Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: Gretchen Morgensen is the Pulitzer Prize winning investigative journalist for
Speaker 1: The Wall Street Journal and The New York Times. She
Speaker 1: currently works at NBC News as an investigative reporter. She
Speaker 1: has worked at Money Magazine, Forbes, worth all over the place.
Speaker 1: Her last book was a bestseller, Reckless Endangerment is all
Speaker 1: about the mortgage crisis. The current book is called These
Speaker 1: Are the Plunderers. How private Equity runs and recks America.
Speaker 1: That's a little bit of a sensationalistic headline. When we spoke,
Speaker 1: the focus and conversation is really emphasizes the largest of
Speaker 1: the large private equity firms. Yes, there's a legitimate need
Speaker 1: and use for private equities, especially in mid markets where,
Speaker 1: to be blunt, Wall Street has just abandoned that space
Speaker 1: and gone up market, creating a vacuum. But we talk
Speaker 1: about some really fascinating things. Thirty percent of operating rooms
Speaker 1: are managed and run by doctors employed by private equity.
Speaker 1: That's a shocking number. We looked at everything from retail
Speaker 1: to nursing, homes, to hospitals, to insurance companies to manufacturers. Really,
Speaker 1: private equity used to be a small, outperforming sector of alternatives.
Speaker 1: It's now become giant, dominated by four firms, and no
Speaker 1: longer generating outsize returns. It's really a kind of fascinating
Speaker 1: aspect of this. As it's become more and more mainstream,
Speaker 1: it appears some of the performance advantages may have gone away. Anyway,
Speaker 1: Gretchen is a legend on Wall Street. She's won Lobe
Speaker 1: Awards and just about every other journalistic award there is.
Speaker 1: So when she dives into a space, really she does
Speaker 1: not any stone on turn. I found this to be
Speaker 1: really interesting conversation, and I think you will also, so,
Speaker 1: with no further ado, my conversation with NBC's Gretchen Morgansen.
Speaker 1: So let's talk a little bit about your kind of
Speaker 1: interesting career. You start as an assistant editor at Vogue
Speaker 1: magazine in the late seventies. How do you go from
Speaker 1: that to being a financial columnist?
Speaker 2: Okay, well, first of all, assistant editor is a little strong.
Speaker 2: I was a secretary, and I got the job because
Speaker 2: I could type more than thirty five words a minute. Okay,
Speaker 2: So I was just out of college, brand new to
Speaker 2: New York. I had graduated from a small liberal arts
Speaker 2: college in the Midwest, and my eyes were as big
Speaker 2: as saucers as I came into New York. It was
Speaker 2: the only job I could get. I wanted to be
Speaker 2: a journalist. This was back in the Watergate days, and
Speaker 2: you know, it was kind of exciting to think about
Speaker 2: possibly being a reporter. So that's my idea. Of course,
Speaker 2: the silence from my job applications to the New York Times,
Speaker 2: to Daily News, you name it was it was the
Speaker 2: silence was deafening. So Vogue was it?
Speaker 1: So you didn't stay a secretary of Vogue for very
Speaker 1: long though.
Speaker 2: Well, I sort of worked my way up, if you
Speaker 2: can call it that, to writing their personal finance column,
Speaker 2: which nobody read, by the way, at Vogue.
Speaker 1: At Vogue, why they just wanted to have a little Hey,
Speaker 1: let's speak to women in our magazine.
Speaker 2: Yes, so I think they sold it against an ad page,
Speaker 2: to be honest with you. But anyway, so it was
Speaker 2: very you know, basic instruction, and I really enjoyed doing that.
Speaker 2: And so I interviewed people, met a lot of folks,
Speaker 2: and then I was making very ten thousand dollars a year.
Speaker 1: That's big money in the seven No really, not really,
Speaker 1: that wasn't even big money in the fifties years. Yeah,
Speaker 1: thing is that? Is that what led you to your
Speaker 1: interest in Wall Street?
Speaker 2: Yes, so I said to myself, I don't have a
Speaker 2: rich dad, I don't have a rich husband. I'm going
Speaker 2: to have to make it on my own, and so
Speaker 2: what can I do? At about that time, Wall Street
Speaker 2: was battling a sex discrimination case with the EEOC. They
Speaker 2: had not hired enough women on the street this is
Speaker 2: the early eighties.
Speaker 1: Returned, Oh, thank goodness that got resolved. Yeah, now that
Speaker 1: we have gender parody.
Speaker 2: Well not quite, but it's better than it was anyways,
Speaker 2: definitely better. So they had to hire they had to
Speaker 2: start hiring women because they lost that case. And so
Speaker 2: I applied to the big brokerage firms as a salesman
Speaker 2: Dean Witter, Merrill Lynch Prudential Base at the time, and
Speaker 2: I got a job at Dean Witter. And the reason
Speaker 2: I got the job was because I killed it on
Speaker 2: the phone test.
Speaker 1: Really, well, you had been doing some journalism beforehand, so
Speaker 1: you're not afraid to ask people questions, right, So this
Speaker 1: is in the eighties and the beginning of the huge
Speaker 1: bull market, not that anyone knew in eighty two that
Speaker 1: strap yourself in the next eighteen years are going to
Speaker 1: be a rocket ship.
Speaker 2: Wait wait, wait. When I sat down in my chair
Speaker 2: at Dean Witter Reynolds, the Dow Jones Industrial average was
Speaker 2: at seven hundred and eighty one.
Speaker 1: Still under a thousand. That's unbelievable.
Speaker 2: So by the way, it made it hard to sell
Speaker 2: stocks because people were still in the looking backward phase.
Speaker 2: They weren't looking forward. But August nineteen eighty two, you're
Speaker 2: too young to remember that.
Speaker 1: Oh no, I have a vivid recollection.
Speaker 2: Was when the turn came and it was sort of like, okay,
Speaker 2: stocks are way too cheap. This is where you want to.
Speaker 1: Be seven pe back then, right seven.
Speaker 2: Pe on the SMP, and it was, you know, that
Speaker 2: was the turning point. So I was really well positioned
Speaker 2: for that move.
Speaker 1: And you stayed at Dean Water for what three four years?
Speaker 1: How long were you there?
Speaker 2: I stayed three years. I lived through the bear market
Speaker 2: that you don't remember of nineteen eighty three in tech
Speaker 2: stocks when there were this sort of you know, initial
Speaker 2: phase of personal computters and computing was becoming big, and
Speaker 2: they just got way ahead of themselves.
Speaker 1: Even calling them tech stocks back then, what was the phrase, you.
Speaker 2: Know, I don't know. I think it was text stocks.
Speaker 2: I mean, anyway, so.
Speaker 1: I don't recall that bear market.
Speaker 2: Yes, it was bad, it was vicious. It was over
Speaker 2: the summer of nineteen eighty three, and so I learned
Speaker 2: the hard way what happens when the stocks that you
Speaker 2: recommended to people because your firm was saying they would
Speaker 2: be goodbyes go down and those people lose money.
Speaker 1: And I felt bad. It was just not in the
Speaker 1: next six months.
Speaker 2: That's you know, they were ahead of themselves. You know,
Speaker 2: the euphoria, the momentum was getting too.
Speaker 1: Was there euphoria in eighty three?
Speaker 2: Yeah? Sure, no kidding, Oh yeah, Eagle Computer. I mean,
Speaker 2: some of these things were high flyers. And so when
Speaker 2: you had customers calling you up and saying, oh my gosh,
Speaker 2: what happened to all my money? It was such a
Speaker 2: huge trauma for me. I really felt bad, and I
Speaker 2: sort of felt like, if you have too much of
Speaker 2: a capacity for guilt, maybe not the right business.
Speaker 1: So is that what set you back into journalists?
Speaker 2: That's what sent me back. However, I did have it
Speaker 2: are I was now armed with a lot of information
Speaker 2: about how the world works on Wall Street.
Speaker 1: So that's exactly where I was going to go next.
Speaker 1: You have a knack for finding some of Wall Street's
Speaker 1: shadier operations. You've done this your whole career. How important
Speaker 1: was working as a broker to giving you insight of, Hey,
Speaker 1: here's how this stuff really works.
Speaker 2: Very important, very I mean you really saw the inner workings.
Speaker 2: You know, how the sausage is made, as they say,
Speaker 2: And so I would see how the over the counter desk,
Speaker 2: over the counterstock desk would push stocks and you know,
Speaker 2: encourage brokers to sell them, put a lot of commission
Speaker 2: in them to move them because some big seller was
Speaker 2: coming into the market. And you know, it just struck me.
