Wednesday, January 11, 2012

The Twinkie Goes Bankrupt - Again


Another day, another Bankruptcy in America.  What is going on with these bankruptcies?  The answer is simple:  Bankruptcy is one way to get out of onerous labor contracts.

More bad news for organized labor.  Hostess Brands, Inc., formerly Interstate Bakery, Inc. (before the last bankruptcy) is going bankrupt yet again.  What does this mean?

To many, Bankruptcy means you are going out of business - a failure in the business world, or in your personal financial world.  Of course, it means no such thing.  Bankruptcy, once you strip away the fear and paranoia that surround it, is not the end of the world.

In fact, until fairly recently, Bankruptcy was a pretty sweet deal for Joe Consumer.  You could run up all sorts of debts, including student loan debt, and then get it all discharged in bankruptcy.  And you could keep your primary residence (house), your car, and your "tools of the trade" - whatever you could convince a Judge those were.

But alas, those glory days are behind us, and today, for the consumer bankruptcy is no panacea to get out of debt.   Often, debts are restructured and a repayment plan is worked out.   But the old days of walking away from consumer debt and starting over are, well, over.

For consumers, anyway.

For Corporations, bankruptcy is still a fun option - one that allows you to stiff all your suppliers, your shareholders, and your employees, while keeping the corporate culture largely intact.  Oh, sure, maybe the CEO will have to be driven off into retirement, with his golden parachute.  But most of the organization remains largely intact, and now refreshed and often in a better position than their competitors.

For example, GM, through the bailout, was able to slash hourly worker's salaries in half - for new hires.  They also were able to shed their retirement liabilities by foisting off a token amount of money to the Union.  And after closing unprofitable plants (a long-term trend at GM) and stiffing suppliers for Billions - not to mention bond holders and shareholders - they emerge from bankruptcy with their only debts on the books being low-interest government loans, which have largely been repaid.  They can now afford to re-content cars and sell them with a real profit margin.

Meanwhile, Toyota, Honda, and Nissan, struggling from the effects of a tsunami, has to cut costs and cheapen product content.  Without the benefit of bankruptcy, they have to struggle to pay suppliers, bondholders, and dividends to shareholders - as well as pay full wages and benefits to labor.  Folks like to crow about how great the "American" car companies (such as Fiat-Chrysler) are doing, but they fail to realize that these companies are running the race on performance-enhancing drugs while their competitors have been kneecapped.  Down the road, well, things can change.

For Hostess, things will change yet again.  After the last bankruptcy, they reorganized as a private concern, and shuttered plants, reduced workforce, and removed themselves from certain markets.  One would think the core brands would be a strong market value, but inroads by the likes of Little Debbie have cut into their market share.  It doesn't help, I am sure, that some of the company's products, such as the Twinkie, are the source of so many urban legends.

Does this mean the Twinkie is going away?  Hardly.  Under Chapter 11, the company will reorganize, and debtors may be converted to shareholders and shareholders may be told to piss off.  But the core management of the company may remain.  And with a host of strong brands, no doubt the company, stripped of debt, union labor contracts, and other baggage, can regroup and compete effectively in the marketplace - undercutting their competition on price initially, to recoup market share.

And so on, down the line.  That is one problem with Corporations - they are designed to make money for shareholders, bondholders, management, and the "workers".  Everyone wants to drag out of that factory, as big a wheelbarrow of money as they can.  And often, when too many people are taking too much out, there ain't much left to go after.  A union contract that doubles or triples wages above the norms for a community (which pretty much describes any union contact) may be a fine thing - in the short-term.

But in the long-term, it often means that the company cannot afford to keep up, invest in technology and improvements, and remain competitive.  And often, the union contracts - by stipulating a number of "workers" per plant, act to retard competitiveness in the marketplace.  When your labor contract stipulates you have to hire X number of people, it is hard to show a cost savings by investing in more advanced and automated equipment.  As a result, you end up investing in inefficiency, and your product becomes outdated, outmoded, and horrendously costly.

So be careful of what you wish for.   When the union man comes into town with his sweet promises of high pay and benefits - if you only give him thousands of dollars in union dues - you may well wonder if it sounds "too good to be true".  You may make out in the short-term, but that defined benefit pension and health care may be gone by the time you retire, and the plant shuttered and your children out of work.

Hostess will emerge from bankruptcy and the Twinkie will survive.  Less clear is whether the union pension plan will - as Hostess had suspended payments into this under-funded defined-benefit-pension deal.  Likely, the Pension Benefit Guarantee Corporation - a U.S. Government Agency will be called in to straighten out the pension mess - and retirees will get 40 cents on the dollar of their pension funds, as many airline and steelworkers did.  Another screw-job for the "worker" I'm afraid.  But then again, why would you let a union run your pension plan?  I mean, after Jimmy Hoffa, that is.

You could argue that these sorts of bankruptcies and reorganizations are a healthy thing - pruning back the vines to allow new growth to occur, economically.  And that is probably true, but cold comfort to the person being "pruned" back.  What this means, for many, is a second career that often pays a lot less that what you are used to.

And even though this scenario has been played out in American businesses (particularly in the so-called rust-belt) for several decades now, a lot of people act shocked and surprised when they are shown the door at age 50 and have to start off in a job that pays near minimum-wage.

Again, you can rail about the unfairness of it all.  You can occupy Wall Street or whatever.  Or you can take action in your own life and not be complacent and "assume" you will have another 10-20 years to save for retirement or that it is OK to buy a $50,000 car because you can afford the payments.

Regardless of whether life is "fair" or not (it never has been and never will be) luck favors the prepared.  Be ready for bad things to happen, and maybe you can come out the other end in better shape.  And if bad things don't happen, so much the better.

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