Thursday, June 22, 2017

F*cked: A Review of Brian Alexander’s "Glass House: The 1% Economy and the Shattering of the All-American Town"

                An editorial in the June 1 edition of The Wall Street Journal by Warren Stephens bemoaned the fact that young people in this country are not embracing capitalism.
                Mr. Stephens worked hard and in 1957 was born to Jackson and Mary Stephens. Jackson and his brother, Witt, were partners in Stephens, Inc., which had come into existence in 1933, so you can see what hard work and the right family can do for a person. Mr. Stephens is estimated to have a net worth of $2.5 Billion.
                Capitalism has been very good to Mr. Stephens. For the majority of Americans, not so much.
                Perhaps our young people are not enthusiastic about the capitalism we currently have in this country—crony capitalism, or capitalism for the masses and socialism for the classes. A capitalism that privatizes gains and socializes losses, as we saw happen in everything from the bailout of Long Term Capital Management to the rescue of the banks in the aftermath of the 2008 global crisis.
                Perhaps our young have seen the effects capitalism run amok has had on their parents, their peers, and their communities, which brings me to Brian Alexander’s book, Glass House: The 1% Economy and the Shattering of the All-American Town. Mr. Alexander grew up in Lancaster, Ohio, which is about 30 miles southeast of Columbus. I’ve visited Lancaster a few times; Dan grew up there.
                Most of us probably have some Anchor Hocking products in our homes. Usually they’re marked with an anchor and or an “H” with a small “A” in the lower half of the “H.” This book is the story of how Anchor Hocking was repeatedly raped and pillaged by a variety of, for lack of a better word, crooks over the past thirty years and the effect that raping and pillaging has had on its workers and the city of Lancaster.
                The Hocking Glass Company was founded in 1905 in Lancaster. In 1937 it merged with the New York-based Anchor Cap and Closure Company. For the next fifty years Anchor Hocking was the main source of employment in Lancaster. It made good products. By the 1960s it was the world’s leading manufacturer of beer bottles, baby food jars, coffee jars, liquor bottles, etc. It also produced oven ware. It employed 5,000 people, or more than one of every six people in Lancaster. It allowed its workers a means to make a decent living. Its stock paid reliable dividends and was a boring widows and orphans kind of investment.
                In 1982 corporate raider Carl Icahn began buying up the stock. Anchor Hocking bought him off. Icahn netted $3 million.
                The Reagan Administration was influenced heavily by Milton Friedman, who preached that business had only one social responsibility—delivering profits to shareholders. Friedman believed that businessmen who concerned themselves with employment, eliminating discrimination, avoiding pollution, and whatever else may be “the catchwords of the contemporary crop of reformers” were preaching “pure and unadulterated socialism.” In 1983 the Reagan Department of Justice endorsed the tactics used by corporate raiders saying they were a very socially beneficial mechanism for assuring that corporate assets would serve the highest value.
                In early 1983 Bill Simon, who had been treasury secretary under Nixon and Gerald Ford and who had formed Wesray Capital Corporation, a leveraged buyout shop, enabled a buyout of a significant part of Anchor Hocking (the Container Division) by backing the buyout to the tune of $76 million, of which Wesray was on the hook for only $1 million. (That’s the leverage in leveraged buyouts.) The general consensus was $76 million would not even be the value of the real estate involved, let alone the business built on top of that real estate. Workers were given the option to move to Tampa. The company considered that a raise, since Florida had no state income tax. (As an aside here, let me assure you, as a former resident of Texas, any state that has no income tax will find a way to make up that revenue—in Texas it’s done through outlandish property tax rates.)
                In the brave new world of leveraged buyouts, the $75 million Wesray had “generated” was loaded on the back of the Container Division. Wesray then used this money to buy some of Anchor Hocking's remaining real estate and equipment, including some furnaces, which Anchor Glass, the remaining part of Anchor Hocking, then leased back from Wesray.
                Anchor Glass went public in 1986. Bill Simon cashed out. In 1989 Vitro, a Mexican company, paid $900 million for what had been a $76 million leveraged buyout just six years before.
                Sales at Anchor fell, and the employees were the next targets for cost cutting. Employees were presented with an ultimatum: walk back on wages, benefits, and work rules or the plant would close. The plant closed.
                Next came Newell. I don’t know what the big deal was in the 1980s. So many businesses were doing just fine, as were so many Savings and Loans. But everybody suddenly felt the need to grow at any cost. That’s what happened with Newell and its enabler, Western Savings and Loan. Newell went on a buying spree fueled by money from Western (which would fail in 1989). It bought the Mirro Aluminum Company, Foley, American Tool Companies, William E. Wright & Sons, Rubbermaid, and others. After every purchase, Newell fired people, cut product lines, and sold off bits of the company.
                In 1986 Newell began its move on Anchor Hocking. In 1987 the deal was done for $338 million, most of which was debt. Employees were fired, buildings were emptied (and some sold off), parts of the company were sold, retiree benefits were cut, machines were not maintained. Sales—surprise!—were down. It appeared Newell would abandon Anchor Hocking.
                Into the breach rushed the government subsidy crowd who believed if they made life sweet for Newell—at taxpayers’ expense—Newell would love them for the rest of its life. In 2003 Lancaster approved a deal to take money from the schools and give it to Newell. Newell was to agree to keep 900 jobs in Lancaster in return. After Newell accepted the deal it fired more employees and reduced its production by a third. In 2004 Newell sold Anchor Hocking to Cerebrus Capital Management.
