Remuneration! O! That's the Latin word for three farthings.

Shakespeare, Love's Labour's Lost

I am the first to acknowledge that I am no financial whiz. The most interesting thing about my self-directed retirement plan is that it is retiring sooner than I. At the rate it is going it will have retired completely while I will continue to work in order to breathe a bit of life into it. Nonetheless, after reading of the actions of the trustee of the Employee Stock Ownership Plan of United Airlines, I have a bit of advice for it that, had it been followed (assuming it's now too late) would have given employees a much merrier Christmas than they now face. But first, a bit of background.

In 1993 United Airlines was on the brink of a financial catastrophe, a catastrophe that was avoided when management and the unions came up with a unique solution to the bargaining impasse. On Dec. 15, 1993, the employee unions reached a tentative agreement to acquire a 55 percent ownership interest in the airline under an employee stock ownership plan (ESOP) in lieu of salary increases. In July, 1994 the plan was approved by shareholders and the company became the largest majority employee-controlled corporation in the world. Employee directors were elected to the board representing pilots, machinists, salaried and management employees.

Between 1994 and 1997 the company's stock tripled in value and in 1997 was trading at $100 a share and the ESOP's investment was worth $3.7 billion. That was then. This, as the expression goes, is now.

On Dec. 10 the company filed for bankruptcy. Its stock was no longer selling for $100 a share. It was selling for somewhere in the neighborhood of $1 a share. Then the trustee of the ESOP plan did a dumb thing. On Dec. 10 the trustee, State Street Bank & Trust Co., filed a document with the Securities and Exchange Commission saying it planned to sell the 28.3 million shares it was holding. Prior to that it had given notice that it planned to sell more than 21 million shares. The two sales were believed to liquidate all the shares held by the ESOP. The proceeds of the sale were to be distributed to the employees. Instead of getting a share of a $3.2 billion pie, the employees will receive a share of a pie worth somewhat less than $50 million. Here is where the trustee went wrong. It should have done what John W. Snow did.

Mr. Snow has been selected to be Mr. Bush's new Treasury secretary. For 12 years Mr. Snow was the chairman of the CSX Corporation, the railroad company. During his 12 years with the company he received more than $50 million in salary. Since 1997 Mr. Snow's pay has increased by 69 percent. The stock price of CSX has fallen 53 percent from its 1997 high, including a dramatic nose dive in 2000. And it was in the year 2000 that the company did what the trustee of the United ESOP should have done. It reversed a $25 million loan it had made to Mr. Snow. Here is how it worked.

In 1996 Mr. Snow and other executives were permitted to buy stock in CSX using money they had borrowed from the company. Mr. Snow borrowed $25.4 million from CSX, and put up shares worth $7 million as a down payment. Explaining this slightly odd transaction, the company explained that by having executives own lots and lots of CSX stock, their interests were closely aligned with other CSX shareholders and they would, therefore, be more inclined to act in the best interests of the company. In justifying the odd arrangement the company said that the officers who took advantage of the deal were at considerable risk because in Mr. Snow's case, for example, he remained liable on the $25.4 million loan until it was fully paid and would thus, presumably, suffer should the stock price drop.

That was 1996. Then along came 2000. The stock had by then fallen 40 percent from its 1996 levels. The company concluded that the program in which Mr. Snow participated was not as good as it seemed in 1996. So it cancelled the program. It took back the shares Mr. Snow had purchased, returned the $7 million worth of shares he had used as a down payment (which by then were worth only $4 million) and cancelled Mr. Snow's $25.4-million note. That was a very nice thing for Mr. Snow since he didn't have to pay back the $25.4 million. And it is in failing to follow CSX's lead that the trustee of the ESOP went wrong.

United Airlines' trustee in bankruptcy should not have sold the stock in the ESOP for what amounted to pennies. It should have explained to the bankruptcy trustee that what was done in 1994 had been a bad idea. The trustee should have offered to return to the company the 55 percent ownership interest the ESOP acquired in 1994 and demanded retroactive pay increases for all the employees who had participated in the ESOP. It probably just never occurred to him to do that. Of course there is a bit of a difference between Mr. Snow and United Airlines employees.

The employees of United Airlines who have seen their life savings dribble away are just ordinary people like pilots and mechanics. Mr. Snow is a very important person. He has very important friends, both in the administration and at CSX. He probably takes for granted the fact that he is treated differently from other folks. There is, however, a bright side to his soon-to-be-elevated status of secretary of the treasury. If he can negotiate these sorts of deals for himself, think what he can do for the taxpayers. At least the rich ones.

Christopher Brauchli is a Boulder lawyer and and writes a weekly column for the Knight Ridder news service. He can be reached at brauchli1@attbi.com

Copyright 2002, The Daily Camera and the E.W. Scripps Company

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