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White Collar Shenanigans
Mark Reutter
Monday, December 10, 2007
Delphi, The Terminator, and the
Misuse of Bankruptcy Law
Interview with Mark Reutter
This interview about Chapter 11 law and Robert Steve Miller, architect of the Delphi Corp. bankruptcy case, was first published in Executive Intelligence Review (November 11, 2005). It has been thoroughly revised and updated.
Posted 4/12/06.
Copyright ©2005, EIR, Inc., ©2006 Mark Reutter
Grim-faced Steve Miller, "The Terminator," with President Rodney O'Neal and Jack Butler of Skadden, Arps, Slate, Meagher & Flom, after Delphi filed for Chapter 11 protection last October. Skadden was paid $9.85 million in legal fees before Delphi even filed for bankruptcy. Butler bills Delphi $835 an hour.
EIR's Paul Gallagher: You wrote in the Washington Post on October 23, 2005 ["Workplace Tremors"] that the U.S. bankruptcy courts have become, in effect, instruments of bankers and of the managements which declare bankruptcy. What did you mean by that? What change is going on?
Reutter: What was once shunned as the "court of last resort" taking a corporation voluntarily into receivership through what's called Chapter 11 of the Bankruptcy Code has become a tool for corporations to shed their employee pension and welfare benefits and to force a unionized workforce to accept new contract terms.
Remember, when a company files under Chapter 11, it is legally protected from creditors as it devises a plan to restructure its capital structure and rehabilitate its operations. The idea is that an otherwise viable company, faced with terrible bad luck or an unexpected external event, is given breathing space by the law to start anew. (1) But what has happened is that some companies and investors are using bankruptcy procedures to slash jobs, wages, and benefits and dumping underfunded corporate pensions into the lap of the federal Pension Benefit Guaranty Corp.
This trend began in 2001 in the steel industry, then jumped to the airline industry where today, three of the seven major carriers are in Chapter 11 and is now spreading to the auto-parts industry. The bankruptcy filing of auto-parts maker Delphi Corp. [on October 8, 2005] is the latest example.
"[Miller] comes into town, big guns blazing. He presents himself as a straight shooter, but has an almost antic ability to shoot himself in the foot."
Gallagher: Does Chapter 11 itself come from the New Deal?
Reutter: Yes, but the Bankruptcy Reform Act of 1978 was the watershed event. It expanded management's right to file an exclusive plan for Chapter 11 reorganization with no practical input from other stakeholders. Creditors and employees were essentially frozen out of the process.
On the other hand, corporate lawyers and top accounting firms set up thriving bankruptcy and restructuring practices. They were delighted to advise management on how to "mop up" all sorts of pre-bankruptcy claims and problems as part of the reorganization plan. Chapter 11 proceedings became highly complex and drawn out, and the fees for advice $100-$200 million in a major case were conveniently charged back to the bankrupt company's estate.
Gallagher: So, are you saying that, with the 1978 reorganization by Congress, that essentially, a management could formulate a desired
Reutter: A desired end.
Gallagher: And then go and use bankruptcy to achieve that end? They could start from the end of, say, cutting their labor costs by "x" amount.
Reutter: Right. And more and more, the desired end of management is to void union contracts. Under Section 1113 of the Code, management can petition the bankruptcy court to implement a labor agreement unilaterally. This is after a short period in which management is required to bargain in "good faith" with a union to reach a new agreement. This process is a tremendous hammer hanging over the head of organized labor.
Credit: SOS
The Soldiers of Solidarity Movement was started in Saginaw, Mich., on December 4, 2005 to fight Delphi's attempt to strip away wages and benefits through Chapter 11. The group has been holding protest rallies throughout the Midwest. See www.futureoftheunion.com.
Gallagher: How long is that short period requiring bargaining in good faith, in the Delphi case, for example?
Reutter: 120 days, but it can be extended.
Gallagher: So essentially, the management, if it wishes to, can ignore that period?
Reutter: You can easily drag something out for four months. But mostly the threat of Section 1113 is enough to soften up a union to agree to so-called "voluntary" concessions.
Another important factor came into force with the 1978 law. Traditionally, bankers sided with creditors against management in reorganizations, or at least were neutral. But today bankers ally themselves with management through "debtor-in-possession financing." DIP financing provides great returns to bankers, who further charge fees for all sorts of financial advice. Two days before it filed for bankruptcy, Delphi executed a loan agreement with J.P. Morgan Chase Bank and Citigroup for $2 billion in DIP financing.
Gallagher: What was Delphi's financial condition before it went bankrupt?
Reutter: Delphi reported $700 million in losses for the first three quarters of 2005. However, at the end of this period, it still reported $1.6 billion of cash on hand.
Gallagher: That cash is not the result of the $2 billion credit line you spoke of?
