Chapter Two—
W. T. Grant:
The Social Construction of Bankruptcy

The banking community . . . took a big public company . . . and ran it into the ground.
—Marvin Jacob, regional head, Securities and Exchange Commission

A corporation facing a serious cash flow shortage—either because of a poor general economy or because of poor or shortsighted managerial decision making—does not inevitably go under or even sustain permanent damage. Under Chapter XI of the bankruptcy code, the troubled firm receives protection from its creditors while it reorganizes for recovery. Once the firm's creditors acknowledge a serious cash flow shortage, a decision-making process founded on capital flows determines the outcome. Financial institutions may decide to advance the necessary loans to postpone or head off a crisis, or they may decide to withhold such loans, precipitating the collapse of the ailing corporation. When W. T. Grant Company faced a massive cash flow shortage, the outcome of the decision-making process was not in its favor, and the huge department store chain went bankrupt.

W. T. Grant's notable bankruptcy was the largest retailing bankruptcy in U.S. history and second in size only to that of Penn Central Corporation (New York Times, 3 Oct. 1975). In the early 1970s the firm was the seventeenth largest retailer in the United States, with 1,200 stores producing profits of $38 million on $1.6 billion in sales (Business Week, 19 July 1976, 60). Yet within a few

years this giant corporation lost $288 million before filing for protection under Chapter XI in October 1975 (Business Week, 19 July 1976, 60). By that time Grant had closed 1,073 stores and laid off 80,000 workers. Its banks had "written off approximately $234 million in bad loans and its suppliers $110 million in receivables" (Business Week, 19 July 1976, 60).

The recession of 1974–1975 brought rising interest rates that hurt the economy at large (New York Times, 1 Jan. 1975, 2; 23 Nov. 1984, 41; 20 Dec. 1975, 33). But giants such as W. T. Grant rarely fall victim of a shrinking economy, because the federal government usually bails out major corporations in crisis. Lockheed and Chrysler are only the more famous of over four hundred such federal bailouts (U.S. Congress, House 1979a; Bearden 1982). What happened to cause such a major corporation to collapse? What role did managerial decisions play, and what were the factors influencing those decisions? What were Grant's capital flow relations with the banking community, and what role did those relations play in the bankruptcy? Was managerial discretion unrestrained? If not, what were the forces of constraint on that discretion? What role did corporate board interlocks play? Finally, what was the locus of power in the struggle over the distribution of Grant's remaining assets after bankruptcy?

Managerial Decisions and Financial Difficulties

W. T. Grant became mired in finance capital markets partially because a long series of unrestrained managerial decisions produced severe cash shortages. These decisions included exceedingly rapid overexpansion, a poorly conceived and inadequately managed inhouse credit system, an incomprehensible inventory system, and an ill-conceived and confusing attempt to shift its merchandising emphasis from soft goods to durable goods. The net result of these managerial decisions was that by 1974 Grant had suffered substantial cash losses, and it eventually filed a Chapter XI bankruptcy. A prolonged investigation, prompted by contentious litigation over the firm's liquidation, revealed the banking community's tacit approval and encouragement of management's decision making. Through their representation on the firm's board of directors,

the banks were in a position to know of and to participate to an extent in these managerial decisions (Morgan Guaranty Trust Company of New York v. Charles G. Rodman, as Trustee of the Estate of W. T. Grant Company, 1975, hereafter cited as Morgan v. Grant ).

An example of Grant's unrestrained and shortsighted managerial decisions was its store expansion program. The company's objective was to open stores in relatively small towns where rival major department stores had not yet gone. Outside director DeWitt Peterkin, Jr., vice chairman of the board of directors of Morgan Guaranty Trust, testified that this expansion program was "a management decision." (See Dramatis Personae 1 for the names and positions of actors in W. T. Grant's bankruptcy.) Yet no one on the board asked management to defend its selection of expansion sites or questioned why other major retailers weren't in these areas if the proposed locations were so good. No one even asked for an analysis of "who the Grant customer was" (Peterkin, in Morgan v. Grant, 366–367, 32, 34). The expansion program was so fast that between 1969 and 1973 Grant opened 369 stores. According to James G. Kendrick, a former chief executive officer, "The expansion program placed a great deal of strain on the physical and human capabilities of the company." Said another former executive: "Our training program could not keep up with the explosion of stores. . . . And it did not take long for the mediocrity to show" (Business Week, 19 July 1976, 60–61).

Another example of poor and unchecked managerial decisions was Grant's credit system. Credit was extremely easy to obtain from Grant, and repayment schedules were often as low as one dollar per month. The firm instituted this program to induce its customers to purchase expensive appliances and furniture. Managers, who are traditionally expected to maximize profits, were under constant pressure to increase credit sales. These same managers were responsible for giving the final approval on new credit accounts. A former finance executive stated that "the stores were told to push credit and had certain quotas to fill." One former manager grumbled, "We gave credit to every deadbeat who breathed" (Business Week, 19 July 1976, 61). Since each store was responsible for promoting credit, collecting payments, and maintaining credit information, Grant in effect had 1,200 credit offices. Indeed, custom-

ers could build up huge amounts of credit by opening separate accounts in different Grant stores.

Richard W. Mayer, Grant's chief executive officer, president, and chairman of the board, testified that the store managers were responsible for both sales and credit granting because of corporate founder William T. Grant's philosophy that "the store manager was . . . 'The King.' And he [sic ] had control over all functions in the store. There is no more reason why he [sic ] should not have control over his [sic ] credit program" (Mayer, in Morgan v. Grant, 82–83). Mayer indicated that no one from Grant's accounting firm (Ernst and Ernst) or Grant's board of directors ever questioned why the same store manager handled the conflicting functions of sales and credit.

The ill effects of the easy-credit lure instituted in 1969 appeared as early as 1970. Yet the company did not become concerned about the situation until after the fiscal report of 1971, which revealed the credit problems. According to John G. Curtin, financial vice president and treasurer at Grant, there was a steady and significant "rise in write-offs of uncollectible credit accounts. Uncollectibles rose from 2.1% in fiscal 1970 to 3.2% in fiscal 1972" (Women's Wear Daily, 4 Feb. 1977, 24).

Peterkin told the court that the company's lax policy toward delinquent creditors was a product of the recession. Since so many of Grant's customers seemed to be adversely affected by the recession, management decided "not to go after delinquencies so hard as they might have otherwise in the hopes that economic conditions were going to improve and these customers were going to be able to get back on current basis" (Peterkin, in Morgan v. Grant, 188).

Grant extended its customary grace period to accommodate its delinquent customers: "Until 1975 it allowed 36 months to pay, with a minimum payment of $1 per month" (Business Week, 19 July 1976, 61). Under this lax policy, Grant's delinquent accounts increased "appreciably" from 1972 to 1973. By 31 January 1973, Grant had approximately 56,000 delinquent accounts. The following year that number had increased to around 102,000 (Peterkin, in Morgan v. Grant, 321). This figure represented a loss of $602.6 million, compared with $556 million in 1973, "and up 86% over the $324 mllion in 1969" (Business Week, 19 July 1976, 61).

On top of this lax payment plan, Grant's managers consolidated delinquent accounts to "make them current." They "would take two different types of credit accounts of a Grant customer and consolidate them into one account. And where one or both of the accounts were delinquent, [they] would make the new account current" (Peterkin, in Morgan v. Grant, 329).

Furthermore, Grant had a policy of "refinancing" a delinquent account: "A new credit agreement would be arranged whereby payments would be spread out over a longer period of time and the . . . new account would thereby be characterized as current." Delinquent customers could make their accounts current by paying small amounts of money toward them (Peterkin, in Morgan v. Grant, 331–332). Again the easy credit was promoted in a short-term effort to increase sales during the recession, to the long-term detriment of accounts receivable.

