Merchants of Debt: The Full Version by Anders George

Author:Anders, George [Anders, George]
Language: eng
Format: epub, azw3
Published: 2013-03-23T21:00:00+00:00

9. The Discipline of Debt

From a distance, leveraged buyouts seemed like a tremendous force for efficiency in the U.S. economy during the 1980s. Study after study showed that worker productivity surged at companies taken private by financiers such as KKR. Operating profit at such companies typically climbed 20 to 30 percent in the first three years after a buyout, University of Chicago economist Stephen Kaplan found. All the while, capital spending held steady or diminished while operating cash flow jumped as much as 50 to 60 percent. Companies somehow seemed to get more done with smaller inputs. “The same managers with the same assets are able to double the productivity and value of the enterprise,” Harvard Business School Professor Michael Jensen told Congress in 1989. “It appears there is no explanation for the gains other than real increases in operating efficiencies.”

In their public speeches, Kravis and Roberts gladly took credit for what scholars began calling “the discipline of debt.” Buyouts “can help create more profitable, productive and focused companies, better able to compete for the long term in a changing business world,” Roberts told an Oregon business group. Kravis was even more dogmatic. “Too many managers are not looking out for the shareholders,” he complained in a business panel discussion in the mid-1980s. “They have more interest in their job security than in making the tough decisions.” Buyouts time and again pushed managers into making those tough decisions, he argued. Such Darwinist themes were routinely echoed by top executives at buyout companies, who portrayed themselves as economic miracle makers, working shoulder-to-shoulder with their KKR partners.

For hundreds of thousands of ordinary employees, however, watching buyout companies play by different rules was nothing to cheer about. Many of these workers spoke with fatigue and bitterness about struggling to meet financial targets set by unknown men far away. Glass-plant engineers in North Carolina forfeited their Christmas vacations to rebuild a sputtering furnace in record time. Motel managers in Texas and Florida scrambled to rent rooms to any guest that arrived—including prostitutes and thieves—just to achieve ever higher occupancy targets. Accounting clerks at every buyout company developed new bill-paying tricks to wangle a little more credit from their suppliers. Many of these steps did promote the efficiency prized by KKR and its academic supporters—but more than a few of the efficiency campaigns were unsustainable, or carried horrific social costs.

Worker frustrations ran deepest at those companies that struggled to keep their big debts under control. At times, the conditions at such companies regressed sixty years or more, to a time when a few capitalist owners ignored the public welfare and instead chose only to maximize their own gain. More commonly, those workers and low-level managers who withstood the brunt of a buyout’s austerity spoke about it with exhausted pride. Their big accomplishment was to survive. Most of them only faintly glimpsed what giant profits might be made by the people at the top. The rank and file certainly didn’t share in the winnings. For ordinary employees, motivation came mostly from fear.

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