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Bailout Background - Three Little Known Business Techniques
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by Emilio Lizardo | October 1, 2008 at 04:28 am
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Now Public Contributor E. Lizardo
October 1, 2008 8:21 AM EDT
OPINION:
Today the US Senate will vote on a revised version of the Emergency Economic Stabilization Act of 2008 which differs from the version rejected last week by the House in that the Senate version has provisions for middle-class tax-relief to sweeten the deal. This is sounding essentially like a 700-billion dollar spending package combined with a tax cut. I don't think you need to be a PhD. economist for the following very reasonable question to occur: 'How the heck is that going to work?'
Another fact which should raise a red flag in the minds of all average American citizens is the manner in which major media both at home and abroad have reported on last week's defeat of Bush's Bailout initiative in Congress. All the big media outlets are uniformly reporting on last week's vote-down of the bailout measure as the failure of Congress to pass the bill. I know 'failure' is just a word, but that's how media works on us, how it sells us all ideas. The pundits might just have easily chosen a description such as, 'Congress defeats Bailout initiative,' verbage which has a whole lot more positive spin than a rather more negative characterization such as, 'Congress fails to pass Bailout initiative.'
Let me put it another way - Congress didn't fail at anything! Congress succeeded at doing their jobs ( for once ), which is representing the will of the people !!
This type of media spin-doctoring tells this writer very clearly big media is just doing everything they can to jam it down our throats. After all, steering public opinion is the major function of media in a technologically advanced Democratic society like America.
With all this in mind I felt that less spin and inuendo, and more factual information might help the average folks out there who, like myself are not business or finance specialists, but just plain old people trying to maintain their footing amidst the media spin-storm now enveloping the Bush Bailout Initiative.
Three Little Known Business Techniques
The Charles Hurwitz Story
Charles E. Hurwitz was born 1940 in Kilgore, Texas to Hyman and Eva Hurwitz. His father owned two clothing stores and built the small town's first shopping center. Charles graduated in 1962, with a degree in marketing, from Oklahoma University. He served in the U.S. Army from 1962 to 1964. Then he became a stockbroker for Bache in San Antonio.In 1988 the company led by Charles Hurwitz, Maxxam, bought controlling interest in Kaiser Aluminum, one of the world's largest companies. This brought Maxxam into the top 200 largest American corporations, according to Fortune's listings. Yet few people know that Charles Hurwitz controls Kaiser. Instead it is his ownership of Pacific Lumber, a northern California timber producer captured by Maxxam in 1986, that has most consistently put Mr. Hurwitz in the newspaper headlines.
To understand how a member of a small-time business family could, in 24 years, become one of America's most prominent industrialists, you need to understand three business techniques not well understood by the public. One is what I call the bankruptcy shuffle, in which funds are transferred out of a corporation, leaving it bankrupt. That technique is also referred to as the OPM, or "other people's money" method of gaining wealth. The second is the minority shareholder squeeze, in which the value of the investments by minority shareholders are captured by the party controlling the corporation. The third is Greenmail.
Using the bankruptcy laws to transfer (the victims would call it "steal") wealth is an American shady business tradition. Under the law one of the most basic features of corporations in the U.S. is that neither management nor shareholders are responsible for the corporation's debts if it becomes bankrupt. There are many variations on this technique. I will use a very simple, straightforward example. You have three corporations, A, B, and C. Corporation A is legitimate, let's say it makes dresses. Corporations B and C are controlled by the same person, whose sole desire is to rip-off Corporation A. Corporation B is set up as a retail clothing store. Corporation C consults for retail clothing stores. Corporation B buys $1,000,000 of dresses from Corporation A on credit. It then sells the dresses for $1,000,000 and has one expense itself, a $1,000,000 consulting fee to Corporation C. Corporation B then has a debt and no assets, so it declares bankruptcy. Corporation B's stockholders and management say they aren't responsible, they are protected by lawyers and the bankruptcy laws. Usually Corporation C pays out the $1,000,000 to its shareholders, who put the money in secret offshore accounts, and declares bankruptcy itself.
Want to do a shareholder squeeze? Suppose you own some stock in a small corporation that is making $5,000,000 a year in profits and is paying a dividend of $1 per share out of it. You could by enough stock to control the corporation and appoint yourself CEO and pay yourself $5,000,000 per year, leaving no profits and dropping the dividend. The stock of the other shareholders, for practical purposes, now has a value of 0. There are many other ways to "milk" a corporation besides excessive executive compensation, most notably transfer of funds to a holding company; both these techniques were used by Charles Hurwitz during his long career.
