The Philadelphia Inquirer from Philadelphia, Pennsylvania • Page 19

The Philadelphia Inquirer AtHenCa! WllSt Wdlt VfORg? Sunday, Oct 20, 1991 19-A QilQljSfijfeEFSIIIb The Tax Reform Act of 1986 cut everyone's taxes. But three years later, some fared much better than others: UP TO $10,000 $37 -is' v-" 111; lilftlS 111 jf v. 1 I 1 -1 f--;" ll 4 1 (T 1 1,,, ii imm iCi wiliiiim.l in. I iV ThffltlMiMnMi i i nm ii Tmi -iiinrf --r-i $69 The Philadelphia Inquirer HICK BOWMfcH closed, Edwin Bohl and wife Geraldine Whn the Florsheim shoe plant in Hermann, ogies died out and workers lost their jobs new factories, new technologies replaced the old. Always at higher wages.

But there are no new manufacturing plants to replace today's Baldwins. And the remaining jobs pay less. While the government rule book encouraged deal-making over creating jobs, Congress has displayed little interest in making changes. From the mid-1980s on, there were news releases. There were hearings.

There were reports. But nothing else. As one congressional staff member put it when he explained why committee hearings trailed off: "There simply is no interest lamong lawmakers! in this." Indeed not. Members of Congress seemed satisfied with the arguments mounted by business people, business-school professors and other experts who insisted that new laws were unnecessary. People like Carl C.

Icahn, who during an appearance before a House Energy and Commerce subcommittee in March 1984, spoke on the virtues of corporate takeovers. Icahn already had made hundreds of millions of dollars in raids on such companies as Texaco Hammermill Paper Uniroyal Inc. and Marshall Field Co. It was the year before Icahn would take over Trans World Airlines which he would pilot to the edge of bankruptcy. Downplaying concerns about layoffs that follow mergers and acquisitions, Icahn told lawmakers: "Generally, if the company is doing pretty well there are not an awful lot of layoffs, and the layoffs that do occurl are really getting rid of some of the fat that is not productive for society." Similar views were expressed by Icahn's fellow corporate raiders and others who The of the employed manufacturing, people who make things their hands cars, radios, clothes plummeting.

percentage workforce in with is M. 6 $20,000 $30,000 $40,000 nr 16 $50,000 vu.uuu- 1U0 $75,000 xnr18 $100,000 kT $100,000 22 $200,000 U-rf $200,000 -xnp 27 $500,000 1 $1,000,000 OR MORE SOURCE: Internal Revenue Service Continued from preceding page audits of companies that would uncover such abuses. And even if the resources were available, an impenetrable tax code places too many demands on the agency. All this made possible a Tom Spiegel and an army of other high-living executives. Federal auditors eventually found that Spiegel used Columbia funds to pay for trips to Europe, to buy luxury condominiums in Columbia's name in the United States and to purchase expensive aircraft.

From 1987 to 1989, for example, Spiegel made at least four trips to Europe at Columbia's expense, staying at the best hotels and running up large bills: $7,446 for a hotel and room service bill for three nights in the Berkeley Hotel in I London for Spiegel and his wife in November 1988." $6,066 for a hotel and room service bill three nights in the Hotel Plaza Athenee Paris in July 1989." I' The Spiegels' most expensive stay was in July 1989 at the Hotel du Cap on the French i Riviera, where the family ran up a $16,519 bill in five days. When they weren't flying to Europe, the Spiegels spent time at luxury condominiums, acquired at a cost of $1.9 million, at Jackson iHole, Indian Wells, and Park vCity, Utah. To make all this travel easier, Spiegel ar- ranged for Columbia, a savings and loan that i had no offices outside California, to buy corporate aircraft, including a Gulfstream IV equipped with a kitcnen ana lounge. Federal auditors now say that Columbia paid $2.4 million "for use of corporate air- craft in commercial flights for the personal hravel for Spiegel, his immediate family and 4 other persons accompanying Spiegel." Columbia wrote off those expenses on its tax returns, thereby transferring the cost of Cihe Spiegel lifestyle to you, the taxpayer. 4 The Federal Office of Thrift Supervision lias filed a complaint against Spiegel, seeking to recover at least $19 million in Columbia ('funds which it claims he misspent.

i Spiegel's lawyer, Dennis Perluss, said Spiegel is contesting the charges. "All of the uses that are at issue in terms of the planes and the condominiums were for legitimate business purposes," Perluss.said. But you are paying for more than Spiegel's lifestyle. You're also going to be picking up the tab for his management of Columbia. After heady earnings in the mid-1980s, Columbia lost twice as much money in 1989 and 1990 a total of $1.4 billion as it had made Jill 11 $300 $467 $1,000 $1,523 $3,034 $7,203 $24,603 $281,033 The Philadelphia Inquirer BILL MARSH in the previous 20 years added together.

Federal regulators seized Columbia in January. Taxpayers will pay for a bailout expected to cost more than $1.5 billion. That final figure depends, in part, on how much the government collects for the sale of the corporate headquarters on Wilshire Boulevard in Beverly Hills. When construction started, it was expected to cost $17 million. By the time work was finished, after Spiegel had made the last of his design changes "the highest possible grade of limestone and marble, stainless steel floors and ceiling tiles" the cost had soared to $55 million.

