The Twinkie defense… Is management or labor is less deserving of the blame in the Hostess liquidation?

    A few days ago, upon hearing that Hostess Brands Inc. was going out of business, I posted the following, assuming that it would just be a matter of time before folks on the right started floating conspiracy theories involving Michelle Obama and her “nanny state” jihad against junk food. As my friend Steve Cherry quickly pointed out, though, “Why blame Michelle Obama when you can blame labor?” And he was right. Union greed quickly became the prevailing narrative in the national press.

    After news broke that Hostess was going under, the Wall Street Journal chose to frame it as the handiwork of organized labor, emboldened by the results of the last election. The liquidation of the company, they said, would be, “a sobering reality check for unions and workers looking to shift the post-recession balance of power with private employers.” The blame, it would seem, lay exclusively with the union employees of Hostess, who, when they saw an opportunity to bleed their employer for even more, went on strike, without a thought as to how the company would be impacted.

    But, it didn’t take long for a competing narrative to emerge in the non-right-wing media.

    It would appear that Hostess, among other things, was horribly mismanaged by a cadre of assholes for years, who were more interested in lining their own pockets than in keeping the company alive. It wasn’t mentioned in the Wall Street Journal article, even in passing, but earlier this year, the CEO of Hostess was awarded a 300% raise (from approximately $750,000 to $2,550,000), as the company prepared for bankruptcy, and began defaulting on their contractually-obligated payments to the pension plans of their union workers. And, the CEO wasn’t alone. According to a press advisory put out by the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, “at least nine other top executives of the company received massive pay raises. One such executive received a pay increase from $500,000 to $900,000 and another received one taking his salary from $375,000 to $656,256.” It also wasn’t noted by the Wall Street Journal, but, as executive pay was soaring, so too was the company’s debt. And that, folks on the left are arguing, is why we’ll no longer have Twinkies to blame when we go on murderous rampages.

    The truth, though, from what I can tell, probably exists somewhere in between these two competing narratives. Or, at least that’s the sense that I’m getting from this post that I just happened across on Reddit, by someone calling himself King of Kona. (Among other things, that CEO who boosted his pay by %300 was forced out earlier this year, and replaced by a CEO that cut executive pay, and offered a 25% ownerships stake in the company to the workers.) As I found it incredibly interesting, I thought that I’d share it here.

    I know I am going to get in trouble for posting this because there is a thing called confirmation bias in psychology that causes people to only want to hear what they already believe – it is why you see racists skip over stories that portray minorities in positive ways or why the religious will often hurry up and click to another channel if a special talking about Darwinism is on television. But I’m going to write it anyway. Why? Because it is the right thing to do.

    As someone with a very deep economics, financial, and business background, this entire conversation is painful to read. There are so many misconceptions about pension accounting and the bankruptcy process that I feel like reading this thread is the equivalent of seeing those videos where people at Glenn Beck rallies are interviewed spouting off about Obama’s secret muslim plot to make us all gay married communists who have interracial children and cross dress while burning flags.

    Instead of writing a thirty-page explanation, I am going to explain this like I would to my five-year-old niece. I am not trying to be condescending, so I apologize for the tone. I am trying to remain sane.

    For more than eleven years, Hostess was horribly run, including by a CEO who left earlier this year after awarding himself huge pay increases and demanding union concessions.

    The new CEO came into office back in March or April and, after discovering these large pay hikes, ordered the top four executive salaries to $1 for the remainder of the year to make up for it, before being restored next year, evening things out.

    This new CEO, with the backing of the bailout investors, went to the unions and offered them a package that included:

    A twenty-five percent (25%) ownership stake in the business, which would transform Hostess into one of the largest partially employee-owned firms on the planet.

    A package of bonds in the company to go to the employees with a face value of $100,000,000 that would generate interest and be repaid in the future

    Two seats on the board of the directors, providing influence and power to shape the future of the enterprise

    In exchange, the unions had to agree to:

    Cut existing pay levels to fall in line with other major bakeries

    Do like the other 90% of American manufacturing firms have and “freeze” pension plans, meaning that any new employees will have to use a 401(k) instead.

