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United We Default - Is the auto industry next?
The Wall Street Journal ^ | May 12, 2005 | The Wall Street Journal

Posted on 05/12/2005 5:31:12 AM PDT by Brilliant

A bankruptcy court's decision this week to permit United Airlines to default on four underfunded pension plans is no surprise. This is what happens when Congress puts the taxpayer on the hook as the insurer of last resort. The ...questions are: Who's next? And ...how much will the taxpayers eventually be forced to ante up?

United's default means that responsibility for the pensions of 120,000 workers and retirees now falls on the federal government... The court bought United's argument that getting rid of its pension plans was necessary for the airline's survival...

But the PBGC itself is in financial hot water, with obligations that currently exceed its assets by $23.3 billion... So unless Congress can come up with a way to bolster the agency's finances, it'll be up to the taxpayers to make up the deficit. If United's default creates a domino effect...

At the close of last year, the PBGC figured its "reasonably possible exposure" at $96 billion. That's the estimated amount of underfunding in pension plans... the pension promises made by car makers and parts companies are underfunded by between $45 billion and $50 billion, the agency says...

...As United's workers are learning, defined benefit plans ultimately depend on the financial health of a single employer.

...unions are blaming United management for the pension fiasco, and not without some cause. But they have helped to put the industry into its current state by using the whip hand they are given under the Railway Labor Act to threaten strikes and force up labor costs in the good times. Now the unions are discovering that they will lose some of the pension benefits they bargained for. The same thing will eventually happen to the Social Security benefits of workers if the AFL-CIO and AARP succeed in blocking private investment accounts...

(Excerpt) Read more at online.wsj.com ...


TOPICS: Business/Economy; Government
KEYWORDS: ford; gm; pbgc; pension; pensions; united
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To: yesiknow
Agreed.

I've always thought management compensation/stock options/bonuses should be tied to company performance.

How did it get so out of whack?

21 posted on 05/12/2005 6:40:57 AM PDT by Texan
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To: Brilliant
This is a no brainer. The company is bankrupt. The pension fund is under funded and broke. The federal insurer is under funded and broke. Regardless of legal moves their are only three options.
1 The company can continue with the bankruptcy and the employees can get in line.
2 The federal insurers can pay at a reduce rate according to the funds they have on hand.
3 The government can increase taxes to fund the federal insurer so they can pay the pensions in full.
Unions have never realized that you can't get money from someone who is broke. In the end if these pensions are fully funded there is only one source of revenue and that is the taxpayer. A bailout by taxpayers will encourage many more in the near future. Union policy and demands have not worked and they should have to live with the results.
22 posted on 05/12/2005 6:42:13 AM PDT by jec41 (Screaming Eagle)
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To: Brilliant

Wanna bet the executives of United walk away with at least $100 million between them?


23 posted on 05/12/2005 6:43:46 AM PDT by shellshocked (They're undocumented Border Patrol agents, not vigilantes.)
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To: shellshocked

Not unless they did it before bankruptcy. A bankruptcy judge is not likely to approve that kind of a fee, except for the lawyers.


24 posted on 05/12/2005 6:45:15 AM PDT by Brilliant
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To: Brilliant

It won't be a fee but a contractual obligation of GM to pay them. I bet the CEO takes at least $10 million.


25 posted on 05/12/2005 6:59:33 AM PDT by shellshocked (They're undocumented Border Patrol agents, not vigilantes.)
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To: shellshocked

The CEO might make $10 million, but that's a lot less than $100 million. The judge will order what he thinks he has to pay in order to get competent management. But these judges generally have a different view of what that requires than does management or Wall Street. I doubt he'd order $10 million a year. He might make it $10 million over two or 3 years.


26 posted on 05/12/2005 7:05:18 AM PDT by Brilliant
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To: Brilliant

"The CEO might make $10 million, but that's a lot less than $100 million. "

I said the execs will make out to the tune of at least $100. "Execs" is plural, meaning they, together.


27 posted on 05/12/2005 7:10:56 AM PDT by shellshocked (They're undocumented Border Patrol agents, not vigilantes.)
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To: Brilliant

"The judge will order what he thinks he has to pay in order to get competent management. "


A judges job is never to make personnel decisions, such that he does not have the ability to "get" any exec.


28 posted on 05/12/2005 7:11:59 AM PDT by shellshocked (They're undocumented Border Patrol agents, not vigilantes.)
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To: yesiknow

http://www.freerepublic.com/focus/f-news/1401589/posts

whazzup, crust? toast?


29 posted on 05/12/2005 7:12:55 AM PDT by Vn_survivor_67-68
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To: shellshocked

In the case of a bankruptcy judge, it's a little different. Under the Bankrupcy Code, bankruptcy judges are responsible for making decisions as to how much execs get paid in a bankruptcy. They like to think of themselves as judges, but the decisions they make are often very much like business decisions.


