Ezra Klein: Our Government in a Nutshell

May 11, 2005

Our Government in a Nutshell

John Cole's got more on United's liquidation of its pensions. The story, amazingly, gets worse. While the Bankruptcy Bill was steamrolling through Congress, Dick Durbin offered an amendment that would've "protect[ed] employees and retirees from the common corporate practice of discharging liability for retirement plans, retained earnings and matching funds when businesses file Chapter 11." This is really, if you think about it, quite amazing. The Bankruptcy Bill made it harder for individuals to declare and survive bankruptcy. Durbin offered an amendment that would've forced corporations, when they were declaring bankruptcy, to fulfill their stated financial obligations to their employees. These financial obligations are retirement plans, matching funds, and so forth. They are, in other words, the exact same long-term assets that are supposed to keep hard-working Americans out of bankruptcy court!

If you want to know who our government is working for, you need look no further than this. Republicans rammed through a bill that made declaring bankruptcy harder on individuals while rejecting amendments that would've helped ensure Americans employed by struggling firms don't lose their financial base and thus have to declare bankruptcy. So the bill made it harder for individuals to declare bankruptcy, but easier for corporations to drive them to that point. Brilliant.

May 11, 2005 in Bush Administration, Economy, Republicans | Permalink

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» United In Bankruptcy from After-Party
Ezra Klein: Our Government in a Nutshell If you want to know who our government is working for, you need look no further than this. Republicans rammed through a bill that made declaring bankruptcy harder on individuals while rejecting amendments... [Read More]

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» Bankruptcy: A game corporations can still play from Waveflux
It's easy to see who rates in George Bush's economy. Just one month after Congress passed the so-called Bankruptcy Abuse Prevention and Consumer Protection Act - an sop to credit card companies that will make it more difficult for lower... [Read More]

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» This Ain't Class Warfare, This is Genocide from Happy Furry Puppy Story Time with Norbizness
See you later, you broke-ass chumps! Good news, people who stupidly paid into their retirement funds! United Airlines, which is operating in bankruptcy protection, received court permission yesterday to terminate its four employee pension plans, setti... [Read More]

Tracked on May 11, 2005 9:58:42 PM

» Pensions - A New Fad Born? from The Stakeholder
Go get background on this from Attaturk at Eschaton, John Cole, and Ezra Klein, or more generally from Krugman - here's the George Miller release... IN AFTERMATH OF UNITED AIRLINES DEAL, NEW LEGISLATION WOULD IMPOSE 6 MONTH MORATORIUM ON TRANSFER... [Read More]

Tracked on May 13, 2005 9:55:38 AM

Tracked on May 13, 2005 1:59:54 PM

» Down and Out in the Middle Class from Blog for America
The promise of a good life for those who work hard and play by the rules has faded a little bit more: A bankruptcy judge last night approved United Airlines' request to terminate its pension plans, clearing the way for... [Read More]

Tracked on May 13, 2005 9:42:09 PM

Comments

yeah but ... a plane flew off course today! (Call me cynical, but that sure was a handy terrorist scare)

Posted by: ~DS~ | May 11, 2005 4:09:38 PM

Of course, this amendment would also seem to have created some parrallelism between the responsibilities individuals have after filing and those corporations have. A person who files now will have to pay off a larger portion of their debts than before the bill passed, but an LLC in bankruptcy can still wriggle out of their liabilities (such as pensions, apparently). The result is that the finished law deals much more harshly with individuals while remaining lenient towards corporations.

Posted by: scott | May 11, 2005 5:01:58 PM

In the United case, where is the money supposed to come from to fund the retirement plan? United doesn't have it. The stockholders don't have it - they are all going to be wiped out when and if United emerges from bankruptcy. The unsecured creditors don't have it - they aren't getting any cash for their claims, either. The only possible source of payment is the stock of the reorganized United, which is supposed to be divided among all of the unsecured creditors (note that the Government is going to get $1.5 billion of new stock to compensate it for taking over the United pension plans). I suppose Sen. Durbin would argue (if he's really thought about it, which seems highly unlikely) that retirees' claims ought to be valued ahead of other unsecured creditors, and that the retirees therefore ought to receive stock in the reorganized United ahead of the other unsecured creditors to compensate them for the loss of their pensions. The consequence of that would be that creditors would charge more to lend, or would stop lending altogether, to companies with underfunded pension plans, which would probably force a few more companies into bankruptcy. Would that be a good thing or a bad thing? I don't know, ask Sen. Durbin.

Posted by: DBL | May 11, 2005 5:15:45 PM

DBL makes some sense.

Its not like "corporations" are an actual thing that we can chain to the radiator and beat the money out of. The closest entities to that in a corp. are stockholders and management. The stockholders get wiped out in bankruptcy. They basically pitch in the entirety of their investment and get nothing. Is that not enough sacrifice for you?

As for management, they often hang on. The company still needs the expertise which management got running the company into the ground in the first place.

There were tons of provisions in the bankruptcy reform act that affected business bankruptcy and almost all of them make it harder to file and worse once filed, just like for individuals.

