The leverage was accomplished by the smaller amount of equity left outstanding in
comparison with the vastly increased debt. This meant that if, after deducting the debt
service, profits went up, the return to the investors could become very high. Naturally, if
losses began to appear, reverse leverage would come into play, producing astronomical
amounts of red ink. Most fundamental was that companies were being loaded with debt
during the years of what the Reagan-Bush regime insisted on calling a boom. It was
evident to any sober observer that in case of a recession or a new depression, many of the
companies that had succumbed to leveraged buyouts and related forces of usury would
very rapidly become insolvent. The Reagan-Bush regime was forced to argue that supply-
side economics and Bush's deregulation had abrogated the business cycle, and that there
never would be any more recessions. This is why the "recession" (in reality the
exacerbation of the pre-existing depression) that George Bush was forced to acknowledge
during late 1990 was so ominous in its implications. The leveraged buyouts of the 1980's
were now doomed to collapse. The handwriting on the wall was clear by September-
October of 1989, the first year of George Bush's presidency, when the $250 billion
market for junk bonds collapsed just in advance of the mini-crash of the New York Stock
Exchange.
All in all, during the years between 1982 and 1988, more than 10,000 merger and
acquisition deals were completed within the borders of the USA, for a total capitlization
of $1 trillion. There were in addition 3500 international mergers and acquisitions for
another $500 billion. [fn 6 ] The enforcement of antitrust laws atrophied into nothing: as
one observer said of the late 1980's, "such concentrations had not been allowed since the
early days of antitrust at the beginning of the century."
George Bush's friend Henry Kravis raised money for his leveraged buyouts from a
number of sources. Money came first of all from insurance companies such as the
Metropolitan Life Insurance Company of New York, which cultivated a close relation
with KKR over a number of years. Met was joined by Prudential, Aetna, and Northwest
Mutual. Then there were banks like Manufacturers Hanover Trust and Bankers Trust. All
these institutions were attracted by astronomical rates of return on KKR investments,
estimated at 32.2% in 1980, 41.8% in 1982, 28% in 1984, and 29.6% in 1986. By 1987,
KKR prospectus boasted that they had carried out the first large LBO of a publicly held
company, the first billion-dollar LBO, the first large LBO of a public company via tender
offer, and the largest LBO in history, Beatrice Foods.
Then came the state pension funds, who were also anxious to share in these very large
returns. The first to begin investing with KKR was Oregon, which shovelled money to
KKR like there was no tomorrow. Other states that joined in were Washington, Utah,
Minnesota, Michigan, New York, Wisconsin, Illinois, Iowa, Massachusetts, and
Montana. The decisions to committ funds were typically made by state boards. An
example is Minnesota: here the State Board of Investment is made up of the Governor,
the state Treasurer, the state auditor, the Secretary of State, and the Attorney General,
currently Skip Humphrey. Some of these funds are so heavily committed to KKR that if
any of the highly-leveraged deals should go sour in the current "recession," pensions for
many retired state workers in those states would soon cease to exist. In that eventuality,