Date: Mon Jan  4 03:48:00 est 1993
From: "John Covici" <covici@ccs.covici.com>
Message-Id: <2b47f9c8.ccs@ccs.covici.com>
Reply-To: "John Covici" <covici@ccs.covici.com>
Organization: Covici Computer Systems
To: uunet!css.itd.umich.edu!pauls@uunet.UU.NET
Subject: Unauthorized Biography of George Bush: Part 28
Status: O
{XX: The Leveraged Buyout
Mob} 

During the entire decade of the
1980s, the policies of the Reagan-Bush
and Bush administrations encouraged one
of the greatest paroxysms of
speculation and usury that the world
has ever seen. Starting especially in
the summer of 1982, a malignant and
cancerous mass of speculative paper
spread through all the vital organs of
the banking, credit, and financial
system. Capital had long since ceased
to be used for the creation of new
productive plant and equipment, new
productive manufacturing jobs,
investment in transportation, power
systems and education; health services
and other infrastructure declined well
below the breakeven level. Wall Street
investors came more and more to
resemble vampires who ranged over a
ghoulish landscape in search of living
prey whose blood they could suck to
perpetuate their own lively form of
death. 
   For the vast majority of the U.S.
population (to say nothing of the
brutal immiseration in the developing
countries) it was an epoch of
austerity, sacrifice, and decline, of
the entropy of a society in which most
people have no purpose and feel
themselves becoming redundant. But for
a paper-thin stratum of plutocrats and
parasites, the 1980s was a time of
unlimited opportunity. These were the
practitioners of the disastrous
financial swindles that marked the
decade, the protagonists of the hostile
takeovers, mergers and acquisitions,
leveraged buyouts, greenmail, and stock
plays that occupied the admiration of
Wall Street. These were corporate
raiders like J. Hugh Liedtke, Baine
Kerr, T. Boone Pickens, and Frank
Lorenzo; Wall Street financiers like
Henry Kravis and Nicholas Brady. And
these men, surely not by coincidence,
belonged to the intimate circle of
personal friends and close political
supporters of George Herbert Walker
Bush. 

