The Great Deformation (123 page)

The particulars of this case, in fact, reek with the stench of crony capitalism. They powerfully illuminate how the Fed's boom and bust cycling of the financial markets wantonly showers ill-gotten wealth on the 1 percent. According to the SEC filings, Elliot Capital picked up its Delphi position for $0.67 per share in the midst of the auto industry collapse and while both GM and Delphi were still in
Chapter 11
. It had the good fortune to sell stock to the public two years later at $22 per share.

Perforce, what the filings do not disclose is that in the interim Elliot Capital and its confederates had gained control of the Delphi bankruptcy by buying up the so-called fulcrum securities for cents on the dollar. They then threatened to paralyze GM by not shipping certain irreplaceable precision-engineered parts like steering gears, where GM technically owned the tooling but it was physically hostage in Delphi plants.

Needless to say, in a regular way bankruptcy a judge would have come down on the Elliot Gang like a ton of bricks for contempt; a tough judge might have even figuratively put them in shackles. But under the ad hoc rules of crony capitalism, the law counts for little and political hardball is the modus operandi. This meant that the hedge funds were literally able to strongarm the Obama White House into providing the $13 billion bailout to the Delphi estate. Even auto czar Steve Rattner, who was himself busily fleecing the taxpayers, described the hedge fund position as an “extortion demand by the Barbary pirates.”

The winnings of the Elliot Gang are an obscene lesson in how crony capitalism and Fed money printing perverts the free market. Without the $13 billion fiscal transfer Delphi would never have emerged from bankruptcy; and without the flood of liquidity from the Eccles Building there would have been no frothy market on which to unload the Delphi IPO.

As it happened, however, the other vultures in the Elliot Gang had a good feed, too. In particular a credit-oriented hedge fund and spin-off from Goldman Sachs called Silver Point gained a $900 million profit from the deal, and this was not an atypical result: it was one of the most adroit speculators in the busted loans and bonds of overleveraged train wrecks miraculously brought back to life by the Fed's flood of fresh money.

Another huge winner was John Paulson's fund. This time its big short was against the American taxpayer and the gain was a reputed $2.6 billion. But the most egregious windfall was the $400 million gain racked up by Third Point Capital. This hedge fund is run by one Daniel Loeb who had been an Obama supporter in 2008, but had since noisily denounced the president for unfairly picking on the 1 percent.

Given the history here this might have put an uninformed observer in mind of biting the hand that feeds you. Except Loeb didn't stop with his supercilious but widely circulated critique of Obama's purported “class war.” Instead, he held fund-raisers for Romney and contributed $500,000 to the GOP campaign.

In so doing, Loeb helped clarify why crony capitalism is so noxious and pervasive. It turned out that another winner from the Elliot Gang's 40X return on the carcass of Delphi was an allegedly passionate opponent of the GM bailout; that is, the author of a famously penned
New York Times
op-ed called “Let Detroit Go Bankrupt.”

The ease with which the vultures made their billions from this crony capitalist raid on the US treasury is evident in Mitt Romney's $15 million of Delphi winnings. Based on the timing of this saga, it appears they were obtained while Romney was on the chicken dinner circuit honing his anti–Big Government rhetoric for the upcoming presidential campaign. Call it the Detroit Job.

It goes without saying that with friends like these the free market does not need any enemies. More importantly, under the financial repression and Wall Street–coddling policies of the Fed there is no free market left. Instead, it has been supplanted by a continuous and destructive cycle of boom and bust emanating from the monetary depredations of the state's central banking branch.

In the process of inflating stocks, leverage, and speculation to absurd heights, the Fed finally loses control, transforming the financial markets
into economic killing fields. Yet in its panicked reflation maneuvers, it then fosters a vulture capitalist harvest of such magnitude as to be unthinkable on the free market. This is the absurd end game of Greenspan's wealth effects monetary policy and specious claim that bubbles can't be seen, but only left to burst. This is how recovery for the 1 percent happens.

