Pod Insights The Prof G Pod with Scott Galloway Private Equity’s Impact on the Economy — with Gretchen Morgenson About this episode Gretchen Morgenson, the senior financial reporter for the NBC News Investigative Unit, and the co-author of These Are the Plunderers: How Private Equity Runs—and Wrecks America, joins Scott to discuss her thoughts on how private equity impacts parts of the economy, and why she thinks it’s problematic. Follow Gretchen on Twitter, @gmorgenson.
Scott opens with his thoughts on the latest branding failure: “bid adieu to the bird”
Algebra of Happiness: are you a protector?
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Transcript 10,398 words · 7 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:18 Scott Galloway? Episode 260. 260 is the area code belonging to the northeastern part of Indiana. In 1960, the first oral contraceptive pill, known as "the pill", was approved by the FDA. True story, my girlfriend said she was going on a new form of birth control. My girlfriend is German, and we found a new form of birth control. It's her sense of humor. Condom's 98% effective, the pill 99. Here's an idea. Makes sperm taste like chocolate. Problem solved.
1:58 Scott Galloway? Welcome to the 260th episode of the Prop G Pod. In today's episode, we speak with Gretchen Morgensen, the senior financial reporter for the NBC News investigative unit and the co-author of These Are the Plunderers: How Private Equity Runs and Wrecks America. I like Gretchen a lot. She didn't remember this. I actually met her when I was at the New York Times. She came in and presented. Gretchen is sort of this fearless, I don't know what the term is, watchdog, hop on the street, kind of calls it as she sees it, and is a great journalist. Anyways, I was excited to have her on the show. Okay, what's happening? We are witnessing yet another, or what arguably rivals the move from HBO to Max, in the first-ballot Hall of Fame Joey Bagadonuts head-up-your-ass brand equity moves.
2:43 Scott Galloway? I'm of course talking about the move from Twitter to some sort of gentleman's club crypto/Confederate flag branding called X, the black and white X. The thing feels downright, I don't know, we're like at a strip club in the Matrix. Back in April, Elon rolled Twitter into his larger parent company, X Corp, but it wasn't until over the weekend that the social platform began shedding its final skin. The move signals Elon's desire to turn Twitter into a super app. Think WeChat in China. What's interesting is, first off, is this a good strategy? I'm not sure. A super app hasn't been able to emerge in the US, and it might be because Apple and Alphabet have a vested interest in not letting a super app emerge, or is it that consumers don't want it? Don't know. Anyways, back to me.
3:28 Scott Galloway? I am credited in the Urban Dictionary with the term "yoga babble," and essentially I used it writing up something about the prospectus for the WeWork IPO. Anyways, this is probably an even better example, or right up there, of yoga babble, and that is Twitter CEO Lynda Yaccarino tweeted after this decision, which she clearly had absolutely no input into, open quote, "X is the future state of unlimited interactivity, centered in audio, video, messaging, payments, banking, creating a global marketplace for ideas, goods, services, and opportunities. Powered by AI, X will connect us in all the ways we're just beginning to imagine." I imagine you have no fucking idea what you're talking about, Ms. Yaccarino.
4:12 Scott Galloway? I imagine that you literally are, have decided to foist a word salad on the world that already diminishes what is a fairly low starting point of credibility when they call you CEO and you're clearly not. What? X will connect us all in ways we're just beginning to imagine. I can imagine a lot. I'd like a large male Filipino nurse with well-moisturized hands who rub the small of my back every night. Is X gonna do that? I can imagine a lot of things, Lynda. A lot of things. In my imagination, shit, there's corners there. You do not want to go, girlfriend. You do not want to go. Elon recently posted, "The Twitter name made sense when it was just 140-character messages going back and forth, like birds tweeting, but now you can post almost anything, including
4:57 Scott Galloway? several hours of video." Huh? So, we're gonna change the brand? So, okay, believe it or not, and I know you don't know this, I teach a brand strategy course at NYU Stern, and I've taught the course for 22 years, and about 4,500 people have come through that course. About 1,000 have come through my digital marketing course. Anyways, every brand strategist who knows anything about brand equity is cocking their head and just saying, "What the actual fuck?" So, if you think about the very basis, the very basic of brand equity, the pillar, the how you set the table, it's awareness.
5:41 Scott Galloway? And awareness is vastly underrated. And Elon is arguably the best example of how powerful awareness is. Elon figures out a way, he doesn't care, like, spread conspiracy, homophobic conspiracy theories, say something really stupid, name my child XA15. Every 72 hours, I need to be the story globally. Why? Because if there's just awareness around me and the companies I'm associated with, anytime someone thinks EV, or anytime someone thinks space hauling, or anytime someone thinks media, or short-form blogging media, they're gonna think of my brands. And to be fair, he's arguably one of the greatest brand builders in history.
6:26 Scott Galloway? Because without using any real, serious media, he built Tesla into what is one of the strongest brands in the world. It's probably, I would think, one of the strongest brands. At least in the automotive industry, and if you look at its market cap, it dominates. It's worth more than almost the entire auto industry combined. He's also been a real visionary around product that obviously has become increasingly important in a world where media is so crowded and digital solutions have unlocked a ton of new innovations. Product is the new bomb again. Supply chain is incredibly important. Amazon, one of the strongest brands in the world, did it through supply chain excellence, specifically getting you everything you'd ever want within 48 hours with no shipping charge. They also, Tesla, started opening dealerships in malls, and I've been in them.