Greenmail involves targeting a (usually) legitimate business and buying a portion of its stock. You then declare (because the SEC requires you to) that you are going to buy more stock and take it over. The current management and stockholders know that if you gain control they will suffer from the Minority Squeeze, or maybe they just don't like you, or like being in control themselves. So they make a deal to buy your stock from you at a higher price than your original purchase price. You've turned a form of blackmail into green money.
To successfully carry off these kinds of business dealings it helps to have a variety of corporate shells. These corporations allow an individual or group of businesspeople to move money around in ways that make it difficult for those who feel victimized to successful sue and recover their money. They may also have legitimate business purposes; shell corporations are not in themselves illegal. It should be noted that the following account, while following the essence of Charles Hurwitz's business dealings, has vastly oversimplified the tangled web of corporations (many with similar names) that he controlled, invested in, or managed.
The article cited above goes on in some detail about the career of Mr. Hurwitz, detailing the ways in which he used the three techniques to his great personal advantage. A visit to the source page for a quick read of how it all works in the real world is highly recommended.
To Sum Up
I posted this article because of the great similarities I see between the business practices of a single individual, in this case one Mr. Hurwitz, and what seems to currently be happening to the entire American financial industry.
The situation is absolutely unprecidented, but not unanticipated. IMHO the people who have brough America to this current precipice learned exactly how to do it from the original masters of the technique, people like Mr. Hurwitz. His phenominal success served as an inspiration to all those corporate leaders and their political sponsors who have now layed upon our national table a butcher's bill of 700-billion dollars.
Of course big media is trying to sell us the bailout - they work for the gentlemen who will benefit most from its enactment. But I urge people to avoid at all cost buying what they are selling - it's only snake oil. It's just a band-aid. And worst of all, bailing out the perpetrators of this crime of unprecedented magnitude will serve only to guarantee it will happen again. Guaranteed!
It might be painful, and nobody wants that, but the pain is now unavoidable. We are all going to have to pay now or pay later. We, as a nation have been done in. But the silver lining here, if there is one, is that this may be absolutely our last chance to really take a shot at fixing the root problem - getting rid of the people doing this to us and making them pay the consequences. I, for one, am sick and tired of paying for their absurd joyrides, and you should be too!
Ask yourself just one question: Haven't we all payed enough for the choices of others?
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Emilio Lizardo
Ann Arbor, Michigan, United States
Most RecentMost Recommended Comments (23)
at 05:18 on October 1st, 2008
Excellent piece, Emilio.
at 05:21 on October 1st, 2008
Thank you for the compliment and flag, Karen!
at 05:26 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff.
Let them Vote until they give in to our will. Is that what Wall Street wants?
I know it is rather simplified. Great Post Emilio.
at 05:32 on October 1st, 2008
Thanks for the comment and the flag, Paschen.
I posted this because I have hope our Democracy still has some life left !!
at 05:35 on October 1st, 2008
Emilio Lizardo, I like this story. It's great stuff.
at 05:46 on October 1st, 2008
Thanks so much, Rhonda. The comment and flag is much appreciated!
Here's maybe our last chance to show 'em we're not dead yet !!
at 08:22 on October 1st, 2008
Emilio Lizardo, I like this story. Very interesting point you raise about "failure" vs "defeat".
at 09:57 on October 2nd, 2008
I point it out, Rachel, because media has the choice of adding either 'righteous'- or 'sinister'- spin, if you will ...
Very similar to the way a particle is steered through some phase-space, say that of the LHC, for instance. Similarly, it seems to many, public opinion can be steered almost as easily when Big Media adds this 'right-hand' or 'left-hand' spin to any given issue ...
Thanks for stopping by with the comment and the flag!
at 08:49 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff.
Great piece. Especially the part about the media spin. It's amazing what one word can do.
at 09:59 on October 2nd, 2008
That's why they get payed the big-bucks, I guess ...
Thanks for flag and comment!
at 08:52 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff. This helps put it in perspective, thanks for posting.
