Caught In a Machine that Grinds Us Up

This is Part II of Companies As Buy-And-Sell Commodities. See Part I, Companies As Buy-And-Sell Commodities - Workers, Customers and Country As Costs.

In Part I I wrote about a pattern we see over and over again: buying up good companies, shedding and outsourcing the workers, cutting their pay and benefits, outsourcing and cheapening the product or service, fleecing and mistreating the customers, closing the offices and factories and running up debt. If you want to make a few hundred million, here is the game:

1. Find a good company that still respects its workers, paying decent wages and benefits, still respects its customers and produces a quality product or service, still respects and has ties to its community and keeps a plant open, maybe sponsors a little league team, etc. These are all "costs" to cut.


2. Use other people's money: Work with an investment bank to finance the buyout, with the company itself as collateral, and pay the banking fees from the financing.


3. Cut. Cut costs, including the quality of the product or service and customer support operations. Externalize environmental costs onto the community. Wait for the union contract to expire and offer wage cuts and elimination of benefits and refuse to negotiate (where are they going to get other jobs?), fire union organizers, threaten to close the operations and move them overseas, and don't worry about labor laws - they aren't enforced anymore.


4. After breaking the union and cutting costs, close the plant. Outsource production to China.


5. Now the books look better because of reduced costs, so take on new financing and pocket it.


6. Further stoke up the books for a couple of quarters using gimmicks like pushing product into distribution channels to make sales look better than they are, find another buyer and pass what's left to them to repeat the cycle - there are always more costs to cut.


7. Pocket your millions, then go back to step 1 and repeat the process with another company.

This is the buyout game and it is part of the story of what has happened to our economy, our jobs, our communities and our country. It has become a machine, with profits fueled by tax and social incentives. These incentives create a formula that follows the steps described above, with an inevitability to the consequences. Because it CAN be done, of course it IS done. It is a great game for short-term profits for a few. It is justified as "finding efficiencies" and the ideology behind it insists that the profits prove the market demands the behavior.

Machines do not have human concerns, they just do what they are designed to do. Their engines burn the fuel that powers them, their gears turn. As an example of what I mean take a look at what happens when this machine encounters companies that provide assisted living for the elderly A year ago I was helping the SEIU get the word out about the private equity game and especially the firm Lazard, which had been purchasing assisted living, retirement and nursing homes and putting them through the machine. I wrote then, in When Seniors Are the Product. Look at how they were treating our most vulnerable people,

OK, we have the perfect combination here. We have elderly, frail, sick, vulnerable, and they have some money. They are a captive audience, too, because people in this situation are not people who can pack up and move somewhere else. Senior care is a big business. You're talking about chains with hundreds of facilities each with dozens or even hundreds of living units you're talking REAL money. So in today's economy you're talking about a perfect target for exploitation.

[. . .] Atria was set up by Lazard LLC., a "financial advisory and asset management firm." Lazard is a private equity, or "buyout" firm. Yep, one of those big Wall Street outfits that you are reading more and more about. Lazard is supposedly based in Bermuda even though it lists [pdf] its "principal offices" as New York, London, Paris and Milan. (Its website doesn't even list Bermuda on its "global presence" map. Wink, wink, nod, nod.) On their website they say that a core value is Citizenship,

[. . .] Here is what is going on: Atria has been reducing services, raising rates, cutting wages, and generally treating the residents and employees like money trees that exist to be squeezed.

In Extreme Wealth Just Isn't Enough, I looked at what could be motivating the people who do this,

Already extremely wealthy, it just isn't enough. It's never enough and it seems the more you get the more you need. You need it bad enough to squeeze more and more money out of old people too frail to even shower without help. You need to so bad that you keep the wages of people as low as you can and you do everything in your power to keep them from forming a union. You need that money. You need that money. You need that money. And you do what you have to do to get even more.

In Living and Working at Atria, I described how the machine turns people into nothing more than economic units

We are people, not economic units, and there is a difference. This may be a difficult concept to grasp after three or four decades of constant corporate-funded "free market" propaganda. But people make decisions for higher reasons than just making or saving a buck or two. Most people, anyway.

[. . .] The caregivers at Atria, at every level, deserve to be treated with respect and compensated fairly for their work.
But they're not. Of course.

Of course, this is all exactly what Atria and Lazard and Bruce Wasserstein are counting on. This is what the people and pension funds and others who park their money at Lazard are counting on. To them the seniors and the workers are just economic units, revenue streams and costs to cut, to be replaced if they don't perform efficiently.

And in Gouging Vulnerable Seniors -- What Can Be Done? I looked at the effect over time as this machine grinds on,

Many people and organizations recognize that such a system is not sustainable, harms the people who work for the companies, the communities around them, the customers and the economies in which they operate. Sure, a few executives make out like bandits for a while, but over time it doesn't do the rest of us any good, not even their companies. (Lazard and the Lazard fund that owns Atria, for example, have not been performing all that well. Meanwhile Wasserstein personally took home $42 million last year - even as Lazard stock lost 14%.)