7:10 Scott Galloway? I bought my Falcon there, my Falcon Model X, is that what it's called? I forget. Anyways, by the way, before I sold it, I took a big dump in the passenger seat. Is that wrong? Is that wrong? Anyways, the guy is a brilliant brand builder. And yet, and yet, to take awareness that is global, literally, everybody knows what Twitter is, and a logo which is very simple, very elegant, the, kind of the design or the logo test for me is that can you recognize it in your peripheral vision? Because your peripheral vision is a lot more important than we think. And that's the reason why billboard companies have actually endured what is an implosion in the traditional media world. And the reason is anthropological. Simply put, the shit you can eat or it could eat you, it doesn't come straight at you,
7:55 Scott Galloway? it comes at you from the sides. So we are very cognizant of what's going on in our peripheral vision. And when you see a big vehicle roam by you that is all brown, you immediately go UPS, global commerce. When you see a little swoosh, millions of times every week because you're a basketball fan, whether you think Nike explicitly or not, in the back of your brain somewhere in your amandala or whatever it's called, you're going Nike, Nike, excellence, Michael Jordan, you didn't win silver, you lost gold. Logos and visual metaphors are exceptionally powerful when they're clean and well-designed and you can recognize them in your peripheral vision. And every media company in the world.
8:35 Scott Galloway? Has had this logo at the bottom of their movie poster, at the bottom of their Chyron for Bloomberg News or CNBC, at the bottom of an article. This logo is everywhere. It is the ultimate ingredient brand for the rest of media, which is really the genius of Twitter, similar to what Intel did around Intel Inside. And why do we care about awareness? You don't buy anything from a brand you haven't heard of. You don't go to a university. You don't buy a car, a shoe. You don't even return the email or apply for a job at a company where you haven't heard of the brand, the person, or the company. Awareness is hugely important, and this brand has global awareness.
9:18 Scott Galloway? So you have, okay, I need you to go build a brand that has global awareness. I'm going to give you 10 years. And it also has to have some positive associations with technology. People have to understand what it is. It has to be differentiated, singular, relevant, have some moats around it. I need you to build that brand in 10 years. And here's $10 billion. Can you guarantee me you can do that? You couldn't, justifiably, you couldn't honestly say yes. This is literally taking tens of billions of dollars, or at least billions, into the street and lighting it on fire. And what does it mean? What does it mean? Yeah, it, okay, the easy one here is this goes down, it's just the stupidest fucking brand strategy move in the history of marketing. It's probably been worse.
10:03 Scott Galloway? It's interesting. Elon Musk is to Mark Zuckerberg what Elon Musk is to David Zaslove. And that is David Zaslove was going to be the, kind of the gold winner, the Ballon d'Or, what's it called? My kids are obsessed with the soccer player who scores the most, most goals. I forget the name of it. Anyways, trying to get into football because my kids are into it, but that's not why you're here. Literally, he's the heat shield for the second worst brand decision of the last decade, taking HBO, an amazing brand, and turning it into Max. This is even dumber. I just don't get it. All right? And no one, no one who's ever taken a marketing course or a brand equity course is going to get it. But watch, all the stans will say, oh, it's so stupid, it's genius, that you just haven't been privy to his genius that's unfolding, that you're thinking checkers and he's playing
10:48 Scott Galloway? chess. No, he's not. He has no idea what he's doing. And on a bigger meta level, what does this represent? What is the issue? We have such incredible income inequality in the United States. Our GDP growth has been consistent, if not robust, the last 30 years. Meanwhile, wages have gone flat. The difference between the line that is GDP growth and productivity growth that has been up and to the right in America because of technology, innovation, great capital markets, and a flat line of wage growth, those two lines used to be inextricably linked like snakes making love. And that was a good thing. That meant that all of the innovation in America was being shared across our labor force. The capital and labor were benefiting together.
11:29 Scott Galloway? And then in 1973, they disarticulated and the wage line went flat. What does that mean? It means a lot of people in America now work 40 or 50 hours a week and still live below the poverty line. So it's hard to say you're the wealthiest or the greatest nation in the world when you don't honor work, when there's no dignity in work. But the difference, the delta, the gap, that space between that wage line that's gone flat for the last 50 years and that productivity and GDP growth line that has gone up and to the right for the last 50 years, the gap between the two, the space between the two is literally trillions of dollars that have accreted to the top 1%, much less the top 10%. The middle class has actually done okay.
12:10 Scott Galloway? The lower income households have actually gone sideways, but the top 1% has been champagne and cocaine. Get this, get this, 10 years ago, there were 500 billionaires. Now there's 2,500. The number of billionaires has quintupled. This impacts all sorts of things. The reason why, and this was a big prediction we made several months ago, that sports franchises will skyrocket in value, and you're already seeing it, is that the supply is regulated or limited. They're not going to let four NFL teams be in Wisconsin. And the demand has exploded because the Gulf has entered into the bidding matches and also we keep producing more and more white guys in their 50s and 60s who are billionaires. And I don't think these are bad people.
12:53 Scott Galloway? I can't stand the whole Senator Warren and Senator Sanders notion that a billionaire has crawled over people and is a bad person. I'm wealthy, so if I'm not a billionaire, but if say I'm worth 100 or 200 million, does that mean I'm a 10th? Of my way to being a bad person. If Elizabeth Warren flies private as she's sort of bad, I just stop. The class warfare shit, or bullshit, I should say, is really unproductive. We need billionaires. We need aspirational people. People want to get rich. People want to have financial security because to be wealthy in America is to have your friends laugh at your jokes, to have a broader selection set of mates, to have people want to know you, to have people be nice to you, to have people who want to do nice things for your kids. And some to be rich in America is to be loved.