    Pay more out of pocket for some other expenses such as insurance

    If all of this happened, the employees of Hostess would not only get to keep their job, but they would be working for themselves. It was the best possible solution to a terrible situation caused by years of mismanagement, none of which was the fault of the current CEO who has only had the job for 8 months or so.

    The Teamsters union wisely signed up. They acknowledged that the situation was bad. They talked about how terrible former management had been. They focused on the future and knew that this could work out well and, among all the potential choices, was the best that could be expected.

    Then, a smaller union – the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union – said no.

    They (the BCTWGMIU) were warned that if the company shut down in a strike, the finances were so weak the doors would have to be closed. Everyone would lose their job. There would be no ownership. There would be no bonds. There would be no seats on the board of directors. There would be no new employees let alone pensions for new employees. It was a complete thermonuclear scenario that would destroy the lives of 18,500 hardworking families.

    The BCTWGMIU struck anyway and the Teamsters, to their credit, crossed picket lines and remained reasonable because their actions were based on facts and analysis of what was economically feasible. The company begged the BCTWGMIU to return to the table, but they refused, talking about the litany of abuses of past managements.

    For anyone who is successful, well educated, and familiar with strategy such as game theory, the choice is clear. When faced with a total wipeout, you take the option that gives you the greatest long-term chance of survival. Even if the new deal had resulted in only an extra six-months of paychecks, that is six months of income for 18,500 families that relied on that cash. When you represent others, like union leaders do, their welfare is your sole concern.

    That is precisely what the Teamsters did. However, the BCTWGMIU behaved like a father who commits a murder-suicide of himself and the children when a spouse leaves, convinced he is in the moral right and that he had no other choice because of his evil ex-wife. He writes a long note detailing all the past mistakes she made and how she drove him to take this action. BCTWGMIU drove Hostess straight into liquidation. The murder-suicide analogy is appropriate because that is exactly what this was: An economic murder-suicide. A vast majority of those 18,500 workers were innocent, behaved the best they could, and did the right thing in a terrible situation. Their entire lives have been destroyed by a handful of their foolish coworkers who were more interested in making a point and detailing past grievances than working with the new team that had come in and offered them a partnership stake in the firm. They were so stuck in the owner vs. employee mindset they ignored the chance to become owners.

    The BCTWGMIU just struck a major blow to the little workers’ rights power remaining in the United States and hurt the labor movement incalculably. Even worse, they are too foolish to see it. The ramifications have already begun. If a new factory wants to raise money, don’t you think investors are going to demand that it locate in a right to work state like Texas, so if this had happened, all of the workers can be summarily fired? The legacy cost of this will be with us for decades.

    TL;DR: The Teamsters Union behaved reasonably. The new CEO behaved reasonably. The BCTWGMIU decided it couldn’t get what it wanted – which was not economically possible based on the numbers – and turned down the chance to own 25% of the business, collect $100 million in bonds, and get seats on the board of directors. Now they get nothing, everyone loses their jobs, the owners get wiped out, and other corporations get to come in and pick up the assets for pennies on the dollar.

    I share this not to take the heat off the management at Hostess, which clearly, over the past decade, has done a piss poor job, but to illustrate that, often times, we may not be getting a complete picture of events from our trusted news sources, whether they be on the right, or the left. Based solely upon the infographics floating around Facebook today, for instance, I was sure that it was the current CEO at Hostess that had inflated his pay as it became clear to everyone that they were headed for disaster. I should add that it’s possible that King of Kona has no idea what he’s talking about. For what it’s worth, though, I’ve fact-checked a few things since reading his post, and he seems to be right on the money.

    Putting all of that aside for a moment, though, it just occurred to me that without Twinkies, there can be no Twinkie defense to fall back on once the revolution is over and we’re all compelled to answer for our actions. If for not other reason than that, I think we all need to start praying for a last-minute resolution at Hostess.

