The immoral face of capitalism – the Remington Arms bankruptcy

I’ve long argued that the activities of many private equity and leveraged buyout firms are immoral and unethical.  Yes, I know that depends on who defines “ethical” or “moral” behavior.  I’m a Christian and a pastor, so I apply Biblical definitions to those terms.  Others differ, of course.  Nevertheless, to see such firms buy a company, asset-strip it, load it up with debt (paying themselves out of the proceeds of such loans) and then abandon it to wither and die under an impossible financial burden, leaves a very sour, nasty taste in one’s mouth.  (It leaves an even worse one in the mouths of the company’s employees, who typically lose everything in the crash.)  Those who glibly claim that such activities are “legal” (as if that makes them moral or ethical) tend to ignore such realities.

A classic example of such proceedings has resulted in the bankruptcy and dissolution of one of America’s most historic manufacturers.

In order to buy Remington, Cerberus, as most private-equity firms would, created a new entity, a holding company. Instead of Cerberus buying a gun company, Cerberus put money into the holding company, and the holding company bought Remington. The entities were related but — and this was crucial — each could borrow money independently. In 2010, Cerberus had the holding company borrow $225 million from an undisclosed group of lenders, most likely hedge funds. Because this loan was risky — the lenders would be paid only if Remington made a lot of money or was sold — the holding company offered a generous interest rate of around 11 percent, much higher than a typical corporate loan. When the interest payments were due, the holding company paid them not in cash but with paid-in-kind notes, that is, with more debt. These are known as PIK notes.

The holding company now had $225 million in borrowed cash. Cerberus, meanwhile, owned most of the shares of the holding company’s stock, basically slips of paper they acquired when they created the holding company. The handoff happened next: The holding company spent most of the $225 million buying back its own stock, effectively transferring all the borrowed cash to Cerberus. Cerberus would keep that money no matter what. Meanwhile Remington continued rolling along as though nothing had happened, because Remington itself was not responsible for the holding company’s debt. Remington was just an “operating company” that the holding company owned, something that allowed the holding company to borrow money, the way you would take a necklace to a pawnshop. These were garden-variety maneuvers in a private-equity buyout. In the trade, this is called “financial engineering.” People get degrees in it.

In April 2012, Cerberus did something fateful, which probably seemed smart at the time. It had Remington borrow hundreds of millions of dollars and use it to buy the holding company’s debt, effectively transferring responsibility for the principal and the interest payments onto Remington. America’s oldest gun company now owed the money that Cerberus had used to pay itself back for having bought the company in the first place. There were plenty of sensible reasons to do this. Gun sales were high, and the debt that Remington took out was cheaper to service than the paid-in-kind debt.

But there was a catch. Because the operating company borrowed the money with a normal loan — and not with PIK notes — interest payments were required in cash. Suddenly Remington was carrying hundreds of millions of dollars in debt that, if it could not be paid, would cause the business to go bankrupt.

There’s more at the link.

Of course, that’s exactly what happened.  When the firearms market tanked after the election of President Trump, Remington couldn’t service those loans, and ended up declaring bankruptcy.  Its component corporations and product lines have now been sold off to seven other companies, and Remington – a company founded in 1816, before the Industrial Revolution really took hold – has ceased to exist.  Most of its staff have been laid off without compensation, because most of the goods they used to produce will now be manufactured by other companies, in their own factories, using their own employees.

This scenario has been played out literally thousands of times in the business world in America over the past few decades.  Supporters of unrestricted capitalism argue that since it’s legal, it should be permitted.  However, the hundreds of thousands of workers who’ve lost their jobs and their livelihoods as a result would probably beg to differ.  Venture capitalists and their ilk don’t care about that, of course.  They worship the dollar and nothing else.

That’s the unacceptable, immoral face of capitalism:  simply not caring about the human cost of making money.  Christianity’s moral code (in theory, at least) should prevent its adherents from behaving like that.  Sadly, in far too many cases, the beliefs and moral code of the holders of capital tend to be conspicuous by their absence when it comes to increasing that capital.  It’s been that way for a long time, of course;  the “robber barons” of the 19th century would probably feel right at home among the venture capitalists, private equity investors and leveraged buyout specialists of the 21st century.

Our politicians eagerly participate in the same racket.  Witness, for example, the Obama administration’s pandering to trades unions in the General Motors bankruptcy of 2009, in which the pensions of Delphi workers were summarily slashed in order to provide greater benefits to union workers.  More than a decade later, those pensioners are still fighting for their stolen benefits to be restored.  There’s little chance that they will succeed.

Spare a thought for the thousands of former Remington workers now struggling to make ends meet, because their employer was sold out from under them.  Spare a thought, too, for the little town of Ilion in New York, former home of Remington Arms, which has lost its major employer.  Whether the town can survive without Remington remains to be seen.  All this need not have happened, and wouldn’t have happened but for the fact that Remington was saddled with hundreds of millions of dollars in debt that it hadn’t incurred in the course of its normal business operations, and from which it derived no benefit – only liabilities that, in the end, crushed it.



