The revolution is over, and Gordon Gekko won.
Three decades on from the leveraged buyout boom, the morals, or lack thereof, of the fictional private equity titan have become the morals of management: greed is good, more is better, and employee benefits are an inconvenient obstacle to unlocking shareholder value. In other words, it's not just corporate raiders coming after your pension now; it's corporate America too.
Just look at Patriot Coal. That's the spin-off company of Peabody Energy, the country's biggest coal producer, that was larded up with 40 percent of its parent company's healthcare liabilities and just 13 percent of its assets back in 2007. A year later, Patriot saddled itself with even more obligations when it bought Magnum Coal, itself a subsidiary of Arch Coal, the nation's second-largest coal company. The end result of all this financial chicanery was Patriot getting stuck holding the bag of retiree health benefits for 22,000 people -- 90 percent
of whom never worked a day for Patriot, but rather for Peabody or Arch.
Well, guess what. Patriot went bust. And now, as the Wall Street Journal
reports, a bankruptcy judge has ruled that it can discharge its $1.6 billion of union healthcare obligations and replace it with ... a $300 million trust, "tens of millions" more in revenue sharing, and 35 percent of the stock of the new Patriot Coal. Not much. Now, it's not completely
clear if Peabody deliberately designed Patriot to fail -- that got a "maybe" or "maybe not" from the judge -- as Temple University business professor Bruce Rader
has argued. But it is clear that Peabody dumped the legacy liabilities and assets it didn't want in Patriot, which, being generous, added several degrees of difficulty to it being a going concern.
Now, believe it or not, there were innocent-ish days of yore when management didn't aggressively try to wiggle out of its promises to workers. That's what buyout barons did. Indeed, as Larry Summers and Andrei Shleifer
argued back in 1988, hostile takeovers often increase shareholder, but not economic, value, because they involve such "breaches of trust." In any corporation there are what Summers and Shleifer call "implicit contracts" -- agreements between shareholders and stakeholders that would be too costly to formalize. Of course, it would always be profitable for shareholders to renege on these informal deals after the fact, but they don't (or didn't), because if they did, stakeholders would stop entering into them. And besides, before the managerial revolution in the go-go 1980s, most bosses came up through the company they ran. There was (some degree of) loyalty to their fellow employees. Who would take away health benefits from people they knew?
But what if they didn't know them? What if private equity gurus bought a company, and decided to scrap its implicit contracts (it's not as if those were written down). That's what Summers and Shleifer saw happening with the hostile takeovers of the day -- with all kinds of ripple effects. For one, it would redistribute income from labor to capital. For another, it would lower the company's costs, which should
lower its prices -- and push its competitors to do the same. In other words, it's a corporate race to the bottom to shed future obligations. Whether it's health insurance or pensions, business has gotten out of the business of taking care of their workers. As you can below in the chart from the Employee Benefit Research Institute
, defined benefit pensions have become a relic of a more generous age: 14 percent of private-sector workers had them in 2011 versus 38 percent back in 1979.
We have become a 401(k) nation. But it's not just the masters of the universe rewriting the social contract; it's the new management class raised on the nostrums of shareholder value. Breaches of trust have become the norm, takeover or not. And it's not just implicit contracts getting broken. It's explicit ones too. The United Mine Workers of America (UMWA) had collectively bargained lower wages and fewer vacation days in the past for higher healthcare benefits in the future. That looked like a smart trade in an industry where lifetime medical problems are rife -- but no longer. All it takes, apparently, is spinning-off the liabilities you decide are standing between your chief executive and an eight-figure payday
into a not-long-for-this-world subsidiary for those promises to be moot.
We are all corporate raiders now. Not "we" as in you and me, but "we" as in corporations -- you know, real people. It's a brave, if terribly unfair, new world, and there's no going back. As Noah Smith
points out, the alternative to the private equity-ization of corporate America isn't the idyllic postwar world where you worked for one company your whole life and it took care of you for your whole life. It's stagnation. Companies do
need to cut costs to be globally competitive. In other words, businesses shouldn't be in the pension business. The government should. Obamacare will help fill the biggest hole in our social contract, but Medicare and Social Security are perpetually on the chopping block now -- and just when people need them more than ever. As Josh Barro
argues, if anything, the government should be expanding Social Security, not cutting it
In the meantime, the transition from postwar to post-buyout capitalism is costing people retirements they thought they had on the altar of shareholder value. It might even make Gordon Gekko blush.