Post by unlawflcombatnt on Feb 3, 2007 4:51:08 GMT -6
Below is an excerpt from a speech made by Mark Reutter from the organization MakingSteel.com. It is a classic tale of Corporate greed and malfeasance in the steel industry. Corporate greed & sleazy behavior has become the rule, not the exception, in today's Corporate boardrooms. Though the article references the steel industry specifically, the same is true in many other industries as well.
www.makingsteel.com/TMA_speech.html
"Morally Bankrupt
Speech before the Great Lakes chapters of the Turnaround Management Association
by Mark Reutter
Posted 8/30/06....
Here is the text of the speech, edited for publication:
It was three years ago on March 24, 2003, when 71-year-old Rudolph Woods found out that the secure retirement he had counted on was about to disappear. On that day, Judge Burton D. Lifland of the U.S. Bankruptcy Court of the Southern District of New York approved Bethlehem Steel’s plan to stop paying medical benefits to its retirees and dependents.
Mr. Woods, an Army veteran, had worked for 40 years at the steel plant at Sparrows Point outside of Baltimore, before retiring in 1996. Now he was sick. A third stroke had left him confined to a wheelchair when he came to the Steelworkers Hall in East Baltimore to hear the news about the termination of benefits. “It’s a shame after the years of working for them that they sell us down the drain and throw us away,” he said. (1)
Jesse Godwin, age 84, walked into the union hall with the help of two canes and his daughter. Four decades of working in the tinplate mill had taken its toll on more than his legs. He had diabetes and congestive heart failure. Stanley Dondalski was hooked up to a small oxygen tank with tubes that ran into his nostrils. He had worked at Sparrows Point for 39 years, and now he suffered from asbestosis.
On “Black Monday 2003,” 95,000 retirees and dependents of Bethlehem Steel lost their health-care and life insurance benefits, effective April 1, 2003. Their numbers included not just unionized blue-collar workers, but also salesmen, secretaries, engineers, mid-level managers, and lawyers. Several thousand of them live not so far from this resort center around the once enormous mill at Lackawanna, N.Y.
Others lived in Pennsylvania – Johnstown and Conshohocken, Steelton and Bethlehem – as well as in Indiana and in the Iron Ore Range of Minnesota.
To be sure, the fallout from the largest bankruptcy in the American steel industry was not limited to retirees. Over the previous 15 years, Bethlehem common stock – once the bluest of blue chips – lost 99.6 percent of its value, which wiped out thousands of shareholders. Suppliers also were affected by Bethlehem’s unpaid bills, and some of them also tumbled into bankruptcy.
But the fate of the 95,000 seniors was most striking given that the former Bethlehem mills were operating profitably within months of their May 2003 sale to the International Steel Group, a company formed by New York financier Wilbur Ross to buy steel companies out of bankruptcy.
Ross had purchased Bethlehem as well as LTV of Cleveland in prearranged asset sales that followed the termination of the predecessor companies’ medical benefit plans. The companies’ underfunded pensions also were terminated and shifted to the PBGC. In the five years prior to the termination of Bethlehem Steel’s pension plan, the company had contributed a mere $71.3 million to the plan.
At termination, PBGC was left with the responsibility of paying $4.3 billion in unfunded liabilities promised to Bethlehem retirees. In terms of health-care benefits, the asset sale signed off by Beth Steel’s CEO and board of directors wiped away $3 billion worth of retiree health-care obligations – or more than double the entire $1.4 billion price that the Ross group paid for the assets of the nation’s second largest steelmaker. (2)
A generation ago, most executives would have sooner committed suicide than betray the trust of their retired employees. But in the new century, retirees have become targets of “heads-I-win, tails-you lose” Chapter 11 reorganizations.
About 150 major public corporations are now in some stage of Chapter 11 reorganization. This includes two of the nation's leading airlines and the world’s largest auto-parts maker, Delphi Corp. Steve Miller, who orchestrated the Beth handover to Wilbur Ross as the steelmaker’s chairman and CEO, predicts that Chapter 11 cases will only grow in the future.
