How private equity conquered America | The Chris Hedges Report

The US economy is being held hostage by a small  cohort of financiers who run private equity firms. Apollo, Blackstone, the Carlyle Group, Kohlberg,  Kravis, Roberts; These equity firms buy up and plunder businesses, piling on debt, refusing  to reinvest, slashing staff, and often driving companies into bankruptcy. The object is not to  sustain businesses but to harvest them for assets to make a short-term profit.

Those who run these  firms such as Leon Black, Henry Kravis, Stephen Schwarzman, and David Rubenstein have amassed  personal fortunes in the billions of dollars. The wreckage they orchestrate is taken out  on workers who lose jobs, see salaries and benefits slashed, are taken out on pension  funds that are depleted because of usurious fees or are abolished. And on our health and  safety, residents of nursing homes, for example, owned by private equity firms, experience  10% more deaths because of staffing shortages and reduced compliance with standards of care.

Private equity owns hospitals and has created a health crisis. Nursing shortages have contributed  to one of every four unexpected hospital deaths or injuries caused by errors. The private equity  firms do not serve patients but profits.

They have closed hospitals, especially in rural  America, and they cut back on stockpiles of vital medical devices including ventilators  and personal protective equipment. In 1975, the US had about 1. 5 million hospital beds and  a population of about 216 million people.

Now, with a population of over 330 million people,  we have around 925,000 beds. 56% of Americans have medical debt, even though many have  insurance, and 23% owe $10,000 or more. Emergency room visits and emergency rooms, often  run by private equity firms, contributed to medical debt for 44% of Americans.

At the same  time, the healthcare system -- Because of this slash and burn assault -- Was unprepared to handle  the COVID epidemic, seeing 330,000 Americans die during the pandemic because they could not afford  to go to a doctor on time. These private equity firms, like an invasive species, are ubiquitous.  They have acquired educational institutions, utility companies, and retail chains, while  bleeding taxpayers of hundreds of billions in subsidies made possible by bought-and-paid-for  prosecutors, politicians, and regulators.

Joining me to discuss private equity firms and  their assault on the economy is the Pulitzer Prize-winning journalist, Gretchen Morgenson,  who -- Along with Joshua Rosner -- Wrote, These are the Plunderers: How Private Equity  Runs and Wrecks America. Let's begin with what they are. They've just rebranded  themselves, but I'll let you start.

Well, Chris, these are the old takeover titans  that we started to learn about in the '80s, RJR Nabisco was the big deal that focused  everyone's attention on them. They just rebranded themselves into something called  private equity. A little bit more genteel, sounds like it might be fair -- equity being that  word.

So these are those corporate raiders that were fearsome, and Congress, at that time, was  concerned about what they were going to do to the economy. Congress lost interest and went on to  the next thing, and they did then go on to -- Over the next few decades -- Pillage the economy  and workers and pensions, as you pointed out. Explain how they work.

Because it's all about  debt. And what's interesting from your book, is they don't put very much money in. But  I'll let you explain the mechanics of it.

Okay. These firms, first of all, they raise money  for their buyouts. They don't use a lot of their own money for those buyouts.

What they do is they  go to public pensions, they go to endowments, they go to the big institutional investors and  say, we're putting together a fund, we're going to buy-out companies, we're going to make them  more efficient, and then we're going to sell them in 5-7 years at a profit, and you will be able  to reap those gains along with us. But yes, the private equity titans do not put a lot of their  own money at stake here. 1%-2% of these funds are typically the private equity firm's money.

So  after they have raised the money, they go out and look for companies to buy, and they home-in  on companies that have assets they can strip. These are often physical  assets that they can sell. Physical assets like real estate.

Now, you  pointed out that they've taken over a lot of retailers. When that was going on, often they  would be buying retailers that had either very, very favorable leases or had land underneath their  stores that they could then sell at a profit, stripping the company. It's not about operating  the company, as you say, it's about stripping the assets, extracting the money that they  can from it.

It's an extraction business. So they buy a company, they then find out how they  can make it more efficient, which means, usually, firing many people, stripping the assets, selling  them off, and sometimes they sell the assets and they get all their money back -- Initially, very,  very early on in the process -- And what's left is a carcass. What's left is a company that has now  got an enormous amount of debt piled on top of it.

