Saturday, November 17, 2012

HOSTESS AND THE WEALTH EXTRACTION MODEL IN REAL TIME

The demise of Hostess is a long and complex story, as Fortune's "Hostess is bankrupt ... again" makes clear. If you don't have the time to read the entire piece this about sums it up ...



The real story behind the Hostess mess can be summarized with the following:

1) While the Hostess brand is still viable many products are tired and out of step.
2) Bain Capital-style investment and management techniques are now driving this show.
3) Bankruptcy law, tax deduction games, and "capital loss" and "carry forward" tax law make it clear that the hedge funds will win.

The last point here is key. The hedge funds are at the top of the liquidation, bankruptcy, and tax food chain. While the Fortune article doesn't mention it the players behind the hedge funds also know that they have PBGC - corporate America's pension safety net (PBGC is really a corporate dump) - plus years of favorable legislation and favorable tax laws at their back.

This means the hedge funds can make money even if bankruptcy is declared and losses are filed.

People can talk all they want about pensions and unions, but not only have concessions been made (and further concessions promised) but current tax law means the hedge funds can drive pensions into the ground, declare bankruptcy if they don't get additional concessions, and still win financially.

Whatever bankruptcy and restructuring emerges from the Hostess case one thing is clear. This is a classic case of wealth extraction, where years of favorable legislation and the tax code subsidize our market players.

- Mark

P.S. On the lighter side ...


No comments: