with Brent D. Griffiths
Warren, who honed her brand as a Wall Street scourge, insists drastic change is needed: Unveiling the "Stop Wall Street Looting Act" yesterday, she said that the private equity industry is “the poster child for financial firms that suck value out of the economy."
“Private equity firms raise money from investors, kick in a little of their own, and then borrow tons more to buy other companies,” she wrote in a Medium post. “Sometimes the companies do well. But far too often, the private equity firms are like vampires — bleeding the company dry and walking away enriched even as the company succumbs.”
The plan's most disruptive change would make firms responsible for both the employee pensions and debt obligations of the companies they buy while tying their profits to the companies’ performances. As The Washington Post’s Peter Whoriskey notes, private equity firms frequently load up their takeover targets with debt, which become a burden the companies have to carry, sometimes precipitating bankruptcies.
This was perhaps most famously the case with Toys R Us, which crumpled under the $5 billion debt burden that Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust saddled it with after acquiring the toy retailer in 2005.
Industry defenders say that tells only part of the story. Steve Biggar, an equities analyst at Argus Research who covers the sector, said the Warren plan would create “asymmetrical risk” for the industry, with too much downside and not enough upside to warrant investments that could save otherwise struggling companies.
“Her premise is that all private equity does is buy companies, leverage them up, can the employees, take the pensions and come out with millions and billions. That’s not usually the case,” Biggar said. “These are broken business models off the bat. The firms are lending capital, expertise and deep industry knowledge, and getting them back on the right path to make them profitable again.”
Axios’s Dan Primack, a veteran of the private capital beat, said Warren’s bill would shake the industry to its studs:
Warren's main proposal on private equity would kill the industry as currently constructed. My best guess is firms would form JVs with Wall Street banks, although loan syndication would still be tricky.— Dan Primack (@danprimack) July 18, 2019
I also think the definition of "private equity" would become very contentious
Investors appear to be taking the threat seriously. Publicly traded private equity giants saw their stock prices tumble on the news of the proposal. Apollo Global Management dipped nearly 2 percent; the Carlyle Group was off by 1.73 percent midmorning before paring losses to close down .76 percent.
The industry has been in Washington’s crosshairs for years. After a 2007 story appeared on the front page of the Wall Street Journal documenting Blackstone Group CEO Steve Schwarzman’s lavish lifestyle, the Senate’s lead tax-writers at the time — Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa) — proposed ending the capital gains treatment of private equity earnings. The industry, which had maintained a relatively modest presence in Washington, responded by massively ramping up its lobbying machine:
Private equity spent the 2012 election on the defensive as President Obama’s reelection campaign weaponized Republican nominee Mitt Romney’s history as an executive at Bain Capital, portraying him as a heartless corporate looter. And it has remained on guard against attempts to close the so-called carried interest loophole Baucus and Grassley first targeted more than a decade ago. President Trump promised to do so on the campaign trail, but the tax cut he signed into law at the end of 2017 left it mostly intact.
Warren's bill — which is cosponsored by fellow 2020 contender Sen. Kirsten Gillibrand (D-N.Y.) and a handful of other Democrats in both chambers — would tax private equity gains as ordinary income. The measure would also scotch the ability of private equity executives to pay themselves monitoring fees; change bankruptcy rules to limit benefits to executives and protect them for workers; and force executives to make their fees and returns public.
The Massachusetts Democrat, who has climbed into the 2020 field’s top tier over the last two months, has won grudging respect in some corners of Wall Street for her policy-heavy focus while benefiting from comparisons to avowed democratic socialist Sen. Bernie Sanders (I-Vt.). In her Thursday post on Medium, however, Warren made clear she will not be content just to tighten the reins on private equity. She also wants to reinstate the Glass-Steagall Act’s firewall between commercial and investment banking; limit bankers’ compensation; and impose tough new standards for capital, liquidity, leverage and living wills on the big banks.
"The truth is that Washington has it backwards," Warren wrote. "For a long time now, Wall Street’s success hasn’t helped the broader economy — it’s come at the expense of the rest of the economy. Wall Street is looting the economy and Washington is helping them do it."
