No Ho's For You! (Ho-Hos, That Is)
The Market Ticker ® - Commentary on The Capital Markets
Posted 2012-11-17 08:16
by Karl Denninger
in Editorial
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No Ho's For You! (Ho-Hos, That Is)
 

The union "movement" in this nation took a big fat movement of the bowel style yesterday when by refusing further concessions to a company already attempting to reorganize in bankruptcy they led it to make the decision to shut down.

Hostess, the maker of Ding-Dongs, Fruit Pies and the veritable Twinkie, the inanimate star of the movie Zombieland, is no more.

Thus we see another example of the markets at work, although I'm sure the "Capitalist Pig!" scream will be heard across the land by many a leftist this weekend.

The truth of course is that by shutting down those "Capitalist Pigs" make no more money either.  This is the nature of a bilateral "gun to the head" sort of negotiation; if you push two hard and either party shoots, both lose.

There comes a time, however, when that's the right choice -- when the position labor has placed management in becomes untenable, especially when it comes to benefits.  The underlying pressures are not, in the main, wages per-se -- they're the forward liabilities of retirement in pensions and particularly health care.

There are many who claim that these benefits were negotiated years or even decades before and are "inviolate."  But that's not really true, because they were negotiated for in bad faith.  The very people who engaged in those negotiations also have been part and parcel of the national "credo" of more for less, of leverage abuse, of government largesse and deficit, of monopoly and abuse of privilege that have driven the cost of those pensions to the moon.

It is one thing to negotiate a health care package for retirement that is expected to cost the firm $1,000 a year at the time you negotiate it.  It is quite another to then take public policy advocacy positions that drive the cost to $10,000 or even $20,000 years later while claiming that you're still entitled to the original benefit -- not the original price of the benefit.

One is just.  The other is fraud.

But since there is no means of separating the two when the public policy implications blow back on manufacturers like Hostess the result is that unions must face their own culpability (and accept the damage) in the outcome they advocated for and now are receiving, or they will be seeing many more Hostess-style results.

The worst offenders in this regard are the public-sector unions, who invariably advocate for political candidates and positions that intentionally drive this deficit spending and leverage expansion -- but then argue they should be exempt from its consequence.

Sorry folks, life doesn't work that way, as over 18,000 formerly-employed people just found out.

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User Info No Ho's For You! (Ho-Hos, That Is) in forum [Market-Ticker]
Steinbeck
Posts: 115
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What will be interesting to see is how similar negotiations are conducted in the future.

This is a perfect case study/example for other companies to follow.

Company XYZ, "Take the deal we are offering or we'll simply close up shop for good."

Union, "You are bluffing."

Company XYZ, "Remember Hostess?"

Union, "We'll take the deal."
Natew
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IN
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It's all Mitt's fault! And the republicans!
http://www.politico.com/news/stories/111....

Steinbeck, isn't there a law against making threats to close down the plant to the union? Or is that only illegal when they are attempting to unionize?
Visualcsharp
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Isn't this what most here have been saying would happen? The parasite literally killed the host[ess] this time! And this is undoubtedly just the first in a long line.

BTW Karl, it's spelled "Twinkies."
Ladyliberty
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Zero Hedge has a good write up about this I wonder if those people will go after the Dem's lol

The Hostess Liquidation: A Curious Cast Of Characters As The Twinkie Tumbles

Perhaps one of the most interesting aspects of the just announced Hostess liquidation, one that will be largely debated and discussed in the media, or maybe not at all, is the curious cast of characters and the peculiar history of this particular bankruptcy. Some may not be aware that the company's Chapter 11 (or colloquially known as 22) bankruptcy filing this January, which today became a Chapter 7 liquidation, was the second one in the company's recent history, with Hostess, previously Interstate Bakeries, emerging from its previous protracted multi-year bankruptcy in 2009. What is curious is that its emergence had all the drama of a anti-Mitt Romney PAC funded thriller, with a PE firm, in this case Ripplewood holdings, injecting $130 million in order to obtain equity control of Hostess as it was emerging last time. There were also more hedge funds, investment banks, strategic buyers, politicians involved in this particular story than one can shake a deep fried numismatic value Twinkie at. More importantly, however, as America has been habituated following the last season of the reality TV show known as the presidential election, if Private Equity then "bad." Only this time there is a twist: because it wasn't really PE that was the pure evil in the Obama long-term campaign, it was associating PE with Republicans, and thus: with jobs outsourcing. And here comes the Hostess twist: because Tim Collins of Ripplewood, was a prominent Democrat, a position which allowed him to get involved in the first bankruptcy process in the first place, due to his proximity with the Teamsters' long-term heartthrob Dick Gephardt (whose consulting group just happens to also be an equity owner of Hostess). In other words, the traditional republican-cum-PE scapegoating strategy here will be a tough one to pull off since the narrative collapses when considering that it was a Democrat who rescued the firm, only to see it implode in a trainwreck that has resulted in the liquidation of a legendary brand, and 18,500 layoffs.

