Meanwhile, private equity's social responsibility would be at odds with a perception that the industry is representative of Wall Street.
For instance, Goldman Sachs (GS) Chief Executive Lloyd Blankfein appeared to echo a Gekko-like mentality in a 2010 Senate hearing where he defended the firm's practice of hedging risky investments that the company sold to its customers. Blankfein noted that the firm's responsibility was to provide "liquidity" and make markets, not to act as an advisor to its trading customers.
Liquidity and market making have clear benefits to society, as do other Wall Street services like lending, capital raising and even storing savings as deposits, but a social responsibility beyond conducting operations in a profit-maximizing fashion and that grows with a firm's size is an ethical Rubicon that Wall Street investment banks have been reluctant to cross.
In fact, Wall Street reforms aimed at the nation's largest banks also are filled with "too big to fail" and "living will" clauses, which reflect the belief that as banks get larger their social costs may actually grow."It's an entirely different mindset," said Rice of Clayton, Dubilier & Rice about the private equity industry's role in being a principal for company investments in contrast to Wall Street's agent role of arranging transactions. As an owner of companies, firms have an interest in growing jobs and the economy said Rice, who is working to compile unbiased data that would prove private equity investments are both high returning and good for the economy. "Good rates of return aren't good enough," added Rubenstein of the industry's image problem. While the industry need to prove to politicians and the press that its incentives are aligned with job creation and growth, "we have not succeeded in getting the message across," added Rubenstein. Rice is currently funding private equity deals database that will quantify the industry's impact on growth, jobs and corporate earnings, in an effort led by Harvard Business School professor Josh Lerner called Private Capital Research Institute. "Until we have that database, it's going to be a difficult sell," said Rice of the industry's ability to prove its economic value to politicians, the press and many in the public. Prior to the financial crisis, a detailed study by Lerner and other economists featured at the World Economic Forum showed that employment at private-equity owned companies falls 10% on average relative to non-PE controlled firms five years after a buyout. Nevertheless, the study found that targets were job losers prior to a takeover and more likely to do hiring after a buyout -a not so catastrophic finding for the financiers congregating at the mountain resort. However, those findings desperately need a sweeping update to account for the financial crisis. In the converse, if Rice's Institute proves that private equity investments impart jobs and growth losses even if they enrich investors and general partners, it might catalyze a complete rethink of the industry's practices.
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