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<\/a>\n<\/div>\n<\/pre>\nNo business can afford to plan for a rainy day. Any company that has a large rainy day fund will be raided by vulture capitalists so that the vulture capitalists can pocket the rainy day fund.<\/p>\n
The rules that allow corporate raiding are the very rules that need to be changed to make our “capitalist” system work again.<\/p>\n
I think much of the current environment was created by Michael Milken. WikiPedia <\/a>has the details that are relevant.<\/p>\n
\nBy the mid-1980s, Milken’s network of high-yield bond buyers (notably Fred Carr’s Executive Life Insurance Company<\/a> and Tom Spiegel’s Columbia Savings & Loan) had reached a size that enabled him to raise large amounts of money quickly.\n<\/p>\n
This money-raising ability also facilitated the activities of leveraged buyout<\/a> (LBO) firms such as Kohlberg Kravis Roberts<\/a> and of the so-called “greenmailers<\/a>“. Most of them were armed with a “highly confident letter<\/a>” from Drexel, a tool Drexel’s corporate finance wing crafted that promised to raise the necessary debt in time to fulfill the buyer’s obligations. It carried no legal status, but by this time, Milken had a reputation for being able to make markets for any bonds that he underwrote. For this reason, “highly confident letters” were considered to reliably demonstrate capacity to pay.[23]<\/a><\/sup>[24]<\/a><\/sup> Supporters, like George Gilder<\/a> in his book, Telecosm<\/i> (2000), state that Milken was “a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken <\/span>… and others took the vast sums trapped in old-line businesses and put them back into the markets.”[25]<\/a><\/sup>\n<\/p>\n
Amongst his significant detractors have been Martin Fridson<\/a> formerly of Merrill Lynch<\/a> and author Ben Stein<\/a>. Milken’s high-yield “pioneer” status has proved dubious as studies show “original issue” high-yield issues were common during and after the Great Depression<\/a>. Milken himself points out that high-yield bonds go back hundreds of years, having been issued by the Massachusetts Bay Colony in the 17th century and by America’s first Treasury Secretary Alexander Hamilton<\/a>. Others such as Stanford Phelps<\/a>, an early co-associate and rival at Drexel, have also contested his credit as having pioneered the modern high-yield market.[citation needed<\/span><\/a><\/i>]<\/sup>\n<\/p>\n<\/blockquote>\n
I read “productivity surge in capital” as meaning doing away with the “wasteful” activities of “saving for a rainy day”. Other “wasteful” activities might include providing adequate funding of pension plans, and paying workers a decent wage. These type of “wasteful” activities might be what Nicholas Nassim Taleb calls making systems anti-fragile<\/a>. Doing away with these activities makes a company more “efficient” and “productive” in the short term, but makes a company highly susceptible to going under in a “black swan” event that could not have been foreseen.<\/p>\n
I also note that “and others took the vast sums trapped in old-line businesses and put them back into the markets” were not “trapped” under a mattress in old-line businesses. If the funds were held in bank accounts or in bonds, the money was already being recirculated in loans that the banks made or use that the bond sellers made of the proceeds from selling bonds.<\/p>\n