The New Financial Capitalists: Kohlberg Kravis Roberts And The Creation Of Corporate Value,
by George P. Baker and George David Smith
Cambridge, England: Cambridge University Press, 1998, 257 pp.

reviewed by MC5

Two rent-a-nerds have written a book claiming to have a new argument why finance capital is not parasitic and in fact plays a very productive role in the economy. The book that came out this year is based on a study of the 1980s mergers and acquisitions craze with a focus on the investment banking firm known as "Kohlberg Kravis Roberts" which is just the names of three partners in the New York and California based business.

The ghost of Lenin

Karl Marx came up with a scientific distinction between "productive" and "unproductive" labor. It is a little different than the popular concept.

Russian revolutionary V. I. Lenin believed that the popular concept of unproductive labor was quite relevant when capitalism came to be dominated by finance capital in the age of monopolies. MIM believes we are still in the stage of capitalism Lenin called the "final stage."

The book we are reviewing is substantially an argument with Lenin's ghost without naming him. Lenin held that capitalist imperialism was the decadent phase of capitalism, the stage where capitalism could bring no more progress to the world, only world wars. According to Lenin, "coupon-clippers" in imperialist countries were people who lived without working by owning stocks, bank notes etc.

Baker and Smith admit that even parasite-friendly Amerikans have never viewed finance capitalists like J.P. Morgan or Michael Milken with the same respect as business leaders like Thomas Edison or Henry Ford who seem to be connected with invention and massive reorganization respectively. "The essential populism of American culture is uncomfortable with financial schemes, which have so often been associated with venal fraud and scandal, or worse, unfruitful labor. In the common caricature, the great practitioners of high finance have made their money without producing goods, extracting 'paper profits' as if by sleight of hand, wringing fortunes from transactions that have no direct connection to anything productive. This view is hardly limited to the uninitiated; it is shared among highly sophisticated business people."(p. 2)

Baker and Smith seek to champion the finance capitalist.

Sycophantic business pulp fiction

Not only does this book squarely address Lenin without naming him, it also claims to know that most business writing is shallow cheerleading of no intellectual depth or consequence. For this reason we call Baker and Smith "rent-a-nerds." They are not the kind of intellectuals who sit in ivory towers. They are the kind that go to the highest bidder and perform the functions of corporate public relations departments but with more intellectual depth than usual.

Baker and Smith are fairly accurate in their self- assessments. They do a better job than most business writers. They have some background.

On the other hand, MIM is disappointed that the premier ivory tower of political economy - Cambridge University Press - published this book, because it really does not engage the issues it raised.

For example, if leveraged buyouts linking management to ownership by giving executive managers stock in the company are so important, then why did Japan do so well economically? Japanese companies have always had abysmal profit rates and their executives are paid a fraction what U.$. executives make. Baker and Smith raise this subject in one sentence (p. 36) and they fail to address it with relevant facts from both the U.$. and Japanese economies.

A book mainly based on the press releases of a single investment bank still has a cheerleading feel to it, no matter how many connected issues are raised, because the evidence that Baker and Smith concern themselves with simply cannot address the subjects they raise. For MIM, this is a basis of some celebration, as another example of the incompetence of the ruling class and why capitalism is likely to fall sooner than later.

From the point of view of Baker and Smith and most business writers, changing one or two executive managers makes a big difference. It is one of the essential ingredients -- retaining or changing the executives-- that KKR looks at before conducting a leveraged buyout of a company. Thus much of the book is talking about how to be more competent members of the capitalist class -- paying more attention to loopholes in the tax code, deciding how many workers to lay off and coming up with a composition of the company's debt structure -- how much in junk bonds, how much in bank loans etc.

Rebutting journalists

Baker and Smith attempt to rebut Susan Faludi who won the Pulitzer Prize for writing about corporate raiders like KKR. A study of companies bought out by KKR between 1977 and 1989 shows that employment increased; capital spending increased and research and development increased three years after takeover.(p. 37)

The unscientific nature of this argument comes out in that Baker and Smith felt no compulsion in the book to come up with statistical generalities about companies that did not get taken over with leveraged buy outs. (A leveraged buy- out occurs when a capitalist successfully offers to buy a company with money he or she borrowed from others. In the case of KKR leveraged buy-outs, it also means that the new capitalist in control gives an ownership stake to executive management and allows management to run day-to-day affairs without interference. Managers are given the goals by finance capitalists, but how they achieve them is up to them.

