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On Oct. 20, 2021, a coalition led by Sen. Elizabeth Warren (D-Mass.) reintroduced the "Stop Wall Street Looting Act" (SWSLA).1 She is joined by Sens. Tammy Baldwin (D-Wis.), Sherrod Brown (D-Ohio), Bernie Sanders (I-Vt.) and Jeff Merkley (D-Ore.), as well as Reps. Mark Pocan (D-Wis.), Pramila Jayapal (D-Wash.), Eleanor Holmes Norton (D-D.C.) and Jesus Garcia (D-Ill.).2 If the bill sounds familiar, that is because an earlier iteration of the SWSLA was introduced during the 116th Congress, only to later die in committee.3 The SWSLA's proponents have once again put forward an ambitious bill that seeks to narrow the parameters within which private-equity firms control portfolio companies and generate wealth.4
Background
Private-equity firms represent a unique investor class that (as one aspect of their broader investment strategy) takes control of struggling companies, turns them around and sells their portfolio companies for a profit.5 If that model is taken as true, logic follows that in addition to enriching the private-equity firm's management and private-equity investors (i.e., pension funds), this practice also benefits portfolio companies' stakeholders (employees, the local community, etc.), as well as the U.S. economy in the aggregate.6
However, the SWSLA's proponents have raised a simple, albeit compelling, concern: If something sounds too good to be true, then it probably is. These politicians argue that the private-equity model presents too many perverse incentives for fund managers.7 While the model works in theory, they argue that private-equity firms are not only incentivized to generate whatever would be considered "optimal wealth" by turning around a struggling portfolio company, they are also incentivized to dig further and overleverage their portfolio companies to maximize short-term profits while disregarding the long-term consequences.8 If a private-equity firm piles on too much additional debt and the turnaround fails, it is the portfolio company and its stakeholders that are left holding the bag, because firm managers can presently mitigate most of the losses by running the failed business through a chapter 11 reorganization.9 These concerns have prompted the SWSLA's proponents to call for reform. No one is arguing for the end of private equity.10 Rather, the SWSLA's proponents present the bill as a balancing of scales: It would allow private-equity firms to continue operating, but would rein in predatory practices by rebalancing some of...