The Beginning of the End of Corporate Gaming of the Bankruptcy Laws?
It will take a few more months of legal maneuvering before American finally throws in the towel and agrees to a US Airways merger. American executives and directors will no doubt have to be bought off with golden parachutes, while trade creditors such as Hewlett-Packard and Boeing will likely be brought on board with promises of future contracts. That’s how things work in the bankruptcy racket. And all of it will be negotiated behind closed doors by legions of bankruptcy lawyers whose $1,000-an-hour fees make those $250-an-hour pilots look like pikers.
For years now, Corporate America has viewed the bankruptcy court as a blunt instrument by which failed executives and directors can shift the burden of their mistakes onto shareholders, employees and suppliers. The auto industry bailout orchestrated by the Obama administration posed the first challenge to that assumption. Now the unions at American airlines have taken another step in curbing this flagrant corporate abuse and restoring the rule of law.
— “Two can play the airline bankruptcy game,” Steven Pearlstein, Washington Post, Apr. 28 (Boldface mine)
Enough said. I think. Except for this: I’d love to see Obama mention this and explain it during the campaign, and not fear that it’s too complicated to be explained briefly. It’s not.
Wow, Great Post, I write alot regarding the Summit 103 Bankruptcy and the Petters Bankruptcy and it sure seem that the Bankruptcy Lawyers end up making all the money.
Thanks. And thanks to Steven Pearlstein, whose article is very well worth reading.
It should be noted that as a result of the recapitalization of a company following chapter 11 a new board of directors will likely be put in place which will result in new managment as well.
Now one change I would make is to provide that supplemental retirement and deferred income accounts (read a proxy statement about these, supplemental retirement pays a defined benefit above the ERISA limit, and execs are permitted to defer some part of their comphensation with generous interest paid as well), should be placed on the same plane as the common shareholders, so that they get wiped out first.
Of course if I had my way the non qualified deferred income programs should be taxable immediatly.
Bev:
I have 100 shares of AMR stock in the hope they will come back. 🙂
Yeah, once the merger goes through, they should start to recover some value. Ooosh.
Yeah, once the merger goes through, they should start to recover some value. I just googled it and saw that the stock has been trading at less than a dollar since Nov. Ooosh. I’m surprised the stock isn’t being just discharged in the bankruptcy. Or will it be?
some of the guys who worked the factory floor for GM had the bulk of their retirement funds in old GM stock, which is now worthless…they dont understand how the company could do that to them & survive to profit another day…
Our neighbor just got bumped up to capt. $180 per hr vs $130. She has 10 years seniority. Hours count only when in the cockpit. Travel time and prep time does not count.
This seems to imply that most (or some significant percentage) of business bankruptcies are part of a racket. huh.
Most likely the common shares will be cancelled.
In the olden days (example, Chrysler in the 1980s), the stock would come back afterwards. When Chrysler needed bailing out in the 80s, the stock hit 1.5 at the low, then rebounded back into the 30s (before I stopped keeping track of it).
Today (example GM a couple years ago), the old stock gets burdened with the bad debts (it was relabeled MOTQQ one weekend), then a new stock will be issued with the good debts/assets transfered to it. The old stock ends up at 0, and the old stock holders get shafted. In the meantime, the mismanagers that screwed the company into the ground in the first place get to pay themselves huge “retention bonuses” which get pitched to willing/complicent bankruptcy courts as a way to keep “top talent” in order to turn the business around. Never mind that “top talent” got them into trouble in the first place.
These sort of shenanigans are why I stay out of the stock market (I only have 3 stocks remaining, of which 2 are held for purely sentimental reasons). I’m not a “full time professional” so I have to stick with mutual funds, and index funds at that. While some of my stocks did well (F tripled while I held it), the majority did horrible (one, HTMXQ, that ended up in bankruptcy lost more than 99%).
That is one way of doing liquidation, it is sometimes called a phoenix company. You bundle all of the assets into a subsidiary, leave the liabilities with the insolvent parent company. The subsidiary is sold as a going concern and the proceeds of the sale used to compensate the creditors of the insolvent company. That for example is what the UK is doing with Northern Rock, it is very common with small and medium sized insolvent companies
Of course the real scandal is that companies can do Ch. 11, getting rid of debts and inconvenient contractual obligations, but individuals can’t at least insofar as mortgage obligations and college debt are concerned. No wonder the voters are pissed and just lash out even though it results in a lunatic House of Representatives.
Odd perspective. This is a corporate takeover. The unions are just the convenient tool for a different management team to achieve ITS objectives. Without the takeover, the unions had no chance.