Gretchen Morgenson: Private Equity Runs and Wrecks America

AMANPOUR: Now, our next guest says that elite Wall Street financiers are undermining the country’s economy for their own benefit. In her latest book, the Pulitzer Prize winning journalist, Gretchen Morgenson, traces the history corporate takeovers in the United States and the private equity firms who load newly bought companies with debt. Here she is talking to Walter Isaacson about how that impacts American workers.

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WALTER ISAACSON, HOST: Thank you, Christiane. And, Gretchen Morgenson, welcome to the show.

GRETCHEN MORGENSON, CO-AUTHOR, “THESE ARE THE PLUNDERERS”: Hi, Walter. Great to be here.

ISAACSON: Your book is called, “These Are the Plunderers.” And let me read something you wrote from it. You say, this is a book about modern-day plunderer, a relatively small group of financiers whose unrelenting pursuit of profits extracts wealth from the many to enrich the few. It’s about a business model that is pernicious and growing and widens the wealth gap. Boy, those are pretty tough words, plunderers, pernicious. Why are you — what is your goal here? Why are you so tough?

MORGENSON: Trying to get people’s attention, Walter. In this day in age, it’s tough, right? No. What we’re trying to do with the book, my co-author, Josh Rosner and I, is to really kind of open people’s eyes to a business model that, for the past 30, 40 years, has really been growing in dominance and growing in problems for the vast majority of people that come into contact with it. This is now called the private equity industry. Previously, it was known as the leveraged buyouts, you know, corporate readers from the 1980s, of course. But it’s now grown into an industry that is so dominant that 7 percent of the American workforce works for private equity backed companies. So, you have it in the retailing industry. You have it very vague in health care, which is extremely problematic. You have it in fast food. You have it — it’s really very pervasive.

ISAACSON: Well, wait. Explain to me exactly what they do. You say, leveraged buyout.

MORGENSON: Yes.

ISAACSON: These are people who buy troubled firms, is that approximately right?

MORGENSON: Well, it used to be. In the beginning, they were buying undervalued companies. Companies that the market was not valuing properly, that were perhaps troubled, had maybe gotten into some sort of a financial scrape or other. Nowadays, they really are just buying companies with the goal of improving them, streamlining them and selling them within five years.

ISAACSON: Well, wait a minute. You say improving them, streamlining them, that’s a great thing, isn’t it? Doesn’t that make our economy stronger, more nimble?

MORGENSON: Well, that’s the concept. And in concept, it does make the economy more nimble. But with many cases in private equity, what they end up doing is taking a company that is not really all that inefficient and making it more efficient by firing workers, by stripping it of assets, for instance, real estate under nursing homes is a very traditional tactic that these firms used to extract money from their deals that they do.

ISAACSON: But doesn’t that reduce the value of the nursing home? At which point, I would see no reason that a private equity firm would reduce the value of one of its holdings?

MORGENSON: Well, because they took the money out. So, they’re getting the money from the sale of the real estate, OK? That’s them and they’re limited partners, they are getting that. And when the company fails, they don’t end up losing anything. Here’s an example, this is ManorCare, a perfect example of this. Carlisle bought the company. A very big nursing home operation. They — after a couple of years after the transaction, they sold the real estate underneath the nursing homes. They got all their money out, pretty much. So, they were now free and clear. Then the company goes bankrupt. So, they really don’t pay the price if they do those kinds of transactions. They end up getting their money out, but the people who are left, the workers, the patients, by the way, the residents are harmed by this. So, that’s really where you are seeing the kind of me first aspect of this business model that I feel really needs to be questioned and examined.

ISAACSON: But if there’s a problem with nursing homes, isn’t that a responsibility of regulators to make sure nursing homes are safe as opposed to depending on the kindness of investors to say, we won’t make as much money as possible?

