Articles

Feb. 11, 2004

Carpet Bagger Corporations

The structure of a corporation finds its basis in the law. Free markets and democracy are only some of the ingredients necessary for a robust economy. A capitalist system cannot exist without the rule of law. What we as a society define as acceptable behavior determines in part our success or failure.

Taking Over The Mouse. Today Comcast announced plans to take over the Mouse. Disney is a long way to climb, but this would not be the first time corporate dreams come true. In the 1970s Ling pyramided a small electrical contracting company inherited from his father into LTV one of the largest conglomerates in the country.

Debt Expands. The evolution of the limited liability stock company since the 1720 South Sea Bubble has been a history of debt, booms and busts. Corporate debt expands to its limits and then collapses back to a base of fair value. Our job as investors and speculators is to correctly time these periods of expansion and contraction.

On occasion periods of expansion begin from extreme under value. Such periods existed in 1932, 1949 and again in the late 1974. More often booms result from new technology or changes in the rules. The rule changes under the Reagan Administration began the LBO (leveraged buy out) boom financed in part by "Milken Style" junk bonds. The Junk Bond boom ended in the 1987 stock and later bond market crash, eventually criminalizing its creators.

Today in the wake of Enron, the political hot button is special interest or corporate influence on government. While Ken Lay exerted influence to both create the rules and then abuse them, Enron is small potatoes to the legal abuses of Comcast.

The use of debt to accumulate assets is valid when creating wealth. The sin of the 1980s was the use of fully paid or over subscribed pensions to fund buyouts. Comcast is a better twist on the same game. By buying regulated assets and increasing debt, Comcast can justify to regulators higher subscription fees. Higher subscription fees increase capitalization allowing for a greater debt burden supporting additional expansion. Lacking competition, other than the bidding up of assets, Comcast is using a guaranteed monopoly to impose a government-sanctioned tax on its subscribers. No new wealth is created. Only debt expense used for expansion justifies fee increases needed to control the system.

As a follower of Adam Smith and a believer in free markets the role of government is to insure a level playing flied, not create an advantage for the minority. There are times such as war or kick starting technology where government subsidies are advantageous. These times are rare.

In part, I am moralizing. However, it is from areas of imbalance where change occurs. The Upgrade of the Long Wave is a time of social displacement forcing structural change. We generally think of the social cycle as affecting moral values. The needed changes governing corporate behavior have a moral basis. More importantly to the investor, companies gaining advantage in the fashion of Comcast pose higher systemic risks. Growth dependant on government fiat can easily collapse or become a liability under social pressure. Politics is a dangerous game best left to generals and draft dodgers. Close marriage of government and the corporation increases volatility and risk to the investor. Today Comcast is the ultimate Carpet Bagger Corporation.