Chop Shop Theory

1A chop shop is a slang phrase for an illegal location or business which disassembles stolen automobiles for the purpose of selling them as parts. It may also be used to refer to a location or business that is involved with the selling of stolen goods in general, or a brokerage that sells non-existent equities, both fraud and stolen goods.”

The Chop

Tearing down a car, a corporation or a society is an amazingly similar process, much like rendering a pig. Pigs are worth far more as chops and bacon than they are on the hoof. There’s a pretty direct comparison between a 2008 Mustang that’s not been moved from its parking space for weeks and a company whose stock price is similarly marooned, with dust, leaves and twigs all over its corporate windshield. They become targets, the Mustang falling victim to a local gang-run chop-shop and the doldrums2 company to a Carl Icahn or an Ivan Boesky. The mob guys maximize value by separating transmissions from chassis.

Essentially, a Carl or an Ivan does the same thing. Sparks fly and value gets maximized. Similar turf-wars ebb and flow as in the Mafia, but in Carl’s world the food is better and fewer participants end up discovered in the trunk of a car abandoned at the airport. For the uninitiated, it runs a good deal like this;

  • Quietly buy up underperforming corporate stock (steal the dusty Mustang)

  • Take over control of the company by either direct stock ownership or options (pull this baby into a darkened garage)

  • Break down the corporate structure and liquidate the parts (profitable divisions, pension funds, etc.)

  • Abandon the wreckage of what’s left (dump the stripped ‘car’ back on the street, less engine numbers and all other identification)

  • Move on to the next ‘underperforming corporation,’ remembering always that underperformance is in the eye of the raider

  • Set up shop in another neighborhood (look for an S-series Mercedes or BMW, with dust on its windshield)

There are variations as complex and fascinating as the mind of man. But the result is almost inevitably short-term profit at the expense of long-term assets. Burning down the house, piece by piece, may create a decade or more of warmth, but in the end it’s still an ash heap. Mitt Romney may well be President of the United States by the time this book hits the press, but his work at Bain Capital made him very rich in just this game.

The Shop

There’s a well-known and predictable pattern to this game. Early days may be quite clandestine, but after that, the remainder is wide open to both public and press. In fact, publicity is a necessary ingredient. It’s such a well known and successful scam in corporate boardrooms, that some of the big names like Carl, Ivan or Kirk are regularly offered a significant hunk of dough just to pack their bags, sell back their stock and steal (no pun intended) silently off into the night. ‘Greenmail’ is the newly coined expression, go-away money that is as effective as blackmail, but without the social stigma.

We hail these speculative corporate surgeons as clever, but this was once called extortion and less well-connected were sent off to jail for it. Neighborhood thugs, who threaten to throw a brick through the jeweler’s window unless they’re paid off, are merely small-time Boeskys, Icahns or Kirkorians. But there’s a crucial difference. The former go to jail, the latter to a home in the Hamptons on weekends, chuckling over the pig they’ve just butchered.

Kirk Kerkorian Tortures General Motors

In 2006, Kerkorian, the French and the Japanese were about to barbecue General Motors and call it a three-way alliance. Which is pretty much the same as calling those ribs, simmering on the backyard grill, an alliance with the pig. Kirk Kerkorian pulled his chair up to the table and tucked in his bib. It’s long been apparent how much Kirk values the American car industry (or anything for that matter with potential in its stripped value).

The man runs a corporate chop-shop, where everything is worth more in bits and pieces than as a going, job and product producing whole. That’s an elegant corporate truth to most of the raiders, who value earnings maximization over pride, tradition, innovation and superiority of product. There’s only long-term value in that and these are all short-term guys.

In fact, we have become a short-term nation and a huge part of the reason is fear of attack by a corporate raider out there hiding in the weeds. Stock-price is the corporate mantra and stock-price depends upon quarterly earnings. CEOs spend far more time devoted to meeting earnings expectations than they do to the care, maintenance and long-term welfare of their companies.

They have to. Several bad quarters and they’re out on their ass, with a severance package and a stack of unearned stock options. CEOs were once in place until retirement age and those days are not so long gone.

  • Roger Penske ran Penske Corporation for 42 years

  • Warren Buffett is still at Berkshire Hathaway, after 41 years

  • Bill Marriott has been head guy for 39 years

  • Larry Ellison has run Oracle for 34 years and counting

It follows that longevity requires care about the long as well as the short-term health of a company, plus a ‘feel’ for the firm that can only be acquired over time. Over the past three years, the average tenure of a corporate CEO has shrunk from 8 to 6 years. Hence, they are scared; they are exploitive and constantly have their eye on the time-clock, anticipating their next job. More on that later.