These transactions are funded by debt, but it's  not the private equity firm that takes on the debt, it's the company they're buying. So if they  buy a retailer, they'll put a load of debt on that retailer. Suddenly that retailer has way higher  costs of operating, which means that then they have to cut costs elsewhere: fire people, deplete  pensions.

It's a game where a very narrow slice of people win and a huge circle of pain of losers  is involved. Everybody else is on the losing end. Well, because it's about short-term profit.

You  have an example in the book about a nursing home system -- This was an amazing story. What they  did is they sold the physical buildings that had the nursing homes, and then suddenly these  nursing homes had to rent, I think it was $40,000 or something more a month. I'll let you explain.

So they're not just loading it up with debt but also carrying out policies that physically  destroy corporations or businesses that before they arrive -- You have the story  of Samsonite, we'll talk about the steel mill you write about -- That we're healthy. Absolutely. So the nursing home company that you were talking about, Manor Care, it was very  well run.

The reason that the acquisition was made -- And this was Carlyle Group, which  is one of the top private equity firms -- Let me interrupt because as you point  out in the book, like James Baker, they pull in heavyweight political figures  once they're out of office to run these groups. Unlike the other firms which are located in  New York and are the Wall Street type folks, Carlyle is based in Washington and it's  much more politically astute and there's a revolving door with government officials;  Very high-powered government officials. Anyway, they bought Manor Care.

It was a very well  established, well-run, national nursing home company. They immediately sold the land under the  nursing homes and made the nursing homes pay rent. They took out the equivalent of what they had  put into the company.

They received that when they sold the land. So they were free and clear.  Everything after that became gravy for them, so they weren't concerned about the profits; They  were already in the money, as they say.

But the nursing homes suddenly had to pay exorbitant rents  and that meant that something else had to give. Ultimately, what ended up happening was an  enormous Medicare fraud that was designed to overcharge Medicare for services to these  residents, and the stories are absolutely gut-wrenching. There were some whistleblowers who  came forward talking about what they were seeing and the DOJ took the case, but then blew the case. 

But some of the tales that these whistleblowers told about forcing aged, frail, ill residents to  go through an incredible rehabilitation that they didn't need, in order to bill Medicare  for these processes, it was shocking. You write about the ER. What are they called? 

Surprise bills? I can't remember the term you use. They will hospitalize people who don't need  it.

It's all about money. And then the care is substandard because the staffing is cut. That's right.

That's right. So ultimately, Manor Care was driven into bankruptcy by the  people that bought it, but they didn't lose because they had done this transaction to buy  the land underneath all of the nursing homes. You call these private equity firms -- These  are your words -- "Money-spinning machines.

" Before we go into specifics, talk about it.  Because the amounts are staggering. Maybe we can talk about the charming, is it Leon  Black?

These people are bringing in these figures -- Billions upon billions of dollars.  Talk about the amount of money they're generating. The net worths of the people running these  companies are in the tens of billions.

In the COVID years, Steve Schwarzman. . .

He is the head  of Blackstone. His net worth doubled during COVID, I think it went up to something like $35 billion  or something. Anyway, these companies extract enormous fees for their operation.

They extract  fees from the pension funds that invest with them. I want to interrupt you. The deal is they get  the pension funds to invest because supposedly the pension funds will make a profit.

But then  as you write in the book, they force the pension funds to pay them management fees. You have cases  in the book where they're not even doing anything, but if I remember, they're pulling like 10%,  a lot of money. And these pension funds, in the end, don't actually make a profit.

Many times they don't, sometimes they do. The rule of thumb is called "2 and 20. " So  they'll get 2% of the assets under management as a management fee every year, and then 20% of the  gains that they make.

So this has translated into a billionaire-making machine for these guys that  run these firms. And yes, it's staggering when you pull back the curtain on some of their practices. One of them that's really outrageous is when they buy a company, they will often install people  on the board of the company to watch over it to make sure that they're going in the right  direction.

