September 19, 2005

Why is this legal?

Sunday's NY Times has an article about Robert Miller, who's made a name for himself helping investors in troubled companies make big bucks. The way he does this is by shutting down a company pensions fund in order to make balance sheets look better and provide bigger profits to investors. Not incidentally, shedding pension obligations makes a company much more attractive as an acquisition target — and investors can make real money as the result of an acquisition.

There's an obvious problem with Miller's approach to business: A whole mess of workers suddenly lose the pensions they'd been promised, and on which they'd based their retirement plans. But the less obvious problem is that US taxpayers get stuck with some or all of the cost of meeting the pension obligations that Miller tossed aside.

As chief executive of Bethlehem Steel in 2002, Mr. Miller shut down the pension plan, leaving a federal program to meet the company's $3.7 billion in unfunded obligations to retirees. That turned the moribund company into a prime acquisition target. Wilbur L. Ross, a so-called vulture investor, snapped it up, combined it with four other dying steel makers he bought at about the same time, and sold the resulting company for $4.5 billion - a return of more than 1,000 percent in just three years on the $400 million he paid for all five companies.

Two years later, as the chief executive of Federal-Mogul, an auto parts maker in Southfield, Mich., Mr. Miller worked on winding up a pension plan for some 37,000 employees in England. The British authorities balked at the idea, fearing that such a move would swamp the pension insurance fund that Britain was creating; it began operations only last April. But the investor Carl C. Icahn has placed a big bet that Federal-Mogul will pay off after the pension plan is gone; he has bought its bonds at less than 20 cents on the dollar and is offering money to help the insurance fund. He, too, stands to make millions.

Now Mr. Miller is at Delphi, the auto parts maker that was spun off by General Motors in 1999. If past is prologue, one of the most powerful turnaround tools at his disposal will be his ability to ditch Delphi's pension fund. He did not return numerous telephone calls seeking his views for this article, but in the past he has said that his first priority at Delphi was to "resolve" its "uncompetitive labor cost structure." That includes the roughly $5.1 billion gap between the pensions it has promised employees and the amount it has put aside to pay for them.

We have to wonder why the Times article rather uncritically accepts the argument [made, incidentally, by the abovementioned Wilbur Ross, who bought Bethlehem Steel] that gutting pension plans is a problem caused by poor government regulation and badly written legislation. To our mind, a more persuasive explanation is that making money at the expense of workers' pensions is a product of a rapacious US corporate culture in which the goal of maximizing profit trumps any and all ethical considerations and social responsibilities. We also find it curious [but not surprising] that the Times article begs the question of what role corporate influence and lobbying have had in ensuring that federal legislation was written badly and then indifferently enforced.

So like we said in the headline: Why is this legal?

Posted by Magpie at September 19, 2005 10:07 AM | Economy | Technorati links |
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