How the stars of the financial markets increase money Ruthless Criticism

Translated from GegenStandpunkt 2-06

The “locusts” debate taken economically serious

How the stars of the financial markets increase money

For years, governments and business groups have complained about a lack of foreign investment. They self-critically noted that Germany has become unattractive to international investors – because of high wages, of course, but also because of bureaucratic overregulation and the inaccessibility of the so-called “Deutschland AG”* to outside investors. The location simply can’t compete with the capitalism of the Anglo Saxon countries in terms of returns. Using these models as a yardstick, the country has been turned inside out, from wages and social costs to conditions for access to the financial market, and has tried to please well-funded investors from overseas. With success. American and British hedge funds[1] and private equity firms[2] in particular have discovered Germany and are investing record sums from year to year.[3] The country has been transformed into a financial powerhouse.

Now even that is not quite right either. Former SPD leader and Labor Minister Franz Müntefering has accused the laboriously solicited investor funds of attacking good German companies like locusts, cannibalizing them for their profits and then moving on, leaving behind economic ruins instead of creating jobs and moving Germany ahead. With all due restraint, he reactivates the old distinction popularized by the fascists between the creative capital that “we all” need and want and the rapacious capital that only exploits “us” and makes us poorer. Of course, this reputational slur is in no way intended to affect finance capital as a whole with its claims to interest and returns; after all, one doesn’t want to scare off global investors. Their money power should be active in this country and not elsewhere, but preferably in a growth-promoting way and with consideration for the social democratic ideology of capital as a source of humane jobs.

Such requests don’t just seem irrelevant and unworldly to the managers of the “locust” scene. They also don’t fit the ethos with which they go about their work.[4]

The spearheads of the New Economy are buying up the Old Economy

The financial geniuses of the capitalist world long ago left the normal lending business of banks and savings banks and are no longer actually at home on the stock exchange floor. Their field of activity is speculation on the course of speculation with securities of all kinds. They make money out of almost any small difference in interest rates or exchange rates, out of options on the performance of stocks and bonds or out of differences between such options, out of marginal deviations between the promised returns of similar “financial products,” using financial resources of enormous size borrowed on short notice. They expressly pride themselves on their quasi-alchemistic art of “achieving positive returns in all market situations,” i.e., of making even the business failures of their investment objects, falling stock prices, crises, foreign exchange turbulence, interest rate changes, etc., into a source of their enrichment.[5] To do this, they collect money capital for which large investors – ‘institutional investors’ such as banks, insurance companies, pension funds – otherwise can’t find any profitable investment opportunity. Meanwhile, however, the elite of the international financial world no longer see a challenge worthy of its status even in this upscale department of speculative insanity. It throws itself into the speculative trade with capitalist companies and immediately invents a multitude of relevant “business models” with which it generates surpluses.

Wyser-Pratte focuses on “break-up value” at IWKA

The American fund manager anonymously buys up shares in the Baden-based IWKA Group, which manufactures machine tools, packaging machines and industrial robots, via the stock exchange. Thanks to the involvement of several other hedge funds that also hold IWKA shares, Wyser-Pratte's 6.6% shareholding is enough for it to act as the controlling shareholder majority at the joint stock company’s annual general meeting and to push through a realignment of business policy: It wants to break up the conglomerate, sell the machine tool and packaging machine divisions, and focus the business on industrial robots. Wyser-Pratte expects that the proceeds from the sale of the two less profitable divisions and the higher returns from the continuing robotics business will more than pay for its investment in the share purchase in a very short time so that it can exit with a profit; a profit that would have been “earned” with a disproportionately small advance of its own capital – a clever manager finances the purchase of the company shares for the short term until they are immediately resold with a cheap loan – and therefore shows up as a high percentage return.

Similar calculations are now being made by investment funds with much larger companies: In the case of Daimler-Chrysler, VW, MAN, Linde and other model corporations of German industry, they are discovering well performing business areas or subsidiaries alongside other, less or not at all profitable areas; here, too, a “break-up” – after deducting the costs of a short-term loan for the company takeover – could create a great deal of “value” for the fund. For VW, for example, it has been calculated that the Audi subsidiary alone could achieve a price on the stock market almost as high as that currently achieved by the entire Group.

“Texas-Pacific-Group” (TPG) subjects Friedrich Grohe AG to “financial engineering”

The private equity fund converts the inheritance of the main owner and son into cash, arranges for the shares remaining in free float to be bought up as the new main shareholder, and takes the stock corporation off the stock exchange. The fund uses the control over the company thus gained, which is no longer restricted by any disclosure or public accounting requirements, for the benefit of its returns. Namely, in such a way that the first thing it does is to burden the acquired company with the debts it has incurred for the acquisition of the shares, thus gaining possession of the entire company at virtually zero cost.[6] Of course, the company is now heavily indebted, but it must be able to withstand this, i.e. it must use its current income to service the loan it has been saddled with; this is why only companies that have not much debt in relation to their sales and surplus and do not need a loan for investments to continue operations in the foreseeable future are considered suitable for this feat of “financial engineering.”[7] And for the unforeseeable future, the fund managers do not want to operate their new acquisition at all; they do not switch to the business of bathroom fixture manufacturing, but let the second act of their “financial engineering” follow their entry: Free from all ties to and considerations of the former owner, they increase the profitability of the capital employed by relocating production to low-cost locations and laying off expensive personnel, as well as by selling or shutting down less profitable business areas – in other words, following the pattern of “break-up value” creation; they turn real estate and other company assets that have become superfluous into money, which they pay out to themselves as owners.[8] The third act at the end is the “exit,”[9] which can take various forms. In the best case, the fund finds a buyer for its company, which has been reduced to its most profitable activities, or takes it public and collects the price or whatever investors will pay for new Grohe shares. In the worse case, the trick behind the entry is also the guideline for the exit:[10] The fund burdens the company with further bonds, has the borrowed money transferred to itself as a “dividend” and “recapitalizes” itself in this way at a profit. When the company goes bankrupt, the investor has long since made his cut. The bankrupt estate is a case for “financial engineering” by a new department of modern loan sharks:[11]

Goldman Sachs “restructures” a drugstore chain and a toy train plant – “distressed debt” strategists turn bankruptcies into profit

Over-indebtedness, insolvency and bankruptcy are seen by the industry as an opportunity to appropriate the property of those who have to bear the devaluation of the capital lost in the competition. These are, firstly, the banks that issued the bad loans, secondly, the old owners who can’t service the loans, and thirdly, sometimes the other creditors of the indebted company.