Creditors won out over both broke businesses and broke individuals in the reform act.

Posted by: Neil Paul | May 11, 2005 5:49:11 PM

Neil,
While we may hae our differences, I think you are right on target. It is very easy for those who demonize the big bad corporations to forget that they are made up of stockholders that are way down the "food chain" when bankruptcy is declared. If the money is not there, it's not there. Bottom line: you can't get blood out of a turnip.

A preventative measure in the future would be to require funding pensions through a third party.

Posted by: Robert Zimmerman | May 11, 2005 6:06:12 PM

RZ,

unfunded liabilities are a big drag once bankruptcy hits. Promises are easy to make when they can be funded in the future. Don't you know, business is always booming in the future and you can always outgrow your liabilities in the future. Pension fund optimism is just one variation on the unbounded optimistic theme that so often leads right into bankruptcy court.

The workers for united who got shafted really got an undeserved bad break. THey didn't bring this on themselves by failing to read the fine print. They sensibly accepted the promises made by United. Unfortunately, the promises were only as good as the company that made them, and the company wound up sucking. Just wait until an automaker files, then we'll see the fur fly. Then again, maybe not. More than half of the steel industry as declared lately and caused hardly a stir.

Posted by: Neil Paul | May 11, 2005 6:39:56 PM

The stockholders get wiped out in bankruptcy. They basically pitch in the entirety of their investment and get nothing. Is that not enough sacrifice for you?

There's a huge difference. Stockholders are, essentially, speculators--IOW, when you buy a share of stock, you should understand there's a possibility you may lose some or all of your investment.

Pensions, OTOH, are part of an employee's compensation package.

Of course, what is sort of being missed in the comments is the massive hypocrisy of the GOP in providing rewards to big corporations for being bad managers while sticking it to those citizens who, for the most part, get into financial straits through no fault of their own.

Posted by: Jadegold | May 11, 2005 7:24:51 PM

Neil,
Again, you are on target.

Jadegold,
It is not always bad management that causes industries to get into trouble. There is not always a finger to be pointed and say "It's their fault". A good example would be those in the manufacturing sector. As world competition drives manufacturing to those countries with comparative advantages, the domestic business might suffer. A change in technology also can cause shifts so that entire industries may die (buggywhips and horse tack). This is not always predictable.
Now with huge increases in fuel costs for airlines, it isn't just one company that is feeling the pinch. I'm not saying that United managers are blameless, I'm just saying that you should take a more macro viewpoint to this problem.

Posted by: Robert Zimmerman | May 11, 2005 7:39:02 PM

wow, it'd be nice if everyone actually knew what was going on at United. This isn't a poor beleagured corporation.
United WAS employee owned until Management asked and recieved permission from the bankruptcy judge to sell off all shares of United Airlines stock from Employee savings plans. Yes, the Judge allowed United management to steal the entire corporation away from the employee owners while the stock was at an all time low.
United has also been giving the upper management raises and massive bonuses while they've been cutting regular employee payroll benefits over and over. It's funny but United is a company where you can only expect to make less and less with NO promise of long term security if you are a normal employee. If you are management, you get regular raises and massive bonuses AND the upper management refuses to consider cutting any of the executive 'golden-parachutes' with are mythic in their proportions. Their argument is that they can't break contracts with past executives.. but they can break every contract with current employees.

The bottom line here isn't that the employees aren't understanding of the companies troubles.. it's that United is being openly gutted by the upper management while the employee's pay and security is being stolen away at every turn.

Perhaps if many of you 'poor belagured United' posters had as many family members working in the airline industry as I do, you'd know how incredibly corrupt the Airline industry is. They routinely pass executives around between companies when they are forced out for incompetence. Dick Wolf, forced out of United years ago with a MASSIVE golden parachute was hired in at a smaller airline (the name escapes me). The head of United (a school mate of Mr. Wolf) defaulted on the buyout of that smaller airline by United 2 WEEKS before the deal was to close. As a result, United (while in bankruptcy) paid that Airline a $50,000,000 default penalty which it would have been expemt from if they had waited 2 weeks. I wonder how big Mr. Wolf's bonus was for that influx of $50,000,000?

Posted by: Steven Bandyk | May 11, 2005 9:14:14 PM

RZ:

While it is certainly true some businesses fail for reasons entirely beyond management control, I'd suggest most business failures are in large part--or completely--due to poor management. Similarly, some personal bankrupcies are prompted by lousy personal finance decisions but most are the result of major medical problems and events beyond individual control.

Again, the operative issue is hypocrisy. At a time when personal bankruptcy is made much more draconian for individuals, corporations get a pass.

Posted by: Jadegold | May 11, 2005 9:30:37 PM

The essence of capitalism is that Investment + Risk = Return. Return has the possibility of profit OR loss, thus justifying the the possibility of great return (or loss)on capital. The wealthy investors of the world however, have done all they can to remove risk. Unobservant stockholders don't act to sell stock of poorly run companies. Negligent board members ignore their fiduciary duties to protect companies, i.e., the shareholders. They make few demands on management, who pretty much do as they please until they bollux the works to the point of insolvency.