It could have been even higher, except that one of Spiegel's ambitious plans never was translated into bricks and mortar. According to federal auditors, he had wanted to include in the building "a large multi-level gymnasium and 'survival chamber' bathrooms with bulletproof glass and an independent air and food supply." Just whom Spiegel thought might attack the bathrooms of a Beverly Hills savings and loan is unclear. Congress has done little to curb the abuses of the 1980s. Consider, for a moment, Congress' response to the leveraged buyout and corporate restructuring craze of the 1980s that led to the loss of millions of jobs. As mergers, acquisitions, hostile takeovers and buyouts swept corporate America in the 1980s, defenders of the restructuring process contended it was merely another stage of the free market economy at work.

During an appearance before a congressional committee in April 198S, Joseph R. Wright then deputy director of President Reagan's Office of Management and Budget, summed up the prevailing attitude: "IThere is) substantial evidence that corporate takeovers, as well as mergers, acquisitions and divestitures are, in the aggregate, beneficial for stockholders and for the economy as a whole." It is true that the restructuring of business is as old as business itself. So, too, the demise of corporations that are mismanaged or that manufacture products for which there is no longer any demand. Once, the Baldwin Locomotive Works sprawled over 20 acres in Philadelphia and more than 600 acres in Eddystone. At the company's peak, it employed 20,000 persons.

When the market for steam locomotives disappeared, so, too, did Baldwin. In those days, when factories and technol- found that times were tough. that was it. That brought it down." In short, a profitable and efficient plant was closed because Interco actually owned rather than leased the building and real estate. And the company needed the cash from the sale of the property to help pay down the debt incurred in the restructuring that was supposed to make the company more efficient.

Hardest hit by the closing, Lovett said, were the older people: "Here were folks who had never worked anywhere else. They had gotten out of high school and they went to work in the shoe factory They were people like Edwin Bohl, who went to work at Florsheim in 1952. Bohl began as a laborer. "I think I started for 70 cents an hour," he recalled. Except for two years out to serve in Korea, he worked at the plant, rising to a supervisory position, until its closing 37 years later.

Announcement of the shutdown came without warning a few weeks before Christmas of 1988. There was a meeting that morning, Bohl said, in which there was talk about increased benefits and changes in the way shoes were made. "They had given me a bunch of new chemicals," he said, "that I was to use in the finishing department. They had told us that everything was looking good." A company executive was supposed to fly in from Chicago that same morning. No one said exactly why, but his plane was delayed.

"The minute we came back from lunch," Bohl said, "they called us supervisors together. The man read us the papers and said there were no jobs held for anybody They told us they had to close the pUnt because of the restructuring. They had to raise money they told it was not because of the quality. We were rated the top in quality and cost. We had no idea this would happen." Unexpectedly, Edwin Bohl found himself on the unemployment rolls at age 58.

He was given a choice: He could wait until he reached retirement age and collect his full pension. If he did so, he would have to pay for his own costly health insurance. ri Or he could take early retirement, sharply reduced pension, and the company would continue to pay his health insurance. "I sacrificed 29 percent of my tq get it the health insurance," he said, adding, "if I hadn't taken early retirement, my insurance would have been sky high. really didn't have much choice." -j Since then, Bohl, who was earning $19,000 a year at the shoe factory, has found part-time work in the local Western Auto store.

The job pays $4 an hour. --y Lamented Bohl's wife, Geraldine: thought this would be the best time of. our life. Now he doesn't know when he's going to get a day off. You either take a poor retirement and have your insurance, or haveyour retirement and pay for high insurance." As for Bruce Wasserstein and Joseph Rer-ella, whose firm collected $9 million in fees for arranging the restructuring that left interco with $2.9 billion in debt which ultimately forced the company into Bankruptcy Court they have a somewhat different perspective of their efforts at reshaping corporate America.

In February 1989, Perella modestly assessed his firm's contributions this way for the Wall Street Journal: "No group of people not just me and Bruce ever accomplished so much in such a short period of time in Wall Street's history." TOMORROW: Learn how to an hour packing and unpacking boxes. The story of an elite group of lawyers, accountants and management consufi-ants who are earning up to $500 arvhSjr in fees. 4- Reporting the series For the last two years, Inquirer reporters Donald L. Barlett and James B. Steele crisscrossed America, interviewing men and women who work in factories and offices, department stores and lumber mills, in nearly 50 cities in 1 6 states and Mexico.

They interviewed government officials and corporate managers. They traced the operations of scores of once-thriving companies, now bankrupt, and gathered more than 100,000 pages of documents. The statistics used in The Inquirer series, "America: What Went Wrong?" are drawn from: the IRS; the Treasury Department; the SEC; Federal Reserve; Interstate Commerce Commission; Federal Election Commission; Senate Records Office; House Clerk's Office; Social Security Administration; Bureau of Labor Statistics; Japan Economic Institute; Pension Benefit Guaranty Patent ami Trademark Office; Resolution Trust Congressional Budget Office; Department ci Education, and Census Bureau. -tt Bmg Mark, an Inquirer editorial assistant, and The Inquirer library staff provided research assistance for the project. current buzz-phrase of politicians and corporate executives.

