Elizabeth Warren Unveils Bill to Bash Private Equity “Vampires”
Private equity firms are called raiders by some of people, and when you put raider together with Wall Street, and you hate both, this can produce a lot of fire and brimstone.
It is no secret that Democratic presidential candidate Sen. Elizabeth Warren is no fan of Wall Street. This is not a view that we need to speculate much on, as indicated in such beliefs as “Wall Street is looting the economy and Washington is helping them do it.”
Given that what goes on in financial markets is actually nothing more than allowing for free exchanges of value, we need to wonder that actually qualifies as looting in her mind and consider whether her definition is one that would even be a proper use of the word.
There are proper and improper ways to conduct oneself in the financial world, and if we are going to accuse someone of looting, we need to be able to reasonably justify the accusation, and not have it merely reflect our distaste for those who are financially successful.
Those who have committed crimes of misrepresentation could qualify as looters, Bernie Madoff for instance, and he did steal a lot of people’s money. We might even want to point fingers at some big financial institutions who may have been negligent in not being transparent enough about financial products such as the mortgage backed securities that were promoted as AAA investments when they were clearly toxic, with the looting consisting of all the money they made selling these.
These institutions did pay the price for this though, and therefore while this particular example wouldn’t really qualify as looting, there is a duty to be transparent enough that this did fall well short of as it turned out. Transparency is actually the most important concept in regulation because if all parties are properly informed, they are in a position to make informed decisions and trade or allocate the assets that they have rightful control over in a manner suitable to their goals.
If, for instance, you had a billion dollars to spend on these things and you were told that they are chock full of toxic debt and the risk was made plain, it is still your money and in this case there wouldn’t be anything wrong with your buying all you want. This is the proper goal of regulation, to promote the proper amount of disclosure, and while we often err on the side of caution, this is what we seek.
Others may take a broader view of the role of regulation, for instance wanting to use it to benefit the “middle class” more, perhaps feeling that this is appropriate to address personal preferences of the way finances should be distributed, and wanting more in the hands of those who have less.
While this may be seen as a worthy political goal, depending on your political views, using this to shape regulation is an entirely different matter, because regulation isn’t and cannot really be about economic redistribution but instead must be based upon principles of fairness that need to be based upon concrete principles and not just on contentious political ideologies.
Elizabeth Warren Seems Only Guided by Her Anger
Sen. Warren, on the other hand, does not feel limited to wanting to use regulation in a way that is principled, and clearly is more than happy to sacrifice this and anything else that stands in the way of her redistributive ideals.
Her going after private equity firms is therefore not so much a matter of her wanting to target them as it is her broader goals of wanting to make the financial world bow to her.
This is very much evident in remarks such as her being “tired of big financial firms looting the economy to pad their own pockets while the rest of the economy suffers,” and the fact that she is “done with Washington ignoring the evidence and acting as if boosting Wall Street helps our families”.
Big financial firms do make a lot of money, from things like people willingly paying them for their services, as well as engaging in transactions on their own behalf that involve voluntary exchanges of value. We might not like the fact that some people make a lot of money from these things, but not liking something isn’t an objective criticism.
The very idea that financial regulation is in any way required to consider what helps our families or not exposes a complete misunderstanding of it. This would be akin to claiming that traffic laws are failing to achieve their objective by letting people drive expensive cars on the road and especially not working because others drive cheaper cars or have to take the bus.
Similar to our being under the rule of law, regulation is under the rule of fairness, and fairness here is an objective standard that addresses conduct. We come up with rules that govern such fairness, and these rules need to be defined reasonably, which does not include notions such that we should restrict activities that are otherwise fair but have some making more profit than others.
Using terms such as looting and referring to families as the rightful concern of financial regulation may incite some of the electorate, but modern governments are representative, which means that those who decide these things are presumably selected based upon their expertise. Part of this expertise does involve a better understanding of the role of regulation than assuming that its goal is to proactively redistribute wealth or punish those who have it simply by virtue of their having it and our wanting it.
This isn’t even about wanting more wealth or income redistribution, as there are political avenues that may at least be seen as appropriate if that’s what we want to do. It is not understanding that regulation is not one of these avenues that it would make sense to go down to seek these goals.