The first maxim I learned in business is that we create our own problems. Who created United's problems? Baggage handlers... stewardesses... food service workers? Spare me!! Who pays for United's problems? Well, who do you think?

Posted by: Byron | May 11, 2005 9:31:59 PM

Byron,
I agree. I think it is, indeed, wrong to make promises that aren't kept such as pensions. That being said, I guess it just bugs me that everyone believes that employees bear no risk at all, that a job is somehow guaranteed for life. When you gain employment you should understand that bastards in management can screw up the company, the economy can slow or stall, your product or service could be made obsolete, if you strike you could get fired, etc. There is no "lead pipe" on your position. Your employment, in most cases, is 'at will' .

Posted by: Robert Zimmerman | May 12, 2005 9:01:41 AM

That being said, I guess it just bugs me that everyone believes that employees bear no risk at all, that a job is somehow guaranteed for life.

No one I know, save a few faculty professors, labors under such a delusion. However, many people who have been promised pensions as part of contractual obligations are probably under the now-mistaken assumption that they will actually get what was actually negotiated. Questioning the motivations of those employees and retirees who have been shafted by coporate financial officers who, aided and abetted by a Congress that allowed them to under-fund (a euphemism for not paying your bills) the pensions and then when it became clear they could not afford them to walk away from them does nothing but provide political cover for the transgressors and smear people who worked their entire lives in good faith.

We can argue about the relative merits of this type of pension plan at another date. We can have discussions about whether or not the employees are partially to blame by demanding unrealistic long-term concessions. Those are all valid debates for a later date.

Right now, however, is not the time to start smearing people whose lives were, if not ruined, done irreperable damage by their employer and, as their employers are getting away completely without prosecution or punishment because of legislative action, their government.

And this is just the tip of the iceberg.

Posted by: John Cole | May 12, 2005 9:59:28 AM

1) In most corporate bankruptcies, management loses their jobs, if not right away, then by the time the company emerges from bankruptcy. That hasn't happened in United, but remember, the United CEO didn't get them into this mess - he wasn't hired until United was on the verge of bankruptcy.

2) I certainly understand the anger expressed above about employees losing their pensions. However, you still have to answer the question: if the pension plan is underfunded, where is the money going to come from to make the employees whole? There is only one possibility - from the stock of the reorganized entity after it emerges from the bankruptcy court. That must mean you think the pensioners ought to come ahead of the other unsecured creditors - the banks, the lessors, various taxing authorities like the IRS and local municipalities, the people who are owned money for gasoline and spare parts, and so on. The result would probably be that the unsecured creditors would get less than the usual $.01-.10 on the dollar. Is that what you think? Have you thought through the consequences?

3) The best solution is probably for the government to be somewhat stricter in requiring companies to fully fund defined contribution pension plans and for the PBGC to charge higher premiums. This is what the NY Times is urging. However, this solution, too, has costs, namely that it will encourage more companies to get rid of their defined benefit plans and adopt defined contribution plans (401(k)) plans instead. Is that what you want? I think that would be a good thing, but you might not.

Posted by: DBL | May 12, 2005 10:57:54 PM

With apologies, in Point 3 above, I meant to say defined benefit plans in the second line.

Also, Mr. Cole, what would be the basis for criminal prosecution of anyone in the United case? I guess if you are arguing that we should return to the days of punishing bankruptcies with prison, I could live with that, if it were applied to all bankrupts. Otherwise, I don't see what your point is.

Posted by: DBL | May 12, 2005 11:01:33 PM

DBL,

Why in God's name are you crying and bleating for the unsecured creditors? Why should they get precedence over the retirees? They made a business decision to lend money without security - tough titties for them - free market, caveat emptor and all that jazz. Retirees had no such expectation of risk for their pensions - and the government is now left holding the bag while the unsecured creditors divvy up the company?? This is a blatant government hand out to the lenders at the expense of the retirees and us taxpayers.

The economy is not going to collapse if unsecured creditors are forced to accept some risk in the marketplace. Some people actually think its a good thing to make creditors more thoughtful about credit risks. Some people have this crazy notion that the greatest danger is if all risk is taken out of lending and money is lent willy-nilly.

Posted by: JTN | May 13, 2005 11:33:31 AM

DBL- I don't want to punish bankruptcy. I want to punish breach of contract, which is how I view what they have done with their failure to fully fund the pension plans

Posted by: John Cole | May 13, 2005 12:10:10 PM

I can't help wondering if DBL stands for Dumb Bush Lover. Did you seriously just say that you'd like to see a return to debtors' prisons?

Why do you favor the economic rights of unsecured creditors over retirees and taxpayers? Seriously. Please explain your logic here. Why should incompetent executives and creditors share the spoils while life-long employees endure a breach of contract and taxpayers are -- once again -- left holding the corporate welfare bag?

Can you see ANY disconnect between your advocacy of corporate socialism and public social Darwinism?

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