As Congress, and the American people, put $2 trillion, plus $4 trillion in Federal Reserve created cash, into bailing out the economy, a lot of criticism fell on companies that bought back stock, paid out fat dividends, and kept cash balances low over the last decade.
I take a back seat to no one in my criticism of companies like AT&T, IBM and GE, whose dividend-first policies acted as a slow liquidation while the cloud grew up around them. A company needs to grow if it wants to survive. It must keep investing if it wants to have a business tomorrow.
But it is hard to do because of the real villains in this piece.
Hedge funds. Vulture capitalists.
I’ve been watching these asshats all my career. Michael Douglas played one in the original Wall Street. (The sequel, Wall Street: Money Never Sleeps, is like Caddyshack II, a pale imitation.) Back in the 1980s, the game was to buy companies with old workers, remove the “excess” in the pension fund to get back the cash, borrow heavily to create a profit, then let the workers and lenders pound sand as they took it all bankrupt.
This has continued.
A good example of what can happen, from the 2000s, is Manchester United. The club ran a big cash balance. It tried to do the right thing, saving for a rainy day. They were ripe for the taking. The late Malcolm Glazer bought the club with its own money.
Here’s how it worked. Once he took command, he put the cash that was on the books into his pocket, borrowed more money against the equity, then raised more cash through a public offering. Much of that cash also wound up in his pocket. The club wound up burdened with debt , but Glazer had both his money back, and the property. His sons still own it. That’s why, when Abu Dhabi swooped in to buy Manchester City, United couldn’t compete.
The point is “doing the right thing” by a company’s future can be impossible in a world of vultures. The same is true for ethical behavior. Business ethics is what you can get away with, and if you don’t run up against the ragged edge of the law, you will be taken out by someone who does.
Government is supposed to prevent this. The Securities and Exchange Commission was put in the hands of Joseph Kennedy in the 1930s because he’d been one of these tricksters and was on to the tricks. But throughout my career all this regulation, and those of the exchanges themselves, have been watered down, gotten around, obeyed only in the breach.
One of the worst abuses in the current system, which I’ve written about before, is the dual-shareholder model. This was how The New York Times became a public company. Shares sold to the public had a fraction of the voting power of those held by the Ochs-Sulzberger clan. The present “publisher” of the Times is the 5th in his direct line, dating from Adolph Ochs’ purchase of the paper for $75,000 in 1896. This is the divine right of kings, not corporate democracy.
The Murdochs maintain control of Fox through the same mechanism. But this has really come to “glory” through the technology business, in what is called the cult of the founders. It’s all done to “protect” the company from the “vultures.” But if we had protections in law against their machinations this would not be necessary. Why should your children bow to the children of Larry Page, because he founded Google? You’d might as well call them Dukes or Counts and be done with it. It’s obscene.
Most of the vulture capitalists are closely tied to Trump. His Secretary of Commerce, Wilbur Ross, counted himself among that number. At last report Carl Icahn was still trying to take over Hewlett Packard after destroying Xerox. During “normal” times these jamokes are all over the papers. Guys like David Ackman, David Tepper, and Dan Loeb. They destroy companies and pay lower taxes than the rest of us because it’s all “capital gains.” Why capital gains aren’t taxed like ordinary income, when they hit an individual’s tax return, is beyond me. I blame vulture capitalism.
Among the worst offenders is Paul Singer, whose Elliott Management has blackmailed dozens of companies over the years. They buy a small stake, maybe in conjunction with other vultures, then demand “change” in the name of “shareholder value.” This involves stripping away cash, reducing investment, cutting salaries and stealing pensions. Singer, a huge Trump supporter, claims he’s creating “discipline” but he’s doing nothing of the sort. He’s robbing society blind.
During good times, men like Singer are treated as heroes, almost as Gods, by Wall Street. Mitt Romney nearly became President because of his success as a vulture capitalist. The smart vultures know this and keep their names out of the paper. I recently wrote about one of them for InvestorPlace, a relatively small bird named Stefan Kuluzny. Kuluzny has gotten rich destroying retail companies, paying small amounts of cash for them, then loading them up with debt he can renounce when the ship sinks.
There can be wisdom in a turnaround. A company that gets taken over by another company, or even an individual investor dedicated to growth, can be a wonderful thing. This is how Warren Buffett works. Most of his good deals have been in the insurance business, a wonderful generator of cash. He buys companies when they’re undervalued, pays the top people well, and tells them to manage for the long-term rather than the short term.
But the rest of them I wouldn’t touch with a barge pole. When this is over, the first thing we need to do is fry their asses, as part of ending this Second Gilded Age.