13:38 Scott Galloway? And we all want to be loved. So it's aspirational. It feeds into capitalism. Capitalism's kind of gangster move, or secret sauce, or hack, if you will, is leveraging our self-interest. And people immediately connected money with prosperity, with happiness in the United States. I figured it out early. The reason I'm financially secure is not because I wanted to change the world, not because I was so good at anything. That's what I love about all of these douchebag VCs who say they don't think about money. I know these guys. They think about money all the time. They're obsessed with it. And I don't, I don't blame them for it. And also, quite frankly, I was obsessed with it. Or specifically, I was obsessed with being able to take care of my mother, who I couldn't when I was younger.
14:19 Scott Galloway? I was obsessed with having opportunities to do wonderful things, which I knew I could do if I had money. Quite frankly, I was obsessed with the notion of finding a really wonderful mate. And I noticed in my senior year in college that all the guys whose parents had homes in Palm Springs or in Mammoth seemed to be attracting more women. If that sounds sexist, it is, and there's data to show it. The number one reason women select men as mates is they signal their ability to garner resources in the future. And there's nothing wrong with that. So here we are. Here we are, obsessed with money. The rich have weaponized government and created a set of tax policies, the most outrageous of which, capital gains tax deduction, 22.8%.
15:02 Scott Galloway? And you think, well, versus 37%, that's good, but it's not outrageous. Yet it's outrageous because every hundred dollars that the people who work at Prof G make every year, they only get maybe 65 after state and city taxes in Manhattan. Whereas if I get another hundred dollars in wealth creation from my Amazon or Apple stock going up, it not only gets taxed at a lower level, 22.8, it doesn't get taxed until I sell it. So it keeps growing and compounding off a much larger base. We have decided in our nation that sweat is less noble than money. That makes no sense. America is about generosity, liberty, letting people pursue their own form of happiness
15:44 Scott Galloway? as long as it doesn't damage other people, letting people love who they want to love, having the first potentially multicultural democracy that's this prosperous. We're a lot of wonderful things. We're also about work and we need to restore dignity to work. And what's happened? We have let so much capital crowd into the top one and 0.1%. That has become a zero sum game. It also creates a lack of guardrails. When one individual can spend $44 billion on a media company and not have to listen to other investors, typically people can't buy that kind of company on their own, which means he doesn't have a board. What happens? He starts spreading homophobic conspiracy theories.
16:27 Scott Galloway? He starts accusing coworkers of sex crimes such that they have to move out of their homes. He starts making really stupid business decisions because he has no guardrails. He has no board. This is part of a bigger problem. And I'm saying this for the first time. I believe we have gotten to a point where too few people have just too much money. And it comes back to the age old saying that really, is there some truth here? Power corrupts. This is an individual that is now doing damage to the world in terms of spreading conspiracy theory and making our discourse more coarse. And then on a smaller level, not nearly as important, but it is meaningful, making really stupid business decisions because if he had been forced to raise outside capital
17:10 Scott Galloway? that was had any sort of fiduciary responsibility, in other words, other equity. That had any, any teeth. By the way, no board seats given to any of these investors. All of the money these idiots who just wanted to be closer to Elon and these VC funds, who threw in money to this deal, literally, it was gone when he signed the deal. He signed a deal for $44 billion. It wasn't worth the debt on the company, which means the equity was wiped out on day one. But the idolatry of innovators infects rich people as well, which is probably a good thing. But here we have an example. When individuals can aggregate the wealth of the GDP of a Latin American nation and they have no guardrails, it not only creates for a worse society, it not only creates
17:51 Scott Galloway? an unfair tax structure, it creates just really bad business decisions. And that's what this is. At the end of the day, there is no upside. This is just a really bad business decision and it connotes a larger problem. And that is, in America, too few people have too much money. And money equals power. See above, power corrupts.
18:14 Scott Galloway? We'll be right back for our conversation with Gretchen Morgensen.
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20:54 Scott Galloway? Welcome back. Here's our conversation with Gretchen Morgensen, the senior financial reporter for the NBC News investigative unit and the co-author of These Are the Plunderers: How Private Equity Runs and Wrecks America. Gretchen, where does this podcast find you?
21:07 Speaker 02 New York City.
21:09 Scott Galloway? Nice. So let's bust right into it. Your new book, These Are the Plunderers, explores a three-decade history of corporate takeovers, how private equity has taken over, or you assert that it's taken over the ecosystem. So let's start there. What is the state of play? Set the table in private equity and takeovers, or private equity-backed takeovers.
21:32 Speaker 02 Well, private equity-backed takeovers, Scott, are hard to track because there's a lot of privacy. These are private companies that are being taken over also by companies that are privately held, although publicly traded stocks. So you don't have all the information that you normally would have about public entities. However, there are measures that show the extent to which private equity has taken over certain parts of the economy. For instance, 7% of the workforce works for private equity-backed companies.
22:11 Speaker 02 More than 40% of United States emergency departments in hospitals are overseen and managed by private equity-backed staffing companies. You see vast takeovers of physician practices. Healthcare has been an enormous investment arena for private equity in recent years. Over a trillion dollars in deals that they have done, taking over physician practices, staffing companies, specialty areas of physicians. So it's not easy to say that, you know, however
22:53 Speaker 02 much percent of the economy is based on or backed by private equity, but it certainly is growing, and it certainly is having a big impact.
23:06 Scott Galloway? Well, one of the, one of the kind of interesting facts in your book is that Blackstone and KKR, just those two firms, control one-third of the nation's hospital emergency rooms, which struck me as just, struck me as striking. But why is that a problem?
