From Hooters to Heartbreak: How Private Equity is Cooking Up the Next Economic Disaster (and Why Your Pension Might Be on the Chopping Block
The Hidden Crisis: How Private Equity is Bankrupting Businesses and Threatening the Economy
Fire tornadoes — Palisades fire -San Fernando Valley in California on 10 January 2025.
Fire tornadoes were spotted as the Palisades fire blazed through the San Fernando Valley in California on 10 January 2025.
In recent years, private equity firms have come under scrutiny for their role in the financial struggles of well-known businesses like Hooters, Joann’s, and others. What began as an investigation into the bankruptcy of these companies has revealed a much larger and more alarming issue: a $3.8 trillion bubble of adjustable-rate loans that threatens to destabilise the American economy and jeopardise the pension system. This essay explores how private equity practices, combined with risky financial instruments, are creating a crisis that could rival the 2008 economic collapse.
The Private Equity Play book: Leveraging Debt to Exploit Businesses
Private equity firms have long been criticised for their aggressive financial strategies, which often prioritise short-term profits over long-term sustainability. When these firms acquire businesses, they frequently use leveraged buyouts, loading the companies with debt to finance the purchase. This debt is then placed on the acquired company’s balance sheet, leaving it responsible for repayment.
In the case of Hooters and other businesses, private equity firms have taken this strategy a step further by using adjustable-rate loans (also referred to as “back-floating rate loans”). These loans have interest rates that fluctuate with market conditions, meaning that as interest rates rise — as they have consistently over the past three years — the cost of servicing the debt increases every 30 to 60 days. Even profitable companies like Joann’s, which reports 97% of its stores as profitable, are being driven into bankruptcy because they can no longer afford the escalating debt payments.
The Role of Banks and Collateralized Loan Obligations (CLOs)
The question arises: why would banks lend to private equity firms under such risky terms? The answer lies in the banks’ ability to offload the risk. Instead of keeping these adjustable-rate loans on their books, banks repackage them into Collateralized Loan Obligations (CLOs), which are then sold to institutional investors, including pension funds. These CLOs are marketed as diversified, low-risk investments, much like the mortgage-backed securities that fuelled the 2008 financial crisis.
This practice creates a dangerous feedback loop. Private equity firms take on risky debt, banks profit by selling it off, and pension funds — unaware of the underlying risks — invest in these instruments to shore up their balance sheets. However, when the adjustable-rate loans become unsustainable and businesses start failing, the pensions are left holding the bag. This could lead to a catastrophic collapse of the American pension system, affecting millions of retirees and working-class families.
The Scale of the Problem: $3.8 Trillion in Adjustable-Rate Debt
The sheer scale of the problem is staggering. Private equity firms have taken out $3.8 trillion in adjustable-rate loans, far exceeding the $1.1 trillion in risky adjustable-rate mortgages that triggered the 2008 crisis. Unlike the housing market, which was the primary focus of the previous collapse, this debt spans nearly every sector of the economy. Private equity firms own not only restaurants like Hooters but also daycare centers, veterinary clinics, nursing homes, emergency rooms, and even funeral homes. When these businesses fail under the weight of unsustainable debt, the ripple effects will be felt across society.
The Human Cost: Job Losses and Economic Instability
The consequences of this crisis extend far beyond financial markets. As private equity-owned businesses fail, thousands of employees lose their jobs, and communities lose access to essential services. For example, Joann’s, despite its profitability, is closing stores and laying off workers because it can no longer service its debt. This pattern is repeating across industries, leading to widespread economic instability and further consolidation of power in the hands of a few private equity firms.
A Deliberate Crisis: Greed and Lack of Regulation
This crisis is not the result of market forces or bad luck; it is the product of deliberate greed and a lack of regulatory oversight. Private equity firms took on adjustable-rate loans because they believed interest rates would remain low indefinitely, allowing them to refinance their debt indefinitely. Banks facilitated this behaviour because they profited from packaging and selling the loans as CLOs. Meanwhile, pension funds, desperate to meet their obligations, invested in these risky instruments without fully understanding the risks.
The lack of accountability is compounded by the Carried interest loophole, which allows private equity executives to pay lower taxes on their earnings. Despite repeated attempts to close this loophole, private equity firms have used their influence to block reform. Even former President Donald Trump has recently called for closing the loophole, though it remains to be seen whether this will lead to meaningful change.
A Call to Action: Preventing the Next Economic Collapse
The situation is dire, but it is not without hope. Public awareness and political action can help address the root causes of this crisis. Closing the carried interest loophole, increasing transparency in private equity practices, and regulating the sale of risky financial instruments like CLOs are essential steps. Additionally, policymakers must ensure that pension funds are not exposed to unsustainable levels of risk.
The stakes could not be higher. If left unchecked, the collapse of private equity-owned businesses and the failure of pension funds could devastate the American economy and undermine the fabric of society. It is up to all of us — citizens, policymakers, and advocates — to demand accountability and prevent this crisis from spiralling out of control.
— -
Conclusion
The bankruptcy of businesses like Hooters is not an isolated incident but a symptom of a much larger problem. Private equity firms, enabled by banks and a lack of regulation, are creating a $3.8 trillion bubble of adjustable-rate debt that threatens to bankrupt the American pension system and destabilise the economy. This crisis, driven by greed and financial manipulation, demands immediate attention and action. By shining a light on these practices and advocating for reform, we can work to prevent the next economic collapse and protect the livelihoods of millions of Americans.