Store managers were hardly in control of the situation. They disliked being pressured by Grant's reward-punishment manner of promoting increased credit sales and new accounts. For example, managers and clerks were "offered $1 bounties for each customer they signed up for a [credit] card" (Forbes, Apr. 1976, 110). Any store manager who failed to sign up his quota of new credit customers suffered the public humiliation of "eating beans instead of steak at the next promotion dinner . . . or having his tie cut off . . . or getting a pie in his face . . . or having to wear a diaper" (Women's Wear Daily, 4 Feb. 1977, 1).

They disliked even more the responsibility of final approval of new accounts, since it often conflicted with their responsibility to maximize credit sales. The situation deteriorated the retailer's fi-

nances so quickly that when the credit system was dismantled in 1974, it was really too late to undo the damage.

To gain some control over the alarming increase in delinquent accounts, Grant's management decided to "centralize the collection function away from the stores" (Peterkin, in Morgan v. Grant, 340). But centralization addressed only the collection of delinquent accounts, leaving the power of granting credit with store managers who were still responsible for sales. Furthermore, the situation was already so problematic that centralization did little to ease the crisis.

Few of Grant's managers and directors were concerned about Grant's credit promotions. Indeed, Peterkin could name only two who were: Raymond H. Fogler and Louis C. Lustenberger (both directors and former presidents of the firm), who had suggested that Grant might be "pushing too hard on credit." Peterkin suggested, however, that these two directors' concerns were ignored because, "of course, this [credit promotion] was an effort in order to increase sales and sales were the name of the game" (Peterkin, in Morgan v. Grant, 335). Defending the directors' silence on the firm's lax credit policies, one former senior Grant executive asked, "What could the board do?" (Business Week, 19 July 1976, 61). Such a question by one of the firm's own executives suggests that the board had little power to control the corporation.

Although the company's management did not seem fully aware of its actual inventories and accounts receivable, there were ample signs of declining health. Sales volume per square foot declined 33 percent from 1966 to 1975. Although sales increased from $1.2 billion in 1969 to $1.8 billion in 1974, "inventories more than doubled to $450 million" (Business Week, 19 July 1976, 60). The company's earnings per sales dollar also declined from 7 cents in 1969 to 2 cents in 1973. Lustenberger and Fogler tried in 1971 to "mobilize the outside board members to force a change because they were alarmed by the company's rapid expansion, inventories, and general lack of leadership" (Business Week, 19 July 1976, 60). They were ignored until September 1974, at which point the board appointed James G. Kendrick of Zeller's, Ltd. (Grant's Canadian subsidiary), to be president, chairman, and chief executive officer of Grant. "He immediately went public with the bad news, which

had not been disclosed" (Business Week, 19 July 1976, 60). As a result, by the end of October Grant had to publish a restatement of its earnings for the entire year: $177 million in losses, $92 million of which was written off as bad debt.

Court-appointed trustee Charles G. Rodman opened an investigation after the firm went bankrupt. He suggested that several of Grant's policies (including insufficient inventory controls, insufficient credit controls, and rapid overexpansion) encouraged the exercise of managerial discretion with few constraints. This discretionary power appeared to be an important factor in the internal generation of the firm's cash flow problems. Ironically, instead of pursuing financially sound goals, the banking community (well represented on Grant's board) continued to extend credit and failed to constrain managerial decision making despite great evidence of mismanagement.

Since financial institutions and corporate board interlocks sometimes act as constraints on such discretionary power, Rodman was interested in ascertaining the precise role banks played in Grant's operations. He charged that to further their own interests the lead banks concealed the real financial state of the retailer. He carefully investigated the Grant Foundation, which he named as a defendant in his suit against the banks. This foundation was reputedly a charitable organization instituted by founder William T. Grant and Connecticut Bank and Trust Company, which was also the agent for a number of the founder's private trusts. Rodman alleged that funds from the foundation were used for "fraudulent stock purchase deals with the company" (Women's Wear Daily, 21 Dec. 1977, 11). The suit sought damages of $50 million from the Grant Foundation.

In 1969 the foundation, which held 1.3 million shares of Grant's stock, decided to sell "to diversify its holdings." To avoid depressing the price of Grant's stock, the retailer and the foundation agreed that Grant would gradually buy back its stock from the foundation "rather than have that amount of stock in effect unloaded on the market" (Lustenberger, in Morgan v. Grant, 392). Rodman testified that Morgan Guaranty's trust department "had a very substantial position in Grant stock," estimated to be greater than 10 percent of Grant's common shares. Morgan sold these holdings around 1973 (Rodman, in Morgan v. Grant, 45, 46).

Richard Mayer indicated that he knew of Morgan's substantial holdings and of its sale of Grant stock because he received quarterly reports of all large holdings. He testified that he never asked outside director Peterkin (from Morgan Guaranty) why Morgan decided to liquidate its entire position in Grant stock. Mayer claimed that the situation was of "very little concern" to him in 1973 (Mayer, in Morgan v. Grant , 55). The precise reason for the sale is still unclear: no crisis had yet been declared. Perhaps Morgan, which was clearly in a position to know of Grant's developing difficulties, sold the stock to escape the impending crisis. As an important managerial consequence of that sale, Morgan relinquished the operational constraint such holdings would have imposed on managerial decision making. Clearly, the banks were not concerned about this apparent loss of their proxy constraint on the firm through Morgan's holdings. The power of collective purse strings in their loan departments would serve them better.

Mayer was a trustee of the W. T. Grant Trust, which purchased Grant stock between 1970 and 1972. Several letters written during that time indicate that Edward "Staley, as trustee of both W. T. Grant Trust and Grant Foundation, determined when and how the stock was to be purchased" (Mayer, in Morgan v. Grant , pt. 9, 72). Staley admitted that he "had power of attorney" over Mr. Grant's affairs, indicating that it was Staley's "decision for the Grant Foundation and the Grant Trust to start liquidating stock in '68" (Staley, in Morgan v. Grant , 1005–1006). Staley's remark signals a careful program of purchases. Furthermore, a letter from the Connecticut Bank and Trust Company dated 6 November 1969 indicates that the bank sold 246,664 shares of Grant common stock to the retailer (Mayer, in Morgan v. Grant , pt. 9, 74). These letters and events suggest that the stock purchases were "attempt[s] to solidify control of the company" and thus to increase managerial autonomy (Mayer, in Morgan v. Grant , pt. 9, 74). In a letter that supports this analysis, Staley wrote that he and William T. Grant established a "program . . . in 1968 to over a period of time liquidate the Grant stock holdings in the Grant Foundation and the trusts established by Mr. Grant in a way so that large holdings of Grant's stock would not fall into unfriendly hands" (Mayer, in Morgan v. Grant , pt. 9, 85). Under the schedule of purchases, Grant acquired 800,000 shares of its stock from the

foundation between 1969 and 1972 (although no stock was purchased in 1971 as Grant's finances began to get tight). When the agreement was terminated in 1973, Grant had purchased its own stock from the trust at a cost of $35 million (an average of $43 per share) and had spent another $15 million purchasing its stock from several trusts. These purchases represented a large portion of the retailer's cash flow.

Less than a year after Grant finished buying the stock, it was desperately in need of cash to pay its bills. Here, the constraints on managerial discretion posed by the banks' control of capital resources began to solidify. Since Grant had tied up its capital in stock purchases, it would have to rely on the banks for loans. "Ultimately, the stock became worthless as Grant's failed in an attempted Chapter XI reorganization and was liquidated" (Daily News Record , 12 Apr. 1978, 9).

Although many of Grant's difficulties clearly derived from a series of poor managerial decisions, some of those decisions were influenced by the presence of banks in its daily affairs. Between 1971 and 1973 Grant "was substantially in excess of the industry average in paying dividends as a percentage of earnings—eighteen percent or more in each of those years" (Staley, in Morgan v. Grant , 1008). Evidence of a significant positive correlation between dividend payout rates and a firm's interlocks with banks suggests that banks favor high dividends because such a policy "add[s] to the value of their stockholdings" (Gogel 1977, 174). High dividend payout rates also deepen the firm's dependence on external sources of investment capital, because substantial amounts of internally generated capital are diverted to stockholders. Consequently, high payout rates ordinarily make a stock attractive to banks. More important than attractive dividend rates to banks is the critical effect of these rates on Grant's cash flow position. This analysis suggests one role that banks may have played in producing the firm's cash flow problems.