Speaker 2: There were a couple of things about it that I
Speaker 2: just kept seeing how it really was. The customer was
Speaker 2: not being put first, and there were, of course the
Speaker 2: conflicted analysts that I then wrote about years later. I
Speaker 2: saw that firsthand and was, you know, my customers were
Speaker 2: harmed by that as well.
Speaker 1: So let's put a little sunshine. Let's put a little
Speaker 1: lipstick on this pig here it is. It's forty years later,
Speaker 1: the fiduciary side of the street, which was tiny in
Speaker 1: the eighties, is now not only large, but one of
Speaker 1: the fastest growing segments. While we're not even remotely close
Speaker 1: to gender parody, it's certainly better than it was.
Speaker 2: It's better than it was to spare. You don't have
Speaker 2: strippers coming in for people's birthday parties like I saw
Speaker 2: when I was a broker.
Speaker 1: Okay, unbelievable.
Speaker 2: Yeah, yeah, I saw it with my own eyes.
Speaker 1: I tell people who are the younger guys in the office,
Speaker 1: go watch boiler Room, go watch Wolf of Wall Street.
Speaker 1: They it's cinema verite. It just rings so and that
Speaker 1: world is gone. It's like the bad part. It's good
Speaker 1: that it's gone. But there were some good aspects of that,
Speaker 1: Like there were training programs. They taught people what's a stock,
Speaker 1: what's a bond. They used to do that at the
Speaker 1: bigger firms. Those are like tiny classes. Now, oh really,
Speaker 1: they don't do that anymore. Yeah, they do it, but
Speaker 1: just not what it was. So around the same time
Speaker 1: you transition from Wall Street to journalism, the LBL boom
Speaker 1: starts to take off. It becomes all the rage. What
Speaker 1: were you thinking at the time, Hey, I'm gonna write
Speaker 1: a book in forty years or were you thinking this
Speaker 1: is interesting or here comes problems? How did you see
Speaker 1: it back then?
Speaker 2: Back then? You know, it really just looked like a
Speaker 2: very reasonable response to a decade or so of undervalued stocks,
Speaker 2: right the nineteen seventies stocks were in the tank, you know,
Speaker 2: the death of equities, you remember to cover, and so
Speaker 2: it looked like it was really a pretty reasonable reaction
Speaker 2: to what had been years of undervalue in the stock market.
Speaker 2: So the initial phase of LBOs were not as not
Speaker 2: as pernicious as they are now because they were actually
Speaker 2: taking over companies that had value. You know, they're sitting
Speaker 2: there in the stock price that you could see, like
Speaker 2: you mentioned the seven price earnings ratio. Yeah, so it
Speaker 2: really was a little it was reasonable, It made sense.
Speaker 2: It was a natural kind of outcome of what had
Speaker 2: happened before.
Speaker 1: So we're going to talk a lot more about the book.
Speaker 1: These are the plunderers, but I have to mention the
Speaker 1: run of names that you really focus on in the book.
Speaker 1: These obviously aren't all of private equity. There's a whole
Speaker 1: lot hundreds of other companies, but Apollo, Blackstone, Carlisle and
Speaker 1: KKR really seems to be the key focus. Is it
Speaker 1: their size, their sector, the way they practice their business?
Speaker 1: What led you to those four?
Speaker 2: Well, it's their size first, Barry. I mean, these are
Speaker 2: the leaders of the pack. These are the folks that
Speaker 2: and the firms that set the tone, lead the way
Speaker 2: other people mimic them. I mean, KKR was behind the
Speaker 2: big Cahuna deal of the nineteen late nineteen eighties, r
Speaker 2: j R Nibisco. So this is a group of firms
Speaker 2: and people that really were there at the creation of
Speaker 2: what we now call private equity, and they do it
Speaker 2: in such size and in such scope that they have
Speaker 2: enormous impact. And that's why we're focusing on them. Yes,
Speaker 2: there are many, many private equity firms, but these really
Speaker 2: are the folks who set the tone.
Speaker 1: And you mentioned barbarians at the Gate in the book,
Speaker 1: which focused on the KKR takeover of RJR Nimbisco. That
Speaker 1: was sort of unfathomable at the time that someone could
Speaker 1: buy a giant publicly traded company strictly with low cost debt.
Speaker 1: Did that change the game going forward at that Once
Speaker 1: r J or Nabisco was in play, does that mean
Speaker 1: anybody is in play? How did that affect what took
Speaker 1: place over the next few decades.
Speaker 2: Yeah, and it also concerned Congress, as you remember, they
Speaker 2: had hearings about it. I mean, it was such a
Speaker 2: gargantuan deal at the time that it really made a
Speaker 2: lot of people nervous. And you know, there were studies
Speaker 2: done about what these deals would mean for workers, for pensions,
Speaker 2: and it really was sort of the beginning of questioning
Speaker 2: what the impact of these deals would be. But they
Speaker 2: just kept going, kept going, and there really was a
Speaker 2: sense during the late eighties, especially after the crash of
Speaker 2: nineteen eighty seven, that we really don't want to meddle
Speaker 2: with this. Let's just let the market take its course.
Speaker 2: In fact, I think Secretary of the Treasury at the
Speaker 2: time said the Mark it will, you know, work out
Speaker 2: these things and they will not become a problem.
Speaker 1: Yeah, the market always works these things out eventually, but
Speaker 1: that eventually can take longer right then expected. You mentioned
Speaker 1: they had a big impact, and they had a large
Speaker 1: effect that they also generated a lot of fees and
Speaker 1: a lot of moneies. What were the dollars like for
Speaker 1: these mega deals like r j AR Nibisco.
Speaker 2: Well, at the time, it sounded big but if you
Speaker 2: look back on it now, I don't know. I think
Speaker 2: there was there's a number we have in the book,
Speaker 2: maybe seventy million dollars or something in fees tokake care.
Speaker 2: I mean, that's like not even around the right, that's
Speaker 2: pocket chat, that's not that's walking around money.
Speaker 1: Right.
Speaker 2: So, you know, it's just gotten so so so much
Speaker 2: bigger erys as you know, the markets and the capitol
Speaker 2: pools have gotten so much bigger.
Speaker 1: Well we'll talk a little bit later about how as
Speaker 1: these companies got bigger, Wall Street got bigger, and it's
Speaker 1: kind of created a void underneath. But it's really really
Speaker 1: interesting to see where all this began at a time
Speaker 1: and when nobody really wanted a lot of these companies.
Speaker 1: They were some of these firms were, you know, all
Speaker 1: but left for debt. So you start the book with
Speaker 1: the line that kind of cracked me up. Let the
Speaker 1: looting begin. So let's start there. Where did this all begin?
Speaker 1: And when did it move from hey, we're going to
Speaker 1: help finance these companies that can't seem to get finance
Speaker 1: to full on piracy and looting.
Speaker 2: Well, there are a couple of things that happen early
Speaker 2: on that sort of you see the beginnings of that.
Speaker 2: These are that these takeovers are not only designed to
Speaker 2: find companies that are maybe undervalued or underperforming, we can
Speaker 2: whip them into shape and then sell them later. That
Speaker 2: while they're doing that, while they're monitoring them, while they
Speaker 2: are looking at them, streamlining them, you know, improving their operations,
Speaker 2: there are a lot of fees to be extracted from
Speaker 2: these companies. So for starters, private equity firms will often
Speaker 2: put people on the company's board, and sometimes those board
Speaker 2: memberships will deliver earnings to those board members. Okay, you
Speaker 2: also had this thing called monitoring fees, where a company
Speaker 2: that was purchased by a private equity fund or firm
Speaker 2: would have to pay the firm fees for its monitoring,
Speaker 2: for its oversight, for its management expertise that it was
Speaker 2: providing to the company. Now, that makes sense because you know,
Speaker 2: they took over the company. There's presumably plus they're presumably
Speaker 2: very good at managing, and they know what they're doing,
Speaker 2: and they have a goal of selling it, you know,
Speaker 2: at a profit later. However, the monitoring fees had this
Speaker 2: really kind of abusive element to them. They typically structured
Speaker 2: as ten year contracts, so the company would agree to
Speaker 2: pay over ten years a certain amount of monitoring fees
Speaker 2: every year to the private equity.
Speaker 1: Firm, regardless of profitability or.
Speaker 2: Oh yes, no, it was absolutely de rigor. They did
Speaker 2: it every year top line. So if the private equity
Speaker 2: firm sold the company after five years, the company still
Speaker 2: had to pay, still had to cough up the remaining
Speaker 2: five year contractual obligation of paying those monitorings.
