Merchants of Debt

The rise of neoliberal Casino Capitalism and why this economy produces more ‘illth’ than wealth.

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Merchants of Debt Kkr and the Mortgaging of American Business

Merchants of Debt: KKR and the Mortgaging of American Business
By George Anders 2002/09 - Beard Books
1587981254 - Paperback - Reprint - 354 pp.

Selected as one of the best business books of 1992 by Business Week.

Categories: Banking and Finance

This title is part of the Business Histories list.

Of interest:

With borrowed money, borrowed management, and a lot of nerve, Kohlberg Kravis Roberts acquired one Fortune 500 company after another in the 1980s, epitomizing both the best and worst of Wall Street's stunning rise to power in the age of casino capitalism. In the compelling book, the author explains why American business became so enchanted by debt; how KKR partners Jerome Kohlberg, Henry Kravis, and George Roberts became billionaires; and how their takeovers affected America's economic strength. This fascinating, behind-the-scenes account show how pride, jealousy, fear, and ambition fueled Wall Street's debt mania - with repercussions to millions of people.

From the back cover blurb:

With borrowed money, borrowed management, and a lot of nerve, Kohlberg Kravis Roberts acquired one Fortune 500 company after another in the age of casino capitalism, KKR epitomized both the best -- and the worst -- of Wall Street's stunning rise to power in the 1980s. In this book, the author explains why American business became so enchanted by debt; how KKR partners Jerome Kohlberg, Henry Kravis and George Roberts became billionaires, and how their takeovers affected America's economic strength. This fascination, behind-the-scenes account shows how pride, jealousy, fear, and ambition fueled Wall Street's debt mania -- with consequences that affected millions of people. Investors and businesspersons alike will find this expose engrossing and informative reading. This book was selected as one of the Best Business Books of 1992 by Business Week.

Referring to an earlier version:

For more than a decade, Henry Kravis and George Roberts have been archetypes, first of Wall Street's boom years and then of its excesses. Their story and that of their firm--the biggest, most successful, and most controversial participant in the age of leverage--illuminates an entire era of financial maneuvering and speculative mania. Kravis and Roberts wrote their way into the history books by concocting one giant takeover after another. Their technique: the leveraged buyout, an audacious way to acquire a company with borrowed money, borrowed management--and a lot of nerve. Their firm, Kohlberg Kravis Roberts & Co., dominated the Wall Street scene in the late 1980s, acquiring one Fortune 500 company after another, including Safeway, Duracell, Motel 6, and RJR Nabisco. Merchants of Debt draws on more than 200 interviews, including recurring access to the central figures and their KKR associates, as well as court documents and private correspondence to couch giant financial issues in human terms. The story of KKR shows how pride, jealousy, fear, and ambition fueled Wall Street's debt mania--with consequences that affected hundreds of thousands of people. Anders addresses three questions: Why did American business become so enchanted by debt in the 1980s? How exactly did Kravis and Roberts rise to the top of the heap? What have buyouts, especially KKR's deals, done to America's economic strength? Here is a gripping saga that takes readers behind closed boardroom doors to show how star-struck young bankers, ruthless deal-makers, and nervous CEOs changed one another's lives--and the whole American economy--over a fifteen-year span.

"For the first fourteen years of KKR's existence, the buyout firm's hallmark could be expressed in one word: debt… As KKR grew evermore powerful, Kravis and Roberts derived their economic clout from a single fact: They could borrow more money, faster, than anyone else," according to the chronicler of this high-flying firm. KKR acquired $60 billion worth of companies in wildly different industries in the 1980s: Safeway Stores, Duracell, Motel 6, Stop & Shop, Avis, Tropicana, and Playtex. They made piles of money by deducting interest expenditures from their taxes, cutting costs in their new companies and riding a long-running bull market.

The juggernaut of Kohlberg Kravis Roberts & Co. began rolling in 1976 when Jerome Kohlberg and cousins Henry Kravis and George Roberts left Bear, Stearns with about $120,000 to spend. The three wunderkind shortly invented and dominated the leveraged buyout as they sought investors and borrowed money to acquire Fortune 500 companies in dizzying succession. They put up very little money of their own funds, but their partnerships made out like bandits. Consider the case of Owens-Illinois: KKR pup up only 4.7 percent of the purchase price. The company's chairman earned $10 million within a few years, the takeover advisors got $60 million, Owens-Illinois was left "gaunt and scaled back," and about five years later, KKR took it public at $11 a share, more than twice what the KKR partnership had paid for it.

