How Shadow Banks Have Exploited the COVID-19 Pandemic

Rather than erase inequality as the Great Depression did, the COVID-19 pandemic has exacerbated inequality around the world, allowing some wealthy investors to take advantage of the crisis and make a fortune from the misfortunes of others.

From March to December last year, American billionaires increased their wealth by more than a third, to a trillion dollars, while millions of Americans faced severe financial hardship.

New research from Copenhagen Business School has examined how U.S. “shadow banks” — which are less regulated and include private credit intermediaries such as private equity, venture capital and hedge fund firms — have invested in ways that profit from the misadventures of frontline workers, struggling companies and ailing industries. .

The investigation focused on industry reports and news media coverage of the industry to track investments made by shadow banks during the crisis, as well as their investments leading up to the crisis that affected the safety and security of frontline workers when the coronavirus hit.

“We found that while the most economically vulnerable have suffered the most from the hardships of the pandemic, those with financial capital have benefited from both struggling and thriving sectors. The work of shadow banks has contributed to the growing economic and social inequality during the crisis,” said lead author Megan Tobias Neely, an assistant professor in the Department of Organization, Copenhagen Business School.

The research has been published in the American magazine Behavioral Scientist.

Influence of shadow banks

While the general public is usually unaware of shadow banking, it has been one of the fastest growing financial areas since deregulation in the early 1980s. The research finds that shadow banking has since played a pivotal role in shaping the way executives manage companies, often pressuring companies to downsize their workforce and cut wages and benefits in the interest of shareholders.

“Private equity invests in private companies and often proactively influences how executives run the company,” said co-author Donna Carmichael, PhD researcher in Sociology at the London School of Economics and Political Science. “Venture capital, a form of private equity, invests in start-up companies and guides entrepreneurs. Hedge funds invest in both public stock markets and private companies.”

Health care, grocery and distribution drivers are some of the sectors that were hardest hit even before this crisis. The authors cite the pivotal research by Eileen Applebaum and Rosemary Batt to show how private equity helped create the conditions that made frontline workers vulnerable in the first place. These investors have focused on US healthcare, negatively impacting hospitals, emergency care and ambulances.

“Private equity firms often try to convert companies quickly and invest less or none at all in new technology, employee skills, quality improvements and supplies of emergency equipment such as personal protective equipment. As a result, healthcare costs have risen and the underpaid healthcare workforce is overburdened,” said Donna Carmichael.

“Women, especially women of color, are disproportionately the workers most at risk during the pandemic. One third of women’s jobs are ‘essential’ and 52% of frontline workers are women, including nine in ten nurses and two thirds of store and pharmacy workers. And so the pandemic has made women “essential and expendable” at the same time,” adds Megan Tobias Neely.

COVID-19 crisis

The research highlights how shadow banks have benefited during the pandemic by investing in both booming sectors (such as health technologies and delivery services) and those struggling (including aviation, energy and hospitality sectors). “Many companies in the latter sectors have seen their stock prices plummet as their earnings plummet and investors sell stocks,” said Donna Carmichael.

Short selling occurs when an investor borrows a security and then sells it on the open market. If the price falls, they can buy back the stock at the lower price and make a profit on the difference.

This is where shadow banks come in, to invest in flipping those companies or short selling (i.e., betting against) the stock. “Here’s what hedge funds did that caused the recent ‘GameStop Rebellion’. An example of short selling during the crisis is how a hedge fund manager made a $1.3 billion profit shorting stocks in malls knowing they were going would be affected by covid shutdowns,” said Megan Tobias Neely.

“It can be seen as a riskier investment and you can also lose money, but it is less regulated than other investment firms because the US Securities and Exchange Commission believes that these wealthy and institutional investors have less need for protection. The climate of laissez-faire economics, the idea that markets are self-regulating and need to be deregulated, has allowed shadow banking to thrive,” adds Neely.

Moving forward

The research hopes to make people aware of how daily work in financial services can have adverse effects on working conditions and inequality. The consequences are often unintended.

“The people who work in these sectors understand that their work makes businesses more efficient and provides savings for people to retire and for institutions like college funds and sovereign wealth funds (the investments of governments),” adds Megan Tobias Neely.

This research provides important insights for public policy to address hardship and inequality among average workers during and after the crisis. Tax and regulatory reforms are a potential avenue for change to address these pressing social problems.

“Another way forward is to democratize employee decision-making and improve employee, consumer and community representation on corporate boards. While many have called for ‘Build Back Better’, the prospects for a more equal and just future are still a long way off,” concludes Donna Carmichael.

Reference: “Profiting from crisis: How predatory financial investors have exacerbated inequality in the coronavirus crisis” by Megan Tobias Neely and Donna Carmichael, March 24, 2021, American behavioral scientist.
DOI: 10.1177%2F00027642211003162