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— Investors' new question: How big a cut? WSJ's Akane Otani: "Investors have gone from debating whether the Federal Reserve will lower interest rates in July to all but assuming that is a foregone conclusion. The question they are grappling with now: Will the Fed’s first rate cut since the financial crisis take the federal-funds rate down by a quarter-percentage-point or half a percentage point?
"Federal-funds futures show traders have been ramping up their expectations for the latter in the past couple of months. The market priced in around a 0% chance of a half-percentage-point cut for much of May, only to bump up the probability as high as 43% in late June after the Fed’s policy meeting, according to CME Group . Chances for a half-percentage-point cut jumped to a 2019 high of 71% Thursday after John Williams, president of the Federal Reserve Bank of New York, said central banks should 'take swift action when faced with adverse economic conditions.'"
- A spokesman later walked back Williams's remarks. “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting,” a New York Fed spokesman said, per WSJ's Michael Derby and Nick Timiraos.
From the New York Times's Jeanna Smialek:
NY Fed's John Williams lays out the intellectual case for pre-emptive rate cuts. "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress."— Jeanna Smialek (@jeannasmialek) July 18, 2019
— U.S., China talk again. Bloomberg: "U.S. and Chinese senior officials spoke by phone this week, the second call since the late June summit at which the two sides agreed to a truce in their ongoing trade conflict. U.S. Trade Representative Robert Lighthizer and Treasury Steven Mnuchin spoke to the Chinese side earlier, a USTR spokesman said. China’s Commerce Ministry said Vice Premier Liu He and Commerce Minister Zhong Shan were among those on the call.
"There were no details released from both sides on what was discussed... There are still deep differences between the two nations, with Commerce Secretary Wilbur Ross cautioning the negotiations would be a 'long, involved process.'"
Major companies pull production from China: “Throughout the trade war, [Trump] has frequently claimed the conflict would force companies to pull their production out of China and move it to the United States. More than a year into it, he’s been proved half-right,” my colleague Taylor Telford reports.
“More than 50 multinational corporations have announced plans to move manufacturing out of China, or are considering to do so, according to reporting from the Nikkei Asian Review. Apple, Google, Nintendo and Dell, among others, are trying to avoid the import penalties on $250 billion in Chinese goods. But rather than move their operations to the United States, as Trump urged, many of these companies are aiming to rebuild their supply chains abroad, primarily in Southeast Asia.”
— U.S. tech companies push for some Huawei sales: “The U.S. tech industry is pushing the Trump administration for permission to supply Chinese tech company Huawei with parts for consumer technology products, arguing that such sales won’t hurt U.S. national security, according to people familiar with the matter,” my colleagues Jeanne Whalen and Reed Albergotti report.
“Tech companies are asking the administration to allow sales of chips and other parts for Huawei-made smartphones and laptops, even if the White House is intent on continuing to block exports of supplies Huawei uses to manufacture 5G wireless equipment, according to the people, who requested anonymity to discuss sensitive issues.”
— Trump eyeing Pentagon contract to Amazon or Microsoft: “[Trump] said Thursday that he’s seriously considering looking at a Pentagon contract that’s said to be worth up to $10 billion for Microsoft or Amazon,” CNBC’s Ari Levy reports.
“Since April, Microsoft and Amazon have been the only remaining competitors for the contract after IBM and Oracle were ruled out by the Defense Department. The contract, known as JEDI, is viewed as a marquee deal for the company that ultimately wins it, particularly as Microsoft and Amazon are aggressively pursuing government work for their expanding cloud units.” (Amazon CEO Jeff Bezos also owns The Washington Post.)
— Epstein denied bail: “Multimillionaire and registered sex offender Jeffrey Epstein will remain jailed while he awaits trial on new allegations that he sexually abused children, a federal judge ruled Thursday,” my colleagues Renae Merle and Matt Zapotosky report.
“U.S. District Judge Richard M. Berman announced the decision at a hearing, siding with prosecutors after they and defense attorneys traded arguments for more than a week about whether Epstein could be released to some sort of home confinement. The judge later issued a 33-page written decision, saying he was ‘concerned for new victims’ and that Epstein’s sexual conduct with young girls ‘appears likely to be uncontrollable.’ Berman pointed to nearly every piece of evidence prosecutors had cited in their bid to keep Epstein locked up, deeming Epstein both a serious danger to the community and a significant flight risk.”