MORGENSON: Wouldn’t it be nice to be able to depend on the kindness of investors, Walter? I mean, honestly, I know that’s a dream. Regulators always, always behind one step, two steps. The very creative minds of Wall Street, I don’t need to tell you that. Regulation of nursing homes, very, very spotty. Not really — you have state authorities involved. You have — we’ve seen a tremendous number of problems with nursing homes that the regulations that exist have done nothing to prevent. One thing I’ll point out about nursing homes, and that is that private equity has gone into them quite substantially, an estimate of 11 percent of nursing homes in the country are owned by private equity firms. That’s probably low because you don’t always know these are secretive organizations, and you don’t always know who owns it. But there was a profound study by academics at NYU, UPenn and University of Chicago that did a longitudinal look at mortality rates in nursing homes. And they found that nursing homes — residents of nursing homes owned by a private equity had 10 percent greater mortality rates over time.

ISAACSON: Is there some cause of that or is that just a correlation?

MORGENSON: They attributed it to a decline in staff, lower staffing, meaning lesser costs. Of course, these people are looking for profit orientation so that they can sell the company after five or so years at a profit from where they paid for it. So, they attributed it to lower costs, you know, given over the staffing and that kind of thing, which does translate to problems for residents.

ISAACSON: One of the surprising statistics I saw in your book is that 40 percent, am I correct, of emergency rooms are owned by private equity? Why would they go into that and does that show some problem with emergency rooms?

MORGENSON: It’s not that they’re owned by private equity firms, Walter, they are operated by them. So, the hospital hires a staffing company to run their emergency department, and there are two very large staffing companies running urgency departments in this country. One is TeamHealth, the other is Envision, they are both private equity-owned. So, you have, along with some smaller private equity-owned companies, 40 percent of the nation’s emergency departments are operated and run by private equity. Now, why would they want to get in there? Because they are going to tell the hospital, we’re going to streamline this process. We’re going to make more money for you. And so, you should contractually, you know, get us to operate for you. The emergency room is a surprisingly profitable area of the hospital, and that’s where you see private equity really honing its focus, it’s where there are profits to be made. That’s why they’re in health care to such a degree. It’s 17 percent of gross domestic product. So, it’s a very large pool of potential money that they can tap into.

ISAACSON: You say that health care is 17 percent of gross domestic product, that’s way larger than most other nations. Isn’t there some systemic problem with the sort of inefficient, bloated way we do health care and maybe private equity is honing in on it, because it is indeed a problem the way we do it?

MORGENSON: No one will argue with you on that. Anybody who tries to see a doctor, tries to go to the hospital and gets the bill will absolutely agree with that. There are problems with this health care system in this country. The problem is that private equity isn’t making it better, Walter. Now, you may remember the surprise billing problem a couple years ago that both sides of the aisle in Congress actually reached together and did something about. It was so outrageous that, you know, both Dems and Republican said, yes, we got to fix this, that was the creation of private equity. Here’s how it worked. You go to an emergency department in your local hospital. You think the hospital is in your insurance network. You go thinking that, because you’re not going to have to pay as much. You then get a bill from the emergency department, which was run by a separate private equity company, that is out of network that ends up costing you way more than it would have if you would have been in network. That was a creation of a private equity company, and it was exposed by Yale, academics at Yale, and people were outraged by. So, no, they’re not generally making it more efficient.

ISAACSON: In your book, you’re right, let me quote from it, that private equity firms would emerge from the pandemic with even greater billions, an unsurprising outcome given their power. And you say that COVID-19 made it – – just made it easier to see. What did the pandemic reveal about these private equity firms?

MORGENSON: Well, one of the things it revealed, I think, was the devastation in our health care world and hospitals. The hospitals were so unprepared, Walter, for COVID-19 and for the pandemic, is a really good microcosm of one of the problems with private equity. Now, back in the mid-2000s, Congress asked for a study about what might happen in the country if there were a pandemic. We write about this in the book. And the study, I think it was CBO, said oh, well —

ISAACSON: That’s the Congressional Budget Office.

