The president of the AFL-CIO, Richard Trumka, has an op-ed in the Wall Street Journal calling for increased regulation of hedge funds, private equity, and venture capital funds.
Mr. Trumka writes:
Private-equity funds are leveraged private pools of capital that benefit from extensive tax subsidies. They are unregulated and shrouded in secrecy, and they extract big profits while the companies, their employees and many of their investors lose. In the Simmons case, the leveraged buyout firm that brought the company to bankruptcy walked away with $77 million in profits on top of hundreds of millions of dollars in special dividends. The Wall Street investment banks that arranged the deals pulled down big money, too. Meanwhile, a thousand employees lost their livelihoods, the company's bondholders lost more than $500 million, and a value-creating American company was in effect pawned for cash.
It's not entirely true that they are "unregulated." One of the biggest private equity shops, Blackstone, is a publicly traded company and subject to all the regulations that apply. Another giant, KKR, is publicly traded in Europe and is planning to go that route in America, too. Even non-public private-equity funds are subject to the same extensive regulation that any privately owned firm is subject to on matters such as the environment, non-discrimination, and employee health and safety.
Wall Street investment banks and bond offerings are highly regulated, and even Mr. Trumka acknowledges that both were involved in Simmons case. Why would regulating the private equity firms lead to any better outcome?
Mr. Trumka is weeping for the losses of the bondholders. But no one forced them to buy the bonds. They could have bought some other investment.
Mr. Trumka writes, "of the 163 nonfinancial companies that went bankrupt last year, nearly half were backed by leveraged buyout firms." That seems like an awfully low figure for the number of companies that went bankrupt last year. This article reports "More than 15,000 businesses filed Chapter 11 petitions to reorganize or liquidate in bankruptcy court in 2009."
Mr. Trumka writes: "Under current law, private investment vehicles—hedge funds, leveraged-buyout and venture-capital funds—function with virtually no oversight." Not true. Investment advisers, including hedge funds, with more than $100 million under management have to file quarterly forms 13 F disclosing their holdings. If they accumulate a certain-sized stake in a publicly traded company that has to be disclosed, too. They are subject to expansive fishing expedition-type document requests from the Securities and Exchange Commission such as this one, reported in a New York Sun editorial, that demanded a firm supply 22 things, including, as no.14, "All e-mail communications sent or received by Registrant's Chief Executive Officer for the period from September 1, 2004 through September 30, 2004, Chief Investment Officer for the period from October 1, 2004 through October 31, 2004, Chief Financial Officer for the period from November 1, 2004 through November 30, 2004, and Head Trader for the period from December 1, 2004 through December 31, 2004. If any one individual holds more than one of these titles, please provide the e-mails from the most recent of the months." And that's just government oversight, not the oversight that comes from clients and investors who aren't shy about wanting to know from fund managers what is happening with their invested money.
Mr. Trumka writes: "Comprehensive regulation of the shadow financial system is equally necessary to prevent the buildup of systemic risk like that which brought our economy to the brink of financial ruin." Yet the examples he gives -- the bankruptcies of Simmons, Linens 'n Things, KB Toys, and Mervyns, the closure of a Bronx bakery, and the decision by fashion firm Hugo Boss to move some jobs overseas -- hardly amount to systemic risk that could bring the economy to ruin. The labor leader focuses on the failures, but he makes no mentions of the many successful firms backed by hedge funds, venture capital, and private equity.
Mr. Trumka's closing paragraph -- "It's time to bring the shadow financial system into the light of day. It's time for Congress to stand up to these firms that gamble with working people's retirement money and insist that they provide the public with full disclosure and essential oversight" -- is particularly ironical coming from someone who exercised his constitiutional right under the Fifth Amendment to avoid answering congressional questions about his involvement in a contested Teamsters election. Where was Mr. Trumka's concern about "full disclosure" and "the light of day" then?