The Prof G Pod with Scott Galloway - Private Equity’s Impact on the Economy — with Gretchen Morgenson

Episode Date: July 27, 2023

Gretchen Morgenson, the senior financial reporter for the NBC News Investigative Unit, and the co-author of These Are the Plunderers: How Private Equity Runs—and Wrecks America, joins Scott to discuss her thoughts on how private equity impacts parts of the economy, and why she thinks it’s problematic. Follow Gretchen on Twitter, @gmorgenson.  Scott opens with his thoughts on the latest branding failure: “bid adieu to the bird” Algebra of Happiness: are you a protector?  Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Go, go, go! like chocolate. Problem solved. Welcome to the 260th episode of The Prop G-Pod. In today's episode, we speak with Gretchen Morgenson, the senior financial reporter for the NBC News investigative unit and the co-author of These Are the Plunderers, How Private Equity Runs and Wrecks America. I like Gretchen a lot. She didn't remember this. I actually met her when I was at the New York Times. She came in and presented. Gretchen is sort of this fearless, I don't know what the term is, watchdog, hop on the street, kind of calls it as she sees it, and is a great journalist. Anyways, I was excited to have her on the show. Okay, what's happening? We are witnessing yet another, or what arguably rivals the move from HBO to Max. In the first ballot hall of fame, Joey Bag of Donuts, head up your ass,

brand equity moves. I'm of course talking about the move from Twitter to some sort of gentleman's club crypto slash confederate flag branding called X, the black and white X. The thing feels downright, I don't know if we're like at a strip club in the matrix. Back in April, Elon rolled Twitter into his larger parent company, XCore, but it wasn't until over the weekend that the social platform began shedding its final skin. The move signals Elon's desire to turn Twitter into a super app. Think WeChat in China. What's interesting is, first off, is this a good strategy? I'm not sure. A super app hasn't been able to emerge in the U.S., and it might be because Apple and Alphabet have a vested

interest in not letting a super app emerge, or is it that consumers don't want it? Don't know. Anyways, back to me. I am credited in the Urban Dictionary with the term yoga babble. And essentially, I used it writing up something about the prospectus for the WeWork IPO. Anyways, this is probably an even better example or right up there of yoga babble.

And that is Twitter CEO, Linda Iaccarino, tweeted after this decision, which she clearly had absolutely no input into. Open quote, X is the future state of unlimited interactivity centered in audio, video, messaging, payments, banking, creating a global marketplace for ideas, good services and opportunities. Powered by AI, X will connect us in all the ways we're just beginning to imagine. I imagine you have no fucking idea what you're talking about, Ms. Yaccarino. I imagine that you literally have decided to foist a word salad on the world that already diminishes what is a fairly low starting point of credibility when they call you CEO and you're clearly not. What? X will connect us all in ways

we're just beginning to imagine? I can imagine a lot. I'd like a large male Filipino nurse with well-moisturized hands who rubbed the small of my back every night. Is X gonna do that? I can imagine a lot of things, Linda. A lot of things.

In my imagination, shit, there's corners there. You do not wanna go, girlfriend. You do not wanna go. Elon recently posted, the Twitter name made sense when it was just 140 character messages going back and forth, like birds tweeting, but now you can post almost anything, including several hours of video. Huh? So we're going to change the brand? So, okay, believe it or not, I know you don't know this, I teach a brand strategy course at NYU Stern, and I've taught the course for 22 years, and about 4,500 people have come through that course.

About 1,000 have come through my digital marketing course. Anyways, every brand strategist who knows anything around brand equity is cocking their head and just saying, what the actual fuck? So if you think about the very basis, the very basic of brand equity, the pillar, how you set the table, it's awareness. And awareness is vastly underrated. And Elon is arguably the best example of how powerful awareness is. Elon figures out a way. He doesn't care. Like spread conspiracy, homophobic conspiracy theories. Say something really stupid.

Name my child XA15. Every 72 hours, I need to be the story globally. Why? Because if there's just awareness around me and the companies I'm associated with, anytime someone thinks EV or anytime someone I'm associated with, anytime someone thinks EV or anytime someone thinks space hauling or anytime someone thinks media or short form blogging media, they're going to think of my brands. And to be fair, he's arguably one of the greatest brand builders in history because without using any real serious media, he built Tesla into what

is one of the strongest brands in the world. It's probably, I would think, one of the strongest brands, at least in the automotive industry. And if you look at its market cap, it dominates. It's worth more than almost the entire auto industry combined. He's also been a real visionary around product that obviously has become increasingly important in a world where media is so crowded and digital solutions have unlocked a ton of new innovations. Product is the new bomb again. Supply chain is incredibly important. Amazon, one of the strongest brands in the world, did it through supply chain excellence, specifically getting you everything you'd ever want within 48 hours with no shipping charge. But also Tesla started opening dealerships and malls. And I've been in

them. I bought my Falcon there, or my Falcon Model X. Is that what it's called? I forget. Anyways, by the way, before I sold it, I took a big dump in the passenger seat. Is that wrong? Is that wrong? Anyways, the guy is a brilliant brand builder. And yet, and yet to take awareness that is global, Literally, everybody knows what Twitter is. And a logo, which is very simple, very elegant. Kind of the design or the logo test for me is, can you recognize it in your peripheral vision? Because your peripheral vision is a lot more important than we think. And that's the reason why billboard companies have actually endured what is an implosion in the traditional media world.

