“In 1996, about 8,000 firms were listed in the U.S. stock market. Since then, the national economy has grown by nearly $20 trillion. The population has increased by 70 million people. And yet, today, the number of American public companies stands at fewer than 4,000. How can that be?” (Roge’ Karma. “The Secretive Industry Devouring the U.S. Economy”: The Atlantic, Oct. 30, 2023)
Karma’s answer is that private-equities companies are buying up public corporations, turning them private. By doing this, information about the companies is no longer available to the public or to government regulators. Karma believes this change is a grave danger to the U.S. economy and so do I. Here’s why:
Public companies are required by law to disclose financial information about assets, liabilities, and risks. If a company goes private, those regulations and government oversight disappear.
In 2021, about 20% of firms were managed by private equity companies. That’s up from 4% in 2000. Lack of transparency is not a good recipe for accountability.
During the stock market crash of 1929, the market lost 50% of its value in three months. Banks collapsed by the thousands causing its customers to lose their entire life savings, and for many, their homes. Unemployment hit 25%. Five years later, the government responded by creating the Securities Act of 1934 and the Securities Exchange Act of 1934 to review and regulate companies’ finances. The result of these regulations and oversight meant that for the next fifty years the economy experienced “the longest period of economic growth and prosperity in U.S. history”, Karma writes.
But in the 1980s, deregulation under the philosophy of capitalist economist Milton Friedman and libertarian-leaning President Ronald Reagan became popular, making it easier for private companies to raise capital.
1997 was the peak year for the number of public companies. Private equity companies increased, as have mergers and acquisitions. One example Karma cites is investments in nursing homes. Investment went from $5 billion in 2000 to $100 billion now. Profits came from cutting staff and replacing them with “psychoactive medication”. This meant there were fewer staff to answer client call buttons. Staff was forced to work while infected with COVID. According to a 2021 study, around 22,500 premature nursing home deaths occurred between 2005-2017 before COVID killed thousands. Karma notes that “If we had some form of disclosure, we probably would have seen regulatory action a decade earlier…. But instead, we’ve had 10-plus years of experimentation and abuse without anyone knowing,” reported Karma.
Similar approaches found their way into “higher education, retail, and grocery stores.” These private equities companies became infamous for “laying off workers, evading regulations, reducing the quality of services, and bankrupting companies while ensuring that their own partners are paid handsomely.”
The private equities argue the claims are exaggerated, and say they are reputational victims of a few bad apples—without providing any documentation. Sound familiar? Private equities have now grown into a $12 trillion dollar industry, often obtaining loans from other private equities, hoping that market conditions will restore their profitability.
Who loses if the equities bets don’t pay off and go bust instead? The answer is “pension funds, university endowments, and wealthy fund managers” (Karma). How bad will it be? No one knows because there is no transparency.
Karma ends his article with this quote: “Nearly a century ago, Congress concluded that the nation’s economic system could not survive as long as its most powerful companies are left to operate in the shadows.”
Will the lack of government regulation of the private equities industry result in another Crash of ‘29, and another Great Depression? I wish I could give you the answer, but the lack of transparency and information means we are operating in the dark—again, just like in 1929 and in the 2007-8 Great Recession.
Ignorance is not bliss. Greed is not good. A lack of transparency does not bode well for the nation’s economy.