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Blumgart reports: "Hedge funds took profits and piled on millions in debt at Hostess. They created this bankruptcy, not unions."

Striking workers Nam Phan, left, and Randy Goodwin picket outside a Hostess Brand plant, last week in Biddeford, Maine. (photo: Robert F. Bukaty/AP)
Striking workers Nam Phan, left, and Randy Goodwin picket outside a Hostess Brand plant, last week in Biddeford, Maine. (photo: Robert F. Bukaty/AP)


Vulture Capitalism, Not Unions, Killed Twinkies

By Jake Blumgart, Salon

20 November 12

 

Hedge funds took profits and piled on millions in debt at Hostess. They created this bankruptcy, not unions

s the final Twinkies, Sno-Balls and those glowing orange cupcakes were stuffed with cream and wrapped in cellophane on Friday, the business world and much of the news media knew who was to blame for this dying American icon. It was the unions.

The Wall Street Journal described the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union as "The union that brought the 85-year-old baker of Twinkies and Wonder Bread to its knees." Over at RedState, a headline tried to mix anti-union sentiment with conservative humor: "The Demise of Twinkies? Yes, It's True. Parasitic Unions Kill Their Hosts (or, in this case, Hostess)."

As Hostess moved to end its operations last week - a bankruptcy judge asked the company Monday to try mediation with its unions; those talks are scheduled to begin today - commentators were eager to blame the rigidity of unions.

But the story is far more complicated than that - and in some ways, the exact opposite of the tale pushed by those on the right. It's the story of two bankruptcies, hundreds of millions of givebacks from Hostess unions and hundreds of millions of debt piled onto the company by venture capitalists. It's a story of management that boosted its own salaries, while failing to make agreed payments into workers' pension funds. And it's a story of changing tastes and diets.

To begin with, when was the last time you ate a Twinkie or chose spongy Wonder Bread over an artisanal or organic load? The company simply hasn't been able to adequately compete due to a stodgy, moribund management that did not act to diversify a product base that hasn't changed with the times (unless you count 100-calorie Twinkies packs). As the New York Times reported way back on Sept. 23, 2004, "People are still eating Hostess Twinkies and Wonder Bread, but the problem for Interstate Bakeries is that they are eating less of them."

For all these reasons, Hostess (then known as Interstate) initially entered bankruptcy in 2004, with uncomfortably close to half a billion dollars in debt. Sixty percent of the debt was owned by hedge funds Silver Point Capital and Monarch Alternative Capital, the rest by an assortment of other lenders. No one who was paying attention to the company's fortunes was surprised by the move. During the nearly five years of its initial bankruptcy, the company accrued even more debt.

As these conditions lingered the workforce agreed to massive pay and benefit cuts in an attempt to keep the company afloat. One 14-year veteran of the company describes the $150 million annual givebacks the union agreed to: "In 2005, before concessions I made $48,000, last year I made $34,000." Pensions and healthcare were cut as well, with labor's total loss equaling $110 million annually.

Following these massive givebacks, a private equity company called Ripplewood Holdings brought the company out of bankruptcy in 2009 for $130 million and rechristened it Hostess Brands. The hedge funds and other lenders forgave some old debt and extended some new debt. Ripplewood convinced the other stakeholders that it could turn the company around and, apparently, convinced them so completely that only Hostess Management and Ripplewood had seats on the board. Neither the unions nor the hedge funds acquired voting seats as part of the deals struck to keep the company afloat. They just trusted Ripplewood to turn things around, implement new technologies, introduce new products, and rebuild aging infrastructure.

That's not how things worked out.

"Ripplewood just failed miserably on implementation," says Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research. "It's been a disaster. Ripplewood did not know what it was doing. They did not introduce any successful new products. Sure, they had high sales revenue but it had been declining since 2004."

As a result of management that still hadn't really attempted to adapt itself to new market realities, the company earned profits in 2011 of $2.5 billion: That's 11 percent less than in 2008, before Ripplewood took over. But thanks to debt approaching $1 billion, Hostess ended 2011 with a loss of $341 million. The CEO who led the company back into bankruptcy? He got a pay raise - while Hostess pushed a 30 percent salary and benefit cut onto its employees. (A previous failed chief executive, Brian J. Driscoll, was pushed out, but only after the board tripled his pay package to $2.55 million.)

