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July 28, 2009

Illusion, Reality, and the Quarterly Report

Goldman Sachs, which has made billions through financing and collecting "advisory fees" on buyout deals in addition to being a major buyout actor in its own right, has posted record quarterly profits. Is prosperity around the corner?

Never has the disconnect between finance and the world of work been bigger, nor profit more deceptive. While workers are experiencing rising unemployment and falls in output not seen since the Great Depresssion. Wall Street and global stock exchanges have detected more "green shoots of recovery" in the latest quarterly reports from the US banking sector.

What is behind Goldman Sachs' record USD $3.44 billion second quarter profit (on USD 13.76 billion in revenue)? According to the Financial Times, the results were powered by "Strong revenue growth in its fixed income, commodities and currencies business, and hefty underwriting fees from capital raisings." Taking these in reverse order, what it really means is this:

Goldman Sachs benefited massively from a no-strings-attached bailout at public expense which pumped cash directly into their vaults while simultaneously giving them virtually free federally guaranteed credit on unsecured loans. US taxpayers directly reimbursed Goldman for billions in losses incurred with AIG, whose demise it helped bring about. Goldman and other leading banks helped design the government balance sheet "stress tests" and then negotiated the results which gave them a clean bill of health. Goldman then turned around and underwrote the equity issues which its less fortunate (and less well connected) competitors needed to remain afloat (the "hefty underwriting fees from capital raisings").

The enduring crisis has meant continued volatility in foreign exchange markets, fuelling speculation (the "currency business"). Investors fleeing investment in the real economy but hoping to surf an eventual recovery poured money into commodity futures, paving the way for the next devastating round of food price hikes (the "commodities business").

The global casino remains wide open for business, doped by public revenue. Goldman Sachs, if it stays on a roll, is set to pay out over USD 22 billion in end-of-year bonuses. So despite Gordon Brown's solemn announcement of an end to the era of unregulated free-market finance, it looks very much like business as usual, bonuses and all, with one key difference. With public money, financial institutions considered "too big to fail" have absorbed the most profitable bits of their failed rivals and are now even bigger

Accounting smoke and mirrors cannot sustain the financial sector indefinitely while the real economy continues to shrink. The clock is ticking on a mountain of debt, including massive credit card and other consumer debt which can only deteriorate further as unemployment climbs.

Strip away the fanciful forecasts and the fantasy valuations of "toxic assets" and global finance remains no sounder than it was a year ago. Large quarterly profits at JP Morgan Chase, Bank of America and Citigroup (the last two of which flunked the "stress test") were based on asset sales and creative accounting. European banks have managed to conceal the worst by writing off only a limited portion of their bad loans and securities. The European Central Bank recently estimated that eurozone banks face cumulative losses for 2007-2010 of a staggering €649 billion. The forecast may prove optimistic; as the Financial Times recently noted, most European banks "employ aggressive accounting practices that may mask their true financial condition."

None of the billions and even trillions of dollars of public support has found its way into real investment in factories, offices, research or infrastructure - investment which generates employment and feeds families. Since January, according to the European Central Bank, the rate of growth in bank lending to manufacturing and services has been halved. Much of the money dished out to the financial sector is simply being parked back at the central banks' own lending facilities in the EU, US and UK, all of which report record inflows of overnight deposits even as finance ministry officials and heads of state beg and plead for the banks to start lending.

None of this should come as a surprise. Vast sums of public money were handed to the banks by governments which consciously renounced using existing tools at their disposal to direct the money into productive investment. It is not too late to change course. The Obama administration in June allowed ten leading banks which had benefited hugely from public support to pay back the loans and wriggle out of restrictions on bonuses and other inconveniences. It could still, through a variety of means, influence their operations. As we saw in the case of Goldman Sachs, access to federal credit is still a vital lifeline to cheap money for the banks. And governments everywhere will be compelled to maintain and expand their existing ownership stakes in failing financial corporations as the banks go on generating losses. Unions must demand that they use their whole or partial ownership to enforce investment policies which can benefit the working people who are paying for the bailouts.

Goldman Sachs and the latest quarterly report madness show, first, that unless governments are prepared to use their financial support for a tottering financial sector as an instrument of public policy rather than a tool for transferring public wealth to private hands, they are simply laying the ground for the next speculative bubble. Second, the crisis in consumer credit is being exacerbated as companies slash jobs and investment to squeeze returns out of stagnant or falling sales. Employment and the crisis in the financial sector are therefore intimately linked. It follows from this that strengthening, not diminishing, the wages and employment which anchor real, not financial growth, offer the only way out of the crisis.

