that the multinational corporation has no broad "popular" ownership constituency among the consumers it is designed to serve in foreign markets. Its stream of profits is not broadly irrigated among its · potential customers. Its constituency is limited to a narrow and non-accountable base of absentee capital owners, a select few who benefit from corporate profits at the expense of the many. The only institution in sight to supplant the privately-owned multinational corporation is the multinational corporation owned by one or more governments collectively, like the giant Soviet corporations and the cartels of. the Mideast, in the name of "the people". And that, of course, would be the final victory in Karl Marx' nearly completed global strategy for abolishing private ownership of capital completely. It was this alternative, spelled out in THE COMMUNIST MANIFESTO, that induced George Orwell to write the ominous "1984" and Milovan Djilas to warn us that "the dictatorship of the proletariat" does not soon wither away under "The New Class". If monopoly capitalism is bad, and Kelso would agree with Marx that it is, then it must be tranformed into democratic capitalism, not state capitalism. As Mr. Kelso suggested in his landmark treatise with the noted philosopher Mortimer Adler, THE CAPITALIST MANIFESTO:

"Just as the status of citizenship conferred upon all
has achieved political democracy, so the individual
and private ownership of capital by all households
would achieve economic democracy."

(p. 29)

PRECEDENTS FOR ESOP FINANCING AS A NEW APPROACH TO DIVESTITURES

To our knowledge, ESOP financing has never yet been utilized in any case of an antitrust divestiture. In at least two cases the first involving a divestiture against the United Fruit Company brought by the Justice Department and the second involving the outstanding FTC divestiture decree against the Kennecott Copper Corporation requiring the spin-off of the Peabody Coal Company the sellers were approached with a proposal to use an ESOP for a sale of the divested subsidiary to its employees. Since neither the Justice Department nor the FTC has taken any official position for or against the ESOP as a divestiture remedy and specific means for accomplishing the divestiture is left by the courts entirely in the hands of the seller, the seller in both of these cases was extremely reluctant, if not outright hostile, to setting a precedent with an ESOP divestiture. What motivated these companies to reject even a serious study of an employee buyout through the ESOP is not known, but in both cases the affected employees expressed strong interest yet were in no position to arrange the financing without full cooperation and backing from the parent corporation. In both cases, however, ESOP solutions are still possible.

In

The first case involved the divestiture of the Guatemalan banana plantations owned by the United Fruit Company, now United Brands. A final decree was rendered in 1958, but no buyer could be found and United kept trying to have the order vacated. 1971, SETUFCO, the union representing all of United's Guatemalan workers, discovered the ESOP possibility and retained counsel to approach United with the ESOP option, with the seller supplying some of the credit through an installment purchase contract with the employees' trust. covering both management and union members. The union's counsel developed a highly novel "self-executing divestiture remedy", requiring the antitrust violator to selffinance up to 100% of the purchase price if the employees were unable to arrange private or public loans on reasonable terms. At that point, Del Monte came into the picture as a serious bidder. The Guatemalan Government had the final say as to whether any new foreign company, like Del Monte, would be allowed to replace United. In 1972, the Guatemalan Government decided in favor of Del Monte over the employees' proposals. In 1975 THE WALL STREET JOURNAL reported possible payoffs by Del Monte to former high Guatemalan officials.. The new Minister of Economy Eduardo Palomo has been placed in charge of the Del Monte scandals investigations and he reportedly is favorably disposed toward the ESOP concept. Hence, a final resolution of this case is still up in the air. The Justice Department lawyers handling enforcement of the United Fruit case were very sympathetic to the ESOP approach, but felt unable to impose it as a remedy.