So, the Kerkorian raid obscured itself behind the rhetoric of ‘alliancing’ GM up the ramp of the abattoir, where it was to be dismembered, swung up on hooks, stripped of its brisket (pension funds) and loins (union contracts) and roasts (research and development), shrink-wrapped in plastic and put back on the market. GM’s stock price, then staggering without direction or much hope, was frozen at approximately $21 per share. It’s easy to imagine the stock doubling or tripling once all those liabilities are history, along with a couple hundred thousand employees. All parties to the ‘alliance’ were well endowed with both stock and future options.

Thus it made excellent personal economic sense for all the players and, at the same time, was something that could be sold to the public as a ‘best case scenario,’ just so long as you weren’t a retiree or line-worker. And that’s why the Gm Board was zipping off by corporate jet to Tokyo and Paris while there still was a corporate jet. By and large, these were the same board members who had fed the GM pig for decades, petted it and encouraged its porcine ways until it was fit for nothing other than the slaughter-house. CEO Rick Wagoner was already history at this point, even though it would take three more years and some additional lost opportunities for him to slide on down the road. When GM’s only hope was an outsider with a hatchet, they’d unwisely turned to Rick as an insider, but the corporate culture was far too ingrained (and inbred) to change its ways.

And, as you may have guessed by now, there’re almost always two sides to a story and should Kirk Kerkorian ever read this, he’ll be bristling to tell his. Target companies are often targets because they are poorly run. GM is a picture-book example, having made almost every blunder possible in the quickly changing automobile industry. It made them (largely) due to a corporate culture of decades of insider management, as inbred as the monarchs of Europe and without a breath of fresh air—all the windows on the 14th corporate floor at GM were sealed.

CEO Rick Wagoner had paid his dues, coming to the company with a shiny MBA from Harvard. I have said many times (and will debate further in Chapter 8) that Harvard University has probably destroyed more of corporate America with its MBA program than any union or stretch of economic recession. Initially an analyst in the treasurer’s office, Rick can be forgiven for continuing to think GM’s problems were financial. They weren’t. GM suffered the double-whammy of giving away the store to the unions in good times and never understanding that the half-century old tail-fin era was gone forever.

Consider Wagoner’s curriculum vitae and by that, better understand the company’s demise;

  • Treasurer, Brazil

  • Managing Director, Brazil

  • Corporate Chief Financial Officer

  • Executive VP

  • President and COO

  • President and CEO

  • Chairman

There isn’t a single stop along the GM Stations-of-the-Cross that lets in even a faint breeze from the real world. It’s corporate-cocooning as art-form. The 14th Floor at General Motors Headquarters was the problem at GM and never produced a savior, because a prophet was simply not possible in that corporate culture. These guys wore brown and white wing-tips and dreamed of the next big-engine, big-body, big-profit land-cruisers, twenty years after that horse bolted the race. Then they declared a dividend, played eighteen holes at Bloomfield Hills Country Club and attended one another’s cocktail parties. Meanwhile, the corporate party was nearly over, no matter that the band played on, without a drummer or lead vocalist.

It must have been frustrating, as well as infuriating, to see Kerkorian turn out to be the turd in the punch-bowl that upper-crust Bloomfield Hills GM execs could no longer ignore. This was once America’s greatest corporation and like Death showing up at an anniversary gala, there was Kirk over in the corner with a scythe, a very dry martini and a grin. Like Death, Kerkorian was inevitable. Described as ‘charismatic,’ Carlos Ghosn, CEO of the Nissan-Renault combine was Kerkorian’s pick to dismember GM and maximize shareholder profit, 10% of it belonging to Kirk. The scheme was to sledgehammer it between the eyes and carve up the choice cuts.

Judging by the contrails spewing behind the GM jet, its board was slathering to approve. And why not? Carlos Ghosn was the man to finally axe the company of which it was once said, “What’s good for General Motors is good for America.” In addition to Nissan and Renault, he sat on the boards of Sony and Alcoa and was called by some “the perfect example of a corporate executive working in today’s multinational market whose multicultural experiences have taught him the importance of combining various cultural perspectives to do business globally.” Ghosn had taken Nissan (facing bankruptcy) in seven short years to Japan’s #2 automaker. He’s a very rare non-Japanese national hero in that country.

