The decline of Sears, the story goes, is the tale of another moribund America company unable to adapt and compete with its more agile competitors—first the booming big box retailers in the eighties and nineties, followed by the advent and rapid rise of online commerce in the new millennium. It is a kind of capitalist amorality play, a just-so allegory that business schools would use to illustrate ideas about adaptability, innovation, and disruption. It is of course almost entirely incorrect.
Sears got Goodfella’d.
In the middle of that movie’s iconic “funny guy” scene, Joe Pesci’s violent, psychotic mobster Tommy DeVito breaks a bottle over the head of a restaurant owner who had the very dumb idea of trying to talk to Tommy about his unpaid—and surely never-to-be-paid—multi-thousand dollar tab in front of Tommy’s mobster friends.
Whether planned in advance or schemed out afterward, it turns out to be a setup. Tommy’s friend Henry Hill (Ray Liotta), takes the wounded, terrified restauranteur to see the gangsters’ boss. “Tell him what we talked about,” Henry urges. In short order, the gang owns a piece of the restaurant, ostensibly as part of a deal to protect it and its former owner from Tommy’s murderous urges, in reality so that they can plunder its cash and credit, buying and selling booze, furs, suits, cigarettes on the business’ dime and reselling them below retail on the street. “Who cares?” Henry shrugs in voiceover. “It was all profit!”
Meanwhile, the restaurant owed its new owner rent, every month. Or else. After the money was spent, the credit wrecked, and everything not bolted to the floor (and some things bolted to the floor) was sold, they declared bankruptcy, burned the place down, and collected the insurance.
This, with strikingly little deviation, is the story of how Eddie Lampert, a goodfella of the Wall Street variety, took over Sears, made himself a billionaire, and destroyed the most famous retail business in American history. As noted in the linked story, he has a $100 million yacht named The Fountainhead. Institutional Investor is too polite to note that Ayn Rand’s novel is not just a story about the value of greed; it is the story of a man who quite directly dynamited his greatest creation and got away with it.
Lampert engineered the merger of Sears and the also-struggling Kmart in the early 2000s on the back of a decision by his predecessor at the Sears helm, Alan Lacy. Lacy bought fifty-odd Kmarts. The public rationale was to pivot away from mall-based retail and create a new brand, Sears Grand, that would better compete with other big-box retail.
The effect of this purchase, which cost upwards of $600 million in cash, was to send Kmart’s stock soaring. (Kmart had only emerged from its own bankruptcy in 2003.) Lampert leveraged the stock valuation and the new cash reserves into an $11 billion takeover of Sears.
Whether Lacy was party to Lampert’s plans or a dupe, he remained with the newly formed Sears Holding Company for a year after the acquisition as CEO and Vice-Chairman. When he left in 2006, Lampert, already the chairman of the board, took over.
Stories of devastating private equity takeovers of struggling companies are absurdly common in our corrupted age. Bain Capital, the erstwhile company of Utah’s newest US Senator, Mitt Romney, recently devoured Toys R’ Us.
Lampert, unusually, was not a private equity guy. He was, and remains, a hedge fund manager. But he used much of the playbook of leveraged buyouts—paying himself exorbitant fees; cannibalizing company operations for cash; neglecting maintenance and capital investment to artificially juice cash flows as the ceiling tiles cave in at stores—and the scope of his skulduggery is incredible and majestic, like a Grand Canyon filled to the brim with shit.
He sold himself the properties on which Sears stores sat, leased them back to the stores, and paid himself the rents. He sold off profitable brands like Lands’ End and Craftsman, sometimes to business entities controlled by his own firm, and he used the proceeds of some of these sales to pay off Sears debt…which was in effect paying himself, since his hedge fund, ESL, was Sears’ largest creditor. (This has been ably and exhaustively chronicled by David Dayen.) I could go on.
Sears eventually entered bankruptcy. On Thursday, it was reported that Lampert has a plan to buy it out. There will be, needless to say, many lawsuits, as other creditors howl in protest at the prospect of getting stiffed by the same guy who’s been short-changing them all along.
To the more traditional business press, Lampert’s conduct is slightly baffling, as it is somewhat unclear if he has really made a great fortune in the sense of an ordinary billionaire, such as such a creature exists. He was at one point worth seven or eight billion; he is now down to one, maybe less. Poverino.
But he has, throughout, lived the gangster ideal, not some schnook, in the dejected words of a post-wiseguy Henry Hill, but a man who was never without a wad of cash to peel off for the valets and the cooks, the car dealers and the suitmakers. In a way, it is a less insane model of wealth, even if it leaves in its wake a human disaster: business wrecked and hundreds of thousands of once-decent jobs diminished and then destroyed. There is an air of psychosis in the hoarding of wealth by our great technology and finance oligarchs. There is, in contrast, something dirty and human about a regular operator who just moves from score to score, forever looking for new ways to “put money on the street,” if on a grander scale than most of us–citizens and small-time crooks alike–can imagine.