LEAR CORPORATION: PRODIGY OF BUBBLE FINANCE

During 2009–2012 the vultures feasted gluttonously in the Fed's killing fields. Indeed, the Delphi abomination was an endlessly repeated template, even within the smoldering ruins of automotive alley. Thus, the miraculous rebirth of Lear Corporation, the poster boy for the auto industry's excursion into bubble finance, was still another case where riches were extracted from the wreckage. Its two-decade sojourn as a leveraged buyout, IPO, M&A machine and stock market wonder was virtually coterminous with the Greenspan bubble era. Thus, Lear Corporation first emerged as a $400 million sales LBO in 1988—with what appeared to be a unique growth model based on just-in-time seat assembly facilities located near auto assembly plants. In return for rapid sales growth from OEM “outsourcing” of seat assembly, Lear accepted razor-thin margins and extended a huge trade credit to the Big Three; that is, it absorbed their working capital and thereby never made any cash profits.

Lear's revenues skyrocketed from this maneuver, however, permitting it to go public in the early 1990s as a “growth company.” In addition to continued huge investments in OEM working capital via the expansion of its seat outsourcing business, it also undertook more than $5 billion of acquisitions to “roll up” suppliers of auto interiors and electronics during the next several years. Accordingly, its sales grew like Topsy from $2 billion in 1993 to $10 billion by 1998 and $17 billion by 2004. Not surprisingly, this stupendous growth absorbed every dime of the company's internal cash flow plus a massive buildup of debt to make ends meet.

At that point Lear had generated immense stock market enthusiasm, sporting a market cap of nearly $5 billion and a 10X return to original IPO investors. What it hadn't generated, however, were profits. In fact, during the two decades between 1991 and 2008 Lear Corporation posted $200 billion of sales, but nearly $1 billion of cumulative net losses.

Like so much else during the Greenspan bubbles, the hit-and-run punters who pumped up Lear's market cap to a preposterous $5 billion were long gone when it became evident that the company was worth zero: the only possible valuation for a company that makes no GAAP net income over two decades. In fact, Lear Corporation was a giant wheel-spinning machine which borrowed $3.5 billion to fund acquisitions and open new
plants to supply the Big Three. In return for virtually profitless sales it extended them upward of $4 billion of trade credit—borrowing against its own assets and cash flow as it did.

Accordingly, when GM finally hit the wall, Lear became a bug on its windshield. Yet instead of undergoing the brutal downsizing and deep reorganization that its failed business model required, it went through a quick four-month rinse cycle in
Chapter 11
, only to reemerge largely intact and with its bad debts from GM paid in full by the White House auto task force.

THE BIG FIX IN MOTOWN

It did not take Wall Street speculators long to realize that both the industry and Lear Corporation would emerge quickly from bankruptcy, thanks to the fact that GM, Chrysler, GMAC, and many auto suppliers were being smeared with $80 billion in taxpayer money. So the fact that Lear went into
Chapter 11
with $3.6 billion in debt and came out a few months later with only $900 million of debt completely obscures the real story; namely, that speculators made out like bandits from Lear's faux bankruptcy.

By early June 2009, the operational wheels at GM had ground nearly to a halt and Lear's bonds had dropped to twenty-seven cents on the dollar according to trading services at the time. However, vulture speculators aggressively scooped up this so-called distressed debt because by then it was evident that the “fix” was in, and that the “carry cost” of holding a position in Lear's busted bonds was virtually nothing under the Fed's ZIRP policy. Moreover, there were plenty of good reasons to take a flyer notwithstanding the headline noise about the auto industry's dire state.

The heart of the matter was that the Obama White House had by then made it abundantly clear that there would be no house cleaning on Wall Street. The president's desire to make an example of Citigroup by busting it up had been sabotaged by his own advisors. Likewise, Wall Street's new viceroy in the Treasury Building, Secretary Tim Geithner, had already completed his phony “stress tests” that gave most of the big banks a clean bill of health.

