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Workers Will Carry the Cost for Toys ‘R’ Us’ Poor Private Equity Practices

Connie M. Razza

We all have to grow up, whether we want to or not. The Toys 'R' Us announcement that it is closing its U.S. stores should be a pivotal moment in the maturation of how we as a nation think about wealth and debt, and the rules that make it possible for companies and communities to be resilient.

From now until the closing of the last of Toys 'R' Us’ 735 stores, 30,000 working people will have lost their jobs. While people of color make up approximately the same percentage of workers in the retail industry as in the labor force in general (roughly one-third), they are much more likely to be in lower paid, less stable positions. The average hourly wage for non-management retail workers is about $13, but it is lower for women, part-time workers, and people of color. Many retail workers rely on credit cards (39 percent) and payday loans (12 percent) just to meet basic expenses, and so may not be in a position to build the wealth that could help them weather the financial crisis of losing their job. Indeed, many of these workers likely fall within the 44 percent of Americans who would have a hard time covering an emergency expense of $400. If they turn to debt to help bridge the gap, they will face challenges finding favorable debt, as people of color and lower income people are often targeted for risky, high-interest debt such as car-title or payday loans.

The story for the owners of Toys 'R' Us will be different. They were able to take advantage of favorable debt terms to buy the company 13 years ago, borrowing $5.3 billion of the $6.6 billion purchasing price and putting that debt onto the Toys 'R' Us balance sheet. The cost of the debt weighed down the company at precisely the time that it needed to be able to invest in nimble responses to the changes in the retail landscape—the shift away from specialized stores in favor of big-box department stores, and away from brick-and-mortar stores to online shopping.

The owners of Toys 'R' Us – two private equity firms and a real estate investment trust – are in a good position to weather its closing. While the owners are claiming a loss of $1.3 billion in their equity stakes in the company, they have collected $470 million in advisory and transaction fees from Toys 'R' Us since 2005. They will be able to write their business loss off of their taxes, as they have been able to write off the cost of the interest payments. They have diverse other investments. And the individuals involved in the ownership have been well-compensated along the way, enabling them to build their own personal safety nets.

The news of Toys 'R' Us closing is part of what Bloomberg has termed a “retail apocalypse,” a coming wave of retail chains that are so overburdened by debt from leveraged buyouts that they are failing even in a time of economic stability and high consumer confidence. In the next 5 years, roughly $1 trillion of risky debt will come due, and analysts worry that it may be set to explode the economy all over again. And, like the subprime crisis, this retail apocalypse will hit working people—particularly people of color—the hardest. We could see the effects of the shuttering of the Toys 'R' Us stores amplified many times over in the coming years.

So, now is the time for our rules to grow up, too. Rather than rolling back provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we need to resource its enforcement and strengthen its regulation. We need to provide the funding, personnel, and autonomy to the Consumer Financial Protection Bureau to ensure that lenders treat all borrowers fairly, and to the Securities Exchange Commission to audit the required reports filed by private equity firms. In addition, we should enact a set of national usury laws and a cap on lender fees, to limit lenders’ ability to prey on families facing emergencies.

Our current tax laws incentivize the risky practices of private equity firms, by allowing businesses to deduct the debt interest payments from their taxes, and by taxing general partners’ earnings at a rate lower than other earned income. Working people have no such relief for their debt interest and pay the higher earned-income tax rates. Additionally, while displaced workers will be paying sales tax on many of their purchases, right now there is no sales tax on financial transactions. We must rewrite and rebalance the tax rules to incentivize responsible behavior, keep risk with the owners, and contribute to the stability of our communities.