  1. Fully agree. My degree is in finance, and while I didn't work in that area, I'd say that your discussion is spot on. Cerberus is not run by gun guys; they had no love for the business, or its history or its people. I was probably more of an embarrassment to the top people there, given the circles they run in.

    I read that the ammunition portion of the business probably will be acquired by a prominent ammunition manufacturer, CCI, and it seems that it would be nuts to shut down THAT facility.

    Remington's handgun manufacturing operation has not had AFAIK any well-received new products in a long time; in fact the last new handgun I recall seeing any reviews of was a problem-plagued dud, so there are presumably questions as to the engineering capability. Something needed to happen there, and if the facility is worth continuing, perhaps it will. The name has value, so better management might be able to find a way to keep people employed. Previous management bears final responsibility for allowing things to decay.

    Final thought: the gun manufacturing business' history in the US is a tough area to compete profitably in over the long run. I own an old Savage-Stevens .22 semiautomatic rifle I inherited, like it a lot, so I read up on THOSE companies' history. Same story. Colt has a similar history. Winchester? Whither Sturm Ruger, et. al? BTW, Ruger is the only "pure play" publicly-held gun company I know of.

  2. I think a wise man once wrote that the love of money is the root of all sorts of evil.

    This is the kind of behavior that leads to more regulation.

    And these are the people leftists will point to when they denounce capitalism. Though I doubt they care about the employees working for a gun company.

  3. I would expect Colt to follow this pattern. They got saddled with so much debt after being stripmined that the company has no value, and owns nothing that would be attractive. Doesn't even own it's own name. Dead man walking.

  4. There are two kinds of capitalism. One is what we are all familiar with where individuals and companies make and sell products and services in a free market. Then there is the other kind of capitalism which is based on financial manipulation. One can be called industrial or producer capitalism. The other is called financialization pr finance capitalism. it is the latter that rose to prominence starting in the 1990's, fueled by loose monetary policy on the part of the FED starting in 1995. It is this finance capitalism that has to be reigned in in some manner.

  5. Boeing is exhibit A of the pernicious effects of financialization. Boeing used to be a company run by "airplane" guys, an engineering company run by engineers. This all changed in 1995 when Philip Condit became their CEO. He was the first finance guy to head Boeing. He bought McDonnell Douglas, which had atrocious managers, and those managers in key positions in Boeing. He took down the corporate firewall between the commercial aircraft division and the military contracting part (this is when moved their HQ to Chicago). He left the company in '02. All of the successor CEO's have been finance guys. All of the problems that Boeing faces today have their root with Philip Condit.

    Boeing is but one example of the phenomenon of finance guys running companies through out corporate America and the problems that result from it.

  6. It seems to me, here and in a lot of other cases. there's a good bit of negligence on the part of those who took on the debt. Could no-one tell from that 11% interest rate that something fishy was going on? Did nobody notice that this or that solid, long-established firm was now controlled by asset strippers?

    It's not only the employees; the people who take on that debt are often – in the end – pension fund managers, and that's ordinary people's retirement money not being paid back.

  7. @Barbarus – They knew the debt was dodgy, but they received millions in commissions on the sales of the debt (junk bonds). Michael Milken made Billions on selling "toxic debt", until the Gov't finally prosecuted him. That merely defined the line in the sand, which financiers & hedge funds had to stay behind. And to your point about "negligence", the company members of the board knew it was wrong, but were outvoted by the hedge funds. When a Vulture Capitalist decides you are a meal, they are going to leave you stripped.

    @Peter – I'll offer a couple of more companies consumed by Vulture Capitalists. Eastern airlines, and Toys'R'Us. Both companies were taken over by hedge funds, had their assets strip-mined, and then were left to declare bankruptcy when they couldn't service the interest on the junk bonds they were saddled with. But the hedge funds, and their managers walked away with the money in their back pockets.

    Something is wrong here.

  8. Freescale semiconductors, IT, and Motorola are three more examples of companies that were destroyed by these private equity/hedge fund entities.

    I also think the financialization effect is accompanied by what I call the "Cult of Management". This is the idea that there is a system of management that can be taught as an academic subject that will enable one to run any kind of company, even ones that make semiconductors or airliners, without the specific technical knowledge and background of the particular product or service you are making. The Cult of Management has been very destructive to industry as well.

  9. Christianity's moral code (in theory, at least) should prevent its adherents from behaving like that.

    Mormons are not Christian, so Mitt Romney can continue!

  10. The other is called financialization pr finance capitalism. it is the latter that rose to prominence starting in the 1990's

    Technically, yes. But it has ancestry: the 'usury' which was condemned by Aquinas and the Church. The Church never condemned "fair dealing" of course.

  11. All of the problems that Boeing faces today have their root with Philip Condit.

    Remember when Chrysler was in deep doo-doo back in the '70's? Yup. They got there with a finance guy as CEO. Who saved them? Iacocca, a sales/marketing guy.

  12. Peter:

    I am afraid that you have drunk the Kool Aid here.