W. T. Grant's Lending Relations with Banks

Before 1973 W. T. Grant conducted its business with only minimal participation by the financial community.

Grant generally satisfied its short term cash needs through the commercial paper market. The lines of credit at money center banks were utilized to cover Grant's short term interim cash needs that resulted from the delays inherent in placing and selling commercial paper through W. T. Grant Financial Corp. [which was organized for the business of making loans to Grant and borrowed funds for that purpose]. ("Order Fixing Time and Place for Hearing to Authorize and Approve Agreement of Compromise and Settlement with Bank Claimants," in Morgan v. Grant , 4; hereafter cited as "Order Fixing Time")

This conversion also solidified the long-term relations between Grant and the banking community and deepened the latter's role in Grant's affairs. Banks' presence on nonfinancial boards can thus facilitate access to capital, as many corporations acknowledge.

By the spring of 1974 Grant's management had converted some of its short-term debt of commercial paper into long-term debt. With the help of Peterkin, who sat on both Grant's and Morgan's boards, Morgan Guaranty organized a five-year unsecured term loan of $100 million for Grant and became the agent for eight other banks ("Order Fixing Time," 4).

The sequence of events leading to Grant's difficulties actually began before December 1973, when high dividend payout rates coupled with inefficient managerial discretion caused a 78 percent decline in earnings (New York Times , 26 July 1974, 64; see also "Order Fixing Time," 6). Both Moody's and Standard and Poor's downgraded Grant's commercial paper rating from prime 1 to prime 2 and also downgraded Grant's long-term securities. This downgrading, together with Grant's declining performance, forced the retailer to resort to its bank lines of credit, which stood at more than $200 million. "As a result, Grant's overall borrowing increased sharply—by approximately $167 million—during 1973." The retailer's performance continued to decline through January 1974, when "Moody's withdrew Grant's commercial paper rating and substantially downgraded Grant's long term securities" ("Order Fixing Time," 6, 7). Grant could therefore no longer cover its short-term cash requirements through the commercial paper market and was forced to rely once again on the banks for its equity-to-debt conversion.

By March 1974 "Grant had $284 million of commercial paper outstanding of which $32 million was maturing on March 5, and

more than $100 million scheduled to mature the following week" ("Order Fixing Time," 7). Grant asked Morgan and the banks to reestablish the $100 million in credit lines that the banks withdrew when they made the $100 million loan to the ailing retailer. The banks agreed to reestablish this credit line, with Morgan Guaranty, Chase Manhattan, and First National City Bank (Citibank) each increasing their loans to Grant by $79 million. The total loans and credit lines the nine banks made were $415 million at this point.

The banks were clearly aware of their power as organized controllers of loan capital to destroy or rescue the firm, to define crisis, and to constrain managerial decision making. John P. Schroeder (executive vice president of Morgan Guaranty, and director and vice chairman of the board of both Morgan Guaranty and J. P. Morgan) testified that the banks met to discuss "what other sources besides the banks there would be for Grant. . . . [and] it was pretty apparent that the options for Grant had been reduced to banks, and banks alone" (Schroeder, in Morgan v. Grant , 18).

In June 1974 twelve of Grant's major banks met to discuss the retailer's situation (Schroeder, in Morgan v. Grant , 35). Apparently the banks recognized that they had a common problem by virtue of their involvement in Grant's lending consortium. That such a meeting (and many similar meetings throughout this case) took place attests that cooperation is standard practice among banks. Lending consortia facilitate and often necessitate such communication, and the consequent development of bank unity, because the situation they create fuses the interests of consortia members.

The new loans and credit lines did not stem the declining performance of the retailer. In July 1974 Grant was troubled by "severe cash shortages, was in default on a number of its short term notes and was running overdrafts at its lead banks." By August 1974 Morgan Guaranty, Chase Manhattan, and Citibank had each given Grant $5 million more in secured loans. Each bank was now exposed by $84 million to Grant. These loans were "secured by an assignment of certain customer accounts receivable of Grant" ("Order Fixing Time," 7). Accounts receivable are running records of customers' credits, payments, and balances due. Control of accounts receivable means control of the lifeblood of the firm, be-

cause these records provide invaluable information for corporate decisions. Furthermore, payments are made to whomever controls the accounts. Hence when the banks seized control of Grant's accounts, they were in a position to intercept any payments customers made on their bills. They were also able to control information regarding the firm's actual financial condition, thereby hindering management's ability to make defensible decisions. The banking community was able to gain control over this essential element of Grant because of their collective control of capital flows: they defined the situation as a crisis and demanded control of accounts receivable in exchange for the infusion of desperately needed capital. By extending loan capital when such an investment appeared imprudent and then seizing accounts receivable, the banks were able to delay bankruptcy to position themselves for their own maximum benefit.

The banks then escalated their constraining influence to control the hiring and firing of Grant's top personnel. In the spring of 1974 Grant's directors discussed "relieving Mr. Mayer of his duties" because of the firm's declining profitability. Peterkin testified to the banks' activism and intervention in Grant's decision-making processes, stating that he had personally discussed Mayer's ouster with several outside board members beyond the confines of formal board meetings (Peterkin, in Morgan v. Grant , 36, 38–39). As the pressure mounted, Mayer resigned as chief executive officer in June 1974. The banks then pressured Grant to name a permanent chief executive. Schroeder testified that Morgan Guaranty, Chase Manhattan, and Citibank "made it known as loudly and as vocally as possible that the absence of a new chief executive officer was impeding [their] efforts to line up the bank group." All "three major committee banks acting in concert . . . provided the communication" to Grant that their "disposition to proceed will be sharply influenced by" the selection of a permanent chief executive (Schroeder, in Morgan v. Grant , 50, 51–52).

In September 1974 James G. Kendrick was brought in from Zeller's, Ltd. (Grant's Canadian subsidiary) as president, chairman, and chief executive officer after the banks (represented by the outside directors who forced Grant's reorganization) strongly implied that Kendrick would cooperate with the banking community. Rodman suggested that Kendrick was named on a "request from

Citibank": The banks "hit the gong pretty hard with that request. Kendrick was named" (Rodman, in Morgan v. Grant , 77, 78). Indeed, one former senior executive noted that "the company joke was you got to be a director by how fast you could say yes. And the outside directors looked to Staley and . . . Peterkin for guidance" (Business Week , 19 July 1976, 61). Rodman asserted that the banks "wanted it [Kendrick's appointment] done before they went further on the accommodation of Grant with the extension of the credit" (Rodman, in Morgan v. Grant , 78). In fact the announcement of Kendrick's selection was speeded up because Citibank refused to go along with the loan agreement until Kendrick was named. Citibank knew Peterkin "was involved in the selection of the new chief executive officer and called him directly" (Schroeder, in Morgan v. Grant , 109–110). That Citibank could freely call Peterkin of Morgan Guaranty to press for a speedy announcement of Kendrick's appointment demonstrates the ease of interbank communication and, more important, the extent to which banks now controlled Grant's strategic decision making and operations.

When Kendrick took the top position at Grant, Peterkin sent him a letter to "encourage" his efforts and to let him know that "we [at Morgan were] going to do all we could to help him in his new work." "We at Morgan expect, in fact demand total credibility," Peterkin wrote, referring to the banks' anger at Grant management's previous secretiveness and lack of cooperation. Peterkin also hinted at the banks' power over the retailer, thanks to their loans to the firm and the substantial holdings of Grant stock in some of their trust funds: "At Morgan Guaranty failure is unacceptable. We are going to seek a way to get the job done. We, the banks, have a far greater investment in Grant than any other element of the Grant ownership" (Peterkin, in Morgan v. Grant , 3, 4, 6). Peterkin's letter was a veiled threat to Kendrick that failure to cooperate with the banks' demand for information and cooperation would lead to his downfall, as it had to Mayer's. Schroeder testified that the banks were "pleased" that Kendrick had taken over Mayer's job (Schroeder, in Morgan v. Grant , 52). This episode suggests the banks' ability to affect personnel decisions in the firm as well as their satisfaction that Kendrick would cooperate.

