The scene in Lower Manhattan was reminiscent of teenagers rushing to the front of a concert stage, only this time it was middle-aged lawyers and Wall Street bankers who pushed elbow to elbow into a federal courtroom no bigger than a gas station mini-mart.
The throng of pinstripe suits forced court aides to call in workers to pry open windows for ventilation, allowing U.S. Bankruptcy Judge Robert D. Drain to proceed with the Oct. 11 opening-day hearing regarding the "petition for relief" by Michigan auto parts maker Delphi Corp. under Chapter 11 of federal bankruptcy laws.
Once shunned by respectable companies and ignored by Wall Street, federal bankruptcy court has become the venue of choice for sophisticated financiers and corporate managers seeking to pull apart labor contracts and roll back health and welfare programs at troubled companies.
About 150 major corporations are now in some stage of bankruptcy reorganization, including four of the nation's leading airlines. As the prospect of other large enterprises taking a spin down Chapter 11 becomes more widely discussed in business circles ("maybes" on the list include such iconic names as General Motors and Ford), the tactics used in bankruptcy courts are shaking the very foundations of the American workplace.
Whether an assembly-line worker or middle manager, an employee can no longer assume that promises made earlier -- health benefits or fully funded pensions -- will be there when he or she retires. The loss of security arising from Chapter 11 reorganizations has introduced a new element of anxiety into the lives of baby boomers who are approaching 60, not to mention younger workers just starting out in their careers.
The new bankruptcy law, which took effect last week, will have little effect on corporate bankruptcies. The legislation, approved by Congress and signed by President Bush in April, is aimed at curbing abuses in consumer bankruptcies. It tightens the rules for individual filings, making it more difficult for consumers to have their credit card and other debts wiped clean in court.
But except for barring certain bonus payouts, the new law keeps intact the legal system by which corporations can shed certain employee obligations, including pension costs that can be shifted to the Pension Benefit Guaranty Corp. (PBGC), which Congress set up in 1974 to insure defined-benefit corporate pensions.
The PBGC is now struggling with $23.3 billion in net deficits arising from the termination of pension plans from Chapter 11 bankruptcies in the steel and airline industries. Delphi's filing shifts the spotlight onto the pension problems of the auto sector, where a total shortfall ranges between $45 billion and $50 billion, according to the PBGC's estimates.
Why the surge in corporate bankruptcies at a time when the economy is expanding? The explanation heard most often is two-fold: global competition and out-of-control labor costs. Competition from low-wage assembly plants in Mexico and Asia is tightening the screws on American manufacturers who must pay top-dollar wages to unionized workers as well as promised pension and health benefits, known as "legacy costs," to retirees.
"Legacy costs are killing us," says Robert S. "Steve" Miller, who was named Delphi's chairman and CEO last July. Miller is emblematic of the shifting nature of bankruptcy law. A self-styled "corporate doctor," he has a law degree from Harvard University, a master's degree in finance from Stanford University and a blunt speaking style that makes him quotable in the media.
Before taking Delphi into Chapter 11 on Oct. 8, Miller made it known that unionized employees represented by the United Auto Workers (UAW) would have to accept either a wage reduction of 62 percent, from an average of $26 an hour to as little as $10 an hour, or sharp benefit reductions to retirees. UAW President Ron Gettelfinger denounced the offer as insulting, but Miller defended it at a news conference. The CEO couldn't have been more explicit in describing his view of the modern workplace: "Some people insist that fairness requires that we slash wages across the board if we cut wages for anyone. Well, I am sorry. My job is to preserve the value of this enterprise as we restructure. We have to adjust to market conditions and appropriately pay for our human capital at each level. There are large disparities in this country and around the world in what people can expect for mowing the lawn, versus managing a huge business. It may not be fair, but it is reality."
The Delphi chief often cites reality -- and the bottom line -- in answering his critics. "They [have to] understand that I haven't got any more money," Miller told the Financial Times.