09: The Stock Swindle Part 1: Stillson’s Prosperity Speech
The driving macguffin of The Hudsucker Proxy is the notion that the Hudsucker Board desperately wish to retain control of their company after the company’s namesake and de facto owner dies. People fear change in general, and the Hudsucker board with Senior Vice President Sidney Mussburger find themselves facing serious change on December 1, 1958 as the company they were used to leading suddenly becomes rudderless, open to being purchased by someone who could conceivably would want to introduce serious changes to the company, maybe making the place somewhere one might not want to work, or outright firing its top executives*. It’s tough to imagine a worse work environment than Hudsucker Industries, considering the profoundly unfriendly onboarding Norville encounters as he takes his job in the mail room, but who knows, maybe a future owner of Hudsucker would make the board profoundly unhappy by becoming a company that treats its employees as human beings.
There are a number of films out there that deal in financial crimes as their driving force, but for the most part they understand that their viewers aren’t very familiar with the ins and outs of how high finance works. Martin Scorsese’s The Wolf Of Wall Street (2013) devoted ample screen time to how Jordan Belfort’s pump and dump stock fraud worked. 2015’s The Big Short was effectively a feature length explanation of how the 2008 financial crisis was able to come about. Even Trading Places (1983) — whose villains “The Dukes” are villainous due to their insider commodities trading just as much as their unethical social science experiments — devoted a scene to what commodities trading was and how it worked (expertly capped by a take of Eddie Murphy staring straight down the barrel of the camera with a “can you believe people get rich off this nonsense” look).
The Hudsucker Proxy however does not have time for such silly explanations. There are dance sequences and montages and pants ripping sequences to get to, dammit! The questions are first: is there a cohesive meaning to the various financial talk, and second: is the film’s stock fraud premise possible or even plausible?
As Norville Barnes looks for a job and ultimately realizes his best bet is the Hudsucker Mail Room, an executive named Stillson in the shooting script is giving a year in review speech to the Hudsucker board. The speech is capped off with a simple summary in the form of “In short, we’re loaded” in case we can’t follow it (as indeed I did not the first time I saw the film) but there’s a startling amount being communicated in that opening paragraph. Let’s break it down sentence by sentence.
Stillson’s first audible line is “we’re up 18% over last year’s 3rd quarter gross, and that needless to say is a new record”. “Gross” in terms of corporate income refers to every last bit of money that comes in the door regardless of how much of that money goes towards operating costs as opposed to “net” income. A helpful mnemonic is to consider a fisherman goes out onto their boat and stakes a claim to a spot of water where they will fish. The sea at large upon which their boat floats —full of slimy algae and sea cucumbers and fish poop— is gross. The thing that they get to actually sell and thus make money ends up in the net. Gross income per se is not necessarily a good indicator of corporate health. Movie theater ticket startup Moviepass had millions of dollars in gross revenue, but at the end of the day their business model was selling a dollar’s worth of tickets for 75 cents, ultimately collapsing under their own poorly thought out business practices. That said, Hudsucker Industries is clearly a healthy company, very likely spending less than they make, and expressing its gross revenue in terms of 18% growth says a lot. A quarter is not a year, but if the third quarter is in any way representative of the year as a whole, and their gross revenue is in any way proportional to net profits 18% is a sizable number . According to Thomas Picketty’s Capital in the 21st Century, the average rate of return on investment for the past 200 years or so has been around 5%. If Hudsucker’s 3rd quarter is in any way indicative of their overall profitability, they are a little under four times the average of corporate growth.