But it only gets better. Because the full cast of characters involved here is quite stunning, as David Kaplan summarized so well recently:

continue

http://www.zerohedge.com/news/2012-11-16....
Crzymorse
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This isn't just about pensions, this was a dodgy scummy private equity deal. The company came out of bankruptcy in 2009 with more debt than it went into bankruptcy in the first place. How the **** did that happen. So any cash flow went to debt payments. They will more than likely sell the brands for $500-600M (Bimbo offered to pay $580M in 2007)) on about $350M in investment minus the $24M in annual interest payments plus any management fees. Nice return for putting 18,500 people out of work. The PE guy is also a promient democrat taking so don't expect anything from Obama except a couple croc tears.
Iou
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When the math doesn't work you close the doors. The unions will have to make concessions or they’ll all be out of jobs. The private sector is taking it up the ass. It’s time for the politically protected union workers to share the pain. I am concerned about the public unions however since there isn’t any free market mechanism to stop their plunder. Most people don’t realize how dangerous public unions are. They’ve taken over every community in this country and they aren’t going to give up a dime without a fight. I believe this will be the spark that ignites the violence that tears this country apart.

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"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."- Frédéric Bastiat
Mangoelvis
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I actually heard a union member on the radio saying this Hostess situation was necessary to strengthen unions in other industries. Wtf?

I haven't had a Twinkie or ding dong in years but I do remember liking frozen ding dongs as a child. Something about them being individually wrapped in foil I think

I'm looking forward to some interesting youtube videos from Walmart on Black Friday. The unions have gotten some news coverage for their walkout and if they can get decent participation it could get quite spicy.


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Hikaruwsulu
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Or, here's a competing narrative: maybe some Wall Street vultures larded (ha!) the company up with debt, extracted all the money gained from previous worker concessions - which was supposed to be spent on product development and capital improvements - in the form of executive bonuses and pay hikes, and now will liquidate because the workers won't accede to draconian pay reductions.

Link to a press release from the union, which presumably is no more biased than the equity perspective: http://www.sacbee.com/2012/11/13/4983174....

Simply, the healthy tension between labor and capital becomes unhealthy when one side has too much power: unions overreach, capital seeks to extract too much value. In this case, it seems more than a little harsh to demonize labor, and I don't know how to reconcile our esteemed host's insightful commentary on international wage arbitrage with his perspective on domestic unions. How does a society maintain an economy when companies are unwilling to share enough of the profits with their employees to create a market for their goods?
Frat
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I *LOVE* it. These bastards finally got what was coming to them, and they SO richly deserve it. Unions had their place in history. They fought for, and helped pass labor laws that protected workers. That's not longer the case - especially NOT with public unions, the ****ing leech****s-with-jobs that******the rest of us.

I wish I could draw, because my political commentary cartoon of the week would have the union and Hostess at the card table, the unions screaming "I call that bluff!" with a pair of two's, and Hostess turns over their royal flush saying "It wasn't a bluff." Classic.

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Lemonaid
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Labor's at fault... you don't like your conditions? Strike or quit.

/actions have consequences

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Ladyliberty
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About those public unions they are a threat to all American's they shouldn't even be abolished even FDR saw the danger. I am sick to death of them holding taxpayers hostage demanding more from the people who pay them then the people themselves make. It's one thing to be in a private union negotiating and quite another to be able to hold people hostage like the teachers, firemen, police, etc. do.

The Trouble with Public Sector Unions

snip

Even President Franklin Roosevelt, a friend of private-sector unionism, drew a line when it came to government workers: "Meticulous attention," the president insisted in 1937, "should be paid to the special relations and obligations of public servants to the public itself and to the Government....The process of collective bargaining, as usually understood, cannot be transplanted into the public service."

in full http://www.nationalaffairs.com/publicati....
Bagbalm
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I think we are near the point mayors and city managers will be openly threatened with violence to their person and homes and family by their own police. And who do they look to to protect them? State police against city police? They are all brothers in blue. Not going to happen.
Themortgagedude
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Iou - yep. And I'm afraid you're correct.

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Uwe
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Part of the problem was inflexible unions. But another part was excessive leverage taken on by the so-called "Owners" of the company.

-Uwe-

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“Whenever the legislators endeavor to take away and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any further obedience.” - John Locke
Themortgagedude
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Uwe I think you're correct. And thus let them all fail. This failure will force lenders to make more prudent decisions in the future.

