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


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