Saturday, April 09, 2011

WHY WALL STREET IS HATED

The culture of Wall Street is often depicted as rapacious, predatory, and uncaring about the concerns of Main Street. Some bankers, traders, money managers will feebly argue that what they do has some redeeming social value, such as ensuring the smooth flow of capital from those who have to those who need it. But let's face it, unlike other professionals such as lawyers, architects, journalists, or doctors who might have another, more noble objective for their career other than getting rich, anyone who works in high finance is in it for one reason and one reason only, namely mula.

The recent bankruptcy of the venerable Harry and David, the company that makes gift fruit baskets that are big selling items during the Holidays, provides a case study in what results from the greed.

Harry and David is a company started over a century ago by Harry and David Rosenberg, sons of a local fruit grower in Medford, Oregon. Over the decades its Royal Riviera pears, Moose Munch popcorn, and fruit baskets became a staple of the Holiday season. DC-8 cargo planes flew in and out of Medord's airport on a regular basis from early November through December. The community counted on Harry and David for not only the regular employment of 2,000 or so souls but also the seasonal part-time employment of another 6,000 workers who picked, packed and shipped baskets around the world. Whether full-time or part-time, these workers directly and the whole town indirectly depended on H&D.

In 2004, the private equity firm, Wasserstein & Co bought H&D from a Japanese drug company for $230 million. Wasserstein did what all buy-out firms do, namely pay for the purchase with other people's money by mostly borrowing what was needed. In 2005 Wasserstein issued $245 million in junk bonds to refinance the original borrowings. Wasserstein also took $82 million from the bond proceeds to pay itself a big fat dividend. Later that year, Wasserstein paid itself another $19mm from Harry and David's coffers. The net effect was that within a couple of years of buying H&D, Wasserstein had managed to recoup all of its original $82 million equity investment in the company. Wasserstein was no playing with the house's money and now had nothing to lose and everything to gain.

But to get in this cat bird's seat, Wasserstein had loaded the company up with a dangerous amount of debt. When the economy turned down in 2008, this burden of debt became unbearable. It didn't help that H&D, under Wasserstein's direction, expanded agressively at just the wrong time by opening up 100 stores and buying Cushman Fruit, a mail order shipper. One might expect such an "all in" strategy from a player who, as I said before, had nothing lose and everything to gain.

With severe downturn in the economy, the over-leveraged company had no choice but to file bankruptcy. Bankruptcy usually entails that the owner, ie, Wasserstein, is left with nothing. But Wasserstein over the past couple of years had been steadily buying the H&D bonds, the price of which had steeply fallen as a result of H&D's bad decisions and debt. So when bond holders end up getting all the equity in the company as the planned bankruptcy reorganization calls for, then Wasserstein, holding more than $40 million of the bonds, will still be a major equity owner of the company that it drove into the ground. Nice work if you can get it....

In the meantime, the layoffs accelerated, adding to Medford's 12.9% unemployment rate. The collateral damage to the region and to other businesses that depeneded on the H&D paychecks has been significant. And Wasserstein? They have gotten all their money back and still own a large stake in the company. They might not be laughing all the way to the bank but they are certainly smiling.

The company is now being run by a managing director with Alvarez Marsal, a corporate restructuring firm in NYC. When asked what she would say to all those workers who lost their jobs and those who have been impacted by H&D's bankruptcy, the Alavarez Marsal executive had this to say, "I'm encouraging everyone in our community to go buy some more Moose Munch."

2 comments:

Anonymous said...

argh. A joke for those who lost good honest livings... people with lives, pride and families.

From the people who recklessly profited.

Nick Goreman said...

Yes, Anonymous. Who are you, btw? Nick