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“Vulture”
capitalists are the big winners. Workplace Tremors: How Chapter 11
Is Demolishing Employee Expectations By Mark Reutter,
Washington Post, Sunday Outlook, October 23, 2005; B01 Once shunned by respectable companies and
ignored by Wall Street, federal bankruptcy court has become the venue of choice
for sophisticated financiers and corporate managers seeking to pull apart labor
contracts and roll back health and welfare programs at troubled companies. About 150 major corporations are now in some
stage of bankruptcy reorganization, including four of the nation's leading airlines. As the
prospect of other large enterprises taking a spin down Chapter 11 becomes more
widely discussed in business circles ("maybes" on the list include
such iconic names as General Motors and Ford), the tactics used in bankruptcy
courts are shaking the very foundations of the American workplace. Whether an
assembly-line worker or middle manager, an employee can no longer assume that
promises made earlier -- health benefits or fully funded pensions -- will be
there when he or she retires. The loss of security arising from Chapter 11
reorganizations has introduced a new element of anxiety into the lives of baby
boomers who are approaching 60, not to mention younger workers just starting
out in their careers. The new bankruptcy
law, which took effect last week, will have little effect on corporate
bankruptcies. The legislation, approved by Congress and signed by President
Bush in April, is aimed at curbing abuses in consumer bankruptcies. It tightens
the rules for individual filings, making it more difficult for consumers to
have their credit card and other debts wiped clean in court. But except for barring certain bonus
payouts, the new law keeps intact the legal system by which corporations can
shed certain employee obligations, including pension costs that can be shifted
to the Pension Benefit Guaranty Corp. (PBGC), which Congress set up in 1974 to
insure defined-benefit corporate pensions. The PBGC is now struggling
with $23.3 billion in
net deficits arising from the termination of pension plans from Chapter 11
bankruptcies in the steel and airline industries. Delphi's filing shifts the
spotlight onto the pension problems of the auto sector, where a total shortfall
ranges between $45
billion and $50 billion,
according to the PBGC's estimates. Why the surge in
corporate bankruptcies at a time when the economy is expanding? The explanation
heard most often is two-fold: global competition and out-of-control labor
costs. Competition from low-wage assembly plants in Mexico and Asia is
tightening the screws on American manufacturers who must pay top-dollar wages
to unionized workers as well as promised pension and health benefits, known as
"legacy costs," to retirees. "Legacy costs are
killing us," says Robert S. "Steve" Miller, who was named
Delphi's chairman and CEO last July. Miller is emblematic of the shifting
nature of bankruptcy law. A self-styled "corporate doctor," he has a
law degree from Harvard University, a master's degree in finance from Stanford
University and a blunt speaking style that makes him quotable in the media. Before taking Delphi
into Chapter 11 on Oct. 8, Miller made it known that unionized employees
represented by the United Auto Workers (UAW) would have to accept either a wage
reduction of 62 percent, from an average of $26 an hour to as little as $10 an
hour, or sharp benefit reductions to retirees. UAW President Ron Gettelfinger
denounced the offer as insulting, but Miller defended it at a news conference.
The CEO couldn't have been more explicit in describing his view of the modern
workplace: "Some people insist that fairness requires that we slash wages
across the board if we cut wages for anyone. Well, I am sorry. My job is to preserve
the value of this enterprise as we restructure. We have to adjust to market
conditions and appropriately pay for our human capital at each level. There are
large disparities in this country and around the world in what people can
expect for mowing the lawn, versus managing a huge business. It may not be
fair, but it is reality." The Delphi chief often
cites reality -- and the bottom line -- in answering his critics. "They
[have to] understand that I haven't got any more money," Miller told the
Financial Times. But the reality, to use Miller's word,
isn't so simple. Delphi
does have money -- specifically, it has $1.6 billion in cash on hand. Even more
significantly, it secured
$2 billion in loans and revolving credit from Citigroup and J.P. Morgan Chase
bank just before it filed for bankruptcy. Which raises a question that the common explanation for
Chapter 11 filings doesn't answer: If Delphi is so broke, with unsustainable
wage costs and skyrocketing pension obligations, why are two of the nation's
major banks offering to lend it money on excellent credit terms? The answer: For the
same reason that Bank of America, General Electric Capital Group, UBS
Securities and distressed property, or "vulture,"
capitalists
have invested billions
of dollars in supposedly tattered companies entering or exiting Chapter 11
since 2001. Investors
can profit richly from the meltdown of established companies -- at least in the
short run.
