PBGC Takes Stock in Big Industries

An article in the Nov. 3 Wall Street Journal relates that the Pension Benefit Guarantee Corporation (PBGC) is fast becoming a major shareholder in the flailing airline industry and may soon take stock (literally) in the auto industry as well. The article explains that when big corporations file for bankruptcy protection and turn their underfunded pension plans over to the PBGC, occasionally a federal bankruptcy court will award shares of a corporation’s stock to the PBGC in lieu of paying cash that the corporation doesn’t have. This practice is increasing as more and more corporations are using bankruptcy for reorganization versus complete liquidation of company assets. It’s estimated that the PBGC may receive as much as 35% of the stock of United Airlines when it emerges from 38 months of bankruptcy protection in February, as well as ‘sizable chunks’ of stock in Northwest and Delta Airlines and Delphi Corp., an auto parts manufacturer. Others in the auto industry, such as General Motors, Ford, and Dana, are currently struggling to stay afloat.

The upside to the PBGC as corporate stockholder is that if the stock increases in value, that would help erase the company’s current deficit, ‘forestalling the need for a taxpayer bailout.’ It sounds like a good idea and a good way for the PBGC to recoup some of its losses from the takeover of so many underfunded pensions. The downside is that we then have a government agency as a stockholder in private enterprise. Although, as the article states, the PBGC “doesn’t have the authority to involve itself in management decisions of bankrupt companies,” it still can’t be denied that an agency of the federal government now has a vested interest in these corporations, which are increasingly representative of entire industries (steel, airline, auto).

My concern is; how might this ‘vested interest’ shape the federal government’s policy-making and regulatory decisions? For example, at the same time that the PBGC stands to gain a big share of the airline industry, a related article states, “the White House signed off on new regulations aimed at easing strict limits on U.S. airlines’ access to foreign capital.” More accurately, the government will apply ‘looser interpretation’ to existing U.S. law, which currently “forbids foreigners from owning more than 25% of an airline’s voting shares and requires that carriers operate under the control of Americans.” While this may very well provide an influx of cash from foreigners for the struggling industry (thereby increasing stock value), it also sets a precedent for foreign ownership and control over other U.S. industries. Is this really what we want? (This proposed regulation will be open for public comment and should be published by November 28. It is sponsored by the U.S. Dept. of Transportation and the Office of Management and Budget.)

It’s not my intention to say that the decision to relax regulation of airline ownership is directly related to the PBGC’s interest in the industry, but if we look at a puzzle only in terms of each individual piece, we may never see the whole picture. Those in charge of running the federal government don’t want to be blamed that they’ve failed the American public and it would be shameful for a government agency, such as the PBGC, to have to rely on a bailout by American taxpayers. However, it’s important that we be wary of government actions that attempt to save its politicians from embarrassment or ridicule under the guise of doing what is best for American businesses and the general public. Wouldn’t a taxpayer bailout of the PBGC be of less consequence than foreign takeover of U.S. industry?

Bear in mind that politicians can (and do) fall under the same pressure to perform and succeed as do corporate officers and managers.