs

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Speaker 2: get huge stock packages, now that came from Michael Jensen.

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Speaker 2: And the reason why is because now suddenly they're a shareholder,

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Speaker 2: so they care about what the shareholders are getting right,

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Speaker 2: that's number one. The number two if you buy a

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Speaker 2: company using that leverage buyout technique where you make the

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Speaker 2: company take out tons of loans so that you can

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Speaker 2: buy that company, it's saddled with so much debt that

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Speaker 2: it immediately has to figure out how to get lean

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Speaker 2: and mean, emphasis on mean, so that it can keep

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Speaker 2: afloat and pay off of those debts. So like, immediately

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Speaker 2: managers have to trim the fat and it just gets

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Speaker 2: more efficient and outperforms just a traditional company, traditionally run company.

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Speaker 2: That was Michael Jensen's contributions.

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Speaker 1: Yeah, and you know we're going to talk about the

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Speaker 1: different ways this happens. Obviously, firing people is a big

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Speaker 1: way to trim the fat, to pay back those huge

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Speaker 1: loans that someone took out on your behalf that you're

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Speaker 1: now responsible for once again. So you know, mass layoffs

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Speaker 1: is one way to make that happen. That's one way

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Speaker 1: to trim the fat. Even if it, you know, makes

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Speaker 1: the company not function as well, it doesn't matter. You know,

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Speaker 1: sometimes there is fat that can be trim. So we're

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Speaker 1: not saying like no one should ever be laid off

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Speaker 1: or anything like that, like we're realistic people, but we're

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Speaker 1: talking about, you know, leverage buyouts and kind of how

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Speaker 1: they work. So another thing they can do is break

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Speaker 1: them apart. And if you've ever seen the movie Wall

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Speaker 1: Street with the great Michael Douglass, I just watched that

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Speaker 1: again for the billion time recently. Really, Yeah, very very

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Speaker 1: good example. It's one of my favorite movies, but very

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Speaker 1: very good examples of all this stuff in there as

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Speaker 1: far as like buying in his case, when he bought

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Speaker 1: arlichenes father's airline just for the sole purpose of breaking

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Speaker 1: it apart and you know, driving it into the ground

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Speaker 1: to get rich.

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Speaker 2: Right.

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Speaker 1: But you know, selling off assets is another way to

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Speaker 1: do it, like I mentioned, like selling off the land

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Speaker 1: that the business sits on. Sometimes that equity firm owns

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Speaker 1: the real estate company as well. Yeah, that buys the

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Speaker 1: land that the company sits on and then leases it

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Speaker 1: back to that company, sometimes against their best interest at

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Speaker 1: like higher rental rates.

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Speaker 2: Yeah, I'll give you an example. We'll talk a little

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Speaker 2: more about Red Lobster. But they got they got taken

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Speaker 2: over in a leveraged buyout, and the company did exactly that.

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Speaker 2: They sold off all of their assets, all of their

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Speaker 2: restaurants to sold them off and then they sold them

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Speaker 2: to a company who turned around and leased them to

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Speaker 2: Red Lobster. Right, the Red Lobster was paying an estimated

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Speaker 2: sixteen million dollars a year for just a one percent

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Speaker 2: property tax on its locations, all of them sixteen million dollars.

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Speaker 2: Now their leases amount to one hundred and fifty eight

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Speaker 2: million dollars. Right. So these are just terrible, terrible business decisions.

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Speaker 2: And the reason why is because anytime a big influx

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Speaker 2: of cash comes in, it gets divided up among the investors.

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Speaker 2: They get tons of money, and it's not just like

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Speaker 2: from selling properties, Chuck. One of the other ways that

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Speaker 2: investors get their money back, they get return on their

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Speaker 2: investment is they'll take out more loans from the company.

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Speaker 2: After the company's been bought and has all this extra debt,

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Speaker 2: they'll take out even more loans, and when that money

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Speaker 2: comes in, rather than spending on the company, they'll divide

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Speaker 2: some or all of it up among the investors. So

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Speaker 2: it's like a vampire process at its worst. I feel

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Speaker 2: like we really should say something to be fair. There

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Speaker 2: is a lot of well run, well thought out private

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Speaker 2: equity firms that know what they're doing that actually have

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Speaker 2: saved companies from going under. It happens. It's just when

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Speaker 2: it's bad, it's so bad that it almost it almost

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Speaker 2: makes it seem like there shouldn't be this type of

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Speaker 2: business model.

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Speaker 1: Yeah, for sure. Sometimes it's a real quick thing, like

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Speaker 1: in the case of Wall Street, like there was no

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Speaker 1: long term plan for Gordon Gecko and Blue Star Air.

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Speaker 1: It was like a house flip. You buy this company

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Speaker 1: sort of a smaller company, and you want to make

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Speaker 1: it look good for maybe another private equity firm to

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Speaker 1: come along and buy. So you're gonna, if you're a

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Speaker 1: manager of that firm, you're gonna make a lot of

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Speaker 1: very short term decisions that make it appear much healthier

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Speaker 1: than it really is on paper. So they can just

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Speaker 1: kind of turn it and flip it and get a

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Speaker 1: big payoff, and then it's someone else's problem where they're

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Speaker 1: gonna do the same thing. Probably.

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Speaker 2: Yeah, And like you said, one of the big things

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Speaker 2: that happens is including layoffs, including just sucking the company

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Speaker 2: dry of its money, is the customer suffers as well.

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Speaker 2: Usually the product or the service takes a really big

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Speaker 2: hit because you're trying to figure out how to put

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Speaker 2: that same thing out and charge as much as you

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Speaker 2: can for it by putting as little as you can

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Speaker 2: into it, because the people who bought the company don't

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Speaker 2: really care about the company or what it does.

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Speaker 1: Good time for a break, I think so, and.

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Speaker 2: Then we'll come back and talk some more about the

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Speaker 2: history of this whole thing. Huh.

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Speaker 1: All right, I need to go get some palmade and

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Speaker 1: grease my hairback real quick. I'll be right back.

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Speaker 2: Okay, definitely should I'm not large childs of each my ski.

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Speaker 1: I should mention real quick that I I love Wall

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Speaker 1: Street so much that I was watching it again and

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Speaker 1: I was like, I wonder if there's a t that

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Speaker 1: says Anacott Steel. It's just one of the companies that they,

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Speaker 1: you know, one of the fictional companies at Oliver Stone

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Speaker 1: wrote it to the movie, and sure enough there's an

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Speaker 1: Anacot Steel T shirt. I bought it. I love it.

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Speaker 1: I hate the message of the movie and Gordon Geko.

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Speaker 1: I don't think he's the hero or anything like that, right,

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Speaker 1: But it's just a movie I've always loved and now

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Speaker 1: I got my Annacott Steel shirt. It just kind of

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Speaker 1: as a movie crusher type. So when people see me

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Speaker 1: that know that movie, they'll be like, oh Wall Street.

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Speaker 2: Right, No, I get it, I get it. I used

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Speaker 2: to have a sweatshirt that was like the print of

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Speaker 2: Danny's sweater, the Apollo Latin sweater. I love that thing.

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Speaker 2: That was one of my more beloved pieces of clothing.

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Speaker 1: You know, I met the guy who owns that sweater.

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Speaker 1: Oh really, Dan Johnson No Lee Ownkrik I think is

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Speaker 1: his name. He's a big animation guy. I think he

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Speaker 1: did Coco and a bunch of other big, oh cool

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Speaker 1: animated films, and he was such a fan of the

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Speaker 1: Shining that he bought that real sweater at auction.

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Speaker 2: Good for him. I hope he's never tried it on

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Speaker 2: because that's a tiny sweater.

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Speaker 1: Well you wouldn't a big guy.

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Speaker 2: It doesn't matter. That is still a very Danny was

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Speaker 2: not a he was a tiny guy.

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Speaker 1: Yeah. Should we talk about history?

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Speaker 2: Yeah? I think we should chuck. So this whole thing

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Speaker 2: is kind of newish, right, I Mean we usually associated

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Speaker 2: with the eighties, and it's pretty accurate, but it goes

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Speaker 2: back a little further. It's just the eighties or when

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Speaker 2: it really took shape and got off the rails the

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Speaker 2: first time.

