Who Stole the American Dream?

by Hedrick Smith

  Volcker later voiced his dismay: Reform was inadequate, and the biggest banks were larger than before the 2008 collapse. In late 2011, he suggested that the government was still stuck with the structural problem of megabanks too large and too interconnected to be allowed to fail. His solution was bold: Reduce the risks either “by reducing their size, curtailing their interconnections, or limiting their activities.” Similarly, Paul Krugman, a Nobel laureate in economics, found the law’s penalties and incentives not tough enough to force bankers to stop the risky trading practices that had caused the financial collapse. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said the reform was so weak that it was destined to perpetuate the cycle of boom and bust and taxpayer rescue.

  Politics—the enormous political power of the banks—was the core problem, as the conservative, pro-business London Telegraph pointed out. “Such is the lobbying power of the big Wall Street institutions,” the British paper said, “that they not only caused a global economic crisis and then forced the US government to pay for a massive bail-out but then used a slice of that bail-out cash to bribe politicians with campaign donations in order to block rule changes that might prevent a repeat performance.”

  A “Starkly Unequal Democracy”

  For our democracy, the danger is that the balance of power has moved so far away from the middle class and into the hands of the financial and business elite that average Americans today feel they have little impact on policy, and they have largely given up on real democracy.

  In the 1960s, just 28 percent of Americans said that “the government is pretty much run by a few big interests looking out for themselves.” Today, that figure is 78 percent. Poll after poll has recorded that most Americans feel cut out of government and that roughly four out of five distrust lobbyists, resent their power, and want the government to curtail it.

  Ordinary people dislike this unfair state of affairs, but they feel powerless to change it. Without knowing the details, they sense that all the advantages accrue to powerful insiders with the money and resources to fight the daily trench warfare over policy. The gulf between the Washington Power Game and the electorate has widened steadily as ordinary people feel cut out of the political process. They have, we all have, become increasingly passive and disengaged and, in the apt comment of Ernie Cortes, one of America’s most energetic grassroots organizers of minority voters, immobilized by our sense of our own powerlessness. The danger, Cortes said, is that Americans over the past three decades have “been institutionally trained to be passive.”

  The peril for our society and for our democracy is that we have been sliding into an economic and political oligarchy where a self-reinforcing process is at work: The wealthy and the corporate elite use their vast financial resources to buy political influence and then leverage that added political power to obtain further policies that exponentially multiply the economic returns to the financial elite at the expense of average Americans.

  We instinctively shy away from this conclusion since it violates our concept of America as a land of equal opportunity and it desecrates our vision of an American Dream accessible to all. But, sadly, the record since the late 1970s shows that the concentration of wealth and the concentration of power in America are mutually reinforcing.

  “The available evidence is striking and sobering,” wrote political scientist Larry Bartels. “In Aristotle’s terms, our political system seems to be functioning not as a ‘democracy,’ but as an ‘oligarchy.’ If we insist on flattering ourselves by referring to it as a democracy, we should be clear that it is a starkly unequal democracy.”

  PAT O’NEILL had it all figured out. Like many average Americans who started out in the 1970s during the era of middle-class prosperity, he had worked a lifetime for the same employer. He had earned a company pension, added a 401(k) plan, and even bought employee stock options. With that nest egg, he felt he could retire secure.

  As a lead mechanic for United Airlines, he put in thirty-five hard years, working at night, often in freezing winds, on the flight line at Chicago’s O’Hare International Airport and Seattle’s SeaTac Airport. His job was to keep DC-8s, DC-10s, and Boeing 737, 757, and 777 airliners flying and to keep his fellow Americans on the move. O’Neill is a plucky, friendly, go-getter Irish American. He poured himself into his job heart and soul.

  “Of course, workin’ there at O’Hare, it’s not a normal nine-to-five job,” he recalled. “Planes are fixed at night, when everybody’s home asleep. You work graveyard. I worked graveyard for twenty-two years. It was a seven-day operation. You didn’t call up an’ say, ‘Aw, I can’t make it in tonight. I’m gonna stay home.’ … I had a work ethic. I was very loyal to the company. An’, you know, we were loyal to our customers. That airplane had to leave every mornin’ six o’clock or eight o’clock or whatever.”

  To O’Neill, United Airlines was like family. He knew his bosses; they knew him. They all trusted one another. He knew that United counted on him when they needed him. He counted on United when he needed them.

  But just as he was getting ready to retire, in May 2003, financial havoc at United tore up his well-laid plans for retirement, and it cost thousands of average employees like O’Neill dearly. So nearly a decade later, O’Neill is still at work, his eventual retirement day receding like a desert mirage—and his predicament a symptom of the financial squeeze that middle-class Americans feel across the board.

  CHAPTER 11

  BROKEN PROMISES

  BANKRUPTING MIDDLE-CLASS PENSIONS

  The essence of [a company] bankruptcy is that whatever promises the company has made, they can’t live up to all of them and they need to find a way to deal with the fact that they’ve promised more than they have.

  —JAMES H. M. SPRAYREGEN,

  corporate bankruptcy lawyer

  Bankruptcy’s terrible for the employee. It’s an absolutely horrific experience for the people who worked hard to build a company…. It means being forced to negotiate changes to your working conditions, to your terms of employment, with a gun to your head.

