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Hostess Bankruptcy: The Hidden Menace That Killed the Twinkie

One of the most inane and pointless columns ever penned by the usually insightful Paul Krugman appeared in the New York Times on Monday. “The Twinkie Manifesto” gleaned precisely one thing from Hostess’s liquidation: that Twinkies reminded him of the 1950s, when tax rates were high and the rich sucked it up. He used the space to reel off a meandering missive on taxes, class erosion, and out of nowhere, Atlas Shrugged — all of which left the impression of Krugman dictating an article while floating in lukewarm bathwater. Twinkies must have also reminded him of something utterly devoid of substance, because he blew past any reckoning of the reasons for the company’s liquidation, including not only the union debacle, but the role played by desperate moneymen chasing good money thrown after bad. He even had the gall to mention “a labor force with a degree of bargaining power hard to imagine today.” So now we know what Krugman sounds like with the munchies.

Most of what’s written about Hostess’s shuttering is partisan puffing that wants to blame everything on the union, or on the hedge funds, or on management. It’s a testament to how politically divided our writer class is, but it is not accurate. There is no way to look at the saga without concluding that, much like an instinct-less teen in a horror film, the company and its employees deserved the end they got due to roundly-shared stupidity. Hostess’s demise collects the worst elements in modern business into one shrink-wrapped sponge cake: union short-sightedness, managerial ineptitude and avarice, and badly spent millions.

The joke is that the loss of Ho-Ho’s, Ding Dongs, and whatever the hell else they were making is probably a net gain to society. I think Twinkies lost their appeal when the possibility of having to survive a nuclear hellscape passed, or when people realized that subsisting on them in such a scenario would lead to a more agonizing death than leukemia. Still, we don’t like to see companies go out of business in a parade of poor decisions. Not at a time when 18,500 people deciding to join the workforce threatens a downturn.

Let’s recognize that a company like Hostess is supposed to go out of business. Liquidation is a proper burial when you sell products no one wants and are unable to change. This was no surprise. BCTGM — the union — did not suck the company dry, as the popular conservative narrative hopes. Their intransigence merely served as a stake grounding the company to strategy and capital structure that it had long failed to adapt. In 2004, Hostess restructured their debt partly thanks to a $110 million round of concessions from the union. Even with that, the bungling management took five years to exit bankruptcy. Had BTCGM absorbed these new cuts, they would have tolerated decreasing pay and benefits for a few meager years until being forced into another raft of cuts by the competitors that are bidding on the properties now. That would have been preferable to 18% of the union’s membership being suddenly unemployed, but it wouldn’t have saved Hostess.

Meanwhile, BTCGM played its cards badly. For one thing, their anti-hedge fund invective betrays a juvenile objection to management’s decisions. If the board room was lethargic in fortifying the brand, then the union was blind not to acknowledge the company’s existential straits. Union president Frank Hurt said, “The plans all along of the Wall Street investors currently in control of this company did not include the operation of Hostess Brands any longer than it takes to sell the company…in a way that will maximize the profits of these vulture capitalists.” 

That’s as rich as a Cup Cake (creative name, by the way) considering that hedge funds had been providing operational cash for years. At the very least, it was a strategic error on the union’s part to not accept the diminished prospects, if only to piggyback the sale of the company. Now unattached to their own products, the union has little leverage to exert on the purchasers of those pieces of Hostess that will again see the light of day.

But I said that this story combines the worst elements of modern business, and that list isn’t complete without politically connected money and inflated pay to useless executives. Like a scene out of the aforementioned Atlas Shrugged, the capital that revived the company out of its five-year engagement was sourced when serial presidential candidate Former Congressman Dick Gephardt sent Hostess a hedge fund friend interested in projects that involved unions. It sounds like a bachelor seeking out older women with troubled children, but union hero Gephardt was happy to help. (So, presumably, was son Matthew, who was made an independent director at $100,000 a year.) The link is significant for at least two reasons. One, it was $170 perfectly good million in buddy money that actually propped up this failing company. Two, it indicates that Hostess was in BCTGM’s good graces then, or else the investor wouldn’t have been directed to them.

The union may have insisted on their pension contributions (the animals! $34,000 a year isn’t good enough?), but it wasn’t them that requested a 300% raise for their CEO as part of their bankruptcy proceedings in January. And yes, he did take that and then leave immediately, to be replaced by someone hired nine days earlier. It wasn’t the union that made Hostess go into their second bankruptcy with a significantly higher debt load than the first, after they agreed to layoffs and pay cuts. It wasn’t them that was caught off-guard when the company failed to “grow into” the capital structure of a company with much higher revenue. The unions did force through rules that required different teamsters to drive Yankee Doodles and Nature's Pride Nutty Oat. They did not force the company to surrender 60% of equity for a lifesaving cash inflow from the two hedge funds that now run the show.

By the end, what we had was yet another company run by moneymen who had no idea what they were trying to sell, employing people who were self-bound to not work, making a shitty sugar thing that modern people didn’t want to buy anymore. The only thing more American would be if they start making wontons.

Let’s not reserve judgment; let’s spread it around liberally. Keep in mind, though, that the demise of Hostess has been due for a long time. It’s dishonest to pick one of the parties involved and use it as a punching bag. Actually; Krugman you can judge.

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