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Speaker 1: Yeah, for sure, the first leverage buyouts that came after

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Speaker 1: World War Two. There were some dudes from Bear Stearns,

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Speaker 1: Jerome Cohlberg, Henry Kravis with a K, and George Roberts,

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Speaker 1: so they were KKR. They got together they started, you know,

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Speaker 1: with this idea of leverage buyouts for small companies, like

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Speaker 1: you know, family owned businesses. This is in the nineteen

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Speaker 1: sixties and in the mid seventies they formed Colberg, Cravis

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Speaker 1: and Roberts the KKR business and their first big success

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Speaker 1: story for them is making a ton of money doing

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Speaker 1: One of these was a machine tooling company or a

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Speaker 1: tool company rather called is that Holdale Whodale? Whodale maybe

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Speaker 1: who dat hou Dai La Industries. This was in nineteen

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Speaker 1: seventy nine. They bought it for three hundred and eighty

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Speaker 1: million bucks, of which they paid about a million bucks.

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Speaker 1: Once again, as we've already learned, the company was saddled

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Speaker 1: with debt immediately covering the remainder of that money, and

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Speaker 1: they got a new CEO. They said, hey, we're going

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Speaker 1: to pay a double what the previous CEO got and

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Speaker 1: we're going to start raking in these fees as the

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Speaker 1: fund manager.

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Speaker 2: Yeah, and so Wodale, which at the time of this

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Speaker 2: purchase was doing really well. It had been around since

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Speaker 2: I think the nineteen teens. It was, it was fat

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Speaker 2: with cash, the employees were happy, and these guys just

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Speaker 2: ran it into the ground and sucked as much money

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Speaker 2: as they could out of it. And the what usually

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Speaker 2: gets companies in this case is they're so settled with

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Speaker 2: that that a recession comes along or things shift like

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Speaker 2: we go from brick and mortar stores to online, and

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Speaker 2: they don't have the cash to keep up because they're

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Speaker 2: spending too much of it either giving it back to

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Speaker 2: investors why you can't even say back, just giving it

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Speaker 2: away to investors, or keeping up with their interest payments

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Speaker 2: on these loans that they eventually just sink and end

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Speaker 2: up in bankruptcy and their debt gets restructured and if

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Speaker 2: they're lucky, they can come back out of it and

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Speaker 2: try the whole thing again.

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Speaker 1: Yeah, for sure. About ten years after that, one of

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Speaker 1: the big, big ones, early ones, took place, such that

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Speaker 1: they wrote a book about it and made a movie

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Speaker 1: about it. If you've seen the movie Barbarians at the

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Speaker 1: Gate with James Garner.

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Speaker 2: I haven't, have you, No, I've always wanted to.

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Speaker 1: Hey, it's out there, buddy.

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Speaker 2: Okay, that's not a Tom Wolf book. I'm thinking of

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Speaker 2: a man in full, aren't I?

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Speaker 1: Yeah, I think so. I can't remember who wrote the book,

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Speaker 1: but the book was called Barbarians at the Gate colon

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Speaker 1: the Fall of RGR Nibisco because it's about RJR Nibisco

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Speaker 1: and there is no more RJR Nibisco. There's RJR and

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Speaker 1: there's Nibisco. But that company ceased to exist after that

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Speaker 1: leverage buyout.

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Speaker 2: Yeah, and I think two thousand people lost their jobs

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Speaker 2: as the company was sold off in pieces and then finally,

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Speaker 2: like you said, the whole thing went down. And at

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Speaker 2: the time, this is nineteen eighty nine, I think you

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Speaker 2: said two thousand people losing their job because some corporate

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Speaker 2: raiders came in and screwed up a good thing that was.

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Speaker 2: That was enormous news, and that really kind of put

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Speaker 2: a period on the end of what had become almost

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Speaker 2: like the wild West, Like these people were in some

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Speaker 2: cases like outlaw folk heroes who were just coming into

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Speaker 2: corporates and taking everything. People getting laid off and then

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Speaker 2: they go off fifty times richer than they were and

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Speaker 2: do the whole thing again. Right, So, they got a

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Speaker 2: bad name in the eighties, and by the time the

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Speaker 2: nineties rolled around, things got a little more legit, a

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Speaker 2: little more structured. Some of the players involved got a

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Speaker 2: little more I don't know, it was more legitimate players

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Speaker 2: than just some maverick guy who worked at bear Stearns

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Speaker 2: or you know, goldn Sachs for a little while. And

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Speaker 2: then additionally some other firms whose names we know because

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Speaker 2: this stuff is just so nuts that it makes the news.

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Speaker 2: Bain Capital was founded in the eighties, Blackstone founded in

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Speaker 2: the eighties. Carlisle Group founded in the eighties. So the

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Speaker 2: eighties were a big deal. The nineties everybody kind of

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Speaker 2: kept a low profile, and then the two thousands of

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Speaker 2: booms started to come back again.

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Speaker 1: Yeah, big boom, you know everything crash. We've done a

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Speaker 1: couple of episodes kind of around the two thousand and

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Speaker 1: eight crash. But a lot of private private equity firms

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Speaker 1: did okay. It's not like they were completely unscathed or

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Speaker 1: anything like that, but they were better off than a

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Speaker 1: lot of financial institutions after the crash, And after that,

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Speaker 1: Congress was like, hey, maybe we should have some some

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Speaker 1: more you know, guardrails and reporting requirement it's on this

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Speaker 1: private equity business, because that's a term that kind of

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Speaker 1: just came around in the twenty first century. Even though

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Speaker 1: it was happening. Private equity as a term came around,

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Speaker 1: I think in the early two thousands, and even though

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Speaker 1: they put some more reporting requirements around, it still way

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Speaker 1: less transparent and way fewer requirements than you know, the

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Speaker 1: publicly traded companies and the stock market and banks and

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Speaker 1: stuff like that. Right, But there's been a real boom

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Speaker 1: since that time. The number of companies publicly traded has

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Speaker 1: dropped about half since nineteen ninety six where it was

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Speaker 1: at its peak, and a couple of years ago, in

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Speaker 1: twenty twenty three, there were five times as many private

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Speaker 1: equity backfirms as publicly held companies.

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Speaker 2: Yeah, because it's you don't have to worry about the

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Speaker 2: government meddling with your stuff. It's crazy. So some of

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Speaker 2: the some of these deals make headlines, and usually when

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Speaker 2: it makes headlines is because it's gotten so bad that

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Speaker 2: the average person wants their blood to boil reading about it.

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Speaker 2: So the news says, here, read this. One of the

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Speaker 2: big ones that I remember was Toys r US.

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Speaker 1: Yeah, one of this.

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Speaker 2: And this is another thing it will also make news

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Speaker 2: if like a beloved nostalgic brand just gets torn apart

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Speaker 2: by corporators. And Toys r Us definitely fit that bill.

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Speaker 2: You know, most people our age have memories of going

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Speaker 2: to Toys r Us and it being like, how does

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Speaker 2: this place exist? This is the most amazing place on

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Speaker 2: the planet. In addition to that, I mean, even more

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Speaker 2: importantly than that loss of nostalgia is that thirty thousand

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Speaker 2: people lost their jobs because of a private equity takeover

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Speaker 2: Toys Rus that eventually ran it into the ground.

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Speaker 1: Yeah. I mean it makes some of those earlier ones

401
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Speaker 1: where you know, on Thy twelve hundred people lose their

402
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Speaker 1: job seemed quaint.

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Speaker 2: Yeah, thirty thousand people just sorry, you don't have a

404
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Speaker 2: job anymore.

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Speaker 1: Yeah, there's this guy. I mean, we got to talk

406
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Speaker 1: about Seers because that's another one iconic brand, iconic brick

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Speaker 1: and order store. I would say there's some nostalgia tied

408
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Speaker 1: up in Sears for sure.

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Speaker 2: Sure.

