In 1965, Alan Greenspan wrote:
“It is precisely the greed of the businessman, or more precisely, his profit-seeking, which is the unexcelled protector of the consumer” (Madrick, 228).
This should really be the epitaph inscribed on the tombstone of the American economy. Far from ‘protecting’ consumers, the greed that has defined American business and especially Wall Street these last 40 years has decimated the economy, loaded businesses with debt, put millions of Americans out of work, and transferred huge chunks of American industry to foreign countries such as China. Therein lies the theme of Jeff Madrick’s crucial book, The Age of Greed, (Knopf: 2011). To read it, with its portraits of banksters and junk bond traders and acquisition specialists and CEOs of America’s largest corporations, is to learn of chicanery, conniving and contempt for average Americans on such a scale as to sometimes deceive the reader into thinking he is reading Dante’s Inferno. Such characters—some of the mightiest names in corporate and political America in the latter years of the 20th Century, names like Rubin and Weill and Reagan and Greenspan and Friedman and Milken and Boesky and Welch—do deserve a poet like Dante to fix them in an appropriate level of pain and torment. While Madrick is not that poet, he does a creditable enough job of this to sicken even the most cynical reader, for his is the tale of the outright looting and crippling of the American industrial might (along with its workers) that was once the envy of the world.
The book begins with the general proposition that while industry and transportation and communications and retailing were once the foundations of American wealth and prosperity, “by the 1990s and 2000s, financial companies provided the fastest path to fabulous wealth for individuals” (24). And where government was once seen as a needed supporter and regulator of such enterprises, Milton Friedman’s economic doctrines, put into saleable form by Ronald Reagan and Alan Greenspan, turned government into the enemy. As Friedman wrote, “The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government (mis)management rather than by the inherent instability of the private economy.” The answer to all problems, in this tortured view, lay not in government actions to help those who need it, but in reducing government and lowering taxes so as to (allegedly) make the poor better off, eliminate inequality and discrimination, and lead us all to the promised free-market land. As noted above, Alan Greenspan believed wholeheartedly in these and other theories (especially those espoused by his friend Ayn Rand), and Ronald Reagan became the shill for selling such pie-in-the-sky nonsense to the American public. As with his sales work for General Electric, Reagan marketed the kool-aid more successfully than anyone could have anticipated. In office in California as governor, he blamed welfare recipients for the state government’s financial problems: “Welfare is the greatest domestic problem facing the nation today and the reason for the high cost of government.” When he got to the national stage with inflation rampant, he hit government profligacy even harder. “We don’t have inflation because the people are living too well,” he said. “We have inflation because government is living too well” (169). All this was coupled with his mantra that getting back to the kind of “rugged individualism” that had made America (and himself) great required reducing taxes. And reduce he did. From a tax rate that was at 70% on the highest earners when he took office, he first signed the 1981 Kemp-Roth bill to reduce it to 50%, and then, in 1986, with the Tax Reform Act, reduced it even further to 28%. Meantime, the rate for the poorest Americans was raised from 11% to 15%, while earlier, Reagan had also raised the payroll tax (for Social Security) from 12.3% to 15.3%. This latter raise, it should be noted, coupled with the provision that only wages up to $107,000 would be taxed for SS, meant that “earners in the middle one-fifth of Americans would now pay nearly 10% of their income in payroll taxes, while those in the top 1% now paid about 1-1/2%” (170). And what Reagan never mentioned about his “rugged individualism” is that he was made wealthy by those rich men who cajoled him to run for office: his agent arranged for 20th Century Fox to buy Reagan’s ranch for $2 million (he had paid only $65,000 for it), giving him a tidy profit with which to buy another ranch that also doubled in price when he sold it.
But such tales treat only the enablers. It is when we get to the actual hucksters of this story that things get interesting (or nauseating, depending on your point of view.) The basic scheme went like this: find a company that is undervalued—often because it had managed its assets so well it had cash on hand—and acquire it, using debt to finance the takeover. Then make money—and I mean millions and billions—on all the steps involved in the takeover, including the debt service, the legal fees, and the rise (or fall) in the stock price. For in the age of greed that Madrick documents, the stock price was all. Anything that pushed the stock price of a company up was good. Anything that pushed it down was bad (unless you were one of those smart guys like hedge-fund ace George Soros who worked the “shorts”). And of course, the best way to get a company’s stock price to go up was to increase profits. And the best way to do that was not to innovate or develop better products, but to slash costs, i.e. fire workers. Here is how Madrick puts it:
American business was adopting a business strategy based on maximizing profits, large size, bargaining power, high levels of debt, and corporate acquisitions…Cutting costs boldly, especially labor costs, was a central part of the strategy. (187)
What began to happen in the 1980s and into the 1990s was that all companies, no matter how successful, became targets of the ruthless merger mania that replaced normal business improvements. Lawyers like Joe Flom and takeover artists like Carl Icahn and T. Boone Pickens could spot an undervalued, or low-stock-price company (the process reminds one of wolves spotting a young, or lame deer in a herd) to take over, using borrowed money to finance it (90% of the purchase price). The borrowing then demanded that the new merged company cut costs in order to service the huge debt required for the merger—which in turn required firing workers. If a company did not want to be taken over, the only way to do so was to get its stock price to rise, and this, too, required the firing of workers. In either case, the workers took the hit. But the CEOs running the merged ventures, often sweethearted into selling by generous gifts of stock, “usually made a fortune.” As Madrick notes, in 1986, Macy CEO Ed Finkelstein arranged for a private buyout of his firm, for $4.5 billion, and became the “envy of fellow CEOs” (174). Like many other mergers, however, this one drained what was one of America’s most successful retail operations, and Macy’s went bankrupt in 1992. Madrick concludes:
