Bankruptcy is a way for companies to take legal promises, and burn them.
Alright, I’m a bit addicted to it but I watched another interesting documentary on Frontline yesterday – Can You Afford to Retire? – about the pensions time bomb that is slowly exploding in America. It’s a very topical subject at the moment with the financial crisis putting millions of pension plans at risk. On CNN yesterday, they were following the senate hearings for the auto industry bailout and a reporter quoted a figure that General Motors only have 75,000 workers to support 250,000 people who have retired from GM. This is obviously a huge financial problem for GM who are already in dire straits if they don’t get bailout funding.
The Frontline report however looked at the phenomenon of what’s called 401K pensions which are widespread in America and probably are the same as those used by General Motors. A 401K pension is basically an employer contribution fund – you put in 4 dollars and your company doubles whatever you put in or something along those lines. That’s if the company fulfills their promise to do so – which all to often they don’t. Or they use the fund to plug gaping financial holes in other parts of the company.
What’s clear is that 401K’s are something of a scam. The name “401K” is taken from an adjustment to the tax code which basically means that companies can use employees salaries to “invest” in a pension fund rather than pay tax on them. It was an adjustment campaigned for by companies and duly passed by the senate. The problem is, they usually invest the money irresponsibly meaning that US pension funds are being used to cover up holes in other parts of the company or gambled on high risk stocks.
The film highlighted the shocking case of one United Airlines worker who lost a huge chunk of both her pension and her salary after 9-11 when the company went bankrupt. United Airlines simply filed for Chapter 11 bankruptcy which meant it could walk away from it’s pension, “reorganise” it’s operations and come back under a different name (“United”) a few months later debt free. None of the directors lost their pensions or salaries, especially the CEO Glenn Tilton who was brought in to “have the balls and gall” to take the company through bankruptcy and confront the unions with the news that their pensions and jobs had gone. The bankers and lawyers involved benefited to the tune of up to €200 million.
This kind of collusion (some might call it corruption) between laws passed the senate under corporate pressure is exactly the kind of thing that has brought the American economy to it’s knees. It simply allows companies to evade responsibility and pursue greed adinfitetum.
Expect 410K pensions and Chapter 11 bankruptcies to be become increasingly bandied around in the US press as companies seek to walk away from the mess they’ve created and re-emerge like Lazarus in a debt free form.