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Speaker 1: And a guy named Edward Lampert is someone who may

411
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Speaker 1: not be on your radar unless you follow this stuff

412
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Speaker 1: a little more closely. Kmart files for bankruptcy in two

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Speaker 1: thousand and two, and Ed Lampert comes in he was

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Speaker 1: a goldman sax guy and he I think former by

415
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Speaker 1: this time. But he buys up a bunch of the

416
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Speaker 1: debt from Kmart they come out of bankruptcy, and then

417
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Speaker 1: he has a hedge fund e SL Investments, and they

418
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Speaker 1: were the largest shareholder, and so thus he becomes the

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Speaker 1: chairman and can then run the show.

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Speaker 2: Right, and he says, Kmart, I think we should buy Sears,

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Speaker 2: And he had a pretty big stake in Sears too,

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Speaker 2: so much so that he was later accused of devaluing

423
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Speaker 2: Sears so that he could buy it through Kmart for cheaper. Regardless,

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Speaker 2: Kmart bought Sears and they formed the Sears Holding Company,

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Speaker 2: which was this huge, massive retailer. Kmart was not doing

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Speaker 2: very good. Sears was doing amazing tens and tens of

427
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Speaker 2: billionions of dollars in sales every year, and for the

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Speaker 2: first couple of years things were going pretty well. But

429
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Speaker 2: Edward Lampert, being a corporate rating private equity guy, again,

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Speaker 2: he's this is his firm, so he is directly taking

431
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Speaker 2: hundreds of millions of dollars that two percent of the

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Speaker 2: assets every year, plus that twenty percent when he gets

433
00:23:22,800 --> 00:23:26,960
Speaker 2: above performance goals. So by juicing this company and like

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Speaker 2: boosting the stock price and the value of all this stuff.

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Speaker 2: He's getting huge percentages of that every year. Right. The

436
00:23:34,080 --> 00:23:36,960
Speaker 2: problem is these bad management decisions. This is when it

437
00:23:37,000 --> 00:23:38,600
Speaker 2: goes bad, and this is when you end up reading

438
00:23:38,640 --> 00:23:41,000
Speaker 2: about it. One of the big things they did was

439
00:23:41,040 --> 00:23:43,760
Speaker 2: a stock buy back. Right. And if you have a

440
00:23:43,760 --> 00:23:46,040
Speaker 2: bunch of stock out there, a bunch of shares out

441
00:23:46,040 --> 00:23:49,080
Speaker 2: there on the market, just by like the laws of

442
00:23:49,119 --> 00:23:53,600
Speaker 2: supplying demand, they're they're worth less than if they're scarcer.

443
00:23:53,760 --> 00:23:57,720
Speaker 2: So you go as the company and buy those shares back.

444
00:23:58,080 --> 00:24:00,560
Speaker 2: And because there's fewer shares on the market, share price

445
00:24:00,600 --> 00:24:03,560
Speaker 2: can increase. Right, So if you're holding shares in the company,

446
00:24:03,600 --> 00:24:06,280
Speaker 2: your share price goes up and you make the company

447
00:24:06,840 --> 00:24:09,040
Speaker 2: buy the stocksback. It's not like you're out there doing

448
00:24:09,040 --> 00:24:13,359
Speaker 2: it yourself. Right. The better thing to do traditionally, for

449
00:24:13,480 --> 00:24:15,679
Speaker 2: if you want your business to keep running, is to

450
00:24:15,760 --> 00:24:19,320
Speaker 2: use that money to keep your business running. But instead

451
00:24:19,359 --> 00:24:23,400
Speaker 2: they took six billion dollars and bought stockback to raise

452
00:24:23,440 --> 00:24:26,560
Speaker 2: the share price, and they only spent I think this

453
00:24:26,640 --> 00:24:28,879
Speaker 2: is over a couple of years. They only spent half

454
00:24:28,920 --> 00:24:32,360
Speaker 2: of that on capital expenditures like keeping up your properties

455
00:24:33,080 --> 00:24:37,920
Speaker 2: maintaining your buildings, stuff like that, and so the company

456
00:24:38,040 --> 00:24:40,760
Speaker 2: just almost immediately started to just falter.

457
00:24:41,800 --> 00:24:45,320
Speaker 1: Yeah, so things start faltering. This is around two thousand

458
00:24:45,320 --> 00:24:49,280
Speaker 1: and seven or so, and ESL, which again was at

459
00:24:49,400 --> 00:24:55,320
Speaker 1: Lampert's company, They and some other firms then loan money

460
00:24:55,359 --> 00:24:59,240
Speaker 1: to themselves almost two point six billion dollars and so

461
00:24:59,400 --> 00:25:03,080
Speaker 1: they're now also collecting interests and fees on that. So

462
00:25:03,119 --> 00:25:05,919
Speaker 1: about four hundred million in interests in fees to the

463
00:25:05,960 --> 00:25:10,280
Speaker 1: big loan that they gave themselves, and Sears continues to

464
00:25:10,400 --> 00:25:12,760
Speaker 1: sort of tank, or the Sears Holding Company continues to tank.

465
00:25:13,040 --> 00:25:15,120
Speaker 1: That's when they break it up. They spun off, they

466
00:25:15,119 --> 00:25:19,959
Speaker 1: start spinning off different divisions. ESL is buying shares in

467
00:25:20,000 --> 00:25:22,640
Speaker 1: most of those smaller divisions as well once they break

468
00:25:22,680 --> 00:25:27,440
Speaker 1: it apart. And then in twenty fifteen, Ed Lampert founded

469
00:25:27,520 --> 00:25:32,320
Speaker 1: a real estate company called Sarritage Growth Properties. They bought

470
00:25:32,480 --> 00:25:35,560
Speaker 1: two hundred and sixty six seers and Kmart buildings and

471
00:25:35,600 --> 00:25:37,280
Speaker 1: then rented them back to themselves.

472
00:25:38,040 --> 00:25:39,640
Speaker 2: It's like robbing Peter to pay Peter.

473
00:25:40,680 --> 00:25:45,280
Speaker 1: Yeah, it's just sounds like such an obvious policing.

474
00:25:45,600 --> 00:25:49,480
Speaker 2: It is and grift and it's totally legal. That's the thing.

475
00:25:49,600 --> 00:25:53,760
Speaker 2: They're not breaking any laws. All of this is completely legal.

476
00:25:53,880 --> 00:26:00,000
Speaker 2: It's just despicably unfair. So obviously, after a fairly short

477
00:26:00,160 --> 00:26:04,920
Speaker 2: time seven years, this company, Seers Holding, filed for bankruptcy.

478
00:26:05,160 --> 00:26:08,040
Speaker 2: And again, bankruptcy doesn't mean like, oh that's it amount

479
00:26:08,040 --> 00:26:09,919
Speaker 2: of money. It means like, hey, I can't pay my

480
00:26:10,040 --> 00:26:13,760
Speaker 2: debts back. So I'm going to negotiate with all these

481
00:26:13,800 --> 00:26:17,320
Speaker 2: people and hopefully reduce it by two thirds and then

482
00:26:17,359 --> 00:26:19,040
Speaker 2: I can manage that. So I'm going to come back

483
00:26:19,040 --> 00:26:22,720
Speaker 2: out of bankruptcy and try to continue on. That's what

484
00:26:22,880 --> 00:26:26,080
Speaker 2: that's that was the result for Sears Holding. But part

485
00:26:26,119 --> 00:26:32,000
Speaker 2: of this restructuring was that they started slashing costs. And

486
00:26:32,080 --> 00:26:33,960
Speaker 2: the first thing you do to slash costs of fear

487
00:26:34,040 --> 00:26:38,240
Speaker 2: corporators fire people. They closed stores, chuck. They had thirty

488
00:26:38,240 --> 00:26:42,959
Speaker 2: five hundred Seers and Kmart stores when those two companies merged. Okay,

489
00:26:43,680 --> 00:26:48,600
Speaker 2: by seven years later they were down to seven hundred,

490
00:26:49,840 --> 00:26:56,960
Speaker 2: and today there's eight eight eighty eight, eight hundred zero eight.

491
00:26:58,400 --> 00:27:02,480
Speaker 1: Yeah, there's eight of those left. It was, you know, again,

492
00:27:02,960 --> 00:27:06,879
Speaker 1: tens of thousands of jobs and eleven billion dollars in

493
00:27:07,000 --> 00:27:11,040
Speaker 1: unpaid debt to creditors. And Ed Lampert ends up making

494
00:27:11,080 --> 00:27:14,280
Speaker 1: about one point for personally personing about one point four

495
00:27:14,320 --> 00:27:17,520
Speaker 1: billion dollars from managing that fund.