“Hedge funds buy credit claims of companies threatened by bankruptcy at the cheapest conditions and gain management influence through debt restructuring. ... They achieve several goals in the case of companies in distress through ‘debt entry’: First, they obtain the receivables at a hefty discount; in the case of non-performing loans, the price is usually based only on the realizable collateral of the loans. If a hedge fund suspects that the company can be saved with a clever restructuring, a loan bought at a discount holds significant profit potential. Second, if the company threatened by bankruptcy restructures, the hedge funds receive high risk premiums on fresh money they provide. And third, in a debt-to-equity swap, the hedge funds obtain a majority equity stake in a company that recovers. After differences with Deutsche Bank, the hedge fund arm of Goldman Sachs took over all the company’s debts, received the Frömbling family’s worthless equity shares for a symbolic price and enforced a debt waiver of more than 50 percent by the creditors. Today, (the drugstore chain) ‘Ihr Platz’ is 100 percent owned by the hedge fund arm of Goldman Sachs. The creditors’ meeting approved the reorganization plan and debt waiver on Nov. 17, and in a few weeks the company will emerge from insolvency reorganized.” (FAZ, 12.16.05)

“Märklin is suffering from shrinking sales and a high interest burden. Banks have been urging the family owners since last year to seek new investors and reorganize the company. Now there could be a shakeup. Goldman Sachs wants to buy more loans” – “close to 20 percent of the company’s loans” has already been bought by the investment bank “at a discount” – “and is apparently negotiating to buy equity stakes at the same time. If the bank’s owners do not comply, Goldman Sachs could call in loans, force the family out of the company and force a tough reorganization.” (SZ, 3.18.06)[12]

If the devaluation of the unsuccessful capital or the capital that is insufficient for its debt level is carried by others, a cheaply acquired promissory note can be the best investment: If it is serviced again after all, then the interest it yields is very high in view of the favorable purchase price, as is the triggered share price increase of the title. If it is not serviced again, the owner of the corporate debt can force a bankruptcy or transfer the remaining assets; and as a potent owner, he can then put the question to the remaining creditors whether they would not prefer to waive a large part of their claims and rely on servicing the reduced debt instruments rather than insisting on a distribution of the bankrupt estate, which is not sufficient to satisfy their claims anyway. A company acquired at virtually zero cost can be continued with limited risk and, if necessary, sold later to the next interested party at a price that is not at all symbolic.

The Children’s Fund (TCI) increases the treasury of Deutsche Börse

The industry can also create value for its funds with companies in which it discovers neither a break-up value nor exploitable over- or under-indebtedness, but is simply attracted to it by an extraordinarily good business performance: The plan of Deutsche Börse’s board to buy out its London counterpart signals a “well-filled war chest” to a whole pack of hedge funds led by TCI, i.e. plenty of accumulated profit not yet invested. They pick it up. They buy enough shares in the stock exchange operator to dominate the annual general meeting, reject the management’s expansion plan there and, in view of the good cash position, push through a special distribution to the shareholders. The forced abandonment of the expansion yields immediate profits, which the funds appropriate in proportion to their shareholdings. Some hedge funds are already selling the Deutsche Börse shares; others are continuing the game. With their enormous financial power, they also buy into the French-Spanish-Dutch stock exchange company Euronext, boycott its attempt to take over the London Stock Exchange, and then push Deutsche Börse and Euronext into merger talks. In this way, they produce the stock market news themselves whose effect on prices they then exploit. On this side, the business model is highly official insider trading.

A further twist in the spiral of speculative madness

Like the New York brokers and derivatives traders before the dot-com bubble burst, the managers of hedge and private equity funds are now regarded as the financial geniuses of our times, and they like to present themselves as such. As if they had reinvented capitalism, they criticize industrial and commercial capital as well as finance capital as sleepy and unnecessarily frugal – that is, they are satisfied with far too few returns. They paint a picture of managers who selfishly develop their companies as if they had forgotten that it is not them who owns them, but rather the shareholders to whom they owe surpluses; and of investors who give away a lot of returns – namely, those they intend to squeeze out of the companies they are grabbing up. And there is one thing they really can’t deny: They have succeeded in adding another facet of powerful parasitism to the financial capitalist superstructure of the dominant market economy – speculation, which governs finance capital, which directs the use of ownership of the means of production, which in turn commands social labor and determines the entire social life process – and in pushing the evolution of the character mask of this insanity, the stock speculator, one twist further.

The shareholder and his fictitious capital

This peculiar capitalist joins forces with others of his ilk – quite contrary to his other competitive interests and practices – and invests money in a company whose operation his own assets are not sufficient for, thereby formally becoming part owner of the new company, but not a co-entrepreneur. The capital raised by the shareholders is managed by paid managers who, within the scope of their responsibilities, make the profit and growth of the stock corporation their business. The shareholder can’t withdraw his contribution; it belongs to the company as long as it exists. In return, the shareholder receives a share certificate entitling him to a share in the profits of the corporation – the dividend – the amount of which is not fixed or may not be paid at all.