23:25 Speaker 02 Well, private equity in healthcare, Scott, is a particularly pernicious problem because it pits the physicians who are operating in these arenas, whether it's the emergency department, whether it's their own practices that they've sold to private equity. It pits their interest in serving the patient and the patient's needs against the private equity firms' demand for profitability. And as you know, there are laws against what's called the corporate practice of medicine in the United States, in more than 30 states, as a matter of fact, but they're rarely enforced.
24:09 Speaker 02 These laws were created to really deal with the potential problem of having, serving two masters as a physician, serving both the patient and serving both the company that wants a profit. So it really gets to the nub of the problem with private equity when you're talking about healthcare, because the conflicts of interest are really very damaging.
24:38 Scott Galloway? But is there evidence that shows that emergency rooms that are run by quote-unquote nonprofits have better outcomes than PE-backed firms with emergency rooms?
24:46 Speaker 02 We're not talking about just PE-backed versus nonprofits. What we're talking about is private equity is, according to people who've worked in the field, who've experienced the field, it's a corporate profit capitalism on steroids, is what some people call it. So it's nonprofits, nonprofit hospitals are an entirely, you know, other topic for you to tackle, because they really don't operate like nonprofits anymore. They're very highly paid, chief executives, et cetera. So it's really not a comparison between nonprofits and profits.
25:27 Speaker 02 In fact, you will see the private equity staffing companies in nonprofit hospitals, because they are trying to get the biggest bang for the buck. Now, what I hear from doctors who are in emergency medicine...
25:44 Speaker 02 Is that they are told how to operate. They are told what tests to run. They are told what to do for patients by people who are not medical professionals, not trained, not healthcare professionals. And that to them is an enormous problem. And it has been shown that prices go up when private equity firms take over healthcare operations. You see the fact that doctors in these arenas are complaining, expressing problems with private equity takeovers.
26:24 Speaker 02 You have doctors actually trying to change this world, the world they operate in, so that they don't have to deal with these kinds of pressures to perform for a profit motive.
26:39 Scott Galloway? So is the tension or the discussion about the fulcrum between a service, an organization that is supposed to, as part of their mission, serve the public good, and the for-profit motive? I mean, what is different about how private equity approaches a company like that versus just if it was a publicly traded company backed by other types of investors? Is this a PE versus healthcare issue? Or is this healthcare versus just the for-profit model and incentives that come along with that?
27:11 Speaker 02 Well, the hospital, the for-profit model is a problem in healthcare. But the private equity model of for-profit healthcare is on another level. So there are two reasons for that.
27:29 Speaker 02 One is these firms are almost always taken over using large amounts of debt.
27:37 Speaker 02 This debt creates a cost for the company that it must pay. It creates an obligation that it didn't have before. A higher cost associated with doing business. Okay, that right there is a pressure. The second pressure that private equity typically exerts on these companies is the need to increase profitability over a very short term. Five to seven years typically. So that they can sell the company at a profit to someone else. So we are not talking about long-term perspective.
28:17 Speaker 02 We're talking about a super heightened short-term interest in increasing profits. So the company looks more profitable and more saleable after five years. So those two pressure points, Scott, are really crucial to understanding why private equity is different from just corporations practicing medicine. Now, one of the interesting things about the current situation, current economic situation, is that many of these companies are now on the precipice because of the heavy debt loads that they carry. One of the two companies that you pointed out
29:02 Speaker 02 that controls 30% of the United States emergency departments filed for bankruptcy earlier this year. So here we are in a situation where because interest rates are going up and because these companies generally float debt that has changing interest rate, i.e. floating rate debt, they are being hurt by the rising interest rates. They would not have been so hurt had the debt been fixed rate debt like, say, a fixed rate mortgage. But these are floating rate obligations and as interest rates have gone up, they have gotten into trouble. The other emergency department operator that is private equity owned,
29:47 Speaker 02 that is enormous, Team Health, is also in difficulties economically. So you have two situations where what it shows you is how perfect the economic environment has to be for these companies to continue to operate. Okay. It has to be a low or zero interest rate environment. And it has to be an environment in which you can increase charges to patients to make the business model work. So I argue that this is not necessarily a sustainable business model.
30:32 Speaker 02 So it really, I think our moment in time right now is very interesting because it shows how the economic environment really sheds a light on these business models as unsustainable.
30:48 Scott Galloway? So I think a representative for the, you're going to forget more about private equity than I'm going to know, but the little I know about it, I would say that private equity, I would argue, has proven to be enduring. That it's been through high interest rate cycles, that the fact that it continues to draw capital, the fact that it continues to be a big part of kind of the alternative investment ecosystem shows that from a capitalist standpoint, that it works. And, and the other argument I would make is that in some instances, isn't the discipline that debt brings or that quite frankly, uber capitalists bring to an organization around hard decisions and allocating capital to its best use? Isn't this just a key component of capitalism?
31:32 Scott Galloway? And there's some externalities and you talk about rising interest rates. That was the question I was going to ask you. I would imagine a lot of their deals no longer make sense. But don't oftentimes you have a, my sense is there's a lot of companies and entrepreneurs that would argue that their partnership with private equity made for a better business and better customer outcomes. Do you, do you acknowledge that private equity is enduring or do you believe that it's an asset class or an investment mode, modality that is going to go away, that it's collapsing on itself? Do you think this is the beginning of the end of private equity?
