Leon Black and the Secret of Private Equity Billionaires

In most press accounts Leon Black is simply described as a “private equity billionaire.” Well what the fuck does that mean?

The first thing it means is that we have a rather less than adversarial press corp because “private equity” is the official industry approved public relations jargon for what people like Leon Black do. Private equity firms were originally called leveraged buyout firms, the new phrase came to be needed after they gained a bad reputation in the 1980s for asset stripping companies, bankrupting iconic brands like TWA, and putting thousands of Americans out of work. Public attitude towards the business can most infamously be seen in Oliver Stone’s 1987 movie Wall Street where the villain Gordon Gekko engages in a shady leveraged buyout of a fictional airline that is modeled on what Carl Ichan actually did to TWA.

This public anger at “private equity” brings us to the second thing that phrase means, which is “crony capitalism.” This isn’t a debatable argument, it’s a factual statement that every private equity firm depends on heavy subsidies from the US federal government to be competitive in the marketplace. Chief among these benefits is the interest deduction: private equity typically buys a company using debt (leverage), transfers that debt onto the acquired company’s books, then takes a tax write off on the interest paid on this debt.

By 1987 voter animosity against these corporate raiders and their tax subsidized schemes was such that Congressman Dan Rostenkowski proposed capping the amount of annual bank interest a company could write off at $5 million if that money was used to acquire it. The industry fiercely fought back (some blame Rosenkowski’s mere proposal for setting off the biggest single day crash in the Dow Jones’ history) and the bill was withdrawn leaving private equity to wield its massive taxpayer funded competitive advantage to this day. Without the subsidies I suspect we’d be reading that phrase “private equity billionaire” much less.

The third thing private equity means is the destruction of jobs, benefits, and wages. When a private equity firm buys a company their goal is typically to sell it within 3-5 years (though they have a wide variety of tactics for securing a profit some of which seem functionally equivalent to a mafia bust out). They thus have a very short term view regarding the long term health of the company.

The most comprehensive study of the impact of this was actually funded by the industry itself when they visited one of their many academic brothels, the American Enterprise Institute, and found a visiting scholar (intellectual prostitute) named Steven J. Davis to try to launder their scam through the dry impersonal prose of economic research. Though Davis attempts to hide his results in the propagandistic language of “creative destruction” and “productivity gains” (who do those gains go to?) his own study shows excess job losses at private equity controlled firms of 3% over two years and 6% over five years compared to non-targeted firms. Earnings per worker (wages and benefits) shrink by 2.4% in the two years after a private equity buyout.

Why are we subsidizing this? You can’t even say the words “tax credit” and “solar panels” without summoning eight years of paroxysmic National Review articles about how it tears apart the fabric of society when the government “picks winners and losers.” The fact is we have had more than four decades of massive government underwriting to an industry that destroys “low skill” jobs and reduces the wages for the people still working them and this has passed almost completely unremarked upon. Since 1979 real inflation adjusted wages are down between 12-24% for the 68% of Americans who do not have college degrees. I guess it doesn’t count if the “winners” went to the right schools and the “losers” live in the parts of the country journalists only see out of the window of their airplane.

This brings us to something you should know about Leon Black specifically and no it’s not the fact that he gave $10 million to serial pedophile Jeffrey Epstein in 2015 for some mysterious reason though you should know that too. It’s that Leon Black became a billionaire first by being an unindicted co-conspirator in felony securities fraud and then by striking a corrupt deal with a California politician to buy assets bankrupted by that fraud on the cheap. During the 1980s Leon Black worked at a company named Drexel Burnham Lambert where he was the right hand man to junk bond felon Michael Milken. Ben Stein has described Milken’s junk bond empire as a ponzi scheme and it’s not hard to see why. Milken managed to create a captive network of insurance companies and Savings and Loans that would buy his new junk bond offerings no matter how shaky the finances of the company they were underwriting. Like any ponzi scheme it collapsed when he was no longer able to draw new people in.

One of the companies bankrupted by the implosion of Milken’s ponzi was First Executive Insurance and its subsidiary Executive Life Insurance. In 1991 newly elected California Insurance Commissioner John Garamendi seized Executive Life Insurance and its portfolio full of Milken junk. That same year Garamendi turned around and sold this freshly acquired property of the State of California to Leon Black for $3.25 billion. At the time of sale Executive Life’s bond holdings alone had a face value of $6.1 billion. Garamendi’s financial consultants explicitly told him not to sell but were ignored, one told the LA Times they were treated like “ants at the picnic.” As part of this deal Executive Life’s policyholders were forced to take 30-50% haircuts and in many cases lose their homes while Leon Black personally cleared at least $300 million in profit. In 1998 John Garamendi started his new job, a no work partnership at an investment company linked to Leon Black. Today he’s the Democratic congressman for California’s 3rd district.

Now I only learned all of this from spending a few hours searching the internet for research on Leon Black to make a podcast episode about him. As part of that research I read at least a half dozen New York Times articles that mention him. I didn’t see the words “Executive Life” until I read a reader comment under one of those New York Times articles.

I understand what I have just laid out here would be a lot of information to convey in every article about Leon Black and some might accuse me of editorializing but I don’t think this fact is in dispute: Leon Black became a billionaire by buying a company from the government at a massive discount and then got the corrupt government employee who sold it to him a job. So maybe instead of describing Leon Black as a “private equity billionaire” you could say “Leon Black, who became a billionaire after buying First Executive from the government at a steep discount.” Or hey I understand space is at a premium so if you don’t have room for that you could always just utilize the concise press shorthand for foreign billionaires: oligarch. Leon Black is an oligarch who got rich on government connections just like any of the wealthy Russians whose names Rachel Maddow fucks up weeknights at 9 PM.

And it’s not just Leon Black. The 2000+ billionaires in the world are the most powerful people in existence, exercising vast control over all of our lives. Whenever a billionaire is in the news people have a right to know more than just the generic descriptors categorizing them as a “tech billionaire” or a “hedge fund billionaire” or “private equity billionaire.” They have a right to know who this person is and what they have done.

They have a right to listen to my podcast.