A New Epidemic: Financial Sars

The conventional wisdom is that even though severe acute respiratory syndrome is scary stuff, it hasn't been a big threat to the United States. Financial SARS, by contrast, is spreading across America. The steel and airline industries have been hit by the highly infectious Severe Asset Restructuring Syndrome, affecting untold thousands of workers and stockholders and lenders. The telecom industry may be the next one.

Bankruptcy, which carries much less stigma than it used to, has become contagious because the business world has gotten so competitive. Older airlines are threatened by low-cost Southwest and upstarts like JetBlue. Old-line steelmakers are threatened by U.S. minimills and by foreign competitors. Debt-laden telecom start-ups are threatened by competitors who've shed their debt in bankruptcy proceedings. "When one participant in a commodity business is using bankruptcy to lower his cost structure, the competitors have to respond," says Mark Feldman, a veteran bankruptcy expert. A commodity business is one, like airlines, where everyone's product is essentially the same. (Sorry, upscale pretzels don't count.)

Whether this contagion is good or bad probably depends most on whether you're a victim or a beneficiary. If you believe that the "creative destruction" that lowers airfares or steel prices or long-distance costs is good, you're a fan. If you have ties to the afflicted companies, you see the lost benefits, lost pensions, lost retiree health care, huge losses for lenders, total wipeouts for shareholders. The federal agency that insures pensions has gotten stuck with so many underwater pension funds that it needs a submarine. And some pensions--especially those of people who take early retirement--aren't fully covered.

Whether you like it or not, high-cost companies in competitive industries have to fight for their lives. "It's Darwinian out there," says Wilbur Ross Jr., a bankruptcy player turned industrialist who has done more to restructure the steel business since J. P. Morgan formed U.S. Steel a century ago by combining the nation's major companies. Ross's newly formed International Steel Group became one of the fittest firms in the steel biz by buying LTV's best plants 13 months ago to conclude LTV's bankruptcy proceedings.

The seminal event was the favorable contract Ross negotiated with the United Steel Workers in December. By buying the plants in a bankruptcy proceeding rather than buying LTV, Ross left behind LTV's multibillion-dollar "legacy costs": underfunded pension plans and commitments to provide cheap health insurance to retirees. Ross's labor contract let him cut the blue-collar work force by about a third from the LTV days, and he slashed the nonunionized white-collar staff by about half. So with fewer employees and no legacy costs, he can make steel far cheaper than LTV or any of the other old-line steel companies. This cost advantage put International Steel in a position to buy the assets of bankrupt Bethlehem Steel last month. It paid $1.5 billion for choice pieces of a company that had $6 billion to $7 billion of pension shortfalls and health-care commitments.

With Ross's company loose in the land, mighty U.S. Steel has been forced to respond. It's in the process of buying the assets of bankrupt National Steel in a Rossian maneuver, and is negotiating new contract terms with the steelworkers' union. The union, bowing to the inevitable, has hired restructuring experts and become a player in the game. "We're trying to make the best deal for our members that we can," says spokesman Marco Trbovich.