HIGH FINANCE

Corporate Champion

During the early years of the 1980s, the financial institutions of the United States in effect became the chosen industry and corporate champion of the nation. The secretary of the treasury, Donald Regan, who was also the former president of Merrill Lynch, dreamed of the day when American banks would dominate the world. The American finance system had emerged from the 1970s in relatively good shape, and members of the Reagan administration wanted to un-leash the potential of the business. The hallmark of free market theory, the doctrine of comparative advantage, holds that in a global economy nations should specialize in doing what they do best. This would maximize the positive effects of competition, In the United States the theory provided a way to explain why heavy industry was doing so poorly while banks and computer industries were doing so well.

Speculation

Support for the banking industry reached high levels during the 1980s. Corporate raiders and speculative buyouts were tolerated and, to some extent, encouraged by the administration, whose belief in the power of market forces to direct the economy helped to provide rationalization and support for speculative activities. The 1981 Recovery Tax Act had added fuel to the speculative impulse. Intended to spur economic growth by cutting taxes and government spending, the act had also allowed businesses to claim depreciation allowances sooner than had previously been the case. As a result, cash flow grew faster than reported earnings, and companies retained large amounts of cash on hand rather than channeling the money into stock dividends. Companies were able to borrow more money, and they also became attractive targets for speculators, who could then use the assets of a conquered company to pay off debts accrued in its takeover. Other ties between the speculative financiers and the Republican administrations were more direct. Many of the most prominent and successful raiders and speculators, including T. Boone Pickens, Ivan Boesky, leveraged buyout (LBO) magnate Henry Kravis, and Sir James Goldsmith, supported the Republican Party through fund-raisers.

Credit Card Economy

Debt and borrowing were not just limited to the federal government during the 1980s but were also practiced extensively by businesses, financiers, and private individuals. Many Americans financed major purchases—and minor ones as well—with credit cards, which sometimes had interest rates approaching 20 percent.

The LBO

Leveraged buyouts of corporations also marked 1980s business. In a leveraged buyout, a group of investors pooled resources, including borrowed money, to buy out a resistant company in a hostile takeover. Small investors often used borrowed money to make investments and told themselves that even with sky-high interest rates they could use the cash flow from companies acquired in a corporate takeover, together with profits gained by breaking up a conquered company, to cover their interest payments and to achieve a profit. Leveraged buyouts received much press coverage during the 1980s, including the leveraged buyout of Beatrice (for $8.2 billion) and RJR Nabisco (for $24.7 billion). By the end of the decade many Americans associated the LBO phenomenon with greed and scandal such as that following the 1987 conviction of Ivan Boesky for insider trading. Analysts have also pointed out that LBOs were generally financially unsound. While some corporate raids were successful, many other deals were disastrous. Companies that had been successful and stable were often driven into financial ruin by their new owners, who were generally more interested in squeezing out profit than making sure that newly acquired businesses remained stable and successful. Some of the conquests turned into disaster, including the Federated and Allied retail store chains, which were driven into bankruptcy after being taken over by Robert Campeau. One of the major firms that promoted LBOs and junk bond financing, Drexel Burnham Lambert, itself collapsed as the LBO phenomenon began to fade. Both the firms that were taken over and those that resisted takeovers (often by borrowing money to keep from being taken over) were left with high levels of debt as they entered the 1990s.

COLA WARS

During the 1980s the soft-drink industry became much more competitive. A Cuban refugee, Robert C. Goizueta, who arrived in the United States in 1959 with $20, became the head of Coca-Cola. In 1983, under his leadership, Coca-Cola released Caffeine Free Coke and Tab; in 1985 New Coke and Cherry Coke were released. The unpopularity of New Coke forced the company to bring back the original formula as Coca-Cola Classic. Also in 1985 independent bottlers and Pepsi Cola brought an antitrust suit against Coca-Cola. Both sides enlisted a variety of celebrities in the Cola Wars, including Michael Jackson and Max Headroom, an animated computerized talking head.

Sources:

Connie Brück, The Predators' Ball: The Junk Bond Raiders and the Man who Staked Them (New York: American Lawyer/Simon & Schuster, 1988);

Daniel Seligman, "Looking Backward: The System Worked," Fortune (26 March 1990): 183.

high fi·nance • n. financial transactions involving large amounts of money.