How Big Finance Wrecked US Defense

 If  you've kept up with events, you know that the United States military's stores of tactical missiles, rockets, and 155's have been seriously depleted by the border-battle between Russia and Ukraine.

What you may NOT know is how a few buyout/LBO pirates and parasitical banks managed to demolish our country's defense infrastructure.  We now rely on our geopolitical and economic enemy, Red China, for critical components of the national-defense armory.

Matt Stoller and Lucas Kunce essayed about this in advance (July/2019) in The American Conservative; the essay is reprinted in Main Street Conservatism*, from which we excerpt relevant--and frightening--quotations.

...the destruction of America's once vibrant military and commercial industrial capacity in many sectors has become the single biggest unacknowledged threat to our national security.  Because of public policies focused on finance instead of production, the United States increasingly cannot produce or maintain vital systems upon which our economy, our military, and our allies rely. .....

In passing, the authors criticize the "More Money Is More Defense" theory with which Trump agreed.  Then the mention the sad, lingering death of Bell Labs, which invented radar, the transistor, and the laser (among other things), and passed those inventions to other American companies which could manufacture them, along with the ultra-sophisticated telephony equipment also invented at Bell.

Then came the LBO pirates.

...In 1996, AT&T spun off Bell Labs into a telecom equipment company, Lucent Technologies, to take advantage of investors' appetite for an independent player selling high-tech telecom gear after Congress deregulated the telecommunications space.  At the time, it was the biggest [IPO] in history and became the foundation of a relationship with financial markets that led to its eventual collapse.

The focus on stock price at Lucent was systematic.  .....[it] was posted daily to encourage everyone to focus on the company's relationship with short-term oriented financial markets.  ....

We must add that upper-level executive compensation included very generous stock-option awards.  It's possible that those execs were thinking of small-time shareholders, of course, but it's not likely, given what you're about to read.

....Lucent began to buy up companies.....[Two scholars wrote] "The perceived need to compete for acquisitions became a 'strategic' justification for keeping stock prices high.  This in turn demanded meeting or exceeding quarterly revenue and earnings targets, objectives [over which CEO McGinn] obsessed."

...McGinn's subordinate.......Carly Fiorina.......juiced returns with a strategy based on lending money to risky startups who would then turn around and buy Lucent equipment.  Fiorina collected $65 million in compensation as the stock soared.  And then, when the dot-com boom turned to bust, the company, beset by accounting scandals designed to impress stockholders and the financial markets, embarked on massive layoffs.....

As most of you recall, Fiorina went on to wreck Hewlett-Parkard and then run for President.  Imagine how a Fiorina presidency might have worked out for the country, eh?

...In the early 2000's, the telecom equipment market began to recover from the recession.  Lucent's new strategy.....was to seek "margin" by offshoring production to China, continuing layoffs of American workers, and hiring abroad.  At first, it was the simpler parts........the boxes and assembly, but soon contract manufacturers in China were making virtually all of it.  American telecom capacity would never return.

Lucent didn't recover its former position.  Chinese entrants, subsidized heavily by the Chinese state and using Western technology, underpriced Western companies.....

Not noted in the essay was the Chinese habit of demanding that US firms "share" their intellectual property with the Chinese, and when that was insufficient for Chinese purposes, the Chinese would simply steal it.

Where do you think Huawei came from, friends?

....This loss goes well beyond telecom equipment......[Bill] Hickey, like many manufacturers, has watched the rise of China with alarm for decades.  "Everyone's upset about the China 2025 plan, referencing the current Chinese plan causing alarm ....The United States has......lost much of its fasteners and casting industries which are key inputs to virtually every industrial product.  It has lost much of its capacity in grain-oriented flat-rolled electrical steel,......required for most electrical motors.  Aluminum that goes into American aircraft carriers now often comes from China.  .....[In a conversation with the admiral in charge of the US submarine fleet], the admiral complained that the US was retiring three subs per year, but could only build 1.5 annually.  [While Trump increased that] to two/year, the US no longer has the capability of producing high-quality castings required for more than two........The supply chain that could support [surge production] should be in the commercial world, but it has been offshored to China.  " You can't run a really high-end casting business on making three submarines per year," Hickey said.  ....This shift happened because Wall Street [the LBO guys] bought up manufacturing facilities in the 1990's and moved them to China.