And the reason is anthropological. Simply put, the shit you can eat or could eat you doesn't come straight at you. It comes at you from the sides. So we are very cognizant of what's going on in our peripheral vision. And when you see a big vehicle roam by you that is all brown, you immediately go UPS, global commerce. When you see a little swoosh millions of times every week because you're a basketball fan, whether you think Nike explicitly or not, in the back of your brain somewhere in your amangala or whatever it's called, you're going Nike, Nike, excellence, Michael Jordan, you didn't win silver, you lost gold. Logos and visual metaphors are exceptionally powerful when they're clean and well-designed and you can

recognize them in your peripheral vision. And every media company in the world has had this logo at the bottom of their movie poster, at the bottom of their chyron for Bloomberg News or CNBC, at the bottom of an article. This logo is everywhere. It is the ultimate ingredient brand for the rest of media, which is really the genius of Twitter, similar to what Intel did around Intel Inside. And why do we care about awareness? You don't buy anything from a brand you haven't heard of. You don't go to a university. You don't buy a car, a shoe. You don't even return the email or apply for a job at a company where you haven't heard of the brand, the person, or the company. Awareness is hugely important. And this brand has global awareness. So you have, okay, I need you to go build a brand that has global awareness. I'm going to give you 10 years. And it also has to have some positive associations with technology. People have to understand what it is. It has to be differentiated, singular, relevant, have some moats around it. I need you to build that brand in 10 years. And here's $10 billion. Can you guarantee me you can

do that? You couldn't justifiably, you couldn't honestly say yes. This is literally taking tens of billions of dollars, or at least billions, into the street and lighting it on fire. And that is David Zaslav was going to be the kind of the gold winner, the blonde or what's it called? My kids are obsessed with the soccer player who scores the most goals. I forget the name of it. Anyways, trying to get into football because my kids are into it, but that's not why you're here. Literally, he's the heat shield for the second worst brand decision of the last decade, taking HBO and Amazing Brand and turning it into Max. This is even dumber. I just don't get it.

All right. And no one who's ever taken a marketing course or a brand equity course is going to get it. But watch. All the stans will say, oh, it's so stupid. It's genius that you just haven't been privy to his genius that's unfolding, that you're thinking checkers and he's playing chess. No, he's not. He has no idea what he's doing. And on a bigger meta level, what does this represent? What is the issue? We have such incredible income inequality in the United States. Our GDP growth

has been consistent, if not robust, the last 30 years. Meanwhile, wages have gone flat. The difference between the line that is GDP growth and productivity growth that has been up and to the right in America because of technology, innovation, great capital markets, and a flat line of wage growth, those two lines used to be inextricably linked like snakes making love. And that was a good thing. That meant that all of the innovation in America was being shared across our labor force. The capital and labor were benefiting together. And then in 1973, they disarticulated and the wage line went flat. What does that mean? It means a lot of people in America now work 40 or 50 hours a week and still live below the poverty line. So it's hard to say

you're the wealthiest or the greatest nation in the world when you don't honor work, when there's no dignity in work. But the difference, the delta, the gap, that space between that wage line that's gone flat for the last 50 years and that productivity and GDP growth line that has gone up into the right for the last 50 years, the gap between the two, the space between the two is literally trillions of dollars that have accreted to the top 1%, much less the top 10%. The middle class has actually done okay. The lower-income households have actually gone sideways. But the top 1% has been champagne and cocaine. Get this, get this. 10 years ago, there were 500 billionaires. Now there's 2,500. The

number of billionaires has quintupled. This impacts all sorts of things. The reason why, and this was a big prediction we made several months ago, that sports franchises will skyrocket in value, and you're already seeing it, is that the supply is regulated or limited. They're not going to let four NFL teams be in Wisconsin. And the demand has exploded because the Gulf has entered into the bidding matches. And also, we keep producing more and more white guys in their 50s and 60s who are billionaires. And I don't think these are bad people. I can't stand the whole Senator Warren and Senator Sanders notion that a billionaire has crawled over people and is a bad person. I'm wealthy. So if I'm not a billionaire, but if,

