The Finance 202: Warren continues attack on Wall Street with a pivot to private equity

THE TICKER

Lest anybody think that Sen. Elizabeth Warren plans to relax her offensive against Wall Street titans, the 2020 Democratic presidential hopeful now is dramatically dialing up her attacks on the private equity industry. 

The Massachusetts Democrat just in the last few days has:

  • gone after the Blackstone Group, Colony Capital, and Cerberus Capital Management for buying up foreclosed homes in the wake of the financial crisis;
  • singled out the Carlyle Group for its role in a dispute over Taylor Swift’s early recordings;
  • and accused the industry’s Washington arm, the American Investment Council, of presenting a “sham study” of its contributions to economic growth. 

Warren’s fusillade comes as the industry takes the hot seat in a House Financial Services hearing today titled, “America for Sale? An Examination of the Practices of Private Funds.” It will focus in part on the House companion to Warren’s proposal, “The Stop Wall Street Looting Act,” which would fundamentally remake private equity’s business model. 

The latest from Warren came in the form of a letter, also signed by fellow 2020 contender Sen. Bernie Sanders (I-Vt.) and seven other lawmakers who have signed on to Warren’s private equity proposal, to Ernst and Young. They accuse the accounting firm of cooking up an analysis with “misleading conclusions and glaring flaws” to paint a falsely rosy picture of private equity’s impact on workers and wages.

“These studies are distorted and biased and misused in the regulatory and legislative and regulatory process, lending an air of legitimacy to corporate special pleading,” the lawmakers write. “The new EY report, prepared with and for a trade group for the private equity industry, appears to be a picture-perfect example of such sham study.” (Read the letter here and the original report here.)

The American Investment Council — whose CEO Drew Maloney will be testifying at the House hearing today — defended the report. “EY is a respected third-party consulting firm and their new report shows exactly how private equity supports millions of jobs across America,” said Emily Schillinger, a spokeswoman for the group. 

Warren’s attack on Blackstone and the other firms that snapped up post-crisis real estate came in an update to her housing plan that focused on tenant protections and improved public housing conditions. 

“Since the mortgage crisis, large private equity firms have become some of the country’s biggest landlords — a big win for Wall Street, but a huge loss for America’s renters,” she writes. “Take Blackstone, one of the largest private equity firms in the world. Since 2016, more than 600 complaints have been filed against Blackstone subsidiary Invitation Homes with the Better Business Bureau, and Invitation Homes is currently facing a class action lawsuit in California for subjecting tenants to excessive and illegal late fees.”

Per Bloomberg News’s Misyrlena Egkolfopoulou and Heather Perlberg, Blackstone countered that it started buying homes only in 2012, once the worst of the housing crisis had ebbed. It argued that its purchases stabilized home prices in areas ravaged by the crisis. “Though we are only a tiny percentage of the housing market, we are proud of our investments, which are helping address the housing shortage by adding high-quality, professionally managed rental housing, while contributing to local economies and creating jobs — all on behalf of our investors, which include retirement systems for millions of teachers, nurses, firefighters and other pensioners,” Jen Friedman, senior vice president for global public affairs at Blackstone, told Egkolfopoulou and Perlberg.

As both sides gird for what looks like an extended fight, the truth about the industry’s impact may be somewhere in the middle. “A recent academic study by researchers from the University of Chicago, Harvard Business School and other institutions found mixed results of private equity takeovers — significant job losses following buyouts of companies traded on public stock markets but an uptick in employment after buyouts of privately held companies,” Politico’s Zachary Warmbrodt writes. “’This conclusion cast doubts on the efficacy of ‘one-size-fits-all’ policy prescriptions for private equity,’ they said.”

MARKET MOVERS

Trump, Powell meet. What happened isn’t exactly clear. The Post’s Heather Long: “President Trump summoned Federal Reserve Chair Jerome H. Powell to the White House Monday for a meeting about the economy only a few weeks after labeling Powell a ‘bonehead,’ a ‘terrible communicator’ and an ‘enemy.’ The Fed released a statement at 10:28 a.m. saying the meeting occurred ‘at the president’s invitation’ and that Powell told Trump that the Fed will continue to set interest rates ‘based solely on careful, objective and non-political analysis.’ The meeting was in the White House residence, not the Oval Office, a White House official said. Treasury Secretary Steven Mnuchin was also present.”