That leaves the unions in one corner and the hedge funds and Hostess management in the other. Management ordered the company to stop contributing to the union pension funds, ignoring their obligations under collective bargaining agreements. They have demanded a new round of concessions, which would have doubled insurance premiums, negated all pension obligations, and slashed pay by 27 to 32 percent. Again, the 14-year Hostess bakery veteran: "Remember how I said I made $48,000 in 2005 and $34,000 last year? I would make $25,000 in five years if I took their offer. It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me."

Hostess CEO Greg Rayburn attempted to blame the company's collapse on its workers and, in a move that seems calculated to add insult to injury, today asked a bankruptcy judge permission to pay executives $1.75 million in bonuses to oversee the dissolution of the company (and 18,000-plus union jobs). And that's after a round of executive pay raises earlier this year.

The union, meanwhile, faced an increasingly untenable position. Pick your poison: another round of humiliating concessions resulting in poverty wages and almost no benefits, or go down swinging? The latter may not seem sensible to those judging from 30,000 feet, but clearly the bakery workers were sick and tired of giving in - 92 percent of them voted against accepting the cuts.

"This is the Twinkie cliff that the company drove over: They had fairly extensive (cuts) for a protracted period of time and a failure to adapt to the market," says Harley Shaiken, labor professor at the University of California, Berkeley. "I think why the bakery union refused these steep concessions is because they didn't see a credible plan to get the company out of this. They just saw that they were being asked to bear the brunt of the managerial mistakes. There were no good options, just disastrous and catastrophic options."

Criticism of the Hostess workers seems to be manifested by a more subtle form of union bashing. It's not that unions are greedy, it's that they are outmoded, and the Hostess crisis is emblematic of organized labor's precipitous decline. They are dying because workers don't like them anymore (so this argument goes), precisely because of situations akin to what is unfolding at Hostess. As Diana Reese noted in the Washington Post, quoting the writer Donna Trussell, "Unions clung to an organizational model more suited to a 19th-century economy than the one we have now. That's why they've lost so many members. When unions protect only their own, and leave over 90 percent of the workforce twisting in the wind, they will inspire more envy than support. Adapt or die."

The labor economist for the Heritage Foundation makes a similar argument at the National Review: "A unionized firm takes longer to respond to changing market conditions … Over time they wither away. This is why union membership hit a record low in 2012."

But as we've seen, it wasn't the unions who were inflexible or unwilling to make sacrifices for the good of the company. "In effect, the union, should they give more concessions, is becoming a major investor without representation," says Shaiken. "Unless they get seats on the board or some other form of input." (The most recent deal included a minority stake in the company; it remains to be seen if the company is willing to offer greater control to the workers in exchange for more givebacks.)

Pegging a horrendously managed company's fate to labor's larger troubles provides an exceedingly limited understanding of the wider context. The Hostess debacle is only half the story of labor's decline: Manufacturing companies that are still organized from the glory days of the mid-20th century are seen as representative of the union movement because current American labor law makes it almost impossible to organize workers in, say, the growing service sector. Unionization rates are falling because unorganized companies can bring disproportionate, and often illegal, force to bear with few repercussions.

In a healthier and more just labor system, the Hostess crisis would be seen as the decline of a moribund and dreadfully mismanaged company, not a symptom of organized labor's malaise.

 

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+63 # Third_stone 2012-11-20 16:01
we have had a plague in recent years of management teams who pursue only their personal profit. Romney was a big player in this same game. You get control of the company, you draw out all the cash, you borrow a lot of money against the company's assets, you transfer that cash to your own interests, then you let the company collapse, leaving creditors grabbing any assets they can, those you have not cleverly protected. People are actually hire men who have done this to do it again. It seems as dumb as voting republican.
 
 
+45 # DemocracyNeedsDefenders 2012-11-20 23:22
And this only works because of the tax breaks offered to tbe vultures. There have been several analyses that show that Romney's big business "successes" would have been a wash, or even a loss without the tax breaks.
This is the real "entitlement society": billionaires that receive federal subsidies to steal from everyone else.
 
 
+18 # RLF 2012-11-21 05:16
These vultures have to be in cahutes with the bankers, otherwise they could only do this once. The real source of their financing is state pension funds, union pension funds, etc. These vultures could sell stripes to a tiger and are perfectly happy to pass dollars to get what they want. This type of business model should have been illegalized under Reagan but wasn't and we haven't heard anything bad about it since. These guys and the banksters are CRIMINALS...but Holder has no balls...or is only doing what he is told by Obama.
 
