Chapter -XIX- The Leveraged Buy-out Gang
During the entire decade of the 1980's, the policies of the Reagan Bush and Bush administrations encouraged one of the greatest paroxysms of speculation and usury that the world has ever seen. Starting especially in the summer of 1982, a malignant and cancerous mass of speculative paper spread through all the vital organs of the banking, credit, and financial system. Capital had long since ceased to be used for the creation of new productive plant and equipment, and new productive manufacturing jobs; investment in transportation, power systems, education, health services and other infrastructure declined well below thje break even level. Wall Street investors came more and more to resemble vampires who ranged over a ghouilish landscape in search of living prey whose blood they could suck to perpetuate their own lively form of death.
Industrial employment was out, the service sector was in. The post-industrial society meant that the production of tangible, physical wealth, of hard commodities, within US borders was being terminated. The future would belong to parasitical legions of lawyers, financial services experts, accountants, and clerical support personnel, but the growth in the balance of payments deficit signalled that the game could not go on forever.
On the surface, wild speculation was the order of the day: there was the stock market boom, which underwent a crash in 1987, but then, thanks to James Brady's drugged futures and index options markets, kept rising until the Dow had passed 3,000, although by that time no one could remember why it was still called the industrial average. The stock market provided the right atmosphere for a much broader speculative boom, the one in commercial and residential real estate, which kept going until almost the end of the decade, but which then began to crash with a vengeance. When real estate began to implode, as in Texas at the middle of the 1980's or the northeast after 1988, savings banks and commercial banks by the scores became insolvent. Thus, by the third year of the Bush administration, a bankrupt savings and loan was being seized by federal regulators on almost every business day, and Congressman Dingell of Michigan had to announce that Citibank, still the largest bank in the USA, was indeed "technically" bankrupt. Depositors in Hong Kong started a run on the Citibank branch there; their US counterparts were slower to react, perhaps because deluded by the pathetic faith that the Federal Deposit Insurance Corporation could still cover their deposits.
Even more fundamental than speculation was the absolute primacy of debt. During the Reagan and Bush years, unprecedented federal defecits pushed the public debt of the United States into the ionosphere, with the total almost quadrupling over a little more than ten years to approach the fantastic total of $3.25 thousand billion. In 1989, it was estimated that total debt claims in the US economy had attained almost $25 thousand billion, and their total has increased exponentially ever since. The debt of state and local governments, corporate debt, consumer debt --all expanded into the wild blue yonder. In the meantime, the Great Lakes industrial region became the rust bowl, the Sun belt oil and computer booms collapsed, the great cities of the east were rotten to the core with slums, and farmers went bankrupt more rapidly than at any other time in the memory of man.
Living standards had been in a gradual but constant decline since the days of Nixon, and it began to dawn on more and more families who considered themselves members of the middle class that they could no longer afford their own home, nor hope to send their children to college, all because of the prohibitive costs. The Bureau of the Census made sure in 1990 not to count the number of those who had become homeless during the 1980's, since the real figure would be an acute political embarrassment to George Bush: were there 5 million, or 6, as many as the total population of Sweden, or of Belgium?
New jobs were created, but most of them were dead-ends for losers at or below the mimimum wage that presupposed illiteracy on the part of the applicant: hamburger sales and pizza home delivery were the growth areas, although a smart kid might still aspire to become a croupier. Behind it all lurked the pervasive narcotics trade, with hundreds of billions of dollars a year in heroin, crack, marijuana.
For the vast majority of the US population (to say nothing of the brutal immiseration in the developing countries) it was an epoch of austerity, sacrifice, and decline, of the entropy of a society in which most people have no purpose and feel themselves becoming redundant, both on the job market and ontologically.
But for a paper thin stratum of plutocrats and parasites, the 1980's were a time of unlimited opportunity. These were the practioners of the monstrous financial swindles that marked the decade, the protagonists of the hostile takeovers, mergers and acquisitions, leveraged buy-outs, greenmail and stock plays that occupied the admiration of Wall Street. These were corporate raiders like J. Hugh Liedkte, Blaine Kerr, T. Boone Pickens, and Frank Lorenzo, Wall Street financiers like Henry Kravis and Nicholas Brady. And these men, surely not by coincidence, belonged to the intimate circle of personal friends and close political supporters of George Herbert Walker Bush.
If the orgy of usury and speculation during the 1980's can be compared to a glittering and exclusive dinner party, and Liedtke, Kerr, Pickens, Lorenzo, Kravis, and Brady were the invited guests, then surely George Bush was the host and arbiter elegantiarum who presided, deciding according to his own whim who would receive an invitation and who would not, and setting the norms for acceptable conduct. By late 1991, the long-deferred bill for these lucullian entertainments was about to arrive. The exhausted working people and destitute unemployed must present the bill to the founder of the feast, the whining and greedy enfant gate' of American politics, George Bush, the man whose idea of privation would be a life without servants, and whose concept of a domestic agenda would be a plan to hire two maids and a butler.
One of the landmark corporate battles of the first Reagan Administration was the battle over control of Getty Oil, a battle fought between Texaco, at that time the third largest oil company in the United States and the fourth largest industrial corporation, and J. Hugh Liedkte's Pennzoil. George Bush's old partner and constant crony, J. Hugh Liedtke, was still obsessed with his dream of building Pennzoil into a major oil company, one that could become the seventh of the traditional Seven Sisters after Chevron and Gulf merged. But the sands of biological time were running out on "Chairman Mao" Liedkte, as the abrasive Pennzoil boss was known in the years after he became the first US oilman to drill in China, thanks to Bush. The only way that Chairman Mao Liedkte could realize his lifelong dream would be by acquiring a large oil company and using its reserves to build Pennzoil up to world-class status.
