America: What Went Wrong? Rigging the Game (Part 1)

October 20, 1991

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And in July 1985, the company purchased most of the assets of Thatcher Glass Co. of Greenwich, Conn., a manufacturer with six plants that was operating under the protection of U.S. Bankruptcy Court.

Thatcher, like so many companies in the 1980s, went through a leveraged buyout in which managers and investors purchased the company with mostly borrowed money. So much borrowed money that the company eventually was forced into Bankruptcy Court.

That same month, Diamond-Bathurst moved from the drab second-floor offices above the aging Royersford plant into a modern office complex built into a hillside in the wooded and rolling countryside in Malvern, Pa.

As Frank B. Foster 3d, the company's president and chief executive officer, put it at the time: "We became in three short months one of the largest glass container manufacturers in the United States, with projected annualized sales of $550 million."

To finance it all, Diamond-Bathurst borrowed big. Its debt rocketed 700 percent, going from $13 million in 1984 to $104 million in 1985.

Wall Street loved it.

The stock shot up from a low of $6 a share to a high of $29. Later, it split. Sales climbed from $62 million to $408 million. Profits went from $2 million to $11 million.

The Philadelphia Inquirer in July 1985 quoted a First Boston Corp. securities analyst, Cornelius W. Thornton, as saying:

"There's a whole lot of synergism in this deal. I don't think the question is can Diamond pull it off. I think they've done it."

They hadn't.

But Wall Street has a short attention span and many investors already had made a killing.

It soon became clear that Diamond-Bathurst would be unable to make the interest payments on its mountain of debt. That debt was made possible by a Congress which, at the time, was working on a tax bill that would eliminate the deductibility of most forms of consumer interest, but retain the interest deduction for corporations.

Without that deduction, much of the corporate restructuring that took place in the 1980s, and the job loss that followed, might never have occurred, since the deals depended on the tax advantage. The use of debt to buy and dismantle companies—instead of to build them—was exploding. Congress, in hammering out the Tax Reform Act of 1986, chose to ignore that phenomenon.

In any event, Diamond-Bathurst posted a $6.2 million loss for 1986 rather than the profit that earlier had been forecast by stockbrokers and company management.

In June 1987, Moody's lowered the credit rating on Diamond-Bathurst's bonds.

Company executives already had closed one manufacturing plant after another—in Indianapolis; Wharton, N.J.; Mount Vernon, Ohio; Vienna, W. Va., and Knox, Pa., abolishing the jobs of several thousand workers.

It was not enough.

In August 1987, a heavily indebted Diamond-Bathurst was acquired by a competitor, the new corporate headquarters in Malvern was closed and more than 250 salaried workers were dismissed.

The buyer was Anchor Glass Container Corp. of Tampa, Fla., a descendant of a leveraged buyout.

When the new owners arrived, Larry Weikel, by then a shift foreman; Belinda Schell, a clerk, and other workers noticed an immediate change.

"It just became so competitive," Weikel said, "and things just started getting nasty and out of hand. It just seemed like they didn't care what you did to get the numbers...They'd expect you to get on somebody about a problem that wasn't their fault to start with."

Schell said Anchor Glass sent in managers from its plants in other parts of the country, and they issued conflicting orders.

Jobs were eliminated and the remaining employees were pressured to increase output. But there was no investment in more modern equipment or new technology.

The final day of production came in August 1990. Weikel, Schell and the remaining 275 or so employees were out of work.

Once again, their stories were much like the stories the authors heard in scores of interviews across the country. With few exceptions, the former Anchor Glass workers have moved into jobs that pay lower wages and offer reduced health-care benefits.

Weikel works part time at a marine-supply store run by his brother-in-law. His wife works in a sewing factory, earning about $6 an hour. When he lost his job, he refinanced the mortgage on the family home and has been draining their savings. Jobs that pay the $15 an hour he earned at Anchor Glass do not exist. Said Weikel:

"That's all I ever did in my life, work in a glass plant. I went to work there when I came out of the service and, you know, I really never learned anything because all I did was make bottles, and there's not much call for that. I could re-educate myself, I guess, but I don't want to get into another mess like that.

"I could get a job anywhere, I mean making $5, $6 an hour. But that's not worth my time...I would do it if I was starving. But I'm not. My kids are grown and I'm not worrying about it that much anymore. I spent 23 years worrying about it...All I really have to do is make enough money to feed my wife and myself."