This share certificate is the object of a trade of its own kind, for which there is even a special marketplace – the stock exchange; a trade which only exceptionally involves money investors putting their property into a company – a new one or one newly listed on the stock exchange or an extension of a company already “listed” there; on normal stock exchange days, shareholders or their brokers trade in securities which have already changed hands several times. This peculiar trading item is characterized by the fact that both “parties,” the joint stock company and its shareholders, make their own calculations with it.

This valuation, which, as already mentioned, the joint stock company and the shareholders each calculate in their own way, has two fixed points of reference. The first is the dividend paid out by the corporation to its shareholders, whereby the most recently realized “distribution” can by no means simply be extrapolated as income for all future periods; it is only the first indication of the return that a purchaser of shares may expect from his security. The other important calculation parameter is the local interest rate for loan capital, the closest practical alternative to an “investment” in shares: If one takes both together and calculates the dividend as interest on a financial investment, then the valuation of the security results from the inference on the sum of money which would normally pay interest in the amount of the dividend – whereby, of course, the current interest rates, of which, moreover, there are always several quite different ones that depend on the quality of the debtor, provide no more than a clue for the second factor of the calculation. Thus, a wide field of speculation opens up, which is characterized by a contradiction that can’t be resolved – fortunately for stock traders, because it guarantees the bad infinity of their business: The more sound the valuation is supposed to be, the more uncertain it becomes.

In order to be sure of their clues, the professionals in this business consider all possible circumstances as possible influencing variables – and expand the field of uncertain variables with every aspect that is supposed to provide certainty. So, on the one hand, they examine the business prospects of the company whose shares are at stake, those of its competitors, the situation of the industry in which the company operates, the economic situation and its likely course in the country in which the company is located, as well as the world economy as a whole; in other words, the competition of capitals in their various spheres, across all business spheres, at various levels of aggregation, in different temporal perspectives, etc.; in addition, they evaluate the business policy of the respective company from the conflicting points of view of an abundant profit distribution, on the one hand, and future-proof accumulation, on the other. On the other hand, they keep an eye on the multitude of alternative financial investments according to the amount and security of the return, first and foremost all other stocks – because there are no obstacles to trading in these paper securities when changing spheres or locations as there is for the company itself – as well as the general development of interest rates and their determinants, or what they consider to be their determinants, in order to weigh it appropriately; there again the national and the global business cycle and other things. They calculate with all sorts of incommensurable variables by estimating their likely relative impact on the trading value of their equity shares, compare the data they derive from their estimates, justify their estimates by the comparisons they make, and do not despair over them.[14] Because an evaluation comes out in the end in any case, because it is about nothing more and nothing less than a tangible competitive affair between investors who are willing to buy and sell money, who either come to an agreement somewhere or do not: In practice, the sum of buying and selling decisions made on the stock exchange results in a stock market price – and the committed traders refer to this as the first and most important point of reference for the evaluation they claim for their business item, update it and orient themselves by it. The fact that they are practicing a completely circular argument does not bother them at all. But they are not satisfied with the result either, they are looking for stability and reliability in the price development they produce. They are ready for any nonsense that claims that movements in stock prices in general can be reproduced in mathematical models. For their day-to-day business, of course, they are content with the maxim of never “jumping on the bandwagon” too late, but not too early either, and under no circumstances “waiting for the price to bottom out before buying.”

With all this insanity, the monetary value of the traded securities, the speculation on future dividends extrapolated to the share price, is not merely estimated, but carried out: the money that the first shareholders have put into ‘their’ joint stock company is in there, circulates there and, at best, increases itself; whatever they or their successors and brokers on the stock exchange may circulate, sell or disburse or exchange with each other is calculated, all in all fictitious capital whose ‘recovery’ and accumulation results solely from the securitized and traded valuations of the success of a joint stock company, but supported by its real course of business and the distributed earnings – or not. The stock buyer stakes his money on the success of ‘his’ joint stock company in the competition, posts as his asset the fictitious principal sum which the stock exchange projects on the basis of the critically compared, speculatively weighted, presumed profit distributions of the company, and is actually as rich as the price of his security achieved in stock exchange trading, which in practice attests to his calculated assets. Thus the development of the wealth securitized in the form of shares, speculatively mediated, depends on the real competitive success of the capital invested in the company.

Conversely, the ups and downs of the share price have an effect on the business activity of the company; in practical terms, the stock market value calculated from it (see above) determines how easily, at what price and to what extent it can obtain credit for the continuation and expansion of its operations – whether directly from its principal bank or by means of a corporate bond, or whether by issuing of new shares which provide it with new liquid funds to the extent of the achieved share price. If, on the other hand, the collective of stock speculators, the stock exchange, comes to the conclusion that they have made a mistake with the increased share prices and speculated in valuations that can definitely no longer be justified by the business performance of the companies, then the collapse of the share prices cancels the business means of the applied capital and ruins it. Thus, the development of wealth securitized in share form, speculatively mediated, depends on the real competitive success of the capital applied in the company.

A note on the fetish of “shareholder value”

From the standpoint of the company that must first earn returns for its shareholders, the advantage of shares over taking out a loan is that they do not create a tributary obligation to an external creditor. Instead, the management is accountable to the title owners. They are interested in an infinite, strong, rapid and at the same time secure, in short: ideal upward development in the price of their shares. ‘Their’ company is supposed to provide the requirements for their calculated assets to grow and for its growth to be justified by the community of financial investors on the stock exchange; in other words, for the fictitious capital to be able to inflate and to be confirmed in this by the applied company capital through returns and growth.

