When Democrats Protected Private Equity- AKA Tax Cheats

 

Hypocrites of the Year—Summers and Rubin

Last week, no fewer than five former treasury secretaries, Republican and Democrat, published a joint op-ed in The New York Times cheering on President Biden’s effort to raise more revenue by cracking down on tax cheats via increased resources for the IRS. The piece, written by Tim Geithner, Jack Lew, Hank Paulson, Bob Rubin, and Larry Summers, was titled "We Ran the Treasury Department. This Is How to Fix Tax Evasion." The piece pointed out that the government loses an estimated $600 billion a year in illegally evaded taxes that could be collected by a beefed-up IRS. Great point. To read the piece, you’d never know that these scoundrels presided over the stripping of the IRS and its enforcement staff, while they had the power to do the opposite. Larry Summers is famous for writing pieces implying that his views while he held power were the opposite of what they actually were, but this is a new low even for Summers. It’s also incautious, because the numbers are a matter of public record. Under Obama, when Summers was the top economic policymaker, the IRS budget was cut by about 20 percent and its audit staff was cut by a third, to just 9,500 auditors, the lowest number since 1953, when the economy was a lot smaller and the tax code was a lot simpler. The Times recently reported that the private equity industry, fiercely defended by Rubin and Summers, basically pays no taxes because it’s too complex for the IRS. Private equity did not exist in 1953. Even before Trump cut it further, the IRS conducted 675,000 fewer audits in 2017 than in 2010, a decline of 42 percent. During the same period of the Obama presidency, investigations of people who failed to file returns entirely dropped from 2.3 million to just 360,000. (These statistics are from an investigative piece by ProPublica, which is worth reading in its entirety.) Supposedly, it was the Republican Congress, with its special animus for the IRS, that made the Democrats do it. But that alibi doesn’t wash, because the president has to agree to the budget and has no small influence in the bargaining. The same downward trend occurred under Clinton. Obviously, protecting the IRS was a very low priority for Clinton, Obama, and their treasury secretaries. Deregulation was what got them up in the morning. Ever since Eisenhower’s Farewell Address warning about the influence of the military-industrial complex, former leaders occasionally get deathbed conversions and espouse policies that were the opposite of what they pursued while in office. We don’t need these guys to join the IRS bandwagon. It’s left the station. The conversion of Rubin, Summers, et al. to the cause of tax enforcement doesn’t even rise to better-late-than-never. It’s rank hypocrisy, and entirely in character.

~ ROBERT KUTTNER

How Private Equity Bankrupt J.C. Penny

David Dayen, American Prospect 
Century-old retailer JCPenney filed for bankruptcy late on Friday, the latest large retailer to succumb this year. And you could hear private equity fund managers breathing a sigh of relief. Unlike J.Crew and Neiman Marcus, JCPenney is a publicly traded company. At least private equity wouldn’t be called out for this retail bankruptcy, and maybe that could absolve them of the high debt loads and mismanagement that has driven much of the retail apocalypse. If public and private firms are equally at risk, maybe the sector’s just obsolete.
First of all, you can’t cherry-pick one company and absolve the failed PE business model. According to the Wall Street Journal, 27 of the 38 retailers with the “weakest credit profiles” are private equity-owned. The incredible debt burden placed on these firms made them inflexible amid industry changes. And that was JCPenney’s problem too; its downfall mirrored the tell-tale signs of a private equity portfolio company.
Back in 2010, hedge fund titan Bill Ackman and real estate investor Vornado bought a quarter of JCPenney stock, and vowed to turn around the company. They effectively installed a new CEO, Ron Johnson, who subsequently ran JCPenney completely into the ground. He brought in his own inexperienced managers, fired 19,000 workers in cost-cutting measures, and reorganized the stores without market testing. Sales dropped 25 percent in a year and by 2012 Johnson was fired. Ackman and Vornado sold out and took losses. Private equity circled around the company, hinting at a purchase. But there was a problem: it was already weighed down by too much debt.
By 2013, JCPenney had $1.9 billion in net debt. And a loan from Goldman Sachsadded another $1.75 billion. In other words, it was already acting like a private equity-held company, using debt to survive. Like its private equity-owned colleagues, JCPenney went into conserve-cash mode, shunning investments in the business. This made it impossible to adapt and build an enduring presence online as e-commerce grew. The company also sold off real estate, stripping assets out to feed the debt machine. 

But that debt mountain grew to $4 billion amid falling sales, and the coronavirus crisis tipped the company over the edge. It started skipping interest payments and the end was nigh. There are still 85,000 employees, most of them on the floor in sales and support. At least 200 stores will likely be shuttered.

After bankruptcy, JCPenney might finally become the attractive, debt-light company that private equity would want to play their turnaround game. It could find itself at the beginning of a new asset-stripping cycle, to the benefit of new private equity owners. The fear is that discounted, hobbled firms would get swallowed up into the PE borg, giving financiers an easy way to extend dominance.

But private equity may not be in the position to capitalize right now. Its portfolio companies keep going under or are considering bankruptcy. Major firms like KKRand Apollo have reported big losses. Valuations are impossible, given the uncertainty of reopening and returning sales. Selling companies, consequently, can’t happen. The federal government has supplied surprisingly little relief, although the Federal Reserve money cannon could still come to the rescue by purchasing junk bonds.

Private equity has lots of money in reserve for deals, and some have been dipping into that. But whether there will be enough appetite to take on companies like JCPenney is an open question. Meanwhile, we can say pretty definitively that the private equity business model adds hidden risk that can be incredibly damaging in a crisis. Where the valie lies is another question.