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The impact of the variable financialization in the collapse of General Motors Corporation of 2008.
Submitted by Julio Julio Castellanos, Universidad Nacional Autónoma de México on 14 févr. 2013 - 06:38
Type de publication:Conference Paper
Source:Gerpisa colloquium, Paris (2013)
Mots-clés:Financialization, General Motors
How the situation of crisis have presented themselves in General Motors Corporation: 1) Analyst Drew Winter, from Ward’s Auto World magazine, calculated in the november 2012 issue that the Big Three spent fifty billion dollars in the last twenty years on “impressing Wall Street” so that the share prices would stay elevated. This move included a distribution of dividends and the purchase of bankrupt companies, among other aspects. 2) In his presentation “The Innovative Enterprise and the Development State: Toward an Economics of ‘Organizational Success’”, for the Annual Bretton Woods Conference of the Institute for New Economic Thinking, April 10, 2011, William Lazonick wrote: “If General Motors had stayed in the banks with the 20.4 billion dollars distributed to the stockholders as repurchases from 1986 to 2002, it would have had 29.4 billion dollars of its own cash to stay afloat and respond to the global competition when it went broke.” 3) GMAC’s 2006 sale (financial sale of the company, worth 270 billion dollars is still, to this day, a cause of legal and financial controversy , information of which is very well protected by the authorities), to Cerberus, for which it received seven billion dollars, while its liabilities rose to 200 billion dollars. 4) In “Finance and the fourth dimension”, Robin Blackburn publishes how the Big Three made, in the period of 1990 and up to 2006, systematically, shares tending toward maintaining their value above their real price, while they bled the capital and the flow of cash; additionally, each of the executives pocketed dozens of millions of dollars per year. The financial analyses of GM from the past twenty years, in which the financial destinations of the resources can be perceived, as well as the leverage and the use of derivatives in speculative operations, which support the previous assertions, are presented.
21st Gerpisa International Colloquium
The impact of the variable financialization in the collapse of General Motors Corporation of 2008.
The term financialization has several definitions and it has been treated in different ways. I make an initial classification which suggests authors who present it as a category where the macroeconomic level predominates through public economic policies, out of which, among many others, John Bellamy Foster’s proposal stands out:
If in the 1970s “the old structure of the economy, consisting of a production system served by a modest financial adjunct” still remained—Sweezy observed in 1995—by the end of the 1980s this “had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system.” Stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse.
This symbiosis had three crucial aspects: (1) The stagnation of the underlying economy meant that capitalists were increasingly dependent on the growth of finance to preserve and enlarge their money capital. (2) The financial superstructure of the capitalist economy could not expand entirely independently of its base in the underlying productive economy—hence the bursting of speculative bubbles was a recurrent and growing problem. (3) Financialization, no matter how far it extended, could never overcome stagnation within production.
The role of the capitalist state was transformed to meet the new imperatives of financialization. The state’s role as lender of last resort, responsible for providing liquidity at short notice, was fully incorporated into the system. Following the 1987 stock market crash the Federal Reserve adopted an explicit “too big to fail” policy toward the entire equity market, which did not, however, prevent a precipitous decline in the stock market in 2000. These conditions marked the rise of what I am calling “monopoly-finance capital” in which financialization has become a permanent structural necessity of the stagnation-prone economy. Moreover, the second category in the classification of financialization is that which bases its explanation on the microeconomic level, represented, among many authors, by William Lazonick, who explains: Financialization means that executives began to base all their decisions on increasing corporate earnings for the sake of jacking up corporate stock prices. Other concerns -- economic, social and political -- took a backseat. From the 1980s, the talk in boardrooms and business schools changed. Instead of running corporations to create wealth for all, leaders should think only of “maximizing shareholder value.”
When the shareholder-value mantra becomes the main focus, executives concentrate on avoiding taxes for the sake of higher profits, and they don’t think twice about permanently axing workers. They increase distributions of corporate cash to shareholders in the forms of dividends and, even more prominently, stock buybacks. When a corporation becomes financialized, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards for all. They become focused instead on generating financial profits that can justify higher stock prices -- in large part because, through their stock-based compensation, high stock prices translate into megabucks for these corporate executives themselves. The ideology becomes: Corporations for the 0.1 percent -- and the 99 percent be damned.
The 99 percent needs to understand these fundamental changes in the ways in which top executives have decided to make use of resources if we want U.S. corporations to work for us rather than just for them.
The beginnings of financialization date back to the 1960s when conglomerate titans built empires by gobbling up scores and even hundreds of companies. Business schools justified this concentration of corporate power by teaching that a good manager could manage any type of business -- the bigger the better. But conglomeration often became simply a method of using accounting tricks to boost earnings in the short-run to encourage speculation in the company’s stock price. This focus on short-term financial manipulation often undermined the financial conditions for sustaining higher levels of earnings over the long term. But the interest of stock-market speculators was (as it always is) to capitalize on short-term changes in the market’s evaluation of corporate shares.