In the FTC divestiture of Peabody Coal Company from the Kennecott Copper Company the final FTC order was handed down on May 5, 1971. In the spring of 1974, the U.S. Supreme Court refused to hear Kennecott's appeal. Kennecott was approached with an ESOP proposal offering over a dozen possible sources of funds for selling the close to $1 billion company to its employees through an ESOP. Although meetings of an educational

nature were held with top officials of Peabody, who had nothing to lose and everything to gain from an ESOP divestiture, no move could be made openly without Kennecott's endorsement. And no bid can be made without an ESOP buyer. The FTC staff handling enforcement of the Kennecott case, like the Justice staff in the United case, view the ESOP as an innovative enforcement remedy, but also seem helpless to mandate a specific remedy. When hearings were held on May 8, 1975 by the Senate Public Works Committee on whether TVA should be allowed to purchase Peabody, Kelso Bangert and Company testified against that option and in favor a Senate resolution or specific legislation requiring the use of the ESOP alternative to restore competition in the coal industry. This testimony outlined a complete strategy for selling Peabody to its employees. TVA dropped out of the picture soon thereafter. On August 11, 1975, this firm petitioned the FTC to re-open the Peabody case on the narrow issue of considering the ESOP as a new relief option to accomplish the divestiture. The Commission declined this request and to date Kennecott continues to seek appeals and extensions of time from carrying out the final FTC order.

Outside of the antitrust area a number of corporations have accomplished conventional divestitures of their divisions and subsidiaries through ESOP financing. Several were accomplished on 100% credit from private lending sources. Thus far, all have been successful and involved no cash outlay or payroll deduction on the part of the new employee-owners. The most dramatic of these divestitures involved the employees of the South Bend Lathe Company, a 70-year-old brand name in the machine tool industry, which was acquired in 1969 by Amsted Industries, a large Chicagobased conglommerate. As a result of the recession in the machine tool industry, Amsted became committed to dispose of South Bend Lathe, threatening the jobs of 500 on the South Bend Lathe payroll and at least 200 with local suppliers. To launch a highly visible demonstration of the potency of an ESOP as a financial problemsolver, the U.S. Economic Development Administration created a prototype ESOP Development Bank for the City of South Bend with sufficient funding to make loans at 3% interest (a signal to the Federal Reserve to pay closer attention to Kelsonian "pure credit" proposals) to firms that could qualify for supplemental private sector financing. Management and the Steelworkers' local at South Bend Lathe came together and jointly developed an ESOP to purchase their company. With half the purchase price coming from three private lenders at market interest rates and the rest coming through a 25-year, 3% loan from the city's ESOP Development Bank, the employees bought their company 100% on credit repayable wholly with future profits. The deal was closed on July 3, 1975 and after the first quarter of operation as an employee-owned company the costs from waste dropped by 70% and profits increased dramatically despite the fact that this industry is still suffering from the Nation's current recession. The South Bend Lathe story illustrates what can be done through an ESOP with a company in trouble. Where a company's bankability is inherently sound, as in any antitrust Civestiture, the creative use of ESOP financing could open up a whole new era in fostering greater competition in overly concentrated basic industries.

"PURE CREDIT": A UNTAPPED SOURCE OF LOW-INTEREST CREDIT TO PROMOTE
MARKET COMPETITION BY CHANNELING A PORTION OF THE NEW MONEY SUPPLY
INTO SELF-LIQUIDATING CAPITAL INVESTMENTS WITHIN FINANCIALLY FEAS-
IBLE START-UP ENTERPRISES OR DIVESTITURES IN OVERLY CONCENTRATED

INDUSTRIES.

"Where will the money come from?" is the classic rejoinder used to defend the status quo where market competition has been found to have broken down and a divestiture has been decreed.

Financing is traditionally the bottleneck and the source of costly and seemingly interminable delays after a company in violation of our antitrust laws has been ordered to carry out a divestiture decree. Who will buy the company being divested? Where will the credit come from, to the extent that the violating corporation has not been ordered to self-finance the divested assets through an installment sales arrangement with the buyer, that is, "taking back paper"? Where would the money come from if Congress took a new approach to increasing the number of firms competing in a basic industry threatened by lack of effective competition and wanted to help new firms with talented and experienced management to gain effective entry into the field?