When Kendrick grasped the full extent of Grant's financial problems, he went public with the bad news. By September 1974

Grant, Grant Financial, and Morgan Guaranty (as agent for itself and 143 other banks) entered into a loan and guaranty agreement. Under this agreement the unsecured loans as well as the secured loans advanced to Grant Financial were extended to 2 June 1975. The agreement also increased the commitments for loans made to Grant Financial, raising total bank loans and advances to $700 million.

Of the 143 banks involved in loans to Grant at the time of its demise, 14 supplied over 83 percent of the $600 million in short-term loans and all of the $100 million in long-term loans (see Table 1). As collateral for the guaranty, the banks were granted security interests in Grant's accounts receivable and 6,399,300 common shares (51.3 percent) of Zeller's, Ltd. ("Order Fixing Time," 8–9).

Notably, when Grant's managers had earlier proposed to sell their receivables, the banks were opposed. Indeed, Schroeder testified that "the banks . . . require[d] bank approval of any such receivable sale." Although Schroeder insisted that Grant "never formally asked for approval," he agreed "it was understood that the banks' approval would be required before any such sale could take place." Grant's management understood that "there wouldn't be any loan agreement if such a sale went through" (Schroeder, in Morgan v. Grant , 70). That Grant deferred the sale of its receivables until after the loan agreement was made (whereupon the banks seized control of the accounts receivable) attests to the banks' constraining power to press management to delay decisions until the banks were in a more favorable position.

Rodman told the court that the banks' procurement of Grant's receivables "was prejudicial to the rights of other creditors" because "it set them [the banks] up with a claim to those assets. The accounts receivable were the single largest assets of Grant, with apparent priority over the other creditors." Rodman suggested that the banks procured these receivables "by virtue of their control and domination," since "it was up to Grant's best interest to cooperate . . . with the banks." Grant had to cooperate because the banks had the power to "force Grant into a very awkward situation" by calling in their demand notes (Rodman, in Morgan v. Grant , 75–76, 76–77, 76). Indeed, Grant executives Harry Pierson and Robert A. Luckett complained later that "the banks were running the company" (Schroeder, in Morgan v. Grant , 350).

The banks appear to have dominated Grant by virtue of their ability to advance or deny loans and thus to force the retailer to accept terms that were not in its interest. According to a Citibank document, "Bankers voiced the opinion that Grant died when [the banks] . . . took collateral and started a chain which made it [Grant] unrehabilitatable" (Schroeder, in Morgan v. Grant , 183). These struggles underscore a general pattern of bank intervention in Grant's decision making.

Not all the banks in Grant's consortium readily agreed with the lead banks' strategy of increasing Grant's lines of credit. Schroeder testified that he worked closely with John Sundman (director and financial vice president of Grant in 1974) between June and August 1974: "Our mission was to put together banks into a cohesive, committed operating group, and it was a very difficult mission" (Schroeder, in Morgan v. Grant , 30–31). One incident that illustrates the resistance of the small banks was the struggle with the Toms River Bank in central New Jersey.

To settle its account with Grant and discontinue involvement, Toms River Bank filed suit to recover its loans. Schroeder testified that "we [Morgan] had to have that suit dropped in order to proceed [with Toms River Bank's increased line of credit]. . . . The notion here was that no one of the banks was going to buy out any other bank." Bankers at Toms River hoped their suit would make them "difficult enough and provide a difficult enough scene so that we [Morgan Guaranty], in fact, would buy them out. But they didn't realize that our position was really quite adamant." Schroeder noted that if Toms River's suit was successful, the action would have forced Grant into bankruptcy (apparently before Morgan Guaranty was ready to precipitate Grant's bankruptcy). The lead banks began to apply pressure on Toms River: "The sound and furor within our sort of agent bank circles . . . about this Toms River Bank was very real. We sent a delegation down there to try to dissuade them. . . . We approached the management of that bank from a number of sources" (Schroeder, in Morgan v. Grant, 57, 58, 59).

One of those sources was the head of the Philadelphia Federal Reserve District, who "was . . . in touch with the management of the Toms River Bank, expressing . . . his great concern over" Toms River's suit. Schroeder acknowledged that such a communication from the Federal Reserve "would certainly be taken with greater seriousness by any bank manager." He told the court that at this request, the New York Federal Reserve District "authorized us [Morgan Guaranty] as the agent bank to mention the fact that we had a meeting with the Fed to the [recalcitrant] banks." A Continental Illinois Bank document indicated that "Morgan [Guaranty] was authorized . . . to report to Federal Reserve authorities such banks as refused to participate." Schroeder told the court that Morgan made telephone calls to Toms River to remind bankers there of Morgan's authorization to report recalcitrant banks to the Washington, D.C., Federal Reserve and to try to convince them to join the major banks in increasing Grant's credit line to $6 million (Schroeder, in Morgan v. Grant, 59, 60). The mounting pressure was apparently too great for the small New Jersey bank to resist. Toms River capitulated, withdrew its suit, and joined the other banks in a cohesive strategy toward Grant.

Schroeder testified that such communication between banks is a

standard operating procedure (Schroeder, in Morgan v. Grant, 63). By facilitating the modification of dissident viewpoints among banks, it creates a coalescence of policy within the banking community as a whole and produces a unified force confronting non-financial corporations. The structure of the lending consortium was the key factor here in the achievement of bank unity. Grant would have been forced to default on its loans without bank support in restructuring its debts. Therefore, since the large banks insisted that all members of the consortium participate in that restructuring arrangement, the small banks were constrained to remain in the consortium to recover their money.^[1]

The formation of coalitions was evident in both the structure of Grant's lending consortium and the establishment of an advisory committee. In November 1974 Grant's three lead banks formed the advisory committee (later called the steering committee) "to give [Grant's management] . . . a forum for discussing with [the banks] . . . ideas that would have . . . consequences [for], or . . . need input from the banking group" (Schroeder, in Morgan v. Grant, 185). Grant was clearly aware of the power of the banks and was trying to line up the banks' approval before making any policy decision that might anger them.

Further constraining influences were mobilized on 1 April 1975, when Grant, Grant Financial, and Morgan (as agent for all 143 banks in the consortium) entered into the loan extension agreement.

This agreement provided (1) for payment of outstanding loans made by 116 banks, in the aggregate principal amount of $56,509,610; and (2) for the extension of the maturity date to March 31, 1976, of outstanding loans made by the Bank Claimants in the aggregate principal amount of $540,916,978. ("Order Fixing Time," 9)

By extending lines of credit and loans totaling $700 million to Grant, and by entering into the loan extension agreement, the banks strengthened their constraining influence on Grant's poli-

[1] At one point, Grant's management was told "not to contact the dissident banks" to try to persuade them to participate in the $6 million loan agreement: "We [Morgan Guaranty] didn't want anybody else muddying up the water. We wanted to end up this ballgame on our own in our own way" (Schroeder, in Morgan v. Grant, 118–119).

cies. Since Grant now depended heavily on the banking community for survival, its management was not free to make decisions that might antagonize the banks. A covenant of the loan extension agreement stipulated bank participation and intervention into Grant's decision-making processes, including personnel and resource allocation. The agreement called for "bank approval of the changes in . . . voting control of the stock" (Schroeder, in Morgan v. Grant, 307). The banks also now demanded that Grant replace Kendrick with someone with expertise in merchandising who would be able to forcefully change, retain, and/or dismiss personnel and policies as necessary. Peterkin headed the search committee, which brought in Robert A. Anderson, a former vice president of Sears Roebuck and Co. (Peterkin, in Morgan v. Grant, 27). The process by which a search committee headed by a bank representative selected Anderson as Grant's chief executive illustrates how Grant's management acted to satisfy the banks.