Liedtke was the chairman of the Pennzoil board, and the Pennzoil president was now Blaine Kerr, a former lawyer from Baker & Botts in Houston. Blaine Kerr was also an old friend of George Bush. Back in 1970, when George was running against Lloyd Bentsen, Kerr had advised Bush on a proposed business deal involving a loan request from Victor A. Flaherty, who needed money to buy Fidelity Printing Company. Blaine Kerr was a hard bargainer: he recommended that Bush make the loan, but that he also demand some stock in Fidelity Printing as part of the deal. Three years later, when Fidelity Printing was sold, Bush cashed in his stock for $499,600 in profit, a gain of 1,900% on his original investment. That was the kind of return that George Bush liked, the kind that honest activities can so rarely produce. [fn 1]
Chairman Mao Liedkte and his sidekick Blaine Kerr constantly scanned their radar screens for an oil company to acquire. They studied Superior Oil, which was in play, but Superior Oil did too much of its business in Canada, where there had been no equivalent of George Bush's Task Force on Regulatory Relief, and where the oil companies were still subject to some restraints. Chairman Mao ruled that one out. Then there was Gulf Oil, where T. Boone Pickens was attempting a takeover, but Liedkte reluctantly decided that Gulf was beyond his means. Then, Chairman Mao began to hear reports of conflicts on the board of Getty Oil. Getty Oil, with 20,000 employees, was a $12 billion corporation, about six times larger than Pennzoil. But Chairman Mao had already managed to fagocitate United Gas when that compnay was about six times larger than his own Pennzoil. Getty Oil had about a billion barrels of oil in the ground. Now Chairman Mao was very interested.
The trouble on the Getty Board was a conflict between Gordon Getty, the surviving son of the freebooting founder J. Paul Getty, and Sidney Petersen, the chairman of the Getty Board. Gordon Getty had musical-aesthetic ambitions; but he wanted to be consulted on all major policy decisions by Getty Oil. Gordon and his wife moved in the social circles of Graham Allison of Harvard's Kennedy School, Lawrence Tisch of Loewe's Corporation, and Warren Buffett, the owner of the Berkshire Hathaway investment house in Omaha. Gordon Getty now controlled the Sarah Getty Trust with 40% of the outstanding stock. About 12% of the stock was controlled by the Getty Museum. Chariman Mao Liedtke gathered his team to attempt to seize control of Getty Oil: James Glanville of Lazard Freres was his investment banker, Arthur Liman of Paul, Weiss, Rifkind, Wharton, & Garrison was his chief negotiator. Liedtke also had the services of the megafirm Baker & Botts of Houston.
In early 1984, Gordon Getty and his Sarah Getty Trust and the Getty Museum represented by the New York mergers and acquisitions lawyer Marty Lipton combined to oblige the board of Getty Oil to give preliminary acceptance to a tender offer for Getty Oil stock (a la Gammell once again) at a price of about $112.50 per share. Arthur Liman thought he had a deal that would enable Chariman Mao to seize control of Getty Oil and its billion barrel reserves, but no contract or any other document was ever signed, and key provisions of the transaction remained to be negotiated.
When the news of these negotiations began to leak out, major oil compnaies who also wanted Getty and its reserves began to move in: Chevron showed signs of making a move, but it was Texaco, represented by Bruce Wasserstein of First Boston and the notorious Skadden, Arps, Slate, Meagher & Flom law firm, that got the attention of the Getty Museum and Gordon Getty with a bid (of $125) that was sweeter than the tight-fisted Chairman Mao Liedkte had been willing to put forward. Gordon Getty and the Getty Museum accordingly signed a contract with Texaco. This was the largest acquisition in human history up to that time, and the check received by Gordon Getty was for $4,071,051,264, the second largest check ever written in the history of the United States, second only to one that had been used to roll over a part of the postwar national debt.
Chairman Mao Liedkte thought he had been cheated. "They've made off with a million dollars of my oil!", he bellowed. "We're going to sue everybody in sight!"
But Chairman Mao Liedtke's attempts to stop the deal in court were fruitless; he then concentrated his attention on a civil suit for damages on a claim that Texaco had been guilty of "tortious interference" with Pennzoil's alleged oral contract with Getty Oil. The charge was that Texaco had known that there already had been a contract, and had set out deliberately to breach it. After extensive forum shopping, Chairman Mao concluded that Houston, Texas was the right venue for a suit of this type.
Liedtke and Pennzoil demanded $7 billion in actual damages and $7 billion in punitive damages for a total of at least $14 billion, a sum bigger than the entire public debt of the United States on December 7, 1941. Liedke hired Houston lawyer Joe "King of Torts" Jamail, and backed up Jamail with Baker & Botts.
Interestingly, the judge who presided over the trial until the final phase, when the die had already been cast, was none other than Anthony J.P. "Tough Tony" Farris, whom we have met two decades earlier as a Bushman of the old guard. Back in February, 1963, we recall, the newly elected Republican County Chairman for Harris County, George H.W. Bush, had named Tough Tony Farris as his first assistant county chairman. [fn 2] This was when Bush was in the midst of preparations for his failed 1964 senate bid. Farris had tried to get elected to Congress on the GOP ticket, but failed. During the Nixon Administration, Farris became the United States Attorney in Houston. Given what we know of the relations between Nixon and George Bush (to say nothing the relations between Nixon and Prescott Bush), we must conclude that a patronage appointment of this type could hardly have been made without George Bush's involvement. Tough Tony Farris was decidedly an asset of the Bush networks.
Now Tough Tony Farris was a State District Judge whose remaining ambition in life was an appointment to the federal bench. Farris did not recuse himself because his patron, George Bush, was a former business partner and constant crony of Chariman Mao Liedkte. Farris rather began issuing a string of rulings favorable to Pennzoil: he ruled that Pennzoil had a right to quick discovery, rocket-docket discovery from Texaco. Farris was an old friend of Pennzoil's lead trial lawyer Joe Jamail, and Jamail had just given Tough Tony Farris a $10,000 contribution for his next election campaign. Jamail, in fact, was a member of Tough Tony's campaign committee. Texaco attempted to recuse Farris, but they failed. Farris claimed that he would have recused himself if Texaco's lawyers had come to him privately, but that their public attempt to get him pitched out of the case made him decide to fight to stay on. Just at that point the district courts of Harris County changed their rules in such a way as to allow Bush's man Tough Tony Farris, who had presided over the pretrial hearings, to actually try the case.
