For the Washington Monthly’s 50th anniversary issue, twenty former editors revisited one of their most important stories for this magazine. They looked at pieces that had an impact on the world or on themselves; that presaged something big to come; or that were totally wrong in an interesting way. Below is one of the resulting essays. Read more of them here.
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In 1978, shortly after landing at the Washington Monthly, I got an assignment that combined two subjects that would one day become my bread and butter: sports and business. My new boss, editor in chief Charlie Peters, a passionate Washington Redskins fan, had an instinct that Redskins ticket holders were being taken advantage of financially—“screwed” was the word he used—by the team’s owners. He wanted me to figure out why. What I discovered, though I didn’t realize it at the time, was that the Redskins’ owners had devised a kind of financial engineering that Wall Street would soon adapt to transform the country.
Here was the story. A company called Pro Football, Inc., a holding entity that controlled the Redskins, had two principal shareholders: the famed criminal defense attorney Edward Bennett Williams (who also served as the team’s president) and businessman Jack Kent Cooke. When Williams originally bought his stock in the early 1960s for between $50,000 and $100,000, it amounted to 5 percent of the company. Cooke, meanwhile, paid $350,000 for 25 percent of the team around the same time.
Over the subsequent decade-plus, Cooke had come to control close to 75 percent of the stock—which by 1978 was worth around $20 million—while Williams’s stake had grown to 15 percent, valued at around $4 million. Their dirty little secret (to borrow a phrase we used in virtually every Washington Monthly story) was that they had increased their stakes, and their wealth, without spending another penny of their own money.
Instead, they had Pro Football buy back shares from other shareholders as they became available. Whenever a sale took place, the people who still had shares suddenly owned a larger percentage of the team. That’s because the stock Pro Football bought back wasn’t sold to anyone else. It was “retired.” In other words, Williams and Cooke gained control of the team not by buying more shares, but by shrinking the number of total shares.
But Pro Football didn’t have the cash to buy all those shares, so the company had to get bank loans—$8.8 million in all. And it was the company that had to pay the annual debt service, not Williams and Cooke personally. The debt service, according to a former Redskins head coach, amounted to about $600,000 a year.
One consequence of this financial maneuver was that the Redskins lost money. Though Williams tended to blame the losses on such factors as excessive player contracts, it was actually the debt service that made the difference between profit and loss. Another consequence was that the Redskins had the highest average ticket prices in the National Football League. The fans were paying for Cooke and Williams to own the team.
On the one hand, when I recently read this four-decade-old story I was immediately reminded of the scene in Austin Powers where Dr. Evil threatens to hold the world hostage for . . . “one million dollars!” Do you know how much the average ticket price was for a Redskins game in 1978? $12.65. Even in 2019 dollars that wasn’t so bad: $50. Today the real average price is over $100. What’s more, fans loved the rosters that Williams and Cooke put on the field, with Hall of Fame players like Joe Theismann and John Riggins and great coaches like George Allen and Joe Gibbs. As for fleecing the fans, Williams and Cooke were pikers compared to the current, much-reviled owner, Dan Snyder. For what they were getting in return, fans didn’t really care that they were paying off the owners’ debt.
On the other hand, what Williams and Cooke did, in gaining control of the team without using their own money, was, in a small but telling way, the beginning of a trend that would genuinely harm America. Call it the financialization of American businesses. Today, companies all across America buy back stock to shrink the number of shares. It’s an artificial way to inflate earnings per share (because there are fewer shares!), a metric Wall Street cares deeply about. Of course, money spent buying back stock is money not spent on, say, capital improvements or worker pay raises. But that doesn’t overly concern the people in America’s executive suites. It maximizes shareholder value, and helps enrich the CEO.
The maneuver Cooke and Williams devised was also an early example of a private equity deal. In such a deal, financiers borrow money to take control of a company, foist the debt on the company, cut costs by laying off workers or raising prices on consumers, and then reward themselves by pulling out various fees and dividends. Williams and Cooke were, alas, trailblazers.
We’ve gotten so accustomed to private equity firms taking over companies that we scarcely notice it anymore. Sometimes they improve companies, but more often they bleed them of cash and saddle them with debt the companies struggle to repay. And when the companies stumble, or a recession hits, the financiers walk away while the companies file for bankruptcy and the workers lose their jobs. Think Toys “R” Us. Or Payless. Or Barneys. Not long ago, researchers at California Polytechnic State University discovered that around 20 percent of all large companies that were taken private were likely to go bankrupt within a decade. Those that eluded the clutches of private equity had only a 2 percent bankruptcy rate.
As my fellow Washington Monthly alum Nicholas Lemann illustrates in his new book Transaction Man, financial engineering has been a huge driver of income inequality. The financiers and top executives of America’s companies reaped rewards they didn’t really deserve on the backs of workers who were being left behind. Forty-one years after Williams and Cooke let the fans pay back the loans they used to buy the team, people have woken up to the damage that kind of financial engineering has done to the country. You can see it in the appeal of Elizabeth Warren. Or the recent strike by General Motors workers. Or the demand by members of Congress that the two firms that shut down Toys “R” Us—Bain Capital and KKR—set aside money for workers who lost their jobs.
I doubt that even Charlie could see all this coming when he put me on the trail of the owners of the Washington Redskins. But in his outrage, he was ahead of his time. As usual, I might add.