Generally the sums involved are so huge that they stagger

the imagination. How can these sums be raised without going to
the taxpayers, without the Federal Government going into the capital
market and using its credit to borrow at high market rates of
interest, thereby increasing the national debt? How can the
Government avoid getting directly involved with investors and
borrowers, yet still be the catalyst of a major new thrust in
national economic policy?

Traditional thinking provides no satisfactory solutions to these questions.

Conventional finance and status quo monetary policy would hold that there can be no investment without accumulations of past savings. Those wondering where the money will come from are right to this degree: there is probably not enough past savings in our financial system to meet the massive capital requirements needed to foster market competition in our basic industries. Likewise, they are right that the $4.5 trillion needed over the next decade in U.S. capital formation cannot be supplied with the projected savings we will have accumulated through that period.

But the ESOP proves that it is just as easy to finance self-liquidating investments on credit repayable with future profits, as with past savings. This is the logic that any wellmanaged firm uses for itself when it makes an investment. Today ESOPS have to pay high interest rates when they borrow and use the past savings of others in making an investment. And there is a limit to the amount of savings already accumulated and available to ESOPS.

The solution lies in the concept of "pure credit" as explained in the following diagram and pages that elaborate upon it.

CASH

-TOOLS

FINANCING ECONOMIC GROWTH BY MONETIZING PRODUCTIVE CAPITAL WHILE

BUILDING MARKET POWER INTO CONSUMERS THROUGH EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") FINANCING

LENDER

(Banks, Insurance Companies, Foreign In

vestors, Government)

(2)

(5)

EXPLANATORY NOTES.

1. The Employee Stock Ownership Plan ("ESOP") Trust is a tax exempt entity organized to conform to Section 401 (a) of the Internal Revenue Code. Not only are payments into it by the corporation deductible from corporate income tax within specified limits (maximum 25% of covered payroll), but the employees can accumulate capital ownership in the Trust until their retirement, free of annual income taxation.

2. In addition to banks, insurance companies, and foreign investors, all of which are currently eligible to make ESOP loans, consideration should be given to enlarging the power of savings and loan institutions to make such loans.

3. The corporate guarantee to make sufficient payments into the trust to enable the trust to meet its loan amortization requirements is, in effect, a pledge of the general obligation of the corporation payable in pre-tax dollars. In tax theory, this is a contribution to a qualified employee trust. In economic theory, it is merely a commitment on the part of the corporation to make a high payout of the wages (i.e., earnings) of the newly formed capital.

4. The direct discounting of the ESOP note with the Federal Reserve Bank should be strictly limited to basic financing of high priority, self-liquidating new capital formation, such as railroad rehabilitation, the building of new rapid transit systems, the expansion of agriculture, etc. It should never be used for consumer financing or mere purchase of existing assets. The interest rate should be limited to the administrative cost to the Federal Reserve Bank and the administrative cost to the lender, including a reasonable profit. We estimate this rate should not exceed 3% per annum to the ESOP borrower. No consideration of risk should be involved in the fixing of the interest rate, since the risk is covered in another way. (See Note 5 below.)

Its name,

5. We recommend that Congress organize a capital financing counterpart of the FHA Insurance Fund designed for use primarily in the consumer housing field. suggested here, is Capital Diffusion Insurance Corporation. (For further discussion, see Kelso and Adler, The New Capitalists, Random House [1961]; Kelso and Hetter, Two Factor Theory: The Economics of Reality, Random House Vintage Books [1967]; Testimony of Louis 0. Kelso and Norman G. Kurland, Financial Markets Subcommittee of the Senate Finance Committee, September 24, 1973.)

This basic financing design, omitting the Capital Diffusion Insurance Corporation, and the arrangement for discounting ESOP notes directly with the Federal Reserve Bank (both of which we recommend Congress provide for with the control conditions herein outlined) has been successfully used by more than one hundred U.S. corporations under existing law.