  —GREG DAVIDOWITCH,

  flight attendants union leader

  LIKE SO MANY OTHERS in the airline industry—pilots, flight attendants, mechanics—Pat O’Neill had a romance with the airplane. As a boy growing up on a dairy farm in Wisconsin, he had looked up at planes flying overhead and had fallen in love. He finished high school in 1966 and took a year’s course in aircraft mechanics, and on November 6, 1967, he went to work for United. He was nineteen.

  “It was an exciting time for me—working on airplanes,” O’Neill recalled proudly. “The one factor that really threw a curveball at us was Old Man Weather. You couldn’t bring these airplanes into a hangar, nice’n warm, and work on ’em. You had to work on ’em outside, in the elements….

  “The responsibility you have as an aircraft mechanic is … really, people don’t realize it,” he said. “A mechanic could ground an airplane. Here you got an airplane that holds lots of people, and you work on it. You gotta fix ’em right the first time.”

  O’Neill did his job well, got promoted, and eventually became chief of a team of flight-line mechanics. He went from a starting pay of $10,000 a year in 1967 to making $50,000 or $60,000 a year in the 1990s, depending on how much overtime he got. With longevity and a good pay scale, O’Neill was counting on the lifetime pension plan that his union, the International Association of Machinists and Aerospace Workers, had negotiated with United for anyone who wanted to retire at fifty-five after thirty years of steady work. That was O’Neill’s plan—put in thirty-five years and retire.

  The Deal: Less Pay in Exchange for a Lifetime Pension

  Pat O’Neill was pretty typical of his generation. Millions of people born in the 1940s, 1950s, and early 1960s were promised lifetime pensions by their employers after a career of work at one company. These plans got started after World War II, when strong labor unions were demanding—and getting—steady wage increases year a
fter year.

  Corporate America made a counteroffer: Take some money now, but take part of it later and we’ll put the second part into a pension. Companies liked that idea; it was cheaper for them. In the 1980s, employers were operating 114,000 of these so-called defined benefit plans that, at their peak, covered 35 percent of America’s private sector workforce and reached a maximum of about 34.5 million participant workers and retirees. Today, 26 million older employees still have these lifetime pension plans.

  Labor unions and their workers bought the pension idea from management. The “defined benefit” is what the unions liked most because it meant employees would get a predictable monthly pension payment for as long as they lived, paid for and guaranteed by the company. Strong unions like the United Auto Workers and the United Steelworkers negotiated contracts with a fixed pension formula.

  Typically, a big company promised workers the equivalent of 1.5 percent or 2 percent of their salary or wages in their last five years, multiplied by the number of years they’d worked. It came out to something between 45 and 60 percent of their final pay. Pat O’Neill, who ended up making $50,000 plus, could count on an annual retirement of roughly $36,000, or about $3,000 a month—for the rest of his life. United Airlines was committed to that under its union contracts and the 1974 Employee Retirement Income Security Act (ERISA).

  Bankrupt Promises

  The crunch began in the 1990s. Low-cost carriers like Southwest Airlines began eating into United’s market share, and its profit margins slipped. In 1994, United’s finances were so shaky that management struck a grand bargain with its unions—management would trade 55 percent majority ownership in the company to its unions in exchange for their agreeing to $4.9 billion in pay cuts and reduced benefits. Union members could buy company stock.

  Pat O’Neill, who had rock-solid faith in United, invested $80,000 of his hard-earned savings in United stock. With the union givebacks on wages and benefits and an infusion of new capital, United had a strong spurt in the second half of the 1990s. Stock, bought by union members for $22 a share, shot up to $90.

  But it turned out that those were phantom gains, way beyond the value of United’s profits. Even in good times, United had been struggling. It piled up a multibillion-dollar debt buying or leasing a fleet of new wide-bodied Boeing 747s and 777s and Airbus A320 airliners. It got into periodic fights with the powerful pilots union. In 2001, United ran a $3.8 billion operating loss. After the 9/11 terrorist attack in 2001, fear of flying panicked the American public. United lost more traffic and revenue than most carriers. By early 2002, it was deep in debt. It desperately needed big new bank loans to survive, and to get that money, United sought a government guarantee.

  The Bush administration’s Air Transportation Stabilization Board gave loan guarantees to other airlines but turned down United. Union leaders said they had heard that anti-union hard-liners around President Bush wanted to push United into bankruptcy to force major concessions from its unions and to erode union power. Whether that was the plan or not, that’s what happened. United filed for bankruptcy on December 9, 2002, the largest American airline ever to take such a desperate step.

  Bankruptcy’s “Triple Whammo”

  United’s eighty-one thousand employees got slammed hard by the company’s bankruptcy. Pat O’Neill, then on the verge of realizing his dream of retiring at fifty-five, suffered what he calls “a triple whammo”—on his employee stock plan, on his 401(k) plan, and on his United pension.