say, I'm worth $100 or $200 million, does that mean I'm a tenth of my way to being a bad person? If Elizabeth Warren flies private, is she sort of bad? Just stop. The class warfare shit, or bullshit, I should say, is really unproductive. We need billionaires. We need aspirational people. People want to get rich. People want to have financial security, because to be wealthy in America is to have your friends laugh at your jokes, to have a broader selection set of mates, to have people want to know you, to have people be nice to you, to have people who want to do nice things for your kids. And some, to be rich in America is to be loved. And we all want to be loved. So it's aspirational. It feeds into capitalism. Capitalism's kind of gangster move or secret sauce or hack, if you will, is leveraging our self-interest and people immediately connected money with prosperity, with happiness in the United States. I figured it out early. The reason I'm financially secure is not because I wanted to change the world, not because I was so good at anything. That's what I love about all of these douchebag VCs who say they don't think about money. I know these guys. They think about money all the time. They're obsessed

with it. And I don't blame them for it. And also, quite frankly, I was obsessed with it. Or specifically, I was obsessed with being able to take care of my mother, who I couldn't when I was younger. I was obsessed with having opportunities to do wonderful things, which I knew I could do if I had money. Quite frankly, I was obsessed with the notion of finding a really wonderful mate. And I noticed in my senior year in college that all the guys whose parents had homes in Palm Springs or in Mammoth seemed to be attracting more women. If that sounds sexist, it is, and there's data to show it. The number one reason women select men as mates is they signal their ability to garner resources in the future. And there's nothing wrong with that. So here we are, here we are, obsessed with money. The rich have weaponized government and created a set of tax policies, the most outrageous of which, capital gains tax deduction, 22.8%. And you think, well, versus 37%, that's good, but it's not outrageous. Yeah, it's outrageous because every $100 that the people who work at Prop G make every year, they only get maybe $65 after state and city taxes in Manhattan. Whereas if I get another $100 in wealth creation from my Amazon or my Apple stock going up, it not only gets taxed at a lower level, $22.8, it doesn't get taxed until I sell it. So it keeps growing and compounding off a much larger base. We have decided in our nation that sweat is less

noble than money. That makes no sense. America is about generosity, liberty, letting people pursue their own form of happiness as long as it doesn't damage other people, letting people love who they want to love, having the first potentially multicultural democracy that's this prosperous. We're a lot of wonderful things. We're also about work, and we need to restore dignity to work. And what's happened? We have let so much capital crowd into the top 1.1%. That has become a zero-sum game. It also creates a lack of guardrails. When one individual can spend $44 billion on a media company and not have to listen to other investors, typically people can't buy that kind of company on their own, which means he doesn't have a board. What happens? He starts spreading homophobic conspiracy theories. He starts accusing co-workers of sex crimes such that they have to move out of their homes. He starts making really stupid business decisions because he has no guardrails. He has no board. This is part of a bigger problem. And I'm saying this for the first time. I believe we have gotten to a point where too few people have just too much money. And it comes back to the age-old saying

that really, is there some truth here? Power corrupts. This is an individual that is now doing damage to the world in terms of spreading conspiracy theory and making our discourse more coarse. And then on a smaller level, not nearly as important, but it is meaningful, making really stupid business decisions. Because if he had been forced to raise outside capital that had any sort of fiduciary responsibility, in other words, other equity, that had any teeth, by the way, no board seats given to any of these investors,

all of the money these idiots who just wanted to be closer to Elon and these VC funds who threw in money to this deal, literally it was gone when he signed the deal. He signed a deal for $44 billion. It wasn't worth the debt on the company, which means the equity was wiped out on day one. But the idolatry of innovators infects rich people as well, which is probably a good thing. But here we have an example of when individuals can aggregate the wealth of the GDP of a Latin American nation and

they have no guardrails, it not only creates for a worse society, it not only creates an unfair tax structure, it creates just really bad business decisions. And that's what this is. At the end of the day, there is no upside. This is just a really bad business decision and it connotes a larger problem. And that is in America, too few people have too much money. And money equals power. See above, power corrupts. We'll be right back for our conversation with Gretchen Morgenson. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin.

Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc.

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ConstantContact.ca Welcome back. Here's our conversation with Gretchen Morgenson, the senior financial reporter for the NBC News investigative unit and the co-author of These Are the Plunderers, How Private Equity Runs and Wrecks America. Gretchen, where does this podcast find you? New York City. Nice. So let's bust right into it. Your new book, These Are the Plunderers, explores a three-decade history of corporate takeovers, how private equity has taken over, or you assert that it's taken over the ecosystem. So let's start there. What is the state of play? Set the table in private equity and takeovers or private equity-backed takeovers. Well, private equity-backed takeovers, Scott, are hard to track because there's a lot of privacy. These are private companies that are being taken over also by companies that are privately held, although publicly traded stocks. So you don't have all the information that you

normally would have about public entities. However, there are measures that show the extent to which private equity has taken over certain parts of the economy. For instance, 7% of the workforce works for private equity-backed companies. More than 40% of United States emergency departments in hospitals are overseen and managed by private equity-backed staffing companies. You see vast takeovers of physician practices. Healthcare has been an enormous investment arena for private equity in recent years, over a trillion dollars in deals that they have done, taking over physician practices, staffing companies, specialty areas of physicians. So it's not easy to say that, you know, however much percent of the economy is based on or backed by private equity, but it certainly is growing and it certainly is having a big impact.