The buzzword “shareholder value” expresses this claim as a special corporate goal, as if that were not always the only thing that matters in a joint stock company. In this way, only the economic life purpose of the company is given an English name. The imperative contained in this name reflects the owners’ suspicion that management, despite all its commitment to the growth of the company as such, is lacking in the decisive respect, namely in the maintenance and increase of the stock market value – as if it were not they themselves, the speculators active on the stock market, who create and quantify the value of their shares with their speculative evaluations of the corporate strategy and its failures and successes. This suspicion has its basis in nothing but the speculation of the shareholders themselves: low expectations of potential share buyers disappoint the high expectations of share owners; the calculation of today with the course of business tomorrow and the day after tomorrow disgraces yesterday’s calculation. Speculation finds itself altogether insufficiently liberated or insufficiently certified or both; fictitious capital may insufficiently pump itself up based on actual corporate growth, or be exposed as merely a pumped up bubble – in the worst case, both.

The progress from speculation on price gains to the production of “underlying data” for speculation on capital gains – a new dimension in the inflation of fictitious capital

The relationship between a company’s success and its share price development, which gives the shareholder sleepless nights because he wants to take advantage of it without risking anything, is one of a number of hedge fund business objects. In the elementary case, they[15] insure the worried shareholder against losses in value, collecting fees for this or a share of any possible price gains; for their part, they hedge themselves with forward transactions in such a way that even a limited drop in price can result in a plus for them. Within their own world of paper values, of fictitious capital, they add a second level on top of the speculative parasitism of simple stock trading: They speculate on suspected fluctuations in the speculative valuation of shares; no longer with the aim of increasing their share assets, but rather in order to grab money with an expressly declared “bet” on the direction and magnitude of the fluctuation presumed at a certain point in time as such from counter-parties who want to hedge against losses in this way or who speculate on a different margin for their part.

This kind of speculative business is too passive for the activists of the hedge fund and private equity scene. As radical protagonists of a corporate policy of shareholder value, they consider the growth strategies of most companies to be misguided, namely unproductive to counterproductive for the purpose of serving their speculation on particularly profitable increases in value in the realm of securities. They are well versed in the art of achieving such increases – through clever stock market manipulations on the one hand; on the other hand, through interventions in the course of business of the applied capital. And, most importantly, they have sufficient amounts of investment-seeking money capital and credit to put their expertise into action. Firmly convinced that their financial power guarantees their success, they, as corporate buyers, go after companies engaged in production, trade or “classic” banking, subjecting their progress to their concepts of increasing the fictitious capital that they believe a functioning capital should yield. In this sense, they manipulate the productive or commercial structure of their acquisitions, their financial endowment and ownership, turn them inside out[16] and instrumentalize them to the hilt to justify the valuation differences they speculatively anticipate.

With this transition into speculative company management, the investment funds stimulate the speculative business – and at the same time offer the speculative world a new object and field of activity, namely themselves as a new investment opportunity, as a new variant of fictitious capital. They promise “investors” a fabulous return because they use their money for the production of valuation differences which could never ever be achieved with conventional tricks of the speculative business in the autonomous course of business of the functioning capitals. Of course, such differences, which fatten the shareholder value, can usually only be achieved once with a business object; this lies in the nature and the intention of such an intervention, which wants and is supposed to get all the valuation differences out of a company that can be gotten out of it. However, the funds involved do not organize one-off raids, but – as the name “fund” suggests – a long-term investment; they collect money capital with the promise of a return which may be less certain, but which is supposed to be higher and more rewarding in the long term than that of “classic” investments in accumulating capital.

This small contradiction between business purpose and business article gives the corporate business of hedge and PE funds its special dynamic. As speculative ventures of the higher kind, they make it their business to certify their own promise of returns, from which investors can extrapolate the market value of their fund shares once they have been purchased, with the acquisition of ever more new objects and the successful completion of ever more new revaluation actions. With this offer they procure themselves the means and put themselves under pressure to expand their corresponding access to exploitable companies in accordance with the increase in funds, to accomplish more and larger, and thus also of course more risky takeovers, transformations and exit actions. In the meantime, they are not merely competing with “classic” forms of investment, but against each other; and this competition is intensified to the extent that the new business sector as a whole is attracting money capital: The funds have to fight over lucrative objects, thus making it more difficult for each other to enter cheaply and exit expensively, but they also cooperate again on the basis of this in order to collectively pounce on companies of an upscale size.[17] Entrusting money to one of these funds means making a speculative bet that it will actually succeed in obtaining a revaluation of the fictitious capital derived from these objects that corresponds to its speculation on ever newer objects and objects that are ever large in the scope of their deployable mass.[18] In this way, the funds themselves, as companies for investing money, considerably inflate fictitious capital; and with their competition against each other, they drive its scale to ever newer orders of magnitude. In this way, of course, they also increase the risk of proving themselves to be a mere bubble – namely, by bursting and destroying the collected money capital.

Both: the mass of available funds as well as the size of the uncertainty of their speculative ‘utilization’, makes hedge and PE funds aggressive in their corporate business.

Attack and defense

In some cases, speculative corporate buyers are welcome; for example, when it comes to relieving a family business of the problem of generational change or taking a business public, or when an over-indebted municipality wants to turn its stock of housing, once created for social reasons, into cash. More often, however, the takeover is an attack on the company; at least on the way it has been managed up to that point, and therefore often on its continued existence. The intended “takeover,” especially if initiated by clandestine share purchases, is – according to the prevailing terminology – “hostile.”

This is no wonder. Because despite all the similarities in the speculative spirit, company managers and speculative company buyers pursue different interests, which coincide in outcome only in exceptional cases and normally collide: The board of directors of the joint stock company is concerned with increasing the stock market value of its company as vigorously and as permanently as possible, analogous to the way the capitalist “Mittelständler” maintains and increases the price of its business and thus its assets, which is to be calculated from its earning power. The investment fund, on the other hand, is concerned with the fastest possible “liquefaction” and appropriation of the largest possible positive difference in the valuation of the company’s assets, which it achieves or, according to its modest self-assessment, “releases” through its financial manipulations and its alternative company management.

