< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: No Pensions = Higher Taxes

Wednesday, June 01, 2005

No Pensions = Higher Taxes

Like a shot across the bow, or something like that. FT's Deborah Brewster reports a big "no shit sherlock" headline on pension funds. But even though everyone knows it, it needs repeating. Pensions are in horrible shape. Let me explain the game from a vulture's point of view. Corp X. can't make its interest payment on its upcoming note. It needs to borrow just to keep afloat, it does by maxing out its credit facility for the next two quarters. Then, the next bond payment comes up, bondholders don't want to talk about a pre-pack, Corp X. has no choice but to go into default and file for C. 11 protection. Corp. X won't be allowed to leave C. 11 until it cleans out its balance sheet and makes all secured creditors whole again. That means all unsecured creditors get shafted. So they fight like hell to keep as much value as they can. It turns out pension plans are one of the biggest groups of unsecured creditors for corporate america. But they aren't as big as unsecured bondholders (normally), so they often wind up getting screwed in the name of: "Pension Benefit Guaranty Fund" which is a supposed to pay those pension plans that get shed in bankruptcy. For vultures, we can't stand pension plans. They get in the way of an otherwise salvageable business. If its possible, we like to see them make concessions for equity, that way we're assured a market when we need to exit. Of course, this doesn't seem nice at all for us to do. But from an investment standpoint, pensions are like swollen scabs, bound to bleed again unless you tape them over. As much as can be dumped into PBG gets dumped for just that reason.

The FT today though points out that state pensions are in just as bad a shape as corporate plans. Or at least, state pensions are as bad off as everyone thinks corporate pensions are, and corporate pensions are worse off! PBG has already warned that with more corporate 11s taking the pension nosedive and coming back up with the lighter load, it may need a taxpayer bailout. But with state pension plans, there are only two ways to bridge the gulf between promise made and promise kept, benefit cuts or higher taxes. You see that, higher taxes on both ends? State pension bailouts, and corporate pension bailouts.

Now let me tell you what this looks like to me. Basically the business roundtable folks have given the nod to shedding pension plans from the corporate america labor force once and for all. They would never publicly say this of course, but when United does it, and when GM says it might have to do it ("it" meaning die a corporate death in C. 11 and rise again w/out a pension obligation), the word is, pensions are history. The implicit bargain is, "if you let us do this without first going into 11, we can save jobs". This is a bunch of bullshit! These guys have run most of these companies like their own personal castles for the last twenty years. They've been underfunding and raiding their pension plans while simulataneously increasing their bonuses and stock buyback plans. You trust them to save jobs? Maybe their own, but not mine. I'd much rather have these dinosaur companies go through C.11 so we can restructure them, kick management in the balls a little, and teach them how to keep their balance sheet clean again. My advice to Democrats, make this a big issue and don't give into the whining of billionaire CEOs about saving jobs, cause when they're threw running great companies into the ground, the only job left will be that of undertaker.