Economics in Film Essay Series
Oliver Stone's Wall Street and the Market for Corporate Control
November 21, 2001
Hostile takeovers, insider trading, cold calling, investment banking, information asymmetries --- the language of so-called high finance permeates the world depicted in Wall Street. The film has come to epitomize the culture of that center of financial transactions in the United States called by the same name. The activities depicted in Wall Street were based upon financial news stories from the early to mid 1980s. The well publicized financial shenanigans of Ivan Boesky and David Levine were important source materials, as were the activities of Drexel, Burnham, Lambert and their wunderkind Michael Milken. The rivalry between Sir James Goldsmith (whose takeover of the paper company, Crown Zellerbach, may have been inspiration for Teldar Paper) and Carl Icahn (who won the battle for Trans World Airlines, which may have been inspiration for Bluestar Airlines) was an important inspiration for the rivalry between Gordon Gekko and Sir Larry Wildman in Wall Street.
The processes engaged in by financial institutions and the individuals who do the work of the financial markets are sexy precisely because of the relatively large sums of money involved, resulting sometimes in spectacular accumulations of financial wealth for certain players (such as Gordon Gekko) or the equally spectacular, although perhaps not as inspiring, falls from financial grace when a player makes the wrong moves (as we saw with Bud Fox and, to some extent, Gordon Gekko). Such dramatic transformations in financial status can be quite exciting, although the processes and instruments involved have rarely been captured on the big screen and perhaps never better than with Oliver Stone's 1987 classic. But if all the financial markets did was move money from "weak" hands to "strong" hands, then it would be little more than the casino that many have claimed it to be.
What is the relationship of the financial sector to the so-called real economy (the world of Bluestar Airlines and Teldar Paper)? This is an important macroeconomic question. In Wall Street, Lou Mannheim tries, implicitly, to answer this question when he says to Bud Fox that "the money you make for people creates science and research jobs." How exactly does this work?
In fact, most of the trading in the financial markets has no direct effect on the capital available to industrial corporations (those producing tangible products, like Teldar Paper, for instance), for building new plants, buying equipment, or hiring new workers (including those engaged in research and development). Trading in existing equity and bonds simply moves money from one portfolio investor's hand to another such portfolio holder with no direct impact on the underlying firm that issued the stocks and bonds. The only time there is a direct connection between the capital available for productive investment and the activities on Wall Street (and in the larger financial community) is when the firm in question issues new equity or bonds.
In the case of both new and existing enterprises, there are three potential sources of financing: equity, debt, and grants. Equity is contributed by owners of the firm's assets. Debt is obtained by borrowing from individuals (including the owners of the firm, family members, strangers) or institutions (banks, insurance companies, governments, etc.). Grants are contributions to the firm that come with no ownership stake or claim on enterprise cash flow. Governments sometimes make such gifts to corporations, although gifts could also come from private parties (and, in the case of non-capitalist enterprises, gifts often come from relatives as a result of kinship obligations and reciprocity). Because capitalist firms are organized around the hiring of wage laborers, and typically a large number of such wage laborers, then such firms often have a large appetite for capital: large sums of money are needed to provide the facilities and equipment wage workers need to produce the final output desired by firm management. Thus, growth in capitalism has often required sizable sums of capital, capital far in excess of the ability of individual firms to generate internal cash flow available for investment (retained earnings) or the ability of private owners and their bankers to raise funds. The need for expanded capital accumulation (described in the Resnick and Wolff text and elsewhere) has been facilitated by the development of the publicly traded corporation and financial markets in the buying and selling of ownership, as well as the trading of existing debt contracts (in the form of publicly traded corporate bonds).
Thus, one of the most important institutional inventions to be tapped by capitalism has been the corporation (or, more specifically, the equity-issuing for-profit corporation). The corporation is a legal institution, incorporated according to state laws, that has the right to commodify the ownership of corporate assets by issuing shares of stock. Initially, these shares are held privately: the equity shares are not yet fully commodified (tradeable on the public financial markets, rather than only in private transactions). By taking the corporation public, the firm's board can authorize the sell of shares to the general public (anyone who is in a position to buy shares on the relevant exchange or in the relevant trading system). This initial public offering (IPO) is typically made through an intermediary, a merchant or investment bank. The sums raised in this initial public offering (minus the merchanting fees required by the investment bank) are available to corporate management and can be used to fund productive investment, including, as Lou Mannheim indicates, research and development expenditures. Indeed, many biotech companies have financed their research and development primarily through the issuance of equity. In Wall Street, there is a reference to Darien (played by Daryl Hannah) taking her interior decoration business public, although it is unclear why she would need to raise additional funds for a business that is most likely organized around self-employment (the labor system in the ancient class process) rather than wage labor (the labor system in the capitalist class process), although I suppose she might follow in the footsteps of Martha Stewart (who, in her current identity as lifestyle guru, started out as self-employed caterer but is now a capitalist corporation, Martha Stewart Living Omnimedia, with publicly traded shares).
