Capt. Campeau’s Titanic Voyage
What could possibly bankrupt a department store with such high-energy marketing that it will sell you French lessons as easily as a new pair of shoes? Well, ask people at Bloomingdale’s, which in the East has for years been just another way of describing the cutting edge of success. But now, for reasons beyond their control, the folks at the popular store most everyone calls “Bloomie’s” face an uncertain future.
All it requires, they would tell you, is a takeover artist whose experience is in real estate, not retailing, whose ego exceeds his bankroll and who goes so deeply into debt to snap you up along with an extended family of other prestige stores that he can’t meet the mortgage payments. So it was that the federal bankruptcy court in Cincinnati this week accepted a petition from entrepreneur Robert Campeau’s Canadian holding company to protect the stores from their creditors under Chapter 11 of U.S. bankruptcy laws.
Campeau paid top dollar, and then some, for Allied Stores Corp. in 1986 and Federated Department Stores in 1988. Between them, they owned 260 retail outlets with more than 100,000 employees. Stockholders did very well in the short run, but only about one in eight ventures into bankruptcy for the purpose of reorganization ever succeeds. And so their windfall could mean Bloomie’s downfall.
Other, more difficult questions come to mind as courts and creditors start their damage assessments. Shouldn’t there be a law to prevent such needless economic calamity? Probably. But does anybody know what kind of law? Not really. The best thinking in Congress homes in on current tax law, which, oddly enough, provides a tax break for acquisitions financed by debt but not for those using real cash. This is an area definitely worth looking into.
Economic legislation in free-enterprise societies is designed to curb sharp practices, not to define or proscribe acceptable levels of risk. Risk in the expectation of gain is the very engine of the system, and courts and regulators are seldom prepared to tell entrepreneurs how much risk is too much. Much of Wall Street saw the Campeau episode as coming close to the finish of the high-interest junk-bond financing of the 1980s--the end of a cycle if not of an era. The next cycle would lift the system and the people who depend on it for jobs into something better.
This may be valid economic theory, but Congress probably will--and certainly should--take a look at the whole risky business. Campeau’s own management has given Congress a place to start looking. The company distributed a memorandum Monday saying, among other things, that “Chapter 11 (bankruptcy) no longer carries the stigma it once did.” Congress should determine whether that wave of the wrist over the wreckage also implies that there is not the risk in high finance there once was, at least for financiers.
If so, Congress may want to see whether there is some way it can make risk seem at least as real as the hope for profit. That is, after all, the point on which the system is supposed to balance.