 
+53 # TrueAmericanPatriot 2012-11-20 18:25
It's time to reexamine this "vulture capitalism" practiced by these greedy, self-serving parasites! Interesting, how they plunder companies of all their liquid assets, leaving workers and investors high and dry. Then SHAMELESSLY LYING on the UNIONS!!! They are NOTHING BUT PROFESSIONAL THIEVES disguised as BUSINESSMEN! Time to get something done to stop this madness!
 
 
+27 # moreover 2012-11-20 21:07
In Germany and other civilized countries unions take part in management decisions, bringing their expertise to the table. In a way the US situation reminds me of Islamic countries where half the population is shut out from active participation. Here it's workers - and then they wonder why things go sideways.
 
 
+21 # WestWinds 2012-11-20 21:10
The Mayans may complain that their calendar did not predict the end of the world, but it is the end of a world that we have known with over 15,000 independent newspapers across the country being consolidated into the hands of about five greedy vultures, the end of physicians as sole practitioners as they sign up to become the paid hack slaves of privatized Regional Medical Centers; the new HMO, and the death of Hostess along side of Sarah Lee; two, now bygone, American icons. This is only the tip of the iceberg, as they say, where we are concerned. The New World Order is here and 2012 marks the beginning of them taking full control. Americans were lazy in their vigilance to protect their freedoms and this is the results. Ben Franklin was correct to be skeptical about our retaining the republic and the democracy he gave us; we couldn't trade it away fast enough.
 
 
+12 # Rick Levy 2012-11-20 21:37
"Neither the unions nor the hedge funds acquired voting seats as part of the deals struck to keep the company afloat. They just trusted Ripplewood to turn things around, implement new technologies, introduce new products, and rebuild aging infrastructure"

I can't speak for the hedge funds but it seems to me that the unions made a big mistake by trusting Ripplewood and not demanding voting seats.
 
 
+6 # Holmes 2012-11-20 22:40
Just like the conquers of old. Alexander the great is an example. Move across the face of the earth, strip temples of their gold and silver and leave the wreckage behind. 5000 years of history of India can be surmised that way, with home grown empires which rose and crash or those like Alexander who would try to invade. Muslim, then Moguls, et al, then Brit. Raj.

This is just continuing the same methods. Come the revolution who is to be stood against the wall and at least looted and ... as well?
 
 
+11 # RMDC 2012-11-21 02:28
Had this been Bain Capital that sucked the life blood out of Hostess, I wonder what Romney's loss in the election would have been. It takes an icon like Hostess to make clear just how vulture capitalists and hedge funds work. They defraud and loot any business that has a base from which to leverage new and risky loans.

Romney may have lost but so far the hedge funds and derivative traders still rule the world. No political force has the balls to take them on. Obama was in Burma this week trying to open the nation to US investments. Now Burma will be looted.
 
 
+16 # MainStreetMentor 2012-11-21 02:36
There is a sinister cannibalistic thread, deeply embedded and inherent within the predatory practices of vulture capitalism – at least as practiced by the corporations depicted within this article. I say “sinister” because current business practices have been allowed to have the previously most effective “checks and balances” removed. Within that eradication comes the potential for the unethical element of private enterprise to eventually “eat” itself and our natural resources, our working class, and, ultimately both private and public business entities – for the unchecked, unbridled, unrestricted greed it incubates and breeds is a cancer.
 
 
+9 # RMDC 2012-11-21 03:10
The age of Englightenment and its ideas about human rights is over. We are now in the age of capital. Capital preservation is a higher political goal than the preservation of human life. That is why corporations are now our ruling class, as people. Corporations are the body of capital. Capital is the soul and the corporation (made up of many mere humans) is the body. Government is all about enhancing the freedoms and rights of capital.

I listened to the really horrible speech Obama made in Burma. He talked all about the rights that Burmans would have in the coming years – rights to own private property, free markets, the world community, and so on. But really all he meant was the right of corporations to buy up the natural resources of Burma and to invest (i.e., hijack) their economy. THe hedge funds will come to Burma and indebt its government and begin to extract wealth from the people. In this, Obama will be their cheerleader.

It's over for human beings. Capital is now our world soul.
 
 
+3 # dkonstruction 2012-11-21 08:55
In general i agree with you but i would add that "capital" (at least as far as Marx defined it) is not a thing but rather it is a social relation and as such it is never uncontested. The same goes for gov't in that Marx (and Lenin for that matter) were clear that while "the state" is always "in the last instance" the state of the ruling class it too is contested terrain or put another way is part of the class struggle and not external to it. This is not to say that we simply need to elect "the right people" but rather that we should never abandon the state as a sphere of struggle and constantly need to be working to build a movement that can pressure the state for substantive and meaningful progressive reforms (while we are at the same time working for bigger systemic change).