   The Pennzoil Wars: A Case
Study
 
   One of the landmark corporate
battles of the first Reagan
administration was the battle over
control of Getty Oil, a battle fought
between Texaco--at that time the third
largest oil company in the United
States and the fourth largest
industrial corporation--and J. Hugh
Liedtke's Pennzoil. George Bush's old
partner and constant crony, J. Hugh
Liedtke, was still obsessed with his
dream of building Pennzoil into a major
oil company, one that could become the
seventh of the traditional Seven
Sisters after Chevron and Gulf merged. 
   Liedtke was the chairman of the
Pennzoil board, and the Pennzoil
president was now Baine Kerr, a former
lawyer from Baker & Botts in Houston.
Baine Kerr was also an old friend of
George Bush. Back in 1970, when George
was running against Lloyd Bentsen, Kerr
had advised Bush on a proposed business
deal involving a loan request from
Victor A. Flaherty, who needed money to
buy Fidelity Printing Company. Baine
Kerr was a hard bargainer: He
recommended that Bush make the loan,
but that he also demand some stock in
Fidelity Printing as part of the deal.
Three years later, when Fidelity
Printing was sold, Bush cashed in his
stock for $99,600 in profit, a gain of
1,900 percent on his original
investment. That was the kind of return
that George Bush liked, the kind that
honest activities can so rarely
produce.@s1 
   Chairman Mao Liedtke and his
sidekick Baine Kerr constantly scanned
their radar screens for an oil company
to acquire. They studied Superior Oil,
which was in play, but Superior Oil did
too much of its business in Canada,
where there had been no equivalent of
George Bush's Task Force on Regulatory
Relief, and where the oil companies
were thus still subject to some
restraints. Chairman Mao ruled that one
out. Then there was Gulf Oil, where T.
Boone Pickens was attempting a
takeover, but Liedtke reluctantly
decided that Gulf was beyond his means.
Then, Chairman Mao began to hear
reports of conflicts on the board of
Getty Oil. Getty Oil, with 20,000
employees, was a $12 billion
corporation, about six times larger
than Pennzoil. But Chairman Mao had
already managed to gobble up United Gas
when that company was about six times
larger than his own Pennzoil. Getty Oil
had about a billion barrels of oil in
the ground. Now Chairman Mao was very
interested. 
   In early 1984, Gordon Getty and
his Sarah Getty Trust, plus the Getty
Museum represented by the New York
mergers and acquisitions lawyer Marty
Lipton, combined to oblige the board of
Getty Oil to give preliminary
acceptance to a tender offer for Getty
Oil stock at a price of about $112.50
per share. Arthur Liman thought he had
a deal that would enable Chairman Mao
to seize control of Getty Oil and its
billion barrel reserves, but no
contract or any other document was ever
signed, and key provisions of the
transaction remained to be negotiated. 
   When the news of these
negotiations began to leak out, major
oil companies who also wanted Getty and
its reserves began to move in: Chevron
showed signs of making a move, but it
was Texaco, represented by Bruce
Wasserstein of First Boston and the
notorious Skadden, Arps, Slate, Meagher
& Flom law firm, that got the attention
of the Getty Museum and Gordon Getty
with a bid (of $125 a share) that was
sweeter than the tight-fisted Chairman
Mao Liedtke had been willing to put
forward. Gordon Getty and the Getty
Museum accordingly signed a contract
with Texaco. This was nominally the
largest acquisition in human history up
to that time, and the check received by
Gordon Getty was for $4,071,051,264,
the second largest check ever written
in the history of the United States,
second only to one that had been used
to roll over a part of the post-World
War II national debt. 
   But Chairman Mao Liedtke thought
he had been cheated. ``They've made off
with a million dollars of my oil!'' he
bellowed. ``We're going to sue
everybody in sight!'' 
   But Chairman Mao Liedtke's
attempts to stop the deal in court were
fruitless; he then concentrated his
attention on a civil suit for damages
on a claim that Texaco had been guilty
of ``tortious interference'' with
Pennzoil's alleged oral contract with
Getty Oil. The charge was that Texaco
had known that there already had been a
contract, and had set out deliberately
to breach it. After extensive forum
shopping, Chairman Mao concluded that
Houston, Texas was the right venue for
a suit of this type. Liedtke and
Pennzoil demanded $7 billion in actual
damages and $7 billion in punitive
damages for a total of at least $14
billion, a sum bigger than the entire
public debt of the United States on
December 7, 1941. Liedtke hired Houston
lawyer Joe ``King of Torts'' Jamail,
and backed up Jamail with Baker &
Botts. 
   Interestingly, the judge who
presided over the trial until the final
phase, when the die had already been
cast, was none other than Anthony J.P.
``Tough Tony'' Farris. Back in February
1963, the newly elected Republican
county chairman for Harris County,
George H.W. Bush, had named Tough Tony
