bloggingbuyouts

In one of the least convincing editorials in recent memory -- no small accomplishment -- Service Employees International Union international president Andy Stern argues that "short-term capital infusions from private-equity funds will only make the banking crisis worse, by encouraging risky behavior and abusive banking practices."

He's so wrong. Risky behavior is encouraged by compensation systems that reward returns regardless of risk, supine directors lacking true independence, and an ownership structure so diffuse that there is no one to enforce accountability.

A private equity fund with a large equity stake and no ulterior motives -- they make money from increased shareholder value, not fees and bonuses -- which paid cash for their shares is the best thing for shareholders. The one valid point that Stern makes is this: "It's hard to imagine private-equity funds resisting the urge to double down on the tactics banks have used to drive profits in recent years – unfair lending practices, higher fees, and exorbitant interest rates on credit cards and other consumer products."

That's probably true -- private equity funds may push public companies to improve their profitability, but that's their job. Consumer protection is the domain of regulators, and publicly-traded banks have a responsibility to increase their profits as much as possible within the confines of the law.

We shouldn't blame private equity for lax regulation.