Although the banks selected Anderson, he quickly had "substantial and loud disagreements with respect to Grant's inability to get merchandise." He threatened to resign, complaining that the banks were not meeting Peterkin's promise of bank support. Chase Manhattan Bank issued a memo on 16 June 1975 that stated, "I believe our only hope is a very senior level meeting with Anderson to try to convince him to stay within our ground rules." Schroeder told the court that Anderson "was not cooperating with the banks [and] . . . he was later told he was expected to. . . . He had 27 banks that were working their heads off to help him and [I told him] that he might just cooperate with them a little better" (Schroeder, in Morgan v. Grant, 321, 325–326).

The struggles between the banks and Grant's management continued against the backdrop of power plays by the major banks against the minor banks. On 2 June 1975 the major banks "convinced the 117 smaller banks to accept a 40% payment" of their loans to Grant, thus reducing the number of banks involved in Grant's indebtedness (Schroeder, in Morgan v. Grant, 312). This action, under which the minor banks recouped only a small portion of their loans to Grant, also precluded them from gaining access to Grant's assets when the major banks later declared the firm insolvent and forced it into bankruptcy.

The banks responded collectively to Anderson's "noncoopera-

tion" when he told them in September 1975 that Grant would need them to help put "more cash . . . into the company" (Kendrick, in Morgan v. Grant, 736). After exending so much support to the firm, the banks suddenly told Grant that they would not provide any more money to enable the retailer to reorganize. Instead, the banks entered into a subordination agreement in August 1975 to persuade vendors and suppliers to continue to ship goods to Grant. Under this agreement the banks "agreed to subordinate $300 million of Grant's indebtedness to them to certain trade obligations of Grant" ("Order Fixing Time," 10). But according to Anderson the subordination came too late to rescue Grant from bankruptcy, and Kendrick testified that both he and Anderson had requested the subordination as early as April or May 1975 (Kendrick, in Morgan v. Grant, 764–766).

Grant filed for Chapter XI bankruptcy on 2 October 1975. At that time the banks "set off approximately $94,523,110 of Grant's funds on deposit with them. . . . $90,300,000 of the set-off funds was subsequently advanced to Grant as a debtor-in-possession" ("Order Fixing Time," 10). By this action the banks essentially lent Grant its own money.

The banking community initially responded to Grant's cash flow shortage and deleterious patterns of managerial decision making by concurring that Grant's approach to business needed to be restructured and by agreeing that the firm should be allowed the opportunity to reorganize under Chapter XI bankruptcy proceedings. This approach is by and large reserved for firms that seem able to reemerge from reorganization as healthy, competitive businesses. The agreement by the banking community to allow Grant to file for reorganization protection indicated that at this point the banks did not define Grant's predicament as a crisis (that is, as permanently damaging to Grant's business trajectory). Rather, they defined it as a problematic situation that was expected to respond positively to reorganization efforts. A creditors' committee (composed of six banks and five trade creditors) was formed ostensibly to aid the firm in its reorganization attempts. Yet the question remains, Why did Grant's banks continue to extend increasing amounts of loans and lines of credit to a firm whose cash flow situation was clearly desperate?

Chapter XI and Beyond:
The Struggle Continues

Although there is general agreement that poor managerial decisions led to W. T. Grant's financial difficulties, evidence suggests that Grant's bankers were aware of those difficulties as they developed. Rodman alleged that Grant's banks continually took "action to assist in the concealment and suppression of the true facts regarding the financial condition and business of Grant" (Rodman, in Morgan v. Grant, 85). Furthermore, Mayer testified that none of Grant's bankers "express[ed] any concern about the quality of Grant's receivables, . . . the quality of management information or information systems at the Grant company, . . . internal controls at the Grant company, [or] . . . any phase of its operating other than the fact that it wasn't earning as much profit as it had in the past" (Mayer, in Morgan v. Grant, pt. 8, 27).

Because Grant's banks were involved in the firm's day-to-day decision-making processes, they must have been aware of the retailer's growing problems and poor managerial decisions. Several bank representatives sat on Grant's board of directors, including Peterkin, of Morgan Guaranty (Grant's lead bank), and Joseph W. Chinn, Jr., of Wilmington Trust Co. (Moody's Industrial Manual, 1974, 1331). In addition, both Peterkin and Chinn were members of Grant's audit committee, and Peterkin chaired that committee from 1969 until Grant's demise. The audit committee, which met at least once a year, received "accountants' audited statements" and would review "the balance sheet and the income statement on a line by line basis." Peterkin admitted that he periodically called Mayer to ask about the poor performance of several of Grant's stores. He further conceded to the court that "there were a lot of stores that were not meeting the 'target'" of sales and profitability (Peterkin, in Morgan v. Grant, 244–249, 336).

In addition to bank participation on Grant's audit committee, the bank advisory committee (composed of representatives from Morgan, Chase Manhattan, and Citibank) was kept abreast of developments with progress reports on the retailer. Peterkin testified that John Sundman (Grant's financial vice president) told him as early as 1972 that "there would come a point in time when Grant

would run out of money if it paid all of its bills" (Peterkin, in Morgan v. Grant, 60, 183). Schroeder also testified to having had periodic "routine" discussions with Peterkin concerning Grant: "We did have a line of credit. Mr. Peterkin in the ordinary course of his activities would be aware of that, and I in the ordinary course of my activities would review our lines with him" (Schroeder, in Morgan v. Grant, 6).

Peterkin's presence on Grant's board created a one-way information network. Throughout this case information concerning Grant flowed from Peterkin to the bank, but information did not flow from the bank to Grant. In fact Peterkin's one-way information flow continued beyond Morgan Guaranty to the rest of the banking community. This wider network came to light in a Chemical Bank document indicating that Peterkin had had conversations about Grant's problems "with at least one banker from Chemical" (Schroeder, in Morgan v. Grant, 107). The evidence indicates that even though the banks knew of the retailer's developing problems and often considered the company insolvent, they did not interfere with the firm's day-to-day operations. Despite top-level managerial changes, the store expansions, credit system, and merchandising practices continued.

In 1974 Grant's banks finally admitted that the firm had substantial problems. In a memorandum prepared in December 1974, Peterkin expressed his opinion "that Grant was at that time on the verge of bankruptcy." Peterkin clearly "knew Grant was insolvent in December of 1974," and yet he continued to make further obligations and loans to the retailer (Rodman, in Morgan v. Grant, 96). Schroeder testified that Grant became a "problem credit" as early as the spring of 1974. He suggested that Peterkin was also aware of Grant's problems because of the bankers' "routine" reviews of credit lines to the retailer. Schroeder told the court that the banks placed Grant on a "special review list" of problem credits in March 1974. This special review indicated to Morgan that "in early July, 1974 . . . it didn't seem prudent . . . to extend additional credit to Grant." At this time, the Irving Trust Company questioned Grant's ability "to survive the crisis." Later that summer several small banks, including the Toms River Bank, concluded that Grant was insolvent, despite denials from the large banks. When asked for his definition of insolvent, Schroeder told

the court that "from a banker's point of view it . . . means . . . inability to pay . . . [the firm's] debts when due." But he denied that Grant was insolvent in 1974, even though the retailer was failing to pay its bank notes "as they matured" and had slowed down its payments to suppliers. According to Schroeder's testimony, he did not conclude that Grant was insolvent until September 1975 (Schroeder, in Morgan v. Grant , 6, 48, 66, 112, 121, 365). Peterkin did not admit Grant's insolvency until December 1974 (Peterkin, in Morgan v. Grant , 365; Rodman, in ibid. , 67). In fact, a Morgan Stanley document indicates that the bank had discussed taking large write-offs of Grant's credit operations back in "late August or early September" of 1974 (Schroeder, in Morgan v. Grant , 123–124).

Despite misgivings about the prudence of further bank involvement, the financial community continued to extend further credit to the company. Although the banks insisted they took this unusual step because they were convinced they could "turn this thing around," Schroeder testified that they acted to "save their own hides." By late summer 1974 "Morgan and the other banks were looking at the Grant credit from a point of view as to how to recoup the most amount of money as possible on the Grant loans." Schroeder further admitted that the reason the banks refrained from liquidating Grant at that point was "because the banks felt they could get more money by keeping it alive" (Schroeder, in Morgan v. Grant , 367, 125). This is a clear statement of the divergence of interests between the banks and the retailer.

