“We must break the money trust or the money trust will break us.”
~ Louis Brandeis
By Catherine Austin Fitts
Brendan Ballou’s Plunder: Private Equity’s Plan to Pillage America comes with my highest recommendation. Published in 2023, Plunder is an invaluable analysis that will help you understand both the growth of the private equity industry and the push for central control that marks domestic and global politics and economics.
One of the opening blurbs by Sarah Miller, executive director of the American Economic Liberties Project, sums up the book succinctly:
“The mysterious private-equity industry is one of the most destructive forces in American society—and one that too-few people truly understand. Ballou’s Plunder promises to change that. At a time when private equity has never been more powerful, his book shines a floodlight on the corporate raiders ravaging our economy and lays out a comprehensive roadmap for policymakers willing to take them on. For people who want to understand why America suffers from enormous disparities in wealth and power—and what we can do to change it—Plunder is essential reading.”
What is private equity? It is equity investment that is managed privately by investment companies that buy, reengineer, and sell companies, principally with funds raised from both institutional and retail investors. Instead of a company financing in the stock market with public equity, it is owned in large part or in whole by an investment company. Often, this occurs when a private equity company buys a public company and then takes it private—not infrequently with the use of debt to finance the purchase (in what is known as a “leveraged buyout”). Increasingly, the large private equity firms finance in the public equity markets and trade on the stock exchange.
One of the reasons that the number of companies traded on the U.S. stock market has diminished is as a result of the growth of private equity firms. As Ballou points out, “Today, the [private equity] industry owns more businesses than all those listed on US stock exchanges combined. KKR’s portfolio companies employ over 800,000 people; Carlyle’s 650,000; and Blackstone 500,000. Considered together they would be the third-, fourth- and fifth-largest employers in America, behind only Walmart and Amazon.”
Ballou is a federal prosecutor who has served in the National Security Division and as Special Counsel for Private Equity in the Antitrust Division at the U. S. Department of Justice. The case histories of people and companies devastated by private equity practices described in Plunder reflect his mastery of both the economics and complex legal structures that mark transactions and financial engineering in the private equity industry. He also has a unique command of how these practices impact wider economies and interact with employees, related industries, pension funds and investors, state and federal government, and the court system. Ballou is an excellent writer, leading the reader through a complex financial and legal ecosystem in a manner that is engaging, interesting, and accessible to the lay reader.
In Plunder, Ballou helps us understand the fundamental business model used by many private equity players—and why this model results in systematically more destructive corporate practices than public equity companies. In particular, he cites three wealth “extraction” practices:
- Private equity investors have a shorter investment horizon. In an interview with Nilay Patel (editor-in-chief of The Verge and host of the Decoder podcast), Ballou describes the impact of shorter investment horizons as follows: “Private equity firms tend to invest for the short term. I always joke that if I was trying to maximize the investment on my house, I’d redo the kitchen and a new inset bookcase. If I was trying to maximize the money over the next week, I would burn it down and try to collect the insurance money. The timeframe that these firms are considering really changes whether they want to invest in research and development, whether they want to invest in employees, whether they want to invest in new output.”
- Private equity investors often load a company up with debt and extract fees and dividends, often by liquidating assets or cutting important company operations, producing positive returns on the private equity investors’ investment but leaving businesses weaker and some eventually bankrupt. Ballou notes (p. 34): “[W]hile private equity doesn’t doom a company to failure, the chance of failure dramatically increases. Roughly one in five large companies acquired through leveraged buyouts go bankrupt in a decade. This is vastly more than the roughly 2 percent of comparable companies not acquired by private equity firms that do. And even among the many companies that do survive, private equity often changes their cultures, from ones focused on the long term to the short, from investment to extraction, and from responsibility to recklessness and, at times, lawlessness.”
- Private equity investment legal models and structures are designed to combine maximum powers to extract money and assets with minimum liability for resulting destruction and harm. If the extraction of value by private equity companies results in a bankruptcy of a company with a pension fund or employee layoffs, the liability is assumed by the Pension Benefit Corporation and the unemployment and social service systems. In short, the employees, their families, and the taxpayer pick up the tab. If it results in poor care in a nursing home leading to patient deaths, layers of corporate and investment structures shield the people who dictated the unacceptable standard of care that led to the increased deaths. Liability remains in the company that is short of resources and assets, not with the controlling parties who often have successfully extracted a wealth of resources in transferred assets and dividends, debt repayments, and fees. As we have seen in areas of the pharmaceutical industry, this creates an industry that is free from liability for highly destructive behavior.