Chapter 11 protects a company from creditors as management develops a
reorganization plan and restructures its liabilities in the hope of becoming
profitable again. Older companies may have high legacy costs, but they have
long-term customer contracts and plenty of cash flow. "The way the code is now
structured, the temptation is to make the workforce pay for management's
mistakes, rather than taking all of the stakeholders into account and
re-building the company together," says Harley Shaiken, a professor at the University
of California at Berkeley who specializes in labor issues. Chapter 11 calls on
management to bargain with unions in good faith to reduce costs, but also
permits management to petition the court to void labor contracts and substitute
whatever terms it chooses. Properly stage-managed and set in motion, the
restructuring process can steamroll the union, peel away retiree benefits and
dump pension obligations onto the PBGC. That's exactly what
happened during Miller's 19-month tenure as chief executive of Bethlehem Steel.
Some 95,000 retirees and dependents lost their health-care plan in 2003 when
the bankruptcy judge sold the company's assets to International Steel Group, a
company controlled by billionaire financier Wilbur L. Ross. Meanwhile, the PBGC
was left with the responsibility of paying $4.3 billion in underfunded
Bethlehem pensions over the next 30 or so years. Because of the less generous
terms of PBGC's pension formula, some steelworkers lost 50 percent of their
expected pensions as well as their health benefits. Earlier this year,
Ross sold International Steel to London-based Mittal Steel Co., picking up $267
million in profit on the sale. Ross's investment fund has since amassed $4.5
billion, some of which he plans to use to make acquisitions in the auto parts
industry, he said recently. One of his possible targets? Delphi. He has made it
clear, in recent interviews, that he is carefully watching the company and its
Chapter 11 reorganization. So what others see as
an ailing business, Ross sees as an opportunity. Economists often talk about "moral
hazard" and "free rider" systems that create incentives for
governments or common citizens to behave imprudently and follow short-term
strategies that can cause long-range problems. Bankruptcy law can encourage
such behavior. Established by
Congress in 1898 as a part of the U.S. district court system, early bankruptcy
courts were auction houses where court-appointed referees settled claims among
squabbling creditors. Little interest was shown in keeping a company on legal
life support until the Great Depression when, faced by an unprecedented number
of business failures, the Chandler Act of 1938 created Chapter 11 bankruptcies to allow
managers to try restructuring instead of simply liquidating the assets. The present system
dates to the 1978 Bankruptcy Act, which made it easier for a business to file for
protection and gave management broad rights to set forth a reorganization plan
under the supervision of a bankruptcy judge. The act changed the economic
ground rules. Before 1978, few law firms bothered having a bankruptcy department;
afterward, nearly every "white-shoe" firm opened up thriving
bankruptcy and restructuring practices. Bankers were not far
behind. Rather than fighting with management over existing assets, they began
to underwrite management's reorganization plans through "debtor in possession" loans and revolving credit. This
gave them priority claim on company assets if reorganization didn't work
(something not offered to employees, who are in the heap of unsecured
creditors), and offered lavish rewards to managers who cut costs. This helps explains an
aspect of the Delphi filing that has puzzled observers: CEO Miller's petition to the court to
award up to $87 million in bonuses to senior managers, who also would share 10
percent of the equity in the reorganized company. Logic would suggest
that a dynamic corporate doctor would want to amputate, not remunerate, the
people who helped get the company in trouble in the first place. Bonuses and
equity, however, "incentivize" managers, to use Wall Street lingo, to
remain at the company and meet the downsizing targets set by Miller. It's one of those disembodied tactics of
modern business life in which there is no apparent crime -- only victims, such
as retirees who lose their benefits, and Middle American towns that lose a part
of their tax base when the local Delphi plant is padlocked. Aside from the
question of social equity, is Chapter 11 an effective cure for a sick company?
There is little evidence that court-supervised reorganization produces a
superior company. In fact, quite a few companies that come out of bankruptcy
make a return trip, and there
is growing evidence that the process diverts capital away from needed
investments into the pockets of the restructurers. "Moral
hazard" warns us against letting poorly run companies undercut the
practices of strong companies. It would be a pity, says Shaiken, to encourage
responsible companies to follow in the Chapter 11 footsteps of weak ones,
rending the social and economic fabric of years of comparative labor peace. You don't have to be
UAW's Ron Gettelfinger to be bothered by the contrast between the winners and
losers of recent Chapter 11 reorganizations. The enrichment of managers and financiers who
parachute into troubled industries is unacceptable if taken from the benefits
promised to workers who served their employers loyally in return for a measure
of security in their golden years. http://www.washingtonpost.com/wp-dyn/content/article/2005/10/21/AR2005102102320.html |
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