Farris as his first assistant county
chairman.@s2 During the Nixon
administration, Farris became the U.S.
Attorney in Houston. Given what we know
of the relations between Nixon and
George Bush, we must conclude that a
patronage appointment of this type
could hardly have been made without
George Bush's involvement. Tough Tony
Farris was decidedly an asset of the
Bush networks. 
   Now Tough Tony Farris was a state
district judge, whose remaining
ambition in life was an appointment to
the federal bench. Farris did not
recuse himself because his patron,
George Bush, was a former business
partner and constant crony of J. Hugh
Liedtke. Farris rather began issuing a
string of rulings favorable to
Pennzoil: He ruled that Pennzoil had a
right to quick discovery from Texaco.
Farris was an old friend of Pennzoil's
lead trial lawyer, Joe Jamail, and
Jamail had just given Tough Tony Farris
a $10,000 contribution for his next
election campaign. Jamail, in fact, was
a member of Tough Tony's campaign
committee. Texaco attempted to recuse
Farris, but they failed. Farris claimed
that he would have recused himself if
Texaco's lawyers had come to him
privately, but that their public
attempt to get him pitched out of the
case made him decide to fight to stay
on. Just at that point, the district
courts of Harris County changed their
rules in such a way as to allow Bush's
man Tough Tony Farris, who had presided
over the pretrial hearings, to actually
try the case. 
   And try the case he did, for 15
weeks, during which the deck was
stacked for Pennzoil's ultimate
victory. With a few weeks left in the
trial, Farris was diagnosed as
suffering from terminal cancer, and he
was forced to request a replacement
district judge. The last-minute
substitute was Judge Solomon Casseb,
who finished up the case along the
lines already clearly established by
Farris. In late November 1985, the jury
awarded Pennzoil damages of $10.53
billion. Casseb not only upheld this
monstrous result, but increased it to a
total of $11,120,976,110.83. 
   Before the trial, back in January
1985, Chairman Mao Liedtke had met with
John K. McKinley, the chairman of
Texaco, at the Hay-Adams Hotel across
Lafayette Park from the White House in
Washington, D.C. Liedtke told McKinley
that he thought what Texaco had done
was highly illegal, but McKinley
responded that his lawyers had assured
him that his legal position was ``very
sound.'' McKinley offered suggestions
for an out-of-court settlement, but
these were rejected by Chairman Mao,
who made his own counter-offer: He
wanted three-sevenths of Getty Oil, and
was now willing to hike his price to
$125 a share. According to one account
of this meeting, Liedtke seemed to go
out of his way to mention his
friendship with George Bush, according
to Bill Weitzel of Texaco. ``Mr.
Liedtke was quite outspoken with regard
to the influence that he felt he
had--and would and could expect in
Washington--in connection with
antitrust matters and legislative
matters,'' McKinley would say in
deposition. ``The idea was that
Pennzoil was not without political
influence that could adversely affect
the efforts of Texaco in completing its
merger.''@s3 
   Liedtke denied all this: ``The
political-influence thing isn't true. I
don't have any and McKinley knows it!''
Did Liedtke keep a straight face? 
   In any case, the Reagan-Bush
regime made no secret of its support
for Pennzoil. In the spring of 1987,
after prolonged litigation, the U.S.
Supreme Court required Texaco to post a
bond of $11 billion. On April 13, 1987,
the press announced that Texaco had
filed for Chapter 11 bankruptcy
protection. The Justice Department
created two committees to represent the
interests of Texaco's unsecured
creditors, and Pennzoil was made the
chairman of one of these committees.
Texaco operations were subjected to
severe disruptions. 
   During the closing weeks of 1987,
Texaco was haggling with Chairman Mao
about the sum of money that the
bankrupt firm would pay to Pennzoil. At
this point, Bushman Lawrence Gibbs was
the commissioner of the Internal
Revenue Service. He slammed bankrupt
and wounded Texaco with a demand for
$6.5 billion in back taxes. This move
was in the works behind the scenes
during the Texaco-Pennzoil talks, and
it certainly made clear to Texaco which
side the government was on. The
implication was that Texaco had better
settle with Chairman Mao in a hurry, or
face the prospect of being broken up by
the various Wall Street sharks, who had
begun to circle the wounded company. In
case Texaco had not gotten the message,
the Department of Energy also launched
an attack on Texaco, alleging that the
bankrupt firm had overcharged its
customers by $1.25 billion during the
time before 1981 when oil price
controls had been in effect. 
   The entire affair represented a
monstrous miscarriage of justice, a
declaration that the entire U.S. legal
system was bankrupt. At the heart of
the matter was the pervasive influence
of the Bush networks, which gave
Liedtke the support he needed to fight
all the way to the final settlement. 

