Meeting room, twelve seats
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Only 12 people control vast US economic power via index funds and private equity. Think of the risks for the economy — and for democracy itself.

Twenty-five percent of the S&P 500, which represents the 500 largest companies in the US, is controlled by just four index funds. Add to this the dominance of the Big Four private equity firms and the handful of American banks officially deemed “too big to fail” and you have a scenario where a group of individuals who could comfortably gather around a conference table exert control over a major portion of the US economy.

This alarming concentration of power is the crux of The Problem of Twelve: When a Few Financial Institutions Control Everything, a new book by our guest on this week’s WhoWhatWhy podcast, John Coates. A professor of law and economics at Harvard Law School, he has held high-ranking positions at the Securities and Exchange Commission and consulted with the Department of Justice, the Department of Treasury, and the New York Stock Exchange.

In our discussion, Coates demystifies much of the jargon and buzzwords surrounding index funds and private equity, while highlighting the genuine risks stemming from the limited transparency in which these powerful institutions operate. 

He details connections between America’s financial powerhouses and their outsized political influence, and he discusses proposed legislation aimed at curtailing their reach. 

Unless we address this issue now, he argues, such extreme concentration of power poses an existential threat not only to corporate America and the wider economy, but to the future of US democracy itself.

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Full Text Transcript:

(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)

Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. American Capitalism is a system that has been the bedrock of our nation’s prosperity but is now facing challenges that could redefine its very essence. Imagine a room with just 12 individuals. These 12 hold the strings to the vast majority of America’s economic power.

The Big Four Index Funds, Vanguard, State Street, Fidelity, and BlackRock now control over 20% of the votes of the S&P 500 companies. This concentration of power is something we’ve never seen before.

On a parallel track with these private equity giants like Apollo and Blackstone, Carlisle, and KKR, which just purchased, Simon and Schuster have amassed a staggering $2.7 trillion in assets. Their modus operandi is taking over public companies, pulling them out of the public eye, and reshaping them away from public discourse and scrutiny.

This isn’t just about economics, it’s about the very ethos of democracy and transparency, the balance between capitalism, which naturally gravitates towards scale, and the ideals of American democracy, which champion a fair distribution of power.

All of this seems at a tipping point. The notion of The Problem of Twelve is more than a term of art on Wall Street. It’s a stark reality that we have to grapple with today. In recent years, this problem of 12 has emerged as a critical concern, highlighting the disproportionate influence of a select few institutions wielded over the nation’s economic landscape. Yet in an era marked by heightened partisanship and polarization, even the most pragmatic solutions face intense scrutiny and debate, further complicating our path forward.

To help us better understand this landscape and how important it is to both our economic and political well-being, I’m joined by John Coates. John Coates is the John F. Kogan, Professor of Law and Economics at Harvard Law School, where he also serves as Deputy Dean and research director of the Center on the Legal Profession. He has served as general counsel and acting director of the Division of Corporate Finance at the SCC and was a partner in the distinguished law firm, Wachtell Lipton, Rosen & Katz.

He’s been a consultant to the Department of Justice, the Department of Treasury, and the New York Stock Exchange, and it is my pleasure to welcome John Coates here to talk about his latest work, The Problem of Twelve, when a few financial institutions control everything. John Coates, thanks so much for being with us on the WhoWhatWhy podcast.

John Coates: Jeff, I’m delighted to be able to talk with you.

Jeff: Well, it is great to have you here. Before we get into The Problem of Twelve and the consequences of this consolidation, explain to our listeners a little bit about what index funds are, and really what private equity represents because they really are at the core of this conversation.

John: Sure. Both index funds and private equity funds are asset management companies. That is, they solicit and get financial assets from other people, and then they manage them. They invest in them in different ways. They’re quite distinct in their overall models. But the reason I’m talking about them in the same book is they’re both growing and have been growing for the past 25 years at more or less the same pretty amazing pace, about 15% growth rate annually, compounded average every year for the past 25 years. And so they’re the modern success stories and the financial industry.

