THE BLOG

While You Were Sleeping

03/01/2013 11:08 am ET | Updated May 01, 2013

In the closing scene of the film, Into the Night, an FBI agent, previously apparently a real Boy Scout is given mysterious instructions from his superiors to deliver a suitcase full of cash to Michele Pfeiffer and Jeff Goldblum. They then will jump on the next plane. For whatever reasons they then will be scot-free (from what is not clear; but we are all pulling for them).

Well, just before he gives them the money something snaps in the federal agent. And somewhat shockingly to the audience, he reaches into the suitcase and starts stuffing bundles of cash into his pockets. His explanation to the stunned Pfeiffer and Goldblum is simply something like "who's going to stop me?"

There is still plenty of cash in the suitcase; in a legal sense you might even argue that the amount he has skimmed off the top is not large enough to be "material," but sure it was large enough to affect the agent's behavior.

For me, the whole scene evokes memories of the vast changes in American business over the past fifty years. We find evidence of these changes in the various schemes, both new and old, for creating windfall opportunities for insiders. They underpin the pathologies of the dot com boom, the junk bond collapse, the leveraged buyout craze, credit default swaps, and the real estate bubbles. While there have always been wide fluctuations in the markets -- booms and busts -- what is novel has been the system of financial rewards for key participants that evolved during the late 20th century. While the success of the deals or investments, of whatever kind, are presumably reflected in whether there are significant corporate profits, high returns on investment, or appreciation of any securities involved, the plain fact is that for many of the key participants in deal-making and financing, the rewards are all up front -- triggered by the transaction itself and generally independent of the eventual outcomes for investors or companies.

Especially beginning in the 1980s, if you watched closely, you would come to understand the centrality of the transaction to wealth and success in much of the financial world. In a sense it's a chance to make a lot of money that exists within a world not accessible to ordinary investors. While it sometime overlaps with creative business building, it can make those involved very rich regardless of what happen after the transaction.

Think of it this way: a large transaction now offers the chance of once in a lifetime paydays for all of the people needed to get the transaction done. Maybe we should just think of them as the lucky folks who get to be "in the room" when the deal is shaped (Or the suitcase is open).) In a larger sense, it is an aspect of what some call the financialization" of much of the business world.
The transaction is not really about the product a company produces or the reliability of the collateral behind an exotic security; it's about how much you can make by doing the deal. Big deals often involve large fees up front for the investment bankers, lawyers, and accountants who shape the transaction. There are now windfalls for the corporate hierarchy that needs to sign off on the deal. There can be golden parachutes for senior managers, even for boards of directors. Everybody in the room gets a few handfuls of cash to lubricate the process. In this environment, expecting players to be truly impartial about whether or not the deal should be done is a lot to ask.

This way, we do the deal and I'm rich; the other way we don't, and I'm no better off.

Of course, during period of economic decline there is less of this activity. But as we are seeing now even modest prosperity provokes a surge in almost any kind of merger, acquisition, restructuring, or leveraged buyout transactions. It helps, by the way, that there are few unions, limited public oversight or clear guidelines about how the "people in the room" should behave. Whatever the traffic will bear is essentially the only constraint. Maybe it's just human nature at work. Some of us just can't resist that open suitcase filled with cash.

Richard C. Leone
(I'll have more to say about how we got into this situation in a later post.)