Originally published in The Village Voice, December 1990, by Curtis Lang
While James Baker was re-establishing a leaner and meaner Trilateral world economic order in preparation for his friend George Bush's ascendancy in 1988, Michael Milken was preparing his own elite team of allies.
Milken was gearing up for a campaign of unbridled corporate warfare that would create a new class of jet-set robber barons and saddle most of corporate America with a Brobdingnagian debt burden. All in the name of -- supposedly -- making managers more "efficient."
Milken had pioneered the sale of "junk" bonds at the Wall Street firm of Drexel Burnham Lambert. Junk represented the IOUs of companies with little or no standing among bankers and lenders. To attract lenders, Milken's bonds paid five or six percentage points more intrest than the bonds of blue-chip companies. The bonds also promised the lender a big, fat fee if the company borrowing the money managed to repay the loan ahead of schedule.
"So, when the company makes money, its junk soars, in anticipation of the windfall," explains Michael Lewis in Liar's Poker . "When the company loses money, its junk sinks, in anticipation of default. In short, junk bonds behave much more like equity, or shares, than old-fashioned corporate bonds."
You may say, so what? Well, the reason that many companies issued junk bonds instead of stock was they could deduct the interest payments on the bonds from their federal taxes. Dividend payments to stockholders are not tax-deductible. Obviously, it became much more attractive for companies to raise new money with junk than stock. So, one may ask, why didn't the Securities and Exchange Commission reclassify junk as stock, and disallow these deductions?
That is a question that can only be answered by John Shad and Roderick Hills, two of the last three SEC chairmen, both of whom served on the board of directors of Drexel Burnham Lambert starting in 1989.
These two were directors "when Drexel engaged in some of its most ethically questionable acts of apparent fraudulent conveyance and were fabulously well-paid for their services even after Drexel entered bankruptcy, leaving the pension funds of teachers and janitors owed millioins," charges Benjamin J. Stein, a Los Angeles-based economist, in a recent article in Barron's .
Furthermore, junk bond underwriters like Drexel have access to inside info about corporations. "Drexel's research department, because of its close relationship with companies, was privy to raw, inside corporate data," says Michael Lewis. There is no law against insider trading of stocks and bonds, only stock; but in the case of junk bonds, which act so much like stock, maybe there should be.
Dollar Bills, Courtesy Wikimedia
The mountain of junk bonds grew from almost zero in the 1970s to $839 million in 1981, to $8.5 billion in 1985. By that time, Milken had a problem. As Michael Lewis explains it, Milken could not find enough small, aggressive companies or old "fallen angels" who needed money to keep up with the demand for junk bonds. Milken had more money than companies wanted to borrow. What to do?
Milken decided he would recruit some would-be robber barons who wanted to take over large corporations with junk bonds. This would create a new market for the bonds, and simultaneously transform the mammoth debt holdings of the target corporations into instant junk, because they would be saddled with so much new, low-grade debt. Fabulous!
Milken funded the dreams of many corporate buccaneers who made the front pages of the newspapers in the Crazy Eighties. Ronald Perelman, Boone Pickens, Carl Icahn, Sir James Goldsmith, Nelson Peltz, Saul Steinberg, Asher Edelman and others. Milken's handkpicked team of corporate predators attacked major U.S. corporations such as Disney, Revlon, TWA, Union Carbide, National Can and Phillips Petroleum.
Many forced management to pay them tens of millions of dollars to go away after only a month or two of laying siege to the corporate fortress. Often the companies would go deeply into debt to discourage the raiders, sell off some of their prize possessions, or otherwise harm themselves, like reluctant virgins disfiguring their faces to repel invaders intent unpon rape. When raiders succeeded in taking over companies, they often had to fire large numbers of workers or sell off whole divisions in order to increase cash flow to service their extremely high-cost junk bond debt. But no matter. They made their money up front, either in greenmail or from the run-up in stock prices that preceded each transaction. Arbitrageurs anticipated the paper profits to be generated by selling off the company's assets, which exceeded the value of the company as a whole.