Now index funds just to sketch them in case people maybe even invested them but don’t really understand how they’re structured. They’re really pretty simple. They’re a legal enterprise, a fund that collects money from thousands if not millions of people, and then takes that money and buys the stock of all the companies in an index, which is usually just a list created by a third party, typically S&P or [unintelligible 00:04:31] is another index provider. The index funds track those companies by buying all their stocks on behalf of their investors.

And because it’s such a simple investment strategy, it’s really– it’s hard to call it even a strategy other than just to say, we’re going to buy all the companies, they can do it at an incredibly low cost. And that’s the basic pitch that has attracted more and more money over time to the index fund industry. It’s not that they’re going to do a great job necessarily picking, choosing companies. In fact, they’re not going to try to do that at all. Instead, they’re just going to keep their costs really, really low, which means that the fees they can charge and still make some profit themselves could be really, really low.

And then that ultimately produces a product, which means you’re basically going to get the market return, which is generally pretty good for stocks over a 25-year span of time as the stock market goes up and down, but it generally outperforms other kinds of investments. So that’s the index fund product world.

Let me say one last thing about index funds. They do better the bigger they get because as with many things in life, and especially in finance, they can do the same buying and holding at a lower average cost as they get bigger and bigger. The same way that Walmart [unintelligible 00:05:57] incredibly low price, in part because Walmart is so big. Basically, the index funds are similar. And that’s what’s contributing to their growth is that the big guys just get better and better at it over time as they gather more assets.

Private equity, let me say a quick word about that industry, very different model. They don’t buy stock really in a normal sense. They buy companies, they buy the whole company. They might buy stock, but they buy 100% of it, typically of a given business. And as a way to raise the money to buy that company, they borrow a lot. So they’re private equity, they’re raising equity, capital stock exposure from their own investors. But when it comes time to buy the businesses that they buy, they typically borrow a substantial amount of the money they need for that.

So it’s a very debt-heavy way of investing ultimately, and therefore financially risky, which means they have to be pretty ruthless about the way they run the businesses after they buy them. They have to really cut costs. They have to focus on efficiency. They have to typically lay workers off in order to get the costs down. And so they’re quite distinct in the way they manage businesses relative typically to other kinds of corporate owners. They buy and hold for 5 to 10 years, and then they traditionally would sell them back to public investors, individuals as well as index funds on the stock exchange.

But over the last 25 years, they’ve moved away from that form of exit, as they call it. And instead, they now sell them typically to other private equity funds, or even increasingly to themselves, they’ll sell from one fund to another fund. And so private equity has become a separate capital universe separate from the stocks that are traded every day on the stock exchange. These private equity complexes oversee larger and larger numbers of workers in the US. It’s up to one or eight or nine, one out of every eight or nine workers by their own industry reports.

Of course, many American workers don’t realize they work for private equity because they don’t make any disclosures because they’re not part of the listed stock exchange company reporting regime. They basically don’t put out reports about the businesses that they own. And so a lot of people work for private equity and don’t even realize it. They’re now somewhere in the range of 15 to 20% of the entire corporate world in the US and that’s well up from where they were 20 years ago. So there are two kinds of funds.

Jeff: You mentioned with respect to index funds that one of the reasons that they’ve grown so rapidly and why they’ve been so effective is because they’re able to do what they do inexpensively. As in fact, people have been able to now trade stocks and do investing virtually for nothing. With online companies, how has that impacted the index fund business?

John: Well, so it’s true that the direct brokerage costs of investing have fallen dramatically over the last 30 years as competition was spurred by some deregulation in the ’70s. But the real cost of direct investing still remains reasonably high, and the reason for that is you have to spend a fair amount of time if you do your own investing, paying attention to the performance of the companies, whether the companies even exist, sometimes they’re sold in a merger. You have to keep track of things for tax reporting purposes every year as you buy and sell.

