To The Surprise of Absolutely No One

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The game is rigged, no, you aren’t paranoid, they are out to get you (and your money):

When liberals talk about economic regulation, they often use eye-rolling abstractions like “accountability” and “transparency.” What do those things even mean? How are those objectives enforced, and what would this enforcement even look like? Luckily we have a real-time example of what it all means, courtesy of Dodd-Frank and the SEC. It involves one of the more controversial parts of the financial markets, and it gives us a view into how reform happens.

As a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, private equity firms must register with the Securities and Exchange Commission (SEC). This, in turn, allows the SEC to examine the behavior of private equity firms on behalf of investors. The SEC just completed an initial wave of 150 firms, and what it found is shocking.

These results were unveiled last week when Andrew Bowden, the director of the SEC’s examinations office, gave a speech titled “Spreading Sunshine in Private Equity.” The big takeaway: Half of the SEC’s exams find corruption in the way fees and expenses are handled. Or as Bowden forcefully describes it: “When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time.”

As Bowden notes, the business model of private equity, which manages almost $3.5 trillion dollars of our nation’s assets, has unique conflicts of interest built into the structure. Private equity firms use their client’s money to do leveraged buyouts of companies. Since this gives them major operating control of both the investment and a pool of other’s investment money, there are significant opportunities to shift costs and otherwise skim off their investors.

Bowden’s speech has numerous examples. One scam is to fire employees of the private equity firm and rehire them immediately as “consultants.” The investors are responsible for consultants’ salaries, where private equity employees are paid out of their own pockets. Another is taking what most private equity investors believe to be part of management fees, things like legal and compliance costs, and billing their investors for them without the investors properly knowing it. A third is private equity firms lying about the valuation methods they use to tell investors about the returns they make each year. All of these are ways for private equity firms to take money from their investors for themselves.

To the additional surprise of no one at all, Republicans are working to remove this requirement so that we won’t be burdened with the uncomfortable knowledge that we are being rogered by Wall Street.

40 replies
  1. 1
    ulee says:

    My grandfather told me the game was rigged. I just thought–oh granddad, that’s paranoid talk–now I know he was right.

  2. 2
    jake the anti-soshal soshalist says:

    Either Fred Pohl or C. M. Kornbluth referred to the Stock Exchange as a casino in Gladiator at Law in 1955.
    Nothing has changed since then to make me think they were wrong.

  3. 3
    VFX Lurker says:

    The prudent investor treats almost the entirety of the financial industrial landscape as an urban combat zone. This means any stock broker or full-service brokerage firm, any newsletter, any advisor who purchases individual securities, any hedge fund. Most mutual fund companies spew more toxic waste into the investment environment than a third-world refinery. Most financial advisors cannot invest their way out a paper bag. Who can you trust? Almost no one.

    — William J Bernstein, The Investor’s Manifesto, 2009

    In the book, the author recommends sticking with low-cost Vanguard index funds.

  4. 4
    efgoldman says:

    The post title says it all.
    Some of these private equity weasel parasites need to be introduced to the court system.
    Hell, I work in the brokerage/mutual fund business, and my company wouldn’t dare pull any of that bullshit.

  5. 5
    Baud says:

    Private equity investors are typically really wealthy. If they can’t avoid being scammed without government oversight, who can?

  6. 6
    Raught says:

    I will never tire of that photo.

    Fuckers.

  7. 7
    The Bobs says:

    Isn’t this a description of Mitt Romney’s career?

  8. 8
    BBA says:

    Private equity is in the class of investments that’s limited to people with net worth over $1M. This isn’t the rich ripping off the poor, it’s the super-rich ripping off the rich.

  9. 9
    efgoldman says:

    @BBA:

    Private equity is in the class of investments that’s limited to people with net worth over $1M. This isn’t the rich ripping off the poor, it’s the super-rich ripping off the rich.

    Doesn’t matter whether the customer’s got ten becks or ten billion, the fund manager has a fiduciary duty to the client.

    Theoretically.

    Interestingly, I bet the likes of Warren Buffett know not to invest in any of that shit, no matter what the promised returns.

  10. 10
    Roger Moore says:

    To the additional surprise of no one at all, Republicans are working to remove this requirement so that we won’t be burdened with the uncomfortable knowledge that we are being rogered by Wall Street.

    This isn’t us being fucked by Wall Street; this is scum like Mitt Romney stealing from his well heeled clients. There is no honor among thieves.

  11. 11
    Roger Moore says:

    @efgoldman:

    Interestingly, I bet the likes of Warren Buffett know not to invest in any of that shit, no matter what the promised returns.