“Our competition continues to flag, and we continue to take up the slack”, Stillson continues. Aside from toy manufacturing later in the film, it is incredibly unclear as to what business Hudsucker Industries is in. The fact that Norville needs to continuously remind his bosses and colleagues that his groundbreaking design is “you know, for kids!” itself suggests that Hudsucker doesn’t expend a lot of energy when he arrives in manufacturing toys, if at all. That said, Hudsucker does appear to have a manufacturing apparatus already in place for Norville to take advantage of to make the hula hoop. What kind of goods Hudsucker makes though is anyone’s guess. Tools? Kitchen Appliances? Firearms? Cars? Musical Instruments? Circuit Boards? Who knows! Regardless though, Stillson’s statement says a lot. Generally speaking, if one’s competition is flagging, it would typically mean there is declined interest in the overall category of the business. If Hudsucker were in the horseshoe business in 1920 and noticed their competition flagging, there’s a very good chance it’s probably not because their competition is making shoddy horseshoes and they’re making good ones. It’s probably more likely because people in general are not buying as many horseshoes, and thus Hudsucker would be in trouble as well. The idea that other companies are failing and Hudsucker is taking their business would suggest that they are in the unique position of being in a healthy and growing industry but have a unique business model or manufacturing practice that gives them a substantial leg up on the competition. Such a combination is rare. The only example that comes to mind is George Eastman’s development of roll film over plate film, creating a camera that was better, cheaper, and easier than existing methods of photography, solidifying his company Kodak’s dominance in the film industry to the point where until the beginning of the era of digital photography it was almost difficult not to buy Kodak film if you wanted to buy film in general. Naturally, for the entirety of the 20th century Kodak was one of the most successful companies in the world. Hudsucker is potentially its peer.
“Market shares in most divisions is increasing and we have opened seven new regional offices. Our international division is showing vigorous signs of upward movement for the last six months, and we’re looking at some exciting things in R&D.” Sillson continues. There’s not much to pick apart here, aside from the fact that seven regional offices is a lot, even in a country the size of the United States. Target for example is one of the most successful retailers to have existed in this country. Since their first store opened in 1962, they have opened 5 total regional offices, a far cry from Hudsucker’s 7 in one year.
it is unsure as to whether or not the Arizona factory ultimately employing H.I. McDunnough as portrayed in Raising Arizona (1987) is one of these 7 regional offices.
Stillson’s next statement is the jargon heavy and yet still vague “Subfranchising; don’t talk to me about Subfranchising. We’re making so much money in subfranchising it isn’t even funny.” This bears some explanation. A franchise is when one company pays another for use of its brand identity, best practices, and promotional materials, but otherwise operates their business independently of the other. Colonel Sanders famously used this business model to expand his Kentucky Fried Chicken operation from one gas station into a national chain by wandering the country and teaching would-be restaurateurs how to make his finger licking good chicken. My first job was at a franchise. To the world I worked at Blockbuster Video, but my paycheck said “MovieCorp” on it. MovieCorp paid the rent on the strip mall we worked in; they paid for the physical VHS tapes and DVD discs that we rented and sold, and they paid my salary, but they were not Blockbuster Video. Blockbuster Video is someone MovieCorp paid to put a sign on the door that said “Blockbuster Video” and get access to those sweet and stylish Blockbuster Video polo shirts. Stillson isn’t talking about franchising though, he’s talking about subfranchising. Subfranchising is where the right to sell franchising rights to individual stores and other small entities is itself farmed out to a separate “master franchisor” company that oversees a large region. So let’s say someone wants to open a Hudsucker store in Yorba Linda, California; they might not be able to contact Hudsucker Industries directly to buy the franchising rights, they might have to contact Bumwoosher Industries, the California company that purchased the right to sell Hudsucker Franchises in the Golden State. Franchising and subfranchising is an easy way to have a broad presence without having to have the hassle of managing hundreds or thousands of different storefronts, but the rub is that if a franchise makes gobs of money, the parent company doesn’t necessarily see that profit. Hudsucker may have an agreement to share profits of subfranchisees but not to take it all. In a subfranchising agreement in fact, the prosperity must be split between three companies, the subfranchisee, the master franchisee, and Hudsucker Industries itself. The fact therefore that Stillson is commenting on the fact that they’re “making so much money in subfranchising it isn’t even funny” suggests that Hudsucker’s brand, presence, and practices are so incredibly strong that even in an operation where by its nature they do not get to keep all the profits they’re still making gobs and gobs of cash.
a portrait of the author’s best friend and 2003 coworker Leeman Kessler (née Tarpley) in his Block-Best
Stillson’s next line is incredibly jargon-y: “Our nominees and assigns continue to multiply and expand extending our influence nationally and abroad.” In contract law, a nominee or an assignment is a person or corporate entity to execute one end of a contract. A nominee is typically a person or entity who is set to receive payment for a service, while an assign is the person or entity who performs the service. Often they are the same person. Stillson appears to be saying that the people we asked to do work of expanding Hudsucker’s influence are actually doing the work.