496
00:27:17,880 --> 00:27:20,520
Speaker 2: Two things I saw. The Wall Street Journal estimated that

497
00:27:20,760 --> 00:27:25,000
Speaker 2: under Lampert's watch of this, I think seven years, two

498
00:27:25,040 --> 00:27:31,000
Speaker 2: hundred thousand people lost their jobs from Sears and k martin. Yeah,

499
00:27:31,000 --> 00:27:34,320
Speaker 2: that's got to be a record, man. And then also

500
00:27:34,760 --> 00:27:37,560
Speaker 2: he was quoted as saying like, yeah, I'm really bummed

501
00:27:37,560 --> 00:27:40,840
Speaker 2: about this whole thing. It was a real loss. It

502
00:27:40,880 --> 00:27:44,080
Speaker 2: was a real opportunity cost for me, meaning he could

503
00:27:44,119 --> 00:27:46,640
Speaker 2: have done this with a different company and maybe made

504
00:27:46,680 --> 00:27:48,000
Speaker 2: out even better than he did.

505
00:27:50,400 --> 00:27:53,040
Speaker 1: So you mentioned Red Lobster, and this was very much

506
00:27:53,040 --> 00:27:56,240
Speaker 1: in the news. It feels like it was more recent. Well,

507
00:27:56,280 --> 00:27:57,800
Speaker 1: I guess some of this stuff was a little more recent.

508
00:27:57,840 --> 00:28:01,240
Speaker 1: But in twenty fourteen, Golden Gate Cap Capital San Francisco

509
00:28:01,280 --> 00:28:05,440
Speaker 1: company bought Red Lobster two point one billion dollars. They

510
00:28:05,440 --> 00:28:07,639
Speaker 1: said it was quote an exceptionally strong brand with an

511
00:28:07,720 --> 00:28:11,520
Speaker 1: unparalleled market position, and in order to pay for that deal,

512
00:28:11,600 --> 00:28:14,440
Speaker 1: they sold, As you mentioned, they sold the real estate

513
00:28:14,480 --> 00:28:17,520
Speaker 1: of five hundred restaurants for about one point five billion bucks,

514
00:28:18,119 --> 00:28:22,040
Speaker 1: and a company called American Realty Capital partners bought that

515
00:28:22,119 --> 00:28:25,119
Speaker 1: land and then once again leased it back at a

516
00:28:25,200 --> 00:28:27,040
Speaker 1: higher rate, like above market rates.

517
00:28:27,160 --> 00:28:30,240
Speaker 2: Yeah, and again that one point five billion. I'm a

518
00:28:30,359 --> 00:28:33,400
Speaker 2: significant portion of it just went right to investors. I'm

519
00:28:33,440 --> 00:28:36,200
Speaker 2: not sure how much, but that was that's the playbook, right.

520
00:28:37,240 --> 00:28:39,120
Speaker 2: I also have to say I worked at Red Lobster

521
00:28:39,120 --> 00:28:40,320
Speaker 2: as a server for a little bit.

522
00:28:41,760 --> 00:28:45,880
Speaker 1: Oh, you and I have dined at Red Lobster before

523
00:28:46,120 --> 00:28:48,920
Speaker 1: one time. It's probably the only time I've been there

524
00:28:48,920 --> 00:28:52,520
Speaker 1: in the past forty years. And you never, I don't think,

525
00:28:52,760 --> 00:28:54,080
Speaker 1: disclosed to meet that.

526
00:28:54,280 --> 00:28:54,720
Speaker 2: Did I not.

527
00:28:56,040 --> 00:28:57,600
Speaker 1: No, All you talked about was how much you love

528
00:28:57,680 --> 00:29:00,000
Speaker 1: those what are they? Little cheesy biscuits, the cheddar bay bisis.

529
00:29:00,520 --> 00:29:02,720
Speaker 2: That is why I worked at Red Lobster so it

530
00:29:02,720 --> 00:29:04,880
Speaker 2: could be closer to them. It was only for a

531
00:29:04,880 --> 00:29:06,720
Speaker 2: couple of weeks, so I was like, I gotta stop

532
00:29:06,720 --> 00:29:07,200
Speaker 2: eating these.

533
00:29:07,240 --> 00:29:08,720
Speaker 1: I didn't know you ever waited tables at all.

534
00:29:08,960 --> 00:29:11,240
Speaker 2: So the reason why I don't talk about that that

535
00:29:11,360 --> 00:29:15,240
Speaker 2: much is because that I'm one of the worst servers

536
00:29:15,280 --> 00:29:19,800
Speaker 2: of all time. Something happens to me between walking from

537
00:29:20,080 --> 00:29:23,520
Speaker 2: you know, the kitchen to your table, and my personality

538
00:29:23,600 --> 00:29:27,080
Speaker 2: just drops out of me somehow, and I forget stuff

539
00:29:27,200 --> 00:29:30,560
Speaker 2: and I'm just terrible, Like the kind of waiter where

540
00:29:30,600 --> 00:29:33,080
Speaker 2: you're like, you just you ruined our dining experience, are

541
00:29:33,160 --> 00:29:35,520
Speaker 2: so bad. That was the kind of waiter I was.

542
00:29:35,600 --> 00:29:38,800
Speaker 2: So I learned after probably six or seven places to

543
00:29:38,880 --> 00:29:40,160
Speaker 2: just stop trying to be a server.

544
00:29:40,720 --> 00:29:44,160
Speaker 1: Yeah, you and Emily. Emily was waited tables for a

545
00:29:44,280 --> 00:29:45,880
Speaker 1: very very short time for similar reasons.

546
00:29:45,960 --> 00:29:48,800
Speaker 2: Yeah, it's just it's Yeah, you have to be in

547
00:29:48,800 --> 00:29:50,720
Speaker 2: the right kind of mindset to pull it off. It's

548
00:29:51,120 --> 00:29:52,640
Speaker 2: not as easy as it looks. I found.

549
00:29:53,240 --> 00:29:54,400
Speaker 1: Yeah, I was pretty good at it.

550
00:29:54,480 --> 00:29:55,000
Speaker 2: I believe that.

551
00:29:55,080 --> 00:29:58,040
Speaker 1: You know. Also glad those days are behind me. Yeah,

552
00:29:58,040 --> 00:30:00,360
Speaker 1: I think my retirement job is going to be uh,

553
00:30:00,680 --> 00:30:04,880
Speaker 1: stadium worker. I want to like that before I want

554
00:30:04,880 --> 00:30:07,120
Speaker 1: to like sell beer at a base at Brays game.

555
00:30:07,200 --> 00:30:10,479
Speaker 2: Let's hear what you got cold? Bea I ha cold,

556
00:30:11,720 --> 00:30:14,920
Speaker 2: that's pretty good. You gotta you gotta grow one of

557
00:30:14,920 --> 00:30:16,880
Speaker 2: those Walrus mustaches.

558
00:30:17,000 --> 00:30:19,200
Speaker 1: Two for one and they're like, you can't do that,

559
00:30:19,320 --> 00:30:20,240
Speaker 1: you can't make deals.

560
00:30:20,280 --> 00:30:23,560
Speaker 2: The one I always remember is popcorn, peanuts, cararalcorn hair.

561
00:30:24,640 --> 00:30:26,040
Speaker 1: Is that it the price you got to finish it

562
00:30:26,120 --> 00:30:26,320
Speaker 1: up with?

563
00:30:26,360 --> 00:30:30,960
Speaker 2: Here? Yeah, that's how you get people's attention. So oh yeah,

564
00:30:30,960 --> 00:30:31,960
Speaker 2: back to Red Lobster.

565
00:30:32,920 --> 00:30:34,520
Speaker 1: Yeah, I can smell the cheesy biscuits.