Bankruptcy is a growth industry, Miller told the Detroit Economic Club in a speech in April 2006. Miller was hired last year as CEO of Delphi and promptly placed the auto-parts maker into Chapter 11.
So why the surge in corporate bankruptcies when the economy has expanded steadily since the 2001 recession?
The explanation heard most often is twofold: global competition and out-of-control “legacy” costs. Competition from low-wage assembly plants in China and Mexico is making life difficult for American manufacturers. But many of the wounds are self-inflicted. And Chapter 11 encourages clever guys like Miller and Ross to game the system.
Miller is emblematic of the shifting nature of bankruptcy law from a court of last resort to a venue of choice for sophisticated moneymen. Boasting an MBA from Stanford and a law degree from Harvard (despite the Harvard degree, he flunked the Oregon bar exam), Miller retired as vice chairman of Chrysler in 1992 to embark on a second career as a “serial CEO.”
Before taking the reins at Delphi, Miller was CEO or chairman or both of construction company Morrison Knudsen; auto-parts maker Federal-Mogul; trash-hauler Waste Management; insurance company Aetna; and steelmaker Bethlehem. In most cases, Miller headed each company for a very brief period, averaging about 18 months, just enough to steer the company through Chapter 11. Miller also sits on the board of United Airlines and played a pivotal background role in the contentious Chapter 11 reorganization of UAL, United’s parent.
Matching this “serial CEO’s” experience on the other side of the bankruptcy process is Wilbur Ross. A veteran Rothschild banker, Ross left the international private banking house amicably in 2001 to form his own boutique buy-out firm, W.L. Ross & Co., to buy distressed properties.
Ross first attracted notice in 2002 when he purchased the assets of LTV, the Cleveland steelmaker. The company had filed for bankruptcy in December 2000. Its collapse seems to doom steelmaking in Ohio’s Cuyahoga Valley. The bankruptcy judge had authorized the company to bank the furnace fires and liquidate. At this dire moment, Ross entered as the company’s deep-pocket savior. He formed ISG to take over the company’s physical assets, but not the health-care coverage of its 40,000 retirees.
He offered a little more than $300 million for assets with a book value of $2.5 billion. Because the retirees were unsecured creditors of the LTV estate, and the estate had nothing to offer them after accepting Ross’ offer, they were stripped of their health-care benefits. With the approval of the United Steelworkers president Leo Gerard (advised by former Lazard Frères banker Ron Bloom), Ross cut 4,000 of the 7,000 jobs and restarted operations.
The press hailed this move as brilliant, and, donning a Steelworkers hardhat, Ross declared himself a patriotic businessman seeking to save American steel from the ravages of global competition.
Ross performed the same financial operation on Bethlehem Steel a year later. He offered CEO Steve Miller $1.4 billion for the mills so long as Miller first chopped off the retiree health benefits. (Bethlehem’s pension plans had already been terminated and taken over by PBGC).
So on March 24, 2003, Miller dispatched a phalanx of lawyers to the courtroom of Judge Lifland. Detailing Bethlehem’s financial losses, the lead lawyer told the judge, “From day one, the public message has been that this company could not survive under the burden of its legacy costs.”
Thus stage-managed and approved by the court, Bethlehem was relieved of its retiree costs, and sick men in wheelchairs – men like Rudolph Woods – were hustled to the union hall and told that they were expendable.
It was one of those disembodied tactics of modern business life in which there is no apparent crime, only victims – 95,000 Americans in this case, who were left stranded between private medical insurance costing $10,000 or so a year and Medicare.
In his speech before the Detroit Economic Club, Miller pronounced the Bethlehem reorganization “a success story” and a model for future turnarounds. When Miller left Bethlehem, complimenting himself for another mission accomplished, he said: “I had two objectives. One was to put the plants in safe hands. The other was to do the best I could for the retirees. The second, I didn’t achieve. I was disappointed for the retirees. But there was no way to generate the millions needed to take on the legacy costs. That dog won’t hunt.” (3)
So the “dog won’t hunt” because the money just wasn’t there? Let’s look at what happened since Ross’ ISG bought these properties. On October 25, 2004, Ross struck a deal with Indian industrialist Lakshmi Mittal to sell ISG for $4.5 billion.