As CNBC’s Eamon Javers notes, the Fed’s statement nearly mirrored one it released following Powell’s last meeting with Trump, back in February, except for the curious addition of the phrase “as required by law” to describe the central bank’s dedication to its mandate in setting monetary policy. 

Trump sent this tweet shortly after the meeting: 

But at 10:34 p.m., Trump suggested the meeting may have been less cordial than his original description:

“I suspect that the meeting was not particularly pleasant,” University of Oregon economist Tim Duy, author of the Fed Watch blog, emails me. “This is completely speculative, but Trump being who he is would probably try to lean on Powell to ease further and take interest rate to zero or below to match those of our trading partners. Powell being who he is would obviously be rather obstinate about acquiesing to such a request… Powell is an entirely different beast than most of Trump’s staff or appointees. He won’t be pushed around and he can’t be made to leave. Trump probably hates that.”

Saudi Aramco set a valuation target for its initial public offering well below Crown Prince Mohammed bin Salman’s goal of $2 trillion and pared back the size of the sale. The initial public offering will now rely on local investors after most international money managers balked at even the reduced price target.

Bloomberg

TRUMP TRACKER

TRADE FLY-AROUND:

Beijing pessimistic about chances of a deal: “The mood in Beijing about a trade deal is pessimistic due to [Trump’s] reluctance to roll back tariffs, which China believed the U.S. had agreed to, a government source told CNBC’s Eunice Yoon,” CNBC’s Yun Li reports.

“The Chinese are looking carefully at the political situation in the U.S. including the impeachment hearings and the presidential election, the source said, adding the officials are wondering if it is more rational to wait things out since it is unclear what Trump’s standing will be even in a few months.”

  • The report spooked investors. CNN Business’s Jill Disis: “A muddled view of US-China trade talks once again seems to be weighing on investors. The major Asian market indexes were mixed in early trading Tuesday after CNBC reported that the mood in Beijing was pessimistic… Japan’s Nikkei 225 declined 0.3%, while South Korea’s Kospi Index fell 0.5%. China’s Shanghai Composite slumped 0.2%, but recovered those losses and was last trading up 0.4%.”

Senate report: U.S. failing to check Chinese aggression. WSJ’s Kate O’Keeffe and Aruna Viswanatha: “Federal agencies have failed to adequately respond to the threat of Chinese government-funded programs that systematically exploit U.S. research to strengthen China’s own economy and military, a new Senate report concludes. With what are known as ‘talent programs,’ the Chinese government provides compensation and resources to researchers who at times illicitly transfer intellectual property to China, in some cases setting up shadow labs overseas mirroring their U.S. research, according to the report released Monday by the Senate Permanent Subcommittee on Investigations. Participants are routinely told to conceal their participation from U.S. authorities, the report said.

“The bipartisan report faulted the Federal Bureau of Investigation and the agencies that fund U.S. research—including the National Institutes of Health, the National Science Foundation, and the Energy Department—for what they described as a slow, disjointed response to the threat of Chinese talent programs.”

Goldman Sachs: Trade war drag will ease in 2020. Bloomberg: “The trade war’s drag on the world’s largest two economies will gradually fade in 2020 as tariffs on imports from China have likely peaked, according to Goldman Sachs Group Inc. The recent progress toward a partial trade deal and expectations of an extended truce implies that this drag will disappear, which will also benefit the global economy, Goldman Sachs economists led by Jan Hatzius wrote in a note dated Nov. 18. This assumes there is no further escalation of tariffs.”

Pelosi works to reassure moderates on USMCA. Politico’s Sarah Ferris and Heather Caygle: “Speaker Nancy Pelosi and her top deputies are working to ease long-simmering anxiety among battleground freshmen, which has intensified amid fears that impeachment could creep into 2020 and make many of them one-term members. Pelosi will bring in AFL-CIO President Richard Trumka on Tuesday to speak with freshman Democrats, many of whom have been privately demanding quicker action on [Trump’s] trade deal, according to multiple people familiar with the meeting.”