In this reprint of his 1992 books, George Anders tells us how they worked: "(t)ime after time, the KKR men presented a tempting offer. The CEO could cash out his company's existing shareholders by agreeing to sell the company to a new group that would be headed by KKR, but would include a lot of room for existing management. The new ownership group would take on a lot of debt, but aim to pay it off quickly. If this buyout worked out as planned, the KKR men hinted, the new owners could earn five times their money over the next five years. Presented with such a choice in the frenzied takeover climate of the 1980s, manages and corporate directors again and again said yes… To top management a leveraged buyout was the most palatable way to ride out the merger-and-acquisition craze."

The author includes a detailed appendix of KKR's 38 buyouts during the period 1977-1992 that presents the following on each purchase: price paid by KKR; percentage of the purchase price paid by KKR's equity funds; length of time KKR owned the company; financial payoff for the ownership group; and the annualized profit rate for investors over the life of the buyout. KKR used less than 9 percent of its own funds in 18 of the 38 cases. In only four cases did KKR put up more than 30 percent of the price. KKR owned the 38 companies for an average of about 5 years. As Anders puts it, "(a)s quickly as the KKR men had roared into a company's life, they roared off."

This behind-the-scene account shows the ambition, pride, envy and fear that characterized the debt mania largely engineered by KKR, a mania that put millions out of work and made a very few very rich. This book is a must read in understanding what happened to corporate America in the 1980s.

George Anders is the West Coast bureau chief of Fast Company magazine. He worked for two decades at the Wall Street Journal, and was part of a seven-person reporting team that won the Pulitzer Prize for national reporting in 1997.

In Merchants of Debt: KKR and the Mortgaging of American Business, George Anders of The Wall Street Journal explores not just Kohlberg Kravis Roberts & Co. but also the impact of the leveraged buyout deals it popularized. Reviewer Anthony Bianco found the book well-researched, fair-minded, and thorough in its history of transactions.

Discussing the $26.4 billion buyout of RJR Nabisco Inc., ``Anders goes beyond what has been previously published,'' Bianco wrote, with his convincing assertion that RJR's post-deal crises pushed KKR close to ruin. Leveraged buyouts in general Anders terms ``one of the most profoundly undemocratic ventures the United States had ever seen.'' Their only lasting impact, he says, was to shift wealth from the mass of corporate employees to a managerial elite allied with Wall Street.

Bianco faulted Anders for shying from sharp judgments and for failing to delve deeply into the motivations and character of KKR's dealmakers. But Anders won unparalleled access to Henry Kravis and his cousin and partner, George Roberts, Bianco noted. Crediting Anders with ``devastating reportage,'' Bianco said, ``His exhaustively researched book provides the closest look yet at KKR's inner workings.''

Excerpted in the Wall Street Journal.

From New York Times Book Review, June 14, 1992

"[S]omething refreshing and important: a book that reckons seriously with Wall Street's innovations and achievements, even as it chronicles its recklessness and intrigues... [A] far more enduring contribution to understanding one of the most dynamic and disturbing periods in American business history."

From Michael Lewis, Author of Liar's Poker and The New Thing

"Excellent... One of the few books that a person can use to evaluate what happened in the financial 1980s. It should be required reading for anyone who got rich, lost a job or watched in consternation as Wall Street's juggernaut swept the U.S. economy."

From Library Journal, June 14, 1992

Kohlberg Kravis Roberts & Co. (KKR) was founded in New York in 1976 by three . . . investment bankers, Jerry Kohlberg, George Kravis, and George Roberts, with the simple purpose of assisting companies to participate in management-led buyouts or leveraged buyouts (LBOs). . . . {The author} chronicles the rise of KKR during the 1980s, the 'age of debt,' and . . . {argues that} a simple formula using borrowed money could be successfully repeated over and over again in corporate takeovers.

This compelling book is recommended for all business collections.

Thayer Watkins' Summary of Merchants of Debt:
Available here.