Finally, since capital is now truly global and the "free flow/movement of capital" is "their" mantra we also need to be fighting for the free-flow of labor as well as pushing to organize labor internationally . We should also be looking more to the global south both for leadership as well as for being one of if not the center of the global anti-capitalist struggles (though the anti-auserity movements emerging in europe may bring some renewed hope to the developed capitalist world but here i think it is still too soon to tell as the european working class is still for the most part getting its butt kicked.
 
 
+12 # sandyclaws 2012-11-21 05:21
Some people in this country cringe when socialism is mentioned. They should really be cringing at the term CAPITALISM! Cutting employees pay in half and removing all benefits including pensions and then tripling their own pay and God knows what kind of retirement or severence plan they have set up(golden parachutes)is immoral and should not be allowed. These criminals have been destroying our country from the inside out like a cancer. If you were to project the effects of what these people are doing, it would become clear that they are really committing treason. They are attacking the American people. What will happen when the unfortunate working people need medical help and what will happen with no pension. With no company pension to augment Social Security they will not have money to survive and help to keep the economy rolling. They will go to emergency rooms where taxpayer dollars will pay many times over what we would pay in normal clinics or insurance programs further undermining our economy. I have read that there are a lot of rich folks that are renouncing their American citizenship and taking all their money out of the country because they are afraid they will have to pay higher taxes. This is just plain, old fashioned selfish greed! Renouncing your citizenship should take just as long as becoming a citizen of this country. Don't look now but we are on the fast track to becoming a third world country and the tea partiers are leading the way!
 
 
+6 # dkonstruction 2012-11-21 08:45
While its certainly true that some if not many people in this country cringe when socialism is mentioned there is actually alot more support for socialism or socialist ideas/principle s than most want to acknowledge (which is definitely encouraging though of course we still have a long way to go).

http://campaignstops.blogs.nytimes.com/2012/11/18/is-rush-limbaughs-country-gone/?nl=todaysheadlines&emc=edit_th_20121119
 
 
+9 # Kootenay Coyote 2012-11-21 07:41
Blame victims: so ethical.
 
 
+8 # tbcrawford 2012-11-21 08:29
Thank heavens Romney (Bain) didn't win election. There should be oversight...
 
 
-1 # gigigsd 2012-11-21 16:48
Bullshit !!!Healthy eating and education killed Twinkies! I don't want my kids and grandkids eating them!
 
 
+1 # bingers 2012-11-23 08:02
Quoting gigigsd:
Bullshit !!!Healthy eating and education killed Twinkies! I don't want my kids and grandkids eating them!


Perhaps, but the unions tried to tell the totally incompetent management to diversify and they failed to do so and destroyed a great company.

It's possible that unions have destroyed some small (under 100 employees) businesses to fail, but it's nearly 100 % certain that the failure of any company is a result of incompetent management. Union workers should make better pay than management in most cases.

An example, to run a corporation, the minimum IQ is considered to be 123. To be a competent electrician requires a 130 IQ.
 
 
0 # RICHARDKANEpa 2012-11-22 12:43
Thanks for the blog. I live in Philadelphia and really appreciate something local

As for Ginigsd as of Nov 22 3:30pm getting a minus one, it would be a very uphill battle to sell Hostess brand organic bread or multigrain snowballs. I think gigigsd is right they probably would have been out of business earlier if they tried.
 
 
+2 # charsjcca 2012-11-23 08:34
In 1967-68 I was an employee and union member of Hostess, cooking fruit for fruit pies. I am saddened that this debacles has happened. In every instance there is always enough blame to go around. I do not know if it is better to draw unemployment or be employed at a lesser wage. What I do know is that I am personally saddened by this outcome. May mercy follow all parties involved.
 
 
-2 # centervoice 2012-11-23 14:19
Somewhat misleading article. Since hostess never made a profit after they emerged from bankruptcy there was no PROFT that went to the Hedge funds. Ripplewood will loose the entire $130 million they invested. not because they were greedy but because they were idiots. Rilpplewood by the way is run by Democrats. their purchase was brokered by other democrats who thought they could work cooperatively with the unions to solve the problems. When no one would work on the real issue it all failed.
 

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