TRUMP WATCH:

IRS whistleblower met with Senate staff: “Two senators are looking into a whistleblower’s allegations that at least one political appointee at the Treasury Department may have tried to interfere with an audit of [Trump] or Vice President Pence, according to two people with knowledge of the matter, a sign that lawmakers are moving to investigate the complaint lodged by a senior staffer at the Internal Revenue Service,” my colleagues Jeff Stein and Tom Hamburger report.

“Staff members for Sens. Charles E. Grassley (R-Iowa) and Ron Wyden (Ore.), the chairman and ranking Democrat on the Senate Finance Committee, met with the IRS whistleblower earlier this month, those people said. Follow-up interviews are expected to further explore the whistleblower’s allegations. It could not be learned to what extent the senators consider the whistleblower a credible source. Trump administration officials have previously played down the complaint’s significance and suggested that it is politically motivated.”

Supreme Court halts fight over Trump’s taxes: The Supreme Court “gave itself a little more time to decide whether a House committee gets to see [Trump’s] financial records,” my colleague Robert Barnes reports.

“Chief Justice John G. Roberts Jr. put on hold ‘until further order’ a lower court’s ruling that said the accounting firm Mazars USA must turn over eight years of personal and business financial records to the House Oversight and Reform Committee. The House itself had acquiesced to such a move earlier Monday. Without the court’s intervention, the firm would have been required to turn over the records Wednesday.”

IMPEACHMENT MINUTE:  A speed read on the latest from the congressional impeachment inquiry.

Impeachment witness says Ukraine ‘gradually came to understand’ Trump’s desired investigation was tied to aid, meeting.” By The Post’s Matt Zapotosky, Karoun Demirjian, Ellen Nakashima and Elise Viebeck 

Lt. Col. Vindman to describe his alarm over president’s call with Ukrainian leader, girding for Republican attack.” By The Post’s Tom Hamburger, Carol D. Leonnig and Rachael Bade 

Attacking witnesses is Trump’s core defense strategy in fighting impeachment.” By The Post’s Elise Viebeck and Isaac Stanley-Becker 

Impeachment Investigators Exploring Whether Trump Lied to Mueller.” By the New York Times’s Charlie Savage

POCKET CHANGE

T-Mobile CEO to step down in 2020: “T-Mobile US Inc. said Chief Executive John Legere will step down this spring, handing the top job to operating chief Mike Sievert,” the Wall Street Journal’s Drew FitzGerald reports.

“[Sievert], 50 years old, will become chief executive on May 1, taking over after [Legere’s] current employment contract expires. The company said Mr. Legere will remain a director. T-Mobile faces a litany of challenges before then, including an antitrust lawsuit brought by a coalition of state attorneys general against T-Mobile’s planned $26 billion-plus takeover of Sprint Corp. A trial is scheduled to start Dec. 9 in New York.”

SCOTUS rebuffs Shkreli’s appeal: The U.S. Supreme Court “declined to hear Martin Shkreli’s appeal of his 2017 conviction on fraud charges, leaving the former drug-company executive who became known as the ‘Pharma Bro’ in prison,” the WSJ’s Corinne Ramey reports.

“The high court, as is typical, didn’t say why it didn’t take [Shkreli’s] appeal. [Shkreli] became widely known in 2015 when, as the young chief executive of Turing Pharmaceuticals, he bought the rights to a decades-old AIDS drug and raised the price to $750 a pill from $13.50. He also gained notoriety for making inflammatory statements on social media.”

Kylie Jenner sells $600 million stake in her company: “Coty Inc. is paying $600 million for a controlling stake in Kylie Jenner’s cosmetics startup, wagering that the celebrity’s brand can revive a struggling beauty business based on CoverGirl and Max Factor,” the WSJ’s Sharon Terlep reports.

“The fragrance and cosmetics company said it plans to buy 51% of Kylie Cosmetics, valuing it at $1.2 billion. [Jenner], the youngest of the five Kardashian-Jenner sisters, founded the brand in 2015. She will remain the public face of the brand.”