From Turnarounds and Workouts, February 15, 2003
Review by Gail Owens Hoelscher

From BusinessWeek.Com
The Best Business Books of the Year (1992)

Casino capitalism continues to baffle by Guy

October 06, 2005

In my humble opinion, the instability of financial trading markets all over the world exemplifies the fact that free market behaviour is not always rational behaviour. Although right-wing liberal economic types like to portray packs of investors as some sort of "hive mind", judging the value of stock in real-time and acting accordingly, investor behaviour is typically more instinctive and random than that. People might sell their stock in Telstra, for example, because they want to go on a holiday. If enough Telstra shareholders want to go on a holiday at the same time, the value of Telstra shares will drop if the numbers of sellers outweighs the numbers of interested buyers. It's a pretty dumb example but it holds true. What does such a decision have to do with the actual value of Telstra? SFA, but markets are blind to that, and market analysts will try to rationalise the stock price movement in any remotely credible way that they can.

And what prompted this anti-market spray? The Australian stock market had $21 billion wiped off it yesterday in the biggest single-day loss since the week of the 9/11 attacks. The purported reason for the loss hardly justifies the reaction:

Local traders were anxious after a plunge on Wall Street, which was sparked by a US Federal Reserve warning that interest rates were likely to rise and energy prices were driving inflation higher.

Anything that can devalue Australian companies by $21 billion in a single day sounds more like a corporate disaster than anything else. It's barmy. Put simply, the global marketplace could do without the ridiculous volatility that often ensues in financial markets. Sometimes it seems as though investors might do well to just go and put their surplus capital on red at the roulette table at Star City instead of pumping it into the stockmarket. At least there is a sense of immediate certainty about that sort of transaction. I'm not seriously advocating gambling as much as trying to make a point here, but gambled monies are at the very least not subject to the often inscrutable and senseless whims of shareholders across the country.

Unsurprisingly, given market volatility and the sense that one is gambling, not investing, when buying shares, critical theorist Susan Strange once labelled the instability of modern financial markets "casino capitalism". Make no mistake, investing in financial markets these days is in many ways closer to being a form of gambling than buying property, or putting your money in the bank.

Nic White at October 6, 2005 09:15 PM

This is just the usual October correction. Its a good thing, because it allows investors to get some bargins before the market climbs up again. We just came off a new high, it may look like a crash but the market is still very healthy. This dip is predicted to last only a month or two, or even only a few weeks.
Chris Fryer at October 7, 2005 12:06 PM

You have obviously never invested in the stock market. For a long-term investor it is nothing like a casino. If a stock price goes down that is a paper loss, you do not actually loose money unless you sell the stock.

To a wise investor an event like this is an opportunity. As Nic said, this is a chance to get bargains before the market goes up again.

The market can be irrational. But the great thing about the stock market is you can control your risk. You could invest in bank shares, this way you'd get a relatively stable stock that pays a good dividend. Or you could invest in a speculative stock that might go up exponentially or vanish altogether.

A smart investor has a broad portfolio of stocks across different market sectors. That way you spread your risk and don't suffer when the market goes haywire.

Guy at October 8, 2005 11:32 PM

"A smart investor has a broad portfolio of stocks across different market sectors. That way you spread your risk and don't suffer when the market goes haywire."

So it's a bit like betting on a few favourites and a few long-shots at the horsetrack, right? ;) I know some gamblers who don't think that they've lost money until they've left the gambling establishment of their choice for the day. Until then, it's just $50 up or $50 down, and the betting continues.

I guess the point I am trying to make is that $21 billion was wiped off the supposed value of companies in a single day, and hardly anything at all changed in a material sense.

It's like if banks decided to randomly revalue the money sitting in your savings account on a real-time basis. On a whim, a significant proportion of your savings could disappear, without anything particularly tangible or real justifying that reduction in value.

The October correctio, as I understand it, is literally a correction - meaning those companies have been over valued in the last year or so, and that is being rectified. As the correction results in a bid, investors and traders panic and sell like mad, and the market dips further before levelling off and climbing again.

Theres relaly nothing to see here, but the media is beating it up something chronic.