And try the case he did, for fifteen weeks, during which the deck was stacked for Pennzoil's ultimate victory. With a few weeks left in the trial, Farris was diagnosed as suffering from a terminal cancer, and he was forced to request a replacement district judge. The last-minute substitute was Judge Solomon Casseb, who finished up the case along the lines already clearly established by Farris. In late November, 1985, the jury awarded Pennzoil damages of $10.53 billion, a figure that exceeded the total Gross National product of 116 countries around the world. Casseb not only upheld this monstrous result, but increased it to a total of $11,120,976,110.83.
Before the trial, back in January, 1985, Chairman Mao Liedkte had met with John K. McKinley, the chairman of Texaco, at the Hay-Adams Hotel across Lafayette Park from the White House in Washington DC. Liedkte told McKinley that he thought what Texaco had done was highly illegal, but McKinley responded that his lawyers had assured him that his legal position was "very sound." McKinley offered suggestions for an out-of-court settlement, but these were rejected by Chairman Mao, who made his own counter-offer: he wanted three sevenths of Getty Oil, and was now willing to hike his price to $125 a share. According to one account of this meeting:
Liedtke seemed to go out of his way to mention his friendship with George Bush, according to Bill Weitzel of Texaco. "Mr. Liedkte was quite outspoken with regard to the influence that he felt he had--and would and could expect in Washington--in connection with antitrust matters and legislative matters," McKinley would say in deposition. "This idea that Pennzoil was not without political influence that could adversely affect the efforts of Texaco in completing its merger." [fn 3]
Liedkte denied all this: "The political-influence thing isn't true. I don't have any and McKinley knows it.!" Did Liedkte keep a straight face? Even during the talks between lawyers on the two sides to set up this meeting, the Pennzoil attorney had referred to the capacity of his client to deflect "antitrust lightning" in the case. Chairman Mao's relations with Nixon and Bush make his protestations about a total lack of political influence sound absurd. Blaine Kerr, Bush's investment advisor, also piously avers that the name of George Bush was never invoked.
In any case, the Reagan-Bush regime made no secret of its support for Pennzoil. In the spring of 1987, after prolonged litigation, the US Supreme Court required Texaco to post a bond of $11 billion. On April 13, 1987, the press announced that Texaco had filed for chapter eleven bankruptcy protection. The Justice Department created two committees to represent the interests of Texaco's unsecured creditors, and Pennzoil was made the chairman of one of these committees. Texaco operations were subjected to severe disruptions.
During the closing weeks of 1987, Texaco was haggling with Chairman Mao about the sum of money that the bankrupt firm would pay to Pennzoil. At this point Bushman Lawrence Gibbs was the Commissioner of the Internal Revenue Service, one of the principal targetting agencies of the totalitarian police state. Gibbs was always looking for new and better ways to serve the Bush power cartel, and now he found one: he slammed bankrupt and wounded Texaco with a demand for $6.5 billion in back taxes. This move was in the works behind the scenes during the Texaco-Pennzoil talks, and it certainly made clear to Texaco which side the government was on. The implication was that Texaco had better settle with Chairman Mao in a hurry, or face the prospect of being broken up by the various Wall Street sharks - Holmes a Court, T. Boone Pickens, Kohlberg Kravis Roberts and Carl Icahn- who had begun to circle the wounded company. In case Texaco had not gotten the message, the Department of Energy also launched an attack on Texaco, alleging that the bankrupt firm had overcharged its customers by $1.25 billion during the time before 1981 when oil price controls had been in effect.
Chairman Mao Liedkte finally got his pound of flesh: he would eventually receive $3 billion from Texaco. Texaco in late 1987 announced an asset write-down of $4.9 billion as a result of staggering losses, and began to sell assets to try to avoid liquidation. Texaco's Canadian operations, its German operations were sold off, as were 600 oil properties in various locations. Later Texaco also sold off a 50% interest in its refining and marketing system to Saudi Arabia. A number of Texaco refineries were simply shut down. A total of $7 billion in assets were sold off during 1988-89 alone.
By early 1989, Texaco had been reduced to two-thirds of its former size, and from its former number three position had become the "runt of the litter" among the US majors. Texaco revenue fell from 47.9 billion in 1984 to $35.1 billion in 1988. Assets declined from $37.7 billion to $26.1 billion. In order to ward off the raiding attacks of Carl Icahn, Texaco was obliged to worsen its situation furthger by payment of $330 million in greenmail in the form a special $8 distribution to shareholders designed mainly to placate Icahn. [fn 4]
The entire affair represented a monstrous miscarriage of justice, a declaration that the entire US legal system was bankrupt. At the heart of the matter was the pervasive influence of the Bush networks, which gave Liedkte the support he needed to fight all the way to the final settlement. The real losers in this affair were the Texaco and Getty workers whose jobs were destroyed, and the families of those workers. Estimates of the numbers of these victims are hard to come by, but the count must reach into the tens of thousands. In addition, the entire economy suffered from a transaction that increased the debt claims on current production while reducing the physical scale of that production.
But even the enormities of Chairman Mao Liedkte were destined to be eclipsed in the political and regulatory climate of savage greed created with the help of the Reagan-Bush administration and George Bush's Task Force on Regulatory Relief. Even Liedkte's colossal grasping was about to be out-topped by a small Wall Street firm which, primarily during the second Reagan-Bush term (when Bush's influence and control were even greater) assembled a financier empire greater than that of J.P. Morgan at the height of Jupiter's power. This firm was Kohlberg, Kravis, Roberts (KKR) which had been founded in 1976 by a partner and some former employees of the Bear Sterns brokerage of lower Manhattan, and which by late 1990 had bought a total of 36 companies using some $58 billion lent to KKR by insurance companies, commercial banks, state pension funds, and junk bond king Michael Milken. The dominant personality of KKR was Henry Kravis, the man who inspired actor Michael Douglas (Kravis's former prep school classmate at the Loomis School) when Douglas played the role of corporate raider Gordon Gekko in Oliver Stone's movie "Wall Street." Henry Kravis was in particular the motor force behind the KKR leveraged buyout of RJR Nabisco, which, with a price tag of $25 billion, was the largest transaction of recorded history.