Speaker 1: Now, wouldn't that just whoever's a purchaser knows this is happening.
Speaker 1: Doesn't that just lower the cost the purchase price by
Speaker 1: that much? Maybe it's a liaity on the books, but.
Speaker 2: Still it goes to these people. It is money for nothing.
Speaker 1: It's good to be the case.
Speaker 2: They are not doing the monitoring, and yet they're being
Speaker 2: paid to do the monitoring.
Speaker 1: So there are other fees like that that just sort
Speaker 1: of away at the stability of a company.
Speaker 2: Well I think I'm trying to think, oh well, okay, Well,
Speaker 2: first of all, the big fee that really ends up
Speaker 2: and this is not a fee to the private equity firm.
Speaker 2: But the big problem with many of these deals is
Speaker 2: the debt interest costs. Okay, so when the private equity
Speaker 2: firm takes over a company, they pile on a lot
Speaker 2: of debt on the company. It's expenses increase dramatically to
Speaker 2: pay those debt expenses, and oftentimes the companies will extract
Speaker 2: the firms, I mean, will extract money in the form
Speaker 2: of what's called dividend recapitalizations. They will load the company
Speaker 2: with debt and then they'll take money out almost immediately,
Speaker 2: and that's just kind of a way of stripping the
Speaker 2: company of well.
Speaker 1: In other words, when you say that they load the
Speaker 1: company with debt, they're borrowing a lot of capital. So
Speaker 1: now the company is sitting with this cash with an
Speaker 1: offsetting liability, meaning the company that's been purchased and the
Speaker 1: pe owner slash manager will take fees out of that.
Speaker 2: Well, they take the dividend recapitalization, meaning that they take
Speaker 2: a portion of what debt they've raised in cash for
Speaker 2: themselves as a payout to themselves.
Speaker 1: And who's lending this money to the company.
Speaker 2: The banks could be Wall Street, could be private debt folks, but.
Speaker 1: It's this is very often securitized and sold off into
Speaker 1: the market.
Speaker 2: It can be collateralized loan obligations. Now it's big private debt.
Speaker 2: But so you had these dividend recaps. In two thousand
Speaker 2: and seven, firms extracted the private equity firms extracted twenty
Speaker 2: billion dollars from companies in the form of dividend recapitalizations,
Speaker 2: and by twenty twenty one they were extracting seventy billion
Speaker 2: in div and recapitalizations. Now that's money that a company
Speaker 2: has to pay back, right the debt that was raised
Speaker 2: to cover it.
Speaker 1: And it's not going into what the company's doing.
Speaker 2: And it's not going into the company's operations, and it
Speaker 2: has an interest cost associated with it. So that's another
Speaker 2: piece of the puzzle that I think is worth.
Speaker 1: So we talked earlier about RJ or Nibisco. When you
Speaker 1: look at the history of the eighties and even nineties
Speaker 1: era LBOs, they seem to be a lot of lesser known,
Speaker 1: not necessarily consumer facing companies, transport and logistics and manufacturing
Speaker 1: like r JR is kind of one of the first
Speaker 1: names that the average person would know. How did that
Speaker 1: transition take place? What were most of the eighties era
Speaker 1: LBOs focused on. These were really way under the radar
Speaker 1: sort of things. It's only later, or at least in
Speaker 1: the book you described that it's only later that it's
Speaker 1: household brands and retailers and names we know. Explain that
Speaker 1: a little bit if you would.
Speaker 2: Well, I think what was going on again we talked
Speaker 2: a little bit about this earlier, is that these were
Speaker 2: the companies that were most undervalued. Remember, we were coming
Speaker 2: out of a very bad recession, and so probably what
Speaker 2: you had at that time, or you know, the industrial
Speaker 2: companies were the ones that were harmed, you know, very
Speaker 2: very much by the recession, and so their price earnings
Speaker 2: ratios were probably below the S and P average of seven,
Speaker 2: and so that might have been why they were taking
Speaker 2: over and focusing more on them. But again, as this
Speaker 2: practice and process sort of morphed into something else, it
Speaker 2: became more about some of the big name companies that
Speaker 2: you know. Now. A big pivotal moment was when the
Speaker 2: junk bond market crashed in the early nineties. This was
Speaker 2: after the SNL crisis. SNL's had been persued to buy
Speaker 2: a lot of junk bonds. The market turned. Milkin and
Speaker 2: Drexel Burnham collapsed and failed. So you had this huge
Speaker 2: market maker and junk bonds disappear. Junk bond market went
Speaker 2: really into the toilet, and that also then created a
Speaker 2: lot of distress in the market for companies that had
Speaker 2: borrowed from the junk bond market, and now you had
Speaker 2: those companies trading at very low prices. So again it
Speaker 2: was a distress situation that these companies took advantage of.
Speaker 1: So how do you draw a distinction between LBO brands
Speaker 1: of private equity, the thing that some people call vulture capitalism,
Speaker 1: and credible mid market banking and merchant banking that is
Speaker 1: really one of the few sources of capital for these
Speaker 1: mid sized companies. Given that Wall Street started chasing all
Speaker 1: the big.
Speaker 2: Firms, Well, I think you know, there is a right
Speaker 2: way and the wrong way to do this business, and
Speaker 2: certainly there are many firms doing the right thing. As
Speaker 2: far as what that might mean, Okay, less debt. Okay,
Speaker 2: the debt that is levied onto these companies is can
Speaker 2: be very damaging. And right now, Barry, we're going through
Speaker 2: a period of rising interest rates and companies are experiencing
Speaker 2: distress because much of this debt is floating, it's not fixed.
Speaker 2: And so what you need to remember is that the
Speaker 2: costs associated with borrowing money as a company when interest
Speaker 2: rates are zero is a different story than when interest
Speaker 2: rates are five so that is a huge part of
Speaker 2: the puzzle. So how about putting a little more equity
Speaker 2: into these deals instead of so much debt. How about
Speaker 2: putting more of your own skin in the game kind
Speaker 2: of a thing. And I think, you know, the massive
Speaker 2: layoffs that often occur her are very detrimental. I think
Speaker 2: that the asset stripping that has also occurred. Pensions, for instance,
Speaker 2: are sold off. Overfunded pensions get sold off and that goes,
Speaker 2: you know, into the private equity firm instead of into
Speaker 2: the company itself. So I think you can avoid some
Speaker 2: of these practices very easily. You don't maybe get the
Speaker 2: returns that you do when you have all those pieces
Speaker 2: of the puzzle in place. But I think right now
Speaker 2: we have to think about this as is it a
Speaker 2: sustainable business model that you fire a lot of workers,
Speaker 2: that you strip pensions and health benefits, that you levy
Speaker 2: the debt on these companies, and that you want to
Speaker 2: sell them in five years, which is short termism you
Speaker 2: know that we often sort of deplore in the stock market.
Speaker 2: Is that is that really a business model that can
Speaker 2: work for the long haul.
Speaker 1: So when private equity really was ramping up in the
Speaker 1: eighties and nineties. It was essentially an institutional allocation. This
Speaker 1: wasn't a mom and pop investment. Today that's changed. It's
Speaker 1: really attracting a lot of retail dollars. How is that
Speaker 1: working out?
Speaker 2: Well, you know, it's interesting. For years decades, as you say,
Speaker 2: this was a investing strategy that was limited to sophisticated investors,
Speaker 2: you know, high network individuals, people who could you know,
Speaker 2: take it stand the fact that it's opaque, that it
Speaker 2: has high fees, that it is you know, not quite
Speaker 2: as investing in an S and P five hundred stock
Speaker 2: fund and not that simple. But now it is encroaching
Speaker 2: onto the mom and pop in four O one k's
Speaker 2: the Labor Department under Donald Trump did open the door
Speaker 2: for private equity to get into for a one case.
Speaker 2: It had been prevented, had been barred from that before
Speaker 2: because of this fiduciary duty idea and also because of
Speaker 2: the opacity of these instruments. But so yes, you have
Speaker 2: it starting to seep into what we might call the
Speaker 2: high net worth retail market. You know, some of these
Speaker 2: the Blackstone b reat is a perfect example of that.
Speaker 2: That's a real estate investment trust that is a Blackstone entity,
Speaker 2: and it has really done a lot to attract the
Speaker 2: kind of high net worth retail customers into that. So,
Speaker 2: you know, I think the private equity sees this as
Speaker 2: an opportunity because they're not really growing the institutional aspect
Speaker 2: of their business. Pension funds perhaps maybe aren't growing as
Speaker 2: much as they need them to, and so this is
Speaker 2: a ripe market for them.