More recently we saw the same pattern play out with the company Stella D'oro. The company went through the same buy-and-sell pattern. Stella D'oro was bought by Nabisco in 1992. Then Nabisco became part of Kraft in 2000. In 2006 Kraft sold the company to Brynwood Partners - a private-equity company. Brynwood bought the company with a plan to break the union and then drastically cut wages and slash benefits to lower costs and then resell. (Just like "flipping" a house.)

From last year, No Sweets When Striking the Cookie Factory,

The workers ... say there has been no effort to negotiate in good faith. They accuse Brynwood of having a plan to force them out of their jobs, noting that replacement workers were lined up before they even went on strike.

. . . "The financiers and speculators have brought the American economy to its knees," they wrote. "The financiers at Brynwood Partners are trying to bring 135 workers to their knees, hiring scabs to do their work. The Stella D'Oro workers are taking a stand against the wrecking of our economy."

But the union sued the company for unfair labor practices and won, so Brynwood "pulled a Wal-Mart," closed the plant in retaliation, laid off the workers, and sold the remains to yet another company,

While Stella D'oro isn't in bankruptcy, its owner, Greenwich, Conn., private equity firm Brynwood Partners, in September announced that it would be shutting the company's doors and putting the company up for sale. Brynwood reportedly decided to sell the Bronx, N.Y.-based cookie company after a National Labor Relations Board judge had ruled in July that it had negotiated employee wages and benefits with the union that represents them in bad faith. That ruling apparently prompted the PE firm to make the sale, which has left 138 employees out of work.

Company, jobs, factory gone, surrounding community devastated. As the pattern repeats itself, the rest of us worry that it could happen to us, that our own employer could be next. What many of us take from this is not to fight this, but to keep our heads down. We learn that we are a cost. We can be replaced. Don't ask for raises. Don't even think about joining a union. Keep your head down or they'll single YOU out and cut your pay or "eliminate your position." Across the economy the pressure builds, hours and workloads are increased while wages and benefits decline. Workers burn out and families are destroyed by the psychological fallout.


I have described here a destructive, unsustainable system that creates company- and society-breaking machines. These exist because of the economic and social incentives that our government has set up and we allow to stay in place. Breaking unions, stealing pensions, outsourcing jobs and squeezing customers all depend on government not enforcing laws and regulations - especially labor, consumer and environmental rules. (The last administration's Labor Dept actually gave advice on how to break unions.) As long as we let the economic incentives call us "costs" and getting rid of us "efficiency" this will continue.

Certainly there is no incentive at the top to stop this. This system helps a wealthy few get ever wealthier and do not feel the consequences. The people who do this are celebrated as "successful." And if they don't like the resulting devastation to the economy, community, country and world they can just hop into their private jet or yacht to retire to their private island or tax haven.

Of course, in the last year we have seen that this was not a sustainable system. The economy collapsed because everyone in the system - the workers, consumers, companies, banks, Wall Street - all hit the limits of how much debt you could pile on our backs. But we haven't started to make any changes in the design of the system, or in the machines that unsustainably grind up our companies, workers, customers and country. And we haven't changed the ideology and rationalizations used to justify destroying lives and companies and our long-term prospects for short-term profits for a few.

But imagine if instead we put in place economic and social incentives that set up a sustainable system with company-making machines that direct all of this capital and energy toward building good companies that serve all of our interests. Call them "green machines." What if we set things up so people could get rich doing this instead? Then people would create green machines that would grind through the economy, finding companies and transforming them into businesses that serve their customers and communities, creating rewarding and fulfilling jobs in stimulating and enjoyable work environments, and building a better future for all of us.

On that note: Take a look at the agenda for the Building the New Economy conference, Thursday, October 29, 2009 -- 9:30 a.m.-3:30 p.m. at the Washington Court Hotel in Washington, D.C.
This conference sounds the call for the new economy we must build out of the ruins of the old. It focuses on the need for a new agenda to revive manufacturing in America. It's free. But you have to RSVP.

This post originally appeared at Campaign for America's Future (CAF) at their Blog for Our Future as part of the Making It In America project. I am a Fellow with CAF.

Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson

Comments

[guard]

What you are describing has in the past originally been an organized crime technique called "busting out" a business. Borrow money for a down payment to buy a successful business with a good credit rating and many suppliers. Drastically increase orders for supplies while decreasing payments. Tell suppliers your business has increased so fast that you are having trouble keeping up but will pay them eventually. Sell the ordered supplies out the back door for cash as long as you can string your suppliers along. String your employees along also with promises of wages but stop paying them. When employees quite and suppliers dry up, begin dismantling and selling the facilities. Finally, let the burned out husk go back to the original financier, pocket the money, and move on to the next business.