    Also, I know that the accompanying image of Charlton Heston doesn’t really fit with the post, but I thought that I was pretty clever adding the “cold, dead hands” line, and wanted to share it.

    update: And it looks like our prayers may have been answered. Word is, both sides have agreed to enter mediation. So, keep your fingers crossed. If all goes well, we could have Twinkines, Wonder Bread and Ho-Hos back to hasten our deaths before we know it.

    This entry was posted in Corporate Crime, Economics, Uncategorized and tagged , , , , , , , , , , , , , , , , , , . Bookmark the permalink. Post a comment or leave a trackback: Trackback URL.

      10 Comments

      1. Dirtgrain
        Posted November 20, 2012 at 5:17 am | Permalink

        Bring Hostess to Water Street. Can we get partial ownership?

      2. John Galt
        Posted November 20, 2012 at 7:44 am | Permalink

        It’s not being talked about in the lamestream liberal media, but I heard that Michelle Obama led an AFT raid on Hostess, alongside leaders of the Black Panthers, confiscating all the Twinkies and Ho-Hos for herself, and then blowing up the machinery, saying “Fat white kids can go to hell.”

      3. Aaron
        Posted November 20, 2012 at 7:48 am | Permalink

        Jacobin Magazine had what I thought was a pretty good take on this: http://jacobinmag.com/2012/11/hostess-and-the-limits-of-the-private-welfare-state/

      4. Meta
        Posted November 20, 2012 at 10:31 am | Permalink

        Thank you, Aaron. That article was informative, and added considerably to the content of the above Reddit post. I particularly liked this part.

        A line I’m seeing from liberals, meanwhile, is that this is another case of private equity vulture capitalism ruining the American dream. Hostess Brands was under the control of a couple of hedge funds, as is the style these days. And so one line of argument is that Hostess could have been a perfectly sustainable company with good paying jobs, if only those short-sighted PE guys hadn’t showed up to loot it. A typical example of the genre is this from Laura Clawson at Daily Kos. Mark Price puts it more pithily on Twitter: “Private equity runs up debt, takes out fees and investment in capital goods declines leading to cost disadvantages.”

        There’s no question that this is part of the story. The usual antics seem to be at work here, like levering up the company with debt and giving big pay raises to top management even as the business was going under. But Hostess had big problems even before the hedge fund guys showed up. Part of it was that on the marketing side, people just got less interested in eating Wonder Bread and Twinkies, and Hostess never managed to come up with any successful replacement products.

        Moreover, the structure of the company’s labor costs is not a completely bogus issue either. The main issue, as it often is in these cases, isn’t wages but benefits, especially for retired workers. When Hostess went into bankruptcy earlier this year, Pensions & Investments reported that seven of its eight largest unsecured creditors were union pension funds, and that the company faced $130 million per year of required contributions to these plans. And like all American companies that offer health insurance, they faced rising health care costs due to the U.S.’s uniquely irrational and inefficient system of privatized health care. It’s absolutely true that these benefits were negotiated fair and square, and the workers have every right to them. But promising future benefits without worrying too much about how to pay for them is a problem for a lot of companies, and it was a way of pretending to continue the Fordist compromise of labor-peace-for-rising-wages long after it had become inoperative in reality. Continuing to fight on this terrain will always put labor on the defensive. It’s worth noting that the Teamsters’ own position already included significant concessions on pensions.

        The truth, it seems, is somewhere between WSJ and Daily Kos.

      5. Anonymatt
        Posted November 20, 2012 at 10:47 am | Permalink

        Has the claim that the union workers were offered an ownership stake been substantiated anywhere else? I’ve only seen that claim in this anonymous Reddit comment.

        I suspect the Hostess business failure can be traced back to whoever came up with the idea for Chocodiles.