Henry Kravis's epic achievements in speculation and usury perhaps had something to do with the fact that he was a close family friend of George Bush.
As we have seen, when Prescott Bush was arranging a job for young George Herbert Walker Bush in 1948, he contacted Ray Kravis of Tulsa, Oklahoma, whose business included helping Brown Brothers, Harriman to evaluate the oil reserves of companies. Ray Kravis had quickly offered George a job, but George declined it, preferring to go to work for Dresser Industries, a much larger company. That was how George had ended up in Odessa and Midland, in the Permian basin of Texas. Ray Kravis over the years had kept in close touch with Senator Prescott Bush and George Bush, and young Henry Kravis had been introduced to George and had hob-nobbed with him at various Republican Party and other fund-raising events. Henry Kravis by the early 1980's was a member of the Republican Party's elite Inner Circle.
Bush and Henry Kravis became even more closely associated during the time that Bush, ever mindful of campaign financing, was preparing his bid for the presidency. Among political contributors, Henry Kravis was a very high roller. In 1987-88, Kravis gave over $80,000 to various senators, congressmen, Republican Political Action Committees, and the Republican National Committee. During 1988, Kravis gave $100,000 to the GOP Team 100, which meant a "soft money" contribution to the Bush campaign. Kravis's partner George Roberts also anted up $100,000 for the Republican Team 100. In 1989, the first year in which it was owned by KKR, RJR Nabisco also gave $100,000 to Team 100. During that year, Kravis and Roberts gave $25,000 each to the GOP.
During the 1988 primary season, Kravis was the co-chair of a lavish Bush fundraiser at the Vista Hotel in lower Manhattan at which Henry's fellow Wall Street dealmakers and financier fatcats coughed up a total of $550,000 for Bush. Part of Kravis's symbolic recompense was to be honored with the prestigious title of co-chairman of Bush's Inaugural Dinner in January, 1989. One year later, in January 1990, Kravis was the National Chairman of Bush's Inaugural Anniversary Dinner. This was a glittering gala held at the Kennedy Center in Washington for a thousand members of the Republican Eagles, most of whom qualify by giving the GOP $15,000 or more. The entertainment was organized as an "oldies night," with Chubby Checker, Tony Bennett, and B.B. King. When George Bush addressed the Eagles, he was prodigal in his praise for Henry Kravis as one of "those who did the heavy lifting on this." [fn 5 ]
According to Jonathan Bush, George Bush's brother and the finance chiarman of the New York State Republican Party, Henry Kravis was "very helpful to President Bush in fundraisers." According to brother Jonathan, Kravis "admired the President. And also, significantly, on a personal level, his father, Ray, and [George Bush] were friends from way back. And that meant a lot to Henry. He wanted to be part of that."
Henry Kravis had married the former Janey Smith of Kirksville, Missouri, who now called herself Carolyne Roehm. Carolyne Roehm had been introduced into New York Nouvelle Society by Oscar de la Renta. She and Henry Kravis cultivated a frenetically sybaritic lifestyle in the company of a social circle that included Bush's patron Henry Kissinger, American Express Chairman Jim Robinson and his wife Linda, Donald and Ivana Trump, Anne Bass, corporate raider Saul Steinberg, cosmetics magnate Ronald Lauder, and Bush's finance operative Robert Mosbacher and his wife Georgette. It was very much a Bushman crowd. Kravis and his "trophy wife" lived in a Park Avenue apartment large enough to be a Hollywood sound stage, and also had a 270 acre estate in Weatherstone, Connecticut. The palatial house there, which is listed in the National Historic Register, has nine fireplaces. Henry and Carolyne added a $7 million, six-building, 42,000 square foot "farm complex" for their seven horses. This was Henry Kravis, chief stoker of the bonfire of the vanities, celebrated by Vice President Dan Quayle as the New York Republican Party Man of the Year.
It was to such an apostle of usury that George Bush turned for advice on public policy in economics and finance. According to Kravis, Bush "writes me handwritten notes all the time and he calls me and stuff, and we talk." The talk concerned what the US government should do in areas of immediate interest to Kravis: "We talked on corporate debt--this was going back a few years--and what that meant to the private sector," said Kravis.
Henry Kravis certainly knows all about debt. The 1980's witnessed the triumph of debt over equity, with a tenfold increase in total corporate debt during the decade, while production, productive capacity, and unemployment stagnated and declined. One of the 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.
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, which for many working people has already occurred, the victims should remember George Bush, the political godfather of Henry Kravis and KKR.
KKR had one other very important source of capital for its deals: this was the now-defunct Wall Strreet investment firm of Drexel, Burnham, Lambert, and its California-based junk bond king, Michael Milken. Drexel and Milken were the most important single customers KKR had. (Drexel had its own Harriman link: it had merged with Harriman Ripley & Co. of New York in 1966.) During the period of close working alliance between KKR and Drexel, Milken's junk-bond operation raised an estimated $20 billion of funds for KKR. Junk bonds were high-risk, high-yield, junior debt securities that Milken floated. He started off with junk bonds issued by fly-by-night insurance companies owned by financiers seeking to emerge from the penumbra of Meyer Lansky. These included Carl Lindner and his Great American; Saul Steinberg and his Reliance Insurance Co., Meshulam Riklis and his Rapid American group; Laurence Tisch and CNA; Nelson Peltz; Victor Posner; Carl Icahn; Thomas Spiegel and his Columbia Savings and Loan; and Fred Carr, a financial gunslinger of the 1960's and his First Executive Corp. insurance firm. Later, the circle of Milken's customers would expand to include commercial banks, savings and loans, mutual funds, upscale insurance companies and others who could not resist the high yields. These robbery barons of modern usury were dubbed "Milken's monsters" by one of their number, Meshulam Riklis.
All of these personages pranced at Milken's annual meetings in Beverley Hills, which were followed by evenings of sumptuous entertainment. These became known as "the predators' ball," and attracted such people as T. Boone Pickens, Icahn, Irwin Jacobs, Sir James Goldsmith, Oscar Wyatt, Saul Steinberg, Boesky, Lindner, the Canadian Belzberg family, Ron Perelman, and other such figures.