In order for these primary markets in securities to work properly, most portfolio investors must be confident that the market is, for the most part, fair. Gordon Gekko might not care that the market is not fair, but in order for Gekko to make extraordinary gains in the market he needs someone on the other side of the trades (and, therefore, someone who necessarily has less information than he does, but does not realize the magnitude and/or significance of this information asymmetry). Who would trade with Gekko if they knew that Gekko had inside information? Thus, if most portfolio investors believed the market to be unfair, they might severely restrict their participation in the market. This would reduce the money in the market for new issues of securities and therefore make it more difficult for companies to raise necessary investment funds through initial public offerings. This is precisely why the Securities and Exchange Commission (SEC), the primary regulatory agency that watches financial market transactions and seeks prosecution of those who violate the securities laws, exists and plays such a critical role in the entire process of channeling savings from individual portfolio holders to young corporations in need of sizable amounts of financing (or older companies seeking to raise additional funds through what are called seasoned offerings of stock or bonds).
screenwriter and director, placed his (intended-to-be) heroic characters
in the background. Bud Fox's father, Carl, the epitomy of the hardworking
laborer, who has toiled on BlueStar's planes for years, rising to be a
leader in the Mechanics Union local, and Lou Mannheim, the honest broker,
were admittedly drawn from Lou Stone, Oliver Stone's father. In the
foreground, we are supposed to see the seedier side of finance capital:
Gordon Gekko, the Mephistopheles-like manipulator who "creates nothing"
but takes everything, and his sidekick Bud Fox, the naive but greedy young
man, whose inner struggle becomes a focal point for the film. However,
once a film is created, it becomes the malleable object of the culture(s)
into which it is thrust and the culture of Wall Street, particularly the
culture of the young traders, analysts, and wanna-be-Gekkos
(many older Wall Street professionals responded negatively to the film, at
reversed the polarity of the morality of the
The cult status of Wall Street and the morality reversal
was best depicted in another film about finance, Boiler Room,
where the young wanna-be-Gekkos even memorize the lines of their hero.
the hip-hop culture of young Wall Streeters, "greed is good," as Gekko
Whereas, Oliver Stone tried to embue the film with a sense of the negative
consequences of the naked pursuit of material wealth by financial
and related shenanigans (with no regard for the real economy or the
productive workers who power that economy), the wanna-be-Gekkos could only
see in the film a boiler plate for achieving their own vision of success.
Thus, Oliver Stone's depiction of the struggle
between good and evil (both in the external world ---
Gekko against Carl Fox, for example, and in the internal world ---
within Bud Fox) was turned into a parable of how to get rich the Gekko way
while reducing the probability of getting caught by the evil SEC.
For the hip-hop Wall Streeters, Gordon Gekko was the hero of the film and
Bud Fox was his Judas, the ungrateful disciple.
Gekko represented possibility (of rise from rags to riches, of using one's
wits to overcome obstacles, of overcoming the banality of love and morality
in favor of a neoclassical logic of naked and boundless self-interest).
The wanna-be-Gekkos, the foot soldiers of money manipulation and deal-making
could see themselves in his shoes, as Gekko the Great. They could
not identify or sympathize with Carl Fox, the mechanic and labor
leader, or the pathetic figure
of Lou Mannheim. Ironically, the reshaping of Wall Street
from morality tale (of an old fashioned variety) to neoclassical tale of
possibility may be precisely in accord with the logic and inner needs of
capitalism. Capitalism needs Gordon Gekko if it is to work properly.
It turns out that Gordon Gekko, at least in his persona as corporate raider,
solves a problem for capitalism, a problem that, if left unsolved, would
cause the capitalist process to lose some of its dynamism and run the risk
of falling into stagnation.
For the hip-hop Wall Streeters, Gordon Gekko was the hero of the film and Bud Fox was his Judas, the ungrateful disciple. Gekko represented possibility (of rise from rags to riches, of using one's wits to overcome obstacles, of overcoming the banality of love and morality in favor of a neoclassical logic of naked and boundless self-interest). The wanna-be-Gekkos, the foot soldiers of money manipulation and deal-making could see themselves in his shoes, as Gekko the Great. They could not identify or sympathize with Carl Fox, the mechanic and labor leader, or the pathetic figure of Lou Mannheim. Ironically, the reshaping of Wall Street from morality tale (of an old fashioned variety) to neoclassical tale of possibility may be precisely in accord with the logic and inner needs of capitalism. Capitalism needs Gordon Gekko if it is to work properly. It turns out that Gordon Gekko, at least in his persona as corporate raider, solves a problem for capitalism, a problem that, if left unsolved, would cause the capitalist process to lose some of its dynamism and run the risk of falling into stagnation.