Belinda Schell, with a growing family, had no choice but to go back to work. At Anchor Glass, she earned more than $10 an hour. At her new job, as a nursing home aide, she earns considerably less.

It is an occupation that the federal government touts as a growth industry that will provide many jobs—mostly low-paying—as the aged population continues to grow.

Belinda Schell's husband, who like Weikel earned $15 an hour at Anchor Glass, found a job in another manufacturing plant in King of Prussia. He, too, earns less than he did.

Mrs. Schell said her brother-in-law encountered another obstacle when he sought a job at lower pay than he had made:

"They would tell him he made too much money and he wouldn't be satisfied. He was making $16 at Anchor Glass and they said he wouldn't be satisfied making $8.

"But people like that don't know what it's like to go through a plant closing when you have a mortgage and children to feed. He has two children. He had just bought a new home the year before." Schell said he finally found other work, but at lower pay than he made at the glass plant.

As for other co-workers, she said, "some of them that are working are only making $5 to $7 an hour, which doesn't compare with what we were making at Anchor... I don't know anybody that is making what they made at Anchor Glass."

For Larry Weikel, the experience was disheartening: "You know what hurts me, that I was liked there at that plant one time. And then for this to happen...Twenty-three years in there, you know, and everything was great. And then an outfit comes in like this and destroys you.

"It seems like I prostituted my whole young life to that company and then they turn me out to pasture...I spent Saturdays and Sundays down there. I didn't do anything with the kids. I didn't go to ballgames. I didn't do that. I was always working. And then they turn around and do something like that to you."

Weikel, Schell and the other Diamond Glass employees were working under America's old economic rules that, for many, provided a job and good salary and health care and pension for life in exchange for a commitment to the company.

The new rules were quite different, and the owners of the Anchor Glass company that bought Diamond Glass knew them intimately. In fact, you might even say that one of Anchor Glass' original owners helped to write those rules. He was former U. S. Treasury Secretary William E. Simon, who was catapulted onto the Forbes magazine directory of the 400 richest Americans (his worth is estimated at $300 million) by taking advantage of the tax deduction for corporate debt.

Anchor Glass Container Corp. was itself the product of a leveraged buyout. It was formed in April 1983 by Wesray Corp. and executives of the glass container division of the Anchor Hocking Corp., one of the country's glass-making institutions.

Wesray was an investment banking firm founded by Simon along with Raymond G. Chambers, an accountant. It was one of the first of what would be many leveraged buyout firms that acquired companies with mostly borrowed money.

After making cosmetic changes that often included job cutbacks and other short-term cost-reduction measures, the companies would be sold, in whole or in part, at a substantial profit—or taken public, another form of sale.

Newspapers and financial publications regaled readers with Simon successes during the 1980s—among them Anchor Glass.

In an article published in October 1988, the Los Angeles Times reported that after Simon helped engineer the Anchor Glass buyout, "managers cut the workforce, slashed expenses and made a successful acquisition." Simon, the Times said, "made more than 100 times his money."

When Anchor Glass purchased the old glass container division of Anchor Hocking, the transaction was financed with the patented Simon debt formula: $76 million in borrowed money and $1 million investment by Wesray and others.

You might think of that kind of arrangement this way: Let's say you want to buy a house for $100,000. You visit your friendly neighborhood bank and offer to put about $1,500 down.

That's not the kind of deal you can get.

But Simon and his associates got a much better one when they organized Anchor Glass.

After Anchor Glass borrowed the $76 million, according to documents filed with the U. S. Securities and Exchange Commission (SEC), $48.5 million of that sum was reloaned to Simon and friends.

They, in turn, used $24 million of that money to buy the land and buildings of the various glass plants. Then they leased the land and buildings back to their new company, Anchor Glass, for 20 years.

In other words, the new owner of the glass plants, Anchor Glass Container Corp., would pay rent on the land and buildings to Simon and the other investors.

There was still more.

Simon and his associates bought the furnaces and other glass-making equipment in the various plants in exchange for a note promising to pay $43.6 million.

Then they leased the glass-making equipment back to Anchor Glass.

Several years later, Anchor Glass, in a report filed with the SEC, said the transactions were too generous to Simon and the other investors:

"These arrangements were entered into when the company was privately owned, were not the result of arm's-length bargaining and on the whole were not as favorable to the company as could have been obtained from unrelated third parties."