So there’s a fair amount of direct time and energy and focus you have to spend if you’re doing your own investing. And so while the brokerage cost side of it has fallen, the effort involved really has not.

The index fund product offers you not only low cost but also you don’t have to pay any attention to what is going on in all of those areas. We’ll keep track of all of that for you. We’ll send you a quarterly statement. We’ll send you an annual tax reporting document. And that’s basically all you have to worry about. So that means that even though brokerage costs have come down, which might make you think any kind of fund investing would become less relatively attractive, actually the index funds have continued to grow again at that 15% rate over the past 30 years, despite the dramatic fall in brokerage costs.

The fall in brokerage costs also have benefited the index funds directly because that means their own trading is very, very cheap these days too. And they’re able to pass those cost savings along in the form of their very low fees.

So as a financial product, it’s amazing. Like their index funds, I think are quite an amazing way for most Americans to invest. They’re so good at it that they’re just getting to a scale that makes them not really passive, which is the way they traditionally advertise themselves. We’re going to be passive. They still are passive in the sense they’re not picking and choosing companies, but they’re forced to be active in the sense of owners. They control the votes of the shares that are in the fund, and that’s what generates the problem.

Jeff: And in fact, one of the problems is that these companies own so much. These index funds own so much stock, own so much of companies that in fact, they have an extraordinary amount of power that combined the four top have owned 20% of the S&P 500.

John: It’s actually even a little higher than when I wrote 20% in the book, it’s now up around 25 for a lot of the companies in the S&P 500. You go back to the economies of scale that I was mentioning earlier, they can do what they do at a lower per-dollar cost the bigger they get. So the big guys in index funds have gotten bigger and bigger and bigger. There really aren’t a lot of small index fund providers and the ones who’ve tried to get in the business have typically not succeeded.

And so not only is money flowing to index funds overall, it’s flowing to the biggest funds in a way that was not true of other kinds of funds that were out there 30 years ago. It still exists. To be clear, they’re actively managed mutual funds across the country. And they still manage a lot of money. But they’re typically not quite at the same scale because in order to pick and choose stocks. You’re actually better off if you’re not trying to do it with huge amounts of money, because the more money you have flowing into one of the stocks you pick, the more likely other people will notice. And suddenly your very good investment will turn out to be an average one.

So most actively managed mutual funds are not nearly the same size as the index fund. So as money has shifted from T Rowe Price and American Funds and Dodge & Cox out there over to the index fund product, it’s also concentrated. And that’s why the big four index funds, they own far more stock collectively than the four biggest other kinds of mutual funds.

So the big four now last, I just did another check a couple of months ago, and it’s now up about 25% at most of the S&P 500. And that’s formal votes, which actually is an understatement of their real power. Why? Because a lot of people don’t vote. If you do your own direct investing, it’s a big pain to have to invest– Sorry, to have to read the proxy statements and think about all the votes. There are 4,000 companies, and if you even own a hundred of them, that’s a whole lot of voting activity that you in theory might do. A lot of people who own directly just don’t vote at all.

And when you don’t vote, that effectively shifts power to those who do vote. That’s true. The political system is also true in corporate governance. And the result of that is that it’s, even though you look at the formal numbers, 20%, 25%, it’s really more like 30% of the actual votes typically are coming from just four index fund complexes. So, Vanguard, Fidelity, Stage Three, and BlackRock, you mentioned them, if they get together and they agree on something, it’s almost impossible for other groups of shareholders to outvote them. They are the swing vote in almost all of the contested corporate votes that occur.

Jeff: And what are we seeing with respect to how they’re exercising this power in corporate America today?

John: Well, it’s a mixed bag. They’re low cost. So they don’t spend gigantic amounts of money thinking about how companies ought to run. They do have a substantial staff. Last time I looked, BlackRock was up towards 100 full-time people thinking about all the companies in their governance. But as I mentioned, there are 4,000 or more companies so that still leaves not a lot of time for them to think about any one company in a serious way. I don’t want people to think I’m suggesting they’re on the phone every day telling CEOs what to do. That’s not really the image you ought to have. Instead every year shareholders have to vote, and when they do vote, these guys drive the outcomes.