This created an entire new industry. Those raiding companies and those defending themselves needed special advisers, such as Felix Rohatyn or Bruce Wasserstein or Joe Perella, to help them maneuver through the labyrinth of accounting and legal chicanery each corporate feud entailed. These advisers could make a million or two for a 60 to 90 day gig.
Investment bankers began to fight with one another for this business. They began to want to lend companies money to initiate takeovers, as did commercial banks. Prestigious law firms like New York's Skadden, Arps, Meagher & Flom, the leaders in merger and acquisition work, made fortunes. Skadden became the highest grossing law firm in the U.S. from this type of business, and Joe Flom, a senior Skadden partner, became one of the highest-paid attorneys in the country.
Eventually, the management of such blue-chip companies as RJR Nabisco and Time, Inc. would maneuver to engage in junk-bond financed mergers and acquisitions, and find ways to position themselves for possible cash windfalls in the tens of millions of dollars. Sometimes the deals worked, and sometimes they didn't. Either way, a host of Milken associates, investment bankers, and others attained superstar status in the world of finance.
Milken and his apologists in the press and in Washington claimed that the cannibalization of U.S. industrial companies was healthy and productive. In truth, the companies had become the equivalent of real estate -- one more commodity to be traded, flipped, subdivided and otherwise brokered.
Companies were valued for their break-up prices, not their long-term prospects -- or the way they provided jobs. And in one way at least, the market in brokered companies was more exciting than real estate. If you wanted to buy someone's real estate, they could dicker and bargain with you to get the best price -- or even refuse to sell at all. But if you wanted to buy a publicly held company in America, you could just hoist the Jolly Roger, call Michael Milken and fire a broadside across their bow!
Favorable tax treatment for junk bonds underpinned the $1 trillion spent in restructuring American industry in the 1980s through mergers and acquisitions. This restructuring took the form of replacing equity capital with high-cost debt. About $285 billion more in equity was liquidated through mergers and acquisitions and other games perfected by paper entrepreneurs than was created by Wall Street's new stock issues. This was the first time since robber barons had constructed their trust and monopoly empires in the late 19th and early 20th centuries that total equity in American corporations had declined.
Milken critic Benajmin Stein argues that the Junk Bond King actually was the perpetrator of a vast Ponzi scheme, a classic fraud in which early investors in a scam are paid back with money from later investors, and nothing of value is ever produced by the schemer. Stein says Milken used his friends Carl Lindner, Stephen Wynn, Meshulam Riklis and Victor Posner as a "captive network of buyers" of junk bonds. Stein claims that Milken would get these "insiders" to buy and trade the bonds among themselves to create an illusion of value where none existed. This is how Stein says Milken initiated the junk bond marketplace.
Later, Stein says Milken induced unscrupulous S&L operators like Charles Keating, who owned Lincoln Savings in California, to purchase mountains of "brokered deposits" or "hot money" from money brokers like Don Regan's former firm, Merrill Lynch (which led the country in sales of such deposits). The S&L operators used these government-guaranteed deposits to purchase junk bonds that Milken needed to unload. Then Milken would get the companies who were borrowing money through junk bonds to buy still more junk bonds issued by other borrowers, to fund still more S&Ls and sell more junk.
Now that Drexel has collapsed, Milken's S&L buddies have gone bankrupt, and Milken himself has been sentenced to 10 years in prison for fraud, there is a great controversy about whether or not the sentence is appropriate.
Meanwhile, the U.S. government has filed suit alleging that Milken and Drexel looted up to 40 S&Ls of over $6 billion, and one S&L in California is suing for another $4 billion. Taxpayers have made up these losses.
Benjamin Stein calculates that Drexel issued a total of $150 billion in junk during the Crazy Eighties. Stein also calculates that Drexel junk bonds have defaulted or traded in for devalued securities at the rate of four to five percent per year. Forty-three precent of Drexel junk issued in 1977 had defaulted by 1988. Fifty-four percent of Drexel junk issued in 1981 had defaulted or been in distressed exchanges by 1989. Stein calculates that eventually one-half of all Drexel junk bonds will default, resulting in a loss of $75 billion, an amount equal to $1,000 for every family in America. "This sum represents a theft far larger than any other known in history," Stein contends. "This is a gargantuan robbery."