32:03 Speaker 02 I don't think it's the beginning of the end of private equity, Scott, because they have amassed so much money that they will be able to, you know, manipulate outcomes in Congress, et cetera. So it's really, I don't, I don't forecast an end to the industry. I do think though, that people are questioning it. Certainly the returns in private equity are reverting to the S and P 500, as you know. For years, there, they did generate alpha and, and from that standpoint, they were attractive from the pension funds perspective of being able to meet their obligations. That no longer is the case.
32:47 Speaker 02 And I think that the reason they have been so funded by pensions is obviously because the obligations that they face are enormous. But also to be very frank, Scott, I think what we're seeing right now is that people are starting to understand that the way these firms mark their portfolios, they have a lot of leeway. They don't have the S and P 500 at the end of the day, like a mutual fund does, that will tell you where every stock in your portfolio wound up and what it's up and what it's down. They can really mark these things where they want to.
33:27 Speaker 02 And in that way, that encourages pension funds to invest in them because the pension funds are on the same side of that equation. They want the marks to be better. They want the valuations to be higher, whether or not it's accurate.
33:47 Speaker 02 But you are starting to see some cracks in the foundation. For instance, of course, deals are pretty dead in the water this year. We haven't seen a lot of deal making. They're having trouble, even the big firms are having trouble raising the money that they had set out to raise. The, you know, new billion dollar funds are having difficulties. They're also experiencing bankruptcies. So I do think we're at a bit of a watershed moment where people are going to start questioning this business model a little bit more.
34:26 Speaker 02 I do not think it's the end of the line, but I do think raising questions about their activities is absolutely appropriate and should be done.
34:39 Scott Galloway? It strikes me that the, and it's the boring stuff to get to, that interest rates are really the kind of elephant in the room here, that if you can borrow money at two or three percent, you know, as long as the company goes up in value, even if it's just through productivity gains or growth in the economy or growth in the population or growth in the number of people in a region that are coming into an emergency room, that if you can borrow money nearly at almost free, that it's, it's not difficult to look like a genius, right?
35:09 Speaker 02 Correct.
35:10 Scott Galloway? Whereas when your three percent borrowing costs go to seven, all of a sudden, a lot of that cash flow is going to paying off interest that you weren't expecting before. And a lot of these, I would imagine, you would think that a lot of bonds would be distressed and I'm shocked there hasn't been more high profile bankruptcies given the acceleration of interest rates. Do you know how much of this debt approximately is variable rate? I always thought that PE kind of took a long-term mindset and borrowed money more for the medium or the long-term. Is this, is in your estimation and the data you look at, is private equity or private equity backed deals, are these, are these bombs about to detonate everywhere as they have to roll their debt and they can't refinance it at, you know, or they have to refinance it at much higher rates,
35:54 Scott Galloway? kind of making these things financially untenable?
35:56 Speaker 02 Yes, most of the money that they raise is floating rate, Scott. And I was surprised to learn that myself. And that is really, as you say, the elephant in the room. So, yeah, it's very easy to look like a genius when, you know, interest rates are at zero and the Fed is flooding the system with money. That is no longer the case. So, yeah, you know, bombs detonating, you know, I think that there will be some restructuring, but you're starting to see some interesting, you know, tactics, as I would describe them, being played for people who want to try to get out of their private equity positions. And what they're doing is finding, these are not liquid investments, as you know.
36:40 Speaker 02 They're very difficult to get out of. If you're in a fund that has a seven-year hold period, you know, you're stuck there. And you would, as a pension, have to reach into your pockets and make further payments when they call your capital. But when people try, when pensions try to get out of these deals, they are doing so at some pretty significant discounts into the 70, 80% level here of some of these transactions. You are also seeing an interesting tactic of selling one portfolio company held by
37:16 Speaker 02 a private equity firm into another fund by the same firm, which is surely an indication that they cannot find a buyer outside of their own four walls. So that is an interesting element that I think you're seeing cropping up. And the secondaries market, where firms, you know, sell secondary parts of their funds to themselves and to other investors, I think these are all indications of stress in the system.
37:54 Scott Galloway? So I would, I would offer a question that it's just a part of the cycle. That they, when interest rates are low and they can get in at a good price, they make a lot of money. And then when interest rates spike and it appears in retrospect that they overpaid for this company, that to support that debt load, they can't support it. And then they declare bankruptcy. The emergency rooms are still there. Somebody comes in a distressed, another part of the ecosystem, a distressed credit investor comes in, buys those bonds on the cheap or the company on the cheap, and we start the cycle over again. I guess what I would ask is, why, why do you think or do you that it's different this time? I just see this as part of the cycle.
38:34 Speaker 02 Well, I think that more people are being touched by this industry and by the extreme pressures that the business model presents for those in the industry, and that it is affecting more stakeholders. It's affecting the workers who get laid off. It's affecting the tax bases of the cities and towns where the bankrupt companies used to pay taxes and now cannot because they're bankrupt. My argument is that the circle of pain surrounding this industry because of its business model, unsustainable business model, the circle of
39:17 Speaker 02 pain is wide. And to the degree that Americans care about how businesses operate and whether or not there is true stakeholder involvement at a 360 degree level, i.e. not just the shareholders, I think this is an interesting moment. And I think it's really worthwhile to talk about it because the impacts are growing on these other stakeholders. And even the pension funds who have really thrown themselves full on into this industry as a way to meet their
39:59 Speaker 02 obligations, I think they too will start to question it.