The goal that guarantees management performance is paying off the debts incurred in the purchase of the company at its new higher stock price.) Hence, we do not know if employment, capital spending and research and development increased even faster in companies not taken over. They only pointed to a study done elsewhere that shows that layoffs are less frequent after leveraged buyouts than in the industry as a whole (p. 218) and that research and development may or may not have suffered after leveraged buyouts (p. 219). Baker and Smith themselves had no evidence to bring to bear. That's another reason we call these business school professors "rent-a-nerds."

New arguments?

We do not believe the authors succeeded in presenting anything new. They claim that the leveraged buyout the way KKR does it has never been seen before, but that is just more marketing hype. Always the hired prizefighters of the ruling class glorify the most obvious of profit-oriented decisions as if they were the brilliance of God. In the case of this book, the extended press release includes a chapter on the glories of working for KKR.

The two most important arguments that Baker and Smith make are these: 1) Ownership and control separated in Amerikan corporations such that executives and stockholders had conflicting interests. Baker and Smith were not the first to argue this as they acknowledge. 2) The leveraged buyout was not a short- term profit orientation, but a long-term strategy increasing stock prices.

What is unique about this book is its portrayal of diverse labor unions, journalists and executives as being opposed to finance capitalists. There is a strong element of truth to this.

Most interesting of all is the claim that executives managed to run the ship without paying attention to shareholders -- the exact opposite of what people studying Japan conclude about the U.$. economy. According to Baker and Smith, it was the leveraged buyout that made executives more accountable to shareholders. Before KKR came around, executives supposedly sought aggrandizement of their own power through conglomeration and decadent perks, not profits for shareholders: "Rank managerial opportunism was reflected in the erection of monumental corporate headquarters, the purchase of executive airplanes, stretch limousines, yachts and resorts, and the sponsorship of lavish trips and celebrity sporting events that did nothing to contribute to the bottom line."(p. 14)

According to Baker and Smith, the law made it difficult for shareholders to exert direct influence in companies. In fact, even boards of directors were usually just the creations of CEOs before the mergers and acquisitions trends of the 1980s.

By buying a company and then giving managers stock in the company, KKR supposedly healed a schism in the capitalist class. Such executives were more willing to lay off workers or do what it takes to pay off corporate debts and see themselves to profitability.

Without any proof or evidence about companies not involved in mergers and acquisitions, Baker and Smith claim that KKR strategies that influenced the whole business world are what laid the basis for prosperity in the 1990s. "In a more fundamental historical sense, KKR's legacy is this: its management buyouts breathed new life into a moribund system of financial capitalism, which in turn stimulated a new era of sustained economic growth, vibrant securities markets, and at this writing, nearly full levels of employment."(p. 206)

As MIM has detailed in "Imperialism and its Class Structure in 1997," the U.$. boom of the 1990s is dependent on a massive transfer of surplus-value from the Third World, especially the increase from East Asia and Latin America. The paper-shufflers simply like to claim credit.

Capitalism as a system

KKR is essentially correct about how capitalism works. Capitalism is a system, not a collection of sentimental people. If one executive will not obey the dictates of profit, another will come along and replace him or her. Hence, the intentions of the individual executive hardly matter. For a period of time, KKR was able to make huge profits from reflecting this truth more accurately than other capitalists. Then conditions changed.

Capitalists about to lose a fight may agree to be bribed out by the other side, which is what KKR generally tried to do: bribe the executive already there. Other capitalists afraid of losing power or money will side with labor unions, local communities threatened with business closings and journalists against "sharks" and "corporate raiders." This coalition also succeeded in passing laws and regulations that made leveraged buyouts more difficult. The money for junk bonds and this sort of acquisition pretty much dried up by the early 1990s.

"During the 1980s, the mere specter of the corporate takeover was prodding more and more executives to undertake internal reforms-- in some cases for no better reason than to defend against unwanted buyers."(p. 43) Although this had struck Baker and Smith as news (p. x), Marx had already elaborated this economic law 150 years ago.

(from MIM Notes 177, Jan. 1, 1999)

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