The Texas Crash
Nineteen eighty-six was the year Charles Keating, owner of California's Lincoln Savings, decided to build a city in the middle of the Arizona desert. Experts later testified to the House banking committee that Arizona's economy had peaked and the national real estate market was already softening when Keating began selling parcels of undeveloped desert land in "Hidden Valley" at huge mark-ups -- to a variety of buyers. How did he do it?
Sinple. Lincoln loaned borrowers the money for a down payment and provided long-term financing at no risk to the borrowers, who agreed simply to pay prices far above legitimate appraised values, according to 1990 House banking hearings. MDC Land Corporation, a real estate company controlled by a group of insiders affiliated with Silverado Savings of Colorado, where Neil Bush sat on the board of directors, was given a $75 million line of credit the same day it purchased Hidden Valley land at highly inflated prices.
Federal regulators reported in August that Hidden Valley "could be a disaster in the making", but Keating had some powerful friends quite capable of keeping the regulators at bay. Alan Greenspan, who now serves as head of the Federal Reserve Board -- which many Wall Street analysts believe stands as the sole bulwark between the U.S. economy and a financial abyss -- represented Lincoln Savings and 15 other "high-flying" real estate development projects (like Hidden Valley): he certified that these institutions were well-run, prudent enterprises.
Experts told Congress that Hidden Valley was an area unsuitable for development within the next 50 to 100 years, and Lincoln would eventually lose $200 million on the desert land deals.
Regulators were unable to press Keating on the issue, because Keating had them in a corner. "The most terrifying thing about this association isn't just the $1.5 billion to $2 billion loss . . .but it's the fact that in 1986, thanks to -- well, I'll use Mr. Ed Gray's rather elegant phrase -- thanks to 'Mr. Don Regan's twerps at the White House,' unquote, Mr. Keating came very close to getting control of the Federal Home Loan Bank Board," an outraged Kevin O'Connell, then a deputy director for the Office of Thrift Supervision, told Congress in 1990. Keating was an inch away from using his political connections to get an inside man at the top government agency supervising thrifts.
Oil prices collapsed in mid-1986, shattering the real estate market in Texas and the rest of the "oil patch" states, and exposing the Texas S&Ls and banks to the effects of their wild speculation and fraudulent pyramid land schemes. Borrowers could no longer make payments and, in an era of slumping prices, lenders could no longer pretend that there was some semblance of reality to an "insider" transaction in which buyers were bribed to pay exorbitant prices for overinflated properties.
By year-end 1986, the federal government had offset bad loans at U.S. S&Ls with $53.031 billion in "good will", an accounting gimmick that was used to disguise the industry's insolvency and the bankruptcy of the FSLIC, the federal insurance fund that protects thrift industry depositors. The news media went along with this charade, and failed to inform the public about the true extent of the huge losses.
On Wall Street, Ivan Boesky was arrested for insider trading, and immediately proceeded to stick a hidden microphone under his Hermes tie, turning stoolie on his friends to broker a softer sentence for himself. In the words of the September-October Harvard Business Review , "Treachery, we found, can pay." Boesky would lead federal investigators straight to Michael Milken.
The Wall Street Crash
As the fabric of Reaganomics began to unravel, first here, then there, around the country, New Yorkers had to endure a season of panics in 1987. In April and May, the dollar collapsed; Paul Volcker raised interest rates. What else?
This time, Volcker's deflationary medicine caused Wall Street bondholders to lose their lunch. Don Regan's former firm, Merrill Lynch, Pierce, Fenner & Smith, dropped over a quarter of a billion dollars trading mortgage-backed securities. First Boston and Salomon Brothers each lost another $100 million. The stock market dropped 200 points.
In May, the era of Walter Wriston and David Rockefeller's lend-now-worry-later policies regarding Third World loans came to an abrupt end. Wriston's successor, John Reed, decided to take a $3 billion hit as a down payment against future write-offs.
That summer Paul Volcker was replaced as head of the Federal Reserve by Alan Greenspan -- the man who had made so many friends in the ailing S&L industry, whose reputation rested on ironclad projections of future economic events for clients engaged in complex business transactions -- like Lincoln Savings.