566
00:30:34,600 --> 00:30:37,000
Speaker 2: They're so good man, and they're ranch dressing is world

567
00:30:37,000 --> 00:30:39,760
Speaker 2: class as well. It's just unlike any other ranch. It's

568
00:30:39,800 --> 00:30:42,640
Speaker 2: really good. Oh all right, I'm glad that Red Lobster

569
00:30:42,640 --> 00:30:45,400
Speaker 2: are still around as far as I know, despite all

570
00:30:45,400 --> 00:30:47,680
Speaker 2: these different companies trying their best to run it into

571
00:30:47,720 --> 00:30:51,640
Speaker 2: the ground. COVID dip definitely didn't help. Yeah, twenty twenty hit,

572
00:30:51,760 --> 00:30:54,560
Speaker 2: Covid hit and Red Lobster, which was already This is

573
00:30:54,560 --> 00:30:57,160
Speaker 2: what I was talking about. When a company is saddled

574
00:30:57,160 --> 00:31:01,520
Speaker 2: with a bunch of debt and new lost, that's hard

575
00:31:01,560 --> 00:31:04,640
Speaker 2: to keep up through through rough times or changes. Right,

576
00:31:05,280 --> 00:31:08,640
Speaker 2: same thing with Red Lobster. And I guess one of

577
00:31:08,640 --> 00:31:11,800
Speaker 2: its seafood suppliers, Tie Union Group, stepped in and was like, hey,

578
00:31:12,120 --> 00:31:15,400
Speaker 2: we'll buy Red Lobster. We have a really good idea.

579
00:31:15,840 --> 00:31:19,320
Speaker 2: So this is their seafood supplier. They became the exclusive

580
00:31:19,360 --> 00:31:22,440
Speaker 2: shrimp supplier to Red Lobster the company that owned it

581
00:31:22,560 --> 00:31:25,240
Speaker 2: that now owned Red Lobster, and the CEO is like,

582
00:31:25,600 --> 00:31:28,480
Speaker 2: you guys get this. You know, the endless shrimp promotion

583
00:31:28,880 --> 00:31:31,800
Speaker 2: for twenty bucks. We're going to make it a permanent

584
00:31:31,960 --> 00:31:34,920
Speaker 2: menu item, and we're going to sell them so much

585
00:31:34,920 --> 00:31:39,080
Speaker 2: shrimp because we're their exclusive supplier of shrimp. Bam. And

586
00:31:39,120 --> 00:31:43,000
Speaker 2: he said, bam, that's a quote. And they lost like

587
00:31:43,080 --> 00:31:45,840
Speaker 2: eleven million dollars in just three months of trying that

588
00:31:45,880 --> 00:31:49,840
Speaker 2: because they grossly underestimated how much shrimp people would eat

589
00:31:49,880 --> 00:31:52,239
Speaker 2: if there was no bottom to it.

590
00:31:53,080 --> 00:31:56,960
Speaker 1: Yeah. I mean, if you're talking to you know, medium

591
00:31:57,000 --> 00:32:00,920
Speaker 1: sized shrimp, I can eat, you know, if I'm really

592
00:32:00,960 --> 00:32:04,880
Speaker 1: trying thirty wow meal.

593
00:32:06,040 --> 00:32:09,080
Speaker 2: Wow. That's a lot of shrimp, dude, not the huge ones.

594
00:32:09,160 --> 00:32:12,560
Speaker 1: No, I got it's if it's endless and it's solved

595
00:32:12,600 --> 00:32:16,239
Speaker 1: for a very set rate. Uh. And I'm, you know,

596
00:32:16,360 --> 00:32:18,360
Speaker 1: maybe trying to impress my date.

597
00:32:18,720 --> 00:32:22,600
Speaker 2: Right, surely not fried though, right, you're just talking like

598
00:32:22,640 --> 00:32:22,960
Speaker 2: peel and.

599
00:32:23,040 --> 00:32:26,000
Speaker 1: E oh, that's more like forty.

600
00:32:25,880 --> 00:32:27,800
Speaker 2: Oh my god, you could eat thirty fried.

601
00:32:28,720 --> 00:32:30,680
Speaker 1: I probably I probably could not eat forty eight peel

602
00:32:30,720 --> 00:32:32,640
Speaker 1: and eat. I don't know if I could eat forty

603
00:32:32,680 --> 00:32:35,320
Speaker 1: I mean, if I'm not eating cheesy biscuits and French

604
00:32:35,320 --> 00:32:38,080
Speaker 1: fries and cole salaw and so you're being serious, then

605
00:32:38,120 --> 00:32:40,240
Speaker 1: I could probably eat thirty fried shrimp for sure.

606
00:32:40,280 --> 00:32:43,120
Speaker 2: Okay, I'm going to be your date for that one.

607
00:32:43,560 --> 00:32:45,239
Speaker 1: Not well, I hope to impress you.

608
00:32:46,240 --> 00:32:48,880
Speaker 2: Oh what else? Oh, I've got one. One of the

609
00:32:48,880 --> 00:32:51,760
Speaker 2: things that a lot of these companies do is they

610
00:32:51,880 --> 00:32:53,800
Speaker 2: take over and buy a business that they just don't

611
00:32:53,880 --> 00:32:55,920
Speaker 2: understand the business of, and that's how they run it

612
00:32:55,960 --> 00:32:58,200
Speaker 2: into the ground. That'll happen a lot. We'll talk about

613
00:32:58,200 --> 00:33:01,280
Speaker 2: that here or there. But there are some niche private

614
00:33:01,320 --> 00:33:04,440
Speaker 2: equity firms that focus on specific kinds of businesses. They

615
00:33:04,480 --> 00:33:07,560
Speaker 2: know what they're doing, and one of them is Rourke Capital.

616
00:33:07,840 --> 00:33:12,360
Speaker 2: They're big on fast food industry. And when you have

617
00:33:12,680 --> 00:33:17,120
Speaker 2: a very powerful, wealthy firm like that that's zeroed in

618
00:33:17,560 --> 00:33:20,200
Speaker 2: on the ups and downs of their particular industry, you

619
00:33:20,280 --> 00:33:23,280
Speaker 2: have the kind of people who will lobby successfully to

620
00:33:23,360 --> 00:33:26,920
Speaker 2: get the fifteen dollars federal minimum wage taken out of

621
00:33:26,960 --> 00:33:30,520
Speaker 2: the stimulus package, which is exactly what Rourke Capital managed

622
00:33:30,560 --> 00:33:32,160
Speaker 2: to do several years back.

623
00:33:32,880 --> 00:33:35,800
Speaker 1: That's right. And if you're wondering, is that named after

624
00:33:36,160 --> 00:33:40,040
Speaker 1: you know, mister Rourke from Fantasy Island. No, it's named

625
00:33:40,640 --> 00:33:46,239
Speaker 1: like seriously named for Howard Rourke ein rand Hero. And

626
00:33:46,800 --> 00:33:47,600
Speaker 1: do with that what you.

627
00:33:47,520 --> 00:33:48,600
Speaker 2: Will yeah, from the fountain.

628
00:33:49,400 --> 00:33:52,160
Speaker 1: That's right, all right. I guess we could talk a

629
00:33:52,160 --> 00:33:57,080
Speaker 1: little bit about newspapers and physical print media because I mean,

630
00:33:57,120 --> 00:33:59,760
Speaker 1: they have been in trouble anyway. So not all of

631
00:33:59,760 --> 00:34:02,959
Speaker 1: the losses of the print media industry are due to

632
00:34:03,080 --> 00:34:08,799
Speaker 1: private equity equity firms, but private equity ownership of newspapers

633
00:34:08,840 --> 00:34:11,760
Speaker 1: rose from five percent in twentyd and one to twenty

634
00:34:11,800 --> 00:34:16,680
Speaker 1: three percent in twenty nineteen. And you know, there have

635
00:34:16,840 --> 00:34:22,560
Speaker 1: been supposedly analyses done that show that ownership of print

636
00:34:22,600 --> 00:34:26,400
Speaker 1: media by a private equity firm can improve circulation, but

637
00:34:27,920 --> 00:34:32,000
Speaker 1: it also will lead to reduction and editorial staff, like

638
00:34:32,080 --> 00:34:35,680
Speaker 1: massive cuts and staff, which means cuts in things like

639
00:34:35,760 --> 00:34:39,240
Speaker 1: local government. And they've shown that results in a decline

640
00:34:39,280 --> 00:34:40,960
Speaker 1: and participation in local elections.