For them anyway, not for the company, necessarily. And they will charge them fees  over a period of time for their management expertise. These fees are generally contracted  on a 10-year life, but many of these deals they end up selling between 5-7years.

That's the goal, as you pointed out, the short-term nature of this. But the company  has to pay for the full 10 years of the fees that the private equity firm is charging them.  And that's money for doing nothing.

That's just one of the tricks of the trade that they do  to generate billions of dollars for themselves while they're impoverishing so many other people. You write that they operate in secrecy with hidden ties to companies they control. The wreckage they  leave behind is often difficult to track back to its origins.

And I want to raise another point  that you do in the book and I thought it was important: Many Americans who are being assaulted  this way, they know something's wrong, but they don't quite know what is wrong. It's tied to this,  almost invisible, hand. Explain that.

And then I want you to talk about their political clout  because it's significant. They get the tax breaks, they corrupt the system enough to essentially  grease the skids for them to continue to operate. Absolutely.

Absolutely. So the secrecy  is important. One of the reasons that we wanted to write this book is to let people  know how pervasive this business model is.

Well, you write at one point that all of us,  although we don't know it, are engaging with private equity firms. So talk about how extensive  it is and then talk about that secrecy too. I write in the book, the coffee and donut that you  pick up on the way to work, the child care entity where you drop your son or daughter off, the  nursing home where your mother or father lives, it is cradle to grave.

You're impacted by private  equity but you don't know it because these are companies that are buying and selling, but you  don't know who the real owner is behind the scenes. And they like it that way, they want  to keep it that way because they operate best in secrecy. They're private companies.

They  don't have to make filings to the Securities and Exchange Commission so a lot of their  business and a lot of their practices are hidden from view, and that is by design. One of the things that could improve our perception or educate people about how pervasive  private equity has become is to force these firms to identify themselves as the owners; So it should  be the Carlyle nursing home or the Blackstone donut shop or whatever. Just so you are aware of  who you are dealing with and whose pocket you're putting your money into.

Now, the secrecy is one  thing, the political clout is immense. They have so much money, their tax treatment is an outrage,  and many presidents have tried to change it, but have not been able to do so. Explain the tax part.

Their fortunes are enhanced by the fact that  they pay a fraction of what you and I pay on our incomes every year because it's called carried  interest; It's not considered ordinary income. The ordinary income tax rate is what, up to 35%?  What these people pay is around 21% on the income that they receive from their operations.

That's  something that's been in the books for decades but it has created a skewed system where they make  fortunes, billions of dollars. The government loses because they're not generating the tax  revenues that they should on those billions. It's nuts.

Now, the last time someone tried to  change this, Kyrsten Sinema was a holdout, the -- Because it was good for the people of Arizona. -- Lawmaker from Arizona. She received $1.

5 million from the private equity world to stand  up and say no, and she scotched it. So getting them to pay their fair share of taxes would  be a good thing. It would help the government, it would generate more income, and it would  take away this unfair aspect of their business.

You write, "Routinely lionized in the financial  press for their dealmaking and lauded for their 'charitable' giving, these unbridled capitalists  have mounted expensive lobbying campaigns to ensure continued enrichment from favorable tax  laws. Hefty donations have won them positions of power on museum boards and think tanks. They've  published books on leadership extolling 'the importance of humility and humanity' at the  top, while eviscerating those at the bottom.

Their companies arrange for them to avoid  paying taxes on the billions in gains that their stockholdings generate. And, of course,  they rarely mention that the companies they own are among the largest beneficiaries of  government investments in highways, railroads, and primary education, reaping massive perks from  subsidies and tax policies that allow them to pay substantially lower rates on their earnings. These men are America's modern-age robber barons.

But unlike many of their predecessors in  the 19th century, who amassed stupefying riches by extracting a young nation's natural resources,  today's barons mine their wealth from the poor and middle class through complex financial dealings. " These people not just control politicians, but they serve in government. You have several  examples of that.

So explain a little bit about how they dominate the political system. Jay Powell, our head of the Federal Reserve Board, was a Carlyle executive. They're everywhere. 