At the same time, the entrepreneurial interventions in the company’s operations do not always have to contradict each other or even differ – that’s why the corporate strategies of both sides can actually conform over long stretches. Senior managers and corporate patriarchs also trim every department of their company for maximum profitability; they sell off less profitable business areas and open up new ones from which they expect more; they merge or acquire; they outsource or float “subsidiaries” on the stock exchange; they constantly search for the golden mean between size and earning power, profit rate and profit mass; and satisfied shareholders are everything to a stock corporation board. Conversely, even the representatives of a holding company can’t avoid – depending on the success strategy they have adopted – taking care of the daily operations of the company they have taken over in order to upgrade or cannibalize it, “technical progress,” handling layoffs, the constant battle for market shares and the like. But in all of this, the interest of the former is directed toward the long-term growth of their company, which necessitates speculative calculations of a “conventional” kind and the corresponding measures on both a small and a large scale, e.g. a temporary sacrifice of returns for the purpose of long-term market dominance, a coexistence of differently profitable parts of the company which mutually support each other in the long run, making the accumulation of “hidden reserves” or a “war chest” seem expedient for larger competitive offensives; even for dealing with the workforce, special considerations and impositions may prove advisable, in which a speculative company buyer can only discover a superfluous, i.e., harmful, cost expenditure. Because the latter’s interest aims at mobilizing maximum revenue for his investment fund in the period between entry and exit, which in principle should be kept as short as possible; accordingly, restrictive criteria apply to investments in future market power – it is not about the company as the “subject” of capitalist accumulation, i.e. a stock market value to be increased indefinitely, but as the object of an in principle one-off, exhaustive revaluation and revaluation for the benefit of the temporarily engaged fund: It is the capitalist “subject” that is the concern of its managers. If the fund profits from the liquidation of the purchased company, then even competitive establishments and corporations are not safe from being broken up, de-invested and finally sold off.

Under the sweetened pressure and by virtue of the power of the huge sums of money they collect with the promise of rapidly multiplying it, speculative corporate traders are now, as mentioned, also targeting the German nation’s major multinationals, great evil excrescences of what in hindsight is called the Deutschland AG, such as Daimler-Chrysler or VW. And everywhere, companies that want to maintain and assert themselves as autonomous players in capitalist world affairs are preparing to defend themselves from impending – threatening or even possible – takeover attacks by allied holding companies. Interestingly enough, they use the same “financial engineering” techniques as the speculators whose attacks they fear. To make themselves unattractive to the market, they incorporate elements of speculative appraisal enhancement into their self-preservation and growth strategy. They mobilize reserves and pay them out to their shareholders, rigorously divest themselves of low-yielding departments, increase their stock market value through self-mutilating “break-ups” and other maneuvers[19], etc. – thus providing practical proof of the extent to which the speculative corporate traders are, in principle, in the right in a market economy, namely, have capitalist logic on their side. Even here, in the highest echelons of speculation, the basic law quite obviously applies, in that the higher, i.e. more absurd and financially stronger, level of finance capital dominates its preconditions, that the generation of profits is always only an instrument of the money-making speculation on it and that in case of doubt its means have to be sacrificed to the right of property to a return – that’s why only their methods help against the “corporate raiders”[20].

In order to maintain their position as global corporations and continue their growth into international champions, the major German corporations, concerned about their independence, also help each other. By buying each other’s shares, they create interlocking structures that protect them against secret buyouts and unforeseen shareholder majorities – and they do this after the interlocking of major German banks with German industrial groups, which has “grown” over decades, the notorious Deutschland AG, has been successfully “broken up” by the tax relief and legal facilitation of company acquisitions and sales and the national economic life has been prepared as an inviting playground for the latest generation of financial investors …

Münte’s mendacious “locusts” act – its reason and purpose

When, in the run-up to the last Bundestag election campaign, the then SPD chairman and now vice chancellor polemically compared investment companies with locusts that are eating honest German companies alive and destroying jobs, he was referring to the consequences of the policies of his own Social Democratic chancellor as far as their business practices, which are new to Germany as a business location, are concerned. After all, in order to “modernize” Germany as a business location, to make it attractive for investors from all over the world and thus to “catch up” with the latest advances in “globalization,” his government did everything necessary to break up the “encrusted” symbiosis of financial and industrial capital from the era of “Rhenish capitalism” and to allow hedge funds and private equity funds to do their business unhindered.

They do what they have been invited to do and really do not need to be accused of anything. They also defend themselves against the nasty rumor that they are anti-national and anti-human “outgrowths” of what is in principle an infinitely employee-friendly system. The fact that they are “only” interested in profits is truly not a violation of this economic system, but rather its principle. Not only hedge funds, even the well-behaved “working” capitalist knows nothing else at all. In his company, too, the production of goods and the payment of workers who have to live on wages is never the purpose of the event, but the means of his plus-making. Under the state protection of private property, his money gives him the power to seize the entire reproduction process of society as a means of his enrichment and to decide which needs are absolutely to be satisfied and which can’t be at all. And that the loan sharks, with their power of disposal over society’s money, set the standards for this productive enrichment, that the capers of the stock exchange business decide on production and consumption in the market economy, that the planning rationality of this system consists in the speculative calculations of securities traders and rises to its peak performances when they speculate on their self-generated speculative expectations: this, too, is a necessity inherent in the system and not an invention of Goldman Sachs and Wyser-Pratte. Conversely, every capitalist faction can claim that it performs an indispensable service to the material reproduction process of society: This is nothing other than an appendage of the accumulation of their wealth; humankind is “supplied” only with what it earns – but with plenty of it – and would therefore perish without daring capitalists. And if everything depends on successfully invested money, then the masters of big money are logically the true benefactors of humankind. Müntefering wants to know about responsible employers who feed the country and its people with a tireless willingness to take risks and innovative methods – the inventive fund managers can rightly claim this compliment and do so: They “restructure” undervalued as well as over-indebted companies; even if they sometimes break up and dissolve one, the bottom line is that they contribute to the “rationalization of capital” and to a better “allocation of resources”; they specifically promote “future viability,” set standards in freeing the business location from the evil of unprofitable jobs, and thus enable the national economy, which they are free to shake up, to survive in the harsh competition between nations. If it is a market economy, then it is also true that a modern nation needs nothing more urgently than financially strong experts who do their best to inflate and certify fictitious capital.

