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December 14, 2016 8:52 PM   Subscribe

This Is Your Life, Brought to You by Private Equity [The New York Times] Since the financial crisis, the private equity industry has become hugely influential. As part of our series on what that means, here’s how the industry’s influence plays out in your daily life.

- Part 1: When You Dial 911 and Wall Street Answers [The New York Times]
“The business of driving ambulances and operating fire brigades represents just one facet of a profound shift on Wall Street and Main Street alike, a New York Times investigation has found. Since the 2008 financial crisis, private equity firms, the “corporate raiders” of an earlier era, have increasingly taken over a wide array of civic and financial services that are central to American life. Today, people interact with private equity when they dial 911, pay their mortgage, play a round of golf or turn on the kitchen tap for a glass of water. Private equity put a unique stamp on these businesses. Unlike other for-profit companies, which often have years of experience making a product or offering a service, private equity is primarily skilled in making money. And in many of these businesses, The Times found, private equity firms applied a sophisticated moneymaking playbook: a mix of cost cuts, price increases, lobbying and litigation.”
- Part 2: How Housing’s New Players Spiraled Into Banks’ Old Mistakes [The New York Times]
“When the housing crisis sent the American economy to the brink of disaster in 2008, millions of people lost their homes. The banking system had failed homeowners and their families. New investors soon swept in — mainly private equity firms — promising to do better. But some of these new investors are repeating the mistakes that banks committed throughout the housing crisis, an investigation by The New York Times has found. They are quickly foreclosing on homeowners. They are losing families’ mortgage paperwork, much as the banks did. And many of these practices were enabled by the federal government, which sold tens of thousands of discounted mortgages to private equity investors, while making few demands on how they treated struggling homeowners. The rising importance of private equity in the housing market is one of the most consequential transformations of the post-crisis American financial landscape. A home, after all, is the single largest investment most families will ever make.”
- Part 3: How Private Equity Found Power and Profit in State Capitols [The New York Times]
“Yet even as private equity wields such influence in the halls of state capitols and in Washington, it faces little public awareness of its government activities, The Times found. Private equity firms often don’t directly engage with legislators and regulators — the companies they control do. As a result, the firms themselves have emerged as relatively anonymous conglomerates that exert power behind the scenes in their dealings with governments. And because private equity’s interests are so diverse, the industry interacts with governments not only through lobbying, but also as contractors and partners on public projects.”
- Part 4: How the Twinkie Made the Superrich Even Richer [The New York Times]
“Across the nation in the summer of 2013, there was a feeding frenzy for Twinkies. The iconic snack cake returned to shelves just months after Hostess had shuttered its bakeries and laid off thousands of workers. The return was billed on “Today” as “the sweetest comeback in the history of ever.” Nowhere was it sweeter, perhaps, than at the investment firms Apollo Global Management and Metropoulos & Company, which spent $186 million in cash to buy some of Hostess’s snack cake bakeries and brands in early 2013. Less than four years later, they sold the company in a deal that valued Hostess at $2.3 billion. Apollo and Metropoulos have now reaped a return totaling 13 times their original cash investment. Behind the financial maneuvering at Hostess, an investigation by The New York Times found a blueprint for how private equity executives like those at Apollo have amassed some of the greatest fortunes of the modern era.”
posted by Fizz (19 comments total) 35 users marked this as a favorite
 
The president-elect had his start as a Manhattan slumlord, and now holds vast *private equity* stakes in real estate worldwide. I require no further examples.
posted by nickrussell at 9:27 PM on December 14, 2016 [3 favorites]


Apologies if this is 101, but is this worse than regular old privatization of government services? In what ways is it different?
posted by Rainbo Vagrant at 11:19 PM on December 14, 2016 [1 favorite]


Rainbo Vagrant, the difference is a whole new level of ruthlessness. This may be over-simplification but private equity companies get in by buying up holdings, make as much money as they can using short term profit maximizing tactics, and move out before the long term consequences hit while the executives fuck off to their private islands.
posted by dagosto at 12:21 AM on December 15, 2016 [20 favorites]


"but is this worse than regular old privatization of government services? In what ways is it different?"

My privatized garbage service is run by a local company named $City Disposal Company that's been around for 50 years whose owner goes to my church and his grandkids play soccer with my neighbor and I can literally talk to the guy who owns it when there's a problem and perhaps more to the point, the city can.

Our private equity owned 911 service, OTOH, is owned by a faceless equity fund that is sold so often nobody knows who the fuck is in charge and they cut ruthlessly and with no interest in quality of local services ... just profit extracted, because they're going to extract a profit and bail and give it to the next equity company. When it's contract negotiating time they've got a team of lawyers in town negotiating hard, but when old ladies die because they cut ambulance staff, they can't even be arsed to return calls from the city council until a lawsuit is filed.

Scale of privatized local monopoly services in terms of quality and responsiveness goes, from excellent to terrible:
Locally owned garbage company
Regionally owned water company
State-wide private electrical utility (highly regulated)
AT&T (highly regulated)
Comcast
Private equity owned 911 & ambulance services

WORSE THAN COMCAST.