A liquidation analysis performed by Citibank in the summer of 1974 indicated that "the banks would get 68 cents on the dollar." The same analysis demonstrated that "in liquidation it was estimated that the Grant liabilities exceeded its assets." In other words, the banks knew Grant would not be able to repay the full amount of their loans if they chose to liquidate the firm at that time. Schroeder told the court that the banks never intended a long-term solution: "We would not be thinking in anything more than a temporary rescue operation." Although according to Schroeder the banks theorized that a short-term rescue would "make cash flows begin," the terms of the loans were too short to allow the deeply troubled firm to repay successfully. Schroeder acknowledged that the banks understood "that it would at least be a number of years

before repayment was made" (Schroeder, in Morgan v. Grant , 90, 132, 22, 25). If the banks were convinced (as they continually testified) that they could transform the retailer from a desperately ailing firm to a profitable one, why was Grant finally thrown into bankruptcy?

Grant's board was apparently aware of the banks' power to reduce Grant to insolvency and of the banks' sudden decision that no more money would be forthcoming. At a meeting on 23 September 1975 Grant's board weighed the prospect of reorganizing under a Chapter XI bankruptcy proceeding. Chapter XI would allow the company to "continue to operate and endeavor to cure its problems under the protection of the court" from its creditors; whereas in the alternative, "Chapter X, the court appointed a trustee, and for all practical purposes, the company management ceased to direct its affairs" (Kendrick, in Morgan v. Grant , 758).

Banks' collective constraining influence in managerial decisions (including the decision to reorganize or to liquidate) became evident once again. While Grant's board was considering Chapter XI, the banks were also conducting meetings to discuss Grant's bankruptcy. Schroeder testified that Morgan Guaranty disseminated a great deal of information about Grant to the other banks in the consortium. He told the court that the information was "rather complete . . . in order to do our job as the agent bank" and that it was communicated both "at meetings of the banks" and "in written form" (Schroeder, in Morgan v. Grant , 158–159). On 26 September 1975 Morgan Stanley bankers held one such meeting at Morgan headquarters, and after a period of discussion among themselves, they invited Kendrick to join them. Having already decided that a "Chapter XI was inevitable," they told Kendrick that they preferred Chapter XI to Chapter X because under the former Grant's management would continue to direct the firm as debtor-in-possession "and therefore would stand a better chance of securing shipments of merchandise." Under Chapter X, however, the firm would be run by a court-appointed trustee who "could at any time with the permission of the court liquidate the company" (Kendrick, in Morgan v. Grant , 769, 774, 789). Apparently, nervous vendors could be persuaded to ship goods to the retailer only by a guarantee that the banks would pay. Moreover, Schroeder testified that the banks equated Chapter X with liquidation (Schroeder, in

Morgan v. Grant , 187). Peterkin testified that the banks wanted no part of a bankruptcy liquidation (that is, Chapter X) at that time "because [they] wanted to maintain the control of the company" (Peterkin, in Morgan v. Grant , 77–78).

Resisting the banks' pressure for Chapter XI or bankruptcy, Grant's management wanted to recapitalize with more money from the banks. In the end management reluctantly gave in, however, and agreed that without recapitalization a Chapter XI proceeding was preferable to Chapter X: "A Chapter XI petition would be filed if the banks were willing to cooperate . . . [because] they would use their best efforts in keeping the company in Chapter XI when appearances were made before the Securities and Exchange Commission." At this point the banks agreed to cooperate "on the condition that Grant close approximately half its stores" (Kendrick, in Morgan v. Grant , 793, 795; see also Peterkin, in ibid. , 42–44).

The issue of store closings generated more conflict between Grant and its banks, underscoring their divergence of interests. Before September 1975 several bank representatives had told Anderson and Sundman that Grant had to close down more than five hundred stores to increase the retailer's cash flow. Kendrick complained that the banks were "relating it entirely to a cash flow situation." Apparently Grant's banks were primarily interested in augmenting the size of Grant's estate in bankruptcy rather than in reorganizing the firm into a viable retailer. A larger estate in bankruptcy would mean a larger proportion of recovery for the banks. If Grant actually reorganized under Chapter XI protection from its creditors, the banks would be unable to recover any of their money for a long time. According to Kendrick's testimony, Sundman presented the banks with figures indicating that Grant's cash flow "would and could be better than was being projected by the banks . . . [and that] on the basis of the way he saw the cash flow developing that it wouldn't require that many stores to be closed" (Kendrick, in Morgan v. Grant , 733, 734). He estimated that only three hundred to five hundred stores needed to be closed to effectively reorganize Grant into solvency. These events and testimony suggest that the banks were indeed attempting to increase the firm's immediate cash flow position, to the detriment of its future viability.

A Citibank memorandum noted the divergence of interests between Grant and the banks: as early as December 1974 the banks recognized that "it was in . . . [Grant's] best interest to file a petition in bankruptcy while at the same time it was recognized that it was not in the bank's best interest to do so." According to Schroeder, the banks acknowledged that "the company's problems with the trade would be solved to a large degree by the filing of a bankruptcy petition." The Citibank memo indicated, however, that "it was important [to the banks] to get into February [1975], since the banks' lien on receivables and Zeller's taken in September would not be perfected until early in that month." Schroeder conceded that "it was the banks' strategy to buy as much time as possible in order to avoid jeopardizing their collateral position." Moreover, a Morgan Guaranty liquidation analysis (found in several other banks' files as well) indicated the deliberateness of this strategy to buy time. To that end the banks secured an agreement from Grant that it would give the banks advance notice of the filing of a Chapter XI petition (Schroeder, in Morgan v. Grant , 221, 222, 254, 408). Grant's managers thus had to seek the banks' permission to go ahead with the very action even the banks acknowledged was in the retailer's best interest. Rodman's testimony indicated that the banks had delayed to position themselves more advantageously before pushing the retailer into bankruptcy.

In late September or early October 1975 Grant's management decided "to actively seek the support of the banks in the filing of the Chapter XI petition." Peterkin acknowledged that "if the banks did not support the filing of the Chapter XI petition . . . [the only alternative] was Chapter X" (Peterkin, in Morgan v. Grant , 87). The banks pressed for the substantial store closings as a condition for their cooperation in a Chapter XI reorganization (Kendrick, in Morgan v. Grant , 797; Peterkin, in ibid. , 42–44), thus increasing the firm's immediate cash flow position. But closing so many stores undermined Grant's future chances of effective reorganization. Although Sundman and Anderson maintained that Grant could reorganize with fewer store closings, the banks were adamant. Grant's management finally acquiesced to an action they clearly viewed as unnecessary and ill advised, and they verbally agreed to comply with the banks' demand.

Grant's managers eventually closed 714 of their 1,073 stores,

leaving 359 stores to operate Grant's business. They fired almost fifty thousand employees and attempted to revamp their merchandising policies by focusing on seasonal merchandise and soft goods (primarily clothing and domestic items) and phasing out the furniture and major appliances that allegedly helped provoke their financial difficulties. The losses incurred by closing down so many stores and holding huge sales of heavily discounted inventory items amounted to approximately $177.3 million for the 1975–76 fiscal year. This discounted inventory loss equaled the total loss for the 1974–75 fiscal year. Grant's managers also replaced their in-house credit system with the use of national bank credit cards, at the suggestion of the banks (Schroeder, in Morgan v. Grant , 139). These changes in Grant's policies indicated a substantial loss of managerial discretion to the banks, which now seemed to run the company altogether. By early 1976 a committee of creditors (consisting of six banks and five trade creditors) formed to consider the future of Grant. John Ingraham, vice president of First National City Bank, chaired the committee.

