Workplace Tremors

But the reality, to use Miller's word, isn't so simple. Delphi does have money -- specifically, it has $1.6 billion in cash on hand. Even more significantly, it secured $2 billion in loans and revolving credit from Citigroup and J.P. Morgan Chase bank just before it filed for bankruptcy. Which raises a question that the common explanation for Chapter 11 filings doesn't answer: If Delphi is so broke, with unsustainable wage costs and skyrocketing pension obligations, why are two of the nation's major banks offering to lend it money on excellent credit terms?

The answer: For the same reason that Bank of America, General Electric Capital Group, UBS Securities and distressed property, or "vulture," capitalists have invested billions of dollars in supposedly tattered companies entering or exiting Chapter 11 since 2001. Investors can profit richly from the meltdown of established companies -- at least in the short run. Chapter 11 protects a company from creditors as management develops a reorganization plan and restructures its liabilities in the hope of becoming profitable again. Older companies may have high legacy costs, but they have long-term customer contracts and plenty of cash flow.

"The way the code is now structured, the temptation is to make the workforce pay for management's mistakes, rather than taking all of the stakeholders into account and re-building the company together," says Harley Shaiken, a professor at the University of California at Berkeley who specializes in labor issues. Chapter 11 calls on management to bargain with unions in good faith to reduce costs, but also permits management to petition the court to void labor contracts and substitute whatever terms it chooses. Properly stage-managed and set in motion, the restructuring process can steamroll the union, peel away retiree benefits and dump pension obligations onto the PBGC.

That's exactly what happened during Miller's 19-month tenure as chief executive of Bethlehem Steel. Some 95,000 retirees and dependents lost their health-care plan in 2003 when the bankruptcy judge sold the company's assets to International Steel Group, a company controlled by billionaire financier Wilbur L. Ross.

Meanwhile, the PBGC was left with the responsibility of paying $4.3 billion in underfunded Bethlehem pensions over the next 30 or so years. Because of the less generous terms of PBGC's pension formula, some steelworkers lost 50 percent of their expected pensions as well as their health benefits.

Earlier this year, Ross sold International Steel to London-based Mittal Steel Co., picking up $267 million in profit on the sale. Ross's investment fund has since amassed $4.5 billion, some of which he plans to use to make acquisitions in the auto parts industry, he said recently. One of his possible targets? Delphi. He has made it clear, in recent interviews, that he is carefully watching the company and its Chapter 11 reorganization.

So what others see as an ailing business, Ross sees as an opportunity.

Economists often talk about "moral hazard" and "free rider" systems that create incentives for governments or common citizens to behave imprudently and follow short-term strategies that can cause long-range problems. Bankruptcy law can encourage such behavior.

Established by Congress in 1898 as a part of the U.S. district court system, early bankruptcy courts were auction houses where court-appointed referees settled claims among squabbling creditors. Little interest was shown in keeping a company on legal life support until the Great Depression when, faced by an unprecedented number of business failures, the Chandler Act of 1938 created Chapter 11 bankruptcies to allow managers to try restructuring instead of simply liquidating the assets.

The present system dates to the 1978 Bankruptcy Act, which made it easier for a business to file for protection and gave management broad rights to set forth a reorganization plan under the supervision of a bankruptcy judge. The act changed the economic ground rules. Before 1978, few law firms bothered having a bankruptcy department; afterward, nearly every "white-shoe" firm opened up thriving bankruptcy and restructuring practices.

Bankers were not far behind. Rather than fighting with management over existing assets, they began to underwrite management's reorganization plans through "debtor in possession" loans and revolving credit. This gave them priority claim on company assets if reorganization didn't work (something not offered to employees, who are in the heap of unsecured creditors), and offered lavish rewards to managers who cut costs.

This helps explains an aspect of the Delphi filing that has puzzled observers: CEO Miller's petition to the court to award up to $87 million in bonuses to senior managers, who also would share 10 percent of the equity in the reorganized company.