First Executive Corp. was the first great bankruptcy among the insurance companies in early 1991, giving the depression of the 1990's a dimension that the economic-financial conflagration of the 1930's did not possess. First Executive Life succumbed to losses on its junk bond portfolio, and it will be the first of many insurance companies to find bankrutpcy via this route. Shortly thereafter, Mutual Benefit Life Insurance Company of New Jersey was seized by state regulators. Mutual Benmefit was also the victim of combined real estate and junk bond losses, and more retirement plans were threatened with annihlitation. Those whose pensions are lost must recall the junk bond united front that reached from Milken to Kravis to Bush.
Spiegel's Columbia S&L is a classic case of a thrift institution that went wild in its acquisition of Milken's high-yield junk. At one time this instutution had about $10 billion of junk in its portfolio. Columbia S&L was seized by federal regulators during the early months of 1990. Although many savings and loan bankruptcies have been caused by real estate speculation, many must also be attributed to a failed quest for a junk bonanza.
Milken's silent partner was Ivan Boesky, the arbitrageur who went beyond program trading to become a silent partner in advancing Milken's stockjobbing: sometimes Milkenm would have Boesky begin to acquire the stock of a certain company so as to signal to the market that it was in play, setting off a stampede of buyers when this suited Milken's strategy.
The Beatrice LBO illustrates how necessary Milken's role was to the overall strategy of Bush backer Kravis. Beatrice was the biggest LBO up to the time it was completed in January-February 1986, with a price tag of $8.2 billion. As part of this deal, Kravis gave Milken warrants for five million shares of stock in the new Beatrice corporation. These warrants could be used in the future to buy Beatrice shares at a small fraction of the market price. One result of this would be a dilution of the equity of the other investors. Milken kept the warrants for his own account, rather than offer them to his junk bond buyers in order to get a better price for the Beatrice junk bonds. Later in the same year, KKR bought out Safeway grocery stores for $4.1 billion, of which a large part came from Milken.
After 1986, Kravis and Roberts were gripped by financial megalomania. Between 1987 and 1989, they acquired 8 additional companies with an aggregate price tag of $43.9 billion. These new victims included Owens-Illinois glass, Duracell, which may not keep on running as long as many think, Stop and Shop food markets, and, in the landmark transaction of the 1980's, RJR Nabisco. RJR Nabisco was the product of a number of earlier mergers: National Bisucuit Company had merged with Standard Brands to form Nabisco Brands, and this in turn merged with R.J. Reynolds Tobacco to create RJR Nabisco. It is important to recall that R.J. Reynolds was the concern traditionally controlled by the famnily of Bush's personal White House lawyer, C. Boyden "Boy" Gray.
The battle for control of RJR Nabisco was lost by RJR Nabisco chairman Ross Johnson, Peter Cohen of Sherason Lehman Hutton and the notorious John Gutfruend of Salomon Brothers. KKR opposed this group, and a third offer for RJR came from First Boston. The Johnson offer and the KKR were about the same, but a cover story in the Luce-Skull and Bones Time Magazine in early December, 1988 targetted Johnson as the greedy party. The attraction of RJR Nabisco, one of the twenty largest US corporations, was an immense cash flow supplied especially by its cigarette sales, where profit margins were enormous. The crucial phases of the fight corresponded with the presidential election of 1988: Bush won the White House, so it was no surprise that Kravis won RJR with a bid of about $109 per share compared to a stock price of about $55 per share before the company was put into play, giving the prebuyout shareholders a capital gain of more than $13.3 billion. How much of that went to Boy Gray of the Bush White House?
The RJR Nabisco swindle generated senior bank debt of about $15 billion. The came $5 billion of subordinate debt, with the largest offering of junk bonds ever made. Then came an echelon of even more junior debt with payment in securities and junk bonds that payed interest not in cash, but in other junk bonds. But even with all the wizardry of KKR, there could have been no deal without Milken and his junk bonds. The banks could not muster the cash required to complete the financing; KKR required bridge loans. Merrill Lynch and Drexel were in the running to provide an extra $5 billion of bridge financing. Drexel got Milken's monsters and many others to buy short-term junk notes with an interest rate that would increase the longer the owner refrained from cashing in the note. Drexel's "increasing rate notes" easily brought in the entire $5 billion required.
In November of 1986, Ivan Boesky pleaded guilty to one felony count of manipulating securities, and his testimony led to the indictment of Milken in March, 1989, some months after the RJR Nabisco deal had been sewn up. In order to protect more important financial players, Milken was allowed to plead guilty in April 1990 a five counts of insider trading, for which he agreed to pay a fine of $600 million. On February 13, 1990, Drexel Burnham Lambert had declared itself bankrupt and gone into liquidation, much to the distress of junk bond holders everywhere who saw the firm as a junk bond buyer of last resort.
By this time, many of the great LBOs had begun to collapse. Robert Campeau's retail sales empire of Allied and Federated stores blew up in the fall of 1989, bring down almosty $10 billion of LBO debt. Revco, Freuhauf, Southland (Seven-Eleven stores), Resorts International, and many other LBOs went into chapter eleven proceedings. As for KKR's deals, they also began to implode: SCI-TV, a spin-off of Storer Broadcasting, announced that it could not service its $1.3 billion of debt, and forced the holders of $500 million in junk bonds to settle for new stocks and bonds worth between 20 and 70 cents on the dollar. Hillsborogh Holdings, a subsidiary of Jim Walker, went bankrupt, and Seamans Furniture put through a forced restructuring of its debt.
It was clear at the time of the RJR Nabisco LBO that the totality of the company's large cash flow would be necessary to maintain payments of $25 billion of debt. That will take a lot of animal crackers and Winstons. If RJR Nabisco had been a foreign country, it would have ranked among the top 15 debtor nations, coming in between Peru and the Phillipines. Within a short time after the LBO, RJR Nabisco proved unable to maintain payments. KKR was forced to inject several billion dollars of new equity, take out new bank loans, and dunning its clients for an extra $1.7 billion. RJR Nabisco by the early autumn of 1991 was a time bomb ticking away near the center of a ruined US economy. If citizens are bright enough to follow the line that leads back from Milken to Kravis to Bush, RJR and similar horror stories could politically demolish George Bush.