Well, one of the kind of interesting facts in your book is that Blackstone and KKR, just those two firms, control one-third of the nation's hospital emergency rooms, which struck me as striking. But why is that a problem? Well, private equity in healthcare, Scott, is a particularly pernicious problem because it pits the physicians who are operating in these arenas, whether it's the emergency department, whether it's their own practices that they've sold to private equity. It pits their interest in serving the patient and the patient's needs against the private equity firm's demand for profitability. And as you know, there are laws against what's called the corporate practice of medicine in the United States, in more than 30

states, as a matter of fact, but they're rarely enforced. These laws were created to really deal with the potential problem of serving two masters as a physician, serving both the patient and serving both the company that wants a profit. So it really gets to the nub of the problem with private equity when you're talking about health care, because the conflicts of interest are really very damaging. But is there evidence that shows that emergency rooms that are run by quote-unquote non-profits have better outcomes than P.E.-backed firms with emergency rooms? experience the field. It's a corporate profit capitalism on steroids is what some people call it. So it's nonprofits. Nonprofit hospitals are an entirely other topic for you to tackle because they really don't operate like nonprofits anymore. They're very highly paid chief executives, etc. So it's really not a comparison between nonprofits and profits. In fact, you will see the private equity staffing companies in nonprofit hospitals that they are told how to operate. They are told what tests to run. They are told what to do for patients by people who are not medical professionals, not trained, not healthcare professionals. And that to them is an enormous problem. And it has been shown that prices go up when private equity firms take over healthcare operations. You see the fact that

doctors in these arenas are complaining, expressing problems with private equity takeovers. You have doctors actually trying to change this world, the world they operate in, so that they don't have to deal with these kinds of pressures to perform for a profit motive. So is the tension or the discussion about the fulcrum between a service, an organization that is supposed to, as part of their mission, serve the public good, and the for-profit motive, I mean, what is different about how private equity approaches a company like that versus just if it was a publicly traded company backed by other types of investors. Is this a PE versus healthcare issue, or is this healthcare versus just the for-profit model and incentives that come along with that? Well, the hospital, the for-profit model is a problem in healthcare, but the private equity model of for-profit healthcare is on another level. So there are two reasons for that. One is these firms are almost always taken over using large amounts of debt.

This debt creates a cost for the company that it must pay. It creates an obligation that it didn't have before, a higher cost associated with doing business. Okay, that right there is a pressure. The second pressure that private equity typically exerts on these companies is the need to increase profitability over a very short term, five to seven years typically, so that they can sell the company at a profit to someone else. So we are not talking about long-term perspective. We're talking about a super heightened short-term interest in increasing profits so the company looks more profitable and more saleable after five years. So those two pressure points, Scott, are really crucial to understanding why private equity is different from just corporations practicing medicine. Now, one of the interesting things about the current situation,

current economic situation, is that many of these companies are now on the precipice because of the heavy debt loads that they carry. One of the two companies that you pointed out that controls 30% of the United States emergency departments filed for bankruptcy earlier this year. companies generally float debt that has a changing interest rate, i.e. floating rate debt, they are being hurt by the rising interest rates. They would not have been so hurt had the debt been fixed rate debt, like, say, a fixed rate mortgage. But these are floating rate obligations, and as interest rates have gone up, they have gotten into trouble. The other emergency department operator that is private equity owned, that is enormous, Team Health, is also in difficulties economically. how perfect the economic environment has to be for these companies to continue to operate,

okay? It has to be a low or zero interest rate environment, and it has to be an environment in which you can increase charges to patients to make the business model work. So I argue that this is not necessarily a sustainable business model. So it really, I think our moment in time right now is very interesting because it shows how the economic environment really sheds a light on these business models as unsustainable. So I think a representative for the, you're going to forget more about private equity than I'm going to know. But the little I know about it, I would say that private equity, I would argue, has proven to be enduring. That it's been through high interest rate cycles, that the fact that it continues to draw capital, the fact that it continues to be a big part of kind of the alternative investment ecosystem shows that from a capitalist standpoint, that it works.

And the other argument I would make is that in some instances, isn't the discipline that debt brings or that, quite frankly, uber-capitalists bring to an organization around hard decisions and allocating capital to its best use, isn't this just a key component of capitalism? And there's some externalities, and you talk about rising interest rates. That was the question I was going to ask you. I would imagine a lot of their deals no longer make sense. But don't oftentimes you have, you know, my sense is there's a lot of companies and entrepreneurs that would argue that their partnership with private equity made for a better business and better customer outcomes. Do you acknowledge that private equity

