Why Private Equity Is Cutting Doctor Pay and Organizing Our Pandemic Response
America's Central Planners, Part One: The New Crop of Dollar-A-Year Men
Matt Stoller
The way to understand the response to the pandemic to recognize that America has been transformed, temporarily, into a planned economy. A planned economy requires central planners directing resources. So who are they and how do they operate? Today I’m going to write about one group of central planners, the fusion of government and the financial sector in the network of funds we call private equity. It’s a notable set of actors making important political decisions under-the-radar as we speak. For instance, private equity funds are making the meaningful political decision to cut doctor pay for those on the front lines of the epidemic, which is a serious public policy choice.
Why? How has our political system come to the point where it becomes ‘rational’ to harm those savings lives in a pandemic?
That’s what I’m going to cover today.
Jared Kushner’s Dollar-a-Year Men
A few days ago, Adam Cancryn and Dan Diamond at Politico published a fascinating story about Jared Kushner’s role in the pandemic response. Kushner is basically running a shadow coordinating unit from the White House, pushing the top civil servants out of the way and cutting deals with private industry to try and organize an aggressive response. It wasn’t just Kushner’s influence that caught my eye, but the network Kushner has pulled around himself to run the response. This network includes Dave Caluori, a partner at private equity fund Welsh Carson Anderson & Stowe, and Andy Slavitt, a former Obama administration official who is now at Town Hall partners. Caluori, according to Politico, is “voluntarily aiding the effort with the help of a couple other Welsh Carson associates.” Meanwhile, Slavitt, though an aggressive media presence, portrays himself as an unofficial coordinator of the national response, regularly updating his audience on the plans of various Governors, Senators, hospital and medical executives to source ventilators or treat patients.
We are in an emergency, and many people draw an analogy to world war mobilization. Both Caluori and Slavitt harken back to a particularly corrupt practice in those eras, what was known as the use of ‘Dollar-a-Year Men.’ This nickname was given to business executives, often from automobile or industrial corporations, employed by government during world wars to facilitate wartime production. Dollar-a-Year men took no salary from government and continued to draw salary from private industry. Despite what seemed to be a charity, the set-up proved enormously controversial. While some Congressmen believed these men offered patriotic service, that was not the general belief. Senator Harry Truman, who oversaw a groundbreaking investigative committee over war profiteering, felt that these men, no matter how well-meaning, should be given no voice over policy, as they were “unable to divorce themselves from their subconscious gravitation to their own industries.”
Unlike the world war buildups, Kushner’s “Dollar-a-Year” men are not a peripheral minor part of the government bureaucracies otherwise run by capable public servants, but central to it. We know have a government where a good chunk of policy is organized directly by private equity executives. Even so, discussion of the role of these men mimic in some ways the debate during the world wars (though this build-up is obviously far more corrupt and incompetent than that during either one of those two wars). Government officials are angry at the managerial chaos induced by Kushner’s network, calling the Kushner group a ‘frat party’. Ethics experts disdain their use of private emails and FreeConferenceCall.com, as evading public records requirements. And of course there is always the potential for self-dealing. Yet there are some who see value, like New York Governor Andrew Cuomo, who lavished praise on Kushner for being “extraordinarily helpful.”
At any rate, you go into a pandemic with the leaders you have, not the leaders you’d like. And one of our key leaders, like it or not, is to be Jared Kushner and his network of private equity executives. These are people who are not shy about rapidly deploying capital, for better or worse.
What is Private Equity?
I wrote up a description of private equity in July, when Elizabeth Warren came out with a plan to reform the sector. I described a private equity fund as “a large unregulated pool of money run by financiers who use that money to invest in, lend to, and/or buy companies and restructure them.” That’s a formal definition, but it’s also a highly ideological social movement that comes out of the modest conglomerate craze of the 1960s and then was transformed by the junk bond mania of the 1980s. Private equity proponents believe that they are removing sloth and waste out of the corporate sector, bringing innovation and productivity to American industry. It is of course a nonsense claim on the merits. Private equity is in fact “a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy,” yet one more rhetorical cover for aristocracy in the long arc of human history.
There are roughly four thousand private equity funds that control about $5 trillion worth of corporations, which is a sixth of the total value of all public companies. The industry has exploded since 2000; today, the number of private equity owned firms outnumbers the number of public companies, and private equity is more significant as a source of financing than initial public offerings in the stock market.
Both Democratic leaders and Donald Trump are close to private equity barons; in many ways, even before the pandemic, private equity executives have been our real government, choosing where to deploy capital and how corporations are valued and structured. Private equity is one of the more important social forces across the West, a style of business that has been structuring our politics and our commerce since it was super-charged by men like Michael Milken and William Simon the early 1980s.
