http://www.nytimes.com/2006/01/29/business/yourmoney/29every.html
When You Fly in First Class, It's Easy to Forget the Dots
By BEN STEIN
ONE of the best conspiracy movies ever made is the perfect British
classic, "The Third Man." In the most haunting scene, the villain,
played adroitly by Orson Welles, takes Joseph Cotten, the good guy,
up in a Ferris wheel. The villain, named Harry Lime, has been selling
adulterated penicillin in postwar Vienna, making a fortune and
causing children to become paralyzed and die.
Mr. Cotten's character, a pulp fiction writer named Holly Martins,
asks him how he could do such an evil thing for money. The two men
are at the top of the Ferris wheel, and the people below them look
like tiny dots. Mr. Welles's villain looks down and says, "Tell me,
would you really feel any pity if one of those dots stopped moving
forever? If I offered you £20,000 for every dot that stopped, would
you really, old man, tell me to keep my money, or would you calculate
how many dots you could afford to spare?"
This scene comes to mind when I think of Glenn F. Tilton and other
executives of the UAL Corporation and the hapless employees of its
primary business, United Airlines. Its history is a perfect text for
the ethical morass in which American business often finds itself.
United is one of the proudest names in airline history. It has long
been a synonym for fine service and extensive, convenient routes. In
the early 1990's, when some investment bankers were casting around
for a way to make tens of millions of dollars, they came up with a
doozy: the employees of UAL would give up some of their salaries and
benefits in exchange for stock in UAL, eventually becoming UAL's
largest owner through an employee stock ownership plan.
The deal went through — with staggering compensation to Wall Street —
and in 1994 the American employees of UAL, as a group, became its
largest owners. Within a few years, overseas personnel were allowed
the privilege of tossing their life savings into UAL, too.
Trouble was not far behind. The employees found management demanding
pay cuts, big (and, for passengers, inconvenient) changes and cuts in
scheduling and services, and even silly changes in their once-great
flight attendant uniforms. Then came the blows of 9/11 and a
recession, and then rising fuel costs. There were demands for more
cuts in pay and benefits and more layoffs. That was not enough. About
three years ago, UAL was "forced" to enter bankruptcy to stay alive.
This step meant that UAL could drastically cut workers' pay — and it
did. Pensions were simply jettisoned and made the burden of the
federal government's Pension Benefit Guaranty Corporation, which
meant cuts of close to two-thirds in some pilots' pension payments.
And, of course, the bankruptcy simply eliminated all of that equity
in UAL that the employees had bought with their hard-earned savings.
Thus, in a series of evil events, management of UAL basically ruined
the lives of the employee-owners, if that is not putting too fine a
point on it, by taking away their savings, incomes and pensions. (I
am indebted to my pal, Phil DeMuth, for much of this research.)
All right, you might say. What else could management have done amid
high fuel costs and a deregulated, supercompetitive market? That's
"creative destruction," and it's good for the economy, some of my
fellow Republicans and admirers of the free market might say. But
what about the rules of law and common decency? Because, you see,
there is a bit more to the story.
Now UAL has been reorganized. It is preparing to emerge from
bankruptcy. It will soon have a stock offering. This offering is
expected to raise very roughly $6 billion. It is presumably worth
that because UAL now has such low labor costs that it may actually
make a profit of some size. (I'll believe it when I see it.)
Here comes the good part: management has asked the bankruptcy court
to let it have — free — roughly 15 percent of the stock in the new
company, or about $900 million. Mr. Tilton, the chief executive, who
plays the Orson Welles character in this drama, would get about $90
million personally for his hard work shepherding UAL through
bankruptcy (for which he was already paid multiple millions of
dollars).
The bankruptcy court, instead of ordering Mr. Tilton's arrest,
instead cut the management share to about 8 percent, so he will get
more than $40 million, more or less. That is more than Lee R.
Raymond, the chief executive of Exxon Mobil, one of the most
successful companies of all time, was paid in 2004 (not counting Mr.
Raymond's 28 million shares of restricted stock).
So here it is in a nutshell: employees are goaded into investing a
big chunk of their wages and benefits in UAL stock. They lose that.
Then they lose big parts of their pay and pensions. They become peons
of UAL. Management gets $480 million, more or less. "Creative
destruction?" Or looting?
Wait, Mr. Tilton and Mr. Bankruptcy Judge. The employees were the
owners of UAL. They were the trustors, and Mr. Tilton and his pals
were trustees for them. How were the trustors wiped out while the
trustees, the fiduciaries, became fantastically rich? Is this the way
capitalism is supposed to work? Trustors save up, and their agents
just take their savings away from them?
If the company is worth so much that management has hundreds of
millions coming to them, shouldn't the employee-owners get a taste?
Does capitalism mean anything if the owners of the capital can be
wiped out while their agents grow wealthy? Is this a way to encourage
savings and the ownership society? Or is this a matter of to him who
hath shall be given?
I know that this is basically the same story I described recently
concerning the Delphi Corporation, where something similar is going
on. But that's exactly the point. Management is using competition,
higher fuel costs and every other cost complaint to cut the pay and
pensions of its own employees while enriching itself.
And I can well imagine what goes through Mr. Tilton's mind as he does
it: "Hey, I'm a great executive. Great executives in private-equity
firms make more than I do. Why shouldn't I get the moolah? Basically,
I've worked it so UAL is now a private-equity deal anyway. That's
what it's all about now, isn't it? Who's got the most at the end of
the day at Bighorn or the Reserve or whatever golf course I choose to
retire at? And, anyway, wouldn't you take $48 million for a few of
those dots we used to call our employees and owners to stop moving?"
Ben Stein is a lawyer, writer, actor and economist. E-mail:
ebiz@xxxxxxxxxxxx
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