   Kohlberg, Kravis, Roberts
 
   But even the enormities of
Chairman Mao Liedtke were destined to
be eclipsed in the political and
regulatory climate of savage greed
created with the help of the
Reagan-Bush administration and George
Bush's Task Force on Regulatory Relief.
Even Liedtke's colossal grasping was
about to be out-topped by a small Wall
Street firm, which, primarily during
the second Reagan-Bush term, assembled
a financial empire greater than that of
J.P. Morgan at the height of Jupiter's
power. This firm was Kohlberg, Kravis,
Roberts (KKR) which had been founded in
1976 by a partner and some former
employees of the Bear Stearns brokerage
firm of lower Manhattan, and which by late
1990 had bought a total of 36 companies
using some $58 billion lent to KKR by
insurance companies, commercial banks,
state pension funds, and junk bond king
Michael Milken. The dominant
personality of KKR was Henry Kravis. 
   Henry Kravis's epic achievements
in speculation and usury perhaps had
something to do with the fact that he
was a close family friend of George
Bush. As we have seen, when Prescott
Bush was arranging a job for young
George Herbert Walker Bush in 1948, he
contacted Ray Kravis of Tulsa,
Oklahoma, whose business included
helping Brown Brothers Harriman to
evaluate the oil reserves of companies.
Ray Kravis over the years had kept in
close touch with Senator Prescott Bush
and George Bush, and young Henry
Kravis, his son, had been introduced to
George and had hob-nobbed with him at
various Republican Party fundraising
events. Henry Kravis by the early 1980s
was a member of the Republican Party's
elite inner circle. 
   Bush and Henry Kravis became even
more closely associated during the time
that Bush, ever mindful of campaign
financing, was preparing his bid for
the presidency. Among political
contributors, Henry Kravis was a very
high roller. In 1987-88, Kravis gave
over $80,000 to various senators,
congressmen, Republican political
action committees, and the Republican
National Committee. During 1988, Kravis
gave $100,000 to the GOP Team 100,
which meant a ``soft money''
contribution to the Bush campaign.
Kravis's partner, George Roberts, also
anted up $100,000 for the Republican
Team 100. In 1989, the first year in
which it was owned by KKR, RJR Nabisco
also gave $100,000 to Team 100. During
that year, Kravis and Roberts gave
$25,000 each to the GOP. During the
1988 primary season, Kravis was the
co-chair of a lavish Bush fundraiser at
the Vista Hotel in lower Manhattan, at
which Henry's fellow Wall Street
dealmakers and financier fat cats
coughed up a total of $550,000 for
Bush. Part of Kravis's symbolic
recompense was the prestigious title of
co-chairman of Bush's Inaugural Dinner
in January 1989. One year later, in
January 1990, Kravis was the national
chairman of Bush's Inaugural
Anniversary Dinner.@s4 
   According to Kravis, Bush ``writes
me handwritten notes all the time and
he calls me and stuff, and we talk.''
The talk concerned what the U.S.
government should do in areas of
immediate interest to Kravis: ``We
talked on corporate debt--this was
going back a few years--and what that
meant to the private sector,'' said
Kravis. 
   Henry Kravis certainly knows all
about debt. The 1980s witnessed the
triumph of debt over equity, with a
tenfold increase in total corporate
debt during the decade, while
production, productive capacity, and
employment stagnated and declined. One
of the principal ways in which this
debt was loaded onto a shrinking
productive base was through the
technique of the hostile, junk
bond-assisted leveraged buyout, of
which Henry Kravis and his firm were
the leading practitioners. 
   Small-scale leveraged buyouts were
pioneered by KKR during the late 1970s.
In its final form, the technique looked
something like this: Corporate raiders
looked around for companies that might
be worth more than their current stock
price if they were broken up and sold
off. Using money borrowed from a number
of sources, the raider would make a
tender offer, or otherwise secure a
majority of the shares. Often all
outstanding shares in the company would
be bought up, taking the company
private, with ownership residing in a
small group of financiers. The company
would end up saddled with an immense
amount of new debt, often in the form
of high-yield, high-risk subordinated
debt certificates called junk bonds.
The risk on these was high, since, if
the company were to go bankrupt and be
auctioned off, the holders of the junk
bonds would be the last to get any
compensation. 
   Often, the first move of the
raider after seizing control of the
company and forcing out its existing
management, would be to sell off the
parts of the firm that produced the
least cash flow, since enhanced cash
flow was imperative to start paying the
new debt. Proceeds from these sales
could also be used to pay down some of
the initial debt, but this process
inevitably meant jobs destroyed and
production diminished. These raiding
operations were justified by a