641
00:34:40,960 --> 00:34:45,040
Speaker 2: Oh yeah, like the loss of local government news reporting

642
00:34:45,080 --> 00:34:49,040
Speaker 2: has had an enormous effect on the United States. It's

643
00:34:49,239 --> 00:34:52,920
Speaker 2: just crazy, like the cascading effect it had. We're going

644
00:34:53,000 --> 00:34:56,920
Speaker 2: to do a whole episode on that right after this. Okay, Great,

645
00:34:57,000 --> 00:35:00,400
Speaker 2: we'll make it up as we go along. Great is

646
00:35:00,440 --> 00:35:03,200
Speaker 2: another one. They were sitting pretty I think they were

647
00:35:03,200 --> 00:35:07,000
Speaker 2: worth almost six billion dollars in twenty seventeen, got bought

648
00:35:07,040 --> 00:35:10,799
Speaker 2: out and by twenty twenty three they were worth three

649
00:35:10,880 --> 00:35:13,160
Speaker 2: hundred and fifty million dollars because it just got run

650
00:35:13,160 --> 00:35:16,960
Speaker 2: into the ground. That's a good example of a company

651
00:35:17,239 --> 00:35:19,800
Speaker 2: that didn't know what they were doing, buying a business

652
00:35:19,920 --> 00:35:23,000
Speaker 2: that they didn't know anything about that and then they

653
00:35:23,080 --> 00:35:24,440
Speaker 2: just made terrible decisions.

654
00:35:25,280 --> 00:35:28,080
Speaker 1: For sure, I think we should take a second break, okay,

655
00:35:28,960 --> 00:35:30,360
Speaker 1: and we'll be back right after this.

656
00:35:54,680 --> 00:35:56,960
Speaker 2: Definitely should.

657
00:36:00,040 --> 00:36:00,800
Speaker 1: Childs of each.

658
00:36:02,840 --> 00:36:08,840
Speaker 2: Ysk kid Okay, Chuck, we're back. And here's where we

659
00:36:08,960 --> 00:36:11,080
Speaker 2: really get into the problems. I mean, aside from people

660
00:36:11,080 --> 00:36:14,600
Speaker 2: getting laid off, people being neglected in the hospitals they

661
00:36:14,640 --> 00:36:17,359
Speaker 2: go to because they're owned by private equity firms. That's

662
00:36:17,360 --> 00:36:21,040
Speaker 2: become a big problem in the twenty first century in

663
00:36:21,080 --> 00:36:22,120
Speaker 2: the United States too.

664
00:36:22,920 --> 00:36:26,520
Speaker 1: Yeah, there's in twenty twenty four a loan by one

665
00:36:26,560 --> 00:36:29,080
Speaker 1: count at least there were one hundred and sixty six

666
00:36:29,640 --> 00:36:33,359
Speaker 1: leverage buyouts in healthcare just in that one year, and

667
00:36:34,000 --> 00:36:37,200
Speaker 1: seven of the eight biggest healthcare bankruptcies that year were

668
00:36:37,360 --> 00:36:40,640
Speaker 1: from companies owned by private equity firms or hospitals in

669
00:36:40,680 --> 00:36:42,160
Speaker 1: healthcare organizations right.

670
00:36:43,360 --> 00:36:47,680
Speaker 2: The private equity firm dental practices rose drew dramatically from

671
00:36:47,719 --> 00:36:51,719
Speaker 2: the teens to the twenty twenties, and that results in

672
00:36:51,760 --> 00:36:55,000
Speaker 2: things like companies push I read an article about the

673
00:36:55,120 --> 00:36:58,960
Speaker 2: Dental Express in Ohio telling a mom that her three

674
00:36:59,040 --> 00:37:01,320
Speaker 2: year old needed seven in root canals.

675
00:37:01,840 --> 00:37:05,719
Speaker 1: Yeah, for sure. And the same goes with hospitals. Hospitals,

676
00:37:06,120 --> 00:37:08,800
Speaker 1: if they're owned by a private equity firm, they result

677
00:37:08,800 --> 00:37:13,160
Speaker 1: in higher charges, more safety issues. There's one study that

678
00:37:13,200 --> 00:37:15,680
Speaker 1: said there was a twenty five percent rise in hospital

679
00:37:15,800 --> 00:37:19,280
Speaker 1: acquired complications like something you got while you were there.

680
00:37:19,239 --> 00:37:21,840
Speaker 2: Right, And I think thirty eight percent more blood infections

681
00:37:21,880 --> 00:37:24,840
Speaker 2: from IV ports. That's just from not having enough staff

682
00:37:24,960 --> 00:37:28,640
Speaker 2: or inexperienced staff. It's just not good and it gets

683
00:37:28,719 --> 00:37:34,520
Speaker 2: even worse. They're also into hospices, nursing homes, and it

684
00:37:35,120 --> 00:37:37,880
Speaker 2: just follows the same pattern that you would expect. A

685
00:37:37,920 --> 00:37:41,920
Speaker 2: study found that private equity ownership increases mortality rates by

686
00:37:41,960 --> 00:37:46,880
Speaker 2: eleven percent just because pe'es cutting corners to save costs.

687
00:37:46,920 --> 00:37:50,279
Speaker 2: So that's a huge, huge issue. I think that that

688
00:37:50,360 --> 00:37:53,480
Speaker 2: one needs regulation where it's like you can't sorry, you guys,

689
00:37:53,560 --> 00:37:57,000
Speaker 2: can't own healthcare stuff that's just off limits for you.

690
00:37:57,920 --> 00:38:00,799
Speaker 1: Yeah, I mean, anyone who's been through the trauma of

691
00:38:00,840 --> 00:38:03,520
Speaker 1: a loved one and having to go to a nursing

692
00:38:03,560 --> 00:38:05,200
Speaker 1: home in the past. I mean, I don't know when

693
00:38:05,200 --> 00:38:07,400
Speaker 1: it was good, but we had to go through that

694
00:38:07,440 --> 00:38:10,040
Speaker 1: with Emily's grandmother, and just the state of that industry

695
00:38:10,160 --> 00:38:13,000
Speaker 1: is horrific. It's the opposite of what it should be

696
00:38:13,040 --> 00:38:14,000
Speaker 1: in almost every way.

697
00:38:14,200 --> 00:38:18,200
Speaker 2: Yeah, and housing too is another big deal. I think Blackstone,

698
00:38:18,200 --> 00:38:20,520
Speaker 2: which we mentioned, was founded back in the eighties. They're

699
00:38:20,560 --> 00:38:24,080
Speaker 2: known as the United States's largest landlord. They owned three

700
00:38:24,200 --> 00:38:27,879
Speaker 2: hundred thousand units of rental housing in the US as

701
00:38:27,880 --> 00:38:31,640
Speaker 2: of twenty twenty three. And as you would expect, when

702
00:38:31,680 --> 00:38:35,200
Speaker 2: private equity comes along, rents go up. The maintenance people

703
00:38:35,200 --> 00:38:38,560
Speaker 2: are slower to respond because they've been laid off, and

704
00:38:38,680 --> 00:38:41,800
Speaker 2: just things kind of go downhill rather than get better

705
00:38:42,000 --> 00:38:44,600
Speaker 2: like they're supposed to. That's the reason private equity is

706
00:38:44,600 --> 00:38:49,400
Speaker 2: supposed to exist. It's supposed to take kind of slow

707
00:38:49,520 --> 00:38:53,000
Speaker 2: lumbering companies that are in a position to do better

708
00:38:53,040 --> 00:38:55,120
Speaker 2: than they are and make them do better. It's not

709
00:38:55,120 --> 00:38:58,239
Speaker 2: supposed to make everything go down hill. But that's how

710
00:38:58,239 --> 00:38:59,040
Speaker 2: it happens a lot.

711
00:38:59,719 --> 00:39:03,400
Speaker 1: Yeah, I mean, sometimes it does happen for the better.