Accordingly, the Fed was free to juice the primary bond dealers with unlimited amounts of fresh cash via Treasury bond and GSE paper purchases in order to levitate financial markets. It was thus “risk on” again with respect to asset classes like junk bonds.

Indeed, with each passing month after the March 2009 stock market bottom it became more evident that the Bernanke put was actually a relentless, turbocharged version of the Greenspan original. So there was
enormous potential upside from leveraged speculation in Lear's busted bonds and exceedingly limited downside given the rampant crony capitalism embodied in the auto task force.

General Motors was Lear's largest customer by far, as it was the UAW's largest employer. So there was precious little chance that it would be shrunk down to “GM Lite” in the White House bankruptcy process or that Lear's supply contracts would be cancelled. Most importantly, since the White House fixers had already made it clear that GM's trade debts to Lear would be paid in full, the reorganized company did not need to fund itself with a large working capital revolver.

This was crucial because it meant that Lear's entire enterprise value could be wacked up among its pre-petition bank and bond lenders; that is, the available value could be captured by the vultures because its assets didn't need to be pledged to a new working capital lender. Not by coincidence, therefore, Lear announced a “pre-pack” bankruptcy filing almost to the day—July 5, 2009—that GM exited its fast dash through
Chapter 11
. As is consistent with normal practice, this deal had already been cleared with the company's principal creditors and provided for expected “recovery” rates for each class of creditor.

In the case of bondholders it was about forty cents on the dollar, meaning that speculators were already well in the money. In fact, when Lear Corporation exited its quickie bankruptcy and its stock began trading on November 9, the package given to its bondholders was worth sixty cents on the dollar, meaning that speculators had doubled their money in about 150 days. But the real “fix” was just getting started.

During the next two years, auto sales recovered smartly from the 9–10 million unit panic lows of late 2008 to a 13–15 unit level after mid-2010. However, as previously indicated, this natural but modest rebound in final sales had a bullwhip effect on production of parts and finished vehicles owing to the auto industry's virtually depleted supply chain. Accordingly, with “booming” production, which was actually just an aggressive onetime fill of the inventory pipeline, even a sow's ear could be positioned as a silk purse.

As previously described, Wall Street triumphantly brought GM public at a nosebleed valuation one year later, and Lear's stock price slipstreamed right behind the expanding auto bubble. It thus came to pass that Lear's busted bonds (which had been swapped for stock) were now valued at the equivalent of 130 percent of par value.

In short, speculators had quadrupled their money from the June 2009 low in just twenty months. And that's assuming that Lear's distressed paper
had been bought for cash. Had they employed ultra-cheap and readily available portfolio leverage, hedge fund punters would have made ten times their original investment or more.

So the cleansing therapies of the free market were once again denied. Instead, Washington's central banking branch and fiscal authorities implemented their fixes—bailouts and money printing—and thereby supplanted a healthy adjustment process with a corrupt game of speculation.

Twenty months after the June 2009 auto industry bottom, Wall Street speculators were pocketing massive profits on the auto sector's busted bonds and born-again stocks. Yet this was not because a healthy rehabilitation of the industry had been completed; it was because one had, in fact, been prevented.

THE KEYNESIAN END GAME:

RECOVERY FOR THE 1 PERCENT IS OVER

In the aftermath of the 2012 election the “fiscal cliff” came bounding into the picture. It was greeted by Wall Street as a singular event and inconvenient roadblock in the path to continued economic recovery and ever rising stock averages. The potentates of Wall Street—Jamie Dimon of JP-Morgan, Lloyd Blankfein of Goldman Sachs, and countless lesser lights—therefore demanded that it be rectified by means of a “grand bargain.” All that was needed was sufficient political will and bipartisan good faith, they brayed in unison. This was a grand delusion.

The Main Street economy was at stall speed, laboring to stay afloat by means of borrowed money and borrowed time. But it was fast running out of time. In fact, it had already entered the zone of Peak Debt, a place where for the first time in forty years most of Washington's actions and even its inactions will cause the Main Street economy to wobble, weaken, and wilt.