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The Progressive Economics Forum

Finance Capital Turns Parasitic

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.

Enjoy and share:

Comments

Comment from duncan cameron
Time: October 11, 2010, 7:42 am

In the 1960s there was considerable discussion of the need for public investment funds, and the Canadian Development Corporation was established. Today only Quebec operates successfully in re-structuring industries through the provision of loan and equity investments. Elsewhere the hedge fund model described so well by Bruce prevails.
Much analysis of the fragility of wholly-owned private subsidiaries of American corporations was done by Walter Gordon. He was ahead of his time in understanding how unchecked financial power could undermine jobs and real investment in Canada.

Comment from Paul tulloch
Time: October 12, 2010, 5:28 am

Greetings Bruce, your new here? Welcome abroad the rag tag pef fugitive fleet.

Just a comment on algoma, it was a difficult time in the salute when Paulson pulled his stunt. Everybody in the town was quite upset, but apparently not much could be done. (my old home town that I am still organically linked to). The hough in my head back then was how could this one person come out and take such control and make such demands- and this after the government, the union and the workers had all made huge sacrficies just a 4-5 years earlier.

Millions spent by the province and the feds, workers were laid off and took wage hits, the city had forgone taxes, the union went through gut wrenching times trying to keep the entity going. Thenwhen everything comes together and the pieces fall into place and the company starts making a profit- wham a capitalist of a different sort comes in and demands all the profit. Which in many ways is what got the plant into trouble in the first place- lack of re-invest ment.
There is a difficult lesson in your point for the neo-cons- reality is no place for their theory.

Comment from Paul tulloch
Time: October 12, 2010, 5:29 am

That should be the Sault my iPad keeps changing words i’ll figure it out

Comment from Purple Library Guy
Time: October 12, 2010, 11:06 pm

This isn’t such a new phenomenon. A while back I read a book called “In praise of hard industries : why manufacturing, not the information economy, is the key to future prosperity” by Eamonn Fingleton. Chapter 3 is “Finance: A Cuckoo in the Economy’s Nest” and describes just this sort of problem. This is a 1999 book.

The problem does seem to be accelerating.

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