Washington DeCoded Inside Casino Capitalism

Inside Casino Capitalism Barbarians at the Gate: The Fall of RJR Nabisco
By Bryan Burrough and John Helyar
Harper & Row. 528 pp. $22.95

By Max Holland

In 1898, Adolphus Green, chairman of the National Biscuit Company, found himself faced with the task of choosing a trademark for his newly formed baking concern. Green was a progressive businessman. He refused to employ child labor, even though it was then a common practice, and he offered his bakery employees the option to buy stock at a discount. Green therefore thought that his trademark should symbolize Nabisco's fundamental business values, "not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States." Eventually he decided that a cross with two bars and an oval – a medieval symbol representing the triumph of the moral and spiritual over the base and material – should grace the package of every Nabisco product.

If they had wracked their brains for months, Bryan Burrough and John Helyar could not have come up with a more ironic metaphor for their book. The fall of Nabisco, and its corporate partner R.J. Reynolds, is nothing less than the exact opposite of Green's business credo, a compelling tale of corporate and Wall Street greed featuring RJR Nabisco officers who first steal shareholders blind and then justify their epic displays of avarice by claiming to maximize shareholder value.

The event which made the RJR Nabisco story worth telling was the 1988 leveraged buyout (LBO) of the mammoth tobacco and food conglomerate, then the 19th-largest industrial corporation in America. Battles for corporate control were common during the loosely regulated 1980s, and the LBO was just one method for capturing the equity of a corporation. (In a typical LBO, a small group of top management and investment bankers put 10 percent down and finance the rest of their purchase through high-interest loans or bonds. If the leveraged, privately-owned corporation survives, the investors, which they can re-sell public shares, reach the so-called "pot of gold"; but if the corporation cannot service its debt, everything is at risk, because the collateral is the corporation itself.

The sheer size of RJR Nabisco and the furious bidding war that erupted guaranteed unusual public scrutiny of this particular piece of financial engineering. F. Ross Johnson, the conglomerate's flamboyant, free-spending CEO (RJR had its own corporate airline), put his own company into play with a $75-a-share bid in October. Experienced buyout artists on Wall Street, however, immediately realized that Johnson was trying to play two incompatible games. LBOs typically put corporations such as RJR Nabisco through a ringer in order to pay the mammoth debt incurred after a buyout. But Johnson, desiring to keep corporate perquisites intact, "low-balled" his offer. Other buyout investors stepped forward with competing bids, and after a six-week-long auction the buyout boutique of Kohlberg, Kravis, Roberts & Company (KKR) emerged on top with a $109-a-share bid. The $25-billion buyout took its place as one of the defining business events of the 1980s

Burrough and Helyar, who covered the story for The Wall Street Journal, supply a breezy, colorful, blow-by-blow account of the "deal from hell" (as one businessman characterized a leveraged buyout). The language of Wall Street, full of incongruous "Rambo" jargon from the Vietnam War, is itself arresting. Buyout artists, who presumably never came within 10,000 miles of wartime Saigon, talk about "napalming" corporate perquisites or liken their strategy to "charging through the rice paddies, not stopping for anything and taking no prisoners."

At the time, F. Ross Johnson was widely pilloried in the press as the embodiment of excess; his conflict of interest was obvious. Yet Burrough and Helyar show that Johnson, for all his free-spending ways, was way over his head in the major leagues of greed, otherwise known as Wall Street in the 1980s. What, after all, is more rapacious: the roughly $100 million Johnson stood to gain if his deal worked out over five years, or the $45 million in expenses KKR demanded for waiting 60 minutes while Ross Johnson prepared a final competing bid?

Barbarians is, in the parlance of the publishing world, a good read. At the same time, unfortunately, a disclaimer issued by the authors proves only too true. Anyone looking for a definitive judgment of LBOs will be disappointed. Burrough and Helyar do at least ask the pertinent question: What does all this activity have to do with building and sustaining a business? But authors should not only pose questions; they should answer them, or at least try.

Admittedly, the single most important answer to the RJR puzzle could not be provided by Burrough and Helyar because it is not yet known. The major test of any financial engineering is its effect on the long-term vitality of the leveraged corporation, as measured by such key indicators as market share (and not just whether the corporation survives its debt, as the authors imply). However, a highly-leveraged RJR Nabisco is already selling off numerous profitable parts of its business because they are no longer a "strategic fit": Wall Street code signifying a need for cash in order to service debts and avoid bankruptcy.

