Our next guest says elite Wall Street financiers are undermining the country's economy for their own benefit.

In her latest book, the Pulitzer Prize winning journalist Gretchen Morgenson traces the history of corporate takeover in the United States and the private equity firms that load new companies with debt.

Walter: Gretchen Morgenson, welcome to the show.

Gretchen: Great to be here.

Walter: Your book is called "These are the Plunderers."

Let me read something you wrote.

You say this is a book about modern-day plunderers, a relatively small group of financiers whose unrelenting pursuit of profits extract wealth from the many to enrich the few.

It is about a business model that is pernicious and growing and widens the wealth gap.

Pretty tough words, "plunderers, pernicious."

What is your goal, why are you so tough?

Gretchen: Trying to get people's attention.

In this day and age, it is tough.

What we are trying to do with the book, my co-author Joshua Rosner and I, is to open people's eyes to a business model that for the past 30, 40 years, has been growing in dominance and problems for the vast majority of people that come into contact with it.

This is now called the private equity industry.

Previously it was known as the leveraged buyouts.

Corporate raiders from the 1980s, of course.

It has grown into an industry that is so dominant that 7% of the American workforce works for private equity backed companies.

You have it in the retail industry, you have it very big in health care, which is extremely problematic.

You have it in fast food.

It is really very pervasive.

Walter: Explain to me what they do.

You said leveraged buyout.

These are people who buy troubled firms, is that approximately right?

Gretchen: It used to be.

In the beginning they were buying undervalued companies, companies the market was not valuing properly that were perhaps troubled, had maybe gotten into a financial scrape.

Nowadays they really are just buying companies with the goal of improving them, streamlining them, and selling them within five years.

Walter: You say improving and streamlining them, isn't that a great thing?

Doesn't that make the economy stronger and more nimble?

Gretchen: That is the concept and in concept it does make the economy more nimble.

With many cases in private equity, what they end up doing is taking a company that is not really all that inefficient and making it more efficient by firing workers, by stripping it of assets.

For instance, real estate under nursing homes is a very traditional tactic these firms to extract money from the deals they do.

Walter: Doesn't that reduce the value of the nursing home, at which point it would seem no reason a private equity firm would reduce the value of a holding.

Gretchen: Because they took the money out.

They get the money from the sale of the real estate.

That is them and their limited partners.

When the company bails, they don't lose anything.

Here is an example.

This is a perfect example, Carlisle bought this company, a very big nursing home operation.

A couple of years after the transaction, they sold the real estate under the nursing homes and got all of their money out pretty much.

They were now free and clear.

Then the company goes bankrupt.

They really don't pay the price if they do those kind of transactions.

They end up getting their money out, but the people who are left, the workers, the patients, the residents are harmed.

That's where you are seeing the first aspect of this business model that I feel really needs to be questioned and examined.

Walter: If there is a problem with nursing homes, isn't that the responsibility of regulators to make sure nursing homes are safe as opposed to depending on the kindness of investors to say we won't make as much money as possible?

Gretchen: Wouldn't it be nice to depend on the kindness of investors?

I know that is a dream.

Regulators are always behind one step or two steps, the very creative minds of Wall Street, I don't need to tell you that.

Regulation in nursing homes is very spotty.

You have state authorities involved, we have seen a tremendous number of problems with nursing homes that the regulations that exist have done nothing to prevent.

One thing I will point out about nursing homes, private equity has gone into them quite substantially.

An estimate of 11% of nursing homes in the country are owned by private equity firms.

That is probably low because you don't always know, these are secretive organizations and you don't always know who owns it.

But there was a profound study by academics at NYU, UPenn and University of Chicago that did a longitudinal look at mortality rates in nursing homes.

They found residents of nursing homes owned by private equity had 10% greater mortality rates over time.

Walter: Is there a cause of that or is that just a correlation?

Gretchen: They attributed it to a decline in staff, lower staffing, meaning lesser costs.

These people are looking for a profit orientation so they can sell the company after five or so years at a profit from what they paid.

They attribute it to lower costs given over to staffing.

Which doesn't translate to problems for residents.

Walter: One of the surprising statistics I saw in your book is a 40% -- am I correct -- of emergency rooms are owned by private equity.

Why would they go into that and doesn't it show a problem with emergency rooms?

Gretchen: It's not that they are owned by private equity firms, they are operated by them.

The hospital hires a staffing company to run the emergency department.

There are two very large staffing companies running emergency departments in this country.

One is Team Health and the other is Envision.

They are both private equity owned.

You have, along with smaller private equity owned companies, 40% of the nation's emergency departments are operated and run by private equity.

Why would they want to get in there?

They tell the hospital we will streamline this process, we will make more money for you and you should contractually us to operate for you.

The emergency room is a surprisingly profitable area of the hospital.

That is where you see private equity really honing its focus, where there are profits to be made.

That's why they are in health care to such a degree.

70% of gross domestic product.

It is a very large pool of potential money they can tap into.

Walter: You say health care is 17% of gross domestic product.

That is way larger than most other nations.

Isn't there some systemic problem with the inefficient, bloated way we do health care and maybe private equity is homing in on it because it is indeed a problem?