is enduring or do you believe that it's an asset class or an investment mode modality that is going to go away, that it's collapsing on itself? Do you think this is the beginning of the end of private equity? I don't think it's the beginning of the end of private equity, Scott, because they have amassed so much money that they will be able to, you know, manipulate outcomes in Congress, etc. So it's really, I don't forecast an end to the industry. I do think, though, that people are questioning it. Certainly the returns in private equity are reverting to the S&P 500, as you know. For years, they did generate alpha. And from that standpoint, they were attractive from the pension fund's perspective of being able to meet their obligations. That no

longer is the case. And I think that the reason they have been so funded by pensions is obviously because the obligations that they face are enormous. But also, to be very frank, Scott, I think what we're seeing right now is that people are starting to understand that the way these firms mark their portfolios, they have a lot of leeway. They don't have the S&P 500 at the end of the day, like a mutual fund does, that will tell you where every stock in your portfolio wound up and what it's up and what it's down. They can really mark these things where they want to. And in that way, that encourages pension funds to invest in them because the pension funds are on

the same side of that equation. They want the marks to be better. They want the valuations to be higher, whether or not it's accurate. But you are starting to see some cracks in the foundation. For instance, of course, deals are pretty dead in the water this year. We haven't seen a lot of deal-making. They're having trouble, even the big firms are having trouble raising the money that they had set out to raise. The new billion-dollar funds are having difficulties. They're also experiencing bankruptcies. So I do think we're at a bit of a watershed moment where people are going to start questioning this business model a little bit more. I do not think it's the end of the line, but I do think raising questions about their activities is absolutely appropriate and should be done. It strikes me that the, and it's the boring stuff

to get to, that interest rates are really the kind of elephant in the room here. That if you can borrow money at 2 or 3%, you know, as long as the company goes up in value, even if it's just through productivity gains or growth in the economy or growth in the population or growth in the number of people in a region that are coming into an emergency room, that if you can borrow money nearly almost free, that it's not difficult to look like a genius, right? Correct. Whereas when your 3% borrowing costs go to 7%, all of a sudden, a lot of that cash flow is going to paying off interest that you weren't expecting before. I would imagine you would think that a lot of bonds would be distressed. And I'm shocked there hasn't been more high profile bankruptcies given the acceleration interest rates. Do you know how much of this debt

approximately is variable rate? I always thought that PE kind of took a long-term mindset and borrowed money more for the medium of the long-term. Is this, is in your estimation and the data you look at, is private equity or private equity backed deals, are these bombs about to detonate everywhere as they have to roll their debt and they can't refinance it at, you know, or they have to refinance it at much higher rates, kind of making these things financially untenable? Yes. Most of the money that they raise is floating

rate, Scott. And I was surprised to learn that myself. And that is really, as you say, the elephant in the room. So yeah, it's very easy to look like a genius when, you know, interest rates are at zero and the Fed is flooding the system with money. That is no longer the case. So yeah, you know, bombs detonating, you know, I think that there will be some restructuring, but you're starting to see some interesting, you know, bombs detonating, you know, I think that there will be some restructuring, but you're starting to see some interesting, you know, tactics, as I would describe them, being played for people who want to try to get out of their private equity positions. And what they're doing is finding these are not liquid investments, as you know,

they're very difficult to get out of. If you're in a fund that has a seven-year hold period, you know, you're stuck there. And you would, as a pension, have to reach into your pockets and make further payments when they call your capital. But when people try, when pensions try to get out of these deals, they are doing so at some pretty significant discounts into the 70-80% level here of some of these transactions. You are also seeing an interesting tactic of selling one portfolio company held by a private equity firm into another fund by the same firm, which is surely an indication that they cannot find a buyer outside of their own four walls. So that is an interesting element that I think you're seeing cropping up. And the secondaries market, know, sell secondary parts of their funds to themselves and to other investors. I think these are all indications of stress in the system.

So I would offer Gretchen that it's just a part of the cycle. When interest rates are low and they can get in at a good price, they make a lot of money. And then when interest rates spike and it appears in retrospect that they overpaid for this company to support that debt load, they can't support it. And then they declare bankruptcy. The emergency rooms are still there. Somebody comes into distress. Another part of the ecosystem, a distressed credit investor comes in, buys those bonds on the cheap or the company on the cheap, and we start the cycle over again. I guess what I would ask is, why do you think or do you that it's different this time? I just see this as part of the cycle. Well, I think that more people are

being touched by this industry and by the extreme pressures that the business model presents for those in the industry, and that it is affecting more stakeholders. It's affecting the workers who get laid off. It's affecting the tax bases of the cities and towns where the bankrupt companies used to pay taxes and now cannot because they're bankrupt. My argument is that the circle of pain surrounding this industry because of its business model, unsustainable business model, the circle of pain is wide. And to the degree that Americans care about how businesses operate and whether or not there is true stakeholder involvement at a 360-degree level, i.e. not just the shareholders, I think this is an interesting moment, and I think it's really worthwhile to talk about it because the impacts are growing on these other stakeholders. And even the pension funds, who have really thrown themselves full on into this industry as a way to meet their obligations, I think they too will start to question it. I hope that they do, because I think that there are other alternatives for them to consider that are not as opaque,

that are not as illiquid, and that do not involve problematic business practices, such as you see in some of the private equity-backed companies that have made headlines recently. The Blackstone-owned slaughterhouse cleaning company that hired children to clean slaughterhouses at night in the Midwest. You know, it's interesting. Why were they hiring children? Were they hiring children because they were less costly, so as to meet a hurdle, an earnings per share earnings hurdle? So when you see stories like this about these pernicious outcomes among these companies, I believe it is important to pay attention to it. Now, all kinds of corporations get into trouble, and it is not solely limited to private equity.