If the authors were unable to predict the ultimate outcome, they still had a rare opportunity to explain how and why an LBO is engineered. Unfortunately, their fixation on re-creating events and dialogue – which admittedly produces a fast-moving book – forced them to accept the issues as defined by the participants themselves. There is no other way to explain the book's uncritical stance. When, for example, the RJR Nabisco board of directors tried to decide which bid to accept, Burrough and Helyar report that several directors sided with KKR's offer because the LBO boutique "knew the value of keeping [employees] happy." It is impossible to tell from the book whether the directors knew this to be true or took KKR's word. Even a cursory investigation would have revealed that KKR is notorious for showing no concern for employees below senior management after a leveraged buyout.

The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire environment procured by buyout artists via their political contributions is scarcely mentioned, crucial though it is. Nowhere are the authors' priorities more obvious than in the number of words devoted to Henry Kravis's conspicuous consumption compared to those devoted to the details of the RJR deal. In testimony before Congress last year, no less an authority than Treasury Secretary Nicholas Brady – himself an old Wall Street hand – noted that the substitution of tax-deductible debt for taxable income is "the mill in which the grist of takeover premiums is ground."

In the case of RJR Nabisco, 81 percent of the $9.9 billion premium paid to shareholders was derived from tax breaks achievable after the buyout. This singularly important fact cannot be found in the book, however; nor will a reader learn that after the buyout the U.S. Treasury was obligated to refund RJR as much as $1 billion because of its post-buyout debt burden. In Barbarians, more time is spent describing Kravis's ostentatious gifts to his fashion-designer wife than to the tax considerations that make or break these deals.

Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll.

As the economist Henry Kaufman has written, the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles. Inexorably, the shift away from equity invites the close, even intrusive involvement of institutional investors (banks, pension funds, and insurance companies) that provide the financing. Superficially, this moves America closer to the system that prevails in Germany and Japan, where historically the relationship between the suppliers and users of capital is close. But Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development.

The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains.

This article first appeared in the Wilson Quarterly, Summer 1990
© 1990 by Max Holland

Reviews 'Cowardly capitalism' by Daniel Ben-Ami Prospect Magazine December 1998 issue 36

The dominant image of the financial markets is that of a giant casino. Brash young men in red braces, driven by insatiable greed, gamble with huge sums every day. When the bets go wrong the innocent suffer. Reckless financial markets pose an immediate threat to the future prosperity of humanity.

Susan Strange, who died just after the publication of her lastest book, was one of the most compelling academic advocates of the view that the global casino is out of control. Although she is not a household name, she played an important role in developing the intellectual framework to support the casino thesis. Her Casino Capitalism (1986) is a Keynesian account of the damage inflicted on the world as a result of financial deregulation which was taken up by many better known writers such as William Greider in the US and Will Hutton in Britain.

With the onset of the Asian financial crisis Strange's account of financial markets has become almost mainstream. Her ideas inform many of the discussions about a "new international financial architecture." Economists who would once have scorned her views now agree with her that deregulation has gone too far and that new forms of regulation are needed. The British government has floated the idea of a world financial authority to regulate global finance. The IMF, once a bastion of free market economics, has conceded that capital controls may be necessary under some circumstances.

Mad Money, the sequel to Casino Capitalism, takes into account the impact of information technology and the rise of financial crime. It also places new emphasis on the role of international institutions. For example, she backs George Soros's plan for an international credit insurance corporation as a complement to the IMF.

Yet there is one striking omission from Mad Money. She points out that the dominant theme of her earlier work was the danger of volatility-the gyrations in the price of financial assets. But then she fails to notice that the decade since the publication of Casino Capitalism has been one of relatively low financial volatility. This assertion appears to be contradicted by everyday experience. Every week there is news of a record fall on the London stock market-often followed by a record rise. But such impressions do not take account of long-term stock market growth. A 200-point fall when the FTSE 100 index is at 6000 does not have the same significance as when it is at 1000.