Admittedly, it can’t be overlooked that the elite of the financial world is introducing a few new mores into German capitalism with its corporate trading. They are doing away with the old-fashioned ethos of “reconciling capital and labor,” with the cultivated pretense that business is about something other than maximum profit, with the morality of consideration for company personnel, and also with some of the relevant national customs of capitalist corporate policy, such as a “corporate culture” that involves official employee representation in the management of exploitation. But the absurdities and vulgarities that the agile corporate traders so resolutely make part of their program are those of the free-market system and have always been the essential content of the prevailing common good. The innovations they push through are financial capitalist achievements, which in this system impose themselves as a logical consequence of the worldwide triumph of the free market economy. And the fund managers are not only licensed to do this by Germany’s government – once the red-green one, now the black-red one – but also have an economic policy mandate.

Müntefering’s complaints, the incarnate representative of the continuity of this Schröder-SPD policy, are therefore particularly mendacious. But they are not based at all on the specific contributions of the investment sector to the national financial business, but on the current poor earnings balance of national capitalism as a whole, which was particularly painful for the red-green government at the time. Nor are they aimed at revising the legally protected business conditions to which the industry owes its boom, but rather express the general dissatisfaction of the state power with the development of the location: The nation is not getting its money’s worth in the desired way, even with all its capital-enhancing reforms. The reason for this lies in the business cycles of world capitalism in general, the competitive failures and successes of German corporations in particular, but last but not least in those who still know how to make the best of the unfortunate overall situation in terms of the market economy, namely a new stable evil excrescence of speculation and speculatively inflated fictitious capital. The fact that the then head of German Social Democracy singles out precisely them to blame for the “economic slump” and mass unemployment is due to a political speculation that is as German as it is Social Democratic: a dissatisfied electorate should spare the government its ballot-box popular anger, preferring to hold itself harmless with nationalist indignation at foreign greedy vultures ruining the highest good that a Social Democratically socialized people can imagine and desire: jobs....

But these are yesterday’s ideological battles. A return to a new objectivity has long been the order of the day. And the “object” is a capitalistically successful Germany. This includes the achievements of international finance capital. Even Müntefering wants this in the country. That’s why we must not scare it away, nor must we try to dictate the ways in which it satisfies its greed for money. Only if it succeeds in doing so will it do its job. Accordingly, work is being done on its image. The power of the funds, originally the bone of contention, is highlighted, makes an impression, and the official grumbling falls silent. Last year alone, they invested 30 billion euros in Germany; 800,000 employees in the country, in Great Britain as many as 20% of all non-public employees, are dependent on these interim employers. Shouldn’t they be recognized as employers? They make a profit out of bankruptcies. Aren’t they saving companies and jobs that would no longer exist without their willingness to take risks? After all, capitalist greed is a blessing for the country – even in their case!

* Translator’s note: Until the early 1990s, “Deutschland AG” was a network of links between large banks, insurance companies and industrial companies. This network was based on mutual shareholdings and a concentration of supervisory board mandates by leading German managers, trade unionists and politicians. The term “Deutschland AG” was usually associated with a negative assessment of the network, in that it was assumed that the links generated coordinated behavior to the detriment of third parties, hindered competition and had a coordinated influence on economic policy decisions. On the other hand, under the heading of “Rhenish capitalism,” it was discussed whether a coordinated economy offered advantages over an overly liberalized economic system.

[1] The most important information on this branch of business can be found in the articles “Geschäfte mit Optionen und Futures – Spekulation auf die Spekulation,” GegenStandpunkt 2-95, p. 24, and “Vom Weltgeld, seiner Krise, seinen Hütern, 1. Teil, Ein Hedgefonds in der Krise,” GegenStandpunkt 4-98, p. 107 [untranslated].

[2] Private equity companies are legally constituted as private partnerships of investors outside the disclosure requirements and financial supervision that apply, for example, to stock corporations, mutual funds and other publicly traded securities – public equity. Their shares are not tradable and are not redeemed by the fund at any time. In addition, PE funds generally invest themselves in companies that are not traded on the stock exchange or first take public limited companies they buy into off the stock exchange – a “going private.”

[3] Hedge funds alone, not yet including private equity, are currently said to manage $1 trillion. Worldwide, 8,000 funds control about 25% of the German stock market and are said to be responsible for half of the turnover of the New York Stock Exchange on some trading days (Handelsblatt, 9.7.05). Experts of the scene predict a growth to 6 trillion in the next decade (FAZ, 9.2.05.). At the same time, these funds are increasingly throwing themselves into activities that the private equity companies have developed on a private equity basis: “This gold-rush mood (of the PE funds) is still being fueled by historically low interest rates and the banks' eagerness to finance. But that could change quickly. ... In addition, new private equity funds are springing up like mushrooms. And with hedge funds running out of traditional investment targets, new poachers are poaching on the turf. Last year, hedge funds bought 23 companies worth $30 billion. Private equity managers ... expect the distinctions between private equity and hedge funds to become increasingly blurred. Many an investment company is in the process of setting up its own hedge funds.”

