Greed be Good

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?



Lawrence DiStasi

Government is Not the Problem

And who can view this mess
And pray for success
With Wall Street tycoons
Using us buffoons
With fundamentals strong
Yet bread lines long
And finances so dire
Who is the biggest liar?
Bush/Paulson hints at Fate
But is it deliberate?


Let me shed some light on the questions posed in the verse above to those of you who may not be keeping up with the financial and political theater currently playing in venues near you. The crisis is deliberate. The fear being injected by the White House is exactly parallel to the fear generated by GW Bush just prior to invading “sovereign” Iraq. I was struck by the 25 September 2008 John Stewart parallel running of video clips of the Bush drumbeat of fear not only repeated, but that it was virtually word for word from his “warnings” about Iraq. For those of you who see government as a purposeful instrument to create commonwealth, this will be heart-breaking news, but some far right-wingers want to destroy government. Their patron saint, Grover Norquist has finally seen his dream within reach. He sees government as the “beast” that must be starved until it can be drowned in the bathtub. What better way to starve the beast than to create debt so huge that none of the usual services of government can be provided? If New Orleans and Galveston did not provide a sufficient bathtub, then Wall Street has exceeded expectations. Victory for the plutocrats can now be achieved by destroying all the usual government services and firmly establishing the rule of money. All services, including human services, and even our national defense services have been badly maimed by profligate spending, outsourcing of key activities, elimination and diminution of oversight and regulation, and damaging labor and the agencies supporting it. When the Bush Administration was forced to recognize some of the agencies such as the USDA or FDA, it deliberately chose to reduce the number of inspectors and, worse, indicated that the purpose of those remaining was to help the companies providing goods and services rather than the public at large. To be fair, this began before GW Bush. He simply perfected the assault techniques.
Bush has simultaneously presided over the largest increase in government while reducing critical government services in areas such as food inspection, drug testing (remember VIOXX?), OSHA, Mine Safety, EPA, etc. Further, he has done it through a simple premise that the market knows better than government and that his clients are the corporations in the marketplace rather than the citizens paying the taxes. He uses clever names such as the “Clear Sky Initiative” while fouling the air. His Neocon tactics include the following:
1. Where possible, eliminate government agencies that now provide services to oversee corporations. Deregulate.
2. Where that cannot be done, under-staff or do not staff the agencies at all.
3. Where that cannot be done, then staff the agencies with incompetent and/or antagonistic managers.
4. In any event, outsource key activities including oversight to corporations loyal to the administration. Use no-bid contracts and executive discretion in assigning contracts.
5. Where these measures fail, support corporations through judicial review by sympathetic judges. The “free” market needs a boost to ensure the right corporations thrive.
Time was when caveat emptor might have been sufficient for most circumstances. If nobody added chemicals to milk and you could smell that it was not sour, then perhaps it was safe for your children to drink. In today’s marketplace, we need testing for listeria, for melamine, for E. coli, etc., in our food products; we need to know about lead contamination in toys and we need to be able to compare complex products. People get hurt when we do not set rules, test and enforce. We, as a commonwealth, need to protect one another and to nurture life rather than corporations. Again, corporations do not have colonoscopies. People do. It seems ironic to me that the very politicians who scream to protect the unborn deliberately ignore safety and health after that moment of birth as they champion the interests of corporations over the common man.
The complexity of our food and other products we use daily extends to the financial world. We use general terms to describe some of these products, but it takes experts to distinguish one derivative from another. Some products were so complex that valuation escaped the experts. The upshot of all this…the only conclusion that we can draw is that Reagan was incorrect. Government is not the problem. Bad government is the problem. Medicare is one of the best programs ever developed by our government, yet the Neocons seek to destroy it and replace it with commercial systems. Social Security has protected the dignity and financial security of our citizens from the 1930s, but Neocons would have replaced it with individual commercial accounts using the mantra of an “ownership society.” Exactly where would we be if the Bush plan had been adopted given our current financial meltdown? We would have bread lines without bread, that’s what. We need to fix Social Security, not destroy it. We need to remember that the federal drug plan was written by drug companies for drug companies, just as our energy plan was written by energy companies. It put the government in the position of, again, protecting corporations rather than people, especially those on fixed incomes. It forbid the government from getting low bids for drugs and is far more expensive than it needs to be. That is not due to government. That is due to bad government. There is a clear difference. Government must serve the people first; not corporations, except as they help our commonwealth.
Just think calmly about the tactics. Bush and McCain accuse Democrats of being the “Tax and Spend” party while they borrow and spend and reduce taxes on the most wealthy among us. If they borrow enough, then the government cannot function and they win by default and by de-funding programs that are needed in a complex new world. This borrowing is now at a record high and about to rocket higher. In the interim, prior to collapse, Neocons can give out contracts to friends and appoint “agency assassins” to head up government departments they want to shut down. Examples abound. Bush insisted on appointing John Bolton to the UN despite his hatred of the institution. But long before GW Bush, Nixon appointed Howard Phillips, a virulent right winger, to lead the Office of Equal Opportunity that Phillips antagonistically described as a “Marxist concept.” He systematically fired moderate Republicans; hired YAF extremists, and withheld budget. Katrina has cost taxpayers about $100 Billion and yet few victims have returned to New Orleans. Contracts went to cronies and work simply did not get done much as in Iraq. The ice for Katrina victims continued to avoid refugee centers and was shipped willy-nilly to “earn” money by favored shippers. Until this latest financial crisis and with the painful exception of the questionable but costly war in Iraq, Katrina provided the single largest boondoggle of any in our history. FEMA was led by a man who had failed at arranging horse shows. Brown was a byproduct of Joe Allbough who had no FEMA experience either, but was a close friend of GW Bush and a major contributor to Bush campaigns. After recommending Brown to Bush, then Joe Allbough set up his lobby and was able to garner millions in Katrina contracts. That’s what friends are for.
Please read The Wrecking Crew by Thomas Frank. Most of the examples provided in this essay are from his well-documented book. It is scary, but you need to read it to understand why things do not appear to make sense and why people now trust government less today than at any time in history. We need moderates to gain control of government. Good Republicans and Democrats who understand the common good, the commonwealth. We need quality employees and a vibrant Civil Service dedicated to citizens instead of corporations. We need to insist on good government to earn the trust of America.




Peace,
George Giacoppe
28 September 2008