Saturday, November 17, 2012

Junk Food Debacle

The broadcast media division of the Republican Party has wasted no time blaming unions for the closing of Hostess' factories and plans tosell of its brands and liquidate the company.   Media Matters noted

Martha MacCallum, co-host of Fox News' America's Newsroom, introduced a segment on the Hostess bankruptcy by saying the company is "blaming a worker's strike for crippling their ability to make and deliver their products." At the end of the report, co-host Bill Hemmer blamed the coming job losses at the company on "a labor dispute," suggesting that the union had put "18,000 jobs on the line." MacCallum said the employees were "paying dues to the union and then the union won't make a deal." 

Rush Limbaugh never misses an opportunity to blame workers and claimed

Yeah, I'm gonna talk about Hostess.  You know what, 18,500 people gone, Hostess Twinkies, Ding Dongs, shut down.  Some people might think it's a buy opportunity if you want to get in the Ding Dong business.  But folks, if you need an indication that the Democrats will never compromise on anything, look at this.  Hostess is going out of business because of unions.

While Rush deftly, without evidence or logic, simultaneously blames unions and the Democratic Party for corporate failure, Dean Baker sets us straight, explaining

Hostess has been relying on pretty much the same mix of products for decades. While other companies have sought to adjust to changing consumer tastes, Hostess still gets the vast majority of its revenue from a relatively small number of products that it has been selling in largely the same form since the sixties. This failure to innovate was the main reason that the company first went into bankruptcy in 2004.

Hostess remained in bankruptcy for five years until it was brought out of bankruptcy in February of 2009 by Ripplewood Holdings, a private equity company. Remarkably, it exited bankruptcy with nearly $670 million in debt, almost 50 percent more than the $450 million it owed when it went into bankruptcy.

Usually companies use bankruptcy to shed debt. With Hostess the opposite was true. This meant that Ripplewood was taking a heavily leveraged gamble. If the company survived, it would get a very high return on its investment. However there was a strong likelihood that the company would not be able to make it given its extraordinary debt burden and the weakness of the economy.

Ripplewood first asked workers for concessions in August of 2011. The workers refused since they had made substantial concessions in 2008 to facilitate the exit from bankruptcy. The concessions did not prevent layoffs of close to 20 percent of the workforce. The company also had stopped making payment to the pension fund in July of 2011 and is now more than $160 million in arrears.

Ripplewood took the company back into bankruptcy in January of this year, owing close to $1 billion. It has used bankruptcy to impose new contract terms on workers. This is the immediate cause of the current impasse, with the bakery workers’ union refusing to accept the reductions in pay and benefits and changes in work rules demanded by management.

Workers had several important issues to consider beyond just the prospect of working for less pay and under worse conditions. First, and most importantly, there was little reason to have much confidence in the current management team. They had done nothing to turn the company around in the three years since the last bankruptcy and there was little reason to believe that they would do any better going forward.

Accepting new concessions would provide no guarantee of job security. In fact, management wanted the unions to agree to the closure of 10-12 plants (of its choosing) as part of a new contract. This means that many of the company’s 18,000 workers would soon have been laid off even if the workers had accepted management’s terms.

Second, management was not shy about rewarding itself in spite of the company’s poor financial condition. The CEO upped his annual pay to $2.25 million and other top executives got raises of 35-80 percent. This doesn’t seem like the behavior of management that puts the survival of the company first.

Third, the financial situation of the pension has to be a top concern for workers. While the pension is guaranteed by the Pension Benefit Guarantee Corporation, the guarantee for multi-employer plans like the one at Hostess is limited. If the plan were to become insolvent then many workers would see large cuts in benefits.

From this standpoint, if Hostess were to continue to put off contributions to the pension and allow it to become badly underfunded, then workers could be looking at sharply reduced pensions in retirement. Workers who are approaching retirement age may view this prospect as a far greater danger than the risk of losing their job at this stage in their career.

Limbaugh blames AFL-CIO President Richard Trumka for maintaining "What’s happening with Hostess Brands is a microcosm of what’s wrong with America, as Bain-style Wall Street vultures make themselves rich by making America poor.  Crony capitalism and consistently poor management drove Hostess into the ground, but its workers are paying the price."   After a campaign in which the Democratic candidate rarely criticized venture capitalism and his most effective (other than Chris Christie) surrogate, Bill Clinton, unsurprisingly completely avoided the issue, it's downright pleasing to hear someone defend unions and workers by highlighting the recklessness of "job creators."  Months ago, Robert Reich illustrated how it works in the world of venture capitalism:

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