PHILADELPHIA—The Netroots Nation presidential candidate forum was a sleepy affair, with four hopefuls mostly rehashing existing positions before a generally admiring audience. But one moment shook that up, when Sarah Woodhams, a 33 year-old former employee at Toys “R” Us, took the stage with her baby to pose former Housing and Urban Development secretary Julián Castro a question.
As the Prospect has documented, private equity firms KKR and Bain Capital, along with real estate firm Vornado, took over Toys “R” Us in a leveraged buyout and dumped over $5.3 billion in debt on the company, digging a hole that proved impossible to climb out from. Toys “R” Us operating income grew each of its final three years, and in 2017, its final year, it was responsible for 1 out of every 5 toys sold in the U.S. But the $450 to $500 million in annual interest payments pushed the retailer into insolvency, while the private equity managers walked away with advisory and management fees, deductions, and tax write-offs.
This is a troublingly familiar story: private equity loads up companies with debt, strips out the profits, and leaves an empty carcass along the road in the aftermath. It has become a particular tragedy for the retail industry, a sector with 4.85 million workers that has seen dozens of private equity-induced bankruptcies over the years, leading to lost jobs and misery for hundreds of thousands of families.
Julián Castro didn’t seem to know much about it.
While antitrust enforcement generically has emerged as a signature issue within the campaign, the plight of working people operating in the face of overwhelming corporate power has its blind spots. Policymakers must understand the way the modern economy works if they ever want to have a chance to reform it.
Sarah Woodhams, of course, knows through personal experience. She spent seven years at the Babies “R” Us outlet in Harleysville, Pennsylvania, about a 45-minute drive from Philadelphia. That store closed in June 2018, along with the rest of the Toys “R” Us empire. “In recent years, dozens of retail companies controlled by Wall Street have gone into bankruptcy, including RadioShack, Payless, and Kmart,” she told Castro at the candidate forum. She estimated that 15,000 jobs vanished in Pennsylvania just from store closures at Toys “R” Us and Sears alone.
“Billionaires buy up these companies, make huge profits on our backs, and get away with it because there’s no financial regulation,” Woodhams explained. “As president, what will you do to hold private equity firms and hedge funds accountable for the destruction of our communities and livelihoods?”
There are a lot of potential answers to this question. You could say that private equity firms thrive on using borrowed money and transferring it onto the companies they buy, and that should be outlawed. Or you could call for additional limits on the tax deductibility of interest payments, which advantages debt over equity. You could suggest a ban on asset stripping like sale-leaseback plans, where a private equity firm splits the company from its real estate and then forces the company to rent space it once owned.
You could make private equity firms joint employers, and therefore responsible for pension liabilities at the companies they own. You could increase transparency on monitoring fees or ban dividend payments within the first two years of a purchase, so private equity managers could not enrich themselves by sucking value out of a debt-hobbled company. Finally, you could just ban private equity firms by closing the loopholes in the 1940 Investment Company and Investment Advisers Acts that allow them to use leverage to take over companies.
Here was Julián Castro’s answer. “I don’t believe any bank or company is too big to fail.” That’s a non sequitur when talking about private equity; the problem isn’t their failure but the failure of the companies they purchase. He continued by saying that “everyone should be held accountable,” and then pivoted to his housing plan.
Castro didn’t come close to answering the question, or even identifying what the question was. He had no framework to address the ways in which Wall Street investment firms have wrested control over the livelihoods of millions of Americans, and prioritized financial engineering over the well-being of the working class.
I talked to Woodhams right after the forum, and asked her what she thought of Castro’s answer. “He had some good ideas,” she said, incredibly diplomatically. “I think he could have delved a little deeper.” It obviously wasn’t good enough for her, because I was told that, a little while later, Woodhams found out that Castro was having dinner at the Hard Rock Cafe a couple blocks from the convention center. She ran over and told him that his answer wasn’t good enough, asking again for legitimate solutions. Castro reportedly stammered through another non-answer.
Castro’s campaign did not respond to a request for comment as of press time.
Woodhams isn’t the kind of person who just appeals to a politician for help in the face of adversity. Through United for Respect, a coalition of retail workers who have experienced job loss at the hands of private equity, she helped win $20 million from KKR and Bain Capital for a severance fund for workers who never received theirs. Toys “R” Us workers also fought for and won a $2 million severance settlement in civil court a few weeks ago.
“Yes, we made some historical wins,” Woodhams said, “but it’s happening again and again and again, and it’s not just going to be retail. It’s going to start affecting everyone as long as hedge funds and private equity firms go unchecked.” Indeed, a block from where Woodhams questioned Castro, a private equity baron is closing the 171 year-old Hahnemann University Hospital and selling off the real estate.
Woodhams did personally meet with Kirsten Gillibrand in D.C., who offered advice and support and wrote a letter to Bain and KKR asking for severance. Cory Booker has also been vocal about Toys “R” Us, which was headquartered in New Jersey. Bernie Sanders has filmed multiple videos with former Toys “R” Us workers. Sanders is also rallying today outside Hahnemann hospital; the contrast between his actions and Castro’s words is dramatic. “We already had the support of quite a few of them,” Woodhams said. “We’re looking for support from all of them.”
But even for those most sympathetic to the cause of the victims of private equity disasters, support has not advanced from public pressure to tangible policy. It’s entirely justified for politicians to challenge private equity managers to reverse their decision to close companies, or demand restitution for workers; it’s also rather pathetic, as it treats financiers as the more powerful actor, with the only avenue to change lying in begging them to use their dominion over the country for good.
That’s not the only option, but no candidate has articulated any actual policy that would bring large investment firms to heel. There are 500 times fewer coal workers than retail workers, yet far more attention paid to the former’s plight. Private equity, like a virus, has shot through the economic bloodstream, and Democratic policymakers are years behind the times in even diagnosing it, let alone devising an antidote.
Some of that, of course, involves the old Upton Sinclair adage: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Most Democrats raise prodigious sums from hedge funders and private equity managers, and don’t want to look too deeply at how their bread is buttered. More important than the money is the influence it purchases, the space in a politician’s mind that thinks twice before scolding potential donors. The two candidates divorced from that glad-handing are Sanders and Elizabeth Warren, who aren’t holding high-dollar fundraisers and selling access. A real policy to rein in private equity is most likely to come from one of those two campaigns.
“The average person doesn’t even know what a hedge fund is. They’ve never heard of private equity,” said Woodhams. Democratic candidates “have the power to say no, this is not OK, and to put in these regulations.”
This article has been updated.