Last month Delphi Corp., a maker of auto parts and major supplier to General Motors, filed for bankruptcy. That doesn't mean that Delphi will go out of business immediately, or even soon. But it does mean that Delphi claims it has trouble paying its bills. So it has asked a federal bankruptcy court (making bankruptcy law is, oddly, one of Congress's handful of enumerated powers) to adjudicate and supervise a plan of (financial) reorganization, under which Delphi wants to be able to continue in business.
Corporate bankruptcies take place all the time, but several features of Delphi's situation highlight shifts in the economic and political landscape that are taking place far from Washington, DC. The Delphi bankruptcy may open a bit of a window onto the realities of the On-your-Ownership Society. If you have the stomach for it, follow me below...
A decade ago, Delphi was a parts-making subsidiary of General Motors. GM spun off Delphi into a separate company in 1999. The idea was that GM would remain Delphi's main customer, but the spinoff would free Delphi to sell more parts to other auto makers. GM is still Delphi's main customer, and the separation from GM has not been enough to keep Delphi from feeling the effects of GM's continuing difficulties. Delphi recently reported a loss of $788 million for the quarter ending September 30, and the company has liabilities of around $20 billion, against assets of about $15 billion.
Enter Steve Miller (not, sadly, the musician), Delphi's recently-hired CEO. Mr. Miller seems to have a history of this sort of thing, having been involved in bankruptcies at Bethlehem Steel, Morrison-Knudson, and Federal-Mogul. Mr. Miller isn't one to drive companies into the ground; he's an operator skilled at the business of using bankruptcy as a way to alter the economic terms on which industrial firms operate.
In the ordinary course of its business, any company enters into, and generally fulfills, a whole variety of promises. It hires workers and promises them wages, benefits, and maybe pensions. It borrows money and promises to pay it back, with interest. It enters long-term contracts with suppliers to assure steady supplies and prices, promising to buy minimum amounts over time. If there's anything left over in profits, they belong to the company's owners, the shareholders. So long as the company prospers, things go more or less smoothly. Suppliers, lenders, customers, employees, managers, and owners engage in a perpetual dance, competing over the value the business creates.
Bankruptcy changes everything. The idea of corporate bankruptcy is that when a company's liabilities (what it owes) overwhelms its assets (what it owns), the situation is unstable, and if the company simply collapses, everybody loses. In entering a Chapter 11 bankruptcy filing, the company asks the bankruptcy court for temporary protection from its creditors. The company then, under the court's supervision, files a plan of reorganization, usually aimed at restructuring the company's obligations so that it can eventually emerge from the court's protection. In a typical plan of reorganization, everybody gives up something. Lenders often agree to partial or extended payment terms, sometimes in exchange for stock in the company. The original shareholders usually end up losing most. But other parties can lose, too. The court may permit the company to back out of long-term purchasing contracts. The court can also insist that employees and their unions accept reductions in wages and benefits. And if the company's pension fund is short on cash, the court may permit the company to freeze or terminate the plan, and possibly put the plan to the Pension Benefit Guaranty Corporation (PBGC), the federal pension insurance entity. The end result of this step may be a substantial reduction in pension benefits.
Because it occurs in court, a bankruptcy proceeding is a public squabble among several parties fighting over a pie that isn't big enough. Investors, lenders, trade creditors, workers, executives -- even the pension fund -- come before the court with legitimate claims that add up to more than the company is worth. The court generally prefers to see the parties negotiate the settlement, but if necessary the court will impose one. The negotiations and related court filings tell us a great deal about the current power dynamics of our industrial economy. There's a lot going on here, but I'm interested in concentrating on two entities -- unions and large pension funds -- that traditionally act as advocates for workers. I fear that the Delphi proceedings show them weakening, to such an extent that we need to work out where to shore them up, and where (and with what) to replace them.
The United Auto Workers (UAW) represents Delphi's rank-and-file workers. Shortly after the bankruptcy filing, Mr. Miller approached the UAW for wage and benefit concessions. These are no ordinary concessions. They amount to as much as two-thirds of the current contract's levels, starting with a reduction of the basic wage from $27.50 to $9.50 an hour. At the same time, Delphi's pension plan is grossly under-funded, and Delphi wants to freeze it. That's an issue that brings to the table both the PBGC and General Motors, which may be on the hook for some of those pension benefits since GM originally made those promises before the spinoff.
It isn't clear how much bargaining power the UAW really has to stop the rollback of wages. They surely have some, but they have to compete with all those other interests, and do so, in part, before the court. They are on the attack on at least one front. The UAW has objected to an executive severance plan is says is part of a $500 million executive compensation package that just isn't acceptable. Basically, if in bankruptcy everybody's supposed to give up something, maybe the executives should, too. The court has set a hearing on their objection for early January.
There's another, more indirect form of worker advocacy at work in the executive compensation dispute. A group of large pension funds (Teachers' Retirement System of Oklahoma, the Public Employees' Retirement System of Mississippi, Raiffeisen Kapitalangage of Austria and ABP, a giant Dutch pension fund), according to the Financial Times (11/23/05), are up in arms:
A group of large shareholders in Delphi are trying to scupper the bankrupt car parts maker's plan to give top executives cash and share bonuses worth up to $488m when it emerges from Chapter 11 protection.
Four large US and European pension funds, who are also bringing a class action lawsuit alleging fraud against Delphi and others, claimed...that many of the executives covered by the bonus scheme were involved in fiddling the company's accounts. They also objected to the "highly generous" scheme because it "lacks fundamental clarity" on what would lead to payments.
The willingness of large pension funds to join the fray in a bankruptcy is important because the pension funds' ultimate constituency is the population of pension beneficiaries - rank-and-file workers.
Large unions and large pension funds have their flaws, but the Delphi case illustrates their importance as advocates for ordinary workers. Unions and large pension funds have been institutions through which ordinary people have traditionally been able to pool their resources, enabling effective, collective action. The forces that seek to drive toward what I call the On-your-Ownership Society also tend to weaken institutions of this type. There's plenty of room to debate whether these particular institutions are the right means for popular advocacy in the twenty-first century. But wherever that debate goes, we can't afford to allow our existing advocacy structures to wither away unless we set about establishing effective alternatives.