      6. 734
        Posted November 20, 2012 at 10:54 am | Permalink

        Speaking of Daily Kos, I also found this post by by “bluebarnstormer” interesting

        http://www.dailykos.com/story/2012/11/18/1162786/-Inside-the-Hostess-Bankery

        Wonder Bread runs deep in my family. I started at Interstate Bakeries in 1999 in Waterloo, Ia after the birth of my first daughter. I asked my father in law who to talk to for an interview. He had spent his entire adult life there, eventually retiring in 2007. His father drew retirement from the very same bakery. My wife and her sisters experienced a truly middle class Midwestern upbringing, complete with a safe home environment, college educations, and health insurance. He went to work everyday knowing he would be able to retire and draw his pension. He was even able to pass the job down to his son in law.

        I love Wonder Bread. It has supported our family financially and medically for the last 14 years. When my wife wanted to attend graduate school we found a university near a bakery and moved to Lawrence, KS, home of the greatest basketball team in the history of ever. I will miss the overwhelming smell of baking bread and the friendships I built at both bakeries. Including with engineers, truck drivers, supervisors and managers who have also lost their jobs.

        Many of them likely blame the Bakers Union, me. Most understand that this was inevitable. There has been no confidence in the leadership of this company at any level of any department for years. We have watched 6 CEO’s come and go since 2002 and all of them left the company worse than when they took over. All of them got paid, not just the salaries they agreed to, but bonuses and increases all along the way. Including the current joker, who announced he was leaving with less than a year on the job, before he even submitted this last contract offer to us.

        When I received my first paycheck from then Interstate Bakeries in 1999 it had a memo stapled to it. The memo announced that Wonder had just had the most productive quarter in baking history. It stated that the health of the company and brand had never been better. The break room was buzzing with excitement because our contract was soon to be up for renegotiation and this would surely mean smooth sailing. A few weeks later we got the ‘oops’ letter. Turns out it was all an ‘accounting’ error and the company was failing miserably.

        Conveniently though, CEO Charles Sullivan and the board managed to sell their stock before word got out about the bad news. No jail time of course. In fact, Sullivan was brought back as a consultant after his resignation. Enron happened a few years later and at the bakery we were amazed how much attention they got compared to us.

        The company of course used it’s ‘oops’ letter to justify asking for concessions from the Union. We gave nothing and gained nothing that year after a 45 minute strike. The status quo continued and I proudly joined the middle class for the first time in my life. I made $14 an hour and had insurance. I even went on vacations for the first time. I had great pride in my job, and the products. We bought a new car for the first and only time in my life. In 2003 I transferred to the Lenexa, KS bakery.

        In 2005 it was another contract year and this time there was no way out of concessions. The Union negotiated a deal that would save the company $150 million a year in labor. It was a tough internal battle to get people to vote for it. We turned it down twice. Finally the Union told us it was in our best interest and something had to give. So many of us, including myself, changed our votes and took the offer. Remember that next time you see CEO Rayburn on tv stating that we haven’t sacrificed for this company. The company then emerged from bankruptcy. In 2005 before concessions I made $48,000, last year I made $34,000. My pay changed dramatically but at least I was still contributing to my self-funded pension.

        In July of 2011 we received a letter from the company. It said that the $3+ per hour that we as a Union contribute to the pension was going to be ‘borrowed’ by the company until they could be profitable again. Then they would pay it all back. The Union was notified of this the same time and method as the individual members. No contact from the company to the Union on a national level.

        This money will never be paid back. The company filed for bankruptcy and the judge ruled that the $3+ per hour was a debt the company couldn’t repay. The Union continued to work despite this theft of our self-funded pension contributions for over a year. I consider this money stolen. No other word in the English language describes what they have done to this money.

        After securing our hourly cash from the bankruptcy judge they set out on getting approval to force a new contract on us. They had already refused to negotiate outside of court. They received approval from the judge to impose the contract then turned it over to the Union for a vote. You read that right, they got it approved by the judge before ever showing to the Union.

        What was this last/best/final offer? You’d never know by watching the main stream media tell the story. So here you go…
        1) 8% hourly pay cut in year 1 with additional cuts totaling 27% over 5 years. Currently, I make $16.12 an hour at TOP rate of pay in the bakery. I would drop to $11.26 in 5 years.
        2) They get to keep our $3+ an hour forever.
        3) Doubling of weekly insurance premium.
        4) Lowering of overall quality of insurance plan.
        5) TOTAL withdrawal from ALL pensions. If you don’t have it now then you never will.

