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WALL STREET IS INVESTING IN YOUR ASBESTOS POISONING  
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Helen Santoro
July 10, 2024
The Lever
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_ Private equity firms are buying up asbestos liability claims —
and asbestos victims will pay the price. _

, AP Photo/Richard Drew/Steve Helber

 

Private equity firms are quietly buying up a literal toxic asset:
companies’ liabilities for decades of asbestos poisoning. Some Wall
Street firms are scoring huge payouts to take on the hassle and
financial risks of people getting sick and dying from asbestos
exposure — and they can use threadbare oversight and cutthroat legal
maneuvers to delay and deny these victims’ claims. 

While assuming asbestos liabilities might seem like a losing
proposition — lawsuits from people with asbestos-related diseases
have cost companies billions
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— private equity firms can demand huge payments for the service and
are not required to abide by traditional insurance regulations
regarding how they manage and invest this cash. 

“I don’t think there’s any oversight to this,” said Michael
Shepard, a Boston-based attorney who represents victims seeking
damages for asbestos exposure. Investors have “hit upon this ability
to have access to a deep well of cash and handle it the way they want
to handle it without any oversight whatsoever.”

To get rid of their asbestos liabilities, industrial manufacturers
create a subsidiary company onto which they offload their
asbestos-related assets
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The manufacturer will also add a large pool of cash to their
subsidiary, ranging from hundreds of millions
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to even billions of dollars. A private equity company will then
acquire the subsidiary company and its asbestos liabilities, making
them responsible for any asbestos claims.

After taking over a manufacturer’s asbestos liability, private
equity investors aim to gradually resolve each claim through
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“litigation, settlement or by successfully resisting it,”
according to the law firm Skadden, Arps, Slate, Meagher & Flom LLP and
Affiliates, which specializes in company mergers and takeovers — all
the while working to spend less than the pool of money received from
the manufacturer. That and high investment returns allow private
equity firms to turn a hefty profit. The longer companies can hold
onto the cash, the more interest it can accumulate in the market. 

Investors view these transactions “as financial instruments, as they
may provide a stable cash flow and reliable yield with potentially
less market risk than equities or real estate,” according to a
February report
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by the Seattle-based consulting firm Milliman that analyzes these
types of acquisitions. According to the report, researchers have
noticed an uptick in these types of deals in recent years.

“I definitely see it as a worrisome trend,” said Shepard, the
Boston-based attorney.  

Down the road, private equity firms may also try to use legal
maneuvers like the “Texas two-step
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to avoid paying claims — leaving future asbestos victims without any
immediate recourse for their medical expenses.    

“The companies that exposed people to asbestos are finding ways to
evade having to pay for the harms that they have caused down the
road,” said Shepard. “Victims moving forward may not have any
recourse to pursue for their injuries because of what is taking place
now.”

A Deadly Mineral

For generations, asbestos [[link removed]] was a
common component of construction materials like insulation thanks to
its resistance to heat, corrosion, and electricity. The mineral is
made up of microscopic, needlelike fibers that are excellent for
building insulation, vinyl floor tiles, and roofing shingles — but
can also be inadvertently inhaled or ingested, leading to scarring,
lung cancer, and mesothelioma
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a rare and aggressive form of cancer.

Though scientists knew about the material’s harmful qualities as
early as the 1920s
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litigation didn’t gain traction until the 1960s
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In 1970, Congress classified asbestos as a hazardous air pollutant
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soon after, most industries began tapering off the use of the
substance.

Still, it wasn’t until this year that the United States’
Environmental Protection Agency followed in the footsteps of more than
50 other countries and prohibited the ongoing use of asbestos
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Meanwhile, asbestos exposure is now linked to more than 40,000 deaths
nationwide every year, and even more people bear the cost of serious
asbestos exposure annually. 

Consequently, individuals have filed hundreds of thousands of lawsuits
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over the years to help pay for treatments and other expenses brought
about by asbestos exposure.  

While the number of asbestos-related lawsuit filings has diminished in
recent years
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due to decreased asbestos use, the average payout per claim is on the
rise, increasing 30 percent
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from 2021 to 2022, according to a report by the National Economic
Research Associates, an economic consulting firm. The average
mesothelioma settlement now ranges between $1 and $1.4 million
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Over the years, more than 150 companies have filed for bankruptcy
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after paying out claims to people with asbestos-related diseases. 

It makes sense that manufacturers would be eager to get rid of their
asbestos assets and related risk — which is why Berkshire Hathaway
stepped in. 

Starting in the 2000s
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subsidiaries owned by Berkshire Hathaway — a multinational
conglomerate led by billionaire investor Warren Buffet — began
buying up billions
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of dollars
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worth of
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asbestos liabilities.