Reutter: No, it's in addition to that. Delphi was sitting on roughly $4 billion of cash, by its own account, when it declared bankruptcy. One has to say "by its own account," because Delphi has also admitted to significant accounting discrepancies. A criminal investigation of accounting fraud is now underway by the U.S. Department of Justice. (2)
Most of Delphi's current reported losses are because GM has refused to help foot the bill for skyrocketing raw material costs. Almost everyone agrees that GM spun off Delphi, formerly known as Delco, in 1999 as a way to reduce the cost of its parts manufacture. As costs have risen, GM's apparent intransigence has created the very losses that Delphi is now using to attack labor costs. But labor costs haven't changed.
Gallagher: In addition, it seems to me, from what you just described, that even with those losses, this doesn't sound like an actually bankrupt company.
Reutter: Delphi is a company that has decided to take a U-turn in its relations with organized labor. Last July [2005], Delphi hired Robert Steve Miller. Miller's previous job was putting Bethlehem Steel Corp. into bankruptcy. The same thing happened to United Airlines, where Miller sits on the board of directors. He was CEO of Federal-Mogul when it went through bankruptcy court, and CEO of Morrison Knudsen Corp. when it went belly-up following the rampant misrule of CEO William Agee.
Miller is a serial CEO. He stays a year or 18 months at a company, enough to pretty up its financials and renegotiate or terminate its union contracts, then he moves on. That's why I call him "The Terminator." He comes into town, big guns blazing. He presents himself as a straight shooter, but has an almost antic ability to shoot himself in the foot through extreme actions and self-serving statements. (3)
A giant rat is how Delphi workers saw Steve Miller at
a November 2005 rally in Kokomo, Ind. A heroic American is how Steve Miller saw himself in a November 2005 photo shoot for a business magazine.
Bottom line: His record as a "turnaround artist" (the preferred description of his activities) is mixed at best. Federal-Mogul was in trouble before Miller was called in, and Federal-Mogul was in trouble during and after he left. At Beth Steel, he alienated employees and destroyed stockholder value. But because he acts so forcefully and kicks up so much dust, his trail of broken promises and half-baked ideas don't seem to undermine his credibility.
For example, Miller claimed to the media that he didn't want to put Delphi into bankruptcy. When he took over as CEO of Beth Steel in 2001, his first announcement was, "I was not hired to put Bethlehem Steel in bankruptcy." Within 20 days, Bethlehem Steel was in bankruptcy court.
Days before Bethlehem went into Chapter 11, however, Miller arranged for a $450-million DIP loan from General Electric Capital Group. That gave him breathing room to bully employees with threats of liquidating Beth Steel as well as to keep up his patter about how he was making U.S. industry competitive again.
Miller seems to be following the same playbook at Delphi: Propose draconian wage cuts (to as little as $9.50 an hour), threaten to close factories, and bad-mouth employee benefits as unaffordable in today's ultracompetitive environment. Then tell the media how he sympathizes with Delphi workers "for the stress they're going through right now." (4) Then turn around and goad them some more by saying they couldn't possibly be so childish as to call a strike.
(Note: On March 31, 2006, Miller petitioned Bankruptcy Judge Robert Drain under Section 1113 to terminate Delphi's agreements with 33,000 unionized employees. Hearings have been scheduled for May 9-10. Then Drain will decide whether to let Miller pull the plug.)
"If Ross can pick up all or part of Delphi on the cheap from Miller, he'll have the same potential for profits as he did in the steel industry ."
The Terminator is not alone in the unfolding story. Also circling around Delphi these days is "vulture capitalist" Wilbur Ross. A "vulture capitalist" is an investor who picks up "value" by finding and reorganizing properties tossed off by others, especially properties in bankruptcy courts. Ross made his reputation as a senior partner at Rothschild, Inc., reorganizing Eastern Airlines, Texaco, and Donald Trump's Taj Mahal casino. In 2000, Ross struck out on his own and started buying bankrupt steel companies. And what was the biggest property he picked up? Bethlehem Steel, purchased from Steve Miller in May 2003.
Ross has now organized a $4-billion private equity fund to buy distressed auto parts companies. One of the properties Ross is reviewing is Delphi if, says Ross, Delphi reduces its "uncompetitive" labor costs. And who did Steve Miller appoint as Delphi's financial advisor? Rothschild, Inc.
Rothschild is receiving a $250,000-a-month "cash advisory fee" for advising Delphi in financial matters. And that's just the hors d'oeuvre Rothschild will be back for a $15 million "completion fee" when Delphi and Miller finish a plan for Chapter 11 reorganization.
If Ross can pick up all or part of Delphi on the cheap from Miller, he'll have the same potential for profit as he did in steel, where he pocketed $267 million by selling ISG to Netherlands-based Mittal Steel Co. (5)
Gallagher: How is it that employee pensions, in the course of bankruptcy proceedings, are so often, or now nearly universally, discarded? Are these not future benefits, as opposed to past debts from which a company could be protected?