Ghosn was born in Brazil, so that’s what it’s come to. Rick Wagoner cut his corporate teeth in Brazil for GM and now a Brazilian vaquero was called in to ride up from behind and knock him off his horse.

Full circle, even though the deal fell apart and GM staggered for another three years, dizzy but not dead from the blow between the eyes. Kerkorian dumped his 14 million shares of GM at $28.75 in late November of 2006 and silently folded his tent.

The Same Sweet Song for Half a Century

They stand like dusty-windowed cars on abandoned streets. The choices are virtually boundless among vulnerable corporations idling in stock-price neutral and essentially stranded in otherwise rising markets. One cannot but wonder, as these corporate raiders unfurl their morning paper and peruse the possibilities over a first cup of freshly roasted and ground Jamaica Blue Mountain coffee, what it will be today, or this week or this month. MGM Resorts stuck at $10, Wells Fargo marooned at $30? GM? A year ago it was $30 and this morning traded at twenty-two bucks.

The question was never whether companies made decent cars, good movies or underpin a whole swath of the American consumer society. The question is what are they worth cut up, sold off, de-structured, re-structured, consumed like so many sausages and shat out in raider profit. We’ve built ourselves (or, I would argue, had built for us) a consumer society and this is just another form of consumption, obvious as a cutting-torch, but more elegant and less grimy in an under-the-fingernails sense of the word.

The guy who bolts wheels on Dodge vans (if such a man actually exists in lieu of a robot) has absolutely no control over the destiny of his livelihood. None. Zero. Nada. His battle was once with Henry Ford or the GM guys on the 14th floor over wages and hours, retirement benefits and health insurance. If Carl and Ivan and Kirk can carve off the portion of GM that owes health and retirement benefits, and bankrupt it, they’ll do so in an eyewink because it lowers liability and raises stock value. If there’s $50 billion of taxpayer money in there somewhere to be had, so much the better. In panic, GM has chosen to chop-shop itself;

GM is shedding the Saturn, Saab and Hummer brands and cutting 47,000 more workers worldwide — leaving half as many as when Wagoner took over in 2000. The United Auto Workers union is giving up most of the expensive perks laid-off workers enjoyed to cushion economic downturns and taking on expensive health- care costs.”3

So, the bailout pleadings to save jobs (after Detroit was sent home by Congress like wayward schoolchildren) were supported by a plan to lay off 47,000 additional workers to the 30,000 announced in November of 2005.4 That announcement brought headlines such as “GM Layoffs Resonate Across U.S.,” along with much well manicured hand-wringing. These latest numbers are met by indifference outside the auto-making communities.

Michigan, of course, is shell shocked. Ultimately, shock is the ‘anesthetic’5 of corporate choice. Paraphrasing Joseph Stalin, “the loss of a single job is a disaster; the loss of 100,000 jobs is a news event.”

A close read of Naomi Klein’s wonderfully written Shock Doctrine; the Rise of Disaster Capitalism6 gives some idea of how all this promises to play out. The prequel was Indonesia, South America and Russia in the nineties, each of them nearly snuffed out by Milton Friedman’s Chicago School economic medicine. Milt’s cure was unique and never failed by his standards, but his patients uniformly died on the operating table. There are still those who contend there was nothing wrong with the cure, but you do not find them in Indonesia, South America or Russia.

Interesting stuff. America has been at it for fifty years, maybe more, but certainly as far back as the ownership of capital gave up on producing stuff and concentrated instead at the far more profitable manipulation of company and profit. Selling consumers the cheapest goods China can produce and dismantling corporations for fun and profit is a heady game of musical chairs.

Until the music stops and American workers can no longer find a chair.

But Nobody Saw It Coming

The mantra across Wall Street, Washington and the media for our near economic collapse is “no one could have seen it coming.” Computer models had no configuration for downturns. I saw it coming. Naomi Klein saw it coming. It was just Alan Greenspan and the underwriters who were too otherwise preoccupied to look. In January, 2005, I wrote;

2005 is to be the Year of the Merger. It’s been declared such on the front page of the New York Times and who would argue with such a venerable icon as the NYT? Never mind that 1997 was the Year of the Spin-Off. Year end 2004 found worn out old Sears and Roebuck marrying tired and careworn K-Mart, the two of them struggling to the alter after trying to put the best face on Wal-Mart running off with their businesses.