They also, in between elections, do take their jobs as stewards of this money seriously. They have to by law, and they do, I think, as a good business practice. And so they will call up companies and talk to them. And some companies they will lean in on, and they typically, for good reason, focus on the companies that are underperforming their industry or have some comment on an obvious corporate governance problem. And so most of the time what they’re doing is pushing and nudging and jawboning.

Now any shareholder can do that, but if you own 9% of the shares, you’re much more likely to get somebody to pick up the phone than when you own nine shares. Or a tiny number, which is what I typically own.

So they get their phone calls returned, and then even more importantly, the person at the company who’s talking to the index fund representative, they know that come the next election of the board of directors of that company, this fund will matter if there’s a fight. It’ll also matter if they need a vote for a merger, which there’s a lot of mergers, a lot of companies do a lot of merging in acquiring, and you typically have to get shareholder approval for those things. And it used to be a rubber stamp. You just would get shareholders to vote yes. Management almost never faces no votes. That’s changed in part because of index funds.

So index funds are much more likely to vote no than any other kind of individual investor that they’re replacing. So again, when they call up, the CEO knows sometime in the next few years, I might want to do an acquisition, I better make sure they’re happy. And so you put all that together, and it’s not that they’re steering the wheel of every company, but they are basically saying, “Here’s the roadmap we want you to follow. Here’s where you’re going off course.” And so that kind of influence is pretty pervasive.

And then, as I say, sometimes when there’s a fight at a company, these funds will determine the outcome. And that’s not frequent, but it does happen.

The Exxon fight from two years ago, I talk about in the book as an example. But every year, even without a board fight, another example that’s not in the book, because it came after I wrote it, Starbucks just had a big shareholder battle over its labor policy over whether it’s treating workers fairly. And a lot of the shareholders were pushing Starbucks to get an independent assessment done. So it wasn’t just take our word for it, we’re doing a good job, let’s hire somebody neutral to come in and really evaluate whether we’re obeying the labor laws or otherwise mistreating our work.

So this was teed up as a shareholder fightback in the spring. And the index funds, again, determined the outcome. It ended up passing, meaning Starbucks management lost. The shareholders have now pushed them to do something they didn’t want to do. And that would not have come out that way had it not been for one of the index funds State Street, which voted in favor, the other two actually voted against. So that shows they’re not always aligned with the index funds but collectively, they determine how companies are being governed.

Jeff: And talk about the growing power of private equity. The amount of money that’s in the hands of private equity now is a staggering amount of money and growing all the time. And their power is growing. Talk about that side of it.

John: So private equity, again, they’re in a different world than index funds because they’re buying whole companies. So it’s not like a battle directly between private equity index funds. When a private equity company buys through one of its funds, a business as you mentioned, like Simon Schuster that just bought what used to be called Clear Channel, owns a bunch of radio stations.

Those acquisitions take all the stock out of the stock market. And so the fund just owns the entire business. They’ve been growing, as I mentioned, very rapidly too, private equity funds, and the buyouts they do have been increasing their share of ownership of the American economy. As I mentioned, somewhere in the 15% to 20% range is a rough estimate. It’s actually hard to know which precision because they don’t put out reports about all of the companies they own. So that estimate is based on trade groups and other sources of data.

The way private equity functions, once they buy all the stock, which is the typical way they take over a company, obviously there’s no one else to fight with. They’re in charge. They really run the business. And they do it as I mentioned also pretty aggressively. You can think of them as hyper-capitalists, whatever capitalism generally is pushing companies to do, they’re doing it the most because they’ve borrowed a lot of their money to raise the capital to buy the business, they got to pay that debt back.

