Monday, October 24, 2005

A BUNCH OF BLOGGERS have commented on yesterday's Washington Post article by Mark Reutter about the growing use of Chapter 11 bankruptcy by corporations as a strategy to shed financial obligations to employees.

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.

Unlike individuals filing under Chapter 7, corporate (Chapter 11) bankruptcies will not be affected by the new bankruptcy law that went into effect this month. You and I will have to jump through legal hoops if we want to start over with a blank slate by liquidating high-interest credit card and other consumer debt. But multibillion-dollar corporations like Bethlehem Steel, General Motors, and Ford, will be able to restructure their debt while getting the bankruptcy judge to wipe clean millions of dollars in employee benefits, pension plans, and salaries.

The law allows corporations to do this even when financial necessity is really not an issue, and in many cases even if the company is showing handsome profits.

Take Delphi Corp, for example -- a Michigan company that manufactures automobile parts:

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.

Now here's the best part: Going through Chapter 11 doesn't even help companies get better. Turns out, in many instances, bankruptcy saps their drive and initiative and keeps them coming back to the trough for more!

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 [Harley] Shaiken [a labor issues specialist], 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.

So we're rewarding failure and creating a generational welfare problem.

Sounds hauntingly familiar....

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