Unsanitized: Private Equity Gets Its Bailout After All

Plus, a protest update, and the incredible shrinking Fed relief. This is The COVID-19 Daily Report for June 4, 2020.

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First Response

A couple weeks ago, the sentiment was that policymakers were holding firm against the entreaties of private equity firms to get bailouts on their risky undertakings. I even got caught up in this to an extent, pointing out that private equity portfolios are bloated and overpriced, meaning losses will mount, potentially preventing the industry from reaching the promised land, where they can scoop up sick businesses for a song and extract value.

It’s true that buyouts of, for example, physician staffing firms like Envision and TeamHealth look pretty bad right now, particularly with ER visits down as everyone fears catching the virus at the hospital. The nursing home disaster also looks poorly on private equity, which has bulked up purchases in the sector in recent years. In fact, the entire healthcare play looked like a real problem for private equity.

But I should have known better than to even consider betting against the most connected financiers in the country. They will get their bailout one way or another. And we’re starting to see it take shape.

Read all of our Unsanitized reports

While the front door of Federal Reserve and small business loan bailout programs have been somewhat unavailable to PE firms, the back door, operated by the Department of Health and Human Services, has welcomed the industry. Companies like EmCare, a division of Envision, have been getting interest-free loans from HHS. Overall, about $1.5 billion in loans have gone to portfolio companies of large private equity firms. Apollo Global Management’s healthcare-related firms got $500 million, and Cerberus Capital Management’s Steward Health Care got another $400 million.

Steward, which previously held up the state of Pennsylvania for a bailout to keep open a hospital in Easton, has now sold off that hospital, pocketing the proceeds. Some other restructuring made Steward a “physician-owned” health care system, with Cerberus selling out after 10 years. If private equity can exit its most controversial deals intact, it can plow those funds into cheap purchases and re-start the system over.

Meanwhile, perhaps the biggest rescue of them all came on Wednesday, when the Labor Department announced that 401(k) plans could invest in private equity firms. This pries open a multi-trillion-dollar market of investment funds and could be worth as much as $400 billion to the industry. Lobbyists have been priming for this for years. There was definitely something of a shock doctrine effect here, with DoL saying that private equity’s entry into retirement savings was needed to “remove barriers” to economic recovery.

What we have here is working people’s retirement money now being put to use to squeeze workers, leak money out of companies to the investor class, and harm businesses. It was bad enough when public pension funds were willingly eating their seed corn in this fashion, to bring ordinary retirement plans in as well is unconscionable.

The idea that you would keep private equity out of the makeshift Fort Knox created by the pandemic was always unrealistic. Where there’s money, there’s private equity.

Protest Update

As demonstrations continue, finally civil liberties groups are questioning the constitutionality of curfews, which were initially just accepted. Los Angeles sheriff Alex Villanueva said yesterday the curfews will continue “until organized protests end,” which is crazy: a protected activity shouldn’t be the cause of a large restriction on movement. The ACLU filed suit against Los Angeles and San Bernardino yesterday, and they’re making some headway, with one L.A. County Supervisor acknowledging that the only function of the curfews now is arresting peaceful protesters.

Meanwhile, the violence continues to come from the police force side. Hey, at least we’re seeing where all our money is going: to nightsticks and rubber bullet guns and flash grenades. Twice as much spent on “law and order” as on social welfare, per one report. Los Angeles has offered what amounts to a 5 percent cut to the policing budget, and I do think that may be just the beginning.

Who Gets Fed

My friend, economist Dean Baker, offered a critique of my story about the Federal Reserve bailout that I don’t really think is a critique at all. After all, we completely agree. He says that this time around, the large corporations getting relief weren’t responsible for the economic crash. I said that explicitly in my story. He says that it would have been nice to place conditions on the bailout to ensure workers were let in on it, but Congress didn’t include them. I also said that explicitly; this was a problem of Congress. (Although the Fed did have conditions on the direct corporate bond-buying program, and then it changed the term sheet amid lobbying pressure, so they have at least some culpability here.) He says that this was a bailout of investors and there are distributional consequences to that, and that Congress should have made sure that everyone got the same type of help. That was the entire point of my story.

What’s become interesting is that the Fed’s rescue of the investor class has become even more localized. You’ll recall that there are two corporate bond programs: a primary market program for direct purchases of debt from corporations, and a secondary market program of exchange-traded funds (ETFs) tied to corporate debt. So far the Fed’s only used the secondary market program.

Part of this is that the Fed did so well opening the markets that companies can tap those and don’t want the stigma of going direct. In addition, if the Fed is pressured to change back the term sheet to place conditions on the purchases, it’s safer to get indirect relief. And of course, the asset management firm managing the bailout, BlackRock, sells ETFs, and is happy to continue buying its own.

In addition to the primary market corporate facility being effectively inert, the so-called “Main Street” lending program for mid-sized firms (up to 15,000 employees) hasn’t gotten out of the gates either. Eligible businesses are complaining that the interest rates are too high, and as it’s been two months since launch, some companies couldn’t wait around for it. Banks, who the program is run through, don’t want to take on any of the risk, either, frustrating the subset of firms who do want the loans.

The Fed did expand its municipal lending program yesterday, and Illinois is planning to use it. But in the corporate context, if mid-sized businesses aren’t the beneficiaries, and big businesses are staying out of it directly, then the Fed really did back into a bondholder bailout. The distributional consequences of that are even worse, especially as the small business program “fix” Congress advanced yesterday doesn’t add one additional dollar for what was envisioned as eight weeks of bridge funding (it’s been more than eight weeks, and the economy isn’t snapping back).

The stock market/real economy disconnect, in other words, grows even larger, with even civil unrest unable to stop the party on Wall Street. But real economy problems, like the coming collapse of commercial real estate, aren’t going away, and eventually, those will become financial market problems.

Today I Learned

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