True story, the 911 private equity is so uninterested in providing services or paying to upgrade anything that some of the firehouses get their 911 call location information via FAX and they set up empty soda can towers so the paper coming out of the fax knocks the cans down with a clatter in case nobody's in the fax room.
posted by Eyebrows McGee at 1:47 AM on December 15, 2016 [50 favorites]


Oh, I should add, the city's been looking for an alternative to the private equity 911 the last several contract cycles but private equity has driven all the regional ambulance companies out of business (by undercutting them for several years until they fold, because they can run at a loss, and then contentedly raising rates and profits when the competition has vanished) and re-starting it as a municipal service is considered prohibitively expensive because of up-front capital costs.

Once a municipality privatizes something it's awfully hard to re-municipalize it. (Like, even the water company and the local GOP agree the city here needs to turn the water back into a municipal system but nobody can figure out the economics.)
posted by Eyebrows McGee at 1:54 AM on December 15, 2016 [30 favorites]


But Twinkies!
posted by chavenet at 2:34 AM on December 15, 2016 [1 favorite]


Oh hello! Rail privatisation. Suddenly I have the expertise to contribute (at least till Garius turns up)
The UK rail privatisation was a disaster of ideology over common sense. In fact what they did was split it up so that one company owned and maintained all the tracks and then companies could bid for franshises to operate trains so that there was some semblance of competition.
It was done very very hastily though and did not go well.
At first the track maintenance company more or less discovered that they would get paid (basically still by the government) to have a lot of managers, but not really get paid very much for fixing the track. So they didn't really do much track fixing.
This led to 60 deaths and 1000 injuries over their 8-year tenure. So they were rapidly wound up and the track turned back over to a publicly owned company (by contrast, there have been 25 killed and 240 injured in the last 14 years under the new public operator, with the great majority of those being in the first 3 or 4 years after taking over from Railtrack)*

The current government is very keen on privatisation and union busting, though, so we're rapidly forgetting these fairly stark numbers, as they again talk about splitting up Network Rail into private affairs. They're also building a new railway to be privately run track and trains all. They possibly are not realising that the reason track maintenance is expensive is because we'd prefer people not die.

On the franchise front this still happens and yes, they are mainly owned by the Dutch, French and German national rail companies. There is a concession (rather than a franchise) running trains from Brighton to London (and generally around) which is going very badly. This is because the government have decided to push the rail unions over what they consider to be a safety issue (guards on trains) possibly in a Thatcheresque union busting stunt. The issue here is that the franchise operator has no say in this, and has guaranteed profits (because it's not really a standard franchise) in the hope that everyone will get fed up of the massive disruption and blame the unions. Southern rail is effectively a condom for the government anti-union activities.
So again, it's all taxpayer money being funnelled out of the system in the name of efficiency.
The small bright spot of the franchising debacle is that it's not private equity so much that's profiting there but state operators in other countries.

The third triumvirate of the rail privatisation in the UK is rolling stock leasing.
So, the track was owned by private equity, but that led to deaths and is now private. The trains are run by privatised companies who are mainly run by foreign state railways. The operators themselves don't actually own any trains. They are required to lease trains from ROSCOS (rolling stock operating companies) these are pretty much all owned by private equity firms and large banks and don't get very much press. But they essentially get a risk free load of cash, because most of the risk on rolling stock is bound up in the franchise contract. All the publicity when it goes wrong is on the franchise operator. The Roscos sit behind it all, taking in a lot of money, and are subject to very little scrutiny.





* Do excuse all these stats, I'm currently working on some rail Health and Safety analysis, so I'm very much in facts and figures mode
posted by Just this guy, y'know at 2:53 AM on December 15, 2016 [26 favorites]


A little example from a local council in the UK. Private contractors came in to cut grass but using the council's own fleet of machines. They could afford to be reckless with those, constantly damaging them with poor technique, because they got fixed by the council. (The council employed workers who used to be cutting grass had to do other things.)
posted by yoHighness at 4:54 AM on December 15, 2016 [2 favorites]


Public support for renationalising the railways is high, but it can't be done because the private companies currently making a profit from the trains would sue the country out of existence.

Not really, they could just not renew the franchises there's nothing legally problematic about it. The real reason no government will do it is that the Department for Transport doesn't want to lose the franchise income and more importantly, no government wants to lose the insulation between themselves and rail performance.

At the moment, when a train is late, public anger is directed at the train companies. In theory people know that the government sets the allowed rate for season ticket fares but the real vitriol over high prices is directed towards the train companies rather than the government.

No government minister wants that to be directed at them.

I'm not actually convinced that re-nationalising the whole thing (as it was between 1948 - 1997) would necessarily improve cost or performance unless there was a shift in policy that led to more general taxation revenue being used for railway infrastructure and services.
posted by atrazine at 6:41 AM on December 15, 2016 [4 favorites]


In what ways is it different?