When the dust settled, Ross personally cashed out with $267 million in stock profits. He took half that amount in cash and half in Mittal Steel stock when the transaction was completed on April 13, 2005.
The sale ended a period of great activity by W.L. Ross & Co. In December 2003, Ross had arranged an IPO (initial public offering) to turn ISG into a public company that was traded on the New York Stock Exchange. Almost immediately thereafter, W.L. Ross & Co. began selling its 33 percent stake in ISG.
When ISG was private, Ross had paid an average of $3.42 for each share, but he sold the shares to institutional investors at between $25 and $35 each (the price range of ISG stock on the New York Exchange). These sales netted the so-called Ross Recovery Funds at least $800 million in profits even before his sale to Mittal.
Now let’s look at what happened to those who were left behind. The 95,000 retirees of defunct Bethlehem Steel collectively lost $380 million in health benefits between the time when Judge Lifland terminated the benefits and when Ross agreed to sell the former Bethlehem assets to Mittal.
Over the same period, PBGC paid out roughly $500 million to maintain a reduced level of pension benefits for ex-Bethlehem retirees. Roughly $200 million more in PBGC funds went out to 40,000 retirees at LTV and the 10,000 retirees at Weirton Steel, which also shed their legacy costs before these assets were bought by ISG.
In back-of-the-envelope terms, about 145,000 Americans and PBGC had to absorb about $1.1 billion in losses arising from Wilbur Ross’ rescue of the steel industry. Lord help the next group of Americans to get saved by Wilbur Ross.
What’s important to remember is that Ross did next to nothing to improve the properties he purchased out of bankruptcy. Little capital investment was made by ISG during its three-year span as a steel company. Nor did ISG develop new markets for steel or find any new innovative niche for its products.
Instead, Ross kept the mills running and, bolstered by rising steel prices, diverted the cash flow that had been going to retirees and a larger workforce to himself and his co-investors. These co-investors, by the way, were not little old ladies from Dubuque. They were savvy insiders such as Michael F. Price, whose Franklin Mutual Advisors scored a seven-fold gain when its ISG stake was sold to Mittal. I guess it’s these kinds of fabulous returns to the very rich that prompted Steve Miller to call the Bethlehem bankruptcy a success story....."
What a "heart-warming" story.
www.makingsteel.com/TMA_speech.html
"Morally Bankrupt
Speech before the Great Lakes chapters of the Turnaround Management Association
by Mark Reutter
Posted 8/30/06....
Here is the text of the speech, edited for publication:
It was three years ago on March 24, 2003, when 71-year-old Rudolph Woods found out that the secure retirement he had counted on was about to disappear. On that day, Judge Burton D. Lifland of the U.S. Bankruptcy Court of the Southern District of New York approved Bethlehem Steel’s plan to stop paying medical benefits to its retirees and dependents.
Mr. Woods, an Army veteran, had worked for 40 years at the steel plant at Sparrows Point outside of Baltimore, before retiring in 1996. Now he was sick. A third stroke had left him confined to a wheelchair when he came to the Steelworkers Hall in East Baltimore to hear the news about the termination of benefits. “It’s a shame after the years of working for them that they sell us down the drain and throw us away,” he said. (1)
Jesse Godwin, age 84, walked into the union hall with the help of two canes and his daughter. Four decades of working in the tinplate mill had taken its toll on more than his legs. He had diabetes and congestive heart failure. Stanley Dondalski was hooked up to a small oxygen tank with tubes that ran into his nostrils. He had worked at Sparrows Point for 39 years, and now he suffered from asbestosis.
On “Black Monday 2003,” 95,000 retirees and dependents of Bethlehem Steel lost their health-care and life insurance benefits, effective April 1, 2003. Their numbers included not just unionized blue-collar workers, but also salesmen, secretaries, engineers, mid-level managers, and lawyers. Several thousand of them live not so far from this resort center around the once enormous mill at Lackawanna, N.Y.
Others lived in Pennsylvania – Johnstown and Conshohocken, Steelton and Bethlehem – as well as in Indiana and in the Iron Ore Range of Minnesota.