“The entire operation was driven by the target numbers,” a former
claims executive from a Berkshire subsidiary said under oath
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over the company’s activities. He said he was told by higher-ups to
“find a way to avoid paying [asbestos claims].”

As the firm bought up subsidiary companies, they also bought up
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some of the insurers covering the liabilities, in a complicated scheme
that let them squeeze out even more profit from the unfolding
catastrophe

Berkshire Hathaway has since faced dozens of lawsuits alleging it
wrongfully delayed or denied compensation to asbestos victims,
according to a 2013 investigation
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by _Scripps News_.  

“Asbestos defendants often drag out court proceedings,” _Scripps
News _reporter Mark Greenblatt wrote in his investigation
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The strategy, one attorney told Greenblatt, is “delay, deny until
[victims] die.”

A Slice Of The Asbestos Pie

While Berkshire Hathaway has reportedly scaled back its aggressive
practices, private equity firms have entered into the asbestos
liability game. 

“Because for all practical purposes Berkshire Hathaway was first
into the sector and with scale, it was able to charge [manufacturers]
what today might be considered a fortune,”  said Stephen Hoke, a
Chicago-based attorney and expert in liability sales. Now, Hoke said
sales of asbestos liabilities have become a competitive market, with
many private equity firms aiming to take a slice of the pie.  

“Competition for these deals from acquirers is fierce,” attorneys
at Skadden law firm wrote in a 2023 post
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“We expect this market to continue to flourish.” 

In 2021, Delticus Group, part of the global private equity firm
Warburg Pincus, was paid $398 million
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to acquire InTelCo Management LLC, a subsidiary of the manufacturing
firm ITT Inc. that managed the companies’ liabilities for exposing
people to asbestos through its aerospace, transportation, and energy
products.  

The transaction represented “the culmination of our multi-year
strategy to reduce ITT’s legacy liability profile,” the
company’s CEO boasted
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in a press release. “ITT will operate with a simplified and
well-capitalized balance sheet… without the risks and management
time required to manage long-term asbestos liabilities.”

Last month, Deliticus was paid another $189 million
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to acquire subsidiary companies holding the asbestos liabilities of
the industrial manufacturer Ingersoll Rand. 

Delticus is just one of several Wall Street firms buying up asbestos
liabilities. In 2022, SPX Technologies, a manufacturer of cooling
towers and other products that historically contained asbestos,
offloaded its asbestos liabilities to three separate subsidiaries. The
private equity firm Global Risk Capital LLC then partnered with Premia
Holdings, a reinsurance company, to acquire the new companies in
exchange for a $139 million
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payout. 

Because private equity companies are not technically insurers, they do
not abide by traditional insurance regulations
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are no requirements around how they invest the cash they receive from
manufacturer payouts. Firms are also not subject to “bad faith”
insurance laws
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prevent insurers from using tactics to delay or avoid paying claims. 

According to an article by the legal news service _Law360_
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York state insurance regulators have confirmed that “non-insurance
transactions,” including private equity firms acquiring asbestos
liability, “do not fall within their jurisdiction.” 

Regulators from New York, Texas, and California reported they have yet
to receive “any complaints regarding private equity acquisitions”
of manufacturers’ liabilities. 

Private equity firms are also well positioned to take advantage of the
controversial Texas two-step scheme
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an increasingly popular legal maneuver in which the subsidiaries
created to offload asbestos-related or other industrial liabilities
subsequently file for bankruptcy
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trapping victims’ legal claims in bankruptcy court. 

Beyond Asbestos

Private equity firms are no longer limiting their toxic asset
investments to just asbestos liability. 

“Investors are considering liabilities that range from asbestos to
workers’ compensation and can even include federal black lung and
per- and polyfluoroalkyl substances (PFAS),” actuaries from Milliman
wrote in their report
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Black lung [[link removed]] refers to a
benefit program through the U.S. Department of Labor that compensates
coal miners and their families who have been impacted by lung disease
caused by their work. Since 1970, the program has paid out more than
$47 billion
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in Social Security supplementation and medical payments. 

PFAS, or so-called “forever chemicals,” are toxic materials found
in a wide range of products like nonstick cooking pans and cleaning
products that have been linked to serious health risks like cancer,
heart damage, and other illnesses. By 2020, insurers had paid out
approximately $92 billion in claims
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from people suffering from PFAS-related diseases, leading companies to
call these chemicals the “new asbestos
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As Wall Street buys up corporate liability for these toxic chemicals
and environmental hazards, it will likely apply the same playbook
it’s used for asbestos: Demand big payouts upfront from industrial
manufacturers and then delay or deny payments to victims. 

Along the way, the people caught in the middle are being harmed twice,
Shepard said: first by the toxins themselves, and then by private
equity firms. 

These investors have “found a way to make money off of victims,”
he said, “and that’s just wrong.”

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