Lots of the debt that can be strategically defaulted on, but has to be repaid before profits.
posted by PMdixon at 7:04 AM on December 15, 2016


Suddenly I have the expertise to contribute (at least till Garius turns up)

Nah - you said it all better than I could, although Southern's problems run way deeper than just the strikes. The strikes make for good soundbites and vox pops though so mainstream coverage rarely goes much deeper.

Indeed in a way that Franchise is an absolute microcosm of all the problems of rail privatisation - there are track and signalling problems that investment got delayed for, rolling stock shortages because the ROSCOs don't really give a fuck as long as the cash is coming in and yet you still have political interference (the union-busting).

That was why they effectively got a monstro-franchise on a border-line concession model - because all the potential Train Operating Companies saw this coming and said point blank that no one would take on the franchise without guarantees they'd still get paid whilst performing prophylactic work for the DfT.

Mind you, sources tell me that even Govia are getting very, very bored of being the Dft's hired goon now and there are distinct rumblings from both themselves and a bunch of other TOCs about getting out of the game completely and focusing on either other areas of the business or only working with people like TfL who have been quietly building up an excellent set of mutually relationships with Arriva, MTR et al. who run the Overground and TfL Rail/Crossrail.

So, weirdly, we may eventually get renationalisation not because it's politically beneficial to do so, but simply because the DfT run out of TOCs prepared to run the railway without the kind of 25-year, locked in profits franchises that even the Tories wouldn't stomach.

Not that there'll be more local rail devolution in the near future of course. That's all fucked up now because Grayling (the transport minister) and Khan (Mayor of London) have vehemently hated each other since they were on opposite sides of the Commons as Justice and Shadow Justice ministers. Both men are locked in a petty, political dick-waving contest over Southern that serves no purpose other than to terrify the shit out of TfL, who have repeatedly told the Mayor that they couldn't run Southern any better if they had control (for all the reasons above) without a shedload of money they don't have.

Fun and games...
posted by garius at 7:11 AM on December 15, 2016 [13 favorites]


Oh and just to add to the list of "Southern as a microcosm" problems - one of the issues they've got is that fracturing the railway into franchises instantly made train drivers a valuable resource. And because - at least to begin with - TOCs didn't see the profit in developing skills (which costs money) they massively cut back on training new drivers.

You can guess how that worked out in the long term - driver shortage! Which means the TOCs spend a whole bunch of time and money luring drivers away from each other which then naturally, in turn, has an impact on services that the TOC on the receiving end can offer as well as taking away another chunk of dosh that could otherwise either be invested back into infrastructure or used to lower fares.

Yay! Capitalism!
posted by garius at 7:21 AM on December 15, 2016 [4 favorites]


The underlying assumption of neoliberalism is that the market will provide better services with less overhead than government can.

The truth is that this is absolute bollocks, and the post above proves it. There's no incentive for privatized government services to provide better services, only to maximize profit and shareholder value which is directly in opposition to what a government service is supposed to do.

But something something market capitalism == freedom from tyranny or something.
posted by SansPoint at 7:24 AM on December 15, 2016 [13 favorites]


Which means the TOCs spend a whole bunch of time and money luring drivers away from each other which then naturally, in turn, has an impact on services that the TOC on the receiving end can offer as well as taking away another chunk of dosh that could otherwise either be invested back into infrastructure or used to lower fares.

To be fair, this driving up of wages is ultimately good for the drivers and it sets a floor on how badly any given TOC can drive its drivers.

In regulated electricity distribution utilities in Great Britain (may NI as well, but I don't know that market) training costs for new apprentices are treated as a special pass-through cost that's directly recoverable outside their regulatory settlement.

That's because the whole industry (and all customers everywhere) benefits from a greater pool of qualified technicians. The way it's set up, companies have an incentive to train technicians even if they immediately leave to join another distribution company. There's a target number of new apprentices nationally for each regulatory cycle and companies compete which each other to convince the regulator that they should get a greater share of the funding for training them.

I wonder if it would be possible to introduce something similar for TOCs?
posted by atrazine at 7:35 AM on December 15, 2016


can we talk about a) private equity rather than merely b) privatization? because a) is a really nasty subset of b) with its own issues.
posted by lalochezia at 8:22 AM on December 15, 2016 [2 favorites]


Hey, Private Equity, can you provide a bucket for me to be sick in?
posted by The Underpants Monster at 8:57 AM on December 15, 2016


The Underpants Monster: Yes. It'll be made of paper-thin plastic and the handle will break off if you vomit more than a few ounces, but at least it's only costing you a buck. (90 cents of which is pure profit.)
posted by SansPoint at 9:05 AM on December 15, 2016 [5 favorites]


Mod note: Comment removed. MattD, you've been doing a lot of fight-starting threadshitting lately and you need to cut it out.
posted by cortex (staff) at 11:17 AM on December 15, 2016


But something something market capitalism == freedom from tyranny or something.

Yeah, the whole God-driven invisible hand o' the market crap doesn't even work when there's an enforced monopoly. In that situation, it's just extract rent as fast as you can.
posted by Mental Wimp at 12:17 PM on December 15, 2016 [2 favorites]


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