woody_zimmerman_118_2007A century ago, the great political cause was “busting the trusts.” Teddy Roosevelt made his bones busting up the so-called “malefactors of great wealth” that pols and pundits had so much fun demonizing. They could do no right. In truth, of course, the great oil, steel, railroad and financial trusts had been pretty ruthless on their way to gaining near-monopoly power over the United States economy. High prices were the result. Oil, for instance, was extremely expensive in the context of the turn-of-the-century economy. One economist has calculated that 20¢-a-gallon gasoline then would translate into $10 a gallon now.

On his way to cornering the market on oil, John D. Rockefeller realized that railroad rolling stock was the key to taking over the industry. At one point he controlled 90% of the oil-car rolling stock in the country, which meant that any small oil producer would have to deal with him to get his product shipped to market. But Rockefeller would selectively deny small producers their needed access to oil cars, thereby forcing some to the wall. When a company collapsed for lack of sales, Rockefeller would swoop in to buy it out for pennies on the dollar. Thus, by the turn of the century, a former railroad clerk had risen to be one of the richest, most powerful men in America. His Standard Oil trust was a near monopoly. Many of the other great magnates – e.g., Andrew Carnegie (steel), Cornelius Vanderbilt (railroads), J. P. Morgan (banking) – gained near-total control of their industries by similarly ruthless tactics.

The danger to the national economy posed by trusts with near-monopoly control of industries was recognized by the end of the 19th century, leading to passage of the Sherman Antitrust Act in 1890. I won’t get into a detailed technical discussion here of “trusts,” which are a centuries-old legal instrument for allowing Party A to control Party B’s property for the benefit of Party A. Suffice it to say that the Sherman Act was really a “competition protection” act intended to prevent the combination of business entities that could harm competition. At the time, trusts were typically the arrangements which formed monopolies that restricted supply, thereby raising prices artificially and harming the economy.

The Sherman Act made the artificial formation of cartels illegal, but up until Roosevelt’s tenure the federal government mostly declined to enforce the law. President Roosevelt made busting the trusts the flagship of his presidency. He broke up 44 trusts via the Sherman Act during his two terms. This earned him the Trust-Buster moniker, although President Taft actually dissolved twice as many trusts (90) during his single term. Mr. Roosevelt was the trail blazer in these high-profile matters, however. President Taft merely followed his lead. TR used Sherman to divide the Northern Securities Company; Taft used it to split the American Tobacco Company. Their actions reformed American business so completely that most Americans today hardly know why the Sherman Act was passed.

In recent years, Microsoft was found in violation of the Sherman Act by the courts because it offered free software to buyers of their computer operating systems. Such incidences are extremely rare now. Modern Americans know relatively little about cartels and monopolies, except in foreign situations like the Organization of the Petroleum Exporting Countries. OPEC’s actions to restrain supply as a means of controlling the world price of oil lie beyond the reach of the Sherman Act, of course.

A new kind of trust or cartel has now emerged, however – one that the framers of Sherman could not have imagined because government is one of the participants. Up until now, government has been the protector of the public and the guarantor of the economy’s freedom from coercive control. In 2009, however, at the onset of the Obama presidency, the federal government engineered a new kind of “trust” which elbowed aside the interests of legitimate investors in favor of political allies of the political party in power; i.e., labor unions and the Democrat Party, respectively. This was done by the investment of public monies in certain companies.

There’s a scene in the film Godfather II, where the Jewish gangster Hyman Roth effuses about the Batista government in Cuba: “We have now what we have always wanted – full partnership with government…” He says that their (organized crime) interests will be free to make their profits away from the reach of the “…bleep-bleeped almighty Kefauver committee…” [1] Of course, the mafia’s “dream” didn’t last long. The Batista government soon collapsed as Fidel Castro took over in 1959.

Automakers Chrysler and General Motors have been on the ropes for years, but they waited until Mr. Obama took office before filing for Chapter 11 bankruptcy. Was this timing a coincidence? You tell me. Thanks to Mr. Obama’s intervention and the investment of $50 billion-plus, bondholders of both corporations were pushed out of their first place in line – a position dictated by standing law – and replaced by labor unions’ pension-fund claims. How many secret conversations occurred between Obama insiders and auto-company executives to arrange the timing and details of the new “partnership” between government and business? The thing appears to have been greased and ready to go well ahead of time.

The near-term result of this unprecedented intervention into business is what amounts to outright theft of bondholders’ funds. These investors had lent General Motors and Chrysler $27 billion and $6 billion, respectively, on the good-faith understanding that they would be first in line for settlement of their claims if those corporations failed. Despite disclosures that many bondholders were ordinary people depending on bond interest-payments for their retirement incomes, Mr. Obama dismissed them as a few rich old guys who could spare the money to put the car-companies back on their feet and protect workers’ pensions. (Full disclosure: I am one of the GM bondholders.)

In return for their trust in the justice of the American financial system, Chrysler and GM bondholders received a shot across the chops with a two-by-four – with some ruffles and flourishes laid on by the Dear Leader, as well. An acquaintance who is a senior economist and cabinet-level advisor to several presidents has told me that he and his colleagues have no idea how Mr. Obama got away with intervening in those bankruptcy proceedings. That economist and his compadres, along with the bondholders themselves, are standing around in shock as the 21st-century “government partnership” movement – “trust” would be a laughable oxymoron – rolls across the country’s financial landscape.

We can already recognize the longer-term results of this radical new movement in the overall business climate of the country. People who know a lot more about these things than I do repeatedly ask, “Why aren’t we moving out of this recession? Why isn’t business expanding and hiring?” Why, why, why…?

Part of the answer seems obvious: business isn’t expanding because investors aren’t investing. Why not? Because they no longer regard bonds as trustworthy. If government can excuse one industry from its bond-obligations, it can do it again – leaving another group of “rich old guys” standing there holding worthless paper as the “full partnership with government” parade romps past.

Recently we heard that GM has repaid some of it government loans and is “profitable” again. No doubt large bonuses are being handed out all around. Yee-ha! Happy days are here again! But a child could see that nothing will be right about this until the original bondholders are made whole. At this writing, a year on since the Chapter 11 filings, the GM and Chrysler bondholders have nothing – none of the interest due them and no settlement on their investments. Nah-thing! Now there is talk of possible government bailouts of union pensions. This is your gangster trust in action. (Has anyone noticed that these guys came from Chicago?)

The Obama presidency will be remembered for numerous actions with far-reaching consequences. But the damage it has done to investors’ trust in the investment system might turn out to be the sleeper in the pack. Millions of Americans hardly noticed the Chrysler and GM interventions, thinking none of it was their concern. They couldn’t be more mistaken. Unless the injustice done to the bondholders of these corporations is undone, investment in American companies will remain seriously degraded long after Mr. Obama’s presidency becomes just a rather unpleasant car-wreck receding in the rear-view mirror.


[1] Senator Estes Kefauver headed a Senate Special Committee on Organized Crime in Interstate Commerce in the 1950s. The committee was the nemesis of the Cosa Nostra – a.k.a. the Mafia – during the era when FBI Director J. Edgar Hoover denied that anything like organized crime existed.