[4] Under the title “A love-hate relationship with Germany – company buyers have to deal with the issue of jobs more than ever,” the SZ reports on 2.20.06 about a congress with the meaningful title “Super Return,” which “the company buyers of the world” have just held again – as every year – in Frankfurt am Main: “Financial investors (praise) unabashedly the potential that lies in the German economy and especially in many companies.” They are concerned about “job cuts” and other “soft factors” that supposedly play an important role when companies “sell subsidiaries to financial investors.” However: “Conflicts over the treatment of employees will not stop financial investors from buying even more German companies. First, investment managers emphasize that they usually find satisfactory solutions with the works councils (for whom?). Second, a good dozen of the biggest corporate buyers have launched new funds of five to ten billion euros each, which (what a constraint!) they now have to invest.” And third, they are certain: “employment commitments and similar factors” will only play a role in company purchase negotiations “even (!) in the future if the prices of two bidders are close to each other.”

[5] A Mr. Rubenstein, co-founder of the American investment company Carlyle, which claims to have achieved a return on equity of 34% per annum over 18 years, explains the facts childlike like this: “You have to remember, however, that we are in two businesses: Buying and selling. When the economy slows down, it’s a good time to buy cheap. When the economy picks up, it’s a great time to sell because people will pay higher prices. So if economic growth declines, private equity funds won't be affected as much.” (FAZ interview, 10.5.05)

[6] The financial trick of buying a company with the money that has yet to come out of it is called “bootstrapping” in English and alludes to Baron Munchausen: In England, he pulls himself out of the swamp not by his hair, but by his bootstraps.

[7] “In an analysis of more than 100 European private equity companies, it is striking that the requirement profiles that financial investors place on companies are similar. (They) prefer mature companies in established markets. ... The company’s stock should be undervalued. ... To reduce risks, the company should have predictable, high cash flows in order to be able to repay debt liabilities later. Due to the debt service, the company should not require substantial investments in fixed assets – at least in the following four to seven years.” (Case Study: Friedrich Grohe AG; in: Webnotes of the University of Witten-Herdecke)

[8] Business administration now also understands this very direct way of appropriating assets as a contribution to the rationality of capitalism, namely a service to the efficiency of capital deployment. It takes over the view with which the funds scan the corporate landscape for candidates whose capital they can appropriate. Where they have access, i.e. companies have little debt, free accumulation mass or reserves, according to the theoretical revaluation of the access, there must be a management mistake, which the funds cure by cannibalizing them. When they pull out money and pile their properties with debt, science establishes the law that a decrease in operating assets causes an increase in stock market value whenever operating assets were previously greater than necessary. “Economists have found that the ‘free cash-flow’ theory (developed by Michael Jensen) helps them to understand much of this activity. This theory postulates that high leverage can be a powerful disciplining device because it forces top management to undertake value-enhancing strategic changes. Companies with ample cash flow but few potentially profitable investment projects should pay out the excess cash to shareholders to maximize shareholder value. According to this theory managements that fail to pay out excess cash, instead investing it in diversifying acquisitions or in low pay-off projects, will cause the stock price of their companies to be below their optimal value, creating a value gap. LBOs and other leveraged recapitalizations force managements to sell unprofitable divisions, avoid low pay-off investments, eliminate wasteful corporate expenses and diversifying acquisitions, and boost operating efficiency in order to meet the interest charges on the high level of debt. These forced efficiencies eliminate the value gap and create net economic gains for shareholders. Although this is a severe solution that exposes the firm to financial distress in the few years after the LBO, the evidence is that the LBOs and leveraged restructurings of the eighties created large net gains for shareholders.” (Gregg A. Jarrell, Takeovers and Leveraged Buyouts, in The Concise Encyclopaedia of Economics, www.econlib.org.) Even though...is good....

[9] On this important act, the British ‘Economist’ aptly remarks: “A crucial factor will be whether private-equity firms can genuinely improve the companies they buy. Another will be how easily they can dispose of their investments. Without an ‘exit’, there can be no profits.” (The new kings of capitalism, The Economist, 11.27.04)

[10] Let’s go back to the technology of this type of profit creation: “Hans Albrecht, former German head of the U.S. private equity firm Carlyle, stated that the takeovers are increasingly financed with bank loans. These debts are then the burden of the acquired companies. If interest rates rise again, this can put companies in an uncomfortable position. Established private equity houses are themselves no longer comfortable with this development, said the industry insider. For this reason, they are increasingly withdrawing their equity from the company shortly after the purchase. ‘Recapitalizations’ serve this purpose: For example, a bond is issued from the proceeds of which the investment company pays dividends and thus recovers its investment even before a resale.” (NZZ, 1.20.06) “These ‘recapitalizations’, in which the debt level of the companies is increased once again, have already flushed 10 billion euros in dividends into the pockets of the investment industry this year, according to the rating agency Fitch. Debt levels in LBOs are at a record high.” (FAZ, 12.16.05) “The investment companies active in Europe are asking their acquired companies to pay up ever faster. Financial investors have extracted an average of 77 percent of their invested equity within 20 months from the large corporate acquisitions (LBOs) through ‘recapitalizations’. As a result of these recapitalizations, the debt level of the companies concerned had risen from 4.5 times the operating profit to 5.5 times compared to the time of entry of the private equity investor.” (FAZ, 1.20.06)

[11] Leon Black, founder of private equity firm Apollo Management, sees a whole lot of credit abuse in the targeted increase in corporate debt levels. “He says he has never seen so much debt rated ... as junk by the rating agencies. Still, he is very calm: If the over-indebted companies get into trouble, Apollo will buy the bad loans and restructure the companies.” (FAZ, 2.22.06)

[12] “Märklin in the pincers – Financial investors buy loans from banks and thus gain control over German companies,” the SZ informs in the headline. Allegedly, “loans from about 100 German companies are already being traded” in London; experts estimate the “mountain of bad loans in Germany,” from which innovative debt traders are making a profit “... at 150 to 400 billion euros.”

