Vampire Capitalists Drain Life from Hostess

Everyone is lamenting the death of the Twinkie now that Hostess is declaring bankruptcy. The right is blaming the unions for staking their favorite snack food in the heart. However, the untold story is that greedy CEOs, hedge funds, and a private equity firm not unlike Bain Capital all had a hand in the demise of Hostess.

But like a zombie in The Walking Dead, Hostess will rise from the grave and start producing deathless Twinkies once again. How do I know? We've seen this horror show once before.

An article in Fortune from last July goes into detail on the current fiasco and its genesis. The last time Hostess declared bankruptcy was in 2004. A private equity firm, Ripplewood Holdings, bought up the assets:

Hostess was able to exit bankruptcy in 2009 for three reasons. The first was Ripplewood's equity infusion of $130 million in return for control of the company (it currently owns about two-thirds of the equity). The second reason: substantial concessions by the two big unions. Annual labor cost savings to the company were about $110 million; thousands of union members lost their jobs. The third reason: Lenders agreed to stay in the game rather than drive Hostess into liquidation and take whatever pieces were left. The key lenders were Silver Point and Monarch. Both are hedge funds that specialize in investing in distressed companies -- whether you call them saviors or vultures depends on whether you're getting fed or getting eaten.

The unions already took a big hit at Hostess, so the current dilemma is not all their fault: we can also blame the vulture capitalists and greedy CEOs, of which Hostess had six over eight years:

[Brian] Driscoll, the CEO, departed suddenly and without explanation in March. It may have been that the Teamsters no longer felt it could trust him. In early February, Hostess had asked the bankruptcy judge to approve a sweet new employment deal for Driscoll. Its terms guaranteed him a base annual salary of $1.5 million, plus cash incentives and "long-term incentive" compensation of up to $2 million. If Hostess liquidated or Driscoll were fired without cause, he'd still get severance pay of $1.95 million as long as he honored a noncompete agreement.

When the Teamsters saw the court motion, Ken Hall, the union's secretary-treasurer and No. 2 man, was irate. So much, he thought, for what he described as Driscoll's "happy talk" about "shared sacrifice." Hall says he tracked Driscoll down by phone and told him, "If you don't withdraw this motion, these negotiations are done." Hostess withdrew the motion a few weeks later when Driscoll left -- the same Driscoll who, Hostess told the court in its motion, was "key" to "reestablishing" Hostess's "competitive position going forward."

The unions are not blameless either, as is clear from their demands for featherbedding (different drivers must be used to deliver different products). But you can certainly see why they're so intransigent in the face of such blatant incompetence and greed in management, after giving up so much the last time.

Thus, there's a whole host of reasons why Hostess is in trouble. Not the least of which is that demand is down for its products because they're simply bad for your health.

But bankruptcy doesn't mean the end of the Hostess brands, just like the last time. In bankruptcy the recipes, trademarks and facilities of Hostess will be liquidated. Which means private equity firms and hedge funds—maybe even run by the same guys—will be able to buy them for pennies on the dollar. And go right back into business, but this time with a much bigger hammer to smash the unions with.

And that's really the point here. These days the balance of power between unions and management is heavily weighted toward management. In the past labor staged strikes, but that's increasingly rare. Now we hear almost exclusively about lockouts. From Hostess, to tire factories, to sugar beet processing plants, to operas and symphony orchestras, to national basketball, football and hockey leagues, management doesn't care if they drive their organizations into the ground with lockouts, as long as they can break the unions.


Despite what Mitt Romney says, corporations, private equity firms and hedge funds are not people. Like vampires, they can die and be resurrected from the dead only to suck the life out of the people who work for and invest in them.

The entire purpose of corporations is to insulate management from personal financial responsibility for their decisions. Hedge funds and private equity firms use other people's money to engineer takeovers. Corporate bankruptcy laws encourage the hedge fund managers to destroy the company in order to start over with a clean slate. All the while these ghouls pay the ridiculously low 15% capital gains tax rates on their salaries because of a loophole in the tax code.

These vampire capitalists drain the life out of companies like Hostess, yet always increase their own wealth, without ever having to risk their own financial well-being. They can then dissolve into corporate bankruptcy, only to reform in their crypts under a new corporate logo.

Those of you who thought you had staked the last vampire capitalist when Mitt Romney lost the election were wrong. Go get your garlic, holy water and crucifixes. There's more work to do.