To be sure, the fallout from the largest bankruptcy in the American steel industry was not limited to retirees. Over the previous 15 years, Bethlehem common stock – once the bluest of blue chips – lost 99.6 percent of its value, which wiped out thousands of shareholders. Suppliers also were affected by Bethlehem’s unpaid bills, and some of them also tumbled into bankruptcy.
But the fate of the 95,000 seniors was most striking given that the former Bethlehem mills were operating profitably within months of their May 2003 sale to the International Steel Group, a company formed by New York financier Wilbur Ross to buy steel companies out of bankruptcy.
Ross had purchased Bethlehem as well as LTV of Cleveland in prearranged asset sales that followed the termination of the predecessor companies’ medical benefit plans. The companies’ underfunded pensions also were terminated and shifted to the PBGC. In the five years prior to the termination of Bethlehem Steel’s pension plan, the company had contributed a mere $71.3 million to the plan.
At termination, PBGC was left with the responsibility of paying $4.3 billion in unfunded liabilities promised to Bethlehem retirees. In terms of health-care benefits, the asset sale signed off by Beth Steel’s CEO and board of directors wiped away $3 billion worth of retiree health-care obligations – or more than double the entire $1.4 billion price that the Ross group paid for the assets of the nation’s second largest steelmaker. (2)
A generation ago, most executives would have sooner committed suicide than betray the trust of their retired employees. But in the new century, retirees have become targets of “heads-I-win, tails-you lose” Chapter 11 reorganizations.
About 150 major public corporations are now in some stage of Chapter 11 reorganization. This includes two of the nation's leading airlines and the world’s largest auto-parts maker, Delphi Corp. Steve Miller, who orchestrated the Beth handover to Wilbur Ross as the steelmaker’s chairman and CEO, predicts that Chapter 11 cases will only grow in the future.
Bankruptcy is a growth industry, Miller told the Detroit Economic Club in a speech in April 2006. Miller was hired last year as CEO of Delphi and promptly placed the auto-parts maker into Chapter 11.
So why the surge in corporate bankruptcies when the economy has expanded steadily since the 2001 recession?
The explanation heard most often is twofold: global competition and out-of-control “legacy” costs. Competition from low-wage assembly plants in China and Mexico is making life difficult for American manufacturers. But many of the wounds are self-inflicted. And Chapter 11 encourages clever guys like Miller and Ross to game the system.
Miller is emblematic of the shifting nature of bankruptcy law from a court of last resort to a venue of choice for sophisticated moneymen. Boasting an MBA from Stanford and a law degree from Harvard (despite the Harvard degree, he flunked the Oregon bar exam), Miller retired as vice chairman of Chrysler in 1992 to embark on a second career as a “serial CEO.”
Before taking the reins at Delphi, Miller was CEO or chairman or both of construction company Morrison Knudsen; auto-parts maker Federal-Mogul; trash-hauler Waste Management; insurance company Aetna; and steelmaker Bethlehem. In most cases, Miller headed each company for a very brief period, averaging about 18 months, just enough to steer the company through Chapter 11. Miller also sits on the board of United Airlines and played a pivotal background role in the contentious Chapter 11 reorganization of UAL, United’s parent.
Matching this “serial CEO’s” experience on the other side of the bankruptcy process is Wilbur Ross. A veteran Rothschild banker, Ross left the international private banking house amicably in 2001 to form his own boutique buy-out firm, W.L. Ross & Co., to buy distressed properties.
Ross first attracted notice in 2002 when he purchased the assets of LTV, the Cleveland steelmaker. The company had filed for bankruptcy in December 2000. Its collapse seems to doom steelmaking in Ohio’s Cuyahoga Valley. The bankruptcy judge had authorized the company to bank the furnace fires and liquidate. At this dire moment, Ross entered as the company’s deep-pocket savior. He formed ISG to take over the company’s physical assets, but not the health-care coverage of its 40,000 retirees.
He offered a little more than $300 million for assets with a book value of $2.5 billion. Because the retirees were unsecured creditors of the LTV estate, and the estate had nothing to offer them after accepting Ross’ offer, they were stripped of their health-care benefits. With the approval of the United Steelworkers president Leo Gerard (advised by former Lazard Frères banker Ron Bloom), Ross cut 4,000 of the 7,000 jobs and restarted operations.