The early to mid 1980s was a period of virtual warfare within the market for corporate control. The extensive commodification of corporate ownership in the United States and the liquidity of the equity markets provided a foundation for sometimes vicious struggles over control of the corporate assets. Since the board of directors serves the modern role of capitalist (the first receiver and distributor of cash flow or, in Marxian terms, surplus value) within capitalist corporations, the struggle was first and foremost over control of the board: win the board of directors and you control the corporate assets. I describe these struggles as warfare (also implied by Oliver Stone in Wall Street --- for example, there were frequent references to Sun Tzu's The Art of War) because despite the absence of martial combat the conflicts usually involved two hostile parties willing to use every legal (and sometimes a few illegal) means for gaining or retaining control over the board of directors. Typically, these conflicts were between outsiders, called raiders, and insiders, in the persons of the existing top level corporate managers and boards of directors. In Wall Street, both Gordon Gekko and Sir Larry Wildman were raiders, although Wildman becomes a white knight in the Bluestar conflict (a white knight is defined as a raider who comes to the assistance of existing management and directors against a hostile raider).
The successful conquest of an existing firm by a raider, such as Gekko or Wildman, usually resulted in the restructuring of the firm. This could mean the selling off of major corporate assets, sizeable layoffs of employees, raiding overfunded pension funds (the funds held by the corporation to meet retirement obligations of existing and former employees), and/or spinning off existing subsidiaries and/or divisions into independent corporate entities (raising cash flow for the raider by the IPO of the subsidiary and/or division now independent corporation). Even if the raider is unsuccessful, the battle for corporate control may have left existing management with no choice but to restructure the firm. Perhaps, for example, they took on sizeable debt in order to buy back stock or simply to overleverage the firm to the extent that bondholders and banks would not be interested in providing the raiders with financing for the takeover of a firm that has become too high a default risk. Either of these aggressive strategies might both keep the company out of the raiders hands and force corporate restructuring, such as selling assets and laying off or firing employees. The firm's managers may have to cut their own perquisites in a further effort at generating the cash flow necessary to meet new debt obligations, precisely the sort of action that Gekko indicated was needed in the case of Teldar Paper (more on this in a moment).
Indeed, as a defense against being raided, an increasing number of corporate managers cut deals with buyout specialists, like Kohlberg, Kravis, Roberts, & Company (KKR), to borrow huge sums of money from banks and in junk bond offerings to buy controlling interest in their companies. These insider takeovers are called management buyouts (MBOs) and because they are financed by debt, they are also referred to as leveraged buyouts (LBOs). LBOs are not restricted, however, to insider takeovers. In Wall Street, we saw two examples of LBOs used in hostile takeovers by Gordon Gekko. Gekko referred to significant subordinated debt involved in his takeover of Teldar Paper and we witnessed a meeting between Gekko's attorneys and bankers in an effort to arrange financing of the takeover and liquidation of the assets of Bluestar Airlines.
In the 1980s, the total value of the corporate assets that changed hands as a result of takeovers was unprecedented, far in excess of anything that had been seen before. In addition, many large corporations merged as a way of protecting existing management's continued control. The bigger the fish, the harder it is to swallow and the more likely it will be the predator, rather than the prey. It was the time of the corporate raiders, such as Ronald Perelman, who seized control of Revlon and came close to seizing control of the investment banking house of Saloman Brothers, Saul Steinberg who greenmailed Disney to the tune of $32 million more than the market value of his holdings (plus an additional $28 million for "out of pocket expenses"), just to keep him from gaining control, and Robert Campeau, who took control over Bloomingdales, Brooks Brothers, Filenes, I. Magnin, and 29 other department store chains. Among the less hostile takeovers and mergers that occurred during this period were: General Electric's takeover of RCA, which had already taken control over the NBC television network; General Motors acquired Electronic Data Systems from Ross Perot, as well as Hughes Aircraft (Howard Hughes' old operation), which has extensive satellite communications systems; U.S. Steel bought Marathon Oil; Chevron Oil paid $13.3 billion for Gulf Oil; Sony took control over CBS Records and Columbia Pictures, and that is only a sampling of the wide ranging consolidations of corporate power during the decade.
In one of the most remarkable speeches in film history, Michael Douglas qua Gordon Gekko explains (in a speech that is understood on the street as largely taken from one given by Ivan Boesky) why the practice of corporate raiding is a positive phenomenon for American capitalism:
"Today management has no stake in the company. Altogether the men sitting here own less than 3% of the company. Where does Mr. Cromwell (the CEO) put his million dollar salary? Not in Teldar stock. He owns less than 1%. You own the company. That's right, you, the stockholders. You are being royally screwed over by these bureaucrats with their steak luncheons, hunting and fishing trips, their corporate jets, and golden parachutes."
