The Soul of Capitalism (Page 3)

If all this seems too visionary to be plausible, the startling fact is that some of these ideas are already at work in practical and tough-minded situations. Aggressive pioneers in the labor movement have connected with a few kindred spirits in finance capital, investment bankers who understand the destructive side of how the present system functions and recognize that there are profitable opportunities for real "wealth creation" if the employees, union and nonunion alike, are brought into the deal. The first successful model for labor's direct investing was fashioned by its most conservative sector: the building trades, which overcame years of traditional legal obstacles and won the right to invest their pension money directly in housing and development projects that create jobs for union members.

More ambitiously, some capitalists and workers, not many but a few, are together now carrying out "labor friendly" corporate takeovers--the direct-equity investment deals that used to be the exclusive domain of the wealthy and powerful. The returns are very strong, typical of direct-equity investing. It is the operating values that are different. And the "deal flow," as investment bankers call the essential task of spotting new investing opportunities, often originates with local union leaders, people intimately familiar with both the failures and the unrealized potential in business enterprises. Leo Gerard, now president of the United Steelworkers of America, became an early apostle for mobilizing labor's capital as he saw small manufacturers in the industrial Midwest decimated either by financial maneuvers or their inability to raise capital. Gerard, who is Canadian, helped engineer Canada's largest worker takeover of a company, Algoma Steel, as well as many smaller rescues in the United States. He created the Heartland Labor Capital Network, which promotes the goal of replicating Canada's successful labor-sponsored investment funds (Quebec's Solidarity Fund, by attracting small investors with tax incentives, has become the largest source of venture capital in the province). "American politics, as regressive as it is at the national level, makes it extremely difficult to do this here," Gerard says. Congress did create new tax subsidies for local venture-capital funds, but the tax breaks go only to large investors, banks and businesses.

Gerard envisions a growing galaxy of like-minded investment firms that do "control investing" for corporate rehabilitations, with union pension funds putting up some of the capital. In return, the takeover insiders would have to agree at a minimum to honor employees and their rights: to remain neutral on union organizing and guarantee speedy recognition of new locals through card-check registration by a majority of workers rather than laborious fights over elections by the National Labor Relations Board. More substantially, workers should be given a role in decision-making processes and, sometimes, an ownership stake with seats on the board. Writing such collateral conditions into direct-investment deals--special terms demanded by major investors--is standard practice. In the language of finance, these are commonly known as "covenants," a biblical term that nicely expresses the social function of shared commitments. "If you can create these alternative forms, then you can show that capitalism doesn't have to do the brutal stuff it does," Gerard says. "Then you have a meaningful, articulate voice that can show a different way of doing things--call it social capitalism, as opposed to Darwinian capitalism."

Oddly enough, David Stockman, the tenaciously bright young conservative who was Ronald Reagan's controversial budget director in the 1980s, is leading one of the "labor-friendly" firms--the $1.4 billion Heartland Industrial Partners (evidently, he borrowed the name from Gerard). Stockman's venture may startle those who remember his combative style in Washington politics, but he impressed labor people with some of the deals he did for the Blackstone Group of Wall Street. Stockman managed large and successful industrial turnarounds by working with the employees and unions instead of rolling over them. Since he launched his own firm in 1999, his "buy and build" strategies have focused entirely on restoring midsized manufacturing companies to good health and profitability: auto parts, home furnishings, aerospace components and other sectors. In all, Heartland manages around $10 billion in industrial companies, probably the largest fund of its kind. The Canadian Pension Plan and Michigan's state employees' fund, as well as the steelworkers', are investors, alongside major private players like J.P. Morgan Chase and AIG, the insurance giant.

"David is buying controlling ownership of these companies, and he's actually turning them around, and he's not doing it by beating the shit out of the workers," Gerard says. "David made his presentation to the trustees of the pension fund, labor and management, and asked for $10 million. When he left the room, the board voted to give him $25 million." Even the mighty Carlyle Group, run by celebrated conservative Republicans like James Baker, has stuck a toe in the same pond by launching a $750 million "worker-friendly" investment fund, perhaps designed to attract capital from the same labor investors.

In social terms, however, the KPS Special Situations Fund is a far more aggressive pioneer: It takes control of failed or abandoned capital assets and attempts to re-create an American corporation with a very different operating ethos. "We invest in a constructive way," says Mike Psaros, one of the KPS partners. "Instead of going in and slashing and burning and screwing people, we go in and work constructively with the employee groups to figure out what's wrong and fix it."

The "K" in KPS is Eugene Keilen, a former Lazard Frères partner who pioneered the first major employee-ownership buyout--Weirton Steel, in 1980. Psaros was a teenager in Weirton, West Virginia, when Keilen's plan saved the mill and 10,000 jobs. "My father worked at the mill," he says. "I watched this guy come in from New York City who quite literally saved our way of life, our town. I said to myself, One day I want to do that--this kid from Weirton who'd never heard of an investment banker." Psaros studied at Georgetown University, majored in finance and went to Wall Street, where he teamed up with his investment-banker hero.

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