"The middle-class Americans who did the manufacturing work, all that capability, machine tools, knowledge, it just became worthless, driven by the stock price," he said.  "The national ability to produce is a national treasure.  If you can't produce you won't consume, and you can't defend yourself."...

That's a fact, Jack.

....The erosion of much of the American industrial and defense-industrial base proceeded like Lucent.  ....In the '80's and '90's, Wall Street financiers focused on short-term profits, market power, and executive payouts over core competencies like research and production, often rolling an industry up into a monopoly producer.  Then, in the 2000's, they offshored production to the lowest-cost producer.  This finance-centric approach opened the door to the Chinese government........to strategically pick off industrial capacity by subsidizing its producers......

The loss of manufacturing capacity has been devastating for American research capacity.  "Innovation doesn't just hover above the Great Plains," Mottl said.  "It is build on steady, incremental changes and knowledge learned out of basic manufacturing."...........

.....In a 2018 report, [DoD] released findings of its analysis of its supply chain.........[there are] dozens of militarily significant items and inputs with only one or two domestic producers, or even none at all.  

Included in the report?

Mortar tubes, bankrupt suppliers, chaff, flares, high-voltage cable, valves, ship-fittings, satellite and missile components, and tent material.  Worse:  China is the sole supplier for specialty chemicals used in munitions and missiles.  In addition, foreigners provide circuit boards, night-vision systems, batteries, and space sensors.

........TransDigm began as a private equity firm in 1993....It achieves [much higher] returns for its investors by buying up companies that the government needs, and then increasing prices by as much as eight times the original amount.  ......TransDigm's gross profit margins using this model to gouge the US government are a robust 54.5%.  To put that into perspective, Boeing's and Lockheed's profit margins are listed at 13.6% and 10.91%....

TransDigm also believes in ESG; it's all over their website.  So you may be getting screwed, but it's environmental- and social-justice screwing.  Feel better now?

You've heard of 'rare earth magnets,' right?  They are absolutely necessary for smart bombs, fighter jets, lasers, and comms devices, not to mention cellphones and most commercial electronics.

China saw the value, too, and China has rare earths.

....Two of Deng's sons-in-law approached investment banker Archibald Cox, Jr. [son of Nixon's tormentor] to use his hedge fund to serve as a front for their companies to buy the US rare-earth magnet enterprise........purchasing and then moving the factory, the Indiana jobs, and the expertise to China....

Cox, Jr. bought a cozy $12.6 million home in New York City.  Clearly, Hunter and the Big Guy were cheap dates in comparison.

"St. Jamie" Dimon's Chase Manhattan Bank

.........agreed to pay a $264 million bribery settlement to the US Government for creating a program, called "Sons and Daughters" to gain access to Chinese money by selectively hiring the unqualified offspring of high-ranking ChiCom officials..........Several other banks [Citigroup and Goldman, Sachs] are also under investigation for similar practices........In 2017, Goldman, Sachs partnered with the Chinese government's sovereign wealth fund to invest $5 Billion of Chinese government money in American industry.  ...

Think Goldman was well-rewarded for hiring the son of China's commerce minister?

What to do?

....Policymakers must recognize that industrial capacity is a public good and short-term actors on Wall Street have become a serious national security vulnerability.  ........the public sector must once again structure how we organize our national defense and protect our defense industrial base from predatory finance.  For several decades, Wall Street has been organizing not just the financing of defense contractors, but the capabilities of our very defense posture.  That experiment has been a failure.  It is time to wake up before it's too late.

Let the debate commence and--for once--let's shut out Wall Street from the meeting room.

*You can purchase copies of Main Street Conservatism from Republic Publishers at Amazon.  You should!