The law also needs to be principled, and while we can’t rightfully shape regulations to suit our social ideals, we also need to be careful that we’re not using the law to do the same thing, especially if we’re talking about legal principles that promote and are necessary to maintain the free exchange of capital.
An example of this would be the concept of shareholders’ liability, part of the broader concept of limited liability that is so central to our economy. Let’s say that you buy some shares of a company, Bernie Madoff Investments. Bernie steals all of your money and your shares are now worthless. He also stole money from others and it would be quite ridiculous for you to be held liable for that, in any way actually.
This story somehow may seem more palatable if this is just directed at the fat cats, private equity firms for instance. As fat as one may be, it’s no less unprincipled to expect that they be held financially liable beyond their stakes. If someone were held personally responsible for financial harm, that’s a different matter, but we’re talking about people who don’t have any involvement apart from just putting up some money for something.
Not that this should ever matter, but as it turns out, cats of all different degrees of fatness and thinness invest in private equity either directly or indirectly, and a lot of pension funds are heavily invested in this sort of thing. If your pension fund is liable for more than its contributions, that’s a pretty ugly thought if they hold your pension money as well.
Destroying the Private Equity Market Would Have Drastic Effects on the Economy
Private equity firms are known for leveraging their capital in ways that are sometimes seen as unpopular, and it very well may turn out that they take over the company that you work for and cut jobs. We need to remember that if they bought the company, we’re going to need more than the displeasure of a few people in Washington to justify their being financially liable improving overall efficiency.
Companies go down from bad management too, but those who have afforded management the power to run their companies are just acting upon not only their legal authority but a much bigger principle, the ability to allocate one’s resources as we see fit. This is the essence of capitalism but not everyone embraces even its most basic tenets it appears.
Being willing to toss aside the most basic legal concept of limited liability whenever we see fit to do this cannot be based upon any utilitarian concept, such as people on Wall Street are too wealthy in our eyes and we should look to spread things around more because this will please us.
The “Stop Wall Street Looting Act” would serve to ignore limited investor liability and make private equity investment responsible for whatever happens to the companies that they invest in. These involve financial obligations that it is not even reasonably conceivable to try to justify, but no matter, as simply being conceivable is seen as enough and the reasonable part isn’t a requirement or a goal.
What is so ironic about this bill is that if this did pass, private equity would be severely constrained and this would mean that the grass roots business people that the Senator holds so dear, the ones that Amazon is allegedly depriving by selling their own brands alongside smaller merchants, will be the ones that will pay the most here.
It is very likely that a bill like this would have catastrophic effects upon the private equity market, one that a lot of businesses depend greatly on. The big corporations that Warren hates don’t, and it is actually pretty funny that she is looking to send all the investment out there away from the smaller and medium sized companies to the shelter of the big publicly-traded ones to avoid her ire.
In theory, we could pick and choose how we use a principal like limited liability, although even Congress has to answer to the judiciary and we cannot act too arbitrarily or they will step in straighten us out.
In the end, after we think this through, this sort of idea should scare left-wing politicians even more, as this would increase the level of polarization in our economy, in addition to stifling it overall. A lot of jobs would not be created and many would be lost, as if you can’t raise capital for your start-up or be able to borrow enough to keep it going, because there are some big disincentives to doing so, you’re going to have to curtail your business or even go out of business.
This money that moves away from private equity in this scenario would have some huge ramifications for our economy and would be a recipe for disaster actually. There’s no way that people will just keep keeping on and just bear these risks with a smile, as some might somehow imagine.
The key point that seems to be missed here is that if you threaten this capital, you will drive it away, and what happens next is what we need to focus on. You can’t protect people from being sent out into the cold by just sending them there now. Destroying the private equity market, and that’s exactly what this bill would do, would throw a lot of people out into the cold indeed.
This would result in a fire sale of private equity, because it would need to price in this risk and unlimited shareholder liability would simply be seen as obscene. A massive amount of wealth would be lost, and this would bring down the pension funds with it, who are struggling enough now. If we see people losing their pensions to bankruptcy, and wish to dramatically increase this misfortune, there may be no better way to do this than with this bill.
We need to always look at the big picture, and the one this bill paints is not only ugly but scary. The truly scary stuff isn’t popular in Congress, although this does not stop some members from coming up with ideas like this. There is no chance of this being passed, quite thankfully.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.