— Wall Street trading desks are hurting: “Bank investors could be forgiven for mistaking executives on recent earnings calls for sports commentators. Their new favorite way to describe trading clients: ‘on the sidelines,’" Bloomberg News’s Michael J Moore and Elizabeth Rembert report.
“Uncertainty about trade-war politics and Federal Reserve rate moves is making clients extra cautious. But those are the types of macroeconomic events that, in the past, have spurred more trading, not less — raising the question of whether the ‘sidelines’ problem is a permanent or temporary phenomenon. It can’t be explained away by plunging markets: stocks and bonds keep climbing … Trading revenue at the five biggest Wall Street banks dropped 8% in the second quarter, following a 14% slide in the first three months of the year. Their European counterparts are expected to post even bigger declines when they start reporting results next week.”
- Corporate anxiety over the direction of the trade war also showed up in the Fed's Beige Book, per Bloomberg.
— Boeing's 737 tab: $8 billion. NYT's David Gelles: "The financial fallout from the troubled 737 Max jetliner continues to swell for Boeing, which on Thursday announced $7.3 billion in costs that will hit its bottom line. The price tag could still climb. The Max has been grounded for months after two deadly crashes, and it may not fly again this year. Airlines that flew the Max have been pushing for compensation, and Boeing has had to slow production and halt deliveries of the jets, the company’s most popular model."
— Budweiser exploring asset sales: “Anheuser-Busch InBev is considering selling off business units in South Korea, Australia and Central America to cut its massive debt pile as it pursues a backup plan after calling off the listing of its Asian business, according to people familiar with the matter,” the Wall Street Journal’s Jennifer Maloney and Saabira Chaudhuri report.
“The Korean and Australian businesses, which make popular beers such as Cass and Victoria Bitter, were major parts of the cancelled Asian initial public offering. The brewer now hopes to raise at least $10 billion from asset sales, the people said.”
— WH sends Pelosi spending cut options for budget deal. Bloomberg's Jennifer Jacobs and Erik Wasson: "The White House late Thursday sent House Speaker Nancy Pelosi a proposed list of spending cuts to give her options for a budget agreement that she wants to include in a deal to raise the debt ceiling, according to two people familiar with the proposal. The Trump administration is giving Democrats a menu of savings equaling at least $574 billion to offset the costs of a two-year budget cap agreement. The White House is seeking to pay for at least $150 billion of the cost for raising the caps and the next step would be for Pelosi to accept or reject items on the list of of proposed cuts.
"Roughly half of the proposals are cuts and the others come from reforms, both people said. One of the suggested reforms is the drug pricing plan from the White House’s 2020 budget, which would save $115 billion, one of the people said."
— House passes $15 minimum wage: “House Democrats voted Thursday to lift the federal minimum wage to $15 an hour, delivering on a long-standing liberal priority that has become a rallying cry for 2020 Democratic presidential contenders,” my colleagues Erica Werner and Mike DeBonis report.
“The bill, which passed 231-199, would raise the minimum wage gradually from its current level of $7.25 an hour until reaching $15 an hour in 2025. The legislation was amended earlier this week at the urging of moderate Democrats to provide for a slower six-year phase-in, instead of five years as originally envisioned … Majority Leader Mitch McConnell (R-Ky.) has said he will not take it up."
- Bernie staffers fight for $15. The Post's Sean Sullivan: "Unionized campaign organizers working for Sen. Bernie Sanders’s presidential effort are battling with its management, arguing that the compensation and treatment they are receiving does not meet the standards Sanders espouses in his rhetoric, according to internal communications. Campaign field hires have demanded an annual salary they say would be equivalent to a $15-an-hour wage, which Sanders for years has said should be the federal minimum."
- A “Fight for $15” worker activist on the House vote: “Fran Marion thinks often about her former co-worker Mike. They worked at Popeyes together five years ago, and he urged her to join the movement for a $15 minimum wage,” my colleague Heather Long reports. “Mike died at age 32 after struggles with depression and substance abuse, and Marion says low pay and poor benefits in the fast-food industry played a role. She compared watching the House vote Thursday to the Super Bowl when your team is ‘up by one point and it’s anybody’s game.’ While she knows the bill will almost certainly die in the Senate, she thinks low-wage workers are winning the national debate.”