The term shadow bank refers to things like hedge funds, venture capital firms, and private equity, which all have relatively less oversight than traditional financial institutions. These are all lending intermediaries, or institutions that lend money that fall outside of the mainstream regulatory structure of finance. They’re either situated outside of investment banks, or they exist in less regulated arenas of investment banks, perhaps in offshore settings. One example you might be familiar with is the big private equity firm Blackstone. Another is the big hedge fund Bridgewater.

The “shadow” label implies a degree of opacity, because frequently they make investments that are harder to understand, often in private markets rather than public markets. But it also refers to the fact that they’re lending in the shadow of larger institutions. This partially because they’re deemed to have sophisticated investors by the Securities and Exchange Commission and are therefore designated as subject to less oversight.

Here in Copenhagen where I live, Blackstone has driven a private equity takeover of housing just as it has in California. The difference is that here in Copenhagen, there’s a bigger government response. The government has taken measures to protect renters, to curb the rent increases that private equity can impose on renters, and to make it easier for locals to buy houses. So that raises an important point, which is that government policy has a huge impact on whether their investments are effective in a given context.

Shadow banks like private equity and hedge funds are sometimes hands-off, but other times they play a more activist role, getting involved in the management of the companies they invest in or acquire. So they like to buy and invest in companies they think can be improved upon from an economic perspective — purely from the standpoint of shareholder and owner value — and they set about making them more profitable.

But often the measures that make companies more profitable actually make them less secure for workers. For example, private equity will do things like close less profitable plants or shops, outsource employment, cut and reduce wages and benefits where they can. All of this creates returns for shareholders, but it makes life for employees much riskier.

A prime example of how this set the course for the pandemic is hospitals and health care. Over the last ten years, private equity has invested a lot in health care and taken measures to make it more efficient from an investor standpoint.

The result for health care workers has been leaner hospital staffs and less personal protective equipment. For patients, it’s been more surprise costs and greater difficulty finding in-network care. During the crisis, there have been major ramifications both for people who are sick and for employees of hospitals and ambulatory workers.

Rather than high net worth individuals, most shadow banks’ investors are institutions — public pension funds, university endowments, some sovereign wealth funds — which means many of us are touched by their investments in one way or another. The reason I bring this up is that a lot of these institutions don’t see themselves as predatory investors out to transform crises into opportunities. In fact, many of them see themselves as investing in ways that are helpful, like investing in health care advances, vaccines, personal protective equipment, and so on.

The problem is that in the course of these investments, they end up both making money off the crisis and influencing how the investments are played out. So a good example of this is Instacart, which was initially funded by venture capitalists and was seen as a revolutionary way of distributing groceries during the pandemic. Over time, the goals of the company have shifted as more private equity and hedge fund investors joined in, and conditions for workers became degraded as the company faced more pressures to reap greater profits from its employees.

Thanks to the pandemic, Instacart is making record amounts of money, but employees have had to take action to demand better wages, better gear, better working conditions, sick leave, and so on. Some of these have been granted, but not enough to secure the position of these workers who are at risk both of not making enough money to live off and of catching the virus.

Like private equity, hedge funds have figured out ways to profit from the pandemic. For example, they made money by shorting the economy at the onset of a pandemic. In general, hedge funds try to anticipate political events or other kinds of public crises that could precipitate a stock market crash. So they made bets that there would be a stock market crash when news of the pandemic broke and actually profited quite handsomely from it.

But in addition to these short-term gains, they also think long-term about what areas of the economy are likely to gain. For example, one avenue that hedge funds have been investing more in is insurance. They’re counting on the idea that insurance premiums will go up not only in the course of the pandemic but in the aftermath — not just health insurance but disaster insurance, hardship insurance, and things like that. So that’s one way that hedge funds are planning to make money off the pandemic for years to come.

It’s indicative and in many ways a continuation of what we’ve seen in previous crises. These companies are always poised to make money during downturns. I have a forthcoming book on the hedge fund industry, and while I was researching it and conducting interviews, several downturns happened, and they always get so excited because a downturn is when they can make money more cheaply.

In their minds, they have a fiduciary duty to their investors to always ensure they’re making money, and this is the local justification for this behavior within the industry. But when you take a couple steps out and look at the bigger implications, it’s clear that they’re able to exploit hardship faced by other people during times of crisis. We saw this with home mortgages during the 2008 financial crisis, and we’re seeing it with economic vulnerability in health care right now.

We need to put more controls on private equity firms, tax and regulatory reform, and greater transparency in corporate structures and capital flows. But in addition to putting curbs on shadow banks, we also need to empower workers, because part of the issue is that there’s an incredible imbalance of power between shareholders and executives and external financial investors on the one hand and workers on the other. If we could do more to pass laws in support of workers so that they’re not so disenfranchised in relation to those in power, it would go a long way.