Speaker 1: Yeah, clearly four oh one K is now much estra
Speaker 1: growing part of the allocation landscape then, either direct benefits
Speaker 1: or pensions that that, if anything, that side of the
Speaker 1: street is treating shrinking dramatically. Let's talk about some of
Speaker 1: the new areas that private equity seems to be playing
Speaker 1: in the book talks about emergency care and er rooms
Speaker 1: that have been privatized. I always think of er and
Speaker 1: those sort of emergency services as a service as a
Speaker 1: community good, not a for profit model. Am I naive
Speaker 1: and not realizing we could monetize emergencies or should this
Speaker 1: be kept out of private asset allocators hands?
Speaker 2: This is a really really crucial question for the whole
Speaker 2: private equity industry. Now they have seized on healthcare as
Speaker 2: a huge industry to really dive into to invest in
Speaker 2: and you know why that is because it's seventeen percent
Speaker 2: of gross domestic products. So it's a big, big pool, okay,
Speaker 2: of potential money. So you have private equity rolling up
Speaker 2: doctors practices, you have private equity going into dermatology practices,
Speaker 2: imaging MRI Mriyes, anesthesiology is another big one, and yes,
Speaker 2: emergency departments. Emergency departments is another. And the difficulty with
Speaker 2: healthcare is that you are not supposed to put profits
Speaker 2: ahead of patients.
Speaker 1: So let's talk about hospitals. I don't understand how all
Speaker 1: these not for profit hospitals get purchased and rolled up
Speaker 1: into a chain of not for profit hospitals that are
Speaker 1: managed for profitability. That seems to be, you know, counterintuitive.
Speaker 1: Tell us a little bit about what's.
Speaker 2: Going on now we're really talking about, Perry, is the
Speaker 2: staffing companies that staff the hospitals. Okay, So private equity
Speaker 2: is not buying the emergency departments. What private equity is
Speaker 2: doing is operating the emergency departments.
Speaker 1: Similar hotels operate for the hospital.
Speaker 2: Okay. And it's like any staffing company. You know, you're
Speaker 2: a big whatever, you hire a staff and company to
Speaker 2: help you find people. Okay, So there are two major
Speaker 2: players in emergency departments. One is Team Health and the
Speaker 2: other is in Vision. Envision is owned by KKR and
Speaker 2: Team Health is Blackstone, and they control and other smaller
Speaker 2: private equity firms control forty percent of the nation's emergency departments.
Speaker 2: Now you don't know this. When you go to the
Speaker 2: emergency department, the hospital hires them. Of course, they say
Speaker 2: to the hospital, we're going to improve your profitability. We're
Speaker 2: going to help you, you know, make more money. We're
Speaker 2: gonna you know, they'll say, improve patient care. But the
Speaker 2: doctors that I have spoken to in emergency medicine say
Speaker 2: that's absolutely not the case. That when the private equity
Speaker 2: firms come in, they tell them how to do their business,
Speaker 2: They tell them how to code for patient billings.
Speaker 1: Well, they're medical experts, aren't they private equity. Don't they
Speaker 1: have a specialty in emergency care?
Speaker 2: I know, I think they have.
Speaker 1: They have a special so they're financers.
Speaker 2: I'm sorry, Yes, they have a specialty financing.
Speaker 1: But and you know, this is a horrife. I have
Speaker 1: to tell you. I don't have problem with private equity
Speaker 1: pushing into real estate and other areas, but emergency rooms
Speaker 1: seems if.
Speaker 2: You're talking about you know, the coffee and donut, you know,
Speaker 2: the private equity owns. Okay, if you don't like the
Speaker 2: coffee and the donut, you'll go somewhere else. But if
Speaker 2: you're in need of an emergency department and this is
Speaker 2: the only one in your town and you have to
Speaker 2: go there and it's run by a private equity firm
Speaker 2: that is putting profits ahead of patients, that's a problem.
Speaker 1: And this has become very big, not necessarily in big cities,
Speaker 1: but in the South, in rural areas, in places that
Speaker 1: have very limited healthcare options and a shortage of doctors.
Speaker 1: It's not like there's the option of saying, oh, I
Speaker 1: don't like Southwestern General, I'm going to go to Northeastern
Speaker 1: General and that's a better emergency room. This is usually
Speaker 1: one of the only games in town.
Speaker 2: Is absolutely. Absolutely rural hospitals have really been hit by
Speaker 2: this practice. The other thing very is that they don't
Speaker 2: put the name on the door now over the emergency department.
Speaker 2: They don't say Team Health is here, or they don't
Speaker 2: say Envision or KKR or Blackstone is running this, And
Speaker 2: so try to find out if your emergency department is
Speaker 2: run by one of these companies. It's very difficult to
Speaker 2: do so again, it's opaque. Again, the consumer does not
Speaker 2: know that this is happening. And so much of what
Speaker 2: private equity has taken over is kind of like this
Speaker 2: a stealth takeover because they don't put their names on
Speaker 2: the door.
Speaker 1: So let's talk about senior living. Since when are old
Speaker 1: folks homes? A profit center? Tell us about that?
Speaker 2: This is perhaps the biggest crisis I think, and it
Speaker 2: really became very evident in a twenty twenty one study
Speaker 2: by academics I think University of Chicago, you pen NYU
Speaker 2: that studied long term mortality at nursing homes that were
Speaker 2: owned by private equity and compared that with nursing homes.
Speaker 1: There's so much more efficient. Their mortality rates have to
Speaker 1: be much better, right.
Speaker 2: There's so much more efficient because maybe they hire fewer
Speaker 2: people to take care of the residents, that the mortality
Speaker 2: rate is higher, the mortality a little higher. Ten percent.
Speaker 1: Really, that's a big number.
Speaker 2: Ten percent. And so these academics found that there were
Speaker 2: twenty thousand lives that they said were lost because at
Speaker 2: private equity owned nursing homes, nursing facilities, and so you
Speaker 2: have the situation the academic said, where the focus, the
Speaker 2: extreme focus on cost cutting meant lower staffs meant you know,
Speaker 2: lesser care essentially translated to lesser care. And this was
Speaker 2: just a striking, striking study of the difference between and
Speaker 2: they were comparing it to other for profit nursing homes.
Speaker 2: So this was not just for profit versus nonprofit. This
Speaker 2: was private equity for profit and nonprofit.
Speaker 1: How did private equity healthcare, senior living nursing homes eers
Speaker 1: hospitals do during the COVID pandemic.
Speaker 2: Well, they did very well because they got a lot
Speaker 2: of cares Act money from the government.
Speaker 1: I mean, how did the care itself, how did they
Speaker 1: perform during the pandemic?
Speaker 2: Well, as you know, healthcare was a disaster, and partly
Speaker 2: because we were so unprepared for the pandemic. And I
Speaker 2: would argue Barry that one of the reasons we were
Speaker 2: so unprepared was because healthcare had been a focus of
Speaker 2: private equity since really the mid two thousands. Okay, so
Speaker 2: HCA perfect example, that's a company that went private in
Speaker 2: an LBO. And so what you had is these firms,
Speaker 2: again focusing on cost cutting, and so they were not
Speaker 2: likely to you know, stockpile ppe masks to buy ventilators
Speaker 2: to prepare for a pandemic, and inform.
Speaker 1: That's the full cost money.
Speaker 2: That costs money, and it's money that sits on a shelf.
Speaker 2: And these guys don't like money sitting on a shelf.
Speaker 2: And so you know, you have this. You actually had
Speaker 2: a study in Congress that had, you know, what might
Speaker 2: happen if we were to experience a pandemic, and it's
Speaker 2: this is back in two thousand and five or six,
Speaker 2: and it said we need to stockpile more than you
Speaker 2: know when.
Speaker 1: You had the Gate study in what twenty fifteen saying
Speaker 1: the same thing, just in time. Inventory doesn't work during
Speaker 1: a pandemic. You can't get things. It turned out to
Speaker 1: be very accurate, right.
Speaker 2: And so, but all those years leading up to twenty twenty,
Speaker 2: when the whole you know, world collapsed in March, all
Speaker 2: those years leading up to it, we had kind of
Speaker 2: a draining of healthcare, a bleeding of healthcare companies because
Speaker 2: getting the fat out, cutting the costs down.
Speaker 1: So I'm going to ask you a question now, but
Speaker 1: it applies to insurance also, which we haven't we'll talk
Speaker 1: about in a minute, But there are regulatory agencies at
Speaker 1: the federal level. Well, every state has a medical board.