fascistoid-populist demagogy that
accused the existing management of
incompetence, indolence, and greed. The
LBO pirates professed to have the
interests of the shareholders at heart,
and made much of the fact that their
operations increased the value of the
stock and, in the case of tender
offers, gave the stockholders a better
price than they would have gotten
otherwise. The litany of the corporate
raider was built around his commitment
to ``maximize shareholder value'';
workers, bondholders, the public, the
firms themselves were all expendable in
the short run. 
   An important enticement to
transform stocks and equity into bonded
and other debt was provided by the
insanity of the U.S. tax code, which
taxed profits distributed to
shareholders, but not the debt paid on
junk bonds. The ascendancy of the
leveraged buyout, therefore, was
accompanied by the demolition of the
U.S. corporate tax base, contributing
in no small way to the growth of
federal deficits. 
   Ultimately, the big profits were
expected when the acquired companies,
after having been downsized to ``lean
and mean'' dimensions, had their stock
sold back to the public. KKR reserved
itself 20 percent of the profits on
these final transactions. In the
meantime, Kravis and his associates
collected investment banking fees,
retainer fees, directors' fees,
management fees, monitoring fees, and a
plethora of other charges for their
services. 
   The leverage was accomplished by
the smaller amount of equity left
outstanding in comparison with the
vastly increased debt. This meant that
if, after deducting the debt service,
profits went up, the return to the
investors could become very high.
Naturally, if losses began to appear,
reverse leverage would come into play,
producing astronomical amounts of red
ink. Most fundamental was that
companies were being loaded with debt
during the years of what the
Reagan-Bush regime insisted on calling
a boom. It was evident to any sober
observer that as the depression
asserted its existence, many of the
companies that had succumbed to
leveraged buyouts and related usury
would very rapidly become insolvent. 
   All in all, during the years
between 1982 and 1988, more than 10,000
merger and acquisition deals were
completed within the borders of the
United States, for a total
capitalization of $1 trillion. There
were, in addition, 3,500 international
mergers and acquisitions for another
$500 billion.@s5 The enforcement of
antitrust laws atrophied into nothing:
As one observer said of the late 1980s,
``such concentrations had not been
allowed since the early days of
antitrust at the beginning of the
century.'' 
   George Bush's friend Henry Kravis
raised money for his leveraged buyouts
from a number of sources. Money came
first of all from insurance companies
such as the Metropolitan Life Insurance
Company of New York, which cultivated a
close relation with KKR over a number
of years. Met was joined by Prudential,
Aetna, and Northwestern Mutual. Then
there were banks like Manufacturers
Hanover Trust and Bankers Trust. All
these institutions were attracted by
astronomical rates of return on KKR
investments, estimated at 32.2 percent
in 1980, 41.8 percent in 1982, 28
percent in 1984, and 29.6 percent in
1986. By 1987, the KKR prospectus
boasted that they had carried out the
first large LBO of a publicly held
company, the first billion-dollar LBO,
the first large LBO of a public company
via tender offer, and the largest LBO
in history until then, Beatrice Foods. 
   Then came the state pension funds,
which were also anxious to share in
these very large returns. The first to
begin investing with KKR was Oregon,
which shoveled money to KKR like there
was no tomorrow. Other states that
joined in were Washington, Utah,
Minnesota, Michigan, New York,
Wisconsin, Illinois, Iowa,
Massachusetts and Montana. 
   KKR had one other very important
source of capital for its deals: This
was the now-defunct Wall Street
investment firm of Drexel, Burnham,
Lambert and its California-based junk
bond king, Michael Milken. Drexel and
Milken were the most important single
customers KKR had. (Drexel had its own
Harriman link: It had merged with
Harriman Ripley & Co. of New York in
1966.) During the period of close
working alliance between KKR and
Drexel, Milken's junk-bond operation
raised an estimated $20 billion of
funds for KKR. 
   The Beatrice Foods LBO illustrates
how necessary Milken's role was to the
overall strategy of Bush backer Kravis.
With a price tag of $8.2 billion,
Beatrice was the biggest LBO up to the
time it was completed in
January-February 1986. As part of this
deal, Kravis gave Milken warrants for
5 million shares of stock in the new
Beatrice corporation. These warrants
could be used in the future to buy
Beatrice shares at a small fraction of
the market price. One result of this
would be a dilution of the equity of
the other investors. Milken kept the
warrants for his own account, rather
than offer them to his junk bond
buyers, in order to get a better price
for the Beatrice junk bonds. Later in
