Law and Order under Donald Trump The Golden Age of Private Prisons

The Obama administration moved to phase out private prisons in the United States, but Donald Trump has now reversed those policies. A boom in the industry is expected and investors are thrilled.
Arizona's privately operated Eloy Detention Center

Arizona's privately operated Eloy Detention Center

Foto: Ricardo Arduengo/ AP

The stock market in the United States has been rallying since Donald Trump's election as president in November, with the Dow Jones Index breaking the 22,000-point mark in August, its third record in a short stretch of time. Yet the extent to which Trump is fueling the upward trend and how long it will last is debatable. Some are already warning of the inevitability of a crash.

Either way, Deutsche Bank has discovered at least two crisis-proof investments. In a recent analyst report, the bank said it was bullish about the prospects for a pair of U.S. companies for which it recently issued "buy" recommendations. These companies are CoreCivic (CXW) and GEO Group, the two largest operators of private prisons in the United States.

Trump's tough law-and-order policies, which so far have resulted in increasing arrests of suspected illegal aliens, "reinforces our optimism," Deutsche Bank analyst Kevin McVeigh wrote in the report. The Federal Bureau of Prisons (BOP) and the U.S. Immigration and Customs Enforcement (ICE) are both calculating that an additional 12,000 prison beds will be required in the 2018 budget, a development that is likely to benefit private facilities.

Even before the roundups of alleged illegal immigrants, the U.S. incarcerated more people than almost any other country. Roughly 1.7 million Americans are behind bars -- and around one-tenth of them are being held in private, for-profit prisons as government-run correctional facilities are hopelessly overpopulated. The controversial reliance on private prisons has been blasted by critics as a form of modern-day slavery, both because of the wretched conditions and because 56 percent of the total prison population is black or Latino.

Trump's Phaseout Reversal

After the release of a damning report by the Justice Department's independent inspector general, Trump's predecessor Barack Obama decided to phase out private prisons for federal inmates by allowing existing contracts to lapse without renewal. The Justice Department found disproportionate violence and even fatalities in private prisons. Then-Deputy Attorney General Sally Yates wrote in August 2016 that the focus should return to "reducing recidivism and improving public safety."

But Trump fired Yates, and current Attorney General Jeff Sessions has since reversed her policy. A short time later, he also ordered federal prosecutors to seek the toughest possible sentences against crime suspects in the future -- the type of sentences that Obama had sought to eliminate, particularly for nonviolent drug offenses.

It's not only the companies in question that are pleased by this "golden age" for private prisons, as CNN has described it. One day after the release of Sessions' memo in May, Deutsche Bank dedicated its first research report to industry leaders CoreCivic and GEO. It included the "buy" recommendation because of "potential bed activations." In other words: the prospects of a surge in prisoners.

Others are also counting on a prisoner boom. GEO, for example, is "well positioned for new contracts, particularly with U.S. federal agencies," Wall Street bank JPMorgan Chase wrote in a research note in July. The stocks are "attractive," it added, because Trump's new policies "will likely lead to an increase in federal prison populations and immigration detentions."

JPMorgan did warn about "negative headlines" ("prisoner escape, riots or other disruptions") as well as lawsuits relating to prisoner civil rights or sexual misconduct against prisoners. But it added that the company's insurance would cover everything.

'The Deadliest Immigration Jail in the Nation'

CoreCivic is classified as a Real Estate Investment Trust (REIT). Among the institutional investors who have parked their money with the company are major Wall Street firms like Vanguard, BlackRock and Fidelity. Shares in CoreCivic, which closed at $14.19 the day before the election, have since shot up to just under $27, almost doubling in value. GEO has seen an even greater increase in share value, rising from $10.62 to $27, a 150-percent rise.

Known as the Corrections Corporation of America when it was founded in 1983, the company has been the subject of frequent criticism. Last year, the company generated revenues of $1.7 billion with its more than 70 prisons and 70,000 prisoners. But there have been numerous incidents at its facilities. At the Eloy Detention Center in Arizona alone, there were 15 deaths between 2003 and 2015, including five suicides. This earned the facility the dubious honor of being the "deadliest immigration detention center in the nation," according to the Arizona Republic newspaper.

The companies seemed to be aware of the windfall that Trump's election might bring them. During the election campaign, CoreCivic donated $254,000 to the Republicans and also provided an additional $250,000 for Trump's inaugural celebrations. The GEO Group spent even more, donating $1.1 million to the Republicans.

Two former staff members of Sessions, who spent years in the Senate before becoming attorney general, took jobs in October at a lobbying firm that now represents the GEO Group.

The bets these private prison operators made on the law-and-order duo Trump and Sessions are already paying off. Under their leadership, the U.S. prison population is likely to rise again -- especially in the deportation detention centers along the border to Mexico.

Analyst McVeigh wrote that, thanks to increased border protection, investors could now hope for higher yields. But it also appears that the "buy" recommendation it issued isn't an entirely comfortable subject for Deutsche Bank. When contacted for comment, a spokesperson said McVeigh was out of the office and that the company had nothing further to say. "We will politely decline on this."