40:05 Speaker 02 I hope that they do because I think that there are other alternatives for them to consider that are not as opaque, that are not as illiquid, and that do not involve problematic business practices, such as you see in some of the private equity-backed companies that have made headlines recently. The Blackstone-owned slaughterhouse cleaning company that hired children to clean slaughterhouses at night in the Midwest. You know, it's interesting. Were they hiring? Why were they hiring children? Were they hiring children because they were less costly so as to meet a hurdle, an earnings
40:50 Speaker 02 per share earnings hurdle? So when you see stories like this about these pernicious outcomes among these companies, I believe it is important to pay attention to it. Now, all kinds of corporations get into trouble, and it is not solely limited to private equity. But I again go back to my argument that the pressure points exerted on this business model by the debt and by the short-termism makes it more problematic.
41:28 Scott Galloway? We'll be right back.
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43:24 Scott Galloway? So if these companies have to go into restructuring, the private equity firm and its investors, their equity gets wiped out. They get hurt badly. If one of that emergency room company with the bonds where they can't make the debt interest payments, they blow covenants. The private equity company and its investors, its limited partners, they lose their equity.
43:47 Speaker 02 It's mostly the limited partners. The GP does not. The GP only invests a small fraction.
43:53 Scott Galloway? Well, they usually invest about 2% of the fund, right?
43:55 Speaker 02 Right, okay.
43:56 Scott Galloway? But they don't make any. I mean, I recognize it's, I don't feel sorry for these guys, but they don't get paid. I mean, they make some money on the management fee, but they have a vested interest in these things being successful. And I recognize that they're putting other people's capital at risk. So, I mean, I, quite frankly, the issue... Well, I think you and I would have the most empathy for one another. Like, I, I hope someday someone loves me like Kristin Sinema, Senator Sinema likes, you know, loves private equity. The carried interest loophole for private equity is, to me, the most outrageous part of our tax code where they somehow have turned short-term current income into capital gains. But anyways, amongst some of the highest-paid people in the world. But it strikes me that-
44:34 Speaker 02 It's a billionaire minting machine.
44:36 Scott Galloway? It's, it's, it's gross that we've decided that the wealthiest people, you know, private, it would be difficult to find an industry that, on average, has higher compensation than private equity. And the, the fact that we've decided to give them long-term capital gains on what are short-term current income commissions on an investment, to me, is just nothing but outrageous from a Democrat who was given a million dollars. I mean, it just represents everything bad about capitalism in America and DC being overrun. Now, having said that, the returns go down, investors want returns, they go to other asset classes. Private equity says, okay, we have to pay less for companies, valuations come down because we can't finance with cheap debt.
45:20 Scott Galloway? And the only way they can add value long-term is to make sure that the end consumer, you know, continues to patronize the emergency room or the company. But I guess if you feel that this, the forces of capitalism here are especially rapacious or are kind of on overdrive to the point where the externalities are just too great and, and have some negative consequences for firms, child labor, you know, pension funds being raided, et cetera. And I, I would actually argue that Blackstone has a lot of reputational risk and was probably as horrified by that. We probably read the same article about child labor, child immigrant labor. What, if you're advising the Biden administration or the SEC or regulatory bodies in DC, do
46:02 Scott Galloway? you feel like this is, the market will take over and recognize that this is an asset class that has real hair on it and ultimately the investment goes down, or the capital available to this type of buyout goes down? Or do you feel like there's some sort of regulatory intervention that's required?
46:17 Speaker 02 Well, I always hate advocating for regulatory intervention because when you close the window, they open the door. And one of my favorite points to make that case is the, when Bill Clinton was pushing and Congress signed into law a limit on CEO pay in salary of a million dollars, over and above that, then the company would have to pay taxes on it. So they just simply started issuing stock options. So these are very shrewd people. They are in the business of finding ways around hurdles. And so I am really not a believer in regulatory solutions. However, I do think we need more information about these companies.
46:56 Speaker 02 I do think it's very interesting that companies like Blackstone do not advertise their ownership of these companies. You don't know, for instance, half the time you're dealing with a private equity-backed company. Why is that? Are they, you know, they want, they have what, they operate in the background? I think that's very, very interesting and very telling. And the fact that Blackstone got tagged on this horrific child labor violation was a real, almost a first, really. It was so, it was so interesting that they got tagged. They, usually the private equity firm can hide behind it and say, oh, we didn't know what was going on. And in fact, when DOJ brings cases against private equity-backed, for instance, healthcare
47:40 Speaker 02 organizations that are accused of Medicare fraud, the PE company always says, oh, we had no idea what was going on. Well, maybe so, but was the business model creating the incentives that were needed to, you know, resort to, in this case, Medicare fraud? That is, to me, a question. So I don't believe the government has the answer. I do believe that if you change the tax code, that would eliminate a huge, huge part of the problem. Because the money just wouldn't be big enough, the money just wouldn't be compelling enough.
48:17 Speaker 02 The other thing I wanted to just mention earlier, you said, you know, the these private equity companies, they lose when the companies go bankrupt. Well, they don't lose as much as the limited partner, A. But B, there are many, many cases, Scott, where they have already taken out all the money that they invested. And they have done dividend recapitalizations, where they have, you know, added debt to the company to pay themselves almost instantly in some cases. There's a case in the book about a aluminum smelter in a tiny town in Missouri that Apollo took over. And they got their money out in like, months. And
49:02 Speaker 02 so when a company goes bankrupt, it's really not evident at the time, unless you do the arithmetic, to see if the private equity firms actually did lose in the bankruptcy. Oftentimes, there's a very good shot that they have taken their money out, and that everything else is gravy. And if the thing goes bankrupt, well, so be it. It's not our problem.