the same year, KKR bought out Safeway
grocery stores for $4.1 billion, of
which a large part came from Milken. 
   After 1986, Henry Kravis and
George Roberts were gripped by
financial megalomania. Between 1987 and
1989, they acquired eight additional
companies with an aggregate price tag
of $43.9 billion. These new victims
included Owens-Illinois Glass,
Duracell, Stop and Shop food markets,
and, in the landmark transaction of the
1980s, RJR Nabisco. RJR Nabisco was the
product of a number of earlier mergers:
National Biscuit Company had merged
with Standard Brands to form Nabisco
Brands, and this in turn merged with
R.J. Reynolds Tobacco to create RJR
Nabisco. It is important to recall that
R.J. Reynolds was the concern
traditionally controlled by the family
of Bush's personal White House lawyer,
C. Boyden ``Boy'' Gray. 
   Control of RJR Nabisco was sought
by opposing gangs: A first group
included RJR Nabisco chairman Ross
Johnson, Peter Cohen of Shearson Lehman
Hutton and the notorious John Gutfreund
of Salomon Brothers. KKR was a second
contender, and a third offer for RJR
came from First Boston. The Johnson
offer and the KKR were about the same,
but a cover story in the Henry
Luce-Skull and Bones {Time} magazine in
early December 1988 targeted Johnson as
the greedy party. The attraction of RJR
Nabisco, one of the 20 largest U.S.
corporations, was an immense cash flow
supplied especially by its cigarette
sales, where profit margins were
enormous. The crucial phases of the
fight corresponded with the
presidential election of 1988: Bush won
the White House, and Kravis won RJR
with a bid of about $109 per share
compared to a stock price of about 
$55 per share before the company was put
into play, giving the pre-buyout
shareholders a capital gain of more
than $13.3 billion. 
    The RJR Nabisco swindle generated
senior bank debt of about $15 billion.
Then came $5 billion of subordinated
debt, with the largest offering of junk
bonds ever made. Then came an echelon
of even more junior debt with
payment-in-kind securities: junk bonds
that paid interest not in cash, but in
other junk bonds. But even with all the
wizardry of KKR, there could have been
no deal without Milken and his junk
bonds. The banks could not muster the
cash required to complete the
financing; KKR required bridge loans.
Merrill Lynch and Drexel were in the
running to provide an extra $5 billion
of bridge financing. Drexel got
Milken's monsters and many others to
buy short-term junk notes with an
interest rate that would increase the
longer the owner refrained from cashing
in the note. Drexel's ``increasing rate
notes'' easily brought in the entire $5
billion required. 
   In November of 1986, Ivan Boesky
pled guilty to one felony count of
manipulating securities, and his
testimony led to the indictment of
Milken in March 1989, some months after
the RJR Nabisco deal had been sewn up.
In order to protect more important
financial players, Milken was allowed
to plead guilty in April 1990 to five
counts of insider trading, for which he
agreed to pay a fine of $600 million.
On February 13, 1990, Drexel Burnham
Lambert had declared itself bankrupt
and gone into liquidation, much to the
distress of junk bond holders
everywhere, who saw the firm as a junk
bond buyer of last resort. 
   By this time, many of the great
LBOs had begun to collapse. Robert
Campeau's retail sales empire of Allied
and Federated Stores blew up in the
fall of 1989, bringing down almost $10
billion of LBO debt. Revco, Fruehauf,
Southland (Seven-Eleven stores),
Resorts International, and many other
LBOs went into Chapter 11 proceedings.
As for KKR's deals, they also began to
implode: SCI-TV, a spin-off of Storer
Broadcasting, announced that it could
not service its $1.3 billion of debt,
and forced the holders of $500 million
in junk bonds to settle for new stocks
and bonds worth between 20 and 70 cents
on the dollar. Hillsborough Holdings, a
subsidiary of Jim Walker, went
bankrupt, and Seamans Furniture put
through a forced restructuring of its
debt. 
   It was clear at the time of the
RJR Nabisco LBO that the totality of
the company's large cash flow would be
necessary to maintain payments of $25
billion of debt. Within a short time
after the LBO, RJR Nabisco proved
unable to maintain payments. KKR was
forced to inject several billion
dollars of new equity, take out new
bank loans, and dun its clients for an
extra $1.7 billion. RJR Nabisco by the
early autumn of 1991 was a time bomb
ticking away near the center of a
ruined U.S. economy. 
   In September 1987, very late in
the day, Senator William Proxmire
submitted a bill which aimed at
restricting takeovers. Two weeks later,
Rep. Dan Rostenkowski of Illinois
offered a bill to limit the tax
deductibility of the interest on
takeover debt. The LBO gang in Wall
Street was horrified, even though it
was clear that the Reagan-Bush team
would oppose such legislation using
every trick in the book. Later, LBO
ideologues blamed the Congress for
causing the crash of October 1987. 

