The Instapundit reacts to this Will Collier piece on the United Airlines scandal and states:
Whatever you call this, it’s not free enterprise.
Of course it isn’t- it is a legally sanctioned attempt to pass on the financial obligations of private corporations to the public. And it is going to be successful.
The company underfunded the pension program with the sanction of the government, knowing with full confidence that the 1974 creation of the Pension Benefit Guaranty Corporation that they were now completely covered to do whatever they wanted as long as they paid their premiums. They then underfunded their pension, which probably allowed them to overstate profits or to maintain a veneer of financial responsibility, which gave creditors the cover to keep lending ( and if the new Bankruptcy Bill shows anything about the mindset of the powers that be, only creditors matter) and shareholders to keep earning returns on stock prices that were over-inflated due to the cooked books (hat tip Kevin Drum):
During the “hostile takeover” craze in the 1980s and 90s, “overfunded” pensions were “relieved” of their excess capital.
As happened in the mid-1980s, rapid appreciation in the value of equity investments has pushed many defined benefit (DB) pension plans into a position of substantial overfunding. Unlike the mid-1980s, however, a pension plan sponsor cannot tap these excess assets for other corporate purposes. Or can it?
(Source: Michael S. Melbinger: Gaining Access to Excess Pension Assets [This article appeared in Pension Management, August 1995][Emphasis added])
Now, of course, the brilliant business strategy of tapping pension “surpluses” for extra cash has reached its inevitable outcome: suddenly all those ‘overfunded” pensions are now “underfunded.”
In The $4.7 Trillion Ponzi Scheme, Michael Hudson explains how this looting in the form of relieving excess capital took place:
The problem was created by fund managers and CFOs who believed
Gatchaman
I am sure once the media is done with this story the pensioners of United will be cast as evil, greedy criminals and the executives will be playing the role of enlightened heroes. Gee, I really trust the folks at Microsoft/GE, TimeWarnerAOL, and NewsCorp to inform us accurately on the doings of their corporate brethren.
Mr Furious
I’m not so sure the media is going to do anything with this story at all…
KC
It’s total and utter garbage that they can get away with this. But, since we’re in the days of Big Government conservatism, I see the companies who bail out on their pension obligations getting away scott free, the public picking up the tab, and stockholders making plenty of cash. Don’t get me wrong, if old school Dems were in charge they’d bail out the companies too, but I think there’d be some large strings attached. However, I’m not so sure that that’s the case with this current Congress and its penchant for satisfying corporate greed-meisters. I hope I’m wrong though, I really, really do.
Slartibartfast
Nice. A fancy way of looting the pension funds; that’ll make me want to fly them.
Libertine
When is it gonna end? First it was the S&L’s, then the credit card companies, now the airlines. Every failing business is going to look to DC to keep them solvent at the taxpayer’s expense.
Robber Barons is a very apt description of our current bunch of corporate leaders John.
Kimmitt
Fortunately, our Republican President and Congress, deeply committed to the ideals of the free market . . . oh, I can’t even begin to go on.
Randolph Fritz
It is, of course, illegal for businesses to use the PBGC to evade contractual responsibilities, just as it was illegal to use the FDIC to evade the banks fiduciary responsibility to invest responsibly. In the case of the FDIC, it is well documented that the Reagan administration’s “deregulation” of the banks led to the S&L debacle. In the case of the PBGC it appears that the political choice of pro-business, anti-consumer, anti-labor judges is likely to be the problem. See, in particular, this account of judicial nominee Priscilla Owen’s protection of Ford Motor Company’s corporate well-being at the expense of the life of an injured man.
Gary Farber
Your first link to “The $4.7 Trillion Ponzi Scheme” is broken, although your second one isn’t.
Say, John, might I wonder where you first heard about that piece?
TJ Jackson
So a pension progarm backed by the promises of management was systematically looted and when the time came to pay up the fraud was revealed. Sound familiar to another pension scheme?
Stormy70
Baby Boomers: “Social Security, here we come!”.
willyb
I have no idea what UAL was investing its pension funds in, but I’m guessing it was a diversified portfolio. If you’ve been following the stock market, you know that just about all the indexes are down on a year-to-date basis (S&P 500 is down about 3.3%). This puts financial pressure on top of financial pressure for a company such as UAL. They just reported a $1.1 billion loss for the first quarter (the 1st qtr loss includes about $725 million in what appear to be nonrecurring charges). Their revenues are flat. Fuel costs are up about 34% year-to-date. And they have a cost structure that includes a heavily unionized cost structure (it’s my understanding that first quarter labor costs were down 17% when compared with the first quarter of 2004). According to the WSJ, transferring that pension assets and liabilities to the PBGC will spare the company from paying $645 million a year (for the next five years). Even with the transfer of liabilities, this company is a dog!
From what I know about the area of funding pension liabilities, actuaries are involved in determining the rates that are used and accountants are involved in auditing the process. Given what I know about the major indexes over the past 3 1/2 years, the rates they were using do not seem extremely high. It depends on what they were invested in.
So who are these robber barons that got rich? And before you start picking on management, any CEO worth his salt would want a lot of money to take on this pig. UAL has been in a chapter 11 bankruptcy reorganization proceeding for about 30 months or so, and even with the pension plans gone, this company is bleeding cash. Does anybody on this blog believe that the pension liabilities should stay with the company, that is, liquidate the company and put the employees in line with the rest of the creditors in a chapter 7 proceeding?
madmatt
You really can’t expect better from the Bush family….everybody remember Neil who still has the record for taxpayer funded bailouts. The whole family is made up of thieves.
Losing Faith
“Don’t get me wrong, if old school Dems were in charge they’d bail out the companies too”
You think so? I think it’s more the other way around. In fact, a good number (I think approaching half) the Dems voted for that piece o shite Bankruptcy bill. I think the Dems of old may have had more integrity when it came to business running all over labor. I don’t care if it’s the dems finding their soul again, the repubs finding a soul to begin with, or some altogether new party emerging, but someone has to start representing the actual people of this country again.
willyb
“In the case of the FDIC, it is well documented that the Reagan administration’s “deregulation” of the banks led to the S&L debacle.”
Where is it “well documented” that the blame for this rests exclusively with Reagan. Seems to me that a law had to be passed first, which means Congress was also involved. And as I recall, Democrats controlled the House of Representatives during this period of time. Deregulation only started the problem for the S&Ls. What really put the nail in the S&Ls coffin was the tax law changes in 1986 that destroyed the commercial real estate market. These changes made the S&L’s investments in commercial real estate projects pretty much worthless.
“In the case of the PBGC it appears that the political choice of pro-business, anti-consumer, anti-labor judges is likely to be the problem.”
I think the deregulation of the airline industry is at the core of the problem with UAL, not pro-business judges. The industry’s main enemies are a competitive environment and their bloated cost structures. What does the Ford Motor Co. lawsuit have to do with the PBGC???
Terry
What year do you think we’re living in?
Of COURSE UAL is going to get away with this. How much do they give up in campaign contributions and lobbying?
You think America is a country where everyone is equal? You think that the same rules apply to you average working Joe that apply to a multimillionaire board member?
Get over it.
There are two kinds of people in this county: the rich, and little people.
America is just a good idea that died years ago, but some people naively believe it still exists.
Miracle Max
How many robber barons does it take to turn capitalism into corporate socialism?
ray
“Congress was also involved”….up to the eyeballs. Anybody remember Garn-St. Germain? They’re the ones who sneaked in at night and bumped up the FSLIC insurance coverage from $10K to $100K, which was the primary step on the road to stuffing bad assets into the S&Ls and therefore the failure of FSLIC, and then the whole S&L fiasco.
willyb
“America is just a good idea that died years ago, but some people naively believe it still exists.”
Just curious … what was the good idea that died years ago?
Randolph Fritz
Willy, no. The S&Ls were deep in trouble in 1980; the state regulatory agencies had all been captured, and all that remained was the federal bank regulators, who Don Regan took of the job. The 1986 law had very little, if anything, to do with the collapse. Oh, and the airlines main problem, aside from a lack of regulation, making it nearly impossible to devise a profitable business model, is rising fuel prices.
