Elizabeth Warren’s hypocritical and foolish attack on private equity

Sen. Elizabeth Warren (D-Mass.) is floundering. Her campaign has begun to fizzle, and rivals smell blood in the water. During the most recent Democratic debate, she was challenged on her wealth tax by Sen. Cory Booker (D-N.J.), and on her over-arching vilification of successful Americans.  “Dear God,” Booker protested at one point, “we’re going to have pathways to prosperity,” and not, he implied, just a plan to strip prosperity from those who have made it.

Booker and others are emboldened to take Warren on, as voters display increasing skepticism about the progressive’s platform, and especially about her improbable explanation of how she would pay for “Medicare for All.” A little over one month ago, RealClearPolitics reported the odds of Warren winning the Democratic nomination at 53 percent; now she’s at 29 percent, with Mayor Pete Buttigieg and former Vice President Joe Biden taking advantage of her slide. National polling confirms the trend: Warren slipping and Joe Biden increasing his lead.

Warren’s problems are obvious: Her non-stop hectoring makes her not especially likable, and her background as a corporate lawyer clouds her authenticity. Also, polling suggests she cannot beat President Trump.

Democrats overlooked those deficiencies while her non-stop blizzard of programs created excitement and she was surging in the polls. But getting stuck on the Medicare for All flypaper has brought her campaign back to earth with a thump.

Now she’s thrashing about, seeking attention in sometimes foolish ways. Her recent effort to turn Taylor Swift into the poster girl for private equity victimization is illustrative. The pop star, reportedly worth nearly $400 million, foolishly failed to protect the rights to her own music, which were offered to her and then, when she declined to make the purchase, duly and legally sold to a third party. When Swift realized her decision might have unpleasant consequences, she threw a hissy fit.

Spoiled rock stars are not normally sympathetic figures, and their squabbles not usually the stuff of serious legislation; there is, for instance, no bill that evolved from Swift’s spat with Katy Perry. But Warren, in her zeal to find someone she thinks has been ill-used by private equity investors, and ignoring her oft-repeated loathing of millionaires and billionaires, has settled on Taylor Swift.  

Warren is using Swift to highlight her Stop Wall Street Looting Act of 2019, her subtly-titled effort to shut down the private equity industry, first released for public consumption in July.

Warren’s bill would make private-equity funds assume responsibility for the liabilities of companies they buy, including all debts and pension-related obligations. Generally, the fund managers would be more closely tied to the fortunes of the companies they invest in, and would also have to make public their fees and financial results. There are numerous other proposed changes, such as demanding companies allocate more monies to laid-off workers and restrict executive payouts in the case of bankruptcy.

Also, Warren’s bill calls for the end of the “carried interest” loophole.

Naturally, the $7 trillion private equity industry has mounted a vigorous defense, with Drew Maloney, the CEO of the American Investment Council, telling the House Financial Services Committee recently that private equity funds invested nearly $700 billion in the U.S. last year.

Warren claims private equity firms “suck value out of the economy”; others would claim they add value. The truth is that both sides have justifiable talking points. The best kind of private equity transaction involves the takeover of a firm with steady cash flow and a conservative balance sheet that can support a debt-fueled buyout and benefit from the expertise and resources of the sponsor. There are thousands of examples of private equity transactions that help a company go to the next level, accessing, for instance, foreign markets unreachable to a small or mid-size business or benefitting from lower insurance premiums available to a large cluster of firms.

There are also examples of takeovers in inappropriate industries, like fashion, which is notoriously fickle and provides anything but the steady income and cash flow needed to fund large borrowings. Sometimes acquisitions are nothing more than vanity projects; workers and investors can get hurt when the project fails. As in every industry, there are both good and bad practitioners.

As a whole, private equity has been a godsend to pension and benefits managers that require returns better than those offered by stock or bond markets over the past decade. Maloney testified that 91 percent of public pensions invest with private equity funds because, indeed, they generated the best performance of any asset class over the past decade.   

Warren’s renewed attack on private equity faces three problems. First, Taylor Swift’s problems have nothing to do with the financial structure of the firm that bought her music. Second, the examples Warren cites to make her case – like retailers and newspapers – are poor ones.  Both sectors have been crushed by the internet; private equity investors have in some instances tried to pick up the pieces, and sometimes they have failed.

Toys “R” Us, for instance, which she often references, was in the crosshairs of Walmart and then Amazon, long before being bought by private equity investors in 2005. 

A bigger problem with Warren’s attack on private equity is that it exposes her as a hypocrite. She chides private equity funds for not assuming responsibility for retirees’ pension funds. But in her work as a corporate lawyer, Warren took exactly the opposite side in such a case back in 1995 when she represented LTV Steel. She argued that the conglomerate should not have to contribute to a health fund set up for retired coal miners. LTV had sold off its coal mining operation a decade earlier; they claimed, and she agreed, that the firm’s bankruptcy absolved them of responsibility.

That was when Elizabeth Warren was earning her millions representing large corporations; now, as a politician, she vilifies those same one-time clients. Maybe her perspective has changed; or maybe her self-interest has.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.