But I again go back to my argument that the pressure points exerted on this business model by the debt and by the short-termism makes it more problematic. We'll be right back. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life.

So tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. relationships with our colleagues, business partners, and managers. Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin, sponsored by Klaviyo. So if these companies have to go into restructuring, the private equity firm and its investors, their equity gets wiped out. They get hurt badly. If one of that emergency room company where the bonds, where they can't make the debt interest payments, they blow covenants, the private equity company and its investors, its limited partners, they lose their equity. It's mostly the limited partners. The GP does not. The GP only invests a small fraction.

Well, they usually invest about 2% of the fund, right? Right. Okay. But they don't make any. I mean, I recognize it's, I don't feel sorry for these guys, but they don't get paid. I mean, they make some money on the management fee, but they have a vested interest in these things being successful. And I recognize that they're putting other people's capital at risk. So, I mean, quite frankly, the issue where I think you and I would have the most empathy for one another, like I hope someday someone loves me like Kristen Sinema, Senator Sinema loves private equity. The carried interest

loophole for private equity is, to me, the most outrageous part of our tax code, where they somehow have turned short-term current income into capital gains. But anyways, amongst some of the highest-paid people in the world. But it strikes me that— It's a billionaire minting machine. people, you know, private, it would be difficult to find an industry that on average has higher compensation than private equity. And the fact that we've decided to give them long-term capital gains on what are short-term current income commissions on an investment, to me, it's just nothing but outrageous from a Democrat who was given a million dollars. I mean, it just represents everything bad about capitalism in America and D.C. being overrun. Now, having said that, the returns go down. Investors want returns. They go to other asset classes.

Private equity says, okay, we have to pay less for companies. Valuations come down because we can't finance with cheap debt. And the only way they can add value long-term is to make sure that the end consumer continues to patronize the emergency room or the company. But I guess if you feel that the forces of capitalism here are especially rapacious or are kind of on overdrive to the point where the externalities are just too great and have some negative consequences for firms, child labor, pension funds being raided, et cetera. And I apologize if I'm jumping around. I would actually argue that Blackstone has a lot of reputational risk and was probably as horrified by that. We probably read the same article about child labor or child immigrant labor.

If you're advising the Biden administration or the SEC or regulatory bodies in DC, do you feel like this is the market will take over and recognize that this is an asset class that has real hair on it and ultimately the investment goes down or the capital available to this type of buyout goes down? Or do you feel like there's some sort of regulatory intervention that's required? Well, I always hate advocating for regulatory intervention because when you close the window, they open the door. And one of my favorite points to make that case is when Bill Clinton was pushing and Congress signed into law a limit on CEO pay in salary of a million dollars over and above that, then the company would have to pay taxes on it.

So they just simply started issuing stock options. So these are very shrewd people. They are in the business of finding ways around hurdles. And so I am really not a believer in regulatory solutions. However, I do think we need more information about these companies. I do think it's very interesting that companies like Blackstone do not advertise their ownership of these companies. You don't know, for instance, half the time you're dealing with a private equity-backed company. Why is that? They operate in the background. I think that's

very, very interesting and very telling. And the fact that Blackstone got tagged on this horrific child labor violation was almost a first, really. It was so interesting that they got tagged. Usually, the private equity firm can hide behind it and say, oh, we didn't know what was going on. And in fact, when DOJ brings cases against private equity-backed, for instance, healthcare organizations that are accused of Medicare fraud, the PE company always says, oh, we had no idea what was going on. Well, maybe so, but was the business model creating the incentives that were needed to, you know, resort to, in this case, Medicare fraud? That is, to me, a question. So I don't believe the government has the answer. I do believe that if you change the tax code, that would eliminate a huge, huge part

of the problem because the money just wouldn't be big enough. The money just wouldn't be compelling enough. The other thing I wanted to just mention, earlier you said, you know, these private equity companies, they lose when the companies go bankrupt. Well, they don't lose as much as the limited partner, A. But B, there are many, many cases, Scott, where they have already taken out all the money that they invested. And they have done dividend recapitalizations where they have, you know, added debt to the company to pay themselves almost instantly in some cases. There's a case in the book about an aluminum smelter in a tiny town in Missouri that Apollo took over, and they got their money out in like months. And so when a company goes bankrupt, it's really not evident at the time, unless you do the arithmetic, to see if the private equity firms actually did lose in the bankruptcy. Oftentimes, there's a very good shot that they have taken their money out and that everything else is gravy. And if the thing goes bankrupt, well, so be it. It's not our problem.

