principal ways in which this debt was loaded onto a shrinking productive base was
through the technique of the hostile, junk-bond assisted leveraaged buyout, of which
Henry Kravis and his firm were the leading practitioners.
The economist Franco Modigliani had written in the 1950's about the theoretical debt
limits of corporations. Small scale leveraged buyouts were pioneered by Kohlberg during
the late 1970's. In its final form, the technique looked something like this: Corporate
raiders looked around for companies that would be worth more than their current stock
price if they were broken up and sold off. Using money borrowed from a number of
sources, the raider would make a tender offer (once again, a la Jimmy Gammell in the
Liedkte United Gas buyout) or otherwise secure a majority of the shares. Often all
outstanding shares in the company would be bought up, taking the company private, with
ownership residing in a small group of financiers. The company would end up saddled
with an immense amount of new debt, often in the form of high-yield, high-risk
sunbordinated debt certificates called junk bonds. The risk on these was high since, if the
company were to go bankrupt and be auctioned off, the holders of the junk bonds would
be the last to get any compensation.
Often, the first move of the raider after seizing control of the company and forcing out its
existing management would be to sell off the parts of the firm that produced the least
cash-flow, since enhanced cash flow was imperative to start paying the new debt.
Proceeds from these sales could also be used to pay down some of the initial debt, but
this process inevitably meant jobs destroyed and production diminished.
Thes raiding operations were justified by a fascistoid-populist demagogy that accused the
existing management of incompetence, indolence and greed. The LBO pirates professed
to have the interests of the shareholders at heart, and made much of the fact that their
operations increased the value of the stock and, in the case of tender offers, gave the
stockholders a better price than they would have gotten otherwise. The litany of the
corporate raider was built around his committment to "maximize shareholder value;"
workers, bondholders, the public, and management were all expendable. Ivan Boesky and
others further embroidered this with a direct apology for greed as a motor force of
progress in human affairs.
An important enticement to transform stocks and equity into bonded and other debt was
provided by the insanity of the US tax code, which taxed profits distributed to
shareholders, but not the debt paid on junk bonds. The ascendancy of the leveraged
buyout therefore proceeded pari passu with the demolition of the US corporate tax base,
contributing in no small way to the growth of federal deficits. Plutocrats are always adept
in finding loopholes to avoid paying their taxes. Ultimately, the big profits were expected
when the companies acquired, after having been downsized to "lean and mean"
dimensions, had their stock sold back to the public. KKR reserved itself 20% of the
profits on these final transactions. In the meantime Kravis and his associates collected
investment banking fees, retainer fees, directors' fees, management fees, monitoring fees,
and a plethora of other charges for their services.