    The problem is NOT attributable to capitalism. The problem is Crony Capitalism — the system that reigns in American today under which the politically powerful manipulate the law and our lawmakers to take advantage of the general public.

    In a truly capitalistic system, the fools who lent money to this rapacious scheme would be the ones left holding the bag. Under Crony Capitalism, on the other hand, the investors and lenders skate and the employees (and others who are dependent upon the health of Remington Arms) take it in the gut.

    We have seen this sort of thing time and time again for the past 100 years. There is not much education in the second kick of a mule, but I guess that America has not figured that out yet.

    The prevalence of this sort of foolishness and financial manipulation is why Donald Trump was elected President.

    BTW, don't even get me started about the Chamber of Commerce — the Holy of the Holies of Crony Capitalism.

  13. Most of the people that run and work at companies like Cerberus are sociopaths. A friend of mine was able to view the job requirements for a major financial firm that essentially required "financial managers" to not give a flip about the effects of what they did had upon people just that they be able to turn everything possible into money.

  14. Huntsville AL courted Remington when the company was looking to get out of Illion NY and its toxic attitude towards firearms. City was quite generous with tax breaks and a number of infrastructure partnership agreements which in the course of time never developed to the benefit of the city. They are now one of the entities filing suit for recovery of those failed promises. Best I know the Huntsville operation was making the Remington versions of 1911 pistol, a .380 pocket gun, and the Bushmaster line of AR rifles. Local news reports that the tooling is all being shipped off to other locations as companies bid on those assets.
    What sounds like good news IMHO is that apparently Ruger has acquired the brand and tooling associated with Marlin which Remington acquired when that company went bust. Hopefully this will mean that the Marlin line of lever guns returns to the market with the added value of Ruger engineering and production skills.

  15. @CPTCWK: No, I haven't drunk the Kool-Aid, and the problem isn't limited to the USA, either. It's an inescapable part of any capitalist system. You've got precisely the same problem in any country operating on that basis. The British called it the "old boy network". Every nation has its own version. Those with influence and power, whether bought, inherited or through drive and ambition, tend to get richer by any means they can use, whether or not it's ethical or moral. They view themselves as above such considerations.

    For an example, see .

  16. @CPTCWK – the only way any 'investors and lenders' can skate is if it isn't actually their own money they are lending. So, somewhere along the chain from responsible citizen with savings and pension fund, through financial services, to vulture, some middleman has been either negligent (missing obvious signs of problems) or actively dishonest (e.g. personally investing in the asset stripper).

    Which says to cut out the middleman. There are platforms for share ownership. I might look into that.

  17. It’s not about capitalism, but how the tax and bankruptcy laws are in the US.

    The question is how to change the laws / regulations to disincentive this behavior. High debt ratios in the us for companies are rewarded. And companies borrow money in order to pay dividends and do stock buybacks.

  18. You guys need to remember that what's being parted out now was made up of parts originally. It isn't Remington, but Remington, AAC, Para-USA, Bushmaster, DPMS, Marlin, Tapco, etc. All these companies were purchased and placed under the Freedom Group/ Remington Outdoor Company. No idea what financial position they were in before being purchased, but my bet would be that many were in trouble.
    As far as jobs being lost, wouldn't it be fair to assume that the new owners need more employees roughly equal to those lost? Yes, those jobs may be in new locations.
    The company was badly hurt by the Remington 700 suit/ recall, and the Bushmaster Sandy Hook suits. The company went bankrupt a few years ago, and shed debt, but was able to emerge. It then wasn't profitable and racked up more debt leading to this bankruptcy. Even given this second chance, the company couldn't be profitable.

  19. @Overload: No, Remington didn't take on more debt for its own operations. It was forced by its owners to take on debt that had nothing to do with it, to pay off other "loans" owed by its owners, so that they got back every cent they spent to acquire Remington and other companies, plus a fat profit, while offloading all those costs onto Remington. When the market imploded, Remington couldn't carry that load – but under normal circumstances, it would never have taken on the load.

    This was a moral and ethical failure of massive proportions, not a mistake on Remington's part.

  20. @Overload: And the Bushmaster suit should not have even been allowed to go forward, as it was clearly in violation of the PLCAA. Politics, not capitalism, on that one.

  21. @Unknown: There is no "systemic" solution, I'm afraid. The ultimate answer is for every businessman to behave morally and ethically, but we all know that's a pipe dream. It's not about to happen. That being the case, all I can suggest is rules, regulations and laws that prohibit this sort of conduct – but then we run the risk of making them too restrictive and limiting, to the point that they'd inhibit normal commerce and industry. It's a fine line to walk.

    I think one solution might be that, in the event of a bankruptcy like this, the company(ies) and individual(s) who caused it by decisions such as those taken by Cerberus should be forced to disgorge their ill-gotten gains in order to pay off the ill-advised loans that caused the crisis. That would make the greedy a whole lot more cautious before they went down that road. However, they'd doubtless mount a stout legal defense, so that it would take years to force them to pay up – years in which those waiting for payment would have to do without. That's as unjust a result as the present one.


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