The low volatility of the main world stock markets can be precisely measured. And William Schwert, a professor of finance and statistics in the US, has produced a comprehensive study of the US, Britain, Germany, Japan, Australia and Canada which states that "all of the evidence leads to the conclusion that volatility has been very low in the decade since the 1987 crash."

Strange is not alone in misreading volatility. The striking feature of the past decade is the gap between the fear of risk-taking and the real level of risk. The obsession with risk management is at an alltime high. Financial markets are characterised by fear rather than greed. We should talk of cowardly capitalism, not casino capitalism.

Cowardly capitalism, for example, lies behind the explosive growth in derivatives, normally seen as one of the instruments of financial madness. Derivatives are bets on the way in which the price of financial assets move. They can be used for speculation-and often are-but they are mainly used to reduce financial uncertainty. (A survey of derivative use by non-financial US companies in 1994-95, at the University of Pennsylvania, found that the main use of derivatives was to manage cash flow and reduce risk.)

How do derivatives work? Imagine a British plastics manufacturer that depends on imports of crude oil-priced in US dollars-as its main raw material. The business suffers if the dollar strengthens. One way it can protect itself against this is to bet on a rising dollar. If it does rise the extra cost of the oil will be offset by the money it makes from its derivative contract. This practice is known as hedging. It is similar in principle to life insurance which can be seen as a bet that the policy-holder will die in a given period.

It is certainly possible, through dishonesty or incompetence, to lose huge amounts through speculation in derivatives, but the market is driven by risk aversion rather than recklessness.

Derivatives are far from the only instance of cowardly capitalism. Another example is fund management. Back in 1957 almost two thirds of the London stock market was owned by private investors. Today it is dominated by investment funds such as pension funds, insurance funds and unit trusts. The main rationale of such investment funds is to manage risk. Their guiding principle is: "Don't put all your eggs in one basket." If an investor holds a few shares his portfolio is likely to suffer from high volatility. But a fund manager with a large number of shares can diversify risk. Increases in the prices of some shares can cancel out falls in others.

The intellectual rationale for fund management explicitly casts risk as a problem. In his seminal paper on portfolio theory, Harry Markowitz argues that "the investor does (or should) consider expected return a desirable thing and variance of return an undesirable thing." The suspicion of risk-taking is embedded in the intellectual heart of cowardly capitalism.

If the financial markets are so risk averse it is not clear why they should be seen as irresponsible risk-takers. In reality both perceptions are closely related. Financial markets are seen as reckless precisely because of the strength of risk aversion in the contemporary world.

But the act of risk-taking should not be stigmatised, otherwise markets will cease to function properly. Susan Strange's notion of casino capitalism should be ditched or at least modified. And grand regulatory schemes based on the notion of out of control financial markets should be handled with care. In the world of cowardly capitalism, where risk aversion rules, it is more accurate to see money as sad rather than mad.

Mad money

Susan Strange

Stefan Stern - Rise of 'casino capitalism ...

Rise of 'casino capitalism' shakes faith of moderate Monks

By Stefan Stern

Published: November 21 2006 02:00 | Last updated: November 21 2006 02:00

"The prototype of the successful man in modern society is not the scientist, the inventor, the scholar. It is the financier, the gambler and those with social pull. The others share [in the winnings] sometimes, it is true, but their share is modest compared with the oligarchs and tycoons; and they don't usually keep their share for long. They are no match for the commercial prowlers."

A snap-shot of London's Mayfair district, home to the burgeoning hedge-fund phenomenon, in November 2006? Actually, no. The above words were written in 1952 by the Labour politician Aneurin Bevan in his book In Place of Fear. Bevan had a gift - his most passionate supporters would say a genius - for exposing the truth of a situation in language that could be both scintillating and pungent.

Fifty years ago, he criticised the prime minister of the day, Sir Anthony Eden, for his reckless actions during the Suez crisis. "[He] has been pretending that he is now invading Egypt in order to strengthen the United Nations," Bevan said in a famous speech in Trafalgar Square. "Every burglar of course could say the same thing: he could argue that he was entering the house in order to train the police. So, if Sir Anthony Eden is sincere in what he is saying, and he may be . . . then he is too stupid to be a prime minister!" Here was political rhetoric with a touch of prophesy about it.