Plunder features a wealth of fascinating case studies, including the acquisition of vast amounts of residential housing by Blackstone, retail businesses by a series of firms including KKR, nursing homes by Carlyle, and throughout health care and medicine by numerous firms. For those interested in policies implemented during Covid-19, it would be well worth reading the book and asking what increasing private equity control of the health care industry and their extractive economic incentives had to do with what happened. There is also a chapter on the prison industry, which I found fascinating given my research into private prison financing described in my online book Dillon Read & Co. Inc. & the Aristocracy of Stock Profits. My book included an overview and some of the documents regarding the European Union’s lawsuit against RJR Nabisco for narcotics trafficking and money laundering. RJR Nabisco was the company that was taken over by KKR, as described in the famous book and movie Barbarians at the Gate.
I enjoyed all the chapters of Plunder, but my hands-down favorite is “PART III: How to Stop Them,” divided into two chapters: “What We Must Do” and “An Agenda for Reform.” Ballou describes why it is possible to turn things around, names some of the groups who are working to do so, and then lays out the specifics of what a wide variety of players can do. This includes a long list of recommendations for U.S. federal agencies and enterprises, including the Department of Justice, the Federal Trade Commission, the Department of Labor, the Consumer Financial Protection Bureau, the Department of Health and Human Services, the Federal Communications Commission, the Department of Education, the Securities and Exchange Commission, the Internal Revenue Service, the Federal Reserve, the Treasury Department, and Fannie Mae and Freddie Mac. Additional recommendations include those for state and local government, including state attorneys general and private plaintiffs, Congress, investors, and activists.
These are exhaustive lists—ones you can put to good use by helping your representatives get going in practical ways.
One of the important areas for reform involves state and local pension funds. I find it astonishing that state and local pension funds are financing private equity firms that have a long history of destroying local tax bases, especially when recent studies indicate that investment returns are no better than those available in the public markets where investment fees are lower. There is a significant potential role to be played by state treasurers as well.
Given the political power of the private equity industry, the first question, of course, is where are the constituencies that will demand and support action? That takes us to retail investors. Why are we pouring investment into the stocks of the large private equity firms? One of the reasons is that their stocks have outperformed the broad equity markets. This brings us back to industry models and why we engineer laws, regulations, tax codes, and enforcement to permit private equity firms to profit from the extraction of capital in a manner that destroys our competitive standing in global markets.
The first step to reforming our financial system into a system that rewards productivity and wealth-building (as opposed to parasitic extraction supporting a billionaire class) is to bring transparency to the role and impact of private equity. If America is to once again become a country rich in companies that can compete successfully in global markets based on merit—which is the ideal way to successfully address the shift to a multipolar world—we will need to take Brendan Ballou’s analysis and recommendations to heart.
Please read and circulate Plunder. Give it to family and friends for their birthday and Christmas. Send copies to your Congressman and Senator and to your state legislators, your governor, attorney general, and state treasurer. Send a copy to your sheriff (yes, they can get involved, too).
Take action to protect yourself. When you do business or interview with a company, please check to see if it is owned by a private equity firm. After numerous dreadful experiences, I make a concerted effort to avoid companies owned or recently sold or spun out by the large private equity companies. If a private equity company buys a company—such an insurance company—with products on which you depend, please do due diligence. You may need to monitor, take action, or seek help from regulators. Whether customer, vendor, employee, or municipal or state official, you are private equity prey.
You can protect yourself because you have been warned. Don’t ever say, “Why is no one doing anything?” Here is the link to Ballou’s website. After you read Plunder, send him a note of gratitude. Ballou is proof positive that leaders are among us who are doing plenty with great competency, courage, and integrity.
Purchase the book here.
Related Solari Report Resources:
Dillon Read & Co. Inc. & the Aristocracy of Stock Profits
An Editorial Comment on Private Equity
Book Review: The Lords of Easy Money by Christopher Leonard