The press hailed this move as brilliant, and, donning a Steelworkers hardhat, Ross declared himself a patriotic businessman seeking to save American steel from the ravages of global competition.
Ross performed the same financial operation on Bethlehem Steel a year later. He offered CEO Steve Miller $1.4 billion for the mills so long as Miller first chopped off the retiree health benefits. (Bethlehem’s pension plans had already been terminated and taken over by PBGC).
So on March 24, 2003, Miller dispatched a phalanx of lawyers to the courtroom of Judge Lifland. Detailing Bethlehem’s financial losses, the lead lawyer told the judge, “From day one, the public message has been that this company could not survive under the burden of its legacy costs.”
Thus stage-managed and approved by the court, Bethlehem was relieved of its retiree costs, and sick men in wheelchairs – men like Rudolph Woods – were hustled to the union hall and told that they were expendable.
It was one of those disembodied tactics of modern business life in which there is no apparent crime, only victims – 95,000 Americans in this case, who were left stranded between private medical insurance costing $10,000 or so a year and Medicare.
In his speech before the Detroit Economic Club, Miller pronounced the Bethlehem reorganization “a success story” and a model for future turnarounds. When Miller left Bethlehem, complimenting himself for another mission accomplished, he said: “I had two objectives. One was to put the plants in safe hands. The other was to do the best I could for the retirees. The second, I didn’t achieve. I was disappointed for the retirees. But there was no way to generate the millions needed to take on the legacy costs. That dog won’t hunt.” (3)
So the “dog won’t hunt” because the money just wasn’t there? Let’s look at what happened since Ross’ ISG bought these properties. On October 25, 2004, Ross struck a deal with Indian industrialist Lakshmi Mittal to sell ISG for $4.5 billion.
When the dust settled, Ross personally cashed out with $267 million in stock profits. He took half that amount in cash and half in Mittal Steel stock when the transaction was completed on April 13, 2005.
The sale ended a period of great activity by W.L. Ross & Co. In December 2003, Ross had arranged an IPO (initial public offering) to turn ISG into a public company that was traded on the New York Stock Exchange. Almost immediately thereafter, W.L. Ross & Co. began selling its 33 percent stake in ISG.
When ISG was private, Ross had paid an average of $3.42 for each share, but he sold the shares to institutional investors at between $25 and $35 each (the price range of ISG stock on the New York Exchange). These sales netted the so-called Ross Recovery Funds at least $800 million in profits even before his sale to Mittal.
Now let’s look at what happened to those who were left behind. The 95,000 retirees of defunct Bethlehem Steel collectively lost $380 million in health benefits between the time when Judge Lifland terminated the benefits and when Ross agreed to sell the former Bethlehem assets to Mittal.
Over the same period, PBGC paid out roughly $500 million to maintain a reduced level of pension benefits for ex-Bethlehem retirees. Roughly $200 million more in PBGC funds went out to 40,000 retirees at LTV and the 10,000 retirees at Weirton Steel, which also shed their legacy costs before these assets were bought by ISG.
In back-of-the-envelope terms, about 145,000 Americans and PBGC had to absorb about $1.1 billion in losses arising from Wilbur Ross’ rescue of the steel industry. Lord help the next group of Americans to get saved by Wilbur Ross.
What’s important to remember is that Ross did next to nothing to improve the properties he purchased out of bankruptcy. Little capital investment was made by ISG during its three-year span as a steel company. Nor did ISG develop new markets for steel or find any new innovative niche for its products.
Instead, Ross kept the mills running and, bolstered by rising steel prices, diverted the cash flow that had been going to retirees and a larger workforce to himself and his co-investors. These co-investors, by the way, were not little old ladies from Dubuque. They were savvy insiders such as Michael F. Price, whose Franklin Mutual Advisors scored a seven-fold gain when its ISG stake was sold to Mittal. I guess it’s these kinds of fabulous returns to the very rich that prompted Steve Miller to call the Bethlehem bankruptcy a success story....."
What a "heart-warming" story.