Speaker 1: How does this sort of four care profit with a
Speaker 1: much worse mortality rate and much worse health outcomes, how
Speaker 1: do they get by the state regulators? It would you
Speaker 1: would imagine that statewide regulatory medical boards wouldn't really tolerate this.
Speaker 2: This is a sixty four trillion dollar question, Barry, and
Speaker 2: I would love for you to ask every state attorney general,
Speaker 2: for instance, why haven't you gone after for profit medicine.
Speaker 2: There is there are statutes in more than thirty states
Speaker 2: across the country that bar what's called the corporate practice
Speaker 2: of medicine. And these laws came into effect, you know,
Speaker 2: one hundred years ago when you had you know, quack
Speaker 2: medicine show guys you know, out there selling you know,
Speaker 2: crazy chures for everything, and they decided, these states decided
Speaker 2: that you can't have profits potentially coming ahead of patient care.
Speaker 2: And so doctors actually have to run these organizations. And
Speaker 2: that is supposedly going to keep from a problem of
Speaker 2: putting profits ahead of patients. But very very very few
Speaker 2: state ags have enforced laws against the corporate practice of medicine.
Speaker 2: And when they do bring cases. They are so tiny
Speaker 2: and so minimalistic in the risk slap that they deliver
Speaker 2: to these companies that it really is not even a
Speaker 2: cost of doing business. And so it's just like, okay, fine,
Speaker 2: I'll do it again and even bigger next time.
Speaker 1: So let's talk insurance. The insurance policy stuff seems just
Speaker 1: absolutely egregious. How did private equity step into the insurance area? Again?
Speaker 1: A very heavy regulated industry with separate, very robust statewide
Speaker 1: oversight panels and boards. What's going on in the world
Speaker 1: of insurance.
Speaker 2: Well, I'm very interested to hear you say. It's very
Speaker 2: robust on the state side.
Speaker 1: At least that's how it's presented. Talk to people who
Speaker 1: try and get licensed to do insurance things, or if
Speaker 1: there's a failure to pay out a policy in the
Speaker 1: litigation that follows, there seems to be some options for policyholders,
Speaker 1: especially if you have a receptive governor or a state
Speaker 1: attorney general who can apply pressure through these insurance boards.
Speaker 1: Although maybe I'm living in the past.
Speaker 2: Well, I think it's spotty. Let's just say that there
Speaker 2: are some states where the regulation is aggressive, but there
Speaker 2: are a lot where it is not. And as you
Speaker 2: might guess some of these companies flock to the one
Speaker 2: to the states where the oversight is more of the minimalistic. Now,
Speaker 2: the problem with insurance companies being owned by private equity
Speaker 2: is that you can understand why they want to own
Speaker 2: them because this is a pool of assets. It's a
Speaker 2: pool of money that they can really generate immense profits on.
Speaker 2: And it's unlike banks. It's not fast money or hot money.
Speaker 2: It isn't likely to leave quickly berry like we've seen
Speaker 2: in some of the recent bank problems. So insurance companies
Speaker 2: are really huge pools of very stable money for these companies,
Speaker 2: for these private equity companies. And it's interesting because you're
Speaker 2: supposed to in insurance be very conservative and most I
Speaker 2: think most people who buy insurance policies really would prefer
Speaker 2: that they're ensure be a conservative entity that not taking risks.
Speaker 2: We're not swinging for the fences here. You know. Yeah,
Speaker 2: if I can get a higher yield, that's awesome, but
Speaker 2: I really want to know that I'm going to get
Speaker 2: a payout when it comes time for my claim. So
Speaker 2: what these companies are doing is buying these insurance companies.
Speaker 2: They're also buying up pension assets very So a corporation
Speaker 2: has a pension, let's say it's Lockheed, Bristol Myers or
Speaker 2: a couple, and the private equity firm will buy those
Speaker 2: pension obligations. Lockheed or Bristol Myers gets it off their books,
Speaker 2: they're happy. They transfer the risk that those obligations had
Speaker 2: for them, and the private equity firm takes over that risk.
Speaker 2: But now you don't have the pension benefit gearing corporation
Speaker 2: backing you if the pension should fail.
Speaker 1: So a company could just get out from under the
Speaker 1: PBG by selling it to a third party.
Speaker 2: Correct. It's called a pension risk transfer, and they have
Speaker 2: been happening like crazy. And private equity firms are the
Speaker 2: ones doing a lot of the pension risk transfers.
Speaker 1: That's really interesting.
Speaker 2: And so you have pensioners at Bristol Myers or Lockheed
Speaker 2: or Cores as another who are really relying on private
Speaker 2: equity to do the right thing for their pensions going forward,
Speaker 2: for their retirement, for their payouts when they need them.
Speaker 2: And that I think is something that we really don't
Speaker 2: understand the entire nature of. And unfortunately we'll see we
Speaker 2: may see some problems with rising interest rates if some
Speaker 2: of the investments that these private equity firms have made
Speaker 2: in their insurance companies start having problems.
Speaker 1: Are these arms length investments meaning you manage this as
Speaker 1: a fiduciary on behalf of the pensioner. You can't then
Speaker 1: turn around and festoon that pension filled with whatever junk
Speaker 1: paper you're selling to the street, or does that happen?
Speaker 2: That does happen? Now, they do have to disclose in
Speaker 2: their statutory filings with the insurance regulators how much of
Speaker 2: their investment portfolio in the insurance company is related transactions
Speaker 2: or related stocks or bonds or mortgages or whatever. So
Speaker 2: they do have to disclose that. But I'm gonna guess
Speaker 2: that very few people read those disclosures.
Speaker 1: Huh. Quite interesting. Let's talk about the insurance deal of
Speaker 1: the century. What's going on with Executive Life, What happened
Speaker 1: there and how did that go off the rails.
Speaker 2: Executive Life is where we start sort of the book,
Speaker 2: because it was such a such a massive failure, and
Speaker 2: of course it was coming at the time of the
Speaker 2: junk bond collapse.
Speaker 1: But this was a triple a highly regarded insurance company beforehand, this.
Speaker 2: Was a highly rated insurance company had the highest rating,
Speaker 2: but it was run by a guy who was kind
Speaker 2: of what we used to call in the old days
Speaker 2: a gunslinger. He was a guy who was more of
Speaker 2: a risk taker than your average insurance company executive. And
Speaker 2: he bought a ton of junk bonds from Drexel. He
Speaker 2: was one of their top clients when they were selling,
Speaker 2: you know, these bonds of slightly you know, lower quality, lesser, slightly,
Speaker 2: lesser known companies. He was there to buy. Okay, so
Speaker 2: his firm, his insurance company, had a ton of junk bonds,
Speaker 2: and when that market turned it was dire.
Speaker 1: So this was really separate from private equity. This was
Speaker 1: just bad stud ward ship by an insurance executive who
Speaker 1: should be conservative. And again the question where the regulators
Speaker 1: when a conservative insurance company is buying junk I mean,
Speaker 1: it's right there in the name. They don't even hide it,
Speaker 1: junk bonds. What happened with the executive life they blow up?
Speaker 2: They blow up. The Department of Insurance for the State
Speaker 2: of California was at the time run by John Garrimndi,
Speaker 2: who is now a representative in the House of Representatives
Speaker 2: from California in Washington, and he was just brand new
Speaker 2: in the job. It was a new elected position. Prior
Speaker 2: to that it had been appointees of the government of governor.
Speaker 1: But we have to run to ye to run that
Speaker 1: could go right anyway.
Speaker 2: So he won the big job, and the minute he
Speaker 2: got in the door, it was, you know, junk bonds
Speaker 2: were you know, cratering, and everybody was concerned about executive
Speaker 2: life and would it be able to to pay its
Speaker 2: policy holders, and so he seized the company. Now keep
Speaker 2: in mind, Burry, that he seesed it probably at or
Speaker 2: very near the bottom. Okay, So junk bonds were starting
Speaker 2: to come back after he seized it. And so if
Speaker 2: it had been worked out another way, it's possible, like
Speaker 2: a reorganization, it's possible that the policy holders might not
Speaker 2: have lost what they ended up losing.
Speaker 1: What was the haircut the policy holder?
Speaker 2: You know, it's still to this day we don't know,
Speaker 2: but it certainly is in the three or four billion
Speaker 2: dollar maybe.
Speaker 1: Does that look like a third half a big chunk
Speaker 1: though it was.