Meanwhile, Grant went about its radical reorganization to restore the creditors' confidence (or, more accurately, to stave off bankruptcy). The consultants advised the creditors that Grant's survival could not be determined with certainty for another six to eight years. That conclusion prompted the banks to flex their muscles and exert their ultimate control over the future of Grant. The trade creditors, who were completely secured, still seemed willing to do business with the retailer. But the banks were strongly in favor of liquidation, and they were said to be "hungrily eyeing the $320 million in cash accumulated from store closings and liquidations" (New York Times , 14 Oct. 1976, 61). Ironically, only the banking community wanted liquidation of the firm. Despite opposition from the trade creditors and Grant's management, the process of bank-dominated decision making (based on their collective control of desperately needed loan capital) led to a resolution of the struggle in favor of the banks. On 10 February 1976 the committee of creditors decided that Grant should be declared bankrupt. That move touched off "the biggest liquidation in retailing history" (Daily News Record , 11 Feb. 1976, 1).

In March 1976 Federal Judge John Galgay signed the order that called for Grant's liquidation within sixty days. By now Grant had

debts to the banks of $640 million and to trade creditors and debenture holders of more than $500 million. The committee of creditors' original vote was seven to four in favor of liquidation; by the time the committee presented its case to Judge Galgay, the decision was unanimous. The banks' collective power and their motivations were not lost on Judge Galgay, who pointedly asked the committee, "Was it more comfortable to pull the plug after Grant's had already built its cash up from $90 million to $320 million?" (New York Times , 13 Feb. 1976, 1).

Securities and Exchange Commission regional head Marvin Jacob pressed Anderson about whether or not he felt Grant could survive if he were allowed to use $150 million of Grant's $320 million in bank deposits. Anderson responded that he thought Grant's chances were "relatively good if we could just undo the results of the committee's decision" (New York Times , 13 Feb. 1976, 1). Here Anderson alluded to the fact that when the committee voted to "pull the plug," suppliers of merchandise refused to ship to Grant any longer, thereby exacerbating the firm's situation by depleting inventory. The action of the committee, led by the banks, illustrates the process of the social construction of corporate crisis. The decisions of the banking community to define Grant's cash flow problems as a crisis permanently altered Grant's business trajectory from slow but eventual recovery to liquidation. Moreover, only the financial institutions had the power, based on their collective control of critical loan capital, to enforce their definition over the opposing assessments of the situation by Grant's management.

At this point Grant's assets totaled $400–475 million, including $320 million cash, $43 million in inventory at cost, $75 million in accounts receivable, and $25 million in stock of Zeller's, Ltd. The creditors scrambled to secure recovery of a portion of these assets. Business Week reported:

First crack at the assets goes to holders of $24 million worth of senior debentures. Then, because of an unusual lien arrangement, come trade creditors, with $110 million owed. The banks, which subordinated to the trade $300 million of their $640 million loan to Grant's, come next and have an additional $90 million that gets preferred treatment; it was lent after the filing for reorganization. Then come junior debenture holders, with $94 million, and finally the unsecured debt, including $300 million in landlord claims and utility bills. . . . And Grant will owe approxi-

mately $15 million in severance pay to its 84,000 employees, although this is not a priority payment. An unresolved Internal Revenue Service claim of $60 million plus interest could possibly take precedence over unsecured creditors. But legal fees, which will run into the millions, are likely to assume a priority status. (Business Week, 1 Mar. 1976, 21)

Clearly there would be little or nothing left to cover the unsecured debt.

The banks did not have to step in and overtly seize control of Grant's executive positions to produce the managerial decisions they wanted. They merely relied on their collective control of capital flows to persuade Grant's management team to acquiesce, precluding consideration of decisions that would displease them. The same power could not have been exerted by single banks acting alone. The organized concerted control of capital flows engendered and enhanced the banking community's power over W. T. Grant.

Pointing to the links between Morgan Guaranty and Grant formed by Peterkin and Chinn, Rodman charged that this interlocking relation had existed "for an extended period of time prior to the commencement of bankruptcy proceedings by Grant." The interlocks helped the banks exercise control over Grant's board and management. Peterkin and Chinn's presence facilitated the dissemination of information about Grant to the banking community and served as a constant reminder to Grant's management that the banks could define the situation as a crisis at any time and withdraw their capital support. The presence of the bankers was a source of preemptive power, in that Grant's management took only those decisions that would please the banks (Rodman, in Morgan v. Grant, 63, 71–74).

By March 1977 Rodman had begun making assessments and proposing plans to Judge Galgay on how to meet Grant's obligations for severance and vacation pay owed to former employees. Since Grant originally filed under Chapter XI, claims made while the firm functioned under bankruptcy and those made during the four months prior to the filing would be recognized. Claims made after the filing of Chapter XI would be prorated from the bankrupt estate. Consequently, employees who quit before Grant filed under Chapter XI received all their benefits, whereas those who remained with the company to the bitter end received almost nothing.

Severance and vacation pay constituted only a part of the cost of Grant's bankruptcy that fell on the workers' shoulders. There was also the question of the account employees had with Grant for the purchase of securities in the firm. Judge Galgay informed the workers that the prospects of recovery of the account's funds looked "bleak" (Wall Street Journal, 11 Mar. 1977, 20). In the end workers had to pay the bill for Grant's (and the banks') excesses. Moreover, other workers outside the firm also shouldered some of that burden. A large proportion of the investors in Grant's sinking fund were the Illinois and Michigan teachers' pension funds.

In early 1978 Rodman reached an agreement with twenty-six of Grant's lender banks on a tentative settlement of their claims of $560 million against the company. This settlement provided for the orderly distribution of the assets of the now bankrupt retailing giant. As part of the compromise agreement, Rodman agreed to discontinue prosecuting the banks to recover $57 million. (That sum represents payments the company made to the banks in June 1975, before it declared bankruptcy.) The terms of the compromise settlement of Grant's estate were as follows:

1. The participating creditors (including secured suppliers, senior debenture holders, and holders of the outstanding sinking fund) were initially given 25 percent of their filed claims and then pro rata distributions of their claims ("Agreement of Compromise and Settlement Among Charles G. Rodman, as Trustee of the Estate of W.T. Grant Company, Bankrupt, and the Banks Listed on Exhibit 1 Hereto," in Morgan v. Grant, 24 Feb. 1978, 3; hereafter cited as "Agreement of Compromise"). The holders of the sinking fund were offered 100 cents on the dollar, but without interest, on their loans. Those creditors who benefited from the trade subordination agreement with the banks have gotten 70 percent of their claims ($90 million), and the unsecured creditors have gotten 39 percent of their claims.

2. The bank claimants agreed not to "enforce security interests and liens against the Bankrupt Estate" to avoid depleting the assets of the estate in litigation prompted by Rodman's suit. The banks' claims would "be allowed in at least an aggregate amount of $650,000,000" ("Agreement of Compromise," 4). Thereafter, prorated payments from the estate would be made to the banks at six-month intervals after settlements were made of the

other claims against the firm's estate. By July 1978 the banks had recovered more than 60 percent of their claims, with more to come. Indeed, these six-month payments may "ultimately result in the banks' recovering a higher percentage of their claims than those of the participating creditors," thanks to the compromise settlement provision specifying that "the participating creditors will receive no more than 50% of their claims or the percentage of their claims that the banks recover, whichever is less" (New York Times, 31 July 1978, D3).

The case is still not completely settled. Pro rata distributions of the estate are still being made to the banks, and the court is still considering contested distributions. Moreover, the pace of the settlement has slowed since the death of Rodman (who has been replaced by his assistant, Joseph Pardo) and of Judge Galgay (replaced by Judge Edward J. Ryan). Still, the compromise settlement between Rodman and the banks attests to the power the banks exercised over W. T. Grant. They have recovered much more of their investment than any other participants in the case. According to a telephone conversation with one of Grant's lawyers, the unsecured creditors have recovered approximately 39 percent and debenture holders 19 percent of their claims, whereas the banks have recovered more than 60 percent thus far. In fact, the banks are the only creditors who will continue to receive payments from the remaining $22 million of the estate. The estate's lawyers indicated that the banks will ultimately recover about 80 percent of their claims—that is, 97–98 percent of the remaining estate, with the other 2–3 percent of the estate devoted to administrative costs.

