Biting The Hand That Used To Feed Me

I worked for five different shareholder-owned, private corporations for nearly 40 years before I retired last year. I was fortunate enough to work in close proximity to top management most of that time, and I saw the internal workings close up. I made a good living and managed to save a decent nest egg for retirement, although my definition of "decent" has changed dramatically since the economy melted down in September 2008. So what I have to say now probably won't sit well with some of my former colleagues.

I think American capitalism has gone terribly wrong in the past couple decades. Companies have grown "too big to fail," to use the term that became popular a year ago to justify government bailouts. In my opinion, however, "too big to fail" is simply a convenient cover to hide the self-preservation instinct that seizes corporate managements when the economy heads south. "Too big to fail" has given too many companies an easy means to protect senior management and almost nobody else.

I'll give you an example. I am investor in a company (I'll be polite and not name it) that sold "auction-rate notes" secured by municipal bonds. Easy redemptions were supposed to be readily available at any time to small investors like me because the company simply went to the credit markets every week for short-term borrowing to fund them. "Nobody expected all credit markets to seize at the same time," was the explanation I got when suddenly none of the company's investors were able to redeem any notes. Now, almost 18 months later, "market conditions" still aren't good enough for investors to get most of our money out. But when I read the fine print in the company's regulatory filings, I found another reason for the problem: During the boom years, the company had borrowed massive amounts of money under its bank credit lines to fund an ambitious growth strategy. So much borrowing, in fact, that the banks have refused to extend any further loans, leaving the company at the mercy of the "credit markets," which is code for billionaires, foreign banks, hedge funds and other shadowy fat cats. And these "credit markets" will only invest if they're comfortable that a company has the wherewithal to survive. Smart of them. I wish I had that option right now.

I add all this up and here's what I get: This company's knows there are ways other than the mysterious "credit markets" in which it could raise capital and take care of its investors. But its managers also know that those other ways -- acquisition, merger, sale of assets, etc. -- would jeopardize their own jobs, bonuses and future employability. So management's solution has been to stall the small investors with reassuring gobbledygook while it finds "other solutions" that will "facilitate investor confidence." Um....right, sure. But let me suggest that if any lower-level worker in any American company tried to stall this long to cover a problem, she or he would pounding the pavement right now and their kids might be using food stamps to eat.

This is just a small example of what's wrong with American capitalism these days. We have allowed an entitled class of executives to take control. These folks refuse to accept responsibility for what has failed us. In Japan and elsewhere, managers usually resign when things go badly -- even if they are not directly to blame. But not here. Our entitled executive class holds on with with a clueless ferocity that would make Marie Antoinette proud. The delusional explanations take my breath away: the scope of the crisis was "unanticipated," "market conditions beyond our control" created the situation, "external factors" affected results. They ought to add that the dog ate their homework. What do shareholders pay executives for if not to anticipate crises, plan for changing market conditions and stay ahead of external factors?

Wouldn't it be refreshing if a company "too big to fail" owned up to the fact that its management borrowed too much, took too many risks and blinded itself to the dangers ahead in order to boost executive perks and rewards? Refreshing indeed, but it'll never happen. Just consider the lawsuits that would be filed! The personal liability that might be incurred! You'd have to be crazy to say that! The lawyers would never let us do that!

To be sure, American capitalism has always been about who could clobber the competition and grow bigger, faster. It has also always been about greed -- which Gordon Gecko memorably told us is "good." Andrew Carnegie and J.P. Morgan were hardly warm and fuzzy guys. But I can also remember some better angels of corporate nature in my own career. When I started with Times-Mirror Company in the early 1970s, the Chandler family of Los Angeles considered the company a reflection of themselves. It was their patrimony for generations. When you went to work there, you knew the company would take care of "its people." Of course the Chandlers grew fabulously wealthy because of "its" company, but there was always a feeling that they cared about us. Most importantly, bonuses at Times-Mirror Company were based on performance. Nobody ever got several times their annual salary, which became almost a norm in some Wall Street firms.

That's what missing today. Few shareholder-owned corporations have institutional memory any more. New management comes in, cuts costs, boosts revenue, gooses the stock, makes huge salaries and bonuses -- and then cashes its chips and leaves the poker table. Then the next management arrives and the cycle starts all over again.

No heart, no soul.