Speaker 2: A big chunk for many people, you know, I mean
Speaker 2: I know of some cases where it was forty percent
Speaker 2: haircut for some policy holders. Right, it's very hard to
Speaker 2: you know, getting numbers on this stuff. They really don't
Speaker 2: want to help.
Speaker 1: Tell us about the crazy rule that said, okay, now
Speaker 1: we're going to shred all the documents related to this.
Speaker 1: What the hell was that?
Speaker 2: Well, okay, so let's just remember this happened in nineteen
Speaker 2: ninety one. Okay, the insurance department took it over in
Speaker 2: nineteen ninety one. Then we had Apollo Leon Black's new
Speaker 2: firm after he flees from Drexel.
Speaker 1: The record is burning Grexel collapse, Grexel collapse, which arguably
Speaker 1: he didn't have anything to do with that was mostly Milkin's.
Speaker 2: No, he was not in the junk bond area. He
Speaker 2: was a corporate finance person, so he was raising money
Speaker 2: for these companies.
Speaker 1: So did he flee or did he just say, hey,
Speaker 1: let's go launch our own Yeah, let's.
Speaker 2: Go launch our own company, right, But I mean, it
Speaker 2: was obviously a dire circumstance. So anyway, long story short,
Speaker 2: he ends up getting a hold of this huge junk
Speaker 2: bond portfolio, which was a lot of paper that he
Speaker 2: had put into Fred Carr's that's the name of the
Speaker 2: guy who ran Executive Life that paper that Apollo really
Speaker 2: knew what it was.
Speaker 1: They was a salesperson and a financer.
Speaker 2: He was the finance guy, right, and so he knew
Speaker 2: the numbers, he knew the companies, and so he knew
Speaker 2: that they were just distressed and that they could be
Speaker 2: restructured and reorganized. And so he buys this portfolio of
Speaker 2: John so Way.
Speaker 1: He's New York based, right, he's New York based and
Speaker 1: executive life is in California. But because of the relationship
Speaker 1: with Drexel, he approaches California and says, we'd like to
Speaker 1: buy this junk paper or did they hold an auction?
Speaker 1: How did it go?
Speaker 2: Well, it was with a French bank. Actually they were
Speaker 2: representing the bank. They were acting as the investment manager
Speaker 2: for the bank, and so it was going to be
Speaker 2: taken over by this French bank. But anyway, so the
Speaker 2: Department of Insurance sold it, sold the company cheap to
Speaker 2: on the cheap absolutely absolutely, and so the people that
Speaker 2: bought it in this case, the French bank and Apollo
Speaker 2: were able to ride the recovery of those junk bonds.
Speaker 1: So when California sells this is there on behalf of
Speaker 1: the policyholder, right, that's right? Is there any mandate? Hey,
Speaker 1: you have to pay ninety cents on the dollar at least,
Speaker 1: or or there any requirements. They're selling it inexpensively. What
Speaker 1: riders is California attaching it to the new owners on
Speaker 1: behalf of the people the California Insurance Board is supposed
Speaker 1: to be operating on.
Speaker 2: Well, California at the time said we think this is
Speaker 2: a great deal. You're going to get at least ninety
Speaker 2: cents on the dollar. Everybody is going to get at
Speaker 2: least ninety cents on the dollar. And that is their story,
Speaker 2: and they're sticking to that, and that's what they say.
Speaker 1: They didn't require that as part of the purchase.
Speaker 2: Well, that's what they said was going to happen as
Speaker 2: part of the purchase.
Speaker 1: I can't say all sorts of things. But until I
Speaker 1: sign a contract that says I guarantee that I will
Speaker 1: pay ninety cents out to each shareholder at a minimum,
Speaker 1: it's just words.
Speaker 2: Yeah. Well, what happened was a lot of people did
Speaker 2: not get ninety cents on the dollar. And there were
Speaker 2: quite a few people who are very who are up
Speaker 2: in arms, who wanted, you know, to be this to
Speaker 2: be investigated. But you know, it is sort of a
Speaker 2: moment in time that you look at and you say,
Speaker 2: this is what can happen if an insurance company takes
Speaker 2: risks with their policyholders' money.
Speaker 1: Right, This all goes back to the gunslinger as opposed
Speaker 1: to a conservative operator. There are a couple of other
Speaker 1: regulatory questions that come up that I'm always sort of
Speaker 1: fascinated about. The first is the performance reporting for private equity.
Speaker 1: There have been lots of criticism from within Wall Street
Speaker 1: that at best it's aggressive and at worst it's just
Speaker 1: a fantasy. If you're committing capital to private equity, you
Speaker 1: don't care when they do the purchase the sort of
Speaker 1: internal rate of return to the endowments and pensions who
Speaker 1: put money into private equity. They don't care about that,
Speaker 1: But that seems to be the way they report. Tell
Speaker 1: us a little bit about how performance numbers are ginned up.
Speaker 1: I don't even know how to describe it.
Speaker 2: Well, these are private companies, not the firms themselves. They're
Speaker 2: publicly traded, as you know, but when they buy a
Speaker 2: company and put it into a fund, it's a private company.
Speaker 2: And so how they mark the value of that company
Speaker 2: is you know, there's leeway there, Barry. They can value
Speaker 2: it a certain way that. Let's just say the stock
Speaker 2: market wouldn't value it.
Speaker 1: But you're valuing it specifically how you're purchasing it, and
Speaker 1: then if it's sold five years later, that's a hard dollar.
Speaker 2: Correct.
Speaker 1: Why is there so much wiggle room in.
Speaker 2: Between because you haven't had a mark, you haven't had
Speaker 2: a buyer, I tell you exactly what it's worth until
Speaker 2: the end of the line when you actually do buy
Speaker 2: the company.
Speaker 1: Huh. Really interesting. And let's talk about tax loopholes. How
Speaker 1: on earth is there still a carried interest tax loophole
Speaker 1: for private equity, hedge funds and venture capital. You're talking
Speaker 1: about a teeny tiny fraction of old taxpayers. Why the
Speaker 1: special treatment?
Speaker 2: It started out I think as a special treatment for
Speaker 2: real estate, and it sort of morphed into this bigger,
Speaker 2: bigger thing as the private equity venture world expanded. And
Speaker 2: it essentially is that the managers executives of these companies
Speaker 2: just to end up paying a far far lower rate
Speaker 2: on their very beneficent payouts than you or I do.
Speaker 2: And it's a loophole that people have tried to get
Speaker 2: rid of for decades. We've had congressional hearings about it,
Speaker 2: and yet it continues to stay on the books, and
Speaker 2: boy they cry blood murder when it comes time for
Speaker 2: people to say, look, maybe we should rethink this and
Speaker 2: not let these guys be I mean, it's like a
Speaker 2: billionaire minting machine to have this kind of a lower
Speaker 2: tax rate on these folks.
Speaker 1: Who wants to pay thirty seven percent when you could
Speaker 1: pay essentially twenty three percent. Right, of course they're spending
Speaker 1: money on lobbyists, right, cut my taxes in half? Where
Speaker 1: do I sign up for that?
Speaker 2: Yeah?
Speaker 1: Oh wait, I don't have access to that.
Speaker 2: Really, start a private equity firm, Barry.
Speaker 1: So here's what we'll do. We'll start a private equity farm.
Speaker 1: We'll buy pensions and just put it in the S
Speaker 1: and P five hundred and cost us five BIPs to
Speaker 1: manage it. It'll be there's a lot of fat there
Speaker 1: if he approaches it that way. So let's talk about
Speaker 1: a little bit of pushback. I've seen some criticisms and
Speaker 1: some stuff. I want to get your your take on it. First.
Speaker 1: We touched on this earlier. Aren't the big firms and
Speaker 1: the LBOs the lever buyouts very different than the middle
Speaker 1: market smaller private equity firms that provide capital and equity
Speaker 1: to small companies. How do we you know, aren't you
Speaker 1: painting with too broad a brush? Goes some of the criticism.
Speaker 2: Well, if you look at these firms, these folks, these
Speaker 2: these really titans of industry, right, They're celebrated in the
Speaker 2: business pages, they are you know, on TV all the time.
Speaker 2: I mean, these are the people leading the way on
Speaker 2: this industry. Now, again, there are others who are doing
Speaker 2: it right and doing it in a better way, yes,
Speaker 2: but what you want to focus on. These are the
Speaker 2: folks that's at the tone. These are the folks that say,
Speaker 2: here's how we're going to operate this. And these are
Speaker 2: the folks that do have the biggest impact Barry because
Speaker 2: of their size, and so that's why we really want
Speaker 2: to focus on them. So when you have, you know,
Speaker 2: two firms controlling thirty percent of emergency departments in this country,
Speaker 2: that's a lot, you know, That's why you focus on
Speaker 2: the big firms. They have the big impact, and so
Speaker 2: that's why we're doing that.