        Remember how I said I made $48,000 in 2005 and $34,000 last year? I would make $25,000 in 5 years if I took their offer.
        It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.
        That $3+ per hour they steal totaled $50 million last year that they never paid us. They sold $2.5 BILLION in product last year. If they can’t make this profitable without stealing my money then good riddance.

        I keep hearing how this strike forced them to liquidate. How we should just take it and be glad to have a job. What an unpatriotic view point. The reason these jobs provided me with a middle class opportunity is because people like my father in law and his father fought for my Union rights. I received that pay and those benefits because previous Union members fought for them. I won’t sell them, or my coworkers, out.

        We may have forced the companies hand but they were going to smack us with it anyway.

      7. Mr. X
        Posted November 20, 2012 at 10:56 am | Permalink

        Yes, Anonymatt. This is from the Hostess press release dated Nov. 16.

        “Hostess Brands is unprofitable under its current cost structure, much of which is determined by union wages and pension costs. The offer to the BCTGM included wage, benefit and work rule concessions but also gave Hostess Brands’ 12 unions a 25 percent ownership stake in the company, representation on its Board of Directors and $100 million in reorganized Hostess Brands’ debt.”

        http://hostessbrands.com/Closed.aspx

      8. Mr. X
        Posted November 20, 2012 at 10:59 am | Permalink

        And the Reddit post wasn’t anonymous. It was penned by the King of Kona.

      9. Posted November 21, 2012 at 3:36 pm | Permalink

        I am total, full-on union but if that stuff about the bakers’ union is true…then wtf?

        Happy Thanksgiving everyone, btw!

      10. Blue Barnstormer
        Posted November 26, 2012 at 9:11 am | Permalink

        I am Bluebarnstormer, author of the blog post that kingofkona psychoanalyzed. What a week. I write a blog post and it blows up. They even put on the TV. Then I’m psychoanalyzed online by someone who’s only source is a company written press release. Apparently thousands have read this thing, including you. It is also apparent that you are taking it at least partially seriously.

        I have never spoken to or interacted with this person. It is very clear that his only source of information was the company story line that they successfully put out during the strike. While employed we are banned from speaking to the media. They had a week to get their story out there with no answer from the Union. If I believed the situation was what kingofkona so carelessly takes for granted, then I too would have doubts. But kingofkona makes a lot of assumptions.

        In fact, his entire analysis hangs from these assumptions. After his awkward part about not being condescending to the reader, who he thinks is like his like his 5 year old niece, he then becomes extremely condescending towards me. If you have a way to get this letter to him I would appreciate it.

        Here is a list of assumptions he makes that are not only wrong, but invalidate everything he says about the situation. It is clear that ALL of his information, wherever he got it, is company spin.

        1) His story about the new CEO saving us from the evil ‘previous’ executives is lacking so many details it can only be called false. There are no short stories.

        a)Former CEO Brian Driscoll sent us the letter calling the pension theft a ‘temporary suspension’. It was Rayburn who stopped pretending we would ever be repaid. It was Rayburn that asked the judge to waive the debt that the company had collected from our hourly work.

        b) When former CEO Driscoll filed Hostess into bankruptcy the company turned over it’s financials and the Union not only reviewed them, but discovered bonuses to executives that were hidden from the Union in violation of the contract. As a private company they didn’t have to prove the pay cuts were equal so they gave themselves massive bonuses.

        c) The Union challenged the bonuses in bankruptcy court, including an as yet unpaid bonus to Driscoll. The judge ruled the bonuses paid before bankruptcy could be kept but Driscoll’s would not be paid. He then resigned.

        d) Rayburn is hired during the firestorm from workers. He puts on a PR bandaid and tells all the bonus recipients they would only make $1 for the rest of the fiscal year, less than four months.