During lengthy hearings on a bill that would provide the bankrupt FSLIC with much-needed cash to close down insolvent S&Ls, federal regulators complained to Congress that "risky investment strategies" and pyramid loan schemes (Ponzi schemes) were "overwhelmingly responsible for virtually all recent failures, FSLIC's growing insolvency, which is now up to $8 billion, and the huge coming losses we have previously identified."
Somehow, word about the industrywide corruption among S&Ls failed to reach Senators John Glenn, Dennis de Concini, John McCain, Alan Cranston, and Donald W. Riegle, Jr., who met twice with top S&L regulator Ed Gray to strong-arm Gray into leaving Keating alone. Ed Gray stepped down in 1987.
In September, Gray's successor, Danny Wall, stopped regulators in the San Francisco district from closing Lincoln Savings down by removing Lincoln from their jurisdiction altogether. Wall proceeded to issue a blizzard of press releases claiming that there would be no need for a taxpayer bailout of the S&L industry, and that fraud and abuse were not important factors in the industry's woes.
In October, Wall Street crashed, losing over $500 billion in value during three panic-filled days that saw equity values in global stock markets decline by a couple of trillion dollars.
President Reagan insisted that the economy was sound. "The economy owes its ruddy color to the willingness of foreigners to lend about $150 billion a year at low interest rates," charged Karin Lissakers and Martin Mayer in The New York Times . James Baker had buffaloed European and Japanese central bankers into propping up the U.S. economy no matter what the cost to themselves. In a sleight-of-hand trick of world-class proportions, Baker managed to hold the enormous U.S. debt over the heads of our creditors like a club, forcing them to do his will in a display of debtor power that would make Third World powers green with envy.
Reaganomics continued to paper over declining U.S. profit margins, the deindustrialization of America, and enfeebled U.S. competitiveness with an ever-increasing flood of corporate, consumer and federal debt. Like a cocaine addict up too long on a binge, the U.S. was too frightened to stop abusing its debt-drug, knowing in its heart of hearts that the crash might be too painful to endure.
The Shape of Things to Come: The Southwest Plan
In November of 1987, Federal Home Loan Bank Board member Roger Martin sat down with a group of Texas S&L executives from Bright Banc of Dallas, San Antonio Savings, First Texas Association of Dallas, Gibraltar Savings Association of Houston, and other large Texas thrifts. These industry "insiders" met to discuss possible federal responses to the Texas S&L industry's meltdown.
At that time, the nation's staggering S&L crisis was still incubating, and the mainstream media relegated the story to the business pages. Few outside the industry understood the magnitude of the problem.
Roger Martin had been studying a "white paper" that detailed the desires of the financial executives, and outlined plans for revitalizing the Texas S&L industry. The plan involved huge federal subsidies for Texas S&L insiders at favored large institutions, who would be glad to expand their increasingly insolvent thrifts exponentially, at government expense, by taking over the operations of dozens of failed and failing Texas thrifts. By socializing the industry's losses and privatizing future profits for a favored few "insiders", the federal government would create a new class of "mega-thrifts". Owners of these new super-S&Ls could keep good assets for private profit and dispose of bad assets at government expense. The government guaranteed them predetermined profits on their real estate portfolios, and offered them Brobdingnagian tax breaks for an initial investment of as little as one or two percent of the assets they were buying. With gold-lined government guarantees, the owners of the new mega-thrifts enjoyed competititive advantages no other S&Ls could match.
W.W. McAllister, chairman of San Antonio Savings and a member of the board of directors of the Dallas Federal Home Loan Bank, which loans federal funds to needy Texas S&Ls, admitted attending the meeting. McAllister agreed that the "Southwest Plan" that emerged in 1988 to bail out Texas thrifts through a process of merger and acquisition "paralleled" the white paper plan.
"The genesis of the Southwest Plan came from the industry and from people in Texas," said Karl Hoyle, executive director for public affairs at the Federal Home Loan Bank Board in Washington. "They came to us."