Speaker 1: So let's talk about wealth inequality. You guys put a
Speaker 1: lot of blame on private equity for making it worse,
Speaker 1: But I look at wealth inequality and wage inequality and
Speaker 1: it's a lot of things. It's it's low wages and
Speaker 1: a low minimum wage that hasn't gone up in forever.
Speaker 1: It's corporate tax avoidance, it's the shifting of the tax
Speaker 1: burden away from the wealthy and away from corporations to
Speaker 1: the middle class. Aren't we putting too much blame on
Speaker 1: private equity for exacerbating wealth inequality in America?
Speaker 2: Well, the reason we think it's important to include them
Speaker 2: in the mix is that we haven't really had that discussion.
Speaker 2: I mean, private equity was not really mentioned as a
Speaker 2: force in the inequality in the Gulf between rich and poor.
Speaker 2: In am you know, you would hear about offshoring of jobs.
Speaker 2: You would hear about companies going to Ireland so that
Speaker 2: they wouldn't have to pay you know, the high.
Speaker 1: Taxes, the double Dutch whatever.
Speaker 2: Whatever, and so there has been a lot of discussion.
Speaker 2: And of course the you know, uh, the defanging or
Speaker 2: the the diminishment of unions, so you don't have a
Speaker 2: balance of power between the worker and the corporation. But
Speaker 2: you look at some of the forces behind those forces, right,
Speaker 2: So pensions, great example, if you're starting to see private
Speaker 2: equity firms taking over pensions, you know, and and or
Speaker 2: stripping the pensions of the companies that they bankrupt. That
Speaker 2: is a definite wealth gulf, right, That is a definite
Speaker 2: impact on every day people main street America that I
Speaker 2: just don't think we've really examined. So you just have
Speaker 2: to look behind some of the practices when you have retailing.
Speaker 2: You know, that's a big force, that a big area
Speaker 2: that private equity has been very forceful in. You know,
Speaker 2: almost six hundred thousand jobs lost in retailing. Now, yes,
Speaker 2: some of that would have happened with the shift online,
Speaker 2: but honestly, you know, there have been consequences like that.
Speaker 2: So you look at that, and then you look at
Speaker 2: the problems with healthcare and what it's doing to patients,
Speaker 2: and so I do think that it is a force
Speaker 2: to be reckoned with here.
Speaker 1: Right, So I'm glad you brought up retail. Some of
Speaker 1: the pushback I've seen is the United States has been
Speaker 1: wildly over retailed twenty I think in two thousand and
Speaker 1: seven we had twenty four square feet per capita versus Europe,
Speaker 1: which was like fourteen and Japan which was like nine.
Speaker 1: So we really had far more retailers than we knew
Speaker 1: what to do. We built way too many malls, and
Speaker 1: ultimately this was going to go through a huge set
Speaker 1: of changes anyway. Private equity maybe it accelerated a little bit,
Speaker 1: but we certainly can't blame the shrinking retail footprint on
Speaker 1: pe can we.
Speaker 2: We could maybe put some of it on them, right? Yeah?
Speaker 2: And obviously you know, the shift online hurt some folks.
Speaker 2: Toys r Us as an example of that.
Speaker 1: But you know, more recently, Bedbath and Beyond that was
Speaker 1: a publicly traded company. They hit the wall without private
Speaker 1: equities help, That's right. So the biggest pushback I've seen
Speaker 1: is go back to the eighties and nineties when LBOs
Speaker 1: were first ramping up. Companies went from big to really big.
Speaker 1: And as as these big, publicly traded mega companies went
Speaker 1: up market, the banks, the brokers, all Wall Street chased
Speaker 1: them and they just created this air pocket, this void
Speaker 1: underneath where there used to be national banks and national
Speaker 1: lenders servicing that industry. And they have nobody left to
Speaker 1: service them. And that vacuum is into what good private
Speaker 1: equity has stepped. If it wasn't for the private equity
Speaker 1: below the four biggest companies, there's very little sources of
Speaker 1: capital for these one hundred five hundred seven hundred million
Speaker 1: dollar firms that Wall Street ignores.
Speaker 2: Well, I think you have to say then if you're
Speaker 2: going to say, Okay, they're not these companies are not
Speaker 2: being banked properly, then that's great if you can get
Speaker 2: money from private equity, but let's not bankrupt them in
Speaker 2: the process. I mean, you have studied a study that
Speaker 2: shows that bankruptcies her you know, far more with companies
Speaker 2: that are private equitized than it does with other companies.
Speaker 2: So I think that you, yes, if you want to
Speaker 2: have the resources, you know, the capital is not being
Speaker 2: assigned to these companies, but that doesn't mean that they
Speaker 2: should be you know, abused, or that some of these
Speaker 2: practices can't be questioned.
Speaker 1: And my one of my favorite parts of the book.
Speaker 1: You talk about equity ownership and wealth ownership in the
Speaker 1: United States. In nineteen thirteen, the bottom ninety percent of
Speaker 1: incomes owned about fifteen percent of the wealthy United States.
Speaker 1: This is real estate businesses and publicly traded companies. By
Speaker 1: the eighties that had more than doubled to thirty five
Speaker 1: percent of the wealth in the US. Was that the peak.
Speaker 1: What happened with that going forward?
Speaker 2: That was the peak. And one of the reasons for
Speaker 2: that very big, considerable growth, and that was the you know,
Speaker 2: people were able to have a family without having two
Speaker 2: wage earners, right, you were able to buy a house,
Speaker 2: et cetera that moment in time. Also a huge contributor
Speaker 2: to that was pensions, so corporate pensions that gave a
Speaker 2: worker reasonable shot at a prosperous retirement, and those started
Speaker 2: disappearing in the mid to late eighties. And so that's
Speaker 2: a big factor in why the wealth held by the
Speaker 2: main street America, the middle class, the big broad brush America.
Speaker 2: That's why that has declined.
Speaker 1: So here's I think my favorite pushback to the conversation
Speaker 1: about wealth inequality. And I'm curious as to your thoughts.
Speaker 1: It's not the top ten percent versus the bottom ninety
Speaker 1: percent where that big disparity has opened up. It's not
Speaker 1: even the top one percent versus the bottom ninety nine percent,
Speaker 1: although that's certainly pretty meaty. It's the top point zero
Speaker 1: one percent versus even within the top one percent. There's
Speaker 1: this massive disparity. We didn't used to have that many
Speaker 1: billionaires in uber wealthy today versus I don't know, fifty
Speaker 1: one hundred years ago, how has the distribution of wealth
Speaker 1: shift in the United States, and what might come out
Speaker 1: of that going forward.
Speaker 2: I just don't think it's a good thing to have
Speaker 2: this coterie of extreme, extreme wealth at the top of
Speaker 2: the pyramid. I mean, it's just not healthy. An economy
Speaker 2: does better if the most people are prosperous, right, and
Speaker 2: so these you know, multi multi, multi billionaires are really outliers.
Speaker 2: But it points to a problem with the entire society.
Speaker 2: And perhaps it's because we lawd wealthy people. But part
Speaker 2: of it is this tax loophole that really is unfair.
Speaker 2: Part of it is some of the practices that really
Speaker 2: are aggressive and that end up harming companies and workers
Speaker 2: and pensioners. And let's not forget the huge fees that
Speaker 2: pensions pay to buy into private equity funds. And for
Speaker 2: years those private equity funds outperformed the S and P
Speaker 2: but they no longer do.
Speaker 1: So let's hit on that, because that's really interesting. This
Speaker 1: was a small asset class that, whether it was the
Speaker 1: ill liquidity premium or just the ability to go places
Speaker 1: where public markets couldn't, actually did better than the markets.
Speaker 1: That risk premia seems to have evaporated.
Speaker 2: It stopped out performing in like the mid two thousand so,
Speaker 2: or you know, towards two thousand and eight, and so
Speaker 2: you really have to wonder what the purpose of the
Speaker 2: continued infatuation with private equity among pensions is if they
Speaker 2: can get the same return in a S and P
Speaker 2: five hundred with five basis points as a cost and
Speaker 2: total transparency by the way, and a mark to market
Speaker 2: that you see at the end of every business day
Speaker 2: and so you know where you stand. So it's not
Speaker 2: one of these fuzzy math situations where you don't really
Speaker 2: know what the value of the fund is because it's
Speaker 2: got private companies in it that are being marked by individuals,
Speaker 2: you know, who have an ax to grind in the mark.