30 posted on 05/12/2005 7:29:12 AM PDT by Brilliant
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To: shellshocked

Yeah, I understand, but I think the lower level execs can expect to make a whole lot less than the top dog. The judge will probably give the top dog something better than a million. The rest will have to content themselves with salaries befitting someone who's working for a bankrupt.


31 posted on 05/12/2005 7:32:15 AM PDT by Brilliant
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To: B.O. Plenty
But we can agree that union demands of the past and present are mostly responsible for all big industry's troubles today

It was management (the people with a fiduciary duty to shareholders) that signed off on the contracts. Can't blame the unions for getting as much as they can.

32 posted on 05/12/2005 8:48:15 AM PDT by glorgau
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To: thoughtomator
>>>>If this comes to the taxpayers, then I want to see it paid for in blood by the industry and union executives who bear responsibility for it. Hanging is appropriate.

1) Who gets hanged? The people who signed these budget-busters are either dead or wearing depends undergarments by now.

2) It always comes to the taxpayers. At least until the taxpayers vote to let these people suffer. When you are perfectly happy to vote to cut off people's old age pensions in order to save $100/ year this practice will stop. But it won't stop beforehand.
33 posted on 05/12/2005 8:51:07 AM PDT by .cnI redruM (M. Moore + MoveOn.org = MooreOn.Org)
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To: B.O. Plenty
We should let United completely cease operations. Ford, GM, or United needs to go completely belly-up and lie dead before anyone in either labor or management begins to behave responsibly.

Think of it as the Iacocca Effect. Since Iacocca sweet talked congress into bailing out Chrysler, no industry really believes it will suffer any inconvenience from an occasional bankruptcy or two.
34 posted on 05/12/2005 8:53:51 AM PDT by .cnI redruM (M. Moore + MoveOn.org = MooreOn.Org)
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To: Brilliant

Let the unions pick up the shortfall. It was their greed that is banckrupting these companies pension plans and killing their profits by demanding Cadillac healthcare plans.


35 posted on 05/12/2005 8:54:26 AM PDT by 1Old Pro
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To: G.Mason
United needs to be allowed to go completely out of business and never offer another flight. We need to let failure have a negative consequence. Otherwise, any intelligent cost accountant will tell you that failure is always cheaper to produce.
36 posted on 05/12/2005 9:00:26 AM PDT by .cnI redruM (M. Moore + MoveOn.org = MooreOn.Org)
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To: TXBSAFH

Dear TXBSAFH,

To your three options:

1. The business model doesn't work for that to occur anymore. The company can't sustain enough revenue to continue meeting these obligations. That's why they're in Chapter 11. Part of the purpose of Chapter 11 is to pare down liabilities in such a way that the remaining business becomes again a viable, going concern.

2. The business model doesn't cover this one either, for the same reasons as above. There are no real prospects that United can grow to the point of being able to take back those obligations, especially with interest added.

3. Under law, the pension plan's position in line is already fixed. The bankruptcy judge deciding the case actually explicitly considered liquidation, and explicitly ruled it out because: the liquidation value of the company low.

Thus, if you liquidate, the government's costs to pick up the pension fund aren't mitigated, and it costs the taxpayers just as much money.

Since, in liquidation, the government has to pick up the costs of the pension obligations anyway, all you're doing is adding insult to injury of having the pension obligations dumped anyway, but also putting a company out of business that just might be viable if it were able to dump the pension obligations through Chapter 11 reorganization.


For whatever set of reasons that brought matters to this point, the bankruptcy judge is stuck with the circumstances that actually exist, and my reading is he's trying to do what costs the taxpayers the least, while inflicting the minimum amount of harm to other stakeholders, including employees and customers.

The folks getting the biggest screwing are the shareholders, as it should be.



sitetest


37 posted on 05/12/2005 9:10:41 AM PDT by sitetest (If Roe is not overturned, no unborn child will ever be protected in law.)
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To: Brilliant

New investment strategy: Divest all monies in any company that has to cow to unions.


38 posted on 05/12/2005 9:13:47 AM PDT by VeniVidiVici (In God We Trust. All Others We Monitor.)
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To: VeniVidiVici
Pretty much. When union behavior becomes a key ingredient in how Wall Street firms rate a company's securities as an investment vehicle, you'll see changes.
39 posted on 05/12/2005 9:22:27 AM PDT by .cnI redruM (M. Moore + MoveOn.org = MooreOn.Org)
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To: .cnI redruM
What we "need" and what we will get are two entirely different things.

Like I stated, IMHO the feds will not allow another depression and will prop up the economy, wherever and whenever it is necessary.

The airlines have become much like Amtrack, the NEA, and any other government program.

40 posted on 05/12/2005 9:35:37 AM PDT by G.Mason ( Save the Republic from the shallow, demagogic sectarians.)
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