They have to typically pay it back on a pretty aggressive timetable in order to resell the company in a few years and make a profit. They want to make a profit so they’re coming in by paying a price and then they’re going to exit and they need to get the price up in order to make a profit promoting the business. So they’re in every dimension you can think of, how to make a company generate more cash. That’s what private equity does.

And in some settings, I think that’s actually a healthy thing. There are a fair number of businesses from time to time that are just badly run. And private equity will come in and quickly eliminate some of the mistakes and get the company back on track, and then they resell and make a profit. And that’s a good part of what they do.

Having said that, they also take risks with the debt that they borrow that pushes up the risk they may go bankrupt, they’re more likely to go bankrupt than many other kinds of ownership structures. That obviously is not a happy outcome. We don’t really know what the risks they run are because they don’t report about the company-level risks that they’re taking.

And in some industries, they seem to repeatedly be making other kinds of mistakes as well. One of the things that I think has been interesting to watch is they’ve pushed into segments of the economy that 30, 40 years ago, private equity did not touch. Traditionally, private equity only went after companies that were mature basic widget companies. The way economists talk about it, they have some inputs, they transform them, they sell some products. It’s all basic and therefore relatively simple and therefore when they’re doing the efficiencies it’s also relatively straightforward.

They’ve pushed increasingly in the last 20 years into service businesses, professionalized service businesses like healthcare, nursing homes, pet care, go down the list. They have been pushing into more and more industries, in part because they’re competing with each other, and in part because they’re getting bigger and bigger and they need to look for new pastures to try to take over.

I think in those sectors, their model is a little more socially risky, let’s just put it that way. And the reason is traditionally, say in healthcare, we can’t precisely regulate in a detailed way how doctors treat their patients or how nurses manage residents of a retirement home.

Instead of detailed rules which just wouldn’t work, there’s too many variables and it changes all the time, we rely heavily as a society on the professionals in those businesses to adhere to professional norms and to put the patient first. It’s not always perfect even in a traditionally doctor-owned business but better than I think attempting to rely on detailed rules and better than no-professional norms at all.

And I worry that private equity, it just runs counter to that. They come in, they take over a business, they’re not professionals. They may not care about the professional norms at all unless it makes them more cash in the short run, and they only own businesses for 5 to 10 years before they resell them. And I think that business model is a bit intentional with, to put it mildly, the kind of needs for society of some of these other kinds of businesses that they’ve been taking over.

And I think that’s where they’ve run into the most trouble. It’s where they’ve generated certainly the worst media coverage. There’s some powerful negative testimony that you can listen to that was generated in the Congress over the last few years. And it’s also a source of political risk, I think ultimately for the whole industry because as they expand and get bigger and bigger, they’re going to be taking on businesses that I just don’t think fit a heavily debt-funded, highly risky, very aggressive business model. So that’s private equity.

Jeff: Talking about the broader issue of the problem of 12 and the concentration of power, we have the index funds, as you’ve talked about, controlling 20%, 25% now of corporate America, the ever-growing power of private equity. Talk about the dangers of so much corporate power in so few hands.

John: Yes, so separate and apart from the private equity worries I was just sketching, both index funds and private equity funds have, as I’ve mentioned, economies of scale. So they do better as financial firms the bigger they get. And then it just becomes a self-fulfilling self-perpetuating cycle where they do well, they get more assets, they get bigger because they get bigger, they do better, they gather more assets, et cetera. And that process, I think, has been already unfolding for a couple of decades and doesn’t show any sign of turning around as a matter of just financial business logic. The same forces that have led them to grow over the past 25 years are still in place and on both sides then you get concentration.

With the growth of these firms, you get more and more economic power in a small number of hands, 12 people is the image I have in the title of the book, The Problem of Twelve. And so even if you think these organizations are fantastic as a financial matter, and I do think that about index funds, I’m a little less sure about private equity because they don’t disclose much and I can’t really assess them.