When these giant empires imploded in the 1970s and 1980s, people began to see the weakness of the model. By the early 1970s the downgraded debt of conglomerates, known as “fallen angels,” created the opportunity for a young bond trader, Michael Milken, to create a liquid market in high-yield “junk bonds.” By the mid-'80s, Milken (who eventually went to jail for securities fraud) was using his network of financial institutions to back corporate raiders in junk-bond financed leveraged buyouts with the purpose of extracting as much money as possible from a company once it was taken over through layoffs of workers and by breaking up the company to sell it off in pieces.
Wall Street changed the way it made its money. Investment banks turned their focus from supporting long-term corporate investment in productive assets to trading corporate securities in search of higher yields. The great casino was taking form. In 1971, NASDAQ was launched as a national electronic market for generating price quotes on highly speculative stocks. The Employee Retirement Income Security Act of 1974 encouraged corporate pension funds to get into the game since inflation had eroded household savings. In 1975, competition from NASDAQ led the much more conservative New York Stock Exchange, which dated back to 1792, to end fixed commissions on stock transactions. This move only further encouraged stock market speculation by making it less costly for speculators to buy and sell.
In 1980, Robert Hayes and William Abernathy, professors of technology management at Harvard Business School, wrote a widely read article that criticized executives for focusing on short-term profits rather than investments in innovation. But in 1983, two financial economists, Eugene Fama of the University of Chicago and Michael Jensen of the University of Rochester, co-authored two articles in the Journal of Law and Economics which extolled corporate honchos who focused on “maximizing shareholder value” -- by which they meant using corporate resources to boost stock prices, however short the time-frame. In 1985 Jensen landed a higher profile pulpit at Harvard Business School. Soon, shareholder-value ideology became the mantra of thousands of MBA students who were unleashed in the corporate world.
Proponents of the Fama/Jenson view argue that for superior economic performance, corporate resources should be allocated to maximize returns to shareholders because they are the only economic actors who make investments without a guaranteed return. They say that shareholders are the only ones who bear risk in the corporate economy, and so they should also get the rewards. But this argument could not be more false. In fact, lots of people bear risks of investing in the corporation without knowing if they will pay off for them. Governments in the U.S., funded by the body of taxpayers, are constantly making investments in physical infrastructures and human capabilities that provide benefits to businesses, but without a guaranteed return to taxpayers. An employer expects workers to give time and effort beyond that required by their current pay to make a better product and boost profits for the company in the future. Where’s the worker’s guaranteed return? In contrast, most public shareholders simply buy and sell shares of a corporation on the stock market, making no contribution whatsoever to investment in the company’s productive capabilities.
In the name of this misguided philosophy, major U.S. corporations now channel virtually all of their profits to shareholders, not only in the form of dividends, which reward them for holding shares, but even more importantly in the form of stock buybacks, which reward them for selling shares. The sole purpose of stock buybacks is to give a manipulative boost to a company’s stock price. The top executives then benefit when they exercise their typically bountiful stock options and cash in by selling the stock. For 2001-2010, 459 companies in the S&P 500 Index in January 2011 distributed $1.9 trillion in dividends, equivalent to 40 percent of their combined net income, and $2.6 trillion in buybacks, equal to another 54 percent of their net income. After all that, what was left over for investments in innovation, including upgrading the capabilities of their workforces? Not much.
Financialization, therefore, is the result of these two aspects. In the macroeconomic level, deregulation and privatization policies have favored the enterprises’ action so that in their financial decisions, they would have turned to pay off workers, to buy small businesses to liquidate them or liquidate their own, all of this with the intention of increasing the price of the shares in stock markets. How these situations have presented themselves in General Motors Corporation: 1) Analyst Drew Winter, from Ward’s Auto World magazine, calculated in the november 2012 issue that the Big Three spent fifty billion dollars in the last twenty years on “impressing Wall Street” so that the share prices would stay elevated. This move included a distribution of dividends and the purchase of bankrupt companies, among other aspects. 2) In his presentation “The Innovative Enterprise and the Development State: Toward an Economics of ‘Organizational Success’”, for the Annual Bretton Woods Conference of the Institute for New Economic Thinking, April 10, 2011, William Lazonick wrote: “If General Motors had stayed in the banks with the 20.4 billion dollars distributed to the stockholders as repurchases from 1986 to 2002, it would have had 29.4 billion dollars of its own cash to stay afloat and respond to the global competition when it went broke.” 3) GMAC’s 2006 sale (financial sale of the company, worth 270 billion dollars is still, to this day, a cause of legal and financial controversy , information of which is very well protected by the authorities), to Cerberus, for which it received seven billion dollars, while its liabilities rose to 200 billion dollars. 4) In “Finance and the fourth dimension”, Robin Blackburn publishes how the Big Three made, in the period of 1990 and up to 2006, systematically, shares tending toward maintaining their value above their real price, while they bled the capital and the flow of cash; additionally, each of the executives pocketed dozens of millions of dollars per year. The financial analyses of GM from the past twenty years, in which the financial destinations of the resources can be perceived, as well as the leverage and the use of derivatives in speculative operations, which support the previous assertions, are presented.
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