[Eggsackley]

Great Post. Please keep hammering on this topic. I am particularly interested in the remedial actions recommended at the conference on the 29th.

[dawnone]

Thank you for the excellent analysis and pulling together all the pieces of how private equity firms actually operate and the devastating consequences of their practices on the lives of ordinary workers.

Unfortunately I do not see that the government or the Obama administration will do much to stop these obscene practices. Hopefully at some point soon, a strong grass roots movement will rise up to challenge and change what passes for business as usual in this country.

[joebaggadonuts]

Apparently Dave you are preaching to the chorus. No trolls even show up. So sad that your efforts are not acted upon, even here, even by those on your side.

Sometimes a good post/article is not responded to because everyone simply agrees. I hope that is the case here.

We need to think these concepts together, find a solution together and implement it together. Otherwise it is just like taking the blue pill, and we go back to sleep until our juice is used up, serving the machine.

[ErnestineBass]

What Dave describes is generally referred to as "vulture capitalism", and, just like outsourcing, it's hardly a new phenomenon. Google "Rockefeller Brothers / Anaconda Mining Corporation".

At some point during America's last protracted military misadventure (Viet Nam), perhaps more of us should have asked ourselves, "to what lengths is "my" government willing to go to protect her beloved corporations?".

http://web.mit.edu/hemisphere/events/kissinger-chile.shtml

Despite this bit of skullduggery, Henry Kissinger received a Nobel Peace Prize.
(and where did Timothy Geithner get his start? At Kissinger & Associates, of course)

I find it ironic that in the course of fighting a Cold War with "socialist" Russia, America slowly morphed into what she is today - a fascist state.

[dawnone]

Timothy Geithner got his start at Kissinger & Associates? How depressing.

I remember reading a comic book from the 70s on the Rockefellers and the vast wealth they control, not to mention the appropriation of Chile's copper resources through the Anaconda Mining Corporation among so many other things. Sigh....

[Humanistic]

The "formula" for this monster machine also includes lobbying and giving lots of money to influence lawmakers and to fund the campaigns of candidates favorable to big business so they'll get elected to key government positions; controlling the mass media and the so-called news, and supporting mega-churches to pull the wool over the eyes of the masses so they'll be grateful for small blessings; and supporting educational institutions that teach the MBAs how to run and feed the machine.

The big question is how to dismantle this monstrous destroyer of our civilization and our planet, which also depends on perpetual war and a gigantic military apparatus with its tentacles extended throughout the world. I can only imagine the system will self-destruct, which appears to have begun, and the extreme neglect of our impact on the environment will cause a massive reaction making our planet uninhabitable.

Such lovely creatures we humans are! And this is supposedly the "greatest country in the world".

[therealredstateblues]

Another excellent post Dave - keep on telling it like it is. this is why you are one of my most favorite bloggers here

What you describe is what I call the "MBA way" - chop, cut, slash, outsource, downsize, close are the opeartive words for these types. There is no "innovate, build, create" going on

And we in industry all know what private equity, the modern day equvalent to the gilded age "trusts" are in business to "strip and flip". We all knew Chrysler was doomed when Cerberus got ahold of them rather than Canadian auto part giant Magna had made a better offer and had a vested interest in success.


A major difference today with these trusts and MBAs compared to the Robber Barons of old - the old guys used to actually build companies, railroads, invent products etc in their lust to enrich themselves, today its all about "creativew destruction" which is the euphemism for the MBA way above. the problem with destruction and the fatal flaw is that nothing substantial emerges from the wreckage.

[iblogleft]

This pattern has been around since before I went to college. (I am now in my early 40's)

I remember the day i sat down with my (Then President of a large corporation) father, a staunch republican at the time (now rehabilitated), and the butterflies in my stomach when I told him "America's current path is unsustainable for society".

Last year he visited me, and said three words that made my life a bit more fulfilled; "You were right."

The solution to this problem must have something to do with measuring return on investment in something other than just dollars.

[marinara]

A blog so good, I am forced to imitate!

[TJCole]

Yes the Capitalists are breaking up America and selling off it's greatest assets, just as in any hostile takeover..!

The Republicans mostly did this to us, the so called patriots, they've even destroyed our manufacturing base connected to National Security..

We are being destroyed from within...

History will always ask what were they thinking, why would they do that..?

[Cautious]

Argentina. Find and see Naomi Klein's movie about Argentina. This is what happened there. It's going to happen here.

All of us on the supposed "left" have to stop our whining and hand-wringing and do something about this.

[ErnestineBass]

The movie you refer to is "The Take", and it's available through Netflix.

Great flick, BTW.