There were other deals.

Wesray picked up investment banking fees for handling the purchase of the glass-container properties and the acquisition of Midland Glass Co.

Anchor Glass purchased its casualty and liability insurance, and its employee health and benefit insurance, from two brokerage firms in which Simon and his colleagues also held an interest. That was worth more millions of dollars in fees.

And finally, there was the Anchor Glass corporate headquarters in Tampa. It, too, was owned by Simon and associates, who leased the building to the company.

In March 1986, Anchor Glass, which had been a private company, offered stock for sale to the public. By February 1988, according to an SEC report, Simon had sold his holdings.

His total profits from the many and varied deals are unknown. But they run into the tens of millions of dollars.

One more note:

In October 1989, Anchor Glass was sold.

The buyer was Vitro S. A., a Mexican glass company that ships products into the United States, competing with American-owned companies. Vitro is part of the corporate empire of Mexico's Sada family, ranked among the world's billionaire families by Forbes.

The Mexican company's first moves included a decision to close the glass plant in Royersford, Pa. And another plant in Vernon, Calif. And another plant in Gulfport, Miss. And another plant in San Leandro, Calif.


What happened to Weikel and Schell and other glass plant workers is not at all unusual. Nor is what happened to the company they worked for. Nor the money being made by investors and corporate executives.

Their story is the story of millions of middle-class Americans who are being forced out of higher-paying jobs into lower-paying jobs, or who have lost a portion or all of their benefits, or both.

VANISHING FACTORY WORKERS. In a letter to Congress in January 1989, President Reagan spoke enthusiastically of the many jobs his administration had created since 1980:

"Nearly 19 million nonagricultural jobs have been created during this period...The jobs created are good ones. Over 90 percent of the new jobs are full-time, and over 85 percent of these full-time jobs are in occupations in which average annual salaries exceed $20,000."

In fact, the job growth was centered in the retail trade and service sectors, which pay the lowest wages. Higher-paying jobs in manufacturing disappeared at a rate unmatched since the Great Depression.

In the 1950s, businesses added 1.6 million manufacturing jobs. They added 1.5 million such jobs in the 1960s, and 1.5 million in the 1970s. But in the 1980s, corporations eliminated 300,000 manufacturing jobs. If the trend continues, 500,000 or more will be erased in the 1990s.

While the number of manufacturing jobs fell 1.3 percent from the 1970s to the 1980s, dropping from an average of 19.6 million to 19.3 million, the number of retail trade jobs climbed 32.5 percent, rising from 12.8 million to 17 million.

The retail trade workers, whose numbers are growing, earn on average $204 a week. The manufacturing workers, whose numbers are dwindling, earn $458 a week.

Those numbers understate the problem. For the percentage of the overall workforce employed in manufacturing, people who make things with their hands—cars, radios, refrigerators, clothing—is plummeting.

During the 1950s, 33 percent of all workers were employed in manufacturing. The figure edged down to 30 percent in the 1960s, and plunged to 20 percent in the 1980s. It is now 17 percent—and falling.

ORGY OF DEBT AND INTEREST. One major reason for the declining fortunes of workers: American companies went on a borrowing binge through the 1980s, issuing corporate IOUs at the rate of $1 million every four minutes, 24 hours a day, year after year.

By decade's end, companies had piled up $1.3 trillion in new debt—much of it to buy and merge companies, leading to the closing of factories and elimination of jobs.

That debt required companies to divert massive sums of cash into interest payments, which in turn meant less money was available for new plants and equipment, less money for research and development.

During the 1950s, when manufacturing jobs were created at a record pace, companies invested $3 billion in new manufacturing plants and equipment for every $1 billion paid out in interest.

By the 1980s, that pattern had been reversed: Corporations paid out $1.6 billion in interest for every $1 billion invested in manufacturing plants and equipment.

Similarly, during the 1950s, for every $1 billion that corporations paid out in interest on borrowed money, they allocated $710 million for research and development.

By the 1980s, corporations spent only $220 million on research and development for every $1 billion in interest payments.

Through the 1980s, corporations paid out $2.2 trillion in interest, more than double their interest payments through the 1940s, 1950s, 1960s and 1970s—combined.

It was enough money to create seven million manufacturing jobs, each paying $25,000 a year.

