It has been said that you often get what you paid for prior to discovering that was not what you wanted. Over the years, professional management has come to fit that parody. Before the War Between The States, there were very few legal entities called corporations. Businesses were either a sole proprietorship or a partnership. The reason being that few individuals owned enough resources to control markets. With the advent of railroads, which required large amounts of capital for construction and even their operations, came other industries that were dependent on large sums of capital. Steel making is one that required large amounts of inventories and large manufacturing facilities. This was not a garage industry. And as shipbuilding changed over into steel vessels, military equipment and munitions requirements grew, and the advent of natural gas and later electric power, the one important ingredient as capital and large amounts of it. About the only person who could have paid for it all out of his pocketbook was JP Morgan. But Morgan wasn’t a loner, he drew to him a good many partners and had a reputation for ruthless revenge on those who crossed him.
We tend to associate the formation of trusts with Morgan as the main means of controlling wealth but that is the muckraker view. A trust is a simple devise that was used so often in the Britain and the European continent. It is a legal partnership without the personal liabilities that go with partnerships. The idea of limited partnerships had not really come of age as they would later on in Britain and Europe. So a group of individuals would pool their money to buy some business or property and the ownership would be held in trust and administered by a board of trustees. The trust normally did not manage the everyday details of that business that was held in trust. Now that may seem strange, but it is none the less true. Trusts tend to be more fiduciary in nature. JP Morgan was one of the first to buy a business from its owner, retain the owner for some specified period of time so as to train some individual specified by the trust to run the business. In the case of distressed sales, Morgan often retained the previous owner if he thought the man capable. Essentially, Morgan and many others from the beginnings of the 1870s on pioneered the profession of manager. Morgan, usually through one of his trusts, would buy a going concern and hire a few people, depending on the size of that concern, to run the business and make money for the trust, which would then come back to Morgan.
Back in Morgan’s time the colleges and universities did not churn out business majors and MBAs. Liberal Arts was still the mainstream degree program along with engineering and sciences. Skills such as bookkeeping, advertising, and a few sundry others retail skills were something one learned on the job, perhaps as an apprentice or as the son of a merchant. But Morgan had an eye for talent and a need for men who knew how to take orders and run his businesses. Often JP spent some time learning the very business he bought so that he soon became nobodys fool and a man would be crazy to try and cheat him. Morgan’s basic business model was simple. Find a business that had been mismanaged but had potential in an industry with growth prospects. Buy the business as cheaply as possible and then spend the time necessary to pur it back on its feet and run by people who knew what they were doing. Later on, sell it for a large profit it others wanted the business bad enough. Morgan was hardly the robber baron many muckrakers made him out. His forte was not just mergers and acquisitions, but in turn around management. He may have bought low but he didn’t steal. And he certainly was no thief like Kennedy, ready to whitewash stocks, defraud shareholders, float bogus company shares. Morgan took us from the infancy of industrialism into the modern age of business. He set standards for his managers which they met or were fired.
Once trusts were successfully busted Morgan and other had to turn to the one legal form for governing a business that Teddy couldn’t attack, couldn’t kill, the corporation. Where a trust could operate in an almost anonymous manner a corporation had to publicize its officers and board of directors. Stockholders were on public record as owners of the corporation and both the board and the officers worked for the stockholders. Now anyone could be a director, such as your aunt Tilly, but an officer would normally be of higher quality. Later on in the last seventy years would we see what might be called interlocking directorates where members of a board on one corporation were members of a board on another company, although for corporations in one industry are not permitted to have common board members due to the possibility of collusion and price fixing. And while board members back in Morgan’s day were paid only nominal fees, today those fees are anything but nominal. Of course it is rare to find members of a board who are not members of other boards, often half a dozen or more. One can make a sizable income just going to board meetings once a month.
We are now so firmly in the age of the professional manager that it is a revolting development. Seems one can’t run a company with having obtains an MBA. And I must add, most of those degrees are totally worthless. Why would that be? Well, one of the main requirements for obtaining one is a belief that leverage is a good thing. Your company, to be considered truly productive must carry a debt load of about 35 to 40 percent, and that’s long term debt. Now when interest rates are very low like they are today, then that percentage should be even higher. The term was a popular one a fed decades ago called OPM or Other People’s Money. When rates are low you can finance operations using OPM or loans, corporate bonds. That means you can buy your way into the competition, into other industries you know nothing about, into great financial schemes to make money on high risk investments using low interest debt. And best of all, if your company isn’t meeting its earnings per share that the analysts demand, then you can borrow the money to engage in stock buyback. Of course that means buy high and sell low, a really good business strategy. So what is General Motors doing now? Just what Apple did a while back. It is issuing corporate debt, bonds and what is known as paper, to obtain the money to buy back its stock on the open market (5 billion dollars I believe is the figure) so that the CEO can show that he or she is making the numbers. I’m sorry, but that is like me going out and borrowing a lot of money through second mortgages so I can show I have more wealth. Did I miss something? I mean, Apple has all these off shore profits, invested it all manner of money making investments and then it decides to: one issue dividends, real big one; and two, it issues bonds so it can obtain the funds to buy back a few billion shares of stock just to make its numbers look better.
The main problem with this situation is that one, interest rates always go back up, usually when the economic starts having severe problems such as high rates of inflation (not likely at the moment) or depression and deflation rears its head. As I have posted earlier, deflation is a bear on debtors because the amount of the debt stays the same but its percentage of your income increases. Apple may not be in a particularly bad position unless in trying to become the high fashion retailer it finds that people are running out of money and its iWatch is not substitute for a rolex in the real world. Apple is too tied to the retail trade and any kind of depression is a death threat to its business. And bring back all those profits for Uncle Sam to tax just so it can pay its debt makes that debt a really high priced bargain. But for GM to borrow its way to profitability? My god, you’ve got to be insane. There is a rapidly rising bubble of auto loans made by those who could never afford the vehicles. There are going to be millions of non performing loans backed by nothing but a depreciating automobile or truck. Oh, it’s not just GM, it’s all the automakers. But GM is the least healthy in terms of the new debt it is acquiring. These are the MBAs who rule our business world. JP Morgan would have had no mercy in crushing them today. I think the old man would have smiled at their presumptuousness. I swear, every new generation invents or reaches a new high in stupidity.