Congress is getting an enormous amount of calls opposing the bailout: find your reps here: votesmart.org
at 10:00 on October 2nd, 2008
Much appreciated. Thanks Erik !
at 09:53 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff. I tend to agree with the opinion expressed: the House of Representatives democratically voted down the motion and the world's media are presenting it as merely Bush's chance to put the motion a second time and the "naughty children" in congress who voted against it will now be shamed and humbled and browbeaten into accepting it. The joke is that US$700 bn is not enough.
Re the three business tricks: Under the recent International Financial Reporting Standards (IFRS) they would be illegal as under IAS 27 (Accounting for Subsidiaries), IAS 28 (Accounting for Associates), IAS33 (Accounting for Joint Ventures) and IFRS 3 (Business Combinations) listed companies are obliged by statute to consolidate their accounts for the whole group and intercompany transaction must be eliminated from the Income Statement and Balance Sheet, thus if we have company A, B and C, as described above, the $1m transaction would not show as a debit or a credit but would show as revenue less expenses and if these were $1m and $1 respectively then the net profit (results) will show as zero. This is simlar to if you take out $10 dollars from one pocket and transfer it to the other pocket, no real outside transaction has taken place and therefore cannot count as either a debit or a credit.
at 10:13 on October 2nd, 2008
This happens to me whenever I dive into an area where I know next to nothing, like finance, and most other things ...
It's good to hear about all the IAS regulations, and that's great. But, certainly you must grant that somehow, through more sophisticated means than those used by Mr. Hurwitz, the same kind of subversion of the rules, the same type of end-around-run has occurred ... and ... the OPM ( other people's money ) part is still absolutely factually accurate.
How could any degree of sophistication ever change the part about OPM ? It's always gotta be somebody else's, or the thing isn't even worth doing in the first place ...
I am pretty sure there is common agreement on that part.
Thank you very much for flag and comment.
at 10:28 on October 1st, 2008
Media is trying to jam it down our throats. Just watched a guy on MSNBC (noon on Wed) who actually said he just spoke with Treasury Secretary Alexander Hamilton who said we had to rescue 'capitalism!' If this weren't so serious, I'd be ROFLMAO.
at 10:57 on October 1st, 2008
They're trying to get us to buy the fake mortgages that don't exist except on paper! Treasury Paulson and Fed in on this:
Source: members.nowpublic.com
This isn't a 'Bailout'! This isn't a 'Rescue'! This is Robbery!
at 11:34 on October 1st, 2008
I like this story, too. I noticed the whole "failure" meme, as well, whereas it was actually a success. I think some sort of bailout is inevitable, and the fat cats will once again fail to learn their lesson, but perhaps this will spark some form of deeper regulation. "Let the market work" does not take into account that "the market" is controlled by people, and people can be controlled by greed.
at 11:46 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff.
This is a great piece - haven't seen you around much lately - glad to see you here today!
at 12:16 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff.
You make very valid points that few "average Americans" grasp. These methods are part of business all over the world and are unlikely to ever really change. All we can do is be informed investors. Vote for good management with our dollars.
at 12:19 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff.
at 18:25 on October 1st, 2008
Emilio Lizardo, I like this story. It's good stuff.
at 03:29 on October 2nd, 2008
Emilio Lizardo, I like this story. It's good stuff.
It is coming to the realization that we should close down Wall Street and the Gambling Den that it really is. What real difference is it from the likes of Nevada and Atlanta City? The people who make the bucks are the Casino's not the guy pulling the slot machines or trying to beat the dealer at Black Jack, or spin the wheel of fortune..... Wall Street is no different....
In reality they are saying save Capitolism, or is it the right to Gamble and Collude, and Bribe to keep the Wall Street Casino's alive and happy. Really this is a big get even by Jack Abramoff and the Enron boys.....because all along they have wanted to fleece America....
And then there are guys like me....who people hate and call me unAmerican because I don't want to fleece other people, don't want to steal their money, and don't play the credit card scam, and Wall Street Scams, or participate in the Phoney American Accreditation Scams to Universities that teach students how to rip off people, or accept the War Machine and their tired diatribe of supporting their country so they can go on scamming the American Way...... I salute you all from PR China......a country I hope does not follow the American stench......Am I an American? I am still wondering and asking myself that question. What good does it do to say I am......given 911 when the Casino's on Wall Street face their maker? ????
Rev. Jermano
at 10:16 on October 2nd, 2008
Great discussion, everybody. Thanks all for reading, and commenting, and for the many flags. I learned a few things writing the piece and then reading the comments !