Carried Interest Is Not About Carrying Afterall

Back in early August, Cory Doctorow had a thread on Twitter (also posted as an essay on his website) about the jargon used in finance. Its opacity is intentional, "because if we called finance tactics by their plain-language names, it would be obvious that the sector exists to defraud the public and loot the real economy."

Leveraged buyout: better known as stealing a company. Use the company itself as collateral to get loans to buy the company, then bribe enough shareholders to sell the company. Afterward, sell off the profitable or valuable parts of the company, and fire workers to repay the debt.

Doctorow makes the point that when the Mafia does something like this, it's called a "bust-out," but we've all become accustomed to private equity firms destroying the retail world as we know it, from Toys R Us to Red Lobster to PetSmart... and now nursing homes, funeral homes, and hospitals.

Heirs property: I'd barely heard of this. In these cases, ownership of real estate that has multiple heirs over long periods, particularly when legal documentation was minimal, is manipulated by very wealthy people to their advantage. The egregious cases are Black descendants of enslaved people, who were cheated out of their share of land in the South, and Native Hawaiian people, most famously cheated by Mark Zuckerberg.

This has created an irresistible opportunity for a certain kind of scammer, who will pull the deeds, hire genealogists to map the family trees of the original owners, and locate distant descendants with homeopathically small claims on the property. These descendants don't even know they own these claims, don't even know about these ancestors, and when they're offered a few thousand bucks for their claim, they naturally take it.

The scammer then gets the property from the "descendant." ProPublica wrote about this scam process.

Carried interest: The interest in this loophole that's sometimes in the news, it turns out, is not like the interest on a loan. Doctorow writes,

The "carried interest" rule dates back to 16th century sea-captains, and it refers to the "interest" they had in the cargo they "carried." Private equity managers are like sea captains in exactly the same way that leveraged buyouts are like mortgages: not at all.

As Doctorow says in an earlier essay he wrote on the topic, carried interest is a 20% payment based on any profits a money manager has made on money they manage:

These are wages, not capital gains. The money in the fund isn't [the manager's] money, it's someone else's (money managers investment in their own funds is a token sum, 1-3% of the total), and your share doesn't come from selling something you own, it comes from doing a job.

Which means it should be taxed at the wage rate, not the lower carried interest (capital gains) rate.

He ends the August thread/essay about obscuring terminology with this:

The practices of private equity are crooked as hell, and it's only the fact that they use euphemisms and deceptive analogies to home mortgages that keep them from being shut down. The more we strip away the bullshit, the faster we'll be able to kill this cancer, and the more of the real economy we'll be able to preserve.