Gretchen: No one will argue with you on that.

Anybody tries to see a doctor, go to a hospital and it gets the bill will agree with that.

There are problems with the health care system in this country.

The problem is private equity is not making it better.

You may remember the surprise billing problem of a couple of years ago that both sides of the aisle in Congress actually reached together and did something about.

It was so outrageous that both Democrats and Republicans said we've got to fix this.

That was the creation of private equity.

Here's how it worked.

You go to an emergency department in your local hospital.

You think the hospital is in your insurance network.

You go thinking that because you are not going to have to pay as much pit you then -- as much.

You then get a bill from the emergency department, run by a separate private equity company, that is out of network, that ends up costing you way more than had you been in network.

That was a creation of a private equity company.

It was exposed by Yale, academics at Yale, and people were outraged.

So no, they are not generally making it more efficient.

Walter: In your book you write that "private equity firms would emerge from the pandemic and greater billions."

You say that COVID-19 made it easier to see.

What did the pandemic reveal about these private equity firms?

Gretchen: One of the things it revealed I think was the devastation in our health care world, in hospitals.

Hospitals were so unprepared for COVID-19 and the pandemic.

It is a really good microcosm of one of the problems with private equity.

Back in the mid-2000s, Congress asked for a study about what might happen in the country if there were a pandemic.

We write about this in the book.

The study, I think it was CBO, the Congressional Budget Office, said it would cause havoc.

We need to invest in ventilators we need to invest in hospital beds, we need to invest in equipment.

Protective equipment for staffers.

Of course, nothing happened.

We did not make those investments.

One of the reasons hospitals may not have made those investments, and health care companies, was because that was the moment when private equity started to go into health care, two do the streamlining they do so well.

To cut costs.

Not to invest in ventilators that would sit on a shelf.

These folks don't like money sitting on a shelf.

When you invest in ventilators and PPE and that sort of material, that is money sitting on a shelf.

It really was an interesting moment.

When COVID-19 strikes and we see there are not enough ventilators, we see there are not enough hospital beds, you look back at the study and say what happened?

Private equity is one of the things that happened.

Walter: Let me read you for the record, just statements they have provided to both of you since you have written the book and maybe you can comment on it.

One is from the Blackstone Group, one of the firms featured in your book.

It says "the false narrative underlying your book is based on the 1980s character of our industry contradicted by facts.

We are proud of the positive impact we deliver for investors, portfolio companies and communities, including adding 200,000 net jobs to our portfolio companies in 15 years."

They say their companies rarely fail.

Leon Black, his firm or what used to be his firm, Apollo, says it illustrates a misunderstanding of many of the facts surrounding transactions.

We strongly encourage you to not publish misleading information.

Tell me what you feel about that.

Gretchen: What is interesting about the Blackstone commentary, these firms say they create jobs they are not job destroyers, they add value.

That is their argument they create, they create money for pensioners that invest with them.

Let me go through a couple of those so we can talk about reality.

The spin is -- Blackstone says it created 200,000 new jobs over 15 years.

I asked Blackstone for the data backing that up.

Just as they asked me for the data backing up the questions I asked them.

They declined to provide it.

If you want to tell me you created 200,000 new jobs, give me the data, give me the numbers so I can verify it.

I thought that was interesting.

As far as the pensions and returns to pensions.

In the early stages of private equity, pensions were making more money through their investments with these firms.

They were outperforming the Dow-Jones, the S&P.

Now they are not.

What you have is a situation where you might be better off buying an S&P 500 index fund and paying a tiny fraction of the fees pay when you buy into a private equity firm.

Walter: Let me ask you a more general question as someone who has covered the economy and I mean this is a genuine question.

One way of doing it is hoping for corporations that are nurturing, that are good to not only shareholders but to employees and communities.

They don't worry too much about trimming every cost and making sure they have a skeletal staff.

It sort of creates that sort of enlightened capitalism we sometimes talk about.

Where all stakeholders benefit.

Another way is saying the American economy is stronger whenever we make things more efficient.

Companies that spend too much time focusing on things other than return on investment are making our economy weaker.

How do you balance those ideas.

Gretchen: I think the first idea you described is the goal.

I don't see why we can't try to make that a goal for American capitalism.

For the past three decades, we have been working under the assumption that if the stockholder benefit, that is all that matters.

That is what the CEO has to worry about.

The CEO will be paid if the stockholder benefits, and it has been a shareholder centric approach to capitalism.

I think you can agree that in that period of time, the gulf between rich and poor in this country has vastly increased.

I don't think that is a benefit.

I don't think it's the only motivating -- I don't think it's the only cause, but I think it is a cause.

During the earlier 1970s up to about 1985, the middle class in this country was growing in its wealth that it held.

It had a growing percentage of wealth.

That all changed around about the time that these takeovers started, pensions began to be obliterated.

You had to do your 401(k) yourself, which is very hard to do.

I think we look at that trajectory and say what has changed over that period?

A lot.

We had offshoring, companies escaping the tax system in this country by going overseas.

I think this is a piece of a puzzle and that's why I think it is really important to look at it.

Why can't capitalism improve the lives of all stakeholders?

Walter: Gretchen Morgenson, thank you for being on the show.