It was the enduring appeal of speeches such as these that helped draw a good crowd to the fifth annual Bevan memorial lecture in London last week. The lecture was to be given by John Monks, formerly general secretary of the British Trades Union Congress, now the Brussels-based leader of the European trade union confederation.

No one in the audience would have been expecting Bevanite rhetorical fireworks from Mr Monks. That has never been his style. Between 1993 and 2003, he led the British trade union movement with modesty and distinction. He was the moderate's moderate: avoiding confrontation wherever possible and advocating partnership at work between management and employees. Business leaders were happy to do business with him.

They would not have found this lecture so easy to deal with. Confronted by today's turbo-charged capitalism, Mr Monks cast off his former moderation. He even seemed to be on the verge of recanting his commitment to the partnership model. "Partnership with who?" he asked. There has been, he said, a "disintegration of the social nexus between worker and employer - a culture containing broad social rights and obligations. The new capitalism wants none of it."

Mr Monks contrasted businesses' healthy profitability with the ruthless way some have treated their staff recently, whether through large-scale redundancies or the constant threat that jobs may be sent off-shore or outsourced. While median wages have stagnated, record executive salaries are legion.

He admitted that he had possibly been a bit naive in the past. "I did not fully appreciate what was happening on the other side of the table," Mr Monks said. While he sympathised with business leaders for the relentless pressure they find themselves under - "It cannot be easy running a firm . . . when you are up for sale every day and every night of every year" - he was appalled by the increasingly "shameless", short-termist behaviour of overpaid corporate executives. "More and more they resemble the Bourbons - and they should be aware of what eventually happened to the Bourbons."

For someone like me, who has sat through 10 years of reasonableness from John Monks, this speech was remarkable, devastating stuff. Maybe there is something in the Brussels water. Perhaps the ghost of Nye Bevan was speaking through him. Or was it just anxiety over the career choice of his daughter's boyfriend? He is now working for - you guessed it - a hedge fund. Whatever its cause, a challenge was being thrown down.

"All this is too important to be left to the practitioners who have a vested interest in obscuring what they do from the rest of us," he said. And, with bonus season fast approaching, he took one final, sweeping aim at the high rollers of "casino capitalism". Their actions are "dangerous to economic stability, traditional industry and jobs", he said. "I would like to see the City pages of the press more challenging and less respectful on these matters . . . Our future - the world's future - is too important to place in the hands of the new capitalists."

Will corporate leaders - those that have read this far anyway - simply shrug their shoulders and get back to their slashing and burning ways? Is Mr Monks merely offering a wholly predictable, knee-jerk, lefty rant? I do not think so. This general secretary just does not do lefty rants. So business people should take note. When the John Monkses of this world say enough is enough, that the capitalist system itself is sick, you can be sure that elsewhere in the world there is deep-seated, lingering resentment and unhappiness.

Half a century ago, Nye Bevan expressed a similar concern. In In Place of Fear he wrote: "There is a sense of injustice in modern society, and this induces a feeling of instability even in normal circumstances. The rewards are not in keeping with social worth, and the consciousness of this, both among the successful and the unsuccessful, will simmer and bubble, blowing up into geysers of political and social disturbance in times of economic stress."

Reading these words, you can see why so many people were prepared to come out on a dark Tuesday night to see if the spirit of Bevan still had something to communicate 46 years after his death.


Gerard Hanlonf1
Institue for the Study of the Legal Profession, Law Faculty, University of Sheffield, Crookesmoor Building, Conduit Road, Sheffield, U.K., S10 1FL
Received 24 February 1994; revised 1 May 1995; accepted 1 May 1995. ; Available online 24 April 2002.


The central contention of this paper is that a new paradigm is emerging within the area of professional or expert labour. This process entails a shift from a "social service" evaluation mechanism to a "commercialised" mechanism. This change is but one element in a wider range of alterations entailed in the change from a Fordist regime of accumulation to a Flexible Accumulation regime. The paper examines these issues with regard to the chartered accountancy profession. It analyses the socialisation processes experienced by accountants and the evaluation criteria involved in the promotional process to partnership. The evidence for this paper was gathered from qualitative and quantitative research undertaken in the Big Six accountancy practices in Ireland and the USA.

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