Even if you think they’re great financial tools for pure financial purposes, there’s just something fundamentally frightening frankly to most people when they’re told 12 people control the whole economy or something that’s getting to be a bigger and bigger piece of the overall economy. Because economic power, of course, conveys political power, and not just in legislation, but just in the overall effects of the way policy rolls out in this country.

So the problem of 12 that I sketch in the book is as these firms get bigger and bigger, more and more control of more and more businesses is being concentrated in the hands of a smaller number of people to a point where if trends continued, you’d have virtually every listed company completely controlled by index funds, and you’d have most of the rest of the economy controlled completely by private equity firms and not just them collectively, but the biggest 4 or so firms each and 12 or so people in total.

And that’s a thought that strikes most people as not sustainable. We’re not comfortable in American democratic history with the idea of that much concentrated unchecked power. And I predicted when I first wrote about this a few years ago, I continued to predict in the book that the political system is going to respond. And it already has to some extent. There are bills pending in Congress that would go after both industries.

And I think, oh, as their power continues to grow, inevitably those kinds of legislative responses are going to get more and more support and frankly, it’ll become more and more a topic of political conversation as much as financial conversation.

Jeff: To what extent though, and you touched on this a moment ago in saying about economic power is political power essentially to the extent that these groups, that these index funds and private equity and even the largest too big to fail banks altogether have such political power by virtue of their economic power, can they prevent any legislative redress to their continued growth?

John: That’s one of the scary elements here, right? Is that we know in our political system money helps get you political outcomes. And the more money these index funds and private equity funds gather, the more potential influence they have that way. Now, the reason I don’t think that guarantees their permanent dominance of everything is that we’ve seen the story before.

You alluded there to banks, and while we all may have views about banks, and they certainly cause a great deal of mischief in mischievous understating, they cause a lot of harm to Americans in the mortgage bubble and the housing bubble, and then the collapse in 2008.

Here’s something to note about banks. They have long been forbidden, barred by law from buying non-financial businesses. So Citigroup and Goldman legally cannot buy General Motors or Apple. They have been prohibited by law from doing that basically for our entire history. Likewise, insurance companies, which can be gigantic, and they also have economies of scale in doing what they’re doing, they’ve been prohibited by law since the early 20th century from buying more than a modest amount of stock in non-insurance businesses.

So again, AIG, which played a contributing role in the housing meltdown, was not able, during the lead-up to that, to go out and buy Microsoft and Facebook. Even though the banks and the insurance companies had ample resources financially to be able to buy some gigantic companies, they just legally were not allowed to.

Now, why are those laws in place? Those laws were put in place because we had The Problem of Twelve before. When banks first emerged, they threatened to take over the whole economy. The political system responded and put into place prohibition. Same with insurance. I think the same thing is going to occur here, and I think ultimately as much influence as money can buy, it still doesn’t really directly translate into votes. It can get out the vote, it can enhance the power of a message.

But while I agree with you that the industries will lobby and push back against the political system as it tries to restrain them. I don’t think they’re going to succeed in the end. I think they will be forced to live with restrictions of various kinds.

And I think the first step for them, they’re already starting to take, and it’s partially in recognition of this. So the index funds, for example, are already starting to think about and experiment with ways to reduce their own power by letting their own investors choose policies that would guide them in how they vote.

Now, it’s still a work in progress, and it’s not at all like they’re just passing the votes through. Don’t get that idea. But they’re already beginning to experiment with things that would reduce their own power, a sign that I think they know the political system will eventually be forced to do something. And on the private equity side, while they’re more modest, I think, in what they’re trying to do to stave off political pressure, they put out their own reports, which are in some sense voluntary that are quite extensive.

And you can learn about the overall private equity business from the documents they put out. Now, they’re not anything like a substitute for real disclosure regulations. They’re not comparable, they’re not consistent. There’s no audit of them. They’re in large ways sales tools, but the very fact that they’re spending a lot of money on these voluntary reports shows that they know they have a bit of a deficit when it comes to the legitimacy and accountability that the public perceives them as having. And there are just too many negative stories that come out of private equity ownership, I think, for them to succeed long-term and staving off all regulation.