The Federal Home Loan Bank Board's 1988 Southwest Plan involved the merger and acquisition of 220 insolvent thrifts with total assets of $60 billion. In conditions of utmost secrecy, Federal Home Loan Bank Board Chairman Danny Wall signed Byzantine financial agreements with Wall Street takeover artists, Republican "soft-money" donors and Sunbelt real estate entrepreneurs that vastly understated the cost of the S&L rescues to taxpayers, committed the FSLIC to a $44 billion dole to the investors, and provided for open-ended "assistance agreements" to the new owners. The original estimates of the cost of the bailout have been raised by $12 billion since the bailout began.
The $50 billion in federal assistance to Texas S&Ls under the Southwest Plan agreements would pay for the equivalent of three Marshall Plan programs. But there is a difference: the Marshall Plan rebuilt Europe after World War II, but Texas is not being rebuilt. Texas has already been overbuilt, and that is the problem.
These 1988 Southwest Plan agreements were made without congressional approval, and now the Bush administration proposes to pay for them with money that doesn't show up on the federal budget.
Does GOP stand for "Good Ol' Purse Snatchers"?
As it turned out, attendance at the 1987 meeting of industry "insiders" was not a requirement for getting a Southwest Plan deal. Many of the industry's "favorite sons" were stabbed in the back by the federal regulators they had hoped to seduce.
Major donors to the Republican party fared much better than the average S&L big shot. Robert Bass and Trammell Crow of Texas, Gerald L. Parsky of Los Angeles, and New York junk-bond predator Ronald Perelman all donated at least $100,000 to the Republican National Committee during the 1988 election cycle -- about the same time decisions about who would get coveted Southwest Plan deals were being made. Bass received $2 billion in federal assistance for buying a failed S&L; Perelman got $5.1 billion in federal assistance and $900 million in tax breaks; Trammel Crow's acquisition group received $1.5 billion for their trouble. Parsky also received a platinum-plated megathrift deal.
Charles Keating, whose donations to five U.S. Senators have landed all six men in hot water following the collapse of his Lincoln Savings, also gave $100,000 to the RNC in 1988. So did Thomas Spiegel of Beverly Hills, California, whose S&L, Columbia Savings, has been named as an integral player in Michael Milken's junk-bond empire and as a member of the nationwide "daisy chain" of corrupt S&Ls that included Silverado Savings, where George Bush's son Neil was a member of the board of directors.
Other lucky acquirers of failed S&Ls who received billions of dollars in U.S. "assistance" included Caroline Hunt Schoellkopf, a member of Texas's fabled Hunt family -- the Sunbelt version of the Republican Rockefellers -- and Lewis Ranieri, a Wall Street shark. Ranieri made millioins selling packages of mortgage-backed securities at high prices to S&L executives.
"Basically, what you've got is a situation where people in the 1980s stopped investing in any real sense of the term, and started shifting their money into speculating in existing assets," charges Dr. R.T. Naylor, author of Hot Money and the Politics of Debt . "The mergers and acquisitions in the Texas S&L industry reflect that same phenomenon two ways. First of all, the money has drained out of the S&Ls because it has gone into speculation in commercial real estate and things like that. Secondly, instead of saving these institutions, they were given to takeover artists, the same gang that are busily involved in the insider trading scams on Wall Street."
"Basically, the Texas S&Ls, like the others, were plundered into insolvency by crooks," Naylor continues. "Now they're being taken over by a new set of crooks, who are going to continue the plundering operation, but probably in a legal way rather than an illegal way. What can I tell you?"
Despite the outrageous nature of the Southwest Plan deals, the U.S. news media accepted at face value Danny Wall's assertions that no taxpayer bailout would be needed, and the S&L issue never surfaced during the 1988 Presidential campaign, to the eternal shame of the Democratic Party. (Did that have something to do with Texan Lloyd Bentsen's place as Vice-Presidential candidate on the doomed Dukakis cmpaign plane? One thing known for sure is that "high-flying" S&L operators gave campaign funds copiously to both
Democrats and Republicans alike, and that the S&L mess is, above all, a bi-partisan scandal.) George Bush was elected president, and almost immediately admitted that at least $100 billion to $150 billion in taxpayer dollars would be needed to clean up the S&L mess. That, of course, is just the down payment on a 40-year mortgage.