[13] The connection between the fate of a company and the right of its shareholders to their share assets is particularly evident in the merger of two stock corporations. When one company takes over another or both merge into a new one, the shares of the acquiring or the new company, respectively, usually serve as “acquisition currency”: The merger of the functioning capitals is paid for with the promise, securitized in share form, that the fictitious capital, the shareholders' property existing separately from the company, will at least not suffer any damage, but rather that it can be speculated on its increase. - For more details, see “II. The combination of two profit sources” in the essay “Mega-mergers” – Capital concentration on a global scale” in GegenStandpunkt 4-98.

[14] On the contrary, the experts and advisors from the realm of the capitalist leading culture find all this completely normal. Unaffected and without any hint of irony, the “Bayerische Vereinsbank,” for example, informs its customers in the brochure “Often used – briefly explained,” pp. 110 and 114, about the two steps of a professional stock valuation: “Basically, stock valuation is divided into two areas, fundamental and technical analysis. The aim of fundamental analysis is to approximate the intrinsic value of a stock. The earnings and balance sheet figures of a company are examined. In addition, the industry situation, the general economic situation and the condition of the capital market are taken into account.” “In contrast to fundamental analysis, technical or chart analysis is based exclusively on market events. The price and turnover movements of the individual shares registered on the stock exchange serve as a basis. These data provide an insight into the balance of forces on the stock market, into the intensity of supply and demand. The chart analyst basically assumes that the sum of the more or less assessable determining factors (economic, political, psychological, etc.) is finally reflected in the price by influencing the supply and demand constellation.” So that he can assume the result of his complex estimations as a good basis for his estimations...

[15] Hence its name.

[16] Meanwhile, different funds specialize in different strategies. Some extract real assets – fixed assets, real estate holdings, reserve funds – from the company and appropriate them in the expectation that this looting of a company that continues to function will not affect its stock market valuation, or not to the same extent. Sometimes they even dare to speculate – as in the case of Deutsche Börse – that a special distribution of the “war chest” to shareholders will make the shares of this company more attractive and cause its price to rise. Others carve up companies, tailor new entities from various conquests (“buy & build” strategy) and thus nurture the hope of an increase in the real profit among prospective buyers in order to encourage their willingness to pay higher prices for the ownership titles of these creations. They analyze the companies they take on to see whether they are suitable for the project of creating a difference in the valuation of the fictitious capital through various manipulations between the time of entry and exit. They call companies “undervalued” in which they have the confidence to do so, as if this were an objective property of a share price and not the speculative judgment of those who want to manipulate it; in fact, they discover their opportunity only because, before their intervention, no one has a reason to pay higher prices for the company’s property titles. In order to be suitable for this maneuver, a company does not have to be successful in competition either before the intervention of the funds or after the cure they give it. Not even the economic environment has to be favorable: Depending on the strategy chosen, it is not the absolute profitability of the object that matters, but only the difference between before and after that is rewarded by other money investors.

[17] Here is an explanation from the FAZ, 1.17,06: “In a pack on the hunt for a company ... Seven investment funds have joined together to form an enormously financially strong bidding syndicate in order to secure the acquisition of a company worth more than 7 billion euros. These temporary alliances ... have recently become fashionable in the investment industry. ... Why not go it alone? Private equity funds are currently pushing a huge mountain of capital in front of them that needs to be invested. And thanks to the combined forces, even large corporations are within reach ... that are too big for individuals alone. ... to keep the risk low, the funds are seldom allowed to invest more than 10 percent of the investment capital in any one company. Another advantage of alliances is that private equity firms often have different specializations that complement each other. ... But such an approach also involves risks: ... the interests of five, six or seven financial investors (are) hard to reconcile ... when it comes to the timing of the sale.”

[18] If this fails, the funds can still continue to exist and even distribute profits, as long as investors still believe in their success, entrust them with cash and give them credit. Things only finally go wrong when such replenishment fails to materialize or deposits are even withdrawn: Then the whole business idea retroactively turns into a mere “pyramid scheme.”

[19] “Some industrial groups, above all General Electric, are now behaving almost like holding companies. At breathtaking speed, they are divesting divisions that do not meet their profitability targets and buying new growth drivers.” (SZ, 9.17.05) Siemens, too, is not missing a beat, streamlining its portfolio and divesting businesses that do not contribute enough to the overall return. In the process, the German global electronics corporation taps into a new, now increasingly important source of increasing profits through pure change of ownership – a source that is likely to be the real driving force behind many a sale and out-sourcing: Siemens gives its entire cell phone division to the Taiwanese manufacturer Benq and adds about 250 million euros on top to buy itself out of social plan obligations that would be due in the event of a closure under its own management. For the workforce, which the new owner is naturally thinning out, things are by no means continuing as before: With the transfer of ownership, the contractually regulated level of pay, the agreed company pension and other benefits and the regulation of working hours that were customary at Siemens no longer apply. Thus, the change of ownership itself becomes a source of profit. Factories and business units that could not generate the required return in the old group can sometimes do so simply because a new level of exploitation is imposed under foreign command, free of old “rights” and habits; if the new owner can then also operate a functioning production facility with zero euros in advance capital, a problem area of the old group easily becomes a pearl of the new one. This is how the workforce gets to experience the defense of their industry against the latest financial sharks.

[20] This unpleasant name – ‘raid’ as in assault, forced entry – was earned by the first private equity investors during the great crisis of U.S. industry in the 1980s, because their standpoint of company exploitation was hostile to the respective management of their purchase objects, which was committed to saving its company and restoring its profitability.