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Hikaruwsulu
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"I *LOVE* it. These bastards finally got what was coming to them, and they SO richly deserve it."

Sure, nothing makes most people happier than seeing those evil people who try to earn a living wage and secure some kind of retirement join the ranks of the unemployed, en masse. I'm sure the author of this comment would GLADLY take a 27% decrease in compensation while his boss tripled his own income. WTF?
Frat
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WTF?

W.T.F?

Have you been paying ****ing ATTENTION? Let me guess where YOUR paycheck comes from? I've BEEN on both sides, management having to listen to bull**** that will put us out of business, and labor where I was FORCED to join the union to get the ****** job, then FORCED to put up with mediocre workers who didn't give a **** because they couldn't be fired, SINCE THEY WERE PART OF THE UNION.

You don't like what management offers? GET A DIFFERENT ****ING JOB. Yes, it looks like Hostess management made some DUMB financial decisions of their own, BUT IT'S THEIR ****ING COMPANY. Employees do NOT hold management by the balls in cases like this, nor SHOULD THEY.

Unions breed mediocrity - AT BEST. **** union stooges.

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Uppity_peasant
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Hikaruwsulu wrote..
Simply, the healthy tension between labor and capital becomes unhealthy when one side has too much power: unions overreach, capital seeks to extract too much value. In this case, it seems more than a little harsh to demonize labor, and I don't know how to reconcile our esteemed host's insightful commentary on international wage arbitrage with his perspective on domestic unions. How does a society maintain an economy when companies are unwilling to share enough of the profits with their employees to create a market for their goods?


That sounds real nice, but you have to remember that union POSs keep qualified workers out of jobs, AND they foster a slacker job environment.

Why should a politically select few get the cream, while every other worker has to eat the scraps?

Unions have had PLENTY of time to evolve and promote an answer to the question "How does a society maintain an economy when companies are unwilling to share enough of the profits with their employees to create a market for their goods?", but they chose to******the companies or the taxpayers, screw over the younger replacement workers, and retire at 52 at 20-30 bucks an hour, while sucking the air out of the labor room by using their connections to continue to work on the side (or in a second career), AGAIN screwing over the younger replacement workers.

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If it's true that "assault weapons" are "weapons of war" and don't belong on the streets of America, why do the police need them? Who are the police at war with?
Magus
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"The company came out of bankruptcy in 2009 with more debt than it went into bankruptcy in the first place. How the **** did that happen"

Very common in Chapter 11 reorganization. The company has to receive more cash [debt, frequently as DIP] to work through bankruptcy, which gets moved to the front of the debt line (for the most part) and all of the other debt moves to the back. It's kind of a damned if you do (extra debt), damned if you don't (chapter 7). Companies that enter chapter 11 frequently reenter bankruptcy proceedings because of this but it does allow the company a chance to turn it around (and many times they do)

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"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

-~~Ludwig V
Goforbroke
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Too bad "our elected officials" (local councilpersons and school board members) don't have the guts to have that dynamic play out in the public sector (including "safety personnel" and teachers).

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Iou
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@Hikaruwsulu
Keep believing in the promises made… Unicorns do exist...

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"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."- Frédéric Bastiat
Ben
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"Nice return for putting 18,500 people out of work"

When you go 22 twice, your duty is to the two sets of creditors. The best deal for them, the right thing to do to pay that debt, was liquidation.

Without the liquidation, you cannot sell the brands.

Then the math does not add up.
Then, you have the debt of $200mn, the interest payments, and no equity and a shuttered cash flow bleed. You begin to hemorrhage cash like insanity.

Karl and others here know how fast the cash situation is in a business but many of you do not. It can turn so ****ing fast, you have no idea. You just see a working solid business that employees people. You do not see the ****load of work it took to get it up to that level and to keep it there. You have no idea how fast it can go backwards.

When it unravels, it's as fast as this. Weeks. 3 to 6 weeks. And it can all go away just like that *

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"Because I'm going to France," says Joe.
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Frat
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Ah, like all of the ignorant-ass Obots during the election, a quick look using the Search function Karl has so kindly provided, shows this one's true motivation and consistent contrarian views when it comes to union thuggery versus, well, anyone who ISN'T a union thug.

I'm done with this one.

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Hikaruwsulu
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No need to guess where my paycheck comes from - it comes from a large software company. I think the company treats us very well, I'm not aware of any unions in the company, and I don't think they're needed. I consider myself extremely fortunate - I bust my butt to help the company succeed, and I'm rewarded: everyone's happy. But I recognize that there are people without college degrees and/or highly marketable technical skills, and that they need to eat, too. Balance!
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