The Real Villain in Bankruptcies: Private Equity

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You probably noticed that venerable Hertz has joined a long parade of consumer companies filing for bankruptcy. In virtually all of these cases, the culprit is neither internet competition nor the corona pandemic, but private equity operators piling debt onto these companies in order to pay themselves massive fees and dividends.

The New York Times story on Hertz is a textbook case of how the press downplays the real story. It cites everything from the pandemic to problems with the SEC to its ill-fated acquisitions of Dollar and Thrifty to mistaken purchases of too many compact cars.

But only in paragraph 31 of a 33-paragraph piece does the patient reader learn that Hertz was purchased by three private equity companies in 2005 who paid themselves a quick billion-dollar special dividend financed by debt, and subsequently cashed out with an initial public offering. The combination of acquisition binges and private equity ownership left the company with far too much debt to withstand economic downturns.

Bloomberg had a much better account, pointing out that the culprit in the Hertz debacle was financial engineering. With the bankruptcy, super financial engineer Carl Icahn loses most of his holding, worth about $700 million at the end of 2019, and half of that at the end of the first quarter of 2020.

Meanwhile, some fine investigative reporting by the Times and the group Good Jobs First, on 20 large hospital chains sitting on more than $100 billion in cash getting $5 billion in windfall benefits from CARES Act relief, revealed that the worst offender is Providence Health System, which pays its CEO over $10 million. And, we learn, this time in paragraph 42, that Providence is itself an investor in private equity and hedge funds.

And speaking of the hedge fund/private equity hall of shame, thanks to ultra-favorable tax treatment to the tune of $650 billion in the CARES Act, some of the worst extractive-industry companies owned by some of the worst hedge fund operators make out like bandits. Marathon, a target of demands by vulture capitalist Paul Singer’s Elliott Management, got a tax break worth $1.9 billion.

Once again, Elizabeth Warren has a plan. Her proposed Stop Wall Street Looting Act would end the loopholes in securities laws and favorable tax treatment for debt that keep these predators in business. (You can understand why she’s such a favorite for VP with the corporate wing of Team Biden.)

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