Former Aegis Employees Without Health Insurance

An HW reader sent me a link to a story appearing late this afternoon at Fortune (”The darker side of buyout firms“), which just blew me away: every single one of the people fired when Aegis Mortgage filed bankruptcy now apparently find themselves without health insurance.

They aren’t even eligible for COBRA:

Aegis, which was founded in 1993, closed its mortgage production operations on August 6. Two days later, employees were warned that there would be layoffs within 60 days and that benefits would be terminated effective midnight August 10, according to Aegis employees. They were also told that earned paid-time off would not be paid out and that there would be no severance. When the layoffs came on Monday, August 13, 782 people out of 1,302 employees were fired. Those let go were shocked to find that they were not eligible for COBRA. While Federal law requires businesses with more than 20 employees to offer departing workers the chance to buy an extra 18 months of health insurance, it is only required for companies with an active benefit plan, and Aegis had terminated its plan days before. Moreover, Aegis admitted in its bankruptcy filing that it didn’t have the money to pay employee benefits anyway.

Losing your job is tough enough; this must be an absolute nightmare for the people affected. Former Aegis CEO Richard Thompson, ousted in 2006 when private equity player Cerberus first purchased the mortgage lender, is among those now lobbying both Cerberus and Aegis to do what he says is “the right thing” and reinstate the company’s health insurance policy.

So far, it hasn’t happened.

The failure calls into question the management and health of Cerberus’s other loan plays. Cerberus owns a majority stake in GMAC and its mortgage subsidiary ResCap. Thanks to the credit crunch, the ratings agencies have downgraded ResCap, thus making it more expensive for the company to operate. The rising cost of capital may hurt Chrysler Financial, too, the healthy operation within Chrysler that should have been able to help fund the ailing automaker’s turnaround. At a minimum, Cerberus will take a financial hit because of Aegis and the bankruptcy is an embarrassment amid the firm’s recent spate of high-profile acquisitions.

Given the feel-good stories I’ve seen coming from former employees at American Home — and what appears to be good-faith efforts by the company to do what it can to help its displaced former employees — the recent events at Aegis are a stark reminder of just how very wrong things can go.