The allegiance of business management thus shifted from the long-term health of the corporations, their workers, and the communities they served, to Wall St. bankers who could make them personally rich... (173)
In the process, of course, the Wall Street bankers and leveraged buyout firms (LBOs) like Kohlberg Kravis Roberts who arranged the buys and the financing took in obscene amounts of money. So did risk abitrageurs (who invest in prospective mergers and acquisitions, angling to buy before the stock price rises on the rumor of a merger) like Ivan Boesky. Earning $100 million in one year alone (1986 when he was Wall Street’s highest earner), Boesky required information to buy early, and got into the little habit of paying investment bankers for that information, i.e. on upcoming deals. Unfortunately for him, he got caught in his banner year because one of his informants (Dennis Levine of Drexel Burnham) was arrested and made a deal to name those he had tipped off. Boesky was one (the deal was to pay Levine 5% of his profits for early information on a takeover), and he too was subpoenaed in the fall of 1986. Boesky immediately agreed to finger others (agreeing to wear a wire at meetings), and nailed Martin Siegel, also with Drexel, who, in turn, kept the daisy chain of ratting out associates going by naming Robert Freeman, an arbitrageur at Goldman Sachs. Nice fellows. Boesky ended up serving three years in prison, but he fingered an even bigger fish, Michael Milken. Then the wealthiest and most ruthless Wall Streeter of all, Milken, who made his money in junk bonds (risky high-interest bonds to ‘rescue’ companies in trouble) was sentenced to 10 years in jail (reduced to 2 years for good behavior) for securities violations, plus $1.3 billion in fines and restitution. He’d made so much money, though, that he and his family still had billions, including enough to start a nice foundation for economic research, to commemorate his good name in perpetuity.
There are, of course, lots of other admirable characters in this tale, but one in particular deserves mention--Jack Welch, the revered CEO of General Electric. This is because Welch’s reign at GE typifies what greed did to a once-great American institution, the very one that Ronald Reagan shilled for in a more innocent age, the one that brought the Gipper to the attention of the big money boys. Welch made enormous profits for GE (in 2001, the year he left, GE earnings had grown by 80 times to more than $5 billion), and for himself, but he didn’t do it the “old fashioned way,” i.e. by developing new and better products. He did it by shifting the emphasis at GE from production to finance. Welch saw the value of this early:
“My gut told me that compared to the industrial operations I did know, the business (i.e. GE Capital) seemed an easy way to make money. You didn’t have to invest heavily in R&D, build factories, or bend metal…” (191)
To give an idea of how this works, Madrick points out that “in 1977, GE Capital…generated $67 million in revenue with only 7,000 employees, while appliances that year generated $100 million and required 47,000 workers” (191). Welch did the math. It didn’t take him long to sell GE’s traditional appliance business to Black & Decker, outraging most employees, though not many of them were left to protest: in his first two years, Welch laid off more than 70,000 workers, nearly 20% of his work force, and within five years, about 130,000 of GE’s 400,000 workers were gone. Fortune Magazine admiringly labeled him the “toughest boss in America.” And by the time he left the company in 2001, GE Capital Services had spread from North America to forty-eight countries, with assets of $370 billion, making GE the most highly valued company in America. The only problem was, with the lure of money and profits so great, GE Capital acquired a mortgage brokerage (Welch was no mean takeover artist himself) and got into subprime lending. In 2008, GE’s profits, mostly based on its financial dealings, sank like a stone, with its stock price dropping by 60%. Welch, the great prophet of American competition, now had to witness his company being bailed out by the Federal Deposit Insurance Company: since it owned a small federal bank, the FDIC guaranteed nearly $149 billion of GE’s debt. So after turning a U.S. industrial giant into a giant bank, the man Fortune Magazine named “manager of the century” also succeeded in turning it into a giant welfare case. Perhaps there’s a lesson here somewhere.
There’s more in this disturbing book—such as the fact that Wall Streeters not only attacked corporations in takeovers, they also attacked governments (George Soros’ hedge fund attacked the British pound, as well as Asian currency in 1999, causing crises in both places, and ultimately, cutbacks in government programs for the poor)—but the story is the same. During several decades of Wall Street financial predation, insider trading, and more financial chicanery than most of us can even dream of, the high-rolling banksters made off with trillions of dollars, and most others (including union pension funds) lost their shirts. Madrick quotes John Bogle, founder of Vanguard Funds, concerning the bust of the high-tech IPO bubble: “If the winners raked in some $2.275 Trillion, who lost all the money?...The losers, of course, were those who bought the stocks and who paid the intermediation fees…the great American public” (332). The same scenario was played out again and again, in derivatives trading, in the housing boom, in the mortgage-backed securities boom, in the false evaluations of stock analysts like Jack Grubman, in the predatory mergers and subprime shenanigans of Citibank CEO Sandy Weill, and on and on, all with an ethic perfectly expressed in an email, made public by the SEC, commenting on how ‘the biz’ was now run:
“Lure the people into the calm and then totally fuck ‘em” (334).
That’s essentially the story here. And the sad ending, which most of us haven’t really digested yet, is that the very vipers who cleverly and maliciously calculated each new heist and made off with all the money while destroying the economy, then got federal guarantees and loans that came to more than $12 trillion, that’s trillion, to “save the country.” And now lobby for “austerity” and “leaner government” and fewer “wasteful social programs” like social security and Medicare, and fewer regulations so that their delicate business minds can feel safe enough to invest again. And save us all again with their unfettered greed.
In which case, I’ll sure feel protected. Won’t you?