The Twinkie Defense

You remember the Twinkie Defense? It was a term of ridicule coined by reporters covering the 1979 San Francisco murder trial of county supervisor Dan White. The right-wing White had assassinated both fellow supervisor Harvey Milk, a heroic figure in San Francisco’s gay community, and Mayor George Moscone. Lawyers for White claimed that he overdosed on Twinkies, and was acting under the delusional influence of a sugar high.

Now, there is a new Twinkie Defense, and it is equally shameless and delusional. The Twinkie Defense is: the unions made us do it.

For those who missed it, having perhaps spent the weekend on Jupiter, the iconic Twinkie brand is on the verge of extinction. The parent company of America’s beloved junk food, Hostess Brands, has been in bankruptcy since January 2012.

In the bankruptcy proceeding, management has been leaning on the unions to go along with massive pay and benefit cuts to “save the company.” The bakers’ union, the largest at Hostess, voted by a 92-percent margin to reject the company’s demand for an immediate 8 percent pay cut. This came on top of $110 million in pay concessions given by the unions the last time Hostess was in bankruptcy.

The company and the financial press have spun this story as the makers of Twinkies going out of business because of excessive labor costs. But here’s the real story.

Hostess Brands is classic case of private equity engineers and executives looting a viable company, loading it up with debt, and then asking the employees to make up the difference.

In the 1960s and 1970s, the pre-existing company went on a buying spree, picking up some of America’ s most famous brands. It paid $330 million for Hostess. The company, then known as Interstate Bakery Holdings, was taken private in 1987, then went public again in 1991. At each step of the way, middlemen and insiders captured windfalls.

In 1995, Interstate bought Continental from Ralston Purina, giving it ownership of the precious Twinkie, as well as Ding Dong, Ho Hos, and Wonder Bread. Yet another acquisition brought Drakes Cakes into the family.

Having taken on massive debt, the company, now called Hostess Brands, declared bankruptcy in 2004. When it emerged from bankruptcy, having laid off some 17,000 workers, its private equity owners loaded it up with debt again. By early 2012, Hostess was in debt to the tune of $860 million. Despite its distress, its last chief executive was paid over $2.5 million a year.

So when further worker pay cuts of 27 to 32 percent were demanded to make up for all these corporate misdeeds, the union said, No way. The company then asked permission of the bankruptcy judge to liquidate—sell off its assets.

So the real story is not one of recalcitrant unions, but of private equity abuses. If this story faintly reminds you of something, it’s Bain Capital, the private equity firm that made Mitt Romney so rich.

Had Romney succeeded in his takeover bid for the White House, he would have been the perfect symbol of this debased era of American capitalism.

And if the man who beat Romney—President Barack Obama—wants to do something for America’s hard pressed workers, he could add to the list of tax reforms in the budget deal a reform of the loopholes that allow the private equity gang to take huge tax deductions for loading up a company with debt in order to take it over and then pay themselves exorbitant dividends that further strip the operating company of resources.

There is still a possibility that the judge in the case will not allow Hostess to be broken up. However, if the liquidation does go forward, fear not for the Twinkie. The gooey food has value as a brand and some company or other will surely buy it.

But fear for America’s workers. The way the private equity game is played, the financial engineers who keep creating these serial crises for their own enrichment will not be satisfied until the employees agree to work for nothing at all.

Comments

The "the iconic Twinkie brand" is not in any way, shape, or form "on the verge of extinction" and I dearly wish commentators would stop with this nonsense. At worst, the company Hostess Brands is on the verge of extinction, but the assets of the company, specifically including the Twinkie brand, but also including Ho Hos and Ding Dongs, will be sold to the highest bidder in a liquidation sale and that new owner will immediately and without a second's delay start making Twinkies to restock the nation's grocery shelves to recoup their investment.

The danger is to the corporate entity, not the brands.

As the poster says, keep calm and carry on.

The author's characterization of Dan White's Twinkie defense is inaccurate. It was not that White's diet caused his mental condition, but that his recent junk-food diet was an indication to the court psychiatrist that some kind of mental disturbance had occurred to a man who had previously been known as a health and fitness extremist.

Read the filing. It is complicated. The company was losing over $100 million per year and that was not because of debt payments. The union work rules seem egregious (union delivery man can't stock the shelves, different union person has to go to the location to do that, etc) and the pension obligations were $1 billion. Tried to a could not find a buyer for the company. Not sure if the union proposed an alternative solution, or just said "no". Lenders and equity losing their investments. Bad deal for all concerned.

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