Reutter: Fair-minded people might think so, but bankruptcy case law doesn't. Today, a company can use the court reorganization process not only to circumvent collective bargaining, but to sidestep environmental consent decrees and force the Pension Benefit Guarantee Corp. to take over underfunded company pensions. The PBGC, for example, was forced to cover $4.3 billion in net losses from Beth Steel. And the United Airlines bankruptcy left it with about $6-$7 billion to cover.
Gallagher: We have discussed the Stelco case in Canada in which the bankruptcy judge has said to the steel company and to its creditors, "You will not shed these pension costs. You will pay these pension costs, or I won't let you out of bankruptcy." Do you know of any major cases in the United States, in which a bankruptcy court has acted that way?
Reutter: In the U.S., an employee is considered an unsecured creditor in a bankruptcy proceeding. You may have worked for a company for 40 years, but you are not a stakeholder in the debtor's estate nor privy to its surviving assets unless management decides to includes you. On the other hand, the J.P. Morgans and Citigroups that bankrolled management with DIP financing are at the front of the line. They have what's known in bankruptcy circles as absolute priority.
Gallagher: There's been a proposal from one of the co-chairs of the Manufacturing Caucus in the Congress, Senator [Hillary] Clinton, to hold an "auto summit" involving Congress and the White House, and industry and labor, on saving the auto industry, "the unique infrastructure" this industry has, as she put it. Before that, proposals were circulated for months by Lyndon LaRouche, throughout the Congress, for interventions by the Senate to protect and regulate and reverse the industrial collapse going on. What are your ideas on how the Congress can address this problem we've been discussing, if it were making an intervention to try to save these industries.
"There is this shortshighted mindset among mainstream 'talking heads' that we needn't care about such unsexy subjects as infrastructure and industry."
Reutter: Congress should hold hearings on the misuse of Chapter 11 bankruptcy to void employee contracts and retiree obligations, while lining the pockets of a few insiders. But both political parties don't want to talk about it. In Maryland, where Bethlehem Steel used to be the largest private employer, the two Democratic Senators Paul Sarbanes and Barbara Mikulski have ducked the issue as vigorously as has Republican Gov. Bob Ehrlich, whose prior day job was representing the communities surrounding the Beth Steel mill in Congress.
In my book "Making Steel," I refer to this phenomenon as a "bipartisan show of silence." This silence is hurting people. In Maryland alone, 20,000 retired steelworkers and widows lost substantial employer-based health benefits as a result of Beth's Chapter 11 proceeding. Many of them are sick. Many of them suffer from heart disease. Some are on respirators. They are now forced to pay $10,000-$20,000 a year in premiums and co-payments for private health insurance, or to rely on Medicare, or are simply left to die from lack of medical attention. (6)
Meanwhile, Steve Miller and Wilbur Ross gallop off to "save" another industry.
Regarding infrastructure, any move in that direction is beneficial. There is this shortsighted mindset among mainstream "talking heads" that we needn't care about such unsexy subjects as infrastructure and industry. China is spending hundreds of billions of dollars on new railroad lines and highways. Steelmaking capacity has been greatly enlarged and modernized. While China builds up her basic industries, we bankrupt ours.
Notes
1. In addition to Chapter 11 (reorganization), the Bankruptcy Code provides for Chapter 7 (liquidation). In theory, a company that realizes it is worth less to shareholders to operate than to sell off should file under Chapter 7. In practice, this next-to-never happens. Management always optimistically believes it can restore the company to health, rather than fire itself and let competitors or creditors take over the assets.
2. Justice and the Securities and Exchange Commission have called more than a dozen Delphi executives to testify, including former CEO J.T. Battenberg. Six executives, including the CFO, treasurer, and controller, were ousted in the weeks before Miller was named CEO. The SEC is looking into fees paid by Delphi to a turnaround-management company and the role of former auditor, Deloitte & Touche, in handling the company's books.
3. Miller has compared Delphi workers to "people ... mowing the lawn" and has insisted that senior executives that is, those not yet under the shadow of the federal fraud probe be awarded retention bonuses by the bankruptcy court.
4. "Delphi CEO Apologizes to Workers for their Stress," Newsday, November 3, 2005. Miller's statements were made at Delphi's Lockport, N.Y., plant.
5. Bolstered by the acquisition of Bethlehem, LTV Corp., and Weirton Steel, ISG became the largest steelmaker in the U.S. before Ross sold the company to Mittal Steel in April 2005.
6. Starting in 2005, some drug coverage for retirees was provided through VEBA (Voluntary Employee Benefit Association), which was negotiated by the United Steelworkers Union and ISG. The VEBA benefits have continued under Mittal Steel.
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