Adam Schwab exposes the Pigs at the Trough

by |February 25, 2010

Adam Schwab gave us all a good belly laugh back in December with his Wilson Tuckey Memorial Kindness to Pensioners Award (which went incidentally to Qantas for its generous $3 million contribution to former CEO Geoff Dixon’s superannuation fund). His stuff can be funny, in the way  that The Men Who Stare at Goats is funny – ie the hilarity comes from the bald-faced brazenness of the action, rather than from a whole lot of clever word play.

Schwab is known to many people through his incisive analysis for He applies the blow torch to the belly to victors and the vanquished of the corporate world, and its regulators. Well,  those of us who have learned to ration their Schwab input, are in for a treat, if you can call a blow-by-blow dissection of  Australia’s decade of corporate greed a treat. If you are into flagrant and insolent audacity then Pigs at the Trough is for you for this is the story of how a generation of executives, under the apparent supervision of respected non-executive directors, duped millions of Australian investors, analysts and commentators.

Want to get a taste of it? Well read on for the preface of Pigs at the Trough, kindly supplied to us by Schwab’s publisher, John Wiley & Sons.

So here is the premise of the book:  Schwab captures the essence of the financial engineering boom-years in a pacey read. He cuts through the nonsense and gets to the heart of how billions in savings were blown sky high while cunning bankers walked away with millions.

Its all here: How Australia’s richest man under 40 built a childcare empire on foundations of sand (ABC Learning Centres), how the Gold Coast white shoe brigade got a second chance (and for those of us who remembered its first chance, it wasn’t pretty then either), the house of cards of Australia’s financial engineers that was Babcock & Brown and how it came crashing down, how the Kirbys became their own leading men (Village Roadshow).

The global financial crisis, like its predecessors all the way back to Tulip Mania, requires the vast majority to delude themselves that wealth can be created by shuffling pieces of paper. It’s fun while it lasts but when the delusion ends, only those doing the shuffling have the wealth. Pigs at the Trough breaks the delusion with a compelling narrative on now Australia’s richest celebrity managers bled their companies dry. (Steve Keen, author of Debunking Economics).

We’ll be hearing a lot more about Pigs at the Trough over the next few weeks, just you wait.

The world is now caught in the worst economic crisis since the
Great Depression. This crisis has been created by an ideology of
unrestrained greed … turbocharged by unregulated financial
markets, by obscene remuneration packages that maximised risk
with no regard whatsoever to the impact of their behaviour on
ordinary investors … this has been extreme capitalism writ large.
Prime Minister Kevin Rudd, 2008
FROM THE recession of the early 1990s until the global financial
crisis of 2008, shareholders experienced almost two decades of
unrestrained joy, punctuated only briefly by an Asian hiccup and burst
dotcom bubble. Insatiable share price and earnings growth, coupled
with billions of dollars of superannuation money, saw the Australian
stock market explode.
But as good as the good times seemed, the boom was built on
very shaky foundations. Generous use of debt created many paper
fortunes. However, it is often said, the greater the bubble, the greater
the deception — and there is little doubt that many of the fastgrowing
businesses were running on bluff and bluster, rather than
sustainable and honest business models.
Throughout this period of excess there were several constants: the
ever-increasing trajectory of executive remuneration, coupled with a
new-found love of debt and widespread use of financial engineering.
While real wages for ordinary workers barely kept up with inflation,
executives received lucrative share options, performance rights and
short-term cash bonus payments that contained very little alignment
with long-term wealth creation (except for their own).
As executive remuneration skyrocketed, Australia also witnessed
insatiable growth in companies that made very little of anything of
value, but instead engaged in pursuits called ‘asset origination’ or ‘asset
recycling’. These companies (typically called ‘ financial engineers’)
would hide the nature of their businesses among an ever-growing
cloak of complexity. Their Byzantine structures and opaque financial
reports allowed executives such as David Coe and Phil Green to
accumulate multi-million-dollar nest eggs. When the fall eventually
came, these so-called masters of the universe would be well protected.
Shareholders and creditors would not be so lucky.
Th e financial engineers, usually operating in the once staid,
government-owned infrastructure sector, used layers of leverage
and billions of dollars of shareholder capital to acquire assets and
later pay income from that very capital and borrowings. The engineers
— led by Babcock & Brown, Allco and MFS — would become the
custodians of Australia’s most important infrastructure and tourism
assets. Their inevitable death, under the weight of burgeoning debt,
would bear an eerie resemblance to the endeavours of the entrepreneurs
of yesteryear — household names such as Bond, Skase and
Spalvins would be replaced in 2008 by a new set of faces, with names
such as Coe, Groves and Green.
The ease with which founders and executives enriched themselves
at shareholders’ expense will long remain a case study for the
importance of corporate governance.
Eddy Groves, the man who ran what was once the world’s
largest childcare company, paid his brother-in-law millions of dollars
in untendered maintenance works, while Allco directors David Coe
and Gordon Fell collected tens of millions of dollars after they sold
their Rubicon property business to Allco — after the sub-prime crisis
had taken hold. Only days after the sale, Gordon Fell’s wife spent
$27 million purchasing one of Australia’s finest homes on Sydney
harbour, the asset remaining safely out of reach of Fell’s creditors and
Allco’s beleaguered shareholders.
Babcock & Brown’s Phil Green and MFS’s Michael King stood
by while the empires they created crumbled. Both appear to have
retained extensive private fi ancial interests, often purchased with
monies extracted from their companies during the glory years.
But it wasn’t only the engineers who brought pain to shareholders.
The  Village Roadshow troika of Robert and John Kirby and ‘surrogate
brother’ Graham Burke would turn the notion of ‘ alignment’
into a furphy. The Village executives received tens of millions of dollars
over a decade while their bumbling management of Australia’s largest
cinema and production concern cost shareholders millions.
Telstra, once a staid, government-owned utility, would turn to a
big-talking American to improve its fortunes. It took four years and
many billions of dollars in lost market value for the Telstra board to
realise the error of their ways.
Toll Holdings, one of Australia’s most successful companies,
became a pariah, paying its already wealthy executives millions for
worthless options, right under the noses of shareholders.
Even two agribusiness companies, which sold woodchips to the
Japanese, ended up being Australia’s largest (alleged) Ponzi schemes,
all the while costing taxpayers billions of dollars as Collins and Pitt
street farmers collected tax deductions for upfront losses on revenue
that would never materialise.
This is the story of how a generation of executives, under the
apparent supervision of respected non-executive directors, duped millions
of Australian investors, analysts and commentators.
From the carnage comes some valuable lessons. While the likes
of Allco and MFS were complex, arcane entities, their financial
statements gave warnings to investors to stay well away. But they
were signals that were missed or ignored by almost all investors and
analysts. At the same time, the business elite, the men and women
who occupy the blue-chip boardrooms of corporate Australia, did
little or nothing to rein in executives. On many occasions, nonexecutive
directors were unwilling or unable to stand up to executives
who enriched themselves while their companies burned.
This book is not merely a tale of greed, but of the clues that can
be gleaned — important evidence that all investors who manage their
own wealth should always be on the lookout for before trusting their
retirement savings to the care of highly paid executives and boards
of directors.
Pigs at the Trough will show you how to spot the next corporate
car crash — and hopefully how to avoid becoming the next casualty.
Santayana once noted that those who forget history are doomed to repeat
it. Unfortunately for many investors, history is too often forgotten as
soon as the next bubble appears.

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