Via Naked Capitalism

Even though I didn’t have high expectations for the House Financial Services Committee hearing yesterday on private equity, America for Sale? I didn’t expect it to be a train wreck either.

Today I will focus on the process issues, as in why this hearing ginned up by Team Dem sucked (Lambert insisted I not use that word in the headline) and what that says about the party. In the next day or so, I’ll turn to what was said in the hearing, and more important, what wasn’t said and what appalling lies were told.

The contrast of the Republicans, who all sang loud and hard from the same factually-challenged hymnal, to the Democrats, who were dominated by moderates who typically attributed the damage done by private equity to a few bad actors punctuated by few Representatives giving detailed accounts of harm done in their districts, and a bang up finale by Alexandria Ocasio-Cortez, can most charitably be seen as an exercise in hopey-changey optics. And the Democrats seem unable to pull that off in the absence of a smooth salesman like Obama.

Mind you, this isn’t news per se. When Matt Stoller was a Congressional staffer, he would regularly say that he preferred working with Republicans because they were clear about what they wanted to achieve and disciplined in how they’d go about it. That didn’t necessarily mean their plans would work out (Benghazi) but at least they’d map a path from A to B and commit resources to the trip.

I’m not even sure what purpose this hearing was intended to serve. I’ve embedded the video below; sadly, none of the old YouTube cropping services seem to work any more but I will highligh. Committee chair Maxine Waters said the purpose of the hearing was to look at the damaging practices of the industry and whether Congress needed to do more. So while Waters positioned the session as an investigation, the Warren private equity bill, the Stop Wall Street Looting Act, is already on the table as a proposed Democratic party response, and the Republicans successfully used her bill as a whipping boy.

This wan’t just my take:

Politico was a tad more measured:

A high-profile House hearing Tuesday designed to showcase the dangers of private equity instead revealed that the industry enjoys bipartisan backing in Washington despite a wave of attacks from Sen. Elizabeth Warren and other critics….

But for much of the morning and early afternoon, business-friendly Democrats and Republicans played down the most controversial effects of the industry’s investments in struggling companies, instead highlighting its benefits to the economy and questioning anecdotal evidence of the problems cited by its critics..

The sympathetic attitude toward private equity from one member after another on the Democratic side of the aisle — including those who continue to accept campaign contributions from the industry — illustrated the widening gulf of views in the party about economic policy before the 2020 election.

More accurately, the hearing illustrated the gap between the corporate Democrats and the increasingly disenfranchised and disaffected base of the party.

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Nevertheless, did they not know what they are up against, even in terms of the not-high bar of having a credible hearing? Private equity firms are the biggest single source of fees for Wall Street. They are far and away the most important clients of the very top law firms in the Anglosphere. They account for more than half of the revenues at Bain and BCG and probably still do at McKinsey.

And as several committee members pointed out, they’d just gotten a taste of private equity muscle in the form of their inability to pass bipartisan legislation to rein in the medical industry abuse known as surprise billing due to a huge lobbying push funded by private equity.

As we’ve explained, not only is private equity driving the increased frequency and severity of these surprise bills, or using them as a threat to negotiate much higher charges to hospitals, it has also found and exploited other choke points in the medical industry, such as kidney dialysis centers and primary physicians’ practices. And the evidence is that services have not improved with the price increases; if anything, it’s that its has often deteriorated.

In other words, if the Democrats are to have any hope of reversing the sorry trend of Americans paying more than any other advanced economy, in GDP terms, for health care, and having the worst results in terms of outcomes, they will need to confront private equity. Dealing with the health insurers is a cakewalk, by comparison.

Back to Politico:

Rep. Gregory Meeks (D-N.Y.) said he was actually trying to attract “private equity dollars” to a minority-owned company at risk of failing. Rep. Brad Sherman (D-Calif.) said he was “not hostile to private equity” and that the industry was being attacked for “doing things that are done elsewhere in our economy.” Rep. Josh Gottheimer (D-N.J.) highlighted investment returns of private equity funds that beat the stock market.

“As a scientist and a businessman, I find myself a little bit frustrated,” Rep. Bill Foster (D-Ill.) said. “We seem to be having this argument by anecdote rather than statistics.”

The fact that the hearing was long on storytelling and thin on facts on both sides. As readers well know, private equity median fund returns haven’t beaten the stock market for the last decade, per our post Oxford Professor Phalippou: Since 2006, Private Equity Has Produced Only S&P 500 Returns While Reaping $400+ Billion in Fees.

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Unfortunately, the Democrats made almost no good use of the only person in the room who was an expert on private equity, Eileen Appelbaum. And her knowledge verges on encyclopediac. For instance, she has carefully analyzed the academic work on private equity, both on returns and on economic effects, and regularly picks apart the methodology, too often showing that undoing sleight of hand leads to different conclusions. Needless to say, she and her research/writing partner Rosemary Batt have performed many deep dives of their own. But Appelbaum was almost never asked to weigh in. If anything, she got more attention from Republicans, who tried to discredit her as a paid-for shill (which she easily dispatched by describing how she and Rosemary Batt had worked for four years with a mere $25,000 grant from Russell Sage) and as a Warren operative deeply involved in her bill (which she again politely disproved).

Too often, the Democrats would instead turn to Wayne Moore, a board member of the Los Angeles County Employee Retirement Association (LACERA). But Moore knows little about private equity; he pointed out that his job was to set policy. His apparent reason for being there was to show that at least one reasonably prominent limited partner was willing to call for more transparency. Even then, Moore said he supported only parts of Warren’s bill. But Moore’s main role appeared to be to say again and again that private equity was the best performing asset class for LACERA and that LACERA had increased its private equity allocation.

Politico skipped over the Republican thumping of the centerpiece of Warren’s bill, of making private equity firms and their controlling persons jointly and severally liable for all the liabilities of the private equity fund and its portfolio companies. We’ll turn to this topic in a later post, because it’s a radical proposal yet Warren seems not to have regarded it as necessary to make a case for it.

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Even the Representatives who gave compelling accounts of private equity harm typically made narrow cases based on what they saw in their districts. One exception was Katie Porter (at 2:25:40), who zeroed in on surprise billing. She pointed out that a Stanford study had found that the odds of getting a surprise bill had increased from 32% in 2010 to 43% in 2016, and the average amount had risen over that time period from $220 to $628. Cindy Axne (Iowa, at 2:05:00) described how private equity was undermining affordable housing in her district, via buying up land rented by owners of manufactured homes, jacking up their rentals by 20% to 70%. Needless to say, people who are barely getting by can’t afford these increases, yet they are hostage because their house is costly to move. Rahisda Tlaib (at 3:25:45) described how cash bail was a destructive force in poor communities like the one she represents, and private equity firm Evercore is a major player.

True to form, AOC had far and away the best comment. Go to 3:31:06 to view it in full; the partial excerpt in the tweet leaves out her getting at the key issue that was abjectly misrepresented in the hearing, that of private equity’s performance.

Needless to say, this sorry performance reinforces the need for wresting control of the Democrats from the corporate stooges, or else finding a way to make the party irrelevant. And as much as the power of private equity illustrates how tough a go this might be, the flip side is the trusts were even more dominant forces in the Gilded Age, yet they were brought to heel. And as we’ve been documenting for years, the supposed raison d’etre of private equity, its supposedly superior returns, has for the last decade been achieved only through faulty metrics. As more and more investors wise up that they are paying hugely to get only stock-market-like performance, its hold will start to weaken. Unfortunately, that will take longer than it should because investors are willing to bet on hope.

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