Promises, Promises......

Two major US airlines filed for bankruptcy protection this week- Northwest and Delta. In the former case, their machinists union is already on strike.

What I find ironic is that, while so much of this week’s, and many prior years’ focus, is on union leaders squaring off against company managements, nobody has bothered to ask how it is that the unions got themselves in this mess in the first place?

Why did unions ever begin taking future pension contributions from the companies for which their members worked, instead of cash compensation?

When you think about it, some of those company CEOs of yesteryear were deceptively brilliant. They managed to get unsecured loans, in the form of future pension “obligations,” from the unions representing their workers. No bank would have lent the same sums on the same terms for the same prices. That’s because, ultimately, companies have much more latitude with which to discharge or change their pension obligations in bankruptcy than they have to escape a group of angry, unified, legally-empowered financial creditors in the same situation.

Why is this relevant today? For two reasons. First, it’s the private sector version of the social security mess. What makes sense and works here should inform our solutions for social security. Second, it should inform labor’s current choices and negotiations, so as not to make the same mistakes twice. Especially now, in the airline and automobile manufacturing sectors.

In hindsight, “defined benefit” plans of any type or name, public or private, are a clever way for a public corporation or a government to fund operations with implicit loans. For big steel, autos and airlines, as well as other labor-intensive sectors in the ‘50s, ‘60s and later, this amounted to labor union members lending, via unsecured future compensation and fringe benefit promises from their employers, sums of money for which they had no collateral. Financial engineering which puts modern investment bankers to shame.

Where is the expose on the union leaders who foolishly negotiated, on behalf of their members, to accept unsecured IOUs from companies on terms that the companies’ banks would never have lent them the money?

Why would any of the current unionized employees of Northwestern, Delta, Ford or GM accept any non-cash compensation going forward?