The goal of private equity isn’t usually to find businesses who need capital to produce better products and services, but to exploit unused pricing power. Sometimes this means taking control of a business that can charge more to customers, but it can also be pricing power used against the taxpayer, workers, investors, or the nation itself. Robert Smith of Vista Equity Partners, for instance, has made billions by buying up mid-level software corporations in niche industries (like Yoga studio software) and raising prices on the small businesses who depend on it. Private equity funds were behind the offshoring craze in the mid-2000s, selling key manufacturing capacity to China. Sycamore Partners, another private equity firm, bought Staples, and then immediately took out a billion dollar special dividend.
Why Is Private Equity Unusually Vicious?
The reason private equity can exploit corporate assets with such ruthlessness is because of its legal structure. Private equity buys companies, but puts very little of their own money in deals. PE takes in money from investors, usually insurance or pensions, and invest it. When they buy a company, they will use some of this money, but they often borrow more money to finance the takeover. Then they restructure the portfolio company, pull out dividends if they can, and sell it. PE executives get paid handsomely if the fund makes money, usually a cut of the upside. But those executives do not lose their own capital if they take a loss. That means there’s an incentive to load up with risk, because PE funds are playing with other peoples’ money.
Moreover, when a private equity fund invests, it’s not like a mutual fund or hedge fund; PE usually buys control of a corporation and puts it in its portfolio. PE is exactly like a conglomerate, except somehow the portfolio company isn’t considered a subsidiary. As a result, PE firms don’t have any liability for their portfolio firms. If a portfolio firm goes bankrupt after moving a bunch of money to its private equity owners, those ‘owners’ have no liability and don’t have to give the money back. Often PE funds have consulting side units, and charge large amounts to their portfolio companies, purely as a means to transfer money from the corporation to the PE fund. It is control without responsibility, the ultimate incentive to behave without any concern for damage one might cause. Unsurprisingly, PE-owned firms are ten times more likely to go bankrupt.
PE executives are also socially distant from the subsidiaries they control and don’t pay a price if those subsidiaries go bankruptcy or harm people. They don’t live in the communities they affect, and most people don’t even know private equity billionaires exist even as they make key social decisions over their lives. This is intentional; one private equity billionaire, Steve Feinberg of Cerberus Capital, reportedly said, "If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it." Investors seek out those PE funds with the highest returns, amplifying the competitive dynamic. As a result, the industry brings out the most ruthless actors in society, those who are politically connected, voraciously greedy, and able to use public relations to remain discrete.
Cerberus, for instance, has on staff former Vice President Dan Quayle and Treasury Secretary John Snow. Feinberg himself heads Trump’s Intelligence Advisory Board. Feinberg got his start under Michael Milken at Drexel, an investment bank whose culture was based on ripping the throat out of the other side of the trade, no matter what.
America's Central Planners, Part One: The New Crop of Dollar-A-Year Men
Matt Stoller
The way to understand the response to the pandemic to recognize that America has been transformed, temporarily, into a planned economy. A planned economy requires central planners directing resources. So who are they and how do they operate? Today I’m going to write about one group of central planners, the fusion of government and the financial sector in the network of funds we call private equity. It’s a notable set of actors making important political decisions under-the-radar as we speak. For instance, private equity funds are making the meaningful political decision to cut doctor pay for those on the front lines of the epidemic, which is a serious public policy choice.
Why? How has our political system come to the point where it becomes ‘rational’ to harm those savings lives in a pandemic?
That’s what I’m going to cover today.
Jared Kushner’s Dollar-a-Year Men
A few days ago, Adam Cancryn and Dan Diamond at Politico published a fascinating story about Jared Kushner’s role in the pandemic response. Kushner is basically running a shadow coordinating unit from the White House, pushing the top civil servants out of the way and cutting deals with private industry to try and organize an aggressive response. It wasn’t just Kushner’s influence that caught my eye, but the network Kushner has pulled around himself to run the response. This network includes Dave Caluori, a partner at private equity fund Welsh Carson Anderson & Stowe, and Andy Slavitt, a former Obama administration official who is now at Town Hall partners. Caluori, according to Politico, is “voluntarily aiding the effort with the help of a couple other Welsh Carson associates.” Meanwhile, Slavitt, though an aggressive media presence, portrays himself as an unofficial coordinator of the national response, regularly updating his audience on the plans of various Governors, Senators, hospital and medical executives to source ventilators or treat patients.
We are in an emergency, and many people draw an analogy to world war mobilization. Both Caluori and Slavitt harken back to a particularly corrupt practice in those eras, what was known as the use of ‘Dollar-a-Year Men.’ This nickname was given to business executives, often from automobile or industrial corporations, employed by government during world wars to facilitate wartime production. Dollar-a-Year men took no salary from government and continued to draw salary from private industry. Despite what seemed to be a charity, the set-up proved enormously controversial. While some Congressmen believed these men offered patriotic service, that was not the general belief. Senator Harry Truman, who oversaw a groundbreaking investigative committee over war profiteering, felt that these men, no matter how well-meaning, should be given no voice over policy, as they were “unable to divorce themselves from their subconscious gravitation to their own industries.”
