Massachusetts Senator Elizabeth Warren thought she would resurrect the Stop Wall Street from Looting Act (SWSLA), again, perhaps hoping it might stick this time. But with no bipartisan support, it is highly unlikely.
Warren has an axe to grind with private equity (PE) firms, investment management companies that provide financial backing to various other companies. PEs invest in startups or mature organizations by supplying additional capital and management services, and in turn, raising their value. The PE firm then sells these companies for a profit. The SWSLA would impose a separate set of tax, regulatory, and legal frameworks on the entire PE industry, giving more control over to Washington bureaucrats.
For sure there are some bad apples, or situations where the targeted company goes out of business. Warren is using the case of Steward Health Care, which bought out a number of hospitals and has since filed for bankruptcy, as the poster child for this round’s legislation. But a few bad situations do not warrant a complete overhaul of the system that would then make it impossible to even attempt to save companies in decline.
An alternative to PE’s taking on failing firms is government bailouts, which merely socializes the loss. Questioning the veracity of PE practices suddenly becomes surreal when taxpayers could instead be on the hook for subsidizing an insolvent company. Bailouts and subsidies not only cost the public significant funds but mask underlying problems such as incompetency and bad management, and only further serve to encourage reckless behavior.
The truth is PE firms provide much-needed capital and expertise to either get a company off the ground or keep it from running into the ground. Many entrepreneurs rely on this private capital to launch a business; entrepreneurship is a vital component to innovation and prosperity. Cutting off potential resources to this group would stifle job creation and economic growth.
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Kristen Walker is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.theamericanconsumer.org or follow us on Twitter @ConsumerPal.