        Conclusion- Kingofkona couldn’t have left out more details. He did not analyze the situation, he analyzed the companies press release. They kept every cent of the bonus they received. They kept every cent of their contracted pay for the first 8 months of the year. Every one of those people pocketed more than the contract said they would over that same period, even after the four months at $1. In other words Rayburn in unworthy of any praise and defense. He is still just an employee of a privately held company, doing what his bosses tell him. The changing of CEOs does not absolve the company of their crimes.

        2)He then proceeds to list the bullet points of an imaginary contract that was clearly dreamed up in the PR department and approved by the lawyers. Again, he never presents to the reader any mention of the Union’s viewpoint on any of his bullet points. He doesn’t even list a single one of the sacrifices asked of us in the Union.

        a)”A twenty-five percent (25%) ownership stake” Factually wrong. It was split. 12.5% is for Bakers and 12.5% is for Teamsters. The Bakers stated goal is to force the sale to a real baking company. An equity stake in this company makes no sense because we have no faith in their business model.

        b)”A package of bonds in the company to go to the employees with a face value of $100,000,000 that would generate interest and be repaid in the future”. This is 3rd tier debt that will be waived in the next bankruptcy with the waive of a hand.

        c)”Two seats on the board of the directors” Ooooh goodie! No we can be ignored in person and still no voting power at all. Only 1 seat was for the Bakers, 1 was for the Teamsters. They are adding two seats to the board, not replacing two seats. It would be the exact same people with an overwhelming majority on the board. It was an offer of nothing.

        d)”Cut existing pay levels to fall in line with other major bakeries”. Funny, that’s not how the contract reads. Perhaps he would like to back that claim up with some evidence. The pay cut he fails to mention is 27% over 5 years and would have lowered my pay per hour from $16.12 to $11.26.

        e)”Do like the other 90% of American manufacturing firms have and “freeze” pension plans, meaning that any new employees will have to use a 401(k) instead.” If by ‘freeze’ you mean total elimination and withdrawal from, sure. If you think we were offered a chance to send our hourly pension money to a 401k then you don’t know what you are talking about.

        f)”Pay more out of pocket for some other expenses such as insurance” The weekly insurance premium will double to $70. In other words we will earn at 40 hours a pretax $380 for take home.

        3) In addition to the 27% over 5 years he forgot to mention, he seems to have missed single most important sacrifice we have had forced on us. A year ago August they ‘borrowed’ the $4.25 an hour that we pay to our pension. In other words, they continue to collect the $4.25 an hour from our hourly earnings but they stopped sending the money to the pension. The contract said that the $4.25 an hour would simply disappear from our compensation. That is an additional 20% cut more than a year ago that no one ever mentions. This contract would have made that permanent.

        4) His description of the Teamsters views on the situation are cartoon like. Again, this is as rosy a description as the English language would allow. It don’t have time to begin to ridicule this statement to the level it deserves.

        5) Personally I don’t know or care about ‘game theory’ but if it means what he says it does “When faced with a total wipeout, you take the option that gives you the greatest long-term chance of survival.” then by his own definition, that’s what we did. Who is he to tell us which option provided us with greatest chance? Especially considering all of the details he has conveniently left out.

        6)He then launches into a barrage of conclusions he has jumped to based solely on his total lack of information of the Bakers side of the issue. He even drops in a falsehood about ‘right to work’ states. Both of the bakeries I’ve worked at were located in ‘right to work’ states. If he were a journalist he would deserve to be fired.

        7) Most insultingly he suggests that the owners have been wiped out. That is outright false. The current owners have publicly stated they expect to sell the brands and facilities for $2.4 Billion. There debt in court is $1.05Billion. That would be a profit of $1.35Billion on their decade with Hostess.

        That profit will not be use to pay back to the pension the money they stole for over a year. The judge has already waived that debt. The irony of kingofkona’s post lies in this sentence “there is a thing called confirmation bias in psychology that causes people to only want to hear what they already believe.” He is certainly not a psychologist. If he were, he would see that he is describing himself.

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