712
00:39:03,520 --> 00:39:07,600
Speaker 1: Like one great example is Hilton, the hotel chain. There

713
00:39:07,640 --> 00:39:09,800
Speaker 1: was a leveraged buy out from Blackstone in two thousand

714
00:39:09,840 --> 00:39:14,600
Speaker 1: and seven of Hilton and the great procession you know, Hit.

715
00:39:15,400 --> 00:39:16,839
Speaker 1: I guess it was like the next year in two

716
00:39:16,840 --> 00:39:19,240
Speaker 1: thousand and eight, and obviously it's going to really affect

717
00:39:19,280 --> 00:39:24,000
Speaker 1: the tourism industry. But they brought in a CEO from Blackstone,

718
00:39:24,000 --> 00:39:27,720
Speaker 1: a guy named Christopher Nesstta, who actually made things better.

719
00:39:27,800 --> 00:39:32,480
Speaker 1: He said, hey, let's invest in emerging markets, let's invest

720
00:39:32,680 --> 00:39:37,239
Speaker 1: in the future, and like digital strategies like apps where

721
00:39:37,239 --> 00:39:39,640
Speaker 1: you can check in and get your hotel key through

722
00:39:39,640 --> 00:39:41,680
Speaker 1: an app and things like that, just you know, instead

723
00:39:41,719 --> 00:39:45,080
Speaker 1: of just shuddering things like actually investing, reinvesting in the company, right,

724
00:39:45,800 --> 00:39:47,400
Speaker 1: And it turned out to be really you know, all

725
00:39:47,400 --> 00:39:50,480
Speaker 1: these things were really popular moves, and Blackstone sold Hilton

726
00:39:50,560 --> 00:39:53,520
Speaker 1: back to the public market after it had been yanked

727
00:39:53,520 --> 00:39:55,799
Speaker 1: out of the public market. They sold it back in

728
00:39:55,800 --> 00:39:59,760
Speaker 1: twenty thirteen and sold out of their stake in twenty eighteen.

729
00:40:00,320 --> 00:40:03,480
Speaker 1: Made a ton of profit fourteen billion dollars over eleven years.

730
00:40:03,520 --> 00:40:07,960
Speaker 1: But the company itself, Hilton, was doing great and continues

731
00:40:07,960 --> 00:40:08,399
Speaker 1: to do great.

732
00:40:08,440 --> 00:40:10,600
Speaker 2: Yeah, they doubled the number of rooms today that they

733
00:40:10,600 --> 00:40:12,439
Speaker 2: had in two thousand and seven when they took over,

734
00:40:12,480 --> 00:40:15,640
Speaker 2: when Blackstone took over. So yeah, that's a big success story.

735
00:40:15,680 --> 00:40:18,120
Speaker 2: It wasn't like a pump and dump. Hilton's still doing well,

736
00:40:18,160 --> 00:40:20,719
Speaker 2: like you were saying. Burger King's another one too. They

737
00:40:20,719 --> 00:40:23,680
Speaker 2: got bought by a Brazilian firm called three G Capital,

738
00:40:24,200 --> 00:40:28,320
Speaker 2: and they just they just made some really good moves

739
00:40:28,360 --> 00:40:30,600
Speaker 2: in a lot of voice. Again, this is from an

740
00:40:30,680 --> 00:40:34,120
Speaker 2: investor standpoint, not necessarily from the standpoint of the people

741
00:40:34,160 --> 00:40:36,359
Speaker 2: at corporate who were laid off or anything like that.

742
00:40:36,920 --> 00:40:39,719
Speaker 2: But as far as firms go, three G made something

743
00:40:39,800 --> 00:40:43,000
Speaker 2: like twenty eight billion dollars over fourteen years and it

744
00:40:43,280 --> 00:40:46,760
Speaker 2: only invested one billion, So that's a pretty good return

745
00:40:46,800 --> 00:40:47,520
Speaker 2: on investment.

746
00:40:48,800 --> 00:40:50,759
Speaker 1: Private equity coming in.

747
00:40:53,200 --> 00:40:53,920
Speaker 2: Why'd you do that?

748
00:40:54,960 --> 00:40:55,240
Speaker 1: Oh?

749
00:40:55,360 --> 00:40:56,799
Speaker 2: Just because hate you got me.

750
00:40:59,640 --> 00:41:04,880
Speaker 1: So here's the thing. Alternative investments make a lot of money.

751
00:41:06,120 --> 00:41:09,839
Speaker 1: We've seen that there's less oversight, So you know, one

752
00:41:09,840 --> 00:41:11,839
Speaker 1: of the ways that they make a lot of money

753
00:41:11,840 --> 00:41:14,120
Speaker 1: is that they're just allowed to do things that you

754
00:41:14,160 --> 00:41:18,279
Speaker 1: can't do in traditional sort of slow growth investments like

755
00:41:18,360 --> 00:41:21,479
Speaker 1: stocks and bonds and things like that. But you also

756
00:41:21,520 --> 00:41:23,920
Speaker 1: mentioned earlier that like pension funds like four to one

757
00:41:23,960 --> 00:41:26,400
Speaker 1: k's or where a lot of this money comes from.

758
00:41:27,000 --> 00:41:30,000
Speaker 1: And like, do you have a choice whether or not

759
00:41:30,040 --> 00:41:32,319
Speaker 1: the four one k that you invest in ends up

760
00:41:33,120 --> 00:41:34,080
Speaker 1: being a part of this thing.

761
00:41:34,440 --> 00:41:36,960
Speaker 2: Yeah, I think you can also invest your four to

762
00:41:37,080 --> 00:41:39,000
Speaker 2: one k, now, which for a long time was off

763
00:41:39,040 --> 00:41:44,000
Speaker 2: limits because that's your You the non accredited investor who

764
00:41:44,000 --> 00:41:46,400
Speaker 2: doesn't know what they're doing with private equity. That was

765
00:41:46,440 --> 00:41:50,320
Speaker 2: off limits. But now you can if you want, although

766
00:41:50,360 --> 00:41:52,440
Speaker 2: they say that's probably not a good idea unless you

767
00:41:52,480 --> 00:41:53,160
Speaker 2: know what you're doing.

768
00:41:53,280 --> 00:41:57,719
Speaker 1: Again, well, eighty nine percent of public pension funds have

769
00:41:57,880 --> 00:42:01,640
Speaker 1: some of their money in private equity. I think thirteen

770
00:42:01,680 --> 00:42:05,800
Speaker 1: percent average of thirteen percent of their assets is the average,

771
00:42:06,440 --> 00:42:08,600
Speaker 1: Sometimes more than twenty five percent. But that's that's almost

772
00:42:08,640 --> 00:42:10,640
Speaker 1: ninety percent of public mention funds. It's a lot.

773
00:42:10,920 --> 00:42:14,120
Speaker 2: Yeah, and then I guess one of the other big things.

774
00:42:14,120 --> 00:42:18,080
Speaker 2: So the reason why, well, another reason why people are

775
00:42:18,120 --> 00:42:21,120
Speaker 2: like this is so not right. All of that money

776
00:42:21,160 --> 00:42:24,239
Speaker 2: that those people like Edward Lampert make made that one

777
00:42:24,280 --> 00:42:27,440
Speaker 2: point four billion dollars by running a huge venerated company

778
00:42:27,440 --> 00:42:32,160
Speaker 2: into the ground. He paid at most twenty percent on

779
00:42:32,280 --> 00:42:36,279
Speaker 2: those profits, even though it was personal income for him.

780
00:42:36,560 --> 00:42:39,280
Speaker 2: He didn't pay the personal income tax of like thirty

781
00:42:39,280 --> 00:42:43,520
Speaker 2: seven percent. Instead, he paid twenty percent in capital gains

782
00:42:43,560 --> 00:42:47,520
Speaker 2: tax because the fis that he charged are treated like

783
00:42:47,640 --> 00:42:51,520
Speaker 2: gains from an investment rather than personal income, even though

784
00:42:52,040 --> 00:42:56,720
Speaker 2: anyone would call those fees personal income. So not only

785
00:42:56,960 --> 00:43:00,640
Speaker 2: are the pe firms robbing companies for their own personal

786
00:43:00,719 --> 00:43:04,239
Speaker 2: enrichment getting people laid off, they're not even paying their

787
00:43:04,239 --> 00:43:08,040
Speaker 2: full share of income taxes on it too. So not

788
00:43:08,080 --> 00:43:12,360
Speaker 2: only are they robbing companies for their own personal enrichment

789
00:43:12,640 --> 00:43:15,399
Speaker 2: getting people laid off, they're not even paying their full

790
00:43:15,440 --> 00:43:17,560
Speaker 2: share of income taxes on it too.