Speaker 1: Really quite interesting, So let me give you one of
Speaker 1: my curveball questions I like to surprise guests with. So
Speaker 1: your care your history is Money Magazine in the early
Speaker 1: mid eighties and then Forbes and then Worth Magazine. But
Speaker 1: while you were at Forbes in nineteen ninety five, you
Speaker 1: get tapped to be press secretary for then presidential election
Speaker 1: candidate Steve Forbes. What was that? Like, how different are
Speaker 1: political campaigns from covering finance?
Speaker 2: Well, when Steve asked me to be his press secretary.
Speaker 2: It was I thought, wow, this is going to be interesting.
Speaker 2: You know, I even maybe thought this is going to
Speaker 2: be fun. Right now, I'm a financial reporter, I am
Speaker 2: not a Washington reporter, not a political reporter, and so
Speaker 2: it was I had a different, you know, idea of
Speaker 2: what it might be like. But anyway, it was a
Speaker 2: very very tough six months, I can imagine, and you
Speaker 2: know it was. So Steve was a candidate that had
Speaker 2: economic ideas, okay, and one of them was the flat tax, which,
Speaker 2: by the way, would have gotten rid of lobbyists.
Speaker 1: That was big benefles and all.
Speaker 2: Those loopholes, right, flat tax. He was also for you know,
Speaker 2: medical savings accounts and health savings accounts anyway, and so
Speaker 2: I would have I would explain these concepts. And he
Speaker 2: was against the double taxation of dividends, which of course
Speaker 2: we have gotten rid of I think. Anyway, So those
Speaker 2: were sort of three of his initial ideas, and I
Speaker 2: would have to explain these to the Washington press corps.
Speaker 2: The Washington press corps not being financially oriented and probably
Speaker 2: not that interested. They were just interested in the horse race.
Speaker 2: Now you know, Now we had he did very well
Speaker 2: in New Hampshire, and so for a frenzied moment, it was,
Speaker 2: you know, like this, you know, maybe he has a
Speaker 2: chance or a shot. But anyway, it was it was
Speaker 2: a very trying time for me, but I really became
Speaker 2: a better journalist because of it.
Speaker 1: Well that I was going to go there with that question,
Speaker 1: what was it like being on the other side of
Speaker 1: the clamoring that scrum that you always see the photos of.
Speaker 1: How did that change how you do journalism and view journalists?
Speaker 2: Well, I really after that decided that I really wanted
Speaker 2: to give people a lot more time to respond to
Speaker 2: my questions. And because I would be asked to answer
Speaker 2: questions that were quite you know, comprehensive and or tricky,
Speaker 2: difficult to come up with the answer in you know,
Speaker 2: like minutes, and so it was very frustrating to not
Speaker 2: be able to do that. And so I came away
Speaker 2: from that experience saying, Okay, from now on, I'm going
Speaker 2: to give everybody that I'm writing about more time to
Speaker 2: respond because I don't want to be in that put
Speaker 2: them in the situation that I was in.
Speaker 1: Huh, all right, we only have you for a few
Speaker 1: more minutes. Let me jump to my favorite questions that
Speaker 1: we asked all of our guests, starting with tell us
Speaker 1: what you're streaming, what are you watching listening to? What's
Speaker 1: keeping you entertained?
Speaker 2: What am I streaming? Well, gosh, I really like the
Speaker 2: BBC show Happy Valley. I don't know if you've seen that.
Speaker 2: It's a kind of a detective, a pretty tough female
Speaker 2: detective like that. I like Ted Lasso. I know that's
Speaker 2: very mundane, but so those are the two right now.
Speaker 1: Tell us about mentors who helped shape your career.
Speaker 2: Jim Michaels, who was the editor of Forbes magazine. He
Speaker 2: was a very tough, old newspaper reporter. He was at
Speaker 2: UPI and he was the guy who broke the story
Speaker 2: of Gandhi's assassination, so really knew how to do that
Speaker 2: kind of you know, reporting. But he took his expertise
Speaker 2: to business and really taught me how to look at businesses,
Speaker 2: analyze balance sheets, income statements, really do contrarian reporting. He
Speaker 2: was a guy who didn't want, you know, the conventional wisdom.
Speaker 2: He wanted to question the conventional wisdom. He was very difficult,
Speaker 2: very irascible, very demanding, but you really learned a lot.
Speaker 1: Huh interesting. Let's talk about books. What are some of
Speaker 1: your favorites and what have you been reading recently.
Speaker 2: I like nineteenth century fiction, so Anthony Twallop The Way
Speaker 2: We Live Now, which is a really wonderful book about
Speaker 2: a tycoon who is, you know, sort of a scoundrel
Speaker 2: who sells shares in a railroad company that doesn't really
Speaker 2: exist anyway.
Speaker 1: Well, if you want the railroad to exist, that'll cost
Speaker 1: you more.
Speaker 2: Yes, Right now, I'm actually reading a biography of Genghis Khan.
Speaker 1: Oh, which one Weatherford Jack Weatherford. It's I'm not sure
Speaker 1: if that's the one I read, but it's amazing.
Speaker 2: Yeah, And you know, that's a who's been kind of us.
Speaker 2: He was kind of slimed, you know, and you know,
Speaker 2: as being this terrible you know, marauder and everything, and
Speaker 2: it's it's a different story altogether. So I'm really enjoying that.
Speaker 1: Our last two questions, what sort of advice would you
Speaker 1: give to a recent college grad who was interested in
Speaker 1: a career in either investigative journalism or finance.
Speaker 2: Well, I would, of course say go with investigative reporting,
Speaker 2: because I think we need more of it in this country.
Speaker 2: I think we don't have as much as we need.
Speaker 2: We have seen newspapers hollowed out, of course, closed down.
Speaker 2: We've also seen that the costs of you know, associated
Speaker 2: with investigative reporting. It's not easy. It's not something that
Speaker 2: happens overnight. So it really is costly, and we've seen
Speaker 2: that fewer and fewer of those folks. So I would say,
Speaker 2: gung ho, if you can get a job doing that,
Speaker 2: that it is going to be the most fun that
Speaker 2: you're going to have. And also, so I'm doing a service.
Speaker 1: And what do you know about the world of investigative
Speaker 1: reporting and finance today you wish you knew back in
Speaker 1: the early eighties when you were first getting started.
Speaker 2: Well, let's see, So what's about the world of finance
Speaker 2: that I wish I knew thirty years ago? Is that
Speaker 2: it isn't as hard as you think that it isn't.
Speaker 2: You know, A lot of people come out of college
Speaker 2: if they're not a financial person, like I was a
Speaker 2: humanities major, you know, and you have this mental block
Speaker 2: about numbers. I can't do numbers, or you know, it's
Speaker 2: not that hard. It really isn't that hard. It's common sense.
Speaker 2: Now there are people who are really extra special good
Speaker 2: at it, but you know it's something that you can
Speaker 2: can tackle. Don't feel like you have a mental block
Speaker 2: against finance, and don't think that finance isn't important. Finance
Speaker 2: is not a backwater is. It touches everyone. It touches
Speaker 2: everybody in this country. It is political, it is everywhere,
Speaker 2: and so just don't discount the importance of finance.
Speaker 1: Really interesting. Thank you Gretchen for being so generous with
Speaker 1: your time. We have been speaking with Gretchen Morgensen. She
Speaker 1: is the author of These Are the Plunderers, How Private
Speaker 1: Equity Runs and RECs America. If you enjoy this conversation,
Speaker 1: well be sure and check out any of the previous
Speaker 1: five hundred we've done over the past I don't know
Speaker 1: eight years. You can find those on YouTube, iTunes, Spotify,
Speaker 1: or wherever you find your favorite podcasts. Sign up for
Speaker 1: my daily reading list at Rid Halts dot com, follow
Speaker 1: me on Twitter at Ridholt's follow all of the Bloomberg
Speaker 1: Family of podcasts at Podcasts. I would be remiss if
Speaker 1: I did not thank the crack team that helps put
Speaker 1: these conversations together each week. Sarah Livesey is my audio
Speaker 1: engineer at Tika of albrun is my project manager. Paris
Speaker 1: Walt is my producer. Sean Russo is my researcher. I'm
Speaker 1: Barry Ridholts. You've been listening to Mass in Business on
Speaker 1: Bloomberg Radio.