Economy  
comments_image Comments

How a Libertarian Used Ayn Rand's Crazy Philosophy to Drive Sears Into the Ground

Rand bequeathed business the perfect formula for failure. Just ask Sears.
 
 
Share

Photo Credit: Flikr / Jeff Pearce

 
 
 
 

Eddie Lampert, the legendary hedge fund manager, was once hailed as the “ Steve Jobs of the investment world” and the second coming of Warren Buffett. These days, he claims the number 2 spot on Forbes’ list of America’s worst CEOs. He has destroyed Sears, the iconic retail giant founded in 1886, which used to be known as the place “Where America Shops.”

America now avoids Sears at all costs, thanks largely to Mr. Lampert and his love of twisted economic logic.

A bit of background: Lampert cut his teeth on Wall Street at the risk-arbitrage desk of Goldman Sachs under Robert Rubin, who later became U.S. Treasury Secretary and now serves as vice chairman at Citigroup. In 1988, Lampert founded ESL Investments and joined the billionaire's club at age 41. He rose to fame in the early 2000s for seizing control of Kmart during bankruptcy and then using it to take over Sears. Along the way he was kidnapped and deposited on a motel toilet in handcuffs for nearly 40 hours, and lived to tell the tale. Lampert is known for his touchiness and odd habits, such as conducting meetings from a bare bones room to Sears executives forced to tune in by videoconference. He hates flying.

You might say that Lampert is the distillation of the fervent market worship and wrong-headed economic approaches that came to dominate the U.S. in the 1980s and have yet to run their fatal course. He adores Ayn Rand, and is reported to have given out copies of Atlas Shrugged during an ESL annual dinner. Lampert is also a fan of Friedrich von Hayek, the Austrian economist beloved by conservatives and libertarians. As a Robert Rubin protégé, he absorbed the lessons of a man whose discredited economic focus on budget deficits ended up starving the country’s infrastructure, education and alternative energy.

Looking at what Lampert has done to Sears, we can see what happens when the lessons of his mentors are actually applied in the real world. It isn’t pretty.

1. Myth: Bigger is better

William Lazonick, an expert on the American business corporation, has written about the rise of the conglomerate movement of the 1960s. At the time, shareholders were clamoring for rapid growth, so they pushed for big mergers and acquisitions. Once-successful firms were pressured to move away from their core businesses, often to terrible effects.  In an email to me, Lazonick noted that “the ideology was that a good manager could manage anything, and that all the central office needed was performance statistics so that it could ‘manage by the numbers’." This foolishness "imploded," as Lazonick put it, in the 1970s .

Evidently Lampert didn’t get the memo. In the 1980s, as deregulation got the casino games rolling on Wall Street, mergers and acquisition fever once again took hold. This time around, mergers more often involved acquisitions in the same industry, like Bristol Meyers' acquisition of Squibb. Two new terms entered the American vocabulary, the “hostile takeover” and the “corporate raider.” Oliver Stone made a movie about this episode called Wall Street.

Some refer to Lampert as a corporate raider. He prefers the term “active investor.” It must be admitted that Lampert wasn’t only interested in stripping the assets of his retail giant to make a fortune off it right away. He thought he could increase profits, too. After making a nice wad of cash from Kmart by selling off the valuable real estate sitting under dozens of stores, shutting down 600 stores and laying off tens of thousands of workers in the name of cost-cutting and thereby jacking up the stock price, he got bigger ideas. He would use Kmart to take over another ginormous retailer, Sears.