791
00:43:18,280 --> 00:43:20,440
Speaker 1: Yeah. This is the kind of thing where in the

792
00:43:20,600 --> 00:43:24,160
Speaker 1: movie version where this is firstborn as an idea, yeah,

793
00:43:24,200 --> 00:43:26,720
Speaker 1: and the person is explaining it to like the people

794
00:43:26,760 --> 00:43:30,000
Speaker 1: at dinner, they keep asking questions that start with yeah,

795
00:43:30,000 --> 00:43:33,200
Speaker 1: but what about and then the answer always starts with oh, no,

796
00:43:33,320 --> 00:43:34,360
Speaker 1: that's the best part.

797
00:43:34,440 --> 00:43:36,759
Speaker 2: Right exactly. It just keeps going like.

798
00:43:36,719 --> 00:43:38,400
Speaker 1: That, yeah, and they're like, no, no, no, but what

799
00:43:38,440 --> 00:43:40,920
Speaker 1: about this, No, no, that's the best part yep. So

800
00:43:40,960 --> 00:43:42,000
Speaker 1: there's a lot of best parts.

801
00:43:42,040 --> 00:43:44,040
Speaker 2: And one of the guys finally puts his fork down

802
00:43:44,040 --> 00:43:47,560
Speaker 2: and stands up, hits the table and goes Bam.

803
00:43:47,160 --> 00:43:50,200
Speaker 1: That's right. But you were talking about the carried interest loophole, right,

804
00:43:50,360 --> 00:43:51,080
Speaker 1: that's what it's called.

805
00:43:51,760 --> 00:43:55,440
Speaker 2: Yeah, Or your personal income is magically treated as returns

806
00:43:55,719 --> 00:43:59,000
Speaker 2: on an investment in text at twenty percent rather than

807
00:43:59,200 --> 00:44:02,000
Speaker 2: thirty seven per or whatever. So if you make one

808
00:44:02,040 --> 00:44:06,520
Speaker 2: hundred million dollars, you pay seventeen million dollars less taxes

809
00:44:06,560 --> 00:44:09,160
Speaker 2: on that one hundred million dollars, and at that point,

810
00:44:09,200 --> 00:44:14,279
Speaker 2: really who cares anyway? Right, Yeah, you would think, so

811
00:44:14,760 --> 00:44:17,280
Speaker 2: that's private equity. I feel like we kind of showed

812
00:44:17,280 --> 00:44:19,680
Speaker 2: our bias a little bit, but it's really tough not

813
00:44:19,800 --> 00:44:21,840
Speaker 2: to be when you really dig into this stuff, you know.

814
00:44:22,520 --> 00:44:25,440
Speaker 1: Yeah, I mean it's not the sole cause of the

815
00:44:25,440 --> 00:44:27,680
Speaker 1: housing crisis, but it's a major player.

816
00:44:28,040 --> 00:44:32,000
Speaker 2: Yeah, and all the other crises that we're facing too,

817
00:44:32,040 --> 00:44:38,200
Speaker 2: economically and socially and politically and probably religiously too. If

818
00:44:38,239 --> 00:44:38,919
Speaker 2: I gave it some.

819
00:44:38,840 --> 00:44:41,040
Speaker 1: Real thought, yeah, personally.

820
00:44:40,880 --> 00:44:44,359
Speaker 2: Yep, since Chuck said personally, I was waiting for it.

821
00:44:44,680 --> 00:44:47,799
Speaker 2: It got you there, because now we just unlocked listener mail.

822
00:44:51,400 --> 00:44:53,920
Speaker 1: Hey guys, this is in response to a tangent that

823
00:44:53,960 --> 00:44:58,239
Speaker 1: you went on during this Saturday's Classic episode when Chuck

824
00:44:58,280 --> 00:45:00,360
Speaker 1: was talking about arguing with his mother about gets to

825
00:45:00,360 --> 00:45:03,120
Speaker 1: pay for dinner. It reminded me of my grandmother, Sheila.

826
00:45:03,239 --> 00:45:05,680
Speaker 1: She always likes to pay for big family dinners and

827
00:45:05,760 --> 00:45:09,120
Speaker 1: has engaged in tricks in the past. For a graduation

828
00:45:09,200 --> 00:45:11,000
Speaker 1: dinner for my brother, my father knew what she was

829
00:45:11,040 --> 00:45:13,840
Speaker 1: doing when she took her purse to the bathroom. So

830
00:45:13,920 --> 00:45:16,200
Speaker 1: that's a good trick. I've done that before. Yeah, that

831
00:45:16,239 --> 00:45:19,200
Speaker 1: wasn't her best trick, though, as even Josh mentioned that

832
00:45:19,320 --> 00:45:23,040
Speaker 1: very trick. The best part did you mention that?

833
00:45:23,400 --> 00:45:26,000
Speaker 2: Yeah? I mentioned that. I remember that. I've done that

834
00:45:26,040 --> 00:45:26,439
Speaker 2: for sure.

835
00:45:26,719 --> 00:45:29,840
Speaker 1: Yeah, Yeah, that's what you gotta do. The best was

836
00:45:29,920 --> 00:45:31,920
Speaker 1: when part of the family was in upstate New York

837
00:45:31,920 --> 00:45:35,160
Speaker 1: for a triathlon. Sheila wasn't even there. She lives in Massachusetts.

838
00:45:35,800 --> 00:45:38,399
Speaker 1: The bill came when dinner was over the night before

839
00:45:38,440 --> 00:45:41,040
Speaker 1: the race. My father and my aunt reached for their

840
00:45:41,120 --> 00:45:43,560
Speaker 1: card and the waitress said it had been taken care of.

841
00:45:44,239 --> 00:45:46,520
Speaker 1: All the adults looked in accusation at each other and

842
00:45:46,560 --> 00:45:48,560
Speaker 1: there was a long silence, and at the exact same

843
00:45:48,560 --> 00:45:50,320
Speaker 1: moment they all threw up their hands crying.

844
00:45:50,400 --> 00:45:55,440
Speaker 2: Sheila all the way over in Massachusetts. Sheila went bam

845
00:45:55,680 --> 00:45:56,239
Speaker 2: that's right.

846
00:45:57,280 --> 00:45:59,120
Speaker 1: My aunt had made the mistake of telling Sheila on

847
00:45:59,160 --> 00:46:01,400
Speaker 1: the phone that where we were going to have dinner,

848
00:46:01,560 --> 00:46:03,680
Speaker 1: and our grandmother called the restaurant and gave her the

849
00:46:03,719 --> 00:46:04,720
Speaker 1: credit card number.

850
00:46:04,840 --> 00:46:05,360
Speaker 2: Beautiful.

851
00:46:06,080 --> 00:46:09,280
Speaker 1: Thanks for all the pods. That is from James. James.

852
00:46:09,280 --> 00:46:11,879
Speaker 1: That's wonderful. Sheila sounds great. I just hope she tips well.

853
00:46:12,360 --> 00:46:15,680
Speaker 2: Oh good point, Chuck, nicely done. If you want to

854
00:46:15,719 --> 00:46:17,480
Speaker 2: be like James. Thank you. By the way, James, that

855
00:46:17,520 --> 00:46:20,399
Speaker 2: was a great email. You can send us an email too.

856
00:46:20,600 --> 00:46:26,560
Speaker 2: Send it off to Stuff Podcasts at iHeartRadio dot com.

857
00:46:26,680 --> 00:46:29,560
Speaker 1: Stuff you Should Know is a production of iHeartRadio. For

858
00:46:29,640 --> 00:46:33,839
Speaker 1: more podcasts my heart Radio, visit the iHeartRadio app, Apple Podcasts,

859
00:46:33,960 --> 00:46:35,800
Speaker 1: or wherever you listen to your favorite shows.