   Bush's `Free Enterprise'
 
   During the 1988 campaign, Bush
presented his views on hostile
takeovers, using the forum provided by
his old friend T. Boone Pickens'
{U.S.A. Advocate}, a monthly newsletter
published by the United Shareholders
Association, which Pickens runs. In the
October 1988 issue of this publication,
Bush made clear that he was not worried
about leveraged buyouts. Rather, what
concerned Bush was the need to prevent
corporations from adopting defenses to
deter such attempted hostile takeovers.
Bush also railed against ``golden
parachutes,'' which provide lucrative
settlements for top executives who are
ousted as the result of a takeover.@s6 
   Bush was clearly hostile to any
federal restrictions on hostile
takeovers. If anything, he was closer
to those who demanded that the federal
government stop the states from passing
laws that interfere with LBO activity.
For that notorious corporate raider and
disciple of Chairman Mao Liedtke, T.
Boone Pickens, the message was clear:
``I know that Vice President Bush is a
free enterpriser.''@s7 
   The expectations of Pickens and
his ilk were not disappointed by the
Bush cabinet that took office in
January 1989. The new secretary of the
treasury, Bush crony Nicholas Brady,
was not only a supporter of leveraged
buyouts; he had been one of the leading
practitioners of the mergers and
acquisitions game during his days in
Wall Street as partner of the
Harriman-allied investment bank of
Dillon Read. 
   The family of Nicholas Brady has
been allied for most of this century
with the Bush-Walker clan. During his
Wall Street career at Dillon Read,
Brady, like Bush, cultivated the
self-image of the patrician banker,
becoming a member of the New York
Jockey Club and racing his own
thoroughbred horses at the New York
tracks once presided over by George
Herbert Walker and Prescott Bush.
Brady, like Bush, is a member of the
Bohemian Club of San Francisco and
attends the Bohemian Grove every
summer. Inside the Bohemian Grove
oligarchic pantheon, Brady enjoys the
special distinction of presiding over
the prestigious Mandalay Camp (or cabin
complex), the one to which Henry
Kissinger habitually retires, and
sometimes frequented by Gerald Ford. 
   Nick Brady got the job he
presently occupies by heading up a
study of the October 1987 stock market
crash, the results of which Brady
announced on a cold Friday afternoon in
January 1988, just after the New York
stock market had taken another
150-point dive. 
   The study of the October 1987
``market break'' was produced by a
group of Wall Street and Treasury
insiders billed as the ``Presidential
Task Force on Market Mechanisms.'' At
the center of the report's attention
was the relation between the New York
Stock Exchange, American Stock
Exchange, and NASDAC over-the-counter
stock trading, on the one hand, and the
future, options, and index trading
carried on at the Chicago Board of
Trade, Chicago Board Options Exchange,
and Chicago Mercantile Exchange. The
Brady group examined the impact of
program trading, index arbitrage, and
portfolio insurance strategies on the
behavior of the markets that led to the
crash. The Brady report recommended the
centralization of all market oversight
in a single federal agency, the
unification of clearing systems,
consistent margins, and the
installation of circuit-breaker
mechanisms. That, at least, was the
public content of the report. 
   The real purpose of the Brady
report was to create a series of
drugged and manipulated markets. The
Brady group realized that if the
Chicago futures price of a stock or
stock index could be artificially
inflated, this would be of great
assistance in propping up the value of
the underlying stock in New York. 
   The Brady group focused on the
Major Market Index of 20 stock futures
traded on the Chicago Board of Trade,
which roughly corresponded to the
principal stocks of the Dow Jones
Industrial Average. As long as the MMI
was trading at a higher price than the
DJIA, the program traders and index
arbitrageurs would tend to sell the MMI
and buy the underlying stock in New
York in order to lock in their
parasitical profits. The great
advantage of this system was first of
all that some tens of millions of
dollars in Chicago, where turnover was
less intense than in New York, could
generate hundreds of millions of
dollars of demand in New York. In
addition, the margin requirements for
borrowing money to buy futures in
Chicago were much less stringent than
the requirements for margin-buying of
stocks in New York. Liquidity for this
operation could be drawn from banks and
other institutions loyal to the
Bush-Baker-Brady power cartel, with
full backup and assistance from the
district banks of the Federal Reserve. 
   The Brady ``drugged market''
mechanisms, with the refinements they
have acquired since 1988, are a key
factor behind the Dow Jones
Industrial's seeming defiance of the
law of gravity in attaining a new
all-time high, well above the 3,000
mark during 1991. 
   In 1988, Bush boasted of his
achievements in the field of
deregulation. One important case study
of the impact of Bush's Task Force on
Regulatory Relief is the meatpacking
industry. In February 1981, when Reagan
gave Bush ``line'' authority for
deregulation, he promulgated Executive
Order 12291, which established the
principle that federal regulations ``be
based upon adequate evidence that their
potential benefits to society are
greater than their potential costs to
society.'' In practice, that meant that
Bush threw health and safety standards
out the window in order to ingratiate
himself with gouging entrepreneurs. In
March 1981, Bush wrote to businessmen
and invited them to enumerate the ten
areas they wanted to see deregulated,
with specific recommendations on what
they wanted done. By the end of the
year, Bush's office issued a
self-congratulatory report boasting of
a ``significant reduction in the cost
of federal regulation.'' 
   In the meatpacking industry, this
translated into production line speedup
as jobs were eliminated, with a
cavalier attitude toward safety
precautions. At the same time, the
Occupational Safety and Health
Administration sharply reduced
inspections, often arriving only after
disabling or lethal accidents had
already occurred. In 1980, there were
280 OSHA inspections in meatpacking
plants, but in 1988 there were only
176. This is in an industry in which
the rate of personal injury is 173
persons per working day, three times
the average of all remaining U.S.
industry.@s8 
   Bush used his Task Force on
Regulatory Relief as a way to curry
favor with various business groups
whose support he wanted for his future
plans to assume the presidency in his
own right. According to one study made
midway through the Reagan years, Bush
converted his own office ``into a
convenient back door for corporate
lobbyists'' and ``a hidden court of
last resort for special interest groups
that have lost their arguments in
Congress, in the federal courts, or in
the regulatory process.... Case by
case, the vice president's office got
involved in some mean and petty issues
that directly affect people's health
and lives, from the dumping of toxic
pollutants to government warnings
concerning potentially harmful
drugs.''@s9 
   There were also reports of serious
abuses by Bush, especially in the area
of conflicts of interest. In one case,
Bush intervened in March 1981 in favor
of Eli Lilly & Co., of which he had
been a director in 1977-79. Bush had
owned $145,000 of stock in Eli Lilly
until January 1981, after which it was
placed in a blind trust, meaning that
Bush ostensibly had no way of knowing
whether his trust still owned shares in
the firm or not. The Treasury
Department had wanted to make the terms
of a tax break for U.S. pharmaceutical
firms operating in Puerto Rico more
stringent, but Vice President Bush had
contacted the Treasury to urge that
``technical'' changes be made in the
planned restriction of the tax break.
By April 14, Bush was feeling some
heat, and he wrote a second letter to
Treasury Secretary Don Regan asking
that his first request be withdrawn,
because Bush was now ``uncomfortable
about the appearance of my active
personal involvement in the details of
a tax matter directly affecting a
company with which I once had a close
association.''@s1@s0 
   Bush's continuing interest in Eli
Lilly is underlined by the fact that
the Pulliam family of Indiana, the
family clan of Bush's 1988 running
mate, Dan Quayle, owned a large portion
of the Eli Lilly shares. Bush's choice
of Quayle was but a reaffirmation of a
pre-existing financial and political
alliance with the Pulliam interests,
which also include a newspaper chain. 