So we touched on this off mic, but I was on the board of the New York Times and you actually came in and presented. And the board meetings would basically bring in, they bring in the most talented or one of the most talented journalists who talks for a while. We ask some questions. It was sort of the entertainment for the dinner before the board meeting. And one meeting that you come in and you didn't remember this was 15 years ago. And you talked about CEO compensation. And I can't remember, but I think one of the board members who was the CFO of Verizon, you really upset her. And she said, you realize what you're saying is, is, you know, people can go to jail for it. And I remember thinking that you were fearless. And I think it kind of summarized for me the difference between the New York Times and the Wall Street Journal. The Wall Street Journal, I think, sees themselves as an evangelist business. And I always thought that the New York Times, to a certain extent, saw themselves a little bit as kind of the watchdog or the cop that was fearless about calling out some of the downside or the ugliness of this industry or how the sausage gets made.

I'm curious, you're a stockbroker and I find that your work is very much investigative journalism. You've won a Pulitzer for this. What in your career or in your life inspired this drive or this notion? I feel like you're on a bit of a mission, that you see that there's real harm here or there are downsides that people aren't talking about or that are being wallpapered over by capitalism or money or the PR consultants that these firms engage with, or that there's a lot of money washing going on here. What is it in your background? Or was there a seminal moment you can point to in your career where you thought, I have a passion or an obligation to cover business in this kind of fearless, hard-hitting way? Because you're definitely, what I would say about your work, I don't agree with a lot of it. But you're fearless, which I just have huge admiration for. Where does that fire come from? Well, first of all, thank you for your admiration. It means a great deal to me. And

I do not believe that we need to agree on everything. And that is what I do for a living. Okay. So funny that you asked. There actually is sort of a seminal moment. Now, I was a stockbroker in ancient history, probably before you were born. Unlikely, Gret history. All right. But anyway, I was one of the few women, I had actually gotten that job because the EEOC had sued Wall Street because they had not hired enough women. And so I am, you know, I had my brokerage firm experience because of that lawsuit, probably. Anyway, I'm a stockbroker. I'm selling stocks. I'm trying to help people. It's 1982. People are still hating stocks because, you know, the 70s were a terrible period for stocks. Interest rates are astronomical, which is bad for

stocks. Anyhow, comes an issue that my firm was underwriting or co-underwriting, and it was a utility stock. And of course, utility stocks are known for being safe money. You sell them to clients who want a high dividend. They don't want much action in the stock, but they do want safety. So this was a company called Public Service of Indiana. And so I sold this offering to my safe money clients. And even before the trade settled, which was five business days back then, the company announced that it was slashing the dividend and that it had nuclear problems. It had problems with a nuclear plant. Nobody had told us anything about this. Now, that was on me. That was my fault because I didn't read the prospectus. I'm sure it was in the prospectus, but we had all of these people in the firm saying,

sell this stock. It's great. It's going to give you a, you know, whatever, 11% yield, whatever it was. And I felt completely betrayed, also foolish and stupid for selling something that before it even settled, my clients were in half on it. That was a pivotal moment for me when I understood that it really wasn't about doing the right thing for the customer. It was about doing the right thing for the customer. It was about doing the right thing for the firm. And if you extrapolate that out to any circumstance, to any company, you can kind of see how it might work. It actually was an enormous embarrassment for the firms who underwrote the stock because you just don't have that happen. It's so unusual. And so does that make sense to you as far as like a watershed moment for me saying, uh, uh, wait a minute, the lights just went on.

This is how the world works. Yeah. And it's really sad because the number of journalists over the last 30 years has been cut in half. And the number of PR and comms people at these companies is up sixfold. So the ratio of what I call bullshit to spend has gone the wrong way by 12x. You know, whether it's WeWork or Theranos, there just aren't enough journalists asking really hard questions. They're overwhelmed. By the way, indulge me for a second. I have a story about your old employer. When I was in 1978, four years before you joined, I was 13. And my mom's boyfriend gave me 200 bucks and said, go to one of those fancy brokerages in the village. I live near Westwood Village and buy some stock. And I walked into Merrill Lynch Pierce Fenner Smith. And I sat in the lobby. I was very self-conscious because I was 13, and no one paid any attention to me.