Jeff: And, finally, John, talk about the potential unintended consequences to the economy from legislation that changes the nature of both private equity and index funds, and also the consequences to democracy if these changes don’t happen.

John: That’s a great double question there, and that illustrates that the problem that the book is trying to sketch is kind of a double problem. On the one hand, I particularly alluded to the idea that index funds are a great financial tool. There’s been public reports. Again since I wrote the book that– that LeBron James who’s not exactly a small investor, he’s got a lot of money to invest. He somehow got connected to Warren Buffet. I’m trying to imagine the room they were in together, but any event.


And Warren Buffet said to him, “Don’t try to pick and choose businesses. Don’t go buy a restaurant chain. Just pick an index fund and put money in it every month as you gather assets from your other activities. And that’s the best way to go.” And LeBron James, by all accounts, did that. And he’s apparently tripled his money and is now in the ranks of the billionaires when he would’ve only been a half a billionaire if he hadn’t done that.

So that shows, again, I really do think for most investors, index funds are a great product. Now, why do I say all that again in response to your question? Well, I worry that the political response to their power may make them no longer effective at doing that financial job. So part of the reason I write the book, frankly, is in a way to defend the industry, or at least encourage the industry to think about how to defend itself. I don’t want Washington to destroy the index fund product, I want them to find ways or work together with industry to reduce the political power they have while continuing to do a good financial job. So that’s on the index fund side.

I’m less sure about private equity, but I am willing to believe that particularly when it comes to second-generation family-owned businesses, private equity might be a good next buyer of those businesses because the families may not have been really running them very well as they go into the second or third generation. And sometimes the public markets are not doing very well. And so there may not be an exit for those family businesses by going public.

So I do think there is a continuing good role for private equity, and I wouldn’t want to see the industry completely crushed either. I have many of my students going to work for private equity firms, I should say, and I would like them to keep getting jobs. I do think overall they can add value. But I do worry again that the political system sometimes is blunt in the way that it responds, particularly in the middle of a downturn or recession.

And if you can roll out some very stark and clear examples of how private equity has ruined businesses and hurt people the political system may well do things to it that will make it unable to continue to function. And I think that’s probably an overreaction, and I worry about that too. That’s on the one side. Those are threats to the businesses from the political system.

On the other hand, if we do nothing and we let them continue to grow, we really could reach a point where the word that you would use is oligarchy, not democracy anymore to describe the American political system.

If a dozen people through their ownership of financial institutions can control even more of the economy than they currently can, and maybe do it even more openly than they currently do without fear of any kind of political check. Well, that’s very much like the system that I thought the American Revolution was intended to overturn, and that we fought periodic battle battles over the years to try to reign in.

Checks and balances are part of our basic political logic and lore for a reason. We don’t want individuals to be able to steer the country in a narrowly defined direction for long periods of time. We want there to be periodic forced checks with the American people. Are you going in the right direction or not? And I do think that without overstating it, that if unchecked, these two types of funds will acquire so much power that it really may be hard to prevent them from doing that.

Jeff: John Coates, his most recent book, is The Problem of Twelve: When A Few Financial Institutions Control Everything. John, I thank you so much for spending time with us today here on the WhoWhatWhy podcast.

John: Delighted To be here, Jeff.

Jeff: Thanks.

John: Happy to talk to you.

Jeff: Thank you. And thank you for listening and joining us here on the Who, What, Why podcast. I hope you join us next week for another Radio Who, What, Why Podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to


  • Jeff Schechtman

    Jeff Schechtman’s career spans movies, radio stations and podcasts. After spending twenty-five years in the motion picture industry as a producer and executive, he immersed himself in journalism, radio, and more recently the world of podcasts. To date he has conducted over ten-thousand interviews with authors, journalists, and thought leaders. Since March of 2015, he has conducted over 315 podcasts for

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