“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