So I walked across the street to Dean Witter Smith Reynolds. Dean Witter Reynolds. Dean Witter Reynolds. This woman came up to me, and I said, I have $200. And I showed her my $200 bills, and she was very nice, put it in an envelope for me. I remember the cell phone envelope. And this broker in his 30s, this guy named Cy Serra, came out and said, hi, I'm Cy Serra. Welcome to Dean Winter. And he took me back to his little stall and he taught me about the markets. And we bought 12 shares of Columbia Pictures at $16 because he

said it's important that you know the business and like it. And every day during lunch, I used to go to a phone booth on the playground of Emerson Junior High School and I would call him. I'd have my two dimes and he would talk to me about what the stock did that day. He would say, close encounters of the third kind is a hit, and Columbia Pictures is up. And he made this connection for me in the markets at the age of 13. And I'm economically secure now, and I'm an entrepreneur, and I've had some success. But 80 or 90 percent of my wealth comes from investing in the markets, which I've been doing for the last 45 years. And I'm still in touch with him. He's about to turn 80. So I have this 45-year-long dealing with a child who has $200. No, thank you. Give it to somebody else. Give it to the new man on campus who just arrived who doesn't know anything. I mean, that guy was a gem and I can see why you held on to him. Anyways, his name is Cy Saro, and he's a good man.

Please tell him I said hello. I absolutely will do that. Gretchen Morgenson is the senior financial reporter for the NBC News investigative unit, a former stockbroker. She won the Pulitzer Prize in 2002 for her trenchant and incisive reporting on Wall Street. I love that, and that's in quotes, trenchant and incisive. Previously, the New York Times and on Wall Street. I love that. And that's in quotes, trenchant and incisive. Previously, the New York Times and Wall Street Journal, she and her co-author, Joshua Rosner, wrote the New York Times bestseller, Reckless Endangerment, How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, which was about the mortgage crisis. And their latest book, These Are the Plunderers, How Private Equity Runs and Wrecks

America is Out Now. She joined us from New York City. Gretchen, I can tell you, I think it's just great. And I think it's important that we have these discussions because I disagree with a lot of what you say. You disagree with probably my thoughts on this, but I'm just such a fan of people like yourself. And I got to think there weren't a lot of women in investigative journalism covering Wall Street back when you started. I think you're fearless. I think you're a great role model. And I really do wish you all the success you deserve with this book and your continued efforts. Well, Scott, thank you so much. And I would love to have another conversation with you, even if it's not on your fabulous podcast. I would love to stay in touch, talk with you about ideas. If you see anything that you think needs exposing, I really,

really, really urge you to let me know. Well, two words. First word is big and second is tech. That's who I would sit Gretchen Morganson on. Gretchen, thanks so much for your time. Thank you, Scott. My pleasure. Algebra of Happiness. I've been thinking a lot about masculinity and trying to work with some people, including Richard Reeves, some of the folks in my world that are social psychologists about trying to understand masculinity, and then maybe even, and this is ambitious, try and articulate a new definition or a modern version of masculinity that captures some of the wonderful things about masculinity while adapting to a new world and acknowledging that there's some components

of masculinity that can go, come off the rails. And one of the words I keep coming back to is protector. And if you think about most of the jobs that are associated with masculinity, whether it's cops or firemen or people in the armed services or emergency room doctors, they're tightly associated with masculinity. I also feel I need to have an asterisk here so I don't trigger too many people. I don't think masculinity is a domain of people born as men. I think a lot of women demonstrate

wonderful masculinity, and a lot of my male friends demonstrate wonderful femininity. So anyways, now that I've said that, most of the jobs we really think of becoming masculine involve protecting others. And now what does that mean specifically in are more prone to have a bias against or prosecute or persecute, that a real wonderful masculine attribute is to not necessarily need to even understand the situation, to not even think through or provide an opinion, but to have a bias towards protecting people. When I was growing up, I didn't understand gay people. I didn't think I knew any. Homosexuality was considered a perversion. And a lot of people just immediately, or kind of a gag reflex or muscle memory among my peer group, my friends, was to be very disparaging of gay people. And I don't think that's how men behave. I think you don't need to understand the trans community. You don't need to empathize with them. When I first heard about gender affirmation therapy, I thought, that doesn't feel right to me that people under the age of 18 should engage in hormone therapy. It offended me, quite frankly. And as I've learned more about it and, you know, read the stuff that the American Pediatric Association has written about it, talked to people who are more informed

on the topic, my views have changed. But even before then, what it means to be a man, what it means to be a man is to realize that that group is subject to a lot of undue persecution and bias and bottom line bigotry. When governors and states are passing laws to exclude trans athletes from a girls' volleyball meet, and that has never happened in the history of their state. No trans athlete has ever showed up and said, I demand to play on the girls' volleyball team here. This group is being persecuted. And our first inclination as men is to protect these people. And whenever you sense or you feel a group, whether it's as simple as your friends being disparaging about a group, you don't engage in that. And maybe even push back a little bit. You have a bias towards protection. Why do we protect people? Why do we stick up for people even if we don't

understand it? Maybe we don't even empathize with this group. We protect people because we're men. This episode was produced by Caroline Shadron. Jennifer Sanchez is our associate producer. And Drew Burrows is our technical director. Thank you for listening to The Property Pod on the Vox Media Podcast Network. We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn, and on Monday with our weekly market show. What software do you use at work? The answer to that question is probably more complicated than you want it to be.

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