Gekko is referring to the fact that in contemporary corporations, the commoditization of ownership has resulted in shareholders losing effective control over the board of directors and top management. It is management, "these bureaucrats," who make the key decisions about deploying corporate assets and spending working capital. Top-level managers look after their own interests, not those of the widely dispersed shareholders. The board of directors is in a position to fire top-level managers who abuse their power, but typically these managers also sit on the board and/or have strong influence over who does. Indeed, the board and top-level managers are often closely allied, except in times of serious threat to the corporation's viability or reputation, when the board may turn against the top-level execs. However, this is rare. Most of the time the board can relax and simply rubber stamp the decisions of their chief executive officer. And the board has little to worry about from shareholders. The costs of monitoring top-level management (agency costs) are very high and most shareholders (owning a tiny fraction of the company) do not even try. Typically, they sign over their votes to the board in the form of proxies. By wielding proxy votes, existing boards of directors can virtually guarantee their continued control over the corporation. The Teldar board, according to Gekko, has been complicit with management in wasting the resources of the corporation (using working capital to finance perquisites for managers and board members, e.g. "steak luncheons, hunting and fishing trips, corporate jets, and golden parachutes"), resources that ultimately belong to the shareholders. And the board has, if Gekko is correct, presided over the creation of a bloated bureaucracy that burdens the corporation and drains cash flow (further stealing from the shareholders):
"Teldar Paper has 33 different vice presidents, each earning over $200,000 a year. I've spent the last two months analyzing what these guys do. I still can't figure it out. One thing I do know is that our paper company lost $110 million last year. I'll bet half of that was spent in the paperwork going back and forth between these vice presidents."
Gekko's argument, which has many adherents within the corporate finance establishment, is that his battle to wrest control of Teldar Paper from the existing board of directors and their managers is in the interest of the shareholders and ultimately has beneficial effects on capitalism as a whole.  The existing board and their managers have created an inefficient, bloated bureaucracy that wastes corporate resources. Gekko would put into place a new regime that would eliminate many of these inefficiencies and squeeze more shareholder value out of the corporate assets. Indeed, the argument in favor of Gekko's analysis would point to the fact that he can pay a much higher price for Teldar stock than it was selling for before his takeover attempt and yet still make a profit on the deal. This proves, according to that argument, that Teldar's assets were simply being mismanaged and that Gekko can take over the company, replace the board, fire Cromwell and his 33 vice presidents, eliminate the waste, and liberate shareholder value:
"Well, in my book, you either do it right or you get eliminated. In the last seven deals that I've been involved with, there were 2.5 million shareholders who have made a pretax profit of $12 billion. I am not a destroyer of companies. I am a liberator of them!"
The corporate raiders and forced restructuring is understood as creating a leaner, meaner, more shareholder friendly American capitalism. If, in the process, long-term employees of the restructured firms lose their jobs and factories or even whole divisions may disappear, generating negative effects on whole communities (see Michael Moore's documentary Roger & Me) then so be it. That's the cost of progress:
"The point is . . . that greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms --- greed for life, for money, for love, knowledge --- has marked the upward surge of mankind, and greed . . . will not only save Teldar Paper but that other malfunctioning corporation called the U.S.A."
speech represents an application of the theory that the market for corporate
control provides an important mechanism for transfering assets from the
control of managers who, by virtue of the widely dispersed pattern of corporate
ownership, have gained too much autonomy and have been using that power
in a manner inconsistent with maximizing shareholder wealth. The ownership
shift that results from the takeover allows for the replacement of inefficient
managers with more efficient ones. This process, according to Gekko, will
not only solve the specific problems of the inefficiently run corporation,
in this instance, Teldar Paper, but will ultimately make US capitalism,
as a whole, function more efficiently, i.e. generate economic growth.
 Any fundamental transformation in the asset base of a firm can be considered a form of corporate restructuring, whether this results in the expansion or contraction in the scope of the firm's mission. For a more in-depth discussion of corporate restructuring, see J. Fred Weston, Kwang S. Chung, and Susan E. Hoag, Takeovers, Restructuring, and Corporate Governance, 2nd edition, (Upper Saddle River, NJ: Prentice Hall, 1998).
 For a discussion of the negative effects of directors on corporate cash flow, see E. S. Browning, "Wharton Study Connects Strengths and Flaws of Directors to Companies' Financial Returns," The Wall Street Journal, April 25, 1997, section C, page 2.
Copyright © 2001, Satya J. Gabriel, Mount Holyoke College