The Year of the Bailout
Congress passed the S&L bailout bill in 1989, the same year that Neil Bush's involvement with Silverado Savings became a staple of nightly TV news broadcasts and Wall Street celebrated the completion of the largest junk-bond buyout ever, the $25 billion deal for RJR Nabisco.
"Then the [junk-bond] market began to unravel," reported Gary Hector in Fortune magazine. Junk bond values tumbled 15 percent in three months, defaults on bonds like Campeau Corporation and Circle K reached record levels, and buyers for new junk were nowhere to be found.
The consequences of the collapse of the junk bond market? Medium-sized companies, large but illiquid companies with poor balance sheets, and corporate raiders alike will find it next to impossible to get financing. Banks will tighten lending standards as they're forced to take a hit on loans to junk-laden companies now inches from default. Junk-bond borrowers of Drexel Burnham, Lambert will be lucky if they survive at all. Investment bankers will lose not only bonuses, but their jobs. Insurance companies and pension funds that loaded up on high-yield junk bonds will have to take major hits. Insurance companies hold $60 billion worth of junk so their losses could be in the tens of bilions.
1990 -- The Japanese Crash
The 1990 bankruptcy of Drexel Burnham, Lambert and the subsequent conviction of Michael Milken and his 10-year sentence for fraud have sealed the fate of the junk-bond market. Things can only get worse for all the participants of the M&A frenzy of the Crazy Eighties, and thus for the American economy, which has come to depend upon paper entrepreneurialism and regular debt infusions.
Speaking of debt dependency, American business in 1990 has grown increasingly nervous about the ability and willingness of Japan, the lender of first, middle and last resort during the 1980s, to continue funding the spiraling U.S. debt habit.
Japanese investors pulled $8.9 billion out of the U.S. stock and bond markets in the first six months of the year. This capital flight was triggered by the relatively higher yields available at home, as Japanese scramble to shore up their own faltering banking system. John Britton, reporter for Grant's Interest Rate Observer , points out that in 1990 Japanese bank stocks have tumbled 25 percent in value, and the Japanese stock market is down 40 percent from its midyear high.
Japanese banks are the only ones in the world arguably weaker than the New York money center giants, who contracted a bad case of the Texas financial flu this year. The Bank of New York has cut 3000 jobs since its 1988 acquisition of Irving Bank Corp., and its strategy may be duplicated by the largest New York banks.
Citibank's stock declined by a breath-taking 66 percent by November of this year, perhaps reflecting the fact that its equity-to-debt ratio is one of the weakest among its peers. In October, Citi showed a $780 million rise in nonperforming commercial loans, and Moody's investors service downgraded its debt. Chase Manhattan, the proud flagship of the Rockefeller empire, was forced to slash thousands of jobs, write off $275 million in bad loans, and pump $650 million into a bad-debt reserve this September. Finally, Chase had to up estimates of nonperforming real estate loans in its portfolio to $2.5 billion, lay off 5000 employees, charge off $1 billion against anticipated losses, and sell off European assets, while sustaining a $625 million operating loss for the third quarter. Moody's investors' service downgraded its debt to junk, which is bad news in the post-Milken market.
Meanwhile, the slow strangulation of Donald Trump's highlyl leveraged empire, which paralleled the highly publicized unraveling of his marriage this year, led to highly embarrassing write-offs for Manufacturer's Hanover, which had to write down $157 million in nonperforming loans to the Donald this June. And Manny Hanny also has substantial further exposure to risky commercial real estate and LBO--type loans.
That's why New York's most powerful bankers decided in 1990 that they might want to follow the lead of their much-derided financial brethern in the Texas S&L community and pursue a strategy of shotgun marriages to one another. After all, when in doubt, merge and acquire.
In October, Prudential-Bache issued a report that indicated that the "Texas sickness" has spread from coast to coast. Bache predicted a nosedive in the value of California real estate, accused venerable Wells, Fargo of acting like a "high-flying" S&L, and pointed out that the four major California banks, Wells Fargo, Bank America, First Interstate, and Security Pacific had already dropped 54.9 percent against their year-to-date highs. The report also predicted that the banks' stocks would be worth even less in the future.
