Bethlehem Case Study

Anita Cavell grabbed the pension reports she photocopied in Baker Library—many of which, like the above, foretold of impending doom—and ran off to her afternoon class at Harvard Business School (HBS). Although she was just 28 years old and decades from retirement, Cavell suddenly developed a keen interest in pensions. It was October 16, 2001—the day after Bethlehem Steel, her father’s pension plan sponsor and his employer for 36 years, filed for bankruptcy protection. Cavell’s father planned to retire within months and was counting on Bethlehem Steel for annual pension income roughly equal to 40% of his current yearly wages. It was hard-earned income he now feared he might never see.

Under normal circumstances, Cavell thought, her father’s fears, probably shared by many of Bethlehem Steel’s 100,000 current and future pensioners, might have attracted public concern. But circumstances were anything but normal. The world was rapt with the monumental tragedies of Tuesday morning, September 11, 2001 and that day’s continuing aftermath around the world. An already fragile U.S. economy reacted dramatically to the news of that day. All U.S. financial markets closed indefinitely on September 11 for the first time since World War II. When markets reopened September 17, the Dow Jones Industrial Average lost 7% of its value in one of the largest one-day losses in its 105-year history. Similarly, the broader S&P 500 index closed down 5% on September 17. Confirming signs of economic weakness, the Federal Reserve cut its benchmark U.S. short-term interest rate on October 3, for the tenth time in 2001. This “discount rate” was slashed to 2.0%, a rate unseen since 1958. Understandably, Bethlehem Steel’s news on October 15 did not capture national attention.

Cavell knew she couldn’t do much about the condition of the markets or of Bethlehem Steel. However, she decided to focus on something she could do—help her father—by evaluating the financial outlook for her father’s retirement...