This Wall Street Journal ($) article picks up on a subject that I have previously addressed in regard to the legacy airline bankruptcies — that is, the federal government’s increasing equity stake in public companies resulting from the conversion of the Pension Benefit Guaranty Corp.’s debt to equity in the reorganized companies under their chapter 11 reorganization plans:

The U.S. government is on its way to becoming a big shareholder in the nation’s airline industry and possibly in the auto industry.
The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of US Airways Group Inc. by a federal bankruptcy court handling the company’s Chapter 11 reorganization, according to the PBGC’s recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.
The agency is likely to get an even larger stake — between 15% and 35% of new shares — of UAL Corp.’s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it’s likely to get sizable chunks of Northwest Airlines, Delta Air Lines and Delphi Corp. — if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.

The article relates that the PGBC’s policy to date has been not to take an active role in corporate governance matters and that the agency generally assigns one of its 11 money managers (currently J.P. Morgan Chase & Co.)that invest its assets to manage individual equity holdings.
The PGBC is being forced to take these equity stakes at a time when it is experiencing a widening deficit. As of the end of 2004, the PBGC had over $62 billion in obligations and about $40 billion in assets and that deficit will widen this year Delta, Northwest and Delphi unload unfunded pension liabilities on the agency. In fact, the Congressional Budget Office — never a bastion of conservative projections — estimates that the deficit will more than triple over the next ten years to $86.7 billion by 2015.
Interestingly, the article puts a rather positive spin on the equity stake that the PGBC is taking in these companies by relating the government’s successful 1980 Chrysler Corp bailout. In that case, the government guaranteed $1.2 billion in loans for Chrysler in return for warrants to buy 14.4 million Chrysler shares. Chrysler’s turnaround resulted in the company repaying the loans three years later, Chrysler ended up buying the government’s warrants at an suction for over a $300 million profit.
Unfortunately for the government, there is one big difference in the current scenario compared with the Chrysler bailout. The auto industry at least had a prior track record of being profitable. The same cannot be said of the airline industry, particularly over the past 20 years.