He wrote the book on drug crimes. Then he allegedly committed some himself: “ A Miami professor who’s an expert on drug trafficking and organized crime was charged by the U.S. with laundering corrupt cash from Venezuela, skimming more than $250,000 for himself,” Bloomberg News’s Bob Van Voris reports.

“Bruce Bagley, 73, a professor of international studies at the University of Miami was the co-editor of the 2015 book ‘Drug Trafficking, Organized Crime, and Violence in the Americas Today’ as well as a contributor to various journals on the topic. But … prosecutors in Manhattan charged Bagley with laundering about $2.5 million into the U.S., money that foreign nationals embezzled and got from bribes and other corruption schemes. Bagley pocketed about 10% of the money, according to prosecutors.”

MONEY ON THE HILL

House, Senate strike deal to avert shutdown: “House and Senate leaders secured a deal … that would extend government funding for four more weeks and sidestep a debilitating governmentwide shutdown,” Politico’s John Bresnahan and Caitlin Emma report.

“The continuing resolution unveiled by House Democrats would last until Dec. 20, leaving out any restrictions on border barrier spending, which [Trump] demanded in exchange for his signature. The current stopgap expires Thursday night. The bill would fund a 3.1 percent military pay raise. It would also provide extra cash to help the Commerce Department gear up for the 2020 census and allow state highway programs to avoid a $7.6 billion cut this summer.”

Meet the billionaires behind the 2020 candidates: “Billionaires are everywhere in the 2020 election. Donald Trump, of course, is the incumbent. Howard Schultz, of Starbucks fame, considered launching a campaign to challenge him. Then Tom Steyer, the hedge fund billionaire, actually did. Now Michael Bloomberg, who is richer than all of them, is reportedly positioning to do the same. And while those four made the headlines, around 100 other billionaires have been quietly donating to Democratic hopefuls,” Forbes’s Michela Tindera and Giacomo Tognini report.

“Forbes mined roughly 2.5 million entries in the Federal Election Commission database and found that almost 20% of American billionaires have donated—either directly or through their spouse—to the campaign committees of Democrats running for president. Ninety billionaires donated in their own names. We found 23 billionaires who did not give any money but are married to people who did. By the close of the latest fundraising period, on September 30, 2019, Kamala Harris, Joe Biden and Cory Booker each counted at least 40 billionaires or spouses of billionaires among their backers.”

A look inside Warren’s big donor fan club: “[Warren] prohibits special access for big donors — but her campaign treasurer and another close ally are organizing wealthy supporters for Warren behind the scenes while she rips on the rich,” Politico’s Maggie Severns reports.

“The pair, Boston businessman Paul Egerman and activist Shanti Fry, have maintained campaign titles as Warren’s finance co-chairs, even as her campaign sheared other links to the Democratic donor class earlier this year by forswearing closed-door, in-person fundraising events of the sort Warren did for years in the Senate. Fry and Egerman — a longtime friend of Warren’s who helped build support for her first run for office — are courting big donors in the Northeast by organizing trips, hosting events and acting as conduits for information about the campaign.”

CHART TOPPER

Via economist Adam Tooze: 

DAYBOOK

Today:

  • Home Depot, Kohl’s and Urban Outfitters are among the notable companies reporting their earnings, per Kiplinger
  • The House Financial Services Committee holds a hearing entitled “America for Sale? An Examination of the Practices of Private Funds”

Wednesday:

  • The Fed releases minutes of its late October meeting
  • Target, Lowe’s and L Brands are among the notable companies reporting their earnings, per Kiplinger
  • A Financial Services Subcommittee holds a hearing on minority depository institutions

Thursday:

  • The Labor Department releases the latest jobless claims
  • Macy’s, Nordstrom, Gap and Shoe Carnival are among the notable companies reporting their earnings, per Kiplinger
  • The Financial Services task force on Financial Technology holds a hearing on big

Friday:

  • Foot Locker, Buckle and J.M. Smucker are among the notable companies reporting their earnings, per Kiplinger

THE FUNNIES

From The Post’s Tom Toles:

BULL SESSION

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