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Opinion Julián Castro and the predatism of private equity

Presidential candidate Julián Castro. (Sergio Flores/Bloomberg News)
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Of all the places for an aspiring Democratic candidate to muff a question about private equity firms, close to the worst right now would be Philadelphia, host of the recent Netroots Nation conference. Many conference attendees joined a rally Thursday to protest the scheduled closing of the city’s Hahnemann University Hospital. The hospital’s crime? It’s low income population apparently isn’t lucrative enough for the private equity firm that owns it. It’s also widely rumored the site would make its owner more money if sold off for the value of its real estate. About 2,000 people are expected to lose their jobs.

So when former housing and urban development secretary Julián Castro took questions at the event’s Saturday presidential forum, surely he should have had an answer at the ready for attendee Sarah Woodhams, a former employee of Toys R Us, another company gutted by private equity firms, who asked, “As president, what would you do to hold hedge funds and private equity accountable for destroying our communities and our livelihoods?”

He did not. “I don’t believe any bank or company is too big to fail,” Castro responded, before going off on a tangent discussing how he would hold Wall Street accountable if there is another housing crisis. None of this, needless to say, has anything to do with why Woodhams lost her job or why Hahnemann University Hospital may close: Companies such as Toys R US and institutions such as Hahnemann are being set up to fail so the wealthy can make a buck.

Castro’s non-answer generated few headlines. Yet it’s worth taking a moment to think about why it matters that a Democratic candidate for president, one considered well within the progressive mainstream, couldn’t or wouldn’t adequately answer the plaintive plea of a woman who lost her job because of the predations of private equity firms.

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Private equity firms put money in a company to make money from their investment. On paper, of course, there is nothing wrong with that. The issue comes when, as happens all too often, making money is prioritized over the health of the business and/or the community.

Here the Toys R Us saga is instructive. The company is often popularly thought to be a victim of the move to Internet shopping combined with the growth of all-purpose big-box retailers such as Walmart. But that’s not quite what happened. In 2005, Toys R Us was purchased by two private-equity firms and a real estate firm. (One of the buyers was Bain Capital, co-founded by Mitt Romney.) The firms took on billions in debt to purchase the company — debt they promptly moved off their own books by loading it onto Toys R Us.

The funds the company needed to service the additional debt prevented it from making needed improvements in both its physical stores and Internet marketing. It also interfered with its ability to reliably pay suppliers. Eventually, it filed for bankruptcy in 2017. Even then, prospects for reorganization initially looked promising. But then a group of bondholders stepped in who could make more money by letting the company fail, in part because they believed the company could raise enough money to pay them off more quickly via going-out-of-business sales. About 33,000 people lost their livelihood, including Woodhams. They only received a portion of their promised severance after the intervention of Sen. Bernie Sanders (I-Vt.), along with fellow presidential candidates Sens. Kirsten Gillibrand (N.Y.) and Cory Booker (N.J.).

Toys R Us is a particularly extreme example, but private equity is exercising an increasingly baleful influence over broad swaths of the business sector. It’s at play in the newspaper business, where outfits such as Digital First Media are an increasingly controversial presence, and in the film industry, where private equity ownership of a number of the largest talent firms is thought to be one of the factors in the Hollywood battle between agents and the writers who say they no longer represent them properly. In the retail sector, its investment in a company makes it less likely the company can survive the seismic shifts occurring in the sector.

There is lots that can be done to temper this. Leveraged buyouts weren’t even legal till the early 1980s. Regulations could limit the amount of debt a would-be purchaser could place on a company. Mandatory severance payments would make it much more financially difficult to profit by forcing companies out of business. But as Bryce Covert pointed out last year in the Atlantic, private equity has its tentacles in both major political parties. Commerce Secretary Wilbur Ross, for example, founded his own private equity firm (with a track record of sketchy behavior) while former treasury secretary Timothy F. Geithner works for another such firm, Warburg Pincus. (Geithner’s employer also owns, among other investments, Mariner Finance, a company that offers desperate working class men and women dodgy, deceptive high-interest loans by mailing them unsolicited checks.)

All of this presents a particular problem for the Democratic Party because, of course, they traditionally stood up for the interests of working people. It also is one of the things that leaves an opening for more conservative interests to pose as working-class champions. In a speech Tucker Carlson gave Monday to the Edmund Burke Foundation’s conference on national conservatism, he said that left-wing identity politics is simply a “a distraction” designed to cover up who is getting rich in the current environment. That’s a ridiculous claim coming from Carlson. But it’s the seeming obliviousness of politicians such as Castro who widen the opening to make that ludicrous argument.

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