    Berkshire Hathaway is basically Buffett’s alternative to private equity. It’s a big holding company that buys and sells interests in other companies and often provides management in the process. The big difference is that Berkshire Hathaway is a publicly traded company that has to meet considerably more rigorous standards of transparency than the a private equity investor.

  12. 12
    efgoldman says:

    @Roger Moore:

    The big difference is that Berkshire Hathaway is a publicly traded company that has to meet considerably more rigorous standards of transparency than the a private equity investor.

    Exactly.
    Also, Buffett doesn’t vulture the companies he buys. He picks up things with a record of long term success, and usually leaves the existing management in place.

  13. 13

    I’m reading Flash Boys right now. To think the level of corruption on Wall Street begins and ends with the big banks is to miss how truly fucked up we are completely.

  14. 14
    Suffern ACE says:

    @Baud: bingo. This is the rich passing their money around to men in nice suits. When you have more money than you can track or figure out what to do with, the fees for managing it are quite high.

  15. 15
    Roger Moore says:

    @efgoldman:

    Also, Buffett doesn’t vulture the companies he buys. He picks up things with a record of long term success, and usually leaves the existing management in place.

    There are actually plenty of private equity firms that do about the same thing. Private equity covers a huge range of practices. There are venture capitalists who fund startups, takeover companies that buy out profitable companies and take them private, vulture funds who take over failing companies and try to turn them around, and asset strippers like Mitt Romney.

  16. 16
    mai naem mobile says:

    I am shocked there is gambling going on in that establishment with slots,cards and roulette wheels. Who knew?

  17. 17
    JGabriel says:

    John Cole @ Top:

    To the additional surprise of no one at all, Republicans are working to remove this requirement so that we won’t be burdened with the uncomfortable knowledge that we are being rogered by Wall Street.

    I get why I hate Republicans. But given the above, what I don’t get is why more of the rich don’t hate them.

    I mean, seriously, if you’re investing in private hedge funds, odds are you’re pretty wealthy. At the very least you’ve got enough to pay all your expenses, invest in hedge funds, and pay all of their considerable fees too – fees that are inflated by the corruption Republicans are voting to protect.

    So, it’s largely rich people who are getting rogered here. And yet many of them will continue to support the very party than votes to enable the thieves who are ripping them off.

    I just don’t get it.

  18. 18
    Avery Greynold says:

    With over 50 percent crooked, that leaves maybe 47 percent obeying the rules. These Obama types aren’t taking personal responsibility for enriching themselves.

  19. 19
    liberal says:

    @Roger Moore: istr that there are public pension funds that invest in private equity.

  20. 20
    Wag says:

    @efgoldman:

    The fund managers respect their fiduciary duty to their client. Their clients just aren’t the investors. Their clients are other managers.

  21. 21
    Jay C says:

    @JGabriel:

    Try this concept: the rich tend not to hate Republicans for a number of well-considered reasons:

    1. As a Party, they are more likely than Democrats to be able to be bought outright.*
    2. As a consequence of this purchasability, the GOP will reliably vote for the interests of Big Money.
    3. Partly as a matter of political philosophy, partly due to Point No 1, Republicans are far less likely to enact any
    serious regulations on the FIRE sector of the economy, and/or repeal existing ones.
    4. Republicans are also far more likely than Democrats to gut, (or downplay, or eliminate) government enforcement efforts re said regulations.
    5. Republicans’ tax policies always favor the rich.

    So as badly as some rich folks may get “rogered” by the Thieves Of Wall Street, they know that one Party will reliably vote in their (classes’) best interests: the other one, they can’t always be sure of.

    *These are sets of “likelihoods” – there are certainly plenty of Dems in the bag, too: don’t be fooled…

  22. 22
    Ksmiami says:

    @efgoldman: you are all better off buying stocks and bonds of good companies and letting time do the rest otoh index funds can achieve similar results… Everything else is designed to skim a clients account

  23. 23
    JGabriel says:

    John Cole @ Top:

    The game is rigged, no, you aren’t paranoid, they are out to get you (and your money) …

    You know, if I wanted to get skimmed, scammed, ripped off and rogered in a rigged game, I’d just sign up for Eve Online.

    It’s got to be a lot cheaper than investing in private hedge fund.

  24. 24
    xenos says:

    @JGabriel: The big money is not in rich people investing in private equity (and hedge funds, which is a different bucket of lampreys) but in pension funds: These are the big investors these days – Calpers, Florida Board of Administration, New York State Common Fund, and so on. Canadian pension funds, too.

    They have cash rolling in every week and they have to invest it. The have to take a lot of risk just to try to get an 8% annual return. The stock market is overpriced and real estate is crooked on a scale that would make Mit Romney ashamed. So they go where they can. Big pension funds that are well run get better deals and transparency, but they do not get nearly enough.

