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Regulating Private Equity: A Jobs Issue

Submitted by on May 12, 2010 – 9:06 am

Attached is a page of examples of leveraged buyouts by hedge funds or private equity firms that have resulted in job losses around the country. In many cases, despite job losses, these deals resulted in huge profits for the investors. Recently, economists have begun registering alarm about the outstanding debt that has resulted from these and other private equity deals. Should that debt default, we could be faced with a financial crisis that would dwarf the current one.

The Senate is poised to take up an amendment to the Wall Street accountability bill that would require all private pools of capital, including hedge funds and private equity, to register with the Securities and Exchange Commission. This would ensure that investors know what they are getting into and whether their interests are being represented. It would also allow regulators to get a handle on the amount of risk piling up in this part of the financial sector and head off another crisis before it happens.

Regulating private equity: A jobs issue

Private equity firms bought companies this decade that employ one of every 10 Americans, 10 million people.

These deals were known as leveraged buyouts – sales in which a private equity group or hedge fund buys controlling interest in a company using borrowed money.

In some cases, these transactions help to rescue struggling companies and put them back on the road to profitability. In others, they bring the company to its knees, whether through poor management or by “stripping and flipping” – removing as much of a company’s assets as possible then turning around and selling what’s left to another buyer.

Americans for Financial Reform does not want to end leveraged buyouts or shut down private equity. The rules we are asking for simply make these transactions more transparent, so investors know what they are getting into and can make educated decisions about whether they are giving their money to firms that create real wealth – jobs, strong communities – or paper wealth – zeros on the end of a balance sheet, and real unemployment.

Click here for examples of companies that have been bought by private equity firms.

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