In September 1987, Senator William Proxmire submitted a bill which aimed at restricting takeovers. Two weeks later, Rep. Rostenkowski of Illinois offered a bill to limit the tax deductability of the interest on takeover debt. The LBO gang in Wall Street was horrified, even though it was clear that the Reagan-Bush team would oppose such legislation using every trick in the book. Later, LBO ideologues blamed the Congress for causing the crash of October, 1987.
Kravis has always been adamant in opposing any restrictions on the kind of insanity we have briefly reviewed. "I'm very much of a free-market person," says Kravis. I don't want interference. My life...you've listened to my life story, I don't want interference! The best thing to happen to people and this country is a free market system, and I'm very concerned, if we don't keep the right people in office, that we're not going to have this free-market environment. And we should have it!" [fn 7]
This corresponds exactly to Bush's policy. During the 1988 campaign, Bush presented his views on hostile takeovers, using the forum provided by his old friend T. Boone Pickens' USA Advocate, a monthly newsletter published by the United Shareholders Association, which Pickens runs. In the October, 1988 issue of this publication, Bush made clear that he was not worried about leveraged buyouts. Rather, what concerned Bush was the need to prevent corporations from adopting defenses to deter such attempted hostile takeovers. Bush indicated he wanted to ban poison pill defenses, which often take the form of a new class of stock in a company that lets its holders buy stock in the successor company at rock-bottom prices after a buyout. Poison pills were invented by New York lawyer Marty Lipton, and did not deter raider Sir James Goldsmith from seizing control of Crown Zellerbach in the mid-1980's, although Goldsmith's costs were increased.
Bush also railed against "golden parachutes," which provide lucrative settlements for top executives who are ousted as the result of a takeover:
I am frankly a bit skeptical about claims that these so-called 'defensive' tactics are necessary to encourage long-term investment. Studies suggest that prices of stock reflect information that is publicly available. Sometimes it seems that managers use these tactics to save themselves from the competitive pressures of the market for corporate control, not to protect the interests of the shareholders.
Bush was clearly hostile to any federal restrictions on hostile takeovers. If anything, he was closer to those who demanded that the federal government stop the states from passing laws that interfere with LBO activity. For that notorious corporate raider and disciple of Chairman Mao Liedtke, T. Boone Pickens, the message was clear:
I know that Vice President Bush is a free enterpriser. I don't think there is any doubt if you look at what Vice President Bush has said and what Gov. Dukakis has said that Bush is pro-stockholder. I would say Dukakis is pro-management. *
The expectations of Pickens and his ilk were not disappointed by the Bush cabinet that took office in January, 1989. The new Secretary of the Treasury, Bush crony Nicholas Brady, was only a supporter of leveraged buyouts; he had been one of the leading practitioners of the mergers and acquisitions game during his days in Wall Street as a partner of the Harriman-allied investment firm of Dillon Read.
The family of Nicholas Brady has been allied for most of this century with the Bush-Walker clan. During his Wall Street career at Dillon, Read, Brady, like Bush, cultivated the self-image of the patrician banker, becoming a member of the New York Jockey Club and racing his own thorougbred horses at the New York tracks once presided over by George Herbert Walker and Prescott Bush. Brady, like Bush, is a member of the Bohemian Club of San Francisco and attended the Bohemian Grove every summer. Inside the Bohemian Grove oligarchic pantheon, Brady enjoys the special distinction of presiding over the prestigious Mandalay Camp (or cabin complex), the one habitually attended by Henry Kissinger, and sometimes frequented by Gerald Ford. When Senator Harrison Williams of New Jersey was driven out of office by the FBI's "Abscam" entrapment operation, Brady was appointed to fill out the remainder of the term to which Williams had been elected. Brady is also reportedly a victim of dyslexia.
At the Regency in Lower Manhattan, Brady rubbed elbows each morning at breakfast with Joe Flom and the rest of the the Skadden Arps crowd, Arthur F. Long of D.F. King and Co., Marty Lipton, Arthur Liman, Felix Rohatyn, Boesky's friend Marty Siegel, and Joe Perella of First Boston.
Brady's LBO experience goes back to the 1985 battle for control of Unocal, the former Union Oil Company. T. Boone Pickens and Mesa Petroleum attempted a hostile takeover of Unocal through a complex "two-tiered" tender offer by which those shareholders willing to help Pickens to a majority stake in Unocal would receive cash payment for their stocks, but those forced to sell to Pickens after he had gone over the top would be compelled to accept junk securities. In order to defend against this two-tier, front-loaded hostile tender offer, Unocal management called in Brady's Dillon Read together with Goldman Sachs.
Working with Goldman Sachs, Brady helped to devise a new form of anti-takoever defense for Unocal: it was in effect a self-inflicted leveraged buyout, a self-tender for a large portion of Unocal's stock which the company offered to buy back at a higher price than the one stipulated in the Pickens tender offer, although Unocal would refuse to accept any of the shares held by Pickens. Pickens tried to overturn this selective self-tender in the courts of Delaware, but he was defeated.
The self-tender sponsored by Brady's investment bankers was actually a usurious chicken game: Unocal's tender offer to buy 80 million shares at an astronomical $72 per share in comparison with the $54 offered by Pickens. This meant $5.8 billion in new high-interest junk-bond debt for Unocal, in another triumph of debt over equity. The premiss was that if Pickens insisted on going ahead, he might very well take over Unocal, but the new debt burden would mean that the company would soon go bankrupt and Pickens would lose all his money. In this case, the Unocal management advised by Nick Brady was more than willing to gamble with the existence of their entire company, and thus with the livelihoods of thousands of workers and their families, to ward off the advances of Pickens. In the end, this device would load Unocal with a crushing $3.6 billion of high-interest debt as a result of the plan advocated by Brady's firm.
Nick Brady got the job he presently occupies by heading up a study of the October, 1987 stock market crash, the results of which Brady announced on a cold Friday afternoon in January, 1988, just after the New York stock market had taken another 150 point dive.