BLOATED PAY FOR EXECUTIVES. While companies are cutting jobs that pay middle-income wages and adding large numbers of lower-paying jobs, they are paying ever-larger salaries and bonuses to people at the top.

Roberto C. Goizueta, chairman and chief executive officer of Coca-Cola Co., received salary and bonuses in 1990 totaling $2.96 million.

Nearly four decades earlier, in 1953, a Goizueta predecessor, Hammond B. Nicholson, earned $134,600 in the top job at Coca-Cola.

To put the salary change in perspective, if the pay of manufacturing workers had gone up at the same pace, a factory worker today would earn $81,000 a year.

While the news media have written at length on corporate salaries, most publications have suggested that high-paid executives are the exception. They are not.

An analysis of tax return data shows that in 1953, executive compensation was the equivalent of 22 percent of corporate profits. By 1987, the latest year for which detailed figures were available, executive compensation was the equivalent of 78 percent of corporate profits.

Measured from a different perspective, in 1953 corporations paid their executives $8.8 billion in salaries, stock bonuses and other compensation. That year, those corporations paid $19.9 billion in federal income taxes.

By contrast, in 1987, corporations paid their officers $200 billion in compensation, while they paid $83.9 billion in federal income taxes.

That means businesses paid $2.3 billion in taxes for every $1 billion paid in executive salaries in 1953. By 1987, that pattern was reversed: Businesses paid $2.4 billion in executive salaries for every $1 billion in taxes.

THE DOWNWARDLY MOBILE. Measured in terms of buying power, the wages of manufacturing, retail trade and other service industry employees during the 1980s fell far short of their parents' and grandparents' earnings.

To understand why, let's go back in time, to 1952, and the opening of Levittown, Pa., the world's largest planned community, a symbol of a flourishing middle class.

It took a factory worker one day to earn enough money to pay the closing costs on a new Levittown house, then selling for $10,000. More importantly, that was an era when the overwhelming majority of families buying homes relied on the income of one wage-earner.

In 1991, it took a factory worker 18 weeks to earn enough money to pay the closing costs on that same Levittown home, now selling for $100,000 or more.

Unfortunately, even if the factory worker of the 1990s had the minimum down payment, his income would be insufficient for him to qualify for a mortgage.

That's because it now requires two incomes for most families to come up with a larger down payment and to meet higher monthly mortgage and tax payments.

Workers in the retail and service industry are even worse off, which helps explain why so many Americans can't afford to own a house. This is especially true for young families, who in decades past were the traditional homebuyers.

On a more mundane level, a store clerk in 1952 had to work two hours to pay for 100 postage stamps. In 1991, a store clerk had to work six hours to buy 100 stamps.

All these things—shrinking paychecks, disappearing factory jobs, fat salaries for corporate executives, uncontrolled business debt, a deteriorating standard of living—are the visible consequences of the distorted government rule book.

Other consequences are harder to see. But look closely and you will find them.

They range from mounting racial tensions between whites and blacks competing for a shrinking number of middle-class jobs to an increase in employee theft and shoplifting.

From fraudulent workers compensation claims approaching epidemic proportions to a growing refusal on the part of citizens to pay taxes that they owe.

From a shifting of the responsibility for social welfare programs from the federal government to the state governments, from the state governments to local governments.

From an increase in domestic violence to a declining quality of care for residents of nursing homes.

What does the government rule book have to do with care in a nursing home?

Meet Mengabelle Quatre, a former resident of a California nursing home operated by Beverly Enterprises Inc.

Actually, let's begin with Beverly Enterprises, the product of a new economic order—one envisioned by Michael R. Milken and his Wall Street associates and made possible by rules set down by Congress.

Like so many other businesses of the 1980s, its rapid expansion was fueled by easy debt. The company grew by acquiring small, independent nursing homes and building new ones, financed with junk bonds, bank loans and, in part, taxpayer dollars through industrial revenue bonds.

The number of beds in its facilities increased from 51,300 in 1981 to 121,800 in 1986. Revenue rose from $486 million to $2 billion. Profits went from $16 million to $51 million. And its stock shot up from $2.50 a share to $22.50, generating millions of dollars in profits for investors.

Along the way, Beverly Enterprises emerged as the nation's largest nursing home operator. Its investment adviser, Drexel Burnham, which had managed a $100 million securities offering for the company in 1983, was bullish on the prospects of making ever more money on the elderly.

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