If you look closely at the disclosures from the mutual fund managing your 401K you may see that they have invested some of your money in a plan to hollow out an American aluminum company and move its production to China. This plan is highly lucrative for the managers of the private equity companies involved and for some bankers and lawyers. What's in it for you? Risk - a lot of it! And you also get help give a salary to Rick Wagoner, last seen presiding over the near death of General Motors. And chances are this is not the only such scheme you are helping finance. Lucky you! Let's see how it works for Aleris, an Ohio based aluminum company. Aleris started February 2011 by selling $500,000,000 ($500 million) of bonds, apparently mostly to mutual funds. Selling bonds is a way of borrowing money. What do they plan to do with this money? Well $300,000,000 will be used to pay "dividends" to the people who run the company. Why work at trying to make a company profitable when you can pay yourself for putting the company into debt! And much of the remaining money is going into a joint venture in - you guessed it - China! I don't want to dwell on what else could be done with this money: maybe some investment in new plant equipment, some energy saving or green power technology (aluminum is highly sensitive to power costs), you know the stuff that used to be what you'd expect management to do with investment money. The folks controlling Aleris are the Private Equity fund managers who scooped it up and they don't seem to have any expertise in or interest in actual manufacturing. Of course, the mutual funds and others who purchased the bonds, with other people's money, must have done their research. And they would have seen that Aleris has a GREAT credit record ever since they finished bankruptcy proceedings in, well a couple of months ago. The previous investors and bondholders lost a whole lot of money from the bankruptcy and it looks like the new owners were just barely prevented from dumping their pension obligations on the taxpayer too - not for lack of trying. The personal integrity of people who want to take old people's pensions away is, um, confidence inspiring? The bond investors also would have seen, I guess, that Moody's rated these bonds B3 - "highly speculative". Historically, though, the default rate for such bonds is between 30% and 40%, what could go wrong? Bonds like these come with legal protections called "covenants" that make sure the company managers take their duty to repay seriously and don't siphon off assets.
Covenant analysts at both Moody's Investors Service and credit research firm Covenant Review said the Aleris deal offers some of the weakest bondholder protections of any deal to come to market recently. In particular, they cite provisions that give Aleris an unusual degree of flexibility to issue additional debt and make future dividend payments. [...] In addition, Covenant Review described the deal's restricted-payments covenant--a common clause in bond offerings that limits dividends and other payments to equity holders--as "seriously deficient." Covenant Review said a combination of loopholes, carve-outs and other exceptions would allow Aleris to move an unlimited amount of its assets into entities that are not subject to the restrictive covenants, while Moody's said the carve-out provisions for this deal are 4.7 times greater than the 2010 market median. Michael Aneiro, Wall Street JournalAll this means that it is possible that the Chinese venture and other profitable parts of the company may eventually walk away from that $500 million and other debt, from the US workers and towns, and leave the chumps with the mess. And to really seal the deal, if you want to feel great about your mutual fund's management of your hard earned retirement money, look at the management board running Aleris! In particular consider their new board member: Mr. Wagoner.
Wagoner, 57, was forced out at GM after U.S. President Barack Obama’s auto task force decided he was unable to craft a plan to save the automaker he ran for more than eight years. He officially retired in August 2009 after 32 years at the company. GM lost $82 billion during Wagoner’s last four years in charge and ceded its title as the world’s top-selling automaker to Toyota Motor Corp Theo Keith.Can you think of anyone you'd more trust to take care of your retirement money than a guy with a track record like that? Fired after losing $82 billion in only 4 years - that is $82,000,000,000! And the next time you read stories about the economy from the Washington Post, stories explaining that the problem with the economy is government spending on "entitlements" and taxes that are too high for the rich to pay, and why President Obama needs to drop this foolishness about infrastructure and education - remember that Rick Wagoner is on the Washington Post board too. He knows business! At least he knows how to personally profit from a business. The shareholders, bondholders, vendors, employees, and pensioners may not do that well, but, screw 'em, they are definitely not part of the inside game.
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