The study of the October, 1988 "market break" was produced by a group of Wall Street and Treasury insiders billed as the "Presidential Task Force on Market Mechanisms." At the center of the report's attention was the relation between the New York Stock Exchange, American Stock Exchange, and NASDAC over-the-counter stock trading, on the one hand, and the future, options, and index trading carried on at the Chicago Board of Trade, Chicago Board Options Exchange, and Chicago Mercantile Exchange. The Brady group examined the impact of program trading, index arbitrage and portfolio insurance strategies on the behavior of the markets that led to the crash. The Brady report recommended the centralization of all market oversight in a single federal agency, the unification of clearing systems, consistent margins, and the installation of circuit breaker mechanisms. That, at least, was the public content of the report.
The real purpose of the Brady report was to create a series of drugged and manipulated markets using funds from the Federal Reserve and other sources. The Brady group realized that if the Chicago futures price of a stock or stock index could be artifically inflated, this would be of great assistance in propping up the value of the underlying stock in New York. The Brady group focussed on the Major Market Index of 20 stock futures traded on the Chicago Board of Trade, which roughly corresponded to the principal stocks of the Dow Jones Industrial Average. As long as the MMI was trading at a higher price than the DJIA, the program traders and index arbitrageurs would tend to sell the MMI and buy the underlying stock in New York in order to lock in their stockjobbing profits. The great advantage of this system was first of all that some tens of millions of dollars in Chicago could generate some hundreds of millions of dollars of demand in New York. In addition, the margin requirements for borrowing money for use to buy futures in Chicago were much less stringent than the requirements for margin buying of stocks in New York. Liquidity for this operation could be drawn from banks and other institutions loyal to the Bush-Baker-Brady power cartel, with full backup and assistance from the district banks of the Federal Reserve.
The Brady "drugged market" mechanisms, with the refinements they have acquired since 1988, are a key factor behind the Dow Jones Industrials' seeming defiance of the law of gravity in attainting a new all time high well above the 3000 mark during 1991.
Brady's exercise was nothing new: during the collapse of the Earl of Oxford's South Sea bubble in 1720, the South Sea Company attemp]ted to support the astronomically inflated price of its shares by becoming a buyer of its own stock until its cash and credit reserves were exhausted. Such manuevers can indeed delay the onset of the final collapse for some period of time, but they guarantee that when the panic, crash and bankruptcy finally become overwhelming, the aggregate damage to society will be far greater than if the crash had been allowed to occur according to its own spontaneous dynamic. For this reason, a large part of the fearful price that is being exacted from the American people as the depression unfolds in its full fury is a result of the Bush-Brady measures to postpone the inevitable reckoning beyond the 1988 election.
One important case study of the impact of Bush's Task Force on Regulatory Relief is the meat-packing industry. In February 1981, when Reagan gave Bush "line" authority for deregulation, he promulgated Executive Order 12291, which established the principle that federal regulations "be based upon adequate evidence that their potential benefits to society are greater than their potential costs to society." In practice, that meant that Bush threw health and safety standards out the window in order to ingratiate himself with entrepreneurs. In March 1981, Bush wrote to businessmen and invited them to enumerate the 10 areas they wanted to see deregulated, with specific recommendations on what they wanted done. By the end of the year Bush's office issued a self-congratulatory report boasting of a "significant reduction in the cost of federal regulation." In the meatpacking industry, this translated into production line speedup as jobs were eliminated, with a cavalier attitude towards safety precautions. At the same time the Occupational Safety and Health Administration sharply reduced inspections, often arriving only after disabling or lethal accidents had already occured. In 1980 there were 280 OSHA inspections in meat packing plants, but in 1988 there were only 176. This, in an industry in which the rate of personal injury is 173 persons per working day, three times the average of all remaining US factories. [fn 8]
Bush used his Regulatory Relief Task Force as a way to curry favor with various business groups whose support he wanted for his future plans to assume the presidency in his own right. According to one study made midway through the Reagan years, Bush converted his own office "into a convenient back door for corporate lobbyists" and "a hidden court of last resort for special interest groups that have lost their arguments in Congress, in the federal courts, or in the regulatory process." "Case by case, the vice president's office got involved in some mean and petty issues that directly affect people's health and lives, from the dumping of toxic pollutants to government warnings concerning potentially harmful drugs." [fn 9]
There were also reports of serious abuses by Bush, especially in the area of conflicts of interest. In one case, Bush intervened in March, 1981 in favor of Eli Lilly & Co., a company of which he had been a director in 1977-79. Bush had owned $145,000 of stock in Eli Lilly until January, 1981, after which it was placed in a blind trust, meaning that Bush allegedly had no way of knowing whether his trust still owned shares in the firm or not. The Treasury Department had wanted to make the terms of a tax break for US pharmaceutical firms operating in Puerto Rico more stringent, but Vice President Bush had contacted the Treasury to urge that "technical" changes be made in the planned restriction of the tax break. By April 14 Bush was feeling some heat, and he wrote a second letter to Treasury Secretary Don Regan asking that his first request be withdrawn because Bush was now "uncomfortable about the appearance of my active personal involvement in the details of a tax matter directly affecting a company with which I once had a close association." [fn 10] Bush's continuing interest in Eli Lilly is underlined by the fact that the Pulliam family of Indiana, the family clan of Bush's later running mate Dan Quayle, owned a very large portion of the Eli Lilly shares. Bush's choice of Quayle was but a re-affirmation of a pre-exisiting financial and political alliance with the Pulliam interests, which also include a newspaper chain.
The long-term results of the deregulation campaign that Bush used to burnish his image are suggested by the September, 1991 fire in a chicken-processing plant operated by Imperial Food Products in Hamlet, North Carolina, in which 25 persons died. One obvious cause of this tragedy was an almost total lack of adequate state and federal inspection, which might have identified the fire hazards that had built up over a period of years. This fire led during October, 1991 to the bankruptcy of the Imperial Food Products Company, which could not obtain financing to roll over its short-term and long-term debt obligations. 225 workers at the Hamlet plant lost their jobs, as did 200 workers at the company's other plant in Cumming, Georgia.
