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Fair or not, Wilbur Ross played the capitalist game

On the surface, the story of Wilbur Ross and the steel industry looks like another depressing tale about the fundamental unfairness of the capitalist system.

The facts are not in dispute. Beginning in 2002, Ross, an investor with a taste for out-of-favor businesses, bought the assets of five failing American steel companies. He slashed the workforce, cut benefits, and transferred billions of dollars of pension obligations to the Pension Benefit Guaranty Corp., a quasi-governmental agency.

A few weeks ago, with steel prices up dramatically, Ross sold his firm, International Steel Group, for $4.5 billion. Ross's investors made more than $2 billion. He personally made $300 million.

Where is Karl Marx when we need him?

But a closer look at the facts suggests the Wilbur Ross story doesn't fit so neatly into an ideological box. ''When Ross started, people viewed the steel industry as a basket case," said John Anton, a steel specialist with Global Insight, an economic research firm in Waltham.

Prices were low, demand was weak, and many steel companies had filed for bankruptcy. On top of that, most of the companies had huge pension obligations for which they had set aside no money. LTV's pension was underfunded by more than $2 billion, and the gap at Bethlehem Steel was more than $4 billion. The pension promises were made at a time when the companies and the industry envisioned a brighter future.

''If the law required a buyer to take over the pension plans, would anyone have bought these companies? asked Steven Kandarian. ''The answer is no."

Kandarian is in a position to know. Until earlier this year, he ran the Pension Benefit Guaranty Corp. He sat across the table from Wilbur Ross in a series of tough negotiations. His bottom line: The pension obligations were going to be dumped no matter what. The economics of the steel industry demanded it. Kandarian's old agency will pay former steelworkers most of what they were owed from premiums paid by companies with healthier pension plans.

Ross didn't stop with pensions. He cut retiree health benefits, wages, and jobs.

The United Steelworkers of America went along with the changes on the theory that saving some union jobs was better than losing them all.

Then Ross got lucky. An improving world economy, and a booming Chinese economy, fueled a big increase in the demand for steel and an even bigger increase in steel prices. In September steel prices reached $750 a ton, up from $210 a ton in November 2001. Profits at Ross's company soared and so did the value of his business.

History may show that Ross bought at the bottom and sold at the top. ''He took advantage of a market opportunity," said Kandarian. ''That is what smart people are supposed to do."

In thinking about Ross, it is important to remember that he didn't create the problems of the steel industry.

Steel is a commodity. It is made by companies all over the world. In commodity industries the efficient, low-cost producer wins; everybody else dies. Life doesn't get more Darwinian than that. Some of the high-cost players will be companies, like the American steel producers, that promised their workers generous pension benefits.

Those promises won't be kept. United Airlines has already revealed its intention to renege on its pension obligations, which will stick the Pension Benefit Guaranty Corp. with a bill of $6.4 billion. Other airlines may do the same. So might companies in other old-line industries. The Pension Benefit Guaranty Corp. could get overwhelmed and the taxpayers could be asked to finance a bailout. It is something we need to think about.

But whatever we do, the winnowing process will go on. And along the way, savvy investors like Ross will figure out a way to anticipate what is coming next. If they guess right, they stand to make a bundle, even as others lose their jobs and their pensions.

You don't have to like it. You don't have to think it is fair. But you can't do much about it. For now, at least, that is the way the game is played.

Charles Stein is a Globe columnist. He can be reached at stein@globe.com.

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