  “The stock went zippo,” O’Neill recalled. Stockholders were virtually wiped out. United’s stock plunged from roughly $100 a share in the late 1990s, when O’Neill bought it, down to $1. United’s unions were left with near worthless stock in return for the $4.9 billion in wage and benefit cuts that they had surrendered in 1994. O’Neill’s $80,000 investment in the employee share ownership program shrank to $1,800. O’Neill got hurt again on his 401(k) plan, which also had a bundle of United stock. Finally, his pension was cut by one-third. When United Airlines dumped its vastly underfunded pension plans on the quasi-governmental Pension Benefit Guaranty Corporation, O’Neill’s pension was automatically reduced from $3,012 to $1,994 a month because the government formula was less generous than United’s contract.

  As Pat O’Neill retired from United in 2003, he knew that for the rest of his life he would lose $1,000 a month, money that he had earned over thirty-five years. Like his co-workers, O’Neill was angry at United’s management. He blamed them for mishandling the airline’s finances and for forcing harsh bankruptcy concessions on union employees while executives got “retention bonuses” and came out of bankruptcy with the prospect of large personal gains from the new United.

  “I never thought it would come to this. Hell, no,” O’Neill said. “There’s a lot of other people who felt the same way. People worked. People cared. They went the extra mile, and now look at it.”

  Companies Exit Lifetime Pensions

  Pat O’Neill’s predicament is a microcosm of the devastating impact of bankruptcy, not just on United’s eighty-one thousand employees, but on workers all across the country. Probably one million workers and retirees, and perhaps as many as 1.6 million, have been casualties of corporate restructuring under Chapter 11 of the bankruptcy code or of companies on the brink of bankruptcy shutting down pension plans. They have seen their pensions, wages, and benefits drastically cut over the past couple of decades by some of the best-known names in Corporate America. In addition, millions of other average Americans without union contracts to protect them have lost their lifetime pensions or had them frozen, even at profitable companies such as IBM, Verizon, and Hewlett-Packard.

  When the economy was growing in the 1980s and ’90s, big corporations liked the pension programs because the billions that accumulated in their pension plans showed up as assets on the corporate balance sheet. When markets went up, so did the stock portfolios in their pension plans. Those gains made the profit line look even rosier on the company books. But when the markets hit rough going in the early 2000s, those pension plans took losses and became a balance sheet eyesore. Suddenly, chief financial officers were being blamed by CEOs for generating losses that made the company look bad.

  So some highly profitable firms headed for the exits. Companies such as IBM, Verizon, and Hewlett-Packard froze the benefits in their existing lifetime pension plans and shifted their workforce into employee-run and largely employee-financed plans, either 401(k)’s or similar options. In one year alone, 2.6 million employees had their lifetime pensions frozen and were switched into 401(k)-style plans. New Economy companies in computers, the Internet, or telecommunications, such as Intel, Microsoft, and Cisco, adopted 401(k) plans from the beginning.

  Overall, the percentage of large and medium-sized American firms that offered traditional lifetime pensions fell from 83 percent in 1980 to 28 percent in 2011.

  Bankruptcy: Efficient Capitalism

  or a Legal Way to Burn Promises?

  Bankruptcy became the typical route for troubled companies to bail out of lifetime pension obligations in a hurry. The financial meltdown in 2008 triggered a flood of high-profile bankruptcies such as those of Lehman Brothers, CIT Financial, General Motors, Chrysler, Washington Mutual, and many more. The early 2000s saw a previous wave of bankruptcies by major corporations such as Enron, WorldCom, Global Crossing, Texaco, Pacific Gas and Electric; steel companies such as LTV, Bethlehem, National, and Weirton; airlines such as Pan Am, Eastern, United, Delta, and US Airways (twice); plus many others.

  Some companies were being liquidated and their meager assets divvied up. But far more frequently, bankruptcy was used by corporate management as a strategy to restructure the company—a vehicle for management to shed old labor contracts and write new ones, to dump old debts to creditors and trade suppliers, and to revive a debt-ridden firm as a leaner, slimmer company ready to compete without the weight of old obligations. The logic of the strategy: Better an amputated company with fewer jobs, lesser bene
fits, and lower wages than a dead carcass.

  Bankruptcy, Jamie Sprayregen asserted, represents “the efficient working of American capitalism.”

  Sprayregen was United’s chief bankruptcy attorney and one of the nation’s most successful bankruptcy lawyers. By the mid-2000s, bankruptcy had become such a popular corporate strategy that big law firms all over the country set up special bankruptcy practices and made hundreds of millions of dollars from that business.

  Companies needed bankruptcy, Sprayregen explained, as a legal way to bail management out of a financial jam. In his words, “The essence of bankruptcy is that whatever promises the company has made, they can’t live up to all of them and they need to find a way to deal with the fact that they’ve promised more than they have.”

  “Bankruptcy,” retorted Elizabeth Warren, then a Harvard Law School professor specializing in bankruptcy, “is a way to take legal promises and burn them.”

  “Bankruptcy’s terrible for the employee,” added Greg Davidowitch, head of the United Airlines section of the flight attendants union. “It’s an absolutely horrific experience for the people who worked hard to build a company…. It means being forced to negotiate changes to your working conditions, to your terms of employment, with a gun to your head.”