                At this point things get really complicated, and I’ll do my best to give you an accurate summary, but I’d really recommend you read this book for the full impact.
                Cerebrus was founded by Stephen Feinberg, a veteran of Drexel Burnham Lambert, the ethically-challenged 1980s leveraged buyout and junk bond trailblazer, as a hybrid hedge fund/private equity manager. Cerebrus had its own banking operation, Madeleine. Immediately after buying Anchor Hocking, Cerebrus loaded it up with debt owed to Madeleine. In addition to the interest payments, Anchor Hocking (actually Global Home Products, of which Anchor Hocking was now a part, but, remember I’m trying to keep it simple here) was supposed to pay Cerebrus $841,000 per month in preferred dividends. Meanwhile, back at the factory, maintenance was ignored. Cerebrus skimped on IT, which hindered shipping, pricing, and invoicing. More workers were cut. Anchor Hocking was again in trouble. Again the government subsidy train rolled. The state of Ohio, Fairfield county, and Lancaster gave a 55% tax credit and $100,000 to train fifty new workers. The company was in trouble. It sought relief from its creditors, secretly stopped paying into its employee pensions, and stopped contributing to 401(k) plans as required by its contract with labor. The company began a series of shutdowns and stopped paying its vendors. It even stopped paying the rental fees on its forklifts and air compressors. Two years after Cerebrus bought Anchor Hocking it declared Chapter 11 bankruptcy.
                (Evidently Mr. Feinberg’s not paying creditors and vendors and screwing workers and filing bankruptcy impressed Donald Trump, who made Mr. Feinberg a key economic advisor to his 2016 campaign.)
                The results of the bankruptcy are detailed in the book, but briefly Cerebrus wanted not to pay for health care for future retirees, to downsize the pension plan, and eliminate several holidays. The bankruptcy court approved everything Cerebrus asked for.  In spite of all the help given Cerebrus by the bankruptcy court, it wound up losing Anchor Hocking to a smaller private equity company, Monomoy Capital Partners.
                Monomoy also bought Oneida and merged it and Anchor Hocking into EveryWare and imposed a $10 million special dividend as well as a new advisory agreement ($625,000 every three months) on the company. EveryWare was also obligated to pay 1% of the value of any transaction, including refinancing. In 2011 this amounted to $6.8 million.
                In 2012 Anchor Hocking was acquired by ROI, which was suckered into the deal by creative accounting on the part of Monomoy. The company yet again went bankrupt in 2015.
                The hero of the book, inasmuch as there is one, is Sam Solomon, who became CEO. Mr. Solomon believed he’d only stay a short time at Anchor Hocking, but he developed an affinity for the company and could see that it could become very profitable. He did everything he could to convince his various employers of that fact, but his employers were not interested in profit potential from making glassware. How boring. His employers were interested in making profits from taking a company, bleeding it dry, putting makeup on the corpse and finding a bigger sucker. It seems that’s the way to make money these days. Mr. Solomon was eventually fired for his efforts.
                I’ve concentrated on the effect all this capitalism had on the company. Mr.  Alexander goes into the effect it had on what once was the all-American town. Lancaster hurt its schools and the state and county wasted incentives trying to prop up the company. The residents of Lancaster are plagued by a drug problem that shows no sign of improving anytime soon. Young people have seen their parents and grandparents, who played by the rules, thrown out of work, losing pensions they’d earned, and unable to afford the health care their contracts said would be covered in retirement. In short, the residents of Lancaster have seen nearly every promise made to them by Anchor Hocking broken.
                Dan’s brother worked for Anchor Hocking from 1977 to 1997—twenty years. Because of all the givebacks, work schedules, and other shenanigans pulled off by Anchor Hocking’s various corporate raiders, he was taking home the same amount of money in 1997 as he had been in 1977. He was able to find another job—eventually.
                You might ask why people don’t follow Ronald Reagan’s advice to those thrown out of work in the 1980s and “vote with their feet.” That sounds nice in theory, but in practice, these people and their families have been part of Lancaster for generations. Their families are there. All their friends live there. It’s just not as easy as it sounds to pull up roots and move.
                Lancaster is growing somewhat but only because Columbus is growing. Lancaster’s new residents generally work in Columbus and are too tired by the time they get home to engage in the community.
                Mr. Alexander’s book is about one company in one town. But what he describes is going on everywhere. When I worked for Company L one of my vendors was Singer Kearfott in New Jersey. We bought guidance systems from them. I really liked the people I worked with. They were very professional and delivered a good product. In 1987 Paul Bilzerian took over Singer Kearfott (as well as other Singer divisions). He followed the path of disgorging the company in pieces and screwing over workers. Unlike Anchor Hocking, Singer Kearfott was in New Jersey, and there were plenty of jobs for Singer Kearfott employees to go to. The best talent left. Singer Kearfott’s products, like Anchor Hockings’s, declined in quality, which is not a good thing when you’re talking about guidance systems. Eventually we had to replace Singer Kearfott.
                Again, making money from making a good product had become secondary to making money from manipulating assets and screwing over workers.
                Which is becoming the American way.
                And Mr. Stephens wonders why the youth of America are not embracing capitalism.
                Maybe he needs to leave the various gated communities he lives in and get out more.             

© 2017 Larry Roth

No comments:

Post a Comment