Monday, September 28, 2009


The following has become a standard move for failing businesses ...

As we saw in the financial sector during the market meltdown large companies that get into financial trouble often pay their executives a lot of money, regardless of performance ... When companies (like Bethlehem Steel and U.S. Air) actually go bankrupt company executives will drop their underfunded pension programs in the laps of the the federal government ... The federal government, in turn, is charged with stabilizing and fulfilling "private" retirement obligations. The following helps explain how this works.

In January Nortel Networks filed for bankruptcy protection in the U.S. and Canada. Because Nortel had underfunded their retirement program their workers were left with roughly 58 cents on the dollar for their pensions. As a result of Nortel's bankruptcy the federal Pension Benefit Guaranty Corporation (PBGC) - which receives no money from general tax revenues - stepped in and took over Nortel's underfunded pension plan in July, and became its trustee on September 8.

Now for the fun part.

At the same time the company was going bankrupt Nortel was also cleared by bankruptcy judges to pay it's top executives and managers about $45 million in bonuses. The rationale was a simple and, by now, a standard industry meme: They had to compensate these talented people for their "high level of expertise." If you're wondering, since 2005 these talented experts helped the company lose over $7 billion.

Today, while Nortel Networks Retirement Income Plan has assets of $716 million, it has liabilities of $1.23 billion. Still, the PBGC believes that they will be able to cover the entire $514 million pension shortfall through other investments and insurance premiums (although this is far from a sure thing).

If you're keeping score at home, this is what we have.

* GOVERNMENT SAFETY NET: Private companies that go belly up while paying their executives big bonuses have found they don't have much to worry about. When it comes to funding pensions they are learning that the federal government will eventually pick up the tab, and their mess.

* ARTIFICIAL PROFITS/INFLATED COMPENSATION: Company board members and other executives who see the PBGC as a safety net are then able to shift money that should have gone into pension funds into other areas. This artificially inflates profits and, no doubt, increases bonuses.

* LOST STATE REVENUE/CORPORATE SUBSIDY: When money that the PBGC earns is siphoned off to pay for underfunded corporate pension funds - instead of being looped back as "profits" into the general fund - the process acts as yet another corporate subsidy.
I don't know about anyone else, but these developments tell me that we need tax clawbacks applied to the salaries and bonuses of executives who run their companies into the ground, and then dump their underfunded pensions on the federal government.

- Mark

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