Who Stole the American Dream? (23 page)

Labor unions and their workers bought the pension idea from management. The “defined benefit” is what the unions liked most because it meant employees would get a predictable monthly pension payment for as long as they lived, paid for and guaranteed by the company. Strong unions like the United Auto Workers and the United Steelworkers negotiated contracts with a fixed pension formula.

Typically, a big company promised workers the equivalent of 1.5 percent or 2 percent of their salary or wages in their last five years, multiplied by the number of years they’d worked. It came out to something between 45 and 60 percent of their final pay.
Pat O’Neill, who ended up making $50,000 plus, could count on an annual retirement of roughly $36,000, or about $3,000 a month—
for the rest of his life
. United Airlines was committed to that under its union contracts and the 1974 Employee Retirement Income Security Act (ERISA).

The crunch began in the 1990s. Low-cost carriers like Southwest Airlines began eating into United’s market share, and its profit margins slipped. In 1994, United’s finances were so shaky that
management struck a grand bargain with its unions—management would trade 55 percent majority ownership in the company to its unions in exchange for their agreeing to $4.9 billion in pay cuts and reduced benefits. Union members could buy company stock.

Pat O’Neill, who had rock-solid faith in United, invested $80,000 of his hard-earned savings in United stock. With the union givebacks on wages and benefits and an infusion of new capital,
United had a strong spurt in the second half of the 1990s. Stock, bought by union members for $22 a share, shot up to $90.

But it turned out that
those were phantom gains, way beyond the value of United’s profits. Even in good times, United had been struggling. It piled up a multibillion-dollar debt buying or leasing a fleet of new wide-bodied Boeing 747s and 777s and Airbus A320 airliners. It got into periodic fights with the powerful pilots union. In 2001, United ran a $3.8 billion operating loss. After the 9/11 terrorist attack in 2001, fear of flying panicked the American public. United lost more traffic and revenue than most carriers. By early 2002, it was deep in debt. It desperately needed big new bank loans to survive, and to get that money, United sought a government guarantee.

The Bush administration’s Air Transportation Stabilization Board gave loan guarantees to other airlines but turned down United.
Union leaders said they had heard that anti-union hard-liners around President Bush wanted to push United into bankruptcy to force major concessions from its unions and to erode union power. Whether that was the plan or not, that’s what happened.
United filed for bankruptcy on December 9, 2002, the largest American airline ever to take such a desperate step.

United’s eighty-one thousand employees got slammed hard by the company’s bankruptcy. Pat O’Neill, then on the verge of realizing his dream of retiring at fifty-five, suffered what he calls “a triple whammo”—on his employee stock plan, on his 401(k) plan, and on his United pension.

“
The stock went zippo,” O’Neill recalled. Stockholders were virtually wiped out. United’s stock plunged from roughly $100 a share in the late 1990s, when O’Neill bought it, down to $1. United’s unions were left with near worthless stock in return for the $4.9 billion in wage and benefit cuts that they had surrendered in 1994. O’Neill’s $80,000 investment in the employee share ownership program shrank to $1,800. O’Neill got hurt again on his 401(k) plan,
which also had a bundle of United stock.
Finally, his pension was cut by one-third. When United Airlines dumped its vastly underfunded pension plans on the quasi-governmental Pension Benefit Guaranty Corporation, O’Neill’s pension was automatically reduced from $3,012 to $1,994 a month because the government formula was less generous than United’s contract.

As Pat O’Neill retired from United in 2003, he knew that for the rest of his life he would lose $1,000 a month, money that he had earned over thirty-five years. Like his co-workers, O’Neill was angry at United’s management. He blamed them for mishandling the airline’s finances and for forcing harsh bankruptcy concessions on union employees while executives got “retention bonuses” and came out of bankruptcy with the prospect of large personal gains from the new United.

“I never thought it would come to this. Hell, no,” O’Neill said. “There’s a lot of other people who felt the same way. People worked. People cared. They went the extra mile, and now look at it.”

