Bethlehem did pour major amounts of money--$7.2 billion in the 1960s and 1970s--into modernizing old plants and building a new integrated mill in Indiana, Burns Harbor. There even came a glorious time, in late 1973 and much of 1974, when demand for steel surged, ROE leaped upward, and the investments looked very wise. But that was one of steel's false springs, the greenest of several that came along and briefly, if fraudulently, lifted the hopes of all. By 1975 the industry was again flattened, and was in fact moving into a new and prolonged era of closing plants.

Lewis Foy, Bethlehem's CEO in the late 1970s, described the company's past capital expenditures, heavy though these were, as "far short of our requirements." He then put his mouth where his money wasn't by closing some outmoded capacity in 1977 and booking $791 million in nonrecurring charges that gave Bethlehem its first loss since 1933. Of the total charge, $483 million was for pension costs and other termination benefits due both workers in the affected plants and thousands of white-collar people shoved out as well.

This huge amount, $483 million, drove home the terrible fix Bethlehem was in: Every time it closed a plant, it accelerated the retirement of longtime workers, rang up a bill for shutdown benefits, and put new burdens on a pension plan that by the 1970s the company acknowledged was underfunded. Bethlehem couldn't just ignore this weakness either: It had to build up the pension plan and, leaving aside any outside capital it could bring in, finance this repair work with money it was currently generating. What Bethlehem had here was simply a demographic nightmare, in which an ever-shrinking number of active employees were charged with making profits sufficient to support the present and future of an ever-growing number of retirees and dependents.

Bethelehem's tumbling employment numbers tell the story: Head count peaked at 167,000 in 1957 and by the mid-1980s was down, gulpingly, to 35,000. And at that point (though this certainly wasn't the end of it) Bethlehem had 70,000 retirees and dependents! It also had a pension plan that it judged underfunded by more than $1 billion. The company was meanwhile feeling the great rise in medical costs that walloped the 1980s. And for its medical promises to retirees, Bethlehem had no funding at all. None.

What it had instead was this colossal burden called "legacy" costs. Legacies are usually good when they come from a kindly spinster aunt. They are colossally bad when they are handed down by corporate hierarchies that both overpromise and fail to plan for the day that payment comes due.

From 1980 on, Bethlehem had five CEOs who, on the one hand, agonized about the legacy costs they inherited and, on the other, created new ones by plant closings and layoffs and even by labor settlements that added to the benefit burden. It was a never-ending, expanding mess. Lewis Kaden, a Davis Polk & Wardwell partner who joined Bethlehem's board in 1994 (indeed, as a representative of the steelworkers) has the perfect mental picture: "Bethlehem," he says, "was like an old man carrying bags of rocks on his back, with the man getting ever frailer and the rocks getting ever heavier." Carry that thought a bit further: It was the old man himself who bent to pick up the rocks he was loading into his bag.

Even Robert S. "Steve" Miller, the restructuring expert whom the board hauled in as CEO on Sept. 20, 2001, took on his job optimistically: "I did not come here," he said upon arriving, "to put this company into bankruptcy." But within weeks, on Oct. 15, he did exactly that.

And the frail, old man, lugging his rocks? After Miller himself had made some head-count cuts, there were--though it's almost unimaginable--11,500 active employees and 120,000 retirees and dependents.

As 2002 ended, the company was also showing--we are now measuring its "legacy"--that the value of its pension fund was $3.7 billion and that trailing along was an unfunded obligation of $2.9 billion. In other words, by Bethlehem's actuarial figuring, the company was that much shy of having enough to ultimately pay all its pensioners and their covered dependents. When the Pension Benefit Guaranty Corp. (PBGC) took over the fund--the biggest it has ever assumed--and figured liabilities on a more conservative basis, it upped the unfunded obligation to $4.3 billion. But by its rules, the PBGC will cover only $3.6 billion. So that's the bill this agency (which is financed by assessments levied on all companies having defined-benefit plans) expects to shoulder.

As things work with the PBGC, it will pay a maximum of $44,386 this year to each Bethlehem pensioner. In addition, the executives who did the annuity hop will be getting a second check from some insurance company. Nobody, though, will be paying that other part of the legacy: the health and insurance benefits that Bethlehem promised and didn't fund. Created cavalierly in a succession of union contracts, this "obligation" amounted at year-end 2002 to a mountainous $3.1 billion. That's simply a promise that evaporated into thin air.

One other interesting note....Steve Miller....the last CEO of Bethleham Steel is very familiar to us because he is Delphi's current CEO.