49:27 Scott Galloway? So, we touched on this off mic, but I was on the board of the New York Times, and you actually came in and presented. The board meetings would basically bring in, they'd bring in the most talented, or one of the most talented journalists, who talks for a while, we ask them questions. It was sort of the entertainment for the dinner before the board meeting. And one meeting, they had you come in, and you didn't remember, this was 15 years ago. And you talked about CEO compensation. And I can't remember, but I think one of the board members, who was the CFO of Verizon, you really upset her. And she said, you realize what you're saying is, is, you know, people can go to jail for. And I remember thinking that you were fearless. And I think it kind of summarized for me that the difference between the New York Times and the Wall Street Journal, the Wall
50:11 Scott Galloway? Street Journal, I think, sees themselves as an evangelist business. And I always thought that the New York Times, to a certain extent, saw themselves a little bit as kind of the watchdog, or the cop that was fearless about calling out. You know, the some of the downside or the ugliness of this industry or how the sausage gets made. I'm curious, you are a stockbroker and I find that your work is very much, you know, investigative journalism. You've won a Pulitzer for this. What in your career or in your life inspired this drive or this notion? I feel like you're on a bit of a mission that you see that there's real harm here or there are downsides that people aren't talking about or that are being wallpapered
50:54 Scott Galloway? over by capitalism or money or the PR consultants that these firms engage with or, you know, that it's, there's a lot of money washing going on here. What is it in your background or whether, was there a seminal moment you can point to in your career where you thought, I have a passion or an obligation to cover business in this kind of fearless, hard hitting way? Because you're definitely, what I would say about your work, I don't agree with a lot of it, but you're fearless, which I just have huge admiration for. Like, where does that fire come from?
51:30 Speaker 02 Well, first of all, thank you for your admiration. It means a great deal to me and I do not believe that we need to agree on everything.
51:39 Scott Galloway? Yeah, 100%.
51:40 Speaker 02 And that is what I do for a living. Okay, so funny that you asked. There actually is sort of a seminal moment. Now, I was a stockbroker in ancient history, probably before you were born. I sat down-
51:55 Scott Galloway? Unlikely, Gretchen, unlikely.
51:57 Speaker 02 I sat down at my desk at Dean Witter in 1982 and the Dow Jones Industrial Average was 780, okay? So we're talking ancient history, all right? But anyway, I was one of the few women, I had actually gotten that job because the EEOC had sued Wall Street because they had not hired enough women. And so I am, you know, I had my brokerage firm experience because of that lawsuit, probably. Anyway, I'm a stockbroker, I'm selling stocks, I'm trying to help people. It's 1982, people are still hating stocks because, you know, the seventies were a terrible period for stocks. Interest rates are astronomical, which is bad for stocks.
52:40 Speaker 02 Anyhow, comes a, an issue that my firm was underwriting or a co-underwriting and it was a utility stock. And of course, utility stocks are known for being safe money. For you, you, you sell them to clients who want a high dividend. They don't want much action in the stock, but they do want safety. So this was a company called Public Service of Indiana. And so I sold this offering to my safe money clients. And even before the trade settled, which was five business days back then, the company announced that it was slashing the dividend
53:23 Speaker 02 and that it had nuclear problems. It had problems with a nuclear plant. That hadn't, nobody had told us anything about this. Now, that was on me. That was my fault because I didn't read the prospectus. I'm sure it was in the prospectus, but we had all of these people in the firm saying, sell this stock, it's great, it's going to give you a, you know, whatever 11% yield, whatever it was. And I felt completely betrayed, also foolish and stupid for selling something that before it even settled, my clients were in half on it. That was a pivotal moment for me. When I understood that it really wasn't about doing the right thing
54:07 Speaker 02 for the customer, it was about doing the right thing for the firm. And if you extrapolate that out to any circumstance, to any company, you can kind of see how it might work. It, it actually was a, a, an enormous embarrassment for the firms who underwrote the stock. Because you just don't have that happen. It's so unusual. And so that, does that make sense to you as far as like a watershed moment for me saying, uh, uh, wait a minute, the lights just went on?
54:45 Speaker 02 This is how the world works.
54:47 Scott Galloway? Yeah, and it's really sad because the number of journalists over the last 30 years has been cut in half and the number of PR and comms people at these companies is up sixfold. So the ratio of what I call bullshit to spend has gone the wrong way by 12x. You know, whether it's WeWork or Theranos, there just aren't enough journalists asking really hard questions. They're overwhelmed. By the way, indulge me for a second. I have a story about your old employer. When I was, in 1978, four years before you joined, I was 13, and my mom's boyfriend gave me 200 bucks and said, "Go to one of those fancy brokerages in the village, I live near Westwood Village, and buy some stock." And I walked into Merrill Lynch, Pierce, Fenner, Smith, and I sat in the lobby. I was very self-conscious because I was 13 and no one paid any attention to me, so I walked across the street to Dean
55:31 Scott Galloway? Witter, Smith Reynolds?
55:34 Speaker 02 Dean Witter Reynolds.
55:36 Scott Galloway? Dean Witter Reynolds. This woman came up to me and I said, "I have 200 dollars." And I showed her my 200 dollar bills and she was very nice, put it in an envelope for me. I remember the cellophane envelope. And this broker in his 30s, this guy named Cy Searle, came out and said, "Hi, I'm Cy Searle. Welcome to Dean Witter." And he took me back to his little stall and he taught me about the markets. And we bought 12 shares of Columbia Pictures at 16 dollars because he said it's important that you know the business and like it. And every day during lunch, I used to go to a phone booth on the playground of Emerson Junior High School and I would call him. I'd have my two dimes and he would talk to me about what the stock did that day. He would say, "Close encounters of the third kind is a hit and Columbia Pictures is up." And he made this connection for me
56:18 Scott Galloway? in the markets at the age of 13. And I'm economically secure now and I'm an entrepreneur and I've had some success, but 80 or 90% of my wealth comes from investing in the markets, which I've been doing for the last 45 years. And I'm still in touch with him. He's about to turn 80. Cy's about to turn 80. So I have this... Forty-five year long relationship with a stockbroker who took a real interest in me. But it was a Dean Winter.