Again, it's this pervasiveness. But even if they're not on the job, say, in the government,  they are behind the scenes absolutely manipulating outcomes so that their businesses will benefit.  They're so powerful and so wealthy.

And you know, Chris, better than anybody, how money  is so central, unfortunately, to how our government works. You have not had enough  attention to this wealth grab by these people. The one thing we did have, the activity, the  practices were so outrageous that it got Congress to act, and that was on the surprise medical bills  that you mentioned a bit ago.

This was a creation, the brainchild of a company called Envision,  which is owned by KKR. And what Envision did was it went into emergency departments and  started running many of those emergency departments in a hospital. It wouldn't own the  hospital, but it ran the emergency departments.

And Envision decided that what they could do  is they could make the emergency department be a separate entity outside of the insurance  coverage that the hospital's patients would normally have. So you're in your town,  you go to the emergency department, you've broken your arm or whatever, your  insurance -- Which covers your normal hospital stay or treatment -- You naturally assume it's  going to cover your emergency department bill. Well, Envision carved themselves out of that  so that you would have to pay more.

And this was something that was so crazy and impossible  to think that it could happen, that Congress did something about it and changed and curbed  the practice. They didn't eliminate them, but they curbed it. And guess what?

Envision  went bankrupt after that because its business model required them . . .

Its business  model was based on ripping people off. I want to talk about several cases, including  that heartbreaking case of the girl and woman who needs constant medical care,  but people have to get the book. Let's talk about, in detail, Noranda Aluminum.

Noranda was a company that had a very profitable, very, very well-located aluminum smelter  on the banks of the Mississippi River in the Bootheel region of Missouri. Not a wealthy  part of the country, but this was a company, this was a smelter aluminum production that had  2,500 jobs. Well-paying jobs, good benefits, healthcare, and the company had been there for  many, many years.

And this was a well-established smelter doing a tremendous business on the  Mississippi. They could deliver their aluminum all up and down the country. Great company. 

Apollo comes in and buys it. And they promise -- Let me interrupt you. -- Yes.

When a private equity firm like Apollo comes  in to buy it it's not always the case that the company's looking to sell. Is that correct? Well, the company has to be willing to sell.

But aren't they able to pressure companies  to sell against their will or not? Well, it depends. Usually it's about money. 

So if it's a public company that has publicly traded shares and the shareholders are the  ones who will then make the decision about whether the acquisition is made, generally  what happens is that the shareholders say, great, I'm going to get a windfall. I'm going  to get whatever premium to whatever the stock price was trading at when the acquirer  comes in and says, I'll pay you $10 more a share. Generally speaking, the shareholders  say, yay.

Let's do it. Let's do the deal. When it's a private company, you're then talking  about persuading whomever owns it that they are better off taking the money and running.

But  it's almost always a premium they're paying and that gets people's attention and the owners  or the shareholders say yes. So Apollo comes in, they buy the smelter, they promise that they're  going to do right by the 2,500 families whose workers are there, and they immediately load  it up with debt. This was a company that did not have a lot of debt, so it didn't have enormous  interest costs.

It didn't have to pay those costs. I want to ask, when they load it up with debt, did  they say, okay, these are our assets and put the assets. .

. That's how they can get the debt because  they're putting the assets up as collateral? Correct.

So the asset is this smelter  and this huge infrastructure. And they also had a very low cost of electricity. Just to interrupt again, is that debt used to pay for the acquisition?

Yes. Yes. The debt is used to pay for the acquisition, but it again allows the  private equity firm to take the money out.

They're loading the debt onto the company itself, not  onto the private equity firm. So the company is the one that now has to struggle with the debt  costs, the increased interest expense that's associated with the debt. So Noranda, they load  it up with debt.

Almost immediately Apollo gets its money out. All of its money out. Which it wasn't that much.

Wasn't that much. Maybe like six months  or something like that. They were able to extract all their money by putting the debt  on the company.

So now Noranda is struggling under this debt load. Apollo then raises more  debt, they ultimately make three times their money on the Noranda purchase. Meanwhile, the  company starts to struggle.

Not surprisingly. It goes under because it  has to service the debt now. It starts to struggle because it has to  service the debt.