As The Inquirer will outline later this week, the global economy will be to the 1990s and beyond what corporate restructuring was to the 1980s. Through the last decade, decisions that produced short-term profits at the expense of jobs and future profits were justified because they increased "shareholder value." In the 1990s, the same decisions are being made with the same consequences only this time the justification is "global competition." Second, the fallout from the 1980s will drag on for years, as more companies file for protection in Bankruptcy Court, more companies lay off workers to meet their debt obligations, more companies reorganize to correct the excesses of the past. eet Edwin Bohl of Hermann, Mo. He, like Larry Weikel and Belinda Schell, knows all about the future. The place to begin Bohl's story is with a company called Interco a Fortune 500 conglomerate whose products included some of the best-known names in American retailing Converse sneakers, London Fog raincoats, Ethan Allen furniture, Florsheim shoes.

That was in 1988, the year the investment banking firm, Wasserstein Perella set out to reorganize Interco, a St. Louis-based company with scores of plants operating in the United States and abroad. Interco could trace its origins back more than 150 years. It was one of the country's largest industrial employers, with 54,000 workers. It had annual sales of $3.3 billion.

It had paid dividends continuously since 1913. In the summer of 1988, a pair of corporate raiders out of Washington, D.C., brothers Steven M. and Mitchell P. Rales, targeted Interco for takeover, offering to buy the company for $64 a share, or $2.4 billion. To fend off the Raleses, ln-terco's management turned to Wasserstein Perella, which came up with a plan valued at $76 a share.

Interco, obviously, did not have that kind of cash lying around. So the plan called for the company to borrow $2.9 billion. The financial plan was the sort that Wall Street embraced with great enthusiasm. Supporters of corporate restructurings insisted that debt was a positive force, imposing discipline on corporate managers and forcing them to keep a tight rein on costs. Michael C.

Jensen, a professor at the Harvard Business School and one of the academic community's most vocal supporters of corporate restructurings, put it this way: The benefits of debt in motivating managers and their organizations to be efficient have largely been ignored." But Interco failed to be a textbook model for the wonders of corporate debt. Instead of encouraging efficiency, it compelled management to make short-term decisions that harmed the long-run interests of the corporation and its employees. Within two weeks of taking on the debt, Interco closed two Florsheim shoe plants and sold the real estate. Interco announced that the shutdowns would save more than $2 million just enough to pay the interest on the company's new mountain of debt for five days. At the Florsheim plant in Paducah, 375 employees lost their jobs.

At the Florsheim plant in Hermann, 265 employees were thrown out of work. None was offered a job at another plant. Hermann is a picturesque town of 2,700 on the Missouri River, about 70 miles west of St. Louis. Settled by Germans from Philadelphia in the 1830s, it remains heavily German.

As might be expected from such a heritage, the deeply ingrained work ethic served the town's largest employer well. Beginning in 1902, that employer was known simply as "the shoe factory." It was a model of stability for the town and one of the manufacturing jewels of the International Shoe later Interco, its owner. Because of the factory's efficient workforce, whenever Florsheim wanted to experiment with new technology or develop a new shoe, it did so at Hermann. The plant had a long history of good labor relations. And it operated at a profit.

So why. then, did Interco choose to close the factory? Listen to Perry D. Lovett, who was city administrator of Hermann when the plant shut down and who discussed the closing with Interco officials: "We talked to the senior vice president who was selling the property and he told me this was a profitable plant and they were pleased with it. "The only thing was, this plant and the one in Kentucky they actually owned. The other plants they had, they had leased.

The only place they could generate cash was from the plant in Hermann and the one in Kentucky. "He said it was just a matter that this was one piece of property in which they could generate revenue to pay off the debt. And profited from the restructuring of business Wall Street investment advisers, bankers, lawyers, accountants, brokers, pension fund managers, arbitrageurs, speculators and a close circle of hangers-on. This army of dealmakers turned the government rule book to its own advantage, seizing on provisions that place a higher value on ever-larger profits today at the expense of long-term growth, more and better-paying middle-class jobs and larger profits in the future. In doing so, they made billions of dollars.

Popular wisdom has it that the worst has passed, that it was all an aberration called the 1980s. The age of takeovers and leveraged buyouts. The decade of greed. And greed has been officially declared dead by trend-trackers. A higher economic morality is supposedly in for the 1990s.

Popular wisdom is wrong. The declining fortunes of the middle-class that began with the restructuring craze will continue through this decade and beyond. There are, an Inquirer analysis suggests, two reasons: First, there is the global economy the Los Angeles Times LORI SHEPLER Thomas Spiegel is former chairman of Columbia Savings Loan Association, a Beverly Hills-based thrift. After big earnings in the mid-1980s, Columbia lost $1.4 billion in 1989 and 1990. Federal regulators seized the last January.

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