   Ripping Up the Airline
Industry
 
   Bush's ideal of labor-management
practices and corporate leadership in
general appears to have been embodied
by Frank Lorenzo, the most celebrated
and hated {banquerotteur} of U.S. air
transport. Before his downfall in early
1990, Lorenzo combined Texas Air,
Continental Airlines, New York Air,
People's Express and Eastern Airlines
into one holding, and then presided
over its bankruptcy. Now Eastern has
been liquidated, and the other
components are likely to follow suit.
Along the way to this debacle, Lorenzo
won the sympathy of the Reagan-Bush
crowd through his union-busting
tactics: He had thrown Continental
Airlines into bankruptcy court and used
the bankruptcy statutes to break all
union contracts, and to break the
unions themselves. 
   George Bush has been on record as
a dedicated union-buster going back to
1963-64, and he has always been very
friendly with Lorenzo. When Bush became
President, this went beyond the
personal sphere and became a revolving
door between the Texas Air group and
the Bush administration. During 1989,
the Airline Pilots Association issued a
list of some 30 cases in which Texas
Air officials had transferred to jobs
in the Bush regime and vice versa. By
the end of 1989, Bush's top
congressional lobbyist was Frederick D.
McClure, who had been a vice president
and chief lobbyist for Texas Air.
McClure had traded jobs with Rebecca
Range, who had worked as a public
liaison for Reagan until she moved over
to the post of lead congressional
lobbyist for Texas Air. John Robson,
Bush's deputy secretary of the
Treasury, was a former member of the
Continental Airlines board of
directors. Elliott Seiden, a top
antitrust lawyer for the Justice
Department, switched to being an
attorney for Texas Air. 
   When questioned by columnist Jack
Anderson, McClure and Robson claimed
that they recused themselves from any
matters involving Texas Air. But
McClure signed a letter to Congress
announcing Bush's opposition to any
government investigation of the
circumstances surrounding the Eastern
Airlines strike in early 1989. This was
a move in support of Lorenzo. Bush
himself has always stonewalled in favor
of Lorenzo. During the early months of
that same Eastern Airlines strike, in
which pilots, flight attendants and
machinists all walked out to block
Lorenzo's plan to asset strip the
airline and bust the unions, the
Congress attempted to set up a panel to
investigate the dispute, but Bush was
adamant in favor of Lorenzo and vetoed
any government probes.@s1@s1 
   Lorenzo's activities were decisive
in the wrecking of U.S. airline
transportation during the Reagan-Bush
era. When Carl Icahn was in the process
of taking over TWA, he was able to
argue that the need to compete in many
of the same markets in which Lorenzo's
airlines were active made it mandatory
that the TWA workforce accept similar
sacrifices and wage cuts. The
cost-cutting criteria pioneered with
such ruthless aggressivity by Lorenzo
have had the long-term effect of
reducing safety margins and increasing
the risk the traveling public must
confront in any decision to board an
airliner operating under U.S.
jurisdiction. Eastern, Midway, and Pan
Am have disappeared, and Continental
has been joined in bankruptcy by
America West and TWA. Northwest, having
been taken through the wringer of an
LBO by Albert Cecchi, is now busy
extorting subsidies from the state of
Minnesota and other sources as a way to
stay afloat. 
   It is widely believed that when
the dust settles, only Delta, American,
and perhaps United will remain among
the large nationwide carriers. 
   And how, the reader may ask, was
George Bush doing financially while
surrounded by so many billions in junk
bonds? Bush had always pontificated
that he had led the fight for full
public disclosure of personal financial
interests by elected officials. He
never tired of repeating that ``in
1967, as a freshman member of the House
of Representatives, I led the fight for
full financial disclosure.'' But after
he was elected to the vice presidency,
Bush stopped disclosing his investments
in detail. He stated his net worth,
which had risen to $2.1 million by the
time of the 1984 election, representing
an increase of some $300,000 over the
previous five years. Bush justified his
refusal to disclose his investments in
detail by saying that he didn't know
himself just what securities he held,
since his portfolio was now in the
blind trust mentioned above. The blind
trust was administered by W.S. Farish &
Co. of Houston, owned by Bush's close
crony William Stamps Farish III of
Beeville, Texas, the grandson and heir
of the Standard Oil executive who had
backed Heinrich Himmler and the Waffen
SS.@s1@s2 

   Notes for Chapter XVIII
 

   1.
 Walter Pincus and Bob Woodward,
``Doing Well with Help from Family,
Friends,'' {Washington Post,} Aug. 11,
1988.
 
   2.
 {Houston Chronicle,} Feb. 21,
1963. See clippings available in Texas
Historical Society, Houston.
 
   3.
 Thomas Petzinger, {Oil and
Honor} (New York: Putnam, 1987), pp.
244-45.
 
     4.
 For the relation between George
Bush and Henry Kravis, see Sarah
Bartlett, {The Money Machine: How KKR
Manufactured Power & Profits} (New
York: 1991), pp. 258-59 and 267-70.
 
   5.
 Roy C. Smith, {The Money Wars}
(New York: Dutton, 1990), p. 106.
 
   6.
 {Washington Post,} Sept. 29,
1988.
 
   7.
 {Ibid.}
 
   8.
 Judy Mann, ``Bush's Top
Achievement,'' {Washington Post,} Nov.
2, 1988.
 
   9.
 William Greider, {Rolling
Stone,} April 12, 1984.
 
   10.
 ``Bush Denies Influencing Drug
Firm Tax Proposal,'' {Washington Post,}
May 20, 1981.
 
   11.
 Jack Anderson and Dale Van
Atta, ``The Bush-Lorenzo Connections,''
{Washington Post,} Dec. 21, 1989.
 
   12.
 James Ridgway, ``The Tax
Records of Reagan and Bush,'' {Texas
Observer,} Sept. 28, 1984.
 
----         John Covici
          covici@ccs.covici.com