  25. 25
    xenos says:

    @JGabriel: The big money is not in rich people investing in private equity (and hedge funds, which is a different bucket of lampreys) but in pension funds: These are the big investors these days – Calpers, Florida Board of Administration, New York State Common Fund, and so on. Canadian pension funds, too.

    They have cash rolling in every week and they have to invest it. The have to take a lot of risk just to try to get an 8% annual return. The stock market is overpriced and real estate is crooked on a scale that would make Mit Romney ashamed. So they go where they can. Big pension funds that are well run get better deals and transparency, but they do not get nearly enough.

  26. 26
    Mike G says:

    Sounds like private equity was the perfect industry for a congenital liar like Rmoney.

  27. 27
    danielx says:

    I am shocked, shocked…..

    @JGabriel:

    And yet many of them will continue to support the very party than votes to enable the thieves who are ripping them off.

    They do. They may have issues with individual parts of the Republican program, whatever that is besides cutting taxes and bombing brown people. But they know that in the final analysis, the Republican Party’s #1 priority above and beyond all else is defending the interests of its wealthy backers. A lot of the people getting skinned aren’t really wealthy by Republican standards. To be considered wealthy, you need to have net worth edging up into the mid eight figures at least and be willing to write some serious checks to get a Senator on the line. If a few of those little people get skinned by someone who can write a lot bigger check to the Rs, well, Reince Priebus can live with that.

  28. 28
    Mike G says:

    @JGabriel:

    So, it’s largely rich people who are getting rogered here. And yet many of them will continue to support the very party than votes to enable the thieves who are ripping them off.

    Which tells you how few of them are honest.

    Honest investors want a robust regulatory system to weed out the crooks and maintain confidence in the integrity of the financial markets to encourage wide participation by other honest investors.

    Crooks assume everything is crooked, and are too busy looking for ways to game the system; and will cheer for lax regulation that opens up new opportunities for grift.

  29. 29
    Citizen_X says:

    @Avery Greynold:

    With over 50 percent crooked, that leaves maybe 47 percent obeying the rules.

    I’d say only 5% crooked. That includes both rich and poor people.

    Probably a higher percentage of the former. They’re not the ones who go to jail, though.

  30. 30
    Linnaeus says:

    Tumbrels might be a growth industry.

  31. 31
    gian says:

    @Mike G:

    I recall the Madoff story and how some people who gave him money knew he was crooked, they just figured he was taking from someone else

  32. 32
    Gretchen says:

    Southern Beale: I second the recommendation of Flash Boys. It reads like a mystery story. A Wall Street trader found that he was unable to buy at the price shown on his screen, almost as if someone knew what he was going to do before he did it. Turned out they did. It’s even rigged against the money boys. I haven’t finished it yet, so I don’t know how it turned out, but it’s a great read.

  33. 33
    Avery Greynold says:

    @Citizen_X: My “50% crooked” referred to post: “are violations of law or material weaknesses in controls over 50 percent of the time”.

  34. 34
    Sophist says:

    @Roger Moore:

    This isn’t us being fucked by Wall Street; this is scum like Mitt Romney stealing from his well heeled clients. There is no honor among thieves.

    Great fleas have greater fleas upon their backs to bite ’em…

  35. 35
    ulee says:

    This is definitely an east coast blog.

  36. 36
    Alex S. says:

    For academic reasons, I’ve been reading about Shay’s Rebellion and the writing of the Constitution lately. The game was rigged from the start.

    Also, it’s funny that index funds do better in the long run than any private investors. I mean, ok, here we see why private equity is not for the benefit of the investors but for the equity guys. So that’s an explanation why these companies do worse than the market as a whole. Still Eugene Fama was right. It’s just that you have to protect capitalism from the capitalists.

  37. 37
    burnspbesq says:

    @Roger Moore:

    This isn’t us being fucked by Wall Street; this is scum like Mitt Romney stealing from his well heeled clients.

    Except that those “well-heeled clients” include the likes of CalPERS.

  38. 38
    Berial says:

    I was reading about this earlier at ‘Naked Capitalism‘ and I’m always surprised at how everyone just accepts how easily the rich can steal. We really should be better than this as a country and as a culture.

    Also, this TED talk by William Brown will REALLY get you mad at how easily the ultra-rich and the banksters have made stealing from the rest of us.

  39. 39
    Missouri Buckeye says:

    @Roger Moore: Remember, the only reason Bernie Madoff is in jail is that he stole from the rich.

  40. 40
    John Weiss says:

    @JGabriel: My late friend’s auntie used to tell him, “Mikey, people are dumber than anyone”.

    Just ’cause one’s rich doesn’t mean that one’s smart.

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