Fair or not, Wilbur Ross played the capitalist game
By Charles Stein, Boston Globe Columnist | November 14, 2004
On the surface, the story of Wilbur Ross and the steel industry looks like
another depressing tale about the fundamental unfairness of the capitalist
The facts are not in dispute. Beginning in 2002, Ross, an investor with a
taste for out-of-favor businesses, bought the assets of five failing
American steel companies. He slashed the workforce, cut benefits, and
transferred billions of dollars of pension obligations to the Pension
Benefit Guaranty Corp., a quasi-governmental agency.
A few weeks ago, with steel prices up dramatically, Ross sold his firm,
International Steel Group, for $4.5 billion. Ross's investors made more
than $2 billion. He personally made $300 million.
Where is Karl Marx when we need him?
But a closer look at the facts suggests the Wilbur Ross story doesn't fit
so neatly into an ideological box. ''When Ross started, people viewed the
steel industry as a basket case," said John Anton, a steel specialist with
Global Insight, an economic research firm in Waltham.
Prices were low, demand was weak, and many steel companies had filed for
bankruptcy. On top of that, most of the companies had huge pension
obligations for which they had set aside no money. LTV's pension was
underfunded by more than $2 billion, and the gap at Bethlehem Steel was
more than $4 billion. The pension promises were made at a time when the
companies and the industry envisioned a brighter future.
''If the law required a buyer to take over the pension plans, would anyone
have bought these companies? asked Steven Kandarian. ''The answer is no."
Kandarian is in a position to know. Until earlier this year, he ran the
Pension Benefit Guaranty Corp. He sat across the table from Wilbur Ross in
a series of tough negotiations. His bottom line: The pension obligations
were going to be dumped no matter what. The economics of the steel
industry demanded it. Kandarian's old agency will pay former steelworkers
most of what they were owed from premiums paid by companies with healthier
Ross didn't stop with pensions. He cut retiree health benefits, wages, and
The United Steelworkers of America went along with the changes on the
theory that saving some union jobs was better than losing them all.
Then Ross got lucky. An improving world economy, and a booming Chinese
economy, fueled a big increase in the demand for steel and an even bigger
increase in steel prices. In September steel prices reached $750 a ton, up
from $210 a ton in November 2001. Profits at Ross's company soared and so
did the value of his business.
History may show that Ross bought at the bottom and sold at the top. ''He
took advantage of a market opportunity," said Kandarian. ''That is what
smart people are supposed to do."
In thinking about Ross, it is important to remember that he didn't create
the problems of the steel industry.
Steel is a commodity. It is made by companies all over the world. In
commodity industries the efficient, low-cost producer wins; everybody else
dies. Life doesn't get more Darwinian than that. Some of the high-cost
players will be companies, like the American steel producers, that
promised their workers generous pension benefits.
Those promises won't be kept. United Airlines has already revealed its
intention to renege on its pension obligations, which will stick the
Pension Benefit Guaranty Corp. with a bill of $6.4 billion. Other airlines
may do the same. So might companies in other old-line industries. The
Pension Benefit Guaranty Corp. could get overwhelmed and the taxpayers
could be asked to finance a bailout. It is something we need to think
But whatever we do, the winnowing process will go on. And along the way,
savvy investors like Ross will figure out a way to anticipate what is
coming next. If they guess right, they stand to make a bundle, even as
others lose their jobs and their pensions.
You don't have to like it. You don't have to think it is fair. But you
can't do much about it. For now, at least, that is the way the game is
Charles Stein is a Globe columnist. He can be reached at email@example.com.