56:43 Speaker 02 He is an unusual person because I can tell you that many people would have said, I'm not dealing with a child who has $200. No, thank you. Give it to somebody else. Give it to the new man, you know, on campus who just arrived, who doesn't know anything. I mean, that guy was a gem and I can see why you held on to him.
57:07 Scott Galloway? Anyways, his name is Cy Sero and he's a good man.
57:10 Speaker 02 Please tell him I said hello.
57:12 Scott Galloway? I absolutely will do that. Gretchen Morgenson is the senior financial reporter for the NBC News investigative unit, a former stockbroker. She won the Pulitzer Prize in 2002 for her trenchant and incisive reporting on Wall Street. I love that, and that's in quotes, trenchant and incisive. Previously, The New York Times and The Wall Street Journal, she and her co-author Joshua Rosner, wrote the New York Times bestseller, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, which was about the mortgage crisis. And their latest book, These Are the Plunderers: How Private Equity Runs and Wrecks America, is out now. She joined us from New York City. Gretchen, I can tell you, I think it's just great and I think it's important that we have
57:54 Scott Galloway? these discussions because I disagree with a lot of what you say. You disagree with probably my thoughts on this, but I'm just such a fan of people like yourself. And I gotta think there weren't a lot of women in investigative journalism covering Wall Street back when you started. I think you're fearless. I think you're a great role model and I really do wish you all the success you deserve with this book and your continued efforts.
58:20 Speaker 02 Well, Scott, thank you so much and I would love to have another conversation with you, even if it's not on your fabulous podcast. I would love to stay in touch, talk with you about ideas. If you see anything that you think needs exposing, I really, really, really urge you to let me know.
58:36 Scott Galloway? Well, two words. First word is big and second is tack. That's who I would sit Gretchen Morgenson on. Gretchen, thanks so much for your time.
58:46 Speaker 02 Thank you, Scott. My pleasure.
58:59 Scott Galloway? Algebra of happiness. I've been thinking a lot about masculinity and trying to work with some people, including Richard Reeves, some of the folks in my world that are social psychologists about trying to understand masculinity and then maybe even, and this is ambitious, try and articulate a new definition or a modern version of masculinity that captures some of the wonderful things about masculinity while adapting to a new world and acknowledging that there's some components of masculinity that can go, come off the rails. And one of the words I keep coming back to is protector. And if you think about most of the jobs that are associated with masculinity, whether it's cops, or firemen, or people in the armed
59:44 Scott Galloway? services, or emergency room doctors, they're tightly associated with masculinity. I also feel I need to have an asterisk here, so I don't trigger too many people. I don't think masculinity is a domain of people born as men. I think a lot of women demonstrate wonderful masculinity. A lot of my male friends demonstrate wonderful femininity. So anyways, now that I've said that, most of the jobs where you really think of being masculine involve protecting others. And now, what does that mean specifically, in addition to going to these, these kind of more high testosterone positions or jobs? I think it means committing yourself that the moment you identify a person, a group, that is vulnerable, that for whatever reason people don't understand, or are more prone to have a bias against, or prosecute, or
1:00:29 Scott Galloway? persecute, that a real wonderful masculine attribute is to not necessarily need to even understand the situation, to not even think through or provide an opinion, but to have a bias towards protecting people. When I was growing up, I didn't understand gay people. I didn't think I knew any. Homosexuality was considered a perversion, and a lot of people just immediately, or kind of a gag reflex or muscle memory, among my peer group, my friends, was to be very disparaging of gay people. And I don't think that's how men behave. I think you don't need to understand the trans community. You don't need to empathize with them. When I first heard about gender affirmation therapy, I thought, that doesn't feel right to me
1:01:12 Scott Galloway? that people under the age of 18 should engage in hormone therapy. It offended me, quite frankly. And as I've learned more about it and, you know, read the stuff that the American Pediatric Association has written about it, talked to people who are more informed on the topic, my views have changed. But even before then, what it means to be a man, what it means to be a man is to realize that that group is subject to a lot of undue persecution and bias and bottom line bigotry. When governors and states are passing laws to exclude trans athletes from a girls volleyball meet, and that has never happened in the history of their state. No trans athlete has ever showed up and said, I demand to play on the girls volleyball team here. This group is being persecuted.
1:01:57 Scott Galloway? And our first inclination as men is to protect these people. And whenever you sense or you feel a group, whether it's as simple as your friends being disparaging about a group, you don't engage in that. And maybe even push back a little bit. You have a bias towards protection. Why do we protect people? Why do we stick up for people even if we don't understand it? Maybe we don't even empathize with this group. We protect people because we're men.
1:02:24 Scott Galloway? This episode was produced by Caroline Shager and Jennifer Sanchez is our associate producer. Andrew Burrows is our technical director. Thank you for listening to the Prop G Pod from the Box Media Podcast Network. We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn, and on Monday with our weekly market show.
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Previous Office Hours: Apple’s Investment in Healthcare, Should I Send My Child to Private School? and How to Introduce Social Media to Your Children Next No Mercy / No Malice: Frenemies Page updated October 26, 2026 · transcript and summary are machine-generated
