STOPPING VULTURE CAPITALISM

The term vulture capitalism is used to refer to financial manipulation techniques used to extract profits from companies without regard to their health or survival. [1] Workers, consumers, suppliers, and the communities where a company is based, as well as taxpayers, typically end up getting the short end of the stick while the vulture capitalists realize significant financial gains. In previous posts, I outlined the vulture capitalist business model and highlighted several examples of vulture capitalism in action.

Vulture capitalism is allowed and facilitated by existing laws and regulations. These need to be changed to restrict private financial gain at the expense of our society and economy. Vulture capitalism is like pollution, it harms the public good while private interests benefit.

Here are some steps that should be taken to rein in vulture capitalism:

  • Reduce the amount of debt (i.e., loans) a company is allowed to have. Pass laws setting limits or institute bank regulations limiting lending to companies with high levels of debt.
  • Limit the payment of dividends to vulture capitalists in the period right after they buy a company. Dividends could be banned for two years after the acquisition of a company, which is what Europe does.
  • Require increased transparency from vulture capitalists, including the disclosure of all fees and expenses they charge to companies they control, as well as the share of profits they take.
  • Stop the favorable tax treatment of the income of vulture capitalists (aka the carried interest loophole). Currently, their income is taxed at only 15% while other high-income individuals typically pay 35% to 40%. Vulture capitalists’ income should simply be treated the same way as everyone else’s earned income.
  • Reduce the tax benefit of companies’ large interest payments by reducing the deductibility of interest expenses when debt exceeds a certain level. (Note: The 2017 Tax Cuts and Jobs Act took a step in this direction by limiting the deductibility of interest when calculating corporate income tax. Businesses with revenues over $25 million are only able to deduct interest expenses of up to 30 percent of adjusted taxable income. This targets the biggest leveraged buyout deals and was included in the tax bill because it raises $253 billion in government revenue over ten years.) [2]
  • End the favorable tax treatment of commercial real estate ownership so that sale / lease back deals are not profitable.
  • Make stock buybacks, which artificially boost the price of a stock, illegal, as they were before 1982, especially if borrowed money is used to pay for them.
  • Treat vulture capitalists as owners of companies (which they are) instead of passive investors (which is how they are typically treated in court today). This would make them liable for unsafe working conditions and illegal treatment of workers, such as wage theft. They could also be held responsible for worker retraining and pension liabilities, for example, instead of being able to avoid these responsibilities when they put companies through bankruptcy.
  • Establish strict rules about conflicts of interest for vulture capitalists, so they can’t engage in self-dealing that enriches them while the company they own is stripped of assets and stability. Prohibit them from being both a shareholder (e.g., owner) and a creditor who has made loans to the company. Prohibit them from buying assets sold by the company. Prohibit them from keeping or reacquiring control of the company after it has gone through bankruptcy.
  • Change bankruptcy laws so that lenders to a company are not the first ones to get paid in a bankruptcy. Workers (and their pension benefits), suppliers and other business partners, and even communities that are harmed should not have to wait in line behind those who have loaned a company money, which usually means they get nothing in a vulture capitalism bankruptcy. The priority for paying lenders first in bankruptcy provides too great an incentive to provide big loans to companies for leveraged buyouts, dividend payouts, and acquisitions of other companies.
  • Give workers voting representation (or increased representation) on the Board of Directors of a company in return for concessions workers make in pay, benefits, working conditions, or workforce levels. This would reflect the fact that the workers have made a major investment in the viability of the company. In Europe, it is routine for workers to have voting representation on companies’ Boards. A strong argument can be made that US companies would be more equitably run if this were the case here.

I urge you to ask your elected officials to take action to stop vulture capitalism. It undermines our economy and society, contributes to economic inequality, and does substantial harm to workers, suppliers, consumers, communities, and taxpayers. The only people who benefit are the greedy vulture capitalists.

[1]      Wikipedia, retrieved 10/24/18, “Vulture capitalist,” https://en.wikipedia.org/wiki/Vulture_capitalist

[2]      Dayen, D., 3/20/18, “Private equity: Looting ‘R’ us,” The American Prospect (http://prospect.org/article/private-equity-looting-r-us)

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