Private equity slashes and burns. Is government next?

Last April, the cashier at a corner store in Washington, D.C. began giving away merchandise for free. Bewildered patrons left the store carrying bottles of wine, presliced Gouda and grapes, organic cheese puffs, and the prized Nitro Oat Latte. What no one at the store yet realized is that this cashier, along with the rest of the staff around the country, had just been unceremoniously informed via email — many while actively working the store — that "as of the end of the day today, you will no longer be employed."

Foxtrot, the corner market chain with over 30 locations in Chicago, Dallas, and Washington, D.C., had recently been taken over by private equity; sold to a company that buys companies. For many who undertake the arduous process of building a business, this is a moment of triumph. You have successfully created something from the ground up, scaled it, and sold it to a larger firm that will now take it to even greater success. Sometimes, that’s exactly what happens.

Unfortunately, not all private equity firms are particularly interested in the success of any one given project or company. Some acquisitions are more appealing because of the opportunity to load down the newly purchased company with debt and ultimately close it. This is exactly what happened at Foxtrot. ‘That doesn’t make sense,“ you might be saying. ”How does anyone benefit from buying a company just to destroy it?“

In his book “The Buyout of America,” Josh Kosman describes in great detail the incentives of this kind of takeover. When a private equity firm takes over without the intention to maintain or grow the company, and then loads it down with massive debt. The interest they pay on that debt can be written off on the private equity firm’s taxes. There is no benefit to pay the actual debt back; it can be much more financially prudent to allow that business to file bankruptcy and close. The fastest path to shareholder gain is through slashing costs; this often manifests as less staffing and decreased safety protocols. The new company is operated as cheaply as possible, burdened with debt, and when the money runs out, it is bankrupted.

This has had some damaging effects in many industries; particularly noticeable in the health care sector, where understaffed facilities have led to an over 25% increase in people getting new conditions while they are already hospitalized. (This showed up most in falls and infections from surgeries and improperly executed IVs.) We have also seen the effects on housing; in Iowa, there was quite a bit of initial press given to the residents of mobile home parks taken over by private equity firms who subsequently raised the lot rents so high that many residents were no longer able to live in communities they had inhabited for decades.

All of this slash-and-burn style private equity got me thinking about the federal government.

There is a clear desire to dismantle and privatize government institutions that took centuries to build; institutions that needed the system of checks and balances to avoid the kind of decision-making that is influenced more by the ability to create profit than to create a functional society.

Medicare and Medicaid, the Consumer Financial Protection Bureau, the Centers for Disease Control and Prevention, the Department of Education, The Department of Defense, the Federal Aviation Administration — this is by no means an exhaustive list, but all of these agencies are on the chopping block. Step one in the private equity hostile takeover … reduce costs.

The truly horrific part about all of this is that it is cannibalistic in nature.

The largest investors in private equity funds, are in fact, pensions. We cheer when our retirement account is looking healthy, not realizing it is due to the costs saved by reducing the nursing staff that contributed to the hospital fall that accelerated grandma’s decline. Not considering what it’s costing the children in our own homes who we send to our Great Public Schools™.

So what is to be done? At a policy level, removing the deductibility of interest would largely deincentivize purchasing a company only to saddle it with debt there is no intent to pay. Additionally, taxing the 20% commission received from buying and selling companies as capital gains instead of as ordinary income. There have been attempts to accomplish both of these; however, as it turns out, sometimes it is cheaper to buy a senator than it is to pay your taxes.

Takeovers for the purpose of pillage follow a familiar script — lofty promises, swift consolidations, and an aggressive push for efficiency that often comes at the expense of the masses. Just as some private equity firms strip assets, load companies with debt, and extract short-term gains, a similar pattern is unfolding at breakneck pace in the federal government: institutions weakened, power concentrated, and public trust eroded. The question isn’t just who benefits today, but what remains when the dust settles. How long will it take our nation to become just another hollowed-out enterprise, primed for liquidation?

Sofia DeMartino is a Gazette editorial fellow. sofia.demartino@thegazette.com