That deal capped 2004, a year that saw IBM pass off their PC business, Sprint gobble up Nextel and Johnson and Johnson . . . well, you know the scene, we’ve been there before. The last big year for mega-mergers was 1999 as the bubble was stretched to bursting.

And burst it did. They always do. That’s the magic of free enterprise, the escape valve that deflates periodic heads of steam, the sun that melts the wings of Icarus. It’s a self-righting system, God bless it, but frequently gets out of balance and then there’s always a leveler out there in the corner of the marketplace, with a scythe and a grin.

The Business Cycle is a known entity and it’s as studied to death as Ernest Hemingway in literature class. Yet here are the Harvard MBA Captains of Industry, goosing their stocks with another round of failed ’90’s strategy. All the players know that mergers are a failed scheme and an empty promise. Name me a merger that made a stronger player of the merged parties. Daimler Chrysler? You’ve got to be kidding.

But the players know there’s gold in arranging that stroll down the aisle to corporate marriage and if the failure rate is about the same as conventional marriage, the gift-list is larger and the investment bankers get to run off with the silver. Insiders watch a lackluster stock run up a few points (which never hurts anyone all that much) and executives on both sides frost the wedding cake with deferred stock options, early retirement packages and one-time bonus structures that assure no one is likely to fart in the limousine on the way to the reception.

The band plays, everyone talks up how handsome the groom and lovely the bride, agreeing that two can certainly live more cheaply together than apart. The canapés are gulped down and toasts proposed to the future family.

Now consider all of these enticements to merger. They’re all, every one of them, powerful inducements to the movers and shakers who dream these things up, yet none have the slightest influence on profit or efficiency. They are made to fail, ’cause there are profits in failure as well. Jobs gone overseas and American productivity shot to hell, but profits to the meat-cutters. Divisions are sold off as the participants rid themselves of the disappointment of the last merger. It’s the Great Corporate Canasta Game and winning depends on who picks up the largest discard pile, not giving a damn if the cards match the hand.

No one really worries, because pretty much by definition it can’t possibly work. Two huge merchandisers, unable to make themselves profitable (or even sustainable) under present management are unlikely to benefit from a merger that’s twice as ungainly and four times as complicated. Their hope (perhaps) is that in the smoke and confusion, private fortunes can be made and public monies will do the making.

I don’t know where the institutional investor stands in this mélange, but perhaps he’s merely desperate to put his money someplace. We have had, for some decades now, a world with more investment money than places to invest and America has become the biggest crap-game in town. Investors no longer have an interest in product and quality; their futures now depend upon riding the unbroken horse of quarterly earnings and trying to stay in the saddle.

The big-hitters don’t rodeo. It’s too sweaty out there in the ring and a guy could get dumped, maybe break an arm and for sure get a $5,000 suit mussed. They swing on insider information and computer programs that reveal a half-point advantage here or there before even the hedge-funds are aware. Then they’re out and those a second or two behind are left with the sawdust and bruises. Quick-trading and the chimera of quarterly earnings have all but ruined our nation. Think about that as you kiss the wife goodbye and head for the factory floor or your seemingly ‘safe’ position in middle management.

It’s true that automobiles are worth far more as parts than as functional transportation, else how would chop-shops (Mafia or Wall Street) be such profitable businesses? A pretty good case can be made that investment bankers are the chop-shops of the corporate world and that the bids they encourage for those polished up old family cruisers on the auction block of merger mania aren’t intended to take anyone anywhere. The big dough is in the pieces. The big dough is in pulling apart and although it’s dirty, gritty work and someone’s likely to get a finger smashed or a forearm burned, the guys behind these ruined junkyards always live in the most posh suburbs.

Goldman Sachs chop-shopped on perhaps a grander scale than most, concentrating on entire nations when mere companies became too tame for them. Ireland, Spain, Portugal, Greece; the wreckage is offshore for the moment, but those types of disasters have a history of finding their way home.


2 But of course, one must define ‘doldrum.’ A company may be doing just fine, making a profit, keeping out of debt and providing jobs as well as security for its owners (investors) and employees. But it is not ‘maximized’ by Ivan Boesky’s understanding of the term.



5 (noun) A drug that causes temporary loss of bodily sensations.


published: 30. 3. 2014