Today in America a handful of investors can kill tens of thousands of jobs overnight.
Earlier this year, they almost killed 30,000 good Teamster jobs at YRC Worldwide (YRCW) the country’s largest trucking company. My boss, Jim Hoffa, managed to shame them into backing down.
The investors had a weapon of mass job destruction called the credit default swap. The credit default swap is essentially a bet that a company won’t be able to repay its debts. It allows investors to make more money if a company goes under than they would if it survives.
Think about it. We have a financial system that gets special treatment from the government and the taxpayers because it’s supposed to create jobs. But the system is actually allowed to sell financial products that destroy jobs.
YRCW is a great example of how it can happen. It’s the parent company of YRC, which consists of Yellow and Roadway. Holland, Reddaway and New Penn are also part of YRCW.
YRCW has been in financial trouble. To stay alive, it needed to exchange its bonds for stock. But financial services companies created and sold credit default swaps on YRCW’s bonds. So the investors who bought those credit default swaps could have made a bigger profit if YRCW shut down.
The investors did exactly what you would expect them to: they held on to their bonds.
Fortunately for 30,000 Teamsters, Hoffa called out that disgraceful behavior. He pushed the bondholders to take part in the exchange of bonds for stock. Ultimately, enough of them did to ensure the company’s survival.
If there isn’t a clearer example of why we need stricter regulation of irresponsible banks, I can’t think of one. Fortunately President Obama is pushing to change the rules that allow banks to act contrary to the interests of their customers.
The Senate is now considering ways to re-regulate the banks. It would be a very good thing if the Senate decided to set some strict rules for derivative products like credit default swaps. We can’t really expect to be creating new jobs in America if we don’t get rid of incentives to destroy the jobs we do have.