The Stop Wall Street Looting Act is an Economic Horror Story

A broad group of Democrat lawmakers, spearheaded by Senator Elizabeth Warren (D-Mass.), reintroduced the Stop Wall Street Looting Act earlier this month. The bill would place significant constraints on the business operations of private equity (PE) firms, namely when they take over companies.

This legislation was first introduced in 2021, where it failed to gain any traction. The bill was reintroduced under the specious notion that PE firms are “legally looting” valuable companies and purposely putting them out of business to benefit a handful of investors. Such a statement ignores the realities of how PE firms have a proven track record of bolstering the American economy and injecting life into nascent or struggling businesses in need of capital. It also bizarrely calls the notion of firms benefiting their investors into question.

The bill would introduce a number of regulations and restrictions that would specifically target PE investors. These include amended bankruptcy rules, expanding legal liability to PE partners, and additional disclosure mandates. It would also amend the tax code to tax carried interest as ordinary income. This would be a significant tax hike that undermines the incentive structure in these firms. General partners compensation is dependent on fund performance. A tax in this area would make risk far less worthwhile for these managers.

This bill would also have onerous economic ramifications that would be felt out throughout the economy. As most tax increases on capital do, the bill would drive out investment. Burdensome disclosure regimes will raise compliance costs for funds and additional regulatory barriers and liability will dry up potential investment funds. This will ultimately eliminate jobs from the economy. Considering that pension funds often rely on PE for their investments, these changes will end up hurting American retirees who might see their retirement funds underperform as a result.

Sen. Warren’s bill rests on many faulty assumptions and is a solution in search of a problem. While the senator chases imaginary monsters, it will be ordinary Americans and their investments that suffer.