The real villain in bankruptcies: private equity

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You may have noticed that the venerable Hertz has joined a long parade of consumer companies filing for bankruptcy. In virtually all of these cases, the culprit is neither internet competition nor the corona pandemic, but the private equity operators who accumulate debt on these companies in order to pay themselves massive fees and dividends.

the New York Times story about Hertz is a textbook case of how the press downplays the real story. He cites everything from the pandemic, to problems with the SEC, to his ill-fated acquisitions of Dollar and Thrifty, to the mistaken purchases of too many compact cars.

But it is not until paragraph 31 of a 33-paragraph article that the patient reader learns that Hertz was acquired by three private equity firms in 2005 which paid itself a quick $1 billion debt-financed special dividend, then cashed in with an initial public offering. The combination of acquisition frenzy and private equity has left the company with far too much debt to weather economic downturns.

Bloomberg had a much better story, pointing out that the the culprit of the Hertz debacle was financial engineering. With bankruptcy, super financial engineer Carl Icahn loses most of his possessionworth around $700 million at the end of 2019, half of which at the end of the first quarter of 2020.

Meanwhile, some nice investigative report speak Time and the group Good jobs first, out of 20 major hospital chains with more than $100 billion in cash and receiving $5 billion in windfall profits from CARES Act relief, found the worst offender is Providence Health System, which pays to its CEO more than $10 million. And, we learn, this time in paragraph 42, that Providence is itself an investor in private equity and hedge funds.

And speaking of the shame of hedge funds/private equity, thanks to ultra-favorable tax treatment to the tune of $650 billion in the CARES Act, some of the worst companies in the extractive industry owned by some of the worst operators in hedge funds stand out as bandits. Marathon, target of demands from Elliott Management, vulture capitalist Paul Singer, got a $1.9 billion in tax relief.

Again, Elizabeth Warren has a plan. She proposed Stop the Wall Street Looting Act end the loopholes in securities laws and the favorable tax treatment of debt that keep these predators in business. (You can see why she’s such a favorite to VP with Team Biden’s corporate wing.)

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