Randolph Fritz
By the way, Paul Krugman has a very good discussion of wage and pension instability in the May 13 New York Times (registration). Though UAL is not mentioned, the larger issues here are.
Bob
Gee, I was dismissed around here recently for saying that it never was right versus left but top versus bottom. While we are arguing whether or not putting pictures of Jesus on the front of Wheaties boxes should be sanctioned by the government the boodle boys are going out the back door with the money. As was forever shall be.
It would be pitiable that a whole class of rich people should be so obsessed with stealing other people’s money and then lording it over them if it weren’t for the fact that those other people are us. It reminds me of a story I saw on local tv in Portland about the rise in thievery due to the meth epidemic.
How’s the war going?
DBL
WillyB wrote: “Does anybody on this blog believe that the pension liabilities should stay with the company, that is, liquidate the company and put the employees in line with the rest of the creditors in a chapter 7 proceeding?” That nails it. If you force United to keep its pension liabilities, you will force it into ch. 7 liquidation. However, there is still the question of whether the pensioners should get an unsecured claim for the amount of their lost pensions, and if so, whether that claim should have priority or be treated equally with all of the other unsecured claims.
la
Time to reregulate the airlines again. Privitization of almost anything seems to suck. IT brings the sharks and carpetbaggers in.
I would rather put up with govt. inefficiency than this crew of robber barons.
John Cole
If we hadn’t kept propping up the airlines, some deregulation would not have been bad.
What we did, though, was let them cook the books, prop them up with bailouts and subsidies, and then let them start fare wars and race to the bottom without having to feel the financial sting of charging less for a product or service than it costs to deliver.
Gary Farber
Your link is still broken, as previously mentioned, John. It’s pretty trivial at this point, but my question is still open, too. No big deal, though.
Gary Farber
Your link is still broken, as previously mentioned, John. It’s pretty trivial at this point, but my question is still open, too. No big deal, though.
Ellen1910
Hindsight is so frequently 20-20. Take the S & L bailout.
Yes, the 1980 amendment increasing account insurance from $40,000 to $100,000 played a part. And the 1982 act deregulating the S & L industry by eliminating interest and lending restrictions along with the Reagan administration’s allowing developers to own S&Ls and to lend money to themselves allowed the bandits to play. And Reagan appointing M. Danny Wall, Sen. Jake Garn’s boy, to head the FHLBB put the fox in the henhouse.
But then, did it really cost that much ($200-$250 billion in 1990 dollars)? Remember what was happening in 1980-1984 to the S&L industry.
With Volker driving short term rates through the roof borrowing short and lending long rendered 75% of all S&Ls technically insolvent by 1982.
How much would we have had to pay to clean them up in 1982-1984? How much less economic activity would we have enjoyed in 1985-1989 if we’d locked the doors of the S&Ls in 1982?
I don’t know the answer. Does anyone?
So, now what do we say we should do about the legacy pension costs of old economy companies (steel, autos, hub-style air carriers, etc.)?
Would Chapter 7 proceedings be better? What about the resulting unemployment insurance costs? foregone income taxes? increased public health insurance costs?
Where’s the accountant who’s doing these types of calculations?
The world is a very complex place.
willyb
“The 1986 law had very little, if anything, to do with the collapse.”
This comment is total bullshit! You might want to check your facts, maybe look at some real estate prices during this period of time.
There were a great number of real estate tax shelters in the early 1980s that were set up to taken advantage of real estate depreciation rules (commercial real estate was depreciable over 19 years, 175% declining balance
willyb
“Oh, and the airlines main problem, aside from a lack of regulation, making it nearly impossible to devise a profitable business model, is rising fuel prices.”
I agree that one of their current problems is fuel prices (as I pointed out in an earlier post). But even without the increase in fuel prices, UAL and most of the other airlines have huge cash flow issues.
If the government had not opened up their routes to competition (a good thing for consumers), the airlines would have built up some capital to see them through the effects of 9/11 and the higher fuel prices they are seeing today. Their basic problem is they have a cost structure which can’t be supported by their “deregulated” revenue streams.