Pat O’Neill’s predicament is a microcosm of the devastating impact of bankruptcy, not just on United’s eighty-one thousand employees, but on workers all across the country.
Probably one million workers and retirees, and perhaps as many as 1.6 million, have been casualties of corporate restructuring under Chapter 11 of the bankruptcy code or of companies on the brink of bankruptcy shutting down pension plans. They have seen their pensions, wages, and benefits drastically cut over the past couple of decades by some of the best-known names in Corporate America. In addition, millions of other average Americans without union contracts to protect them have lost their lifetime pensions or had them frozen, even at profitable companies such as IBM, Verizon, and Hewlett-Packard.

When the economy was growing in the 1980s and ’90s, big corporations liked the pension programs because the billions that accumulated
in their pension plans showed up as assets on the corporate balance sheet. When markets went up, so did the stock portfolios in their pension plans. Those gains made the profit line look even rosier on the company books. But when the markets hit rough going in the early 2000s, those pension plans took losses and became a balance sheet eyesore. Suddenly, chief financial officers were being blamed by CEOs for generating losses that made the company look bad.

So some highly profitable firms headed for the exits. Companies such as IBM, Verizon, and Hewlett-Packard froze the benefits in their existing lifetime pension plans and shifted their workforce into employee-run and largely employee-financed plans, either 401(k)’s or similar options.
In one year alone, 2.6 million employees had their lifetime pensions frozen and were switched into 401(k)-style plans. New Economy companies in computers, the Internet, or telecommunications, such as Intel, Microsoft, and Cisco, adopted 401(k) plans from the beginning.

Overall, the percentage of large and medium-sized American firms that offered traditional lifetime pensions fell from 83 percent in 1980 to 28 percent in 2011.

Bankruptcy became the typical route for troubled companies to bail out of lifetime pension obligations in a hurry. The financial meltdown in 2008 triggered a flood of high-profile bankruptcies such as those of Lehman Brothers, CIT Financial, General Motors, Chrysler, Washington Mutual, and many more. The early 2000s saw a previous wave of bankruptcies by major corporations such as Enron, WorldCom, Global Crossing, Texaco, Pacific Gas and Electric; steel companies such as LTV, Bethlehem, National, and Weirton; airlines such as Pan Am, Eastern, United, Delta, and US Airways (twice); plus many others.

Some companies were being liquidated and their meager assets
divvied up. But far more frequently, bankruptcy was used by corporate management as a strategy to restructure the company—a vehicle for management to shed old labor contracts and write new ones, to dump old debts to creditors and trade suppliers, and to revive a debt-ridden firm as a leaner, slimmer company ready to compete without the weight of old obligations. The logic of the strategy: Better an amputated company with fewer jobs, lesser benefits, and lower wages than a dead carcass.

Bankruptcy, Jamie Sprayregen asserted, represents “
the efficient working of American capitalism.”

Sprayregen was United’s chief bankruptcy attorney and one of the nation’s most successful bankruptcy lawyers. By the mid-2000s, bankruptcy had become such a popular corporate strategy that big law firms all over the country set up special bankruptcy practices and made hundreds of millions of dollars from that business.

Companies needed bankruptcy, Sprayregen explained, as a legal way to bail management out of a financial jam. In his words, “The essence of bankruptcy is that whatever promises the company has made, they can’t live up to all of them and they need to find a way to deal with the fact that they’ve promised more than they have.”

“Bankruptcy,” retorted Elizabeth Warren, then a Harvard Law School professor specializing in bankruptcy, “is a way to take legal promises and burn them.”

“Bankruptcy’s terrible for the employee,” added Greg Davidowitch, head of the United Airlines section of the flight attendants union. “
It’s an absolutely horrific experience for the people who worked hard to build a company…. It means being forced to negotiate changes to your working conditions, to your terms of employment, with a gun to your head.”

That’s no accident. That’s the way the 1978 bankruptcy law was written and the way bankruptcy courts have applied it. Technically, a bankrupt company such as United Airlines tells a bankruptcy judge that it cannot pay its bills and asks the judge to defer claims on its assets and to impose losses on its creditors—but not on the banks.

