Finance Capital Turns Parasitic

By Bruce Livesey of Progressive Economics Forum.  Originally posted here.

In an announcement that largely went unnoticed last week, U.S. Steel said it plans to close down the blast furnace at Stelco’s Hilton Works in Hamilton, Ontario.

Hilton Works was once the main steelmaking operation of what was once Canada’s largest integrated steelmaker. Its demise exposes how Stelco has been reduced to a mere shell of its former glorious self. Indeed, since purchasing Stelco in 2007, U.S. Steel has strived to shutter the Stelco factories, even forcing the Harper government to sue the American company for reneging on promises to keep Hilton Works open and for selling American-made steel in the Canadian marketplace.

Yet the tragedy of Stelco highlights an alarming trend in the development of finance capital. In many respects, Stelco fell victim to the parasitic phenomenon of investment and hedge funds preying upon manufacturing companies and, basically, raping them of their capital. As witnessed by the credit crisis, finance capital has become less about investing in the productive capacity of the economy, and more about sucking out whatever profits exist in often vulnerable and shaky industrial sectors.

This parasitic trend was keenly illustrated by what happened to Algoma Steel a few years ago. Hedge fund billionaire John Paulson – who runs a New York-based hedge fund called Paulson & Co. – bought into Sault Ste. Marie-based Algoma in 2004, eventually controlling a 19% stake in the company. Paulson was enamored with Algoma only because it had turned into the most efficient steel company in the world. Under the guidance of CEO Denis Turcotte, and after some savage layoffs, Algoma was making huge sums of money, handing out $500-million to shareholders between 2002-’06. Algoma also stockpiled $400-million in cash to reinvest in its plants – money that Paulson coveted.

In 2005, Paulson made his move, demanding that this cash be handed over to shareholders like himself. To get his way, he instigated a coup to oust Turcotte and Algoma’s board. They, in turn, successfully fought off the hedge fund billionaire’s money grab (Paulson went on to profit mightily from the collapse of the subprime mortgage market).

Stelco, however, would be less successful in rebuffing the Bay Street/Wall Street vultures. In 2004, Stelco was pushed prematurely into creditor protection just as the company was beginning to earn record profits. Buyers began kicking its tires. The leadership of the United Steelworkers union, which represented the Stelco workers, made a Faustian pact with three investment funds – a New York-based hedge fund called Appaloosa Management, and two Canadian vulture funds, Tricap Management (part of the Bronfman/Brascan/Brookfield/ empire) and Sunrise Partners. These investment funds bought Stelco in 2006 and brought in an American turnaround expert, who laid off workers and reorganized the company. Their intention, however, was never to hold onto Stelco: Indeed, Stelco was sold to U.S. Steel in 2007 for an impressive US$1.1 billion. Tricap and its partners walked away with $375 million — more than seven times its original equity investment, plus profit from interest, fees and debt.

Yet U.S. Steel seemed to have no interest in maintaining the long-term viability of Stelco. The Hilton Works was almost entirely closed down in 2009 while the company locked out its Lake Erie plant workers for nearly a year. Hundreds of steelworkers have lost their jobs.

This process is what William Lazonick, a Canadian-born, Harvard-educated economist at the University of Massachusetts calls the “financialization” of the economy. In a paper he co-wrote earlier this year, Lazonick says “financialization” is where corporate executives are obsessed with distributing value to shareholders at the expense of investment in innovation and jobs. He says it’s having a pernicious affect on the North American economy facing aggressive challenges from Asia, especially China. “In the 2000s the financialization of the US business corporation undermined the innovative potential of marketization and globalization, thus not only exacerbating inequity and instability but also restricting the potential for economic growth,” writes Lazonick. “Despite the financial meltdown of 2008, there are scant signs in the 2010s of institutional changes that will constrain the destructive behavior of financialized corporations.”

One of the results of the aggressive invasion of hedge funds and investment funds into the Canadian steel industry was its demise as a nationally-owned industry. Between 2005 and 2007, the entire Canadian steel industry was sold off to foreign corporations.

At the very time that Canada’s industrial base is in such dire straits, one of our essential industries was bartered away. And finance capital had a lot to do with it.

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