Bush's idea of ideal labor-management practices and corporate leadership in general appears to have been embodied by Frank Lorenzo, the most celebrated and hated banquerotteur of US air transport. Before his downfall in early 1990, Lorenzo combined Texas Air, Continental Airlines, New York Air, People Express, and Eastern Airlines into one holding, and then presided over its bankruptcy. Now Eastern has been liquidated, and the other components are likely to follow suit. Along the way to this debacle, Lorenzo won the sympathy of the Reagan-Bush crowd through his union-busting tactics: he had thrown Continental Airlines into bankruptcy court and used the bankruptcy statutes to break all union contracts, and to break the unions themselves as well. Continental pilots had been stripped of seniority, benefits, and bargaining rights, and had been subjected to a massive pay cut under threat of being turned out into the street. In 1985, the average yearly wage of a pilot was $87,000 at TWA, but less than $30,000 at Continental. The hourly cost of a flight crew for a DC-10 at American Airlines was $703, while at Continental it was only $194. It is an interesting commentary on such wage gouging that Lorenzo neverthless managed to bankrupt Continental by the end of the decade.
George Bush has been on record as a dedicated union-buster going back to 1963-64, and he has always been very friendly with Lorenzo. When Bush became president, this went beyond the personal sphere and became a revolving door between the Texas Air group and the Bush Administration. During 1989, the Airline Pilots' Association issued a list of some 30 cases in which Texas Air officials had transferred to jobs in the Bush regime and vice versa. By the end of 1989, Bush's top Congressional lobbyist was Frderick D. McClure, who had been a vice president and chief lobbyist for Texas Air. McClure had traded jobs with Rebecca Range, who had worked as a public liasion for Reagan until she moved over to the post of lead Congressional lobbyist for Texas Air. John Robson, Bush's deputy Secretary of the Treasury, was a former member of the Continental Airlines board of directors. Elliott Seiden, once a top antritrust lawyer for the Justice Department, switched to being an attorney for Texas Air. [fn 11]
When questioned by Jack Anderson, McClure and Robson claimed that they recused themselves from any matters involving Texas Air. But McClure signed a letter to Congress announcing Bush's opposition to any government investigation of the circumstances surrounding the Eastern Airlines strike in early 1989. Bush himself has always stonewalled in favor of Lorenzo. During the early months of the landmark Eastern Airlines strike, in which pilots, flight attendants, and machinists all walked out to block Lorenzo's plan to downsize the airline and bust the unions, the Congress attempted to set up a panel to investigate the dispute, but Bush was adamant in favor of Lorenzo and vetoed any government probes. [fn 12]
Lorenzo's activities were decisive in the wrecking of US airline transportation during the Reagan-Bush era. When Carl Icahn was in the process of taking over TWA, he was able to argue that the need to compete in many of the same markets in which Lorenzo's airlines were active made mandatory that the TWA work force accept similar sacrifices and wage cuts. The cost-cutting criteria pioneered with such ruthless aggressivity by Lorenzo have had the long-term of effect of reducing safety margins and increasing the risk the travelling public must confront in any decision to board an airliner operating under US jurisdiction. Eastern has disappeared, and Continental has been joined in bankruptcy by Midway, America West, while Pan American sold off a large part of its operations to Delta while teetering on the verge of liquidation. Icahn's TWA is bankrupt in every sense except the final technicalities. Northwest, having been taken through the wringer of an LBO by Albert Cecchi, is now busy lining up subsidies from the state of Minnesota and other sources as a way to stay afloat. It is widely believed that when the dust settles, only Delta, American, and perhaps United will remain among the large nationwide carriers. At that point hundreds of localities will be served by only one airline, and that airline will proceed to raise its fares without any fear of price competition or any other form of competition. With that, air travel will float beyond the reach of much of the American middle class, and the final fruits of airline deregulation will be manifest. In the meantime, it must be feared that the erosion of safety margins will exact a growing toll of human lives in airline accidents. If such tragedies occur, the bereaved relatives will perhaps recall George Bush's friend Frank Lorenzo.
And how, the reader may ask, was George Bush doing financially while surrounded by so many billions in junk bonds? Bush had always pontificated that he had led the fight for full public disclosure of personal financial interests by elected officials. He never tired of repeating that "in 1967, as a freshman member of the House of Representatives, I led the fight for full financial disclosure." But after he was elected to the vice presidency, Bush stopped disclosing his investments in detail. He stated his net worth, which had risen to $2.1 million by the time of the 1984 election, representing an increase of some $300,000 over the previous five years. Bush justified his refusal to disclose his investments in detail by saying that he didn't know himself just what securities he held, since his portfolio was now in the blind trust mentioned above. The blind trust was administered by W.S. Farish & Co. of Houston, owned by Bush's close crony William Stamps Farish III of Beeville, Texas, the descendant of the Standard Oil executive who had backed Heinrich Himmler and the Waffen SS. [fn 13]
1. Walter Pincus and Bob Woodward, "Doing Well With help From Family, Freinds," Washington Post, August 11, 1988.
2. Houston Chronicle, February 21, 1963. See clippings available in Texas Historical Society, Houston.
3. Thomas Petzinger, Oil and Honor (New York, 1987), pp. 244-245.
4. See Washington Post, February 5, 1989.
5. For the relation between George Bush and Henry Kravis, see Sarah Bartlett, The Money Machine: How KKR Manufactured Power & Profits (New York, 1991), pp. 258-259 and 267-270.
6. Roy C. Smith, The Money Wars (New York, 1990), p. 106.
7. Bartlett, pp. 269-270.
8. Washington Post, September 29, 1988.
9. Judy Mann, "Bush's Top Achievement," Washington Post, November 2, 1988.
10. William Greider, Rolling Stone, April 12, 1984.
11. "Bush Denies Influencing Drug Firm Tax Proposal," Washington Post, May 20, 1981.
12. Jack Anderson and Dale Van Atta, "The Bush-Lorenzo Connections," Washington Post, December 21, 1989.
13. James Ridgway, The Tax Records of Reagan and Bush, Texas Observer, September 28, 1984.