The law and the courts give top priority to the banks that loan
money to the besieged corporation—in this case United and United’s management—to make sure that banks don’t lose money on their loans. The 1978 bankruptcy law also leaves corporate management in control of the bankruptcy process and gives employees very low priority—unlike some countries in Europe and Latin America where employee interests are better protected.

In reality, as I learned from Hugh Ray, a Texas attorney with thirty years of experience in bankruptcy law, the process is run by and for what insiders call “the DIP club”—the small group of big banks that loan funds to the bankrupt company, which is legally known as “the DIP,” meaning “the debtor in possession.” The 1978 bankruptcy law gave the DIP, the corporate management, the primary initiative and control of the company’s restructuring during bankruptcy.

In a so-called Chapter 11 bankruptcy such as United’s, the company’s attorneys go into court on the first day with drafts of court orders, worked out in advance and in private with the banks, which they give to the judge as a road map for the bankruptcy process. Generally, Ray reported, bankruptcy judges sign off on the company drafts, which then become the judge’s “first day orders.” They govern the bankruptcy process—especially the financial winners and losers.

“
It says right here in the United first day order that the lenders are given superpriority claims—superpriority, not just priority, but superpriority,” Hugh Ray pointed out to me. “Employee rights are inferior here [in the United States]. They are superior in other countries, but here, that’s the way it works.”

“It sounds [to me] as though through the first day orders, the whole deal, the whole outcome, is pre-cooked,” I said, astonished at the thought that a judge would render the most critical verdict in advance of testimony and most of the arguments.

“Absolutely.” Ray nodded. “The die is cast.
Certain players have been made irrelevant at the end of the first day.”

“What’s the typical outcome in terms of who gets hit?” I asked.

“The typical outcome is the employees get new contracts that are much less generous than what they had before,” Ray said. “The trade people [suppliers] get very little, very few cents on the dollar [of what they are owed]. Typically, the people who own stock in the company get wiped out.”

“So the banks win?” I asked.

“That’s correct,” said Ray.

“It sounds like money is flowing from little people, middle-class, maybe poor people, to rich people, the rich institutions,” I suggested.

“
That’s the norm in these situations,” Ray agreed.

The United Airlines bankruptcy followed Hugh Ray’s script.
CEO Glenn Tilton, who came to United from a previous bankruptcy, talked initially about how all of United’s stakeholders would need to “share the pain” financially to save United. “This is going to take sacrifice by every single member of United’s family,” Tilton urged.

But before long, Tilton was focused mainly on major sacrifices from rank-and-file employees. Within a few months, United’s four major unions agreed to $3.3 billion in “givebacks,” mostly in lower wages and smaller health benefits. Not enough, insisted United’s management; more cuts were needed. “
No way to exit this bankruptcy case,” United attorney Jamie Sprayregen asserted, “without taking on what I had called the silent elephant in the room. That is, addressing the pension issue.”

United’s lifetime pensions had become an elephant-sized problem because for several years, United Airlines, like many other companies, had been largely ignoring its obligations to fund them. Management had put little or no cash into the pension funds for pilots, mechanics, flight attendants, and office employees. Management’s assumption was that its pension obligations would be covered by stock market growth from past contributions.

In the 1990s, that stratagem worked as long as the stock market was booming, but by 2001–02, those rosy assumptions were wildly off the mark. When the market plunged in 2002,
United’s pension funds were more than $10 billion in the red.

By declaring bankruptcy, United Airlines was able legally to shift its $10 billion pension debt onto a little-known federal agency, the Pension Benefit Guaranty Corporation (PBGC), which is the safety net and payer of last resort that insures failed pension plans. United was a granddaddy of failures, but it was also, unfortunately, a proxy for much of Corporate America.

According to Bradley Belt, then executive director of PBGC, more than eighteen thousand U.S. companies had been welshing on their promises to their employees, skimping on legally required contributions to their pension plans. By 2006, Belt said,
corporate pensions were underfunded by $450 billion. Even though ERISA, the nation’s pension law, required companies to put up the money, the law was so full of loopholes that corporate accountants and attorneys had found ways to dodge their obligations, and PBGC was left to pick up the pieces. But often, as in Pat O’Neill’s case, PBGC’s payout formula offered much less money than what the company had promised. So average employees lost out.