The U.S. insurance industry also received a tremendous amount of negative publicity in 1990, as it became apparent tehat U.S. insurers had caught the disco fever of the S&Ls and banks in the 1990s, betting increasing amounts on high-risk casino-type transactions. IDS Financial Services, a division of American Express, published a study that found that 20 of the largest 100 U.S. insurance companies face insolvency in the event of a recession -- like the one we are now entering.
The Southern Finance Project, a nonprofit research institution known for its savvy analysis of banking issues, points out in an upcoming study that merely extrapolating present trends into the future shows industry losses of nearly $10 billion by 1994. This is money that will be paid out by state guaranty funds paid for by member insurance companies.
In case this all sounds familiar -- it should! All these symptoms appeared during the collapse of the $1 trillion S&L industry. A special grand jury convened to oversee the task force cases complained that "we also found that fraud is not confined to insolvent insurance companies but is prevalent throughout the industry and plagues all types of insurers."
Meanwhile, Wall Street's report card from Moody's is in on its last decade of Reaganomics, Reganomics, and general excess: it gets a failing grade. After Wall Street firms spent 10 years merging with one another and with superstrong partners outside the industry, like American Express, to provide them with the strength to open lavishly appointed foreign offices from Europe to Japan, Wall Street firms are retrenching and giving up their overseas offices. Those that had global ambitions are now terminating entire product lines, cutting staff, and consolidating their U.S. market positions.
Between 1980 and 1990, Moody's reports, equity, revenue, expenses and employment skyrocketed in the U.S. securities industry, but pretax earnings today are less than they were in 1980. Moody's reports that a decade-long Wall Street shakeout is about to begin, in which thousands will lose their jobs just as proposed deregulation of commercial banks threatens to introduce intense new competitors into the securities marketplace. Strong foreign firms are now eyeballing the U.S. with overseas expansion in mind. That's the magic of the global marketplace for you!
The Ghost of Christmas Future
If there is a lesson to be learned from a decade of Reaganomics it is a grim one, brought to us by the ghost of Christmas Future, who has been talking to Pete Peterson, Wall Street investment banker and former commerce secretary under President Nixon.
Peterson believes that the reason the U.S. has dug itself into such a hole is that it spends too much on Social Security, Medicare, and government retirement benefits. He publicized his views in The Atlantic Monthly and in double-page ads in the nation's newspapers; the ads carried endorsements by 250 Republican and Democratic bankers.
Peterson wants to cut entitlements and tax consumption. He wants to impose austerity on the middle class, the poor and the powerless, while eliminating the corporate income tax and reducing taxes on interest, dividends and capital gains. He expects such draconian measures should restore the U.S. economy to health -- after a mere 20 years of falling living standards for those outside the charmed circle of paper entrepreneurialism in the United States.
"What Peterson is proposing, in effect, is Reaganomics II," explains Jeff Faux, president of the Economic Policy Institute in Washington, D.C. "A tougher and more brutal version of the original. Peterson, the pin-striped Robespierre of the Reagan revolution, believes that still more blood must be spilled."
The problem is that in today's casino economy, 20 years of transferring wealth from the middle class and the poor to corporate America will not increase productive investment any more than Reaganomics did during the Crazy Eighties. In an environment of shrinking demand, when the vast majority of Americans will have less and less to spend, there will be no incentive to invest in America at all. Americans will be reduced to the status of 21st century serfs on the multinational corporate plantation, and Peterson and his friends will continue to play 24-hour computerized global economic games to sustain their jet-set lifestyles. Whenever they fuck up and need to be bailed out, Uncle Scrooge will come across.
"Someone should tell the American worker that domestic austerity is not over, it's just beginning," says Shearson-Lehman's Michael Moffitt. "Now the captains of industry and governement want Americans to work for Korean and Mexican wages."
The United States has suffered from a decade of class warfare waged on the middle class and the poor by Republicans and Democrats alike, and Uncle Scrooge has much more of the same in store. The lesson the 1990 ghost of Christmas Future has for all of us is a simple one. In the movie Wall Street , corporate raider Gordeon Gekko says that "Greed is good. Greed works." But the lessons of the Crazy Eighties amply demonstrate that when it comes to building a stable, peaceful world economy, "Greed is not enough!"