Clearly the banks did not enjoy absolute power. They lost more money than any other creditors and were unable to recover all their investment. They accepted the compromise settlement under the threat of protracted and prohibitively expensive litigation from Rodman's suit. Such litigation would have depleted the estate and prevented the banks from recovering any of their investment, because Chapter XI provides for payment in full of the legal fees incurred in the settlement of bankrupt estates. The banks' acceptance of a partial recovery demonstrates the limits of bank power and illustrates the difference between bank control and bank hegemony. Control implies absolute power. Thus bank control theory is a static description of power as a trait accruing to banks. By

contrast, bank hegemony is a process of relative power that depends on structurally unified action (here in a lending consortium) activated in the context of struggle.

Conclusion

The case of W. T. Grant's bankruptcy demonstrates the power of banks to socially construct a corporate crisis. Through their collective control of capital flows, Grant's banks were able to prevent a serious cash flow problem from becoming an actual bankruptcy for two years by increasing the loans and lines of credit to the retailer to a total of $700 million. When they decided to pull the plug and define the cash flow problem as a crisis, they simply refused to advance any more capital to the firm. Even though Grant management's assessment of the situation differed from that of the banking community, the banks' hegemonic control of capital flows enhanced their ability to enforce their definition of crisis.

The banks were aware as early as 1974 that they were the firm's only source of capital, because the commercial paper market was closed to Grant. Although there is compelling evidence that the banks knew of Grant's deepening problems, they chose to continue to pour money into the retailer, thus postponing the crisis. Evidence indicates that they did so in a bid to increase the size of Grant's estate in bankruptcy. Grant's financial vice president, John Sundman, suggested that the banks used their control of capital flows to keep the firm alive long enough to get as much of their money as possible (Forbes, 1 Feb. 1975, 18), to the detriment of other participants in the case, particularly Grant's employees, its unsecured creditors, and the Illinois and Michigan teachers' pension funds. Jacob of the Securities and Exchange Commission angrily said that the banks "took a big public company which should have been a Chapter X proceeding and ran it into the ground" (Business Week, 19 July 1976, 62). The banks' collective ability to delay Grant's bankruptcy is consistent with Nelson's (1981) finding that it is common for financial institutions to engage in such behavior to improve their secured position in bankruptcy. Moreover, banks sometimes push firms into liquidation when it would be more appropriate for these firms to reorganize. Grant's bankruptcy case supports this finding. After closing half its stores, the

firm had accumulated about $160 million in cash. The banks could either support the firm's continued reorganization efforts (and wait to recover their investment) or force the bankruptcy they had long delayed (and begin the struggle to muscle other claimants aside). They chose the latter course. Most important, only the banks collectively had the power to determine both the timing and the outcome of Grant's bankruptcy.

Although it may be tempting to view the banks' decision as a last-resort remedy to a serious problem, such an analysis is not appropriate here. W. T. Grant was well on the way to restructuring and rehabilitating itself under a Chapter XI reorganization program when the banks cut the capital flows. Apparently, less extreme measures to address the firm's cash flow shortage and its managerial problems were working, if slowly. Clearly the decision to force the firm into liquidation was not selected because less extreme measures had failed. Rather, Grant's banks chose liquidation because of their secure position in the priority claimant list established in bankruptcy.

The large banks (particularly Morgan Guaranty, Chase Manhattan, Citibank, and Manufacturers Hanover) demonstrated their organized power to discipline the small recalcitrant banks into continuing to advance credit lines to Grant. Although the case reveals some conflict within the financial community, the large banks' success in disciplining the small banks shows how banks develop coalescence and present a unified position to the business community. This unity is crucial to the relative power of the banking community. The control of capital flows by individual competing banks would not translate into power, because competition would enable individual firms to bargain and negotiate favorably with individual banks by exploiting the implicit threat of taking substantial corporate business to another bank (see Herman 1973). In contrast, unity transforms the banking community into a cooperative oligopoly. The financial community has structural mechanisms to resolve and moderate conflicts and achieve coalescence. Moreover, banks strongly discourage non-banking community intervention in the formation of bank unity.

Evidence indicates that Grant's banks freely communicated with each other about the retailer's situation, contradicting any notion of bank isolation. Indeed, Grant's interlocks with the banks

(through De Witt Peterkin, Jr., of Morgan Guaranty, and Joseph W. Chinn, Jr., of Wilmington Trust) functioned as one-way information networks, facilitating the flow of information from the retailer to Morgan Guaranty, Wilmington Trust, and many other banks in Grant's consortium.

The day-to-day consultation between lenders is significant in two ways. First, such consultations contradict the notion of the invisible hand of the marketplace as the natural controling mechanism disciplining corporate existence. Apparently, the invisible hand can be guided forcefully by the very visible hands of the banking community. Second, such consultations also contradict the notion of competition in the banking community. The standard practice of friendly consultations indicates cooperation and planning between banks rather than free competition (the hallmark of the invisible hand).

Taken together, the lack of competition between banks and the consequent failure of the invisible hand to rationally and objectively discipline the market suggest inaccuracies in the traditional view of American corporate life. The conventional view of business structure assumes free and open competition to ensure that only the most efficient firms survive (see, e.g., Herman 1973; Chandler 1977; Kaysen 1957; Rose 1967). Critical analyses similarly suggest that competition would mitigate the banking community's ability to establish unity and thus provide the state (and presumably nonfinancial firms like W. T. Grant) with relative autonomy from the lenders (see, e.g., Poulantzas 1968, 1973). But day-to-day consultations between banks are inconsistent with both of these viewpoints. The structural arrangement of the banking community necessitates cooperation rather than competition among banks.

Noteworthy is the divergence of interests between Grant and its banks and the extensive day-to-day participation of the banking community in Grant's decision-making processes. Finance capital is unique as a resource in that it is the prerequisite for the purchase of all other resources. Lending consortia develop because of the legal and financial inability of single banks to provide the increasingly large borrowing needs of corporate America. The structure of the consortia increases access by individual banks to the lucrative business of corporate lending. It also spreads the risks of

such loans among many banks, organizes the banking community to mitigate competition, and facilitates cooperation and consultation between banks. Schroeder referred to W. T. Grant's consortium as the "whole family of banks," suggesting a unified group of financial institutions (Schroeder, in Morgan v. Grant , 10). By fusing the interests of financial institutions, structural developments such as lending consortia produce bank hegemony and thereby facilitate bank constraints on nonfinancial corporations' decisionmaking processes.

Similar processes in the social construction of corporate crisis can be seen in the 1969 collapse of Penn Central Corporation. As in W. T. Grant's bankruptcy, there is ample evidence that the banking community knew of the railroad's worsening liquidity problems. And as with Grant, the banks delayed publicly acknowledging Penn Central's grave problems until a time they deemed more advantageous. Meanwhile they contributed to the fiction of a healthy, profitable railroad by hiring a prestigious accounting firm to perform some "creative accounting" procedures and by declaring a series of hefty dividends for stockholders (Fitch and Oppenheimer 1970, pt. 2, 81). The delay in acknowledging Penn Central's real difficulties gave the firm's bankers ample time to quietly sell off their holdings of Penn Central stock even as they told security analysts such investments were sound (Wall Street Journal , 25 Sept. 1970, 5). The banks' collective control of capital gives them the discretionary power to time the public disclosure of a firm's liquidity problems and the ability to socially construct corporate reality. This power is inaccessible to all other stockholders and most corporate managers. For example, because nine of the ten largest shareholders at Penn Central were commercial banks (which collectively held 22.1 percent of the firm's total stock), banks dominated Penn Central's board of directors: eleven of the thirteen directors created fourteen interlocks with twelve commercial banks (see Patman 1970, 22632–22638).

The difference between the bankruptcies of W. T. Grant and Penn Central illustrates the variety of sources of organized bank power. Grant's banks derived their power from their common presence in a huge lending consortium, whereas Penn Central's banks derived their power from their collective impact as the railroad's major shareholders.