MORGENSON: The Congressional Budget Office, said, well, it would cause huge havoc. We need to invest in ventilators, we need to invest in hospital beds, we need to invest in equipment, protective equipment for the staffers. Anyway, of course nothing happened. We didn’t make those investments. And one of the reasons that hospitals may not have made those investments and health care companies was because that was the moment when private equity started to go into health care, to do the streamlining that they do so well, to cut costs, not to invest in ventilators that would sit on a shelf, OK? These folks don’t like money sitting on a shelf. And when you invest in ventilators and PPE and that sort of material, that’s money sitting on the shelf. So, it really was an interesting moment. Now, when COVID-19 strikes, and we see that there aren’t enough ventilators, we see that there aren’t enough hospital beds, you look back at that study and you say, well, what happened? And private equity is one of the things that happened.

ISAACSON: Well, let me read you, for the record, just statements that they’ve provided to you since — to both of you, since you’ve written the book, and maybe you can comment on it. One of them comes from the Blackstone Group, which is one of the ones featured in your book. It says, the false narrative underlying your book is based on a 1980s caricature of our industry that is contradicted by facts. We’re proud of the positive impact we deliver for our investors, portfolio companies and communities, including adding 200,000 net jobs to our portfolio companies in 15 years. And that they say their companies have rarely failed, the thousand companies they’ve invested in. Likewise, Leon Black is a character in your book. His firm, or what used to be his firm, Apollo, says it illustrates a misunderstanding of many of the facts surrounding transactions. We strongly encourage you from not printing misleading information. Tough pushback. Tell me what you feel about that.

MORGENSON: Well, Walter, what’s interesting about the Blackstone commentary, so, these firms do say they create jobs, they’re not job destroyers, that they add value. Of course, that’s their argument, that they create money for pensioners because pension funds invest with them. Let me go through a couple of those and so, we can talk about reality. The spin is, OK, Blackstone says it created 200,000 new jobs over 15 years. So, I asked Blackstone for the data backing that up. You know, just as they asked me for the data backing up my questions, I asked them. And they declined to provide it. So, you know, if you want to tell me that you created 200,000 new jobs, then give me the data. Give me the numbers so that I can verify, right? I thought that was interesting. Now, as far as the pensions and the returns to pensions, in the early stages of private equity, pensions were making more money through their investments with these firms. They were outperforming, the Dow Jones, the S&P. Now, they are not. And so, what you have is a situation where you might be better off buying and S&P 500 index fund and paying, you know, tiny fraction of the fees that you pay when you buy into a private equity firm.

ISAACSON: Let me ask you a more general question, as somebody who’s covered the economy. And I mean this as a genuine question. One way of doing it is hoping for corporations that are nurturing, that are very good to not only their shareholders but to their employees and their communities. They don’t worry too much about trimming every cost and making sure they have a skeletal staff, and it sort of creates that sort of enlightened capitalism we sometimes talk about, where all stakeholders benefit. Another way is saying the American economy is stronger whenever we make things more efficient. And companies have too much time focusing on things other than return on investment are making our economy weaker. How do you balance those two ideas?

MORGENSON: Well, I think that the first idea that you described is the goal, and I don’t see why we can’t try to make that a goal for American capitalism. You know, for the past, I would say, three decades, we have been working under the assumption that if the stockholder benefits, that’s all that matters, and that is exactly what the CEO has to worry about. The CEO will be paid if the stockholder benefits. And it really has been a shareholder-centric approach to capitalism. Well, I think you can agree that in those — in that period of time, the gulf between rich and poor in this country has vastly increased. So, I don’t think that’s a benefit. I don’t think it’s the only motivating — I don’t think it’s the only cause, but I do think it is a cause. And I think that during the earlier, you know, ’70s and up to about ’85, 1985, the middle class in this country was growing in its wealth that it held. It had a growing percentage of wealth, but that all changed around about the time that these takeovers started, pensions began to be obliterated. You had to do your 401(k) yourself, which is very hard to do. So, I think we look at that trajectory and say, OK, what’s changed over that period? A lot. We had offshoring. We have companies escaping the tax system in this country by going overseas. But I think this is a piece of the puzzle, and that’s why I think it’s really important to look at it. Why can’t capitalism improve the lives of all stakeholders?

ISAACSON: Gretchen Morgenson, thank you so much for being on the show.

MORGENSON: Thank you, Walter.