“Our owned-and-operateds are performing far beyond our expectations both here and abroad and the federal tax act of 1958 is giving us a swell write off on our plant and heavies.” Stillson continues before his audio becomes muffled and fades out as Waring Hudsucker stares out the window. Owned-and-operated is of course the opposite of a franchise. An owned and operated storefront or separate business is one where the entire operation top to bottom is owned by and operated by the parent company. Speaking to the Federal Tax Act of 1958, Joel & Ethan Coen along with cowriter Sam Raimi were probably banking on the fact that no huge nerd would try and make sense of this monologue 26 years after the movie came out, and thus were alluding to a law that didn’t actually exist. Little did they know that this nerd does exist, who researched and found out that there was a minor bit of tax legislation that was passed in 1958, specifically allowing for small businesses to have additional write-offs in the purchase of depreciating assets. A depreciating asset is of course something owned that loses value over time as it is used, like a car, or a television, or a plastic extruder used in the manufacture of plastic dinguses. Hudsucker of course should not benefit from the bill as it is explicitly for small businesses, but if time has shown us anything about capitalism, it is that they will take any advantage however unfair they can. Hudsucker no doubt has very clever accountants to take care of these kinds of things.
A tax break, for kids!
As Stillson fades back in, the first words of his we hear are “... and our last debenture issue was this year’s fastest seller.” A debenture issue is an instrument of debt, a loan effectively, that is taken out by a corporation with no backing or collateral. A debenture issue is effectively a corporation saying “Let me hold $20 until Friday, you know I’m good for it”. The fact that Hudsucker can not only issue a debenture but that people were apparently lining up to get in on it speaks to the immense trust the public has for the company.
Most of Stillson’s next statement needs no further explanation: “So third quarter and year-to-date we have set a new record in sales, a new record in gross, a new record in pre-tax earnings, a new record in after-tax profits”, but he tacks something on at the end that bears scrutiny: “and our stock has split twice in the past year.” A stock split is a corporate event when it has determined that its stock has become so expensive that it has become cumbersome to trade and therefore they declare that each share of stock is now 2 or 3 or 5 shares and the individual value of the stock is ½ or ⅓ or ⅕ of what it used to be. Stock splits were rare in the time this essay is being written, as many corporate leaders such as Apple and Amazon have decided that a stock worth hundreds or thousands of dollars projects their incredible value in the marketplace. In the mid 20th century however, they were substantially more common. Most companies in the 1950s opted to split their stock if it climbed above $100, as a $100+ valued stock was considered too much of a burden to trade. So if Hudsucker’s stock split twice in 1958 and they acted like other companies of the 1950s, this would mean that the value climbed above $100 twice. Let’s assume the most conservative of corporate growth, and that in January of 1958 Hud stock was worth $99, quickly climbing to $100. Hudsucker splits the stock in January creating twice as many shares that now sell for $50. This would mean that at the least Hudsucker stock would then be worth $100 again before December. As stated previously, the average rate of return on any kind of investment for the past 200 years was around 5% per year, but if someone had invested in Hudsucker stock in January of 1958, they would earn over 100% on their investment in under a year. That is a bananas level of growth.
“In short: we’re loaded” Stillson concludes.
Roughly two minutes after Stillson concludes this, Sidney Mussburger is smoking Waring Hudsucker’s cigar while Waring Hudsucker is dead on the pavement 45 floors below and trying to figure out how to undo all that growth and goodwill in under a month. What would need to happen for that to be real will be discussed in next week’s essay.
*It is worth noting that Mussburger’s exact line expressing his concern is “any slob in a smelly t-shirt will be able to buy Hudsucker stock?” The t-shirt as a piece of outerwear was a brand new phenomenon in the 1950s, largely being popularized by Marlon Brando’s breakout performance in A Streetcar Named Desire (1951), a Tennessee Williams adaptation. Another breakout 1950s breakout performance from a Tennessee Williams adaptation is of course Paul Newman in Cat On A Hot Tin Roof (1958), whose acting promise would be culminated by playing Sidney Mussburger in The Hudsucker Proxy (1994). Newman’s Brick Pollitt however has too much self respect to wear a t-shirt in public unlike Brando’s more slobby yet hunky Stanley Kowalski.