CVC Capital in Bid for Anheuser-Busch InBev ECE Operations

Two private equity groups - CVC Capital Partners and TPG - are the two private equity funds which remain in the running to acquire the Eastern and Central European assets of Anheuser-Busch Inbev in a bidding process which closed on July 27.

CVC, as reported in the Belgian daily de Tijd, has offered USD 2.1 billion for 11 breweries in Bulgaria, Romania, Hungary, Croatia, Czech Republic, Serbia and Montenegro. Anheuser-Busch Inbev's Russian and Ukrainian operations, which account for some 14% of the company's global sales, are not part of the deal. Some 6,000 workers are employed at the operations in these seven countries.

A-B Inbev, the world's largest brewer, still needs USD 4 billion in cash to pay down debt it took on to fund the USD 52 billion purchase of Anheuser-Busch last year, only partially funded through a rights issue. With other global brewers strapped for cash, that left only the buyout funds as a possible source of ready cash. Five showed initial interest in the ECE deal, but the list was whittled down to two.

In May, AB Inbev sold off its Korean brewers, Oriental Brewery, to KKR for USD 1.8 billion. Details of the financing remain murky - and the company has the right to buy it back after 5 years on undisclosed terms.

Luxembourg-based CVC, one of the five top global buyout funds, currently has a portfolio of 52 companies employing some 447,000 employees worldwide. Fundraising slowed marginally last year, though it raised the biggest ever Asia/Pacific buyout fund, but CVC is flush with cash. The problem is bank financing and diminished bank appetite for buyout deals.

According to de Tijd, CVC is negotiating with 13 banks for some 700 million euros in loans - meaning it would still have to shell out a large bit of its own cash to purchase the shares.

In the IUF sectors, CVC (together with Nordic Capital) gutted the Finnish confectionery company Leaf and its role in the destruction of UK retailer Debenhams (on this site dissected here) is a textbook case of predatory private equity financial vandalism.

Union action in Korea in 2007 played an important role in derailing a potential CVC acquisition of Coca-Cola's South Korean bottling operations.

July 16, 2009

Stella D'oro Workers to Fight Retaliatory Plant Closure

The 136 members of the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union (BCTGM) on strike for nearly 11 months at the New York biscuit maker Stella D'oro (Buyouts, Bread Sticks, Biscotti) returned to work on July 6 to find that private equity owners Brynwood Partners would be closing the plant within 90 days and relocating production.

Brynwood, which boasts of its 28.8% returns to investors, bought the company from Kraft in 2006. They forced the union out on strike last year by presenting a take-it-or-leave-it contract offer which would have shredded wages and benefits. From August 14, 2008, union members showed tremendous solidarity on the picket line, winning growing community, national and international support for holding the line against a predatory financial investor

In response to an unfair labour practices complaint filed by the union at the National Labor Relations Board (NLRB) earlier this year, a judge on June 30 agreed with the union that Brynwood had committed an unfair labour practice by invoking economic difficulties to justify the contract slash-and-burn offer but then refusing to provide any information about the company's actual finances. The judge ordered the workers reinstated with back pay, instructing the company to furnish the requested information and engage in genuine bargaining.

The union has responded to the announced closure by filing new charges against Brynwood Partners at the NLRB denouncing the threat to relocate production and close the factory as illegal retaliation for the union's successful legal action in getting the workers back to their jobs.

According to BCTGM Local 50, which represents the Stella workers, "In an attempt to reopen negotiations, the union exercised its right to demand bargaining over both the renewal of the expired collective agreement and the company’s decision to close the plant and relocate production. In a July 13 letter to company attorney Mark Jacoby, the union asked to be given the information the federal judge had previously ordered the company to provide. Further, since the company indicated that it was relocating production because of allegedly high labor costs, the union is entitled to and demanded information regarding the identity of the facility production was being transferred to and the projected costs of production and distribution of Stella D’oro products from that facility."

The union has also highlighted the tax rebates and subsidies that Brynwood Partners have received from city and state governmen to support local manufacturingt.

The BCTGM has identified at least two employee pension funds invested with Brynwood: CalPERS of California, the largest US public pension fund, and the Pennsylvania State Retirement System. CalPERS - which at the end of 2008 had over USD 43 billion invested in private equity - has recently voted to increase its private equity investment allotment from 10 to 14%, securing its position as one of the world's largest investors in private equity.

Brynwood bought the Turtles and Flipz confectionery brands from Nestlé, merged them as Demet's, and in December 2008 added two more Nestlé USA brands, Trerasures and Stixx. Brynwood's food portfoliio includes as well private label food manufacturer Richelieu Foods.