Vulture Capitalism And The Pillaging Of America

Sears, the iconic American retailer for over a century, filed for bankruptcy yesterday, a victim more of the vulture capitalist approach of its hedge fund manager CEO, Eddie Lampert, than of the changing and challenging retail environment. At the same time, it is also a prime example of the failure of corporate governance in the post-Reagan era.

Lampert got his start at Goldman Sachs, working in the risk arbitrage division overseen by Robert Freeman, who was arrested and pleaded guilty to insider trading while Lampert was there. That incident apparently prompted Lampert to leave the firm and set up his own hedge fund, ESL, at the ripe old age of 25. ESL had a string of successful investments, such as AutoZone and AutoNation, some of which was the result of the usual hedge fund/private equity management tactic of cutting  investment and personnel and driving up the stock price with stock buybacks.

ESL and Lampert tried the same approach when it bought Kmart out of bankruptcy in 2003. In 2005, he merged it with Sears in an attempt to compete with WalMart and Target. Over the next decade, Lampert would lay off 175,000 employees and destroy the company.

Initially, ESL’s strategy appeared to be successful, at least by the Wall Street focused financial metrics that Lampert believed should be the standard for the company. In 2006, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) increased by nearly 18%, from the baseline of $2.524 billion at the time of the merger, and the stock soared 45% to $156. In 2007, EBITDA soared to $3.657 billion, prompting Lampert to boast that he was proving you can “cut your way to success”. Lampert wrote in his 2007 letter to investors, “Unless we believe we will receive an adequate return on investment, we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do. If share repurchases or acquisitions appear to be more productive, then we will allocate capital to those options appropriately.”

Not surprisingly, as the stores deteriorated from lack of investment and employee morale faltered because of continued layoffs and Lampert’s decision to pit the various Sears’ units in competition with each other, sales started to drop precipitously. In 2008, EBITDA dropped a shocking 44% to barely over $2 billion. Lampert’s response was not to invest in fixing the problems at the firm but to break the company into five separate units in preparation for selling them off to generate cash for the company. But he continued his policy of massive stock buybacks to keep the stock price elevated. Between 2005 and 2010, Lampert spent $5.8 billion a share repurchases while Sears earnings during that same period only totaled $3.8 billion.

By 2012, EBITDA had turned negative and Lampert was beginning to basically liquidate Sears’ assets, essentially selling the valuable commodities of a public company to private and public firms where ESL had ownership interests. As one hedge fund manager described it, “Eddie has orchestrated for himself, and for the benefit of shareholders, the most protracted liquidation in history”. The Land’s End brand was sold in 2015. Last year, the company’s most valuable brand, Craftsman tools, was sold off to Stanley Black & Decker.

But by far Lampert’s biggest grab of Sears’ assets was what he did with the real estate the company owned. Lampert sold those real estate assets off to Seritage Growth Properties, who then agreed to lease those stores back to Sears. The sale raised $2.7 billion for Sears which was largely used to pay off Sear’s debt, some of which was owed to Lampert’s ESL fund. Lampert is Seritage’s chairman and the firm is 40% owned by ESL. This move so outraged other investors that they filed a class action suit against Lampert’s self dealing which ended up with Sears, not Lampert, paying out a $40 million settlement.

Sears will now enter bankruptcy where Lampert will still remain in nominal control of the company and benefit yet again from the distribution of the remains of the company he destroyed. He managed to take a company with a net worth of $12.7 billion in 2006 and turn it into a firm with a net worth of $-3.8 billion, a loss of $16.5 billion of net worth in a decade. He was able to do this because the company’s board were Lampert cronies, including his college roommate and great friend Steve Mnuchin, who only had the interests of themselves and the shareholders, not the company as a whole, at heart.

America is not Sears and we will not be going bankrupt anytime soon, primarily because we have the ability to print dollars. But vulture capitalism was largely made possible by Republican tax and economic policies, so we should not be surprised to see those policies mimic vulture capitalism at the federal and state level.

Like Lampert’s refusal to invest in the upkeep of Sears’s stores, state and federal governments have underinvested in our nation’s infrastructure for decades. The American Society of Civil Engineers gave the US infrastructure a D+ rating in 2017 and estimates we will have to spend $4.5 trillion within the next decade on necessary repairs and upgrades. This underinvestment extends beyond infrastructure into education where things had so deteriorated that teachers in multiple red states went on strike for higher wages and more resources earlier this year.

When Sears was actually generating lots of cash, Lampert would use that money to engage in stock buybacks, increasing the share price and putting money in his own pockets and those of his shareholders. When the cash flow shrank, Lampert would try to “cut his way to success”, laying off more employees and closing more stores. When even that became unsustainable, Lampert then sold off the firm’s assets, again enriching himself and his shareholders.

Republicans have taken a similar path. When times are good, they will cut taxes for their wealthy benefactors. Bush did this in 2001 and Trump and the GOP just pulled off a double earlier this year, literally putting money in the pockets of their benefactors and the shareholder class by cutting corporate tax rates. The money that companies saved from the lower tax rates almost overwhelmingly went in to the share repurchase plans that Lampert loved.

When the debt or deficit rises, largely as a result of prior GOP policies, then Republicans declare that it’s time to cut costs, meaning slashing Medicaid, Medicare, and Social Security if they can get away with it. Just today, McConnell blamed the rising deficits on federal spending programs, citing those three programs as “driver of the debt by any objective standard.” The fact that corporate tax receipts have fallen by one-third thanks to the tax cuts went unmentioned. And Republicans are always interested in selling off public lands and assets to private interests.

Eddie Lampert spent a decade pillaging Sears until there was nothing left. Republicans have spent nearly the last 40 years doing the same to America.