So then Apollo says, wow, this is a problem. We need to negotiate with  the state of Missouri's utility commission to lower our electricity costs or otherwise, we're  going to leave. We're going to sell the company, take it somewhere else or something.

So  they negotiate with the utility commission a lower rate, even though it means that the other  ratepayers in Missouri have to pick up the slack, have to cover that difference. Apollo gets the lower rate, it then starts to fire people because it can't  make ends meet. The company is struggling again, the debt is too high, there may have been an  economic downturn.

Aluminum wasn't quite as in demand but it was the debt that was causing the  problems. The company ultimately goes bankrupt, but Apollo has made three times its money. So  people are thrown out of work.

They savaged three different pensions. The Pension Benefit  Guarantee Corporation had to come in and bail out three Noranda pensions because of the bankruptcy. They had ratepayers paying more across the state.

Noranda was the biggest taxpayer in this  small town in Missouri all of a sudden, the tax base crumbled, and the school teachers  had to pay their own healthcare costs. What Noranda owed for the school payments, for its  taxes, was not paid because they went bankrupt. So this was a perfect example of the circle of  pain that these people create when they make all of the money for themselves.

Three times  their investment but they harmed rate payers, they harmed school teachers and school  children, they harmed workers, and they harmed pensioners. That's what we're talking about. You write, "To outsiders, the buyout firms appeared to be fierce rivals competing  assiduously to beat each other out for the companies they hope to acquire.

In reality,  the firms were cozy collaborators, members of a club that meant richer profits for them and fewer  for everyday investors. " Explain how that works. This was an amazing case.

It was brought by  shareholders or maybe debt holders; I think it was shareholders. But anyway, they turned up  some amazing documents in the discovery where they had emails between these big powerful firms that  everyone thought were competing to buy companies, KKR, et cetera. The emails showed them to be very  chummy.

They would say, oh, well, we'll stand back on this deal. We won't do this deal. We'll let  you take this deal.

You give us the next one. So it became clear when you have this kind of  acquisition, if you have more bidders -- If you have two bidders, three bidders, five bidders --  The people who own the company that are selling it are going to get a better price because those  bidders are going to bid up the price of the company. If you only have one bidder, they're  not competing with anyone else and they're not going to be raising the cost of the acquisition. 

So what happened was the shareholders ended up getting less because the other firms had decided  not to compete and not to bid up the price. It was collusion that people had not  understood was happening on a regular basis, and it was shocking. They ended up paying a lot  of money to settle the case.

But it was a real eye-opener about how they are working together to  make sure that they don't have to pay too high a price and that there won't be tough competition. Isn't that illegal? Sorry to be so naive.

DOJ didn't think so. Oh, really? Did not bring a case.

Okay. I want to talk about utilities. I wrote a book called America the Farewell Tour,  it opens in Scranton, Pennsylvania, which had declared bankruptcy, and they were stripping city  parking, sewers, and anything they could sell off, which made things worse.

It was a temporary fix  but rates skyrocketed. You write about Bayonne; Talk about how they're cannibalizing basic  services that were once managed by cities, communities, and the government. You remember the idea that took hold in the '80s about privatization; That the government  doesn't know how to run anything and we should privatize all of these organizations and services. 

The private sector knows what they're doing and they're going to do a better job -- We know  that that's not the case, but in any case, these private equity firms do understand that there  is money to be made buying into these kinds of utilities that are necessities. We are not talking  about frivolous items, we're talking about water. So Bayonne, New Jersey, like many cities in the  Northeast, had a decrepit water system.

Pipes were bursting that needed help. Along comes KKR  and they say, we'll help you out. We'll buy this, we'll give the money to you that you need to  refurbish.

Let's make that happen. They did the deal, you can well imagine that the people  on the KKR side of the table were pretty shrewd operators, and the people on the water utility  side of the table were probably not as shrewd. What ended up happening was that for the people  of Bayonne, New Jersey, which is a working class town, not a wealthy town, their water rates  skyrocketed.

And again, it was a situation where this very small group of financiers  wind up winning, gaining enormous amounts, and everyone else winds up paying the freight. When you wrote 'skyrocketed'. .