Unlike the world war buildups, Kushner’s “Dollar-a-Year” men are not a peripheral minor part of the government bureaucracies otherwise run by capable public servants, but central to it. We know have a government where a good chunk of policy is organized directly by private equity executives. Even so, discussion of the role of these men mimic in some ways the debate during the world wars (though this build-up is obviously far more corrupt and incompetent than that during either one of those two wars). Government officials are angry at the managerial chaos induced by Kushner’s network, calling the Kushner group a ‘frat party’. Ethics experts disdain their use of private emails and FreeConferenceCall.com, as evading public records requirements. And of course there is always the potential for self-dealing. Yet there are some who see value, like New York Governor Andrew Cuomo, who lavished praise on Kushner for being “extraordinarily helpful.”
At any rate, you go into a pandemic with the leaders you have, not the leaders you’d like. And one of our key leaders, like it or not, is to be Jared Kushner and his network of private equity executives. These are people who are not shy about rapidly deploying capital, for better or worse.
What is Private Equity?
I wrote up a description of private equity in July, when Elizabeth Warren came out with a plan to reform the sector. I described a private equity fund as “a large unregulated pool of money run by financiers who use that money to invest in, lend to, and/or buy companies and restructure them.” That’s a formal definition, but it’s also a highly ideological social movement that comes out of the modest conglomerate craze of the 1960s and then was transformed by the junk bond mania of the 1980s. Private equity proponents believe that they are removing sloth and waste out of the corporate sector, bringing innovation and productivity to American industry. It is of course a nonsense claim on the merits. Private equity is in fact “a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy,” yet one more rhetorical cover for aristocracy in the long arc of human history.
There are roughly four thousand private equity funds that control about $5 trillion worth of corporations, which is a sixth of the total value of all public companies. The industry has exploded since 2000; today, the number of private equity owned firms outnumbers the number of public companies, and private equity is more significant as a source of financing than initial public offerings in the stock market.
Both Democratic leaders and Donald Trump are close to private equity barons; in many ways, even before the pandemic, private equity executives have been our real government, choosing where to deploy capital and how corporations are valued and structured. Private equity is one of the more important social forces across the West, a style of business that has been structuring our politics and our commerce since it was super-charged by men like Michael Milken and William Simon the early 1980s.
The goal of private equity isn’t usually to find businesses who need capital to produce better products and services, but to exploit unused pricing power. Sometimes this means taking control of a business that can charge more to customers, but it can also be pricing power used against the taxpayer, workers, investors, or the nation itself. Robert Smith of Vista Equity Partners, for instance, has made billions by buying up mid-level software corporations in niche industries (like Yoga studio software) and raising prices on the small businesses who depend on it. Private equity funds were behind the offshoring craze in the mid-2000s, selling key manufacturing capacity to China. Sycamore Partners, another private equity firm, bought Staples, and then immediately took out a billion dollar special dividend.
Why Is Private Equity Unusually Vicious?
The reason private equity can exploit corporate assets with such ruthlessness is because of its legal structure. Private equity buys companies, but puts very little of their own money in deals. PE takes in money from investors, usually insurance or pensions, and invest it. When they buy a company, they will use some of this money, but they often borrow more money to finance the takeover. Then they restructure the portfolio company, pull out dividends if they can, and sell it. PE executives get paid handsomely if the fund makes money, usually a cut of the upside. But those executives do not lose their own capital if they take a loss. That means there’s an incentive to load up with risk, because PE funds are playing with other peoples’ money.
Moreover, when a private equity fund invests, it’s not like a mutual fund or hedge fund; PE usually buys control of a corporation and puts it in its portfolio. PE is exactly like a conglomerate, except somehow the portfolio company isn’t considered a subsidiary. As a result, PE firms don’t have any liability for their portfolio firms. If a portfolio firm goes bankrupt after moving a bunch of money to its private equity owners, those ‘owners’ have no liability and don’t have to give the money back. Often PE funds have consulting side units, and charge large amounts to their portfolio companies, purely as a means to transfer money from the corporation to the PE fund. It is control without responsibility, the ultimate incentive to behave without any concern for damage one might cause. Unsurprisingly, PE-owned firms are ten times more likely to go bankrupt.
PE executives are also socially distant from the subsidiaries they control and don’t pay a price if those subsidiaries go bankruptcy or harm people. They don’t live in the communities they affect, and most people don’t even know private equity billionaires exist even as they make key social decisions over their lives. This is intentional; one private equity billionaire, Steve Feinberg of Cerberus Capital, reportedly said, "If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it." Investors seek out those PE funds with the highest returns, amplifying the competitive dynamic. As a result, the industry brings out the most ruthless actors in society, those who are politically connected, voraciously greedy, and able to use public relations to remain discrete.
Cerberus, for instance, has on staff former Vice President Dan Quayle and Treasury Secretary John Snow. Feinberg himself heads Trump’s Intelligence Advisory Board. Feinberg got his start under Michael Milken at Drexel, an investment bank whose culture was based on ripping the throat out of the other side of the trade, no matter what.