. A 2021 report by the Association of Environmental Authorities,  a public utility nonprofit, said "The average annual bill for privately-owned water systems in  the US was 60% higher than that of publicly-owned systems. And in privatized arrangements,  low-income households spent 1.

55% more of their income on water. " So these rate hikes are  staggering. They're very, very high and crippling.

Crippling. Crippling. And it's  not like you can say, okay, well, let's not drink any water today.

Let's not  use water to cook our food, wash our clothes, or do our dishes. It's not a frivolous item. Let's talk about the social cost.

We've talked in a microcosm, but what's it doing to the  national economy? How is it affecting us globally? The first thing, and the most important  30,000 foot view, is it expands the wealth gap in this country, it blows that out. 

So people who are in the lower echelon, the disparity between the rich and poor in this  country, it is not healthy. It's unsustainable. Is it unsustainable because in essence,  they're cannibalizing everything?

Well, it is unsustainable because you can't keep  extracting money from the middle class and poor people to become billionaires; That's a recipe for  disaster. Capitalism is supposed to, in theory, benefit a wide array of people. It's supposed to  provide prosperity for people to enhance their economic situation.

Have a good job. Be able to -- But when it's regulated. -- When it's regulated, right.

When it's not regulated. . .

You have a term in the book, "a-hole capitalism. " Right. Right.

Me, me, me. Right? I, me, mine, capitalism.

Where I don't care about everyone  else. It's all about what I want and what I can get for myself. So it's the wealth gap in  this country that has blown out and I believe these entities are contributing mightily  to that.

Then, when you get lower down, that's the 30,000-foot view. When you  get lower down, you have these situations where people are personally affected by this. Whether it's because the tax base in their town disappears because a company goes bankrupt -- That  means the taxpayers have to make up the difference -- Whether you're talking about a nursing home  where people die more frequently, wWhether you're talking about pensions that are depleted because  of this, meaning your retirement is going to be less prosperous than you had hoped it would be;  These are the stories that you don't hear about Chris, and that's why this is important to know.

All the business press lionizing these people and talking about their deals and how  they're this billion and that billion, you never hear about the people on the other side  of the transaction. And that's wrong because there are people on the other side of the transaction  and their stories and their voices are important. Well, that's been the great failing.

The  failing of the presses, that we're not telling those stories. Reading your book and  seeing that line that you have in the book about how people know something is wrong,  but they don't know what exactly is wrong, I read that as a huge factor in the rise of a  figure like Trump. I don't know how you feel.

Yes, I agree 100%. They don't understand finance.  And yes, the financiers make it complex for a reason.

They hide behind the complexity. They hide  behind the secrecy. They hide behind the fact that you don't know that they own the companies.

I'm  not blaming people for not understanding it, not knowing what the problem is, because it is  hidden from view and they do that on purpose. But it is pernicious and it is impacting  people. It's causing job losses, it's causing reduced pensions, it's causing increased costs for  taxpayers, which all contribute to this sense of unease about my future.

Am I going to have enough  money to retire? Am I going to have enough money to send my child to college? There's an unease  going on that these people are contributing to.

You make a point in the book with the surprise  bills from the emergency room. The average, if I remember it, was about $600 or something. Well,  since they don't know these bills are coming, these families living on the edge are completely  wiped out.

This has catastrophic effects and these predatory practices are bleeding, especially with  the working, poor, and the lower working class, which you make very clear in the book. And that has political consequences when it's not addressed. And it's largely not addressed  because under our system of legalized bribery, in essence, these people own the political class. 

Not only own the political class but -- Especially during the Trump administration -- A lot of these  private equity people were in the administration. Steve Schwarzman was at Trump's  right hand in many photographs. He was his business advisor.

Financial expert. One crook advising another. Great.

All right, thanks. That was Pulitzer Prize-winning  journalist, Gretchen Morgenson, author of These Are The Plunderers: How  Private Equity Runs and Wrecks America. I want to thank The Real News Network and  its production team, Cameron Granadino, Adam Coley, David Hebden, and Kayla Rivara. 

You can find me at chrishedges. substack. com.