When Wall Street came to coal country: how a big-money gamble scarred Appalachia

When Wall Street came to coal country: how a big-money gamble scarred Appalachia

Around the turn of the millennium, hedge fund investors put an audacious bet on coal mining in the US. The bet failed – but it was the workers and the environment that paid the price


Last modified on Tue 14 Sep 2021 04.47 EDT

Once or twice a generation, Americans rediscover Appalachia. Sometimes, they come to it through caricature – the cartoon strip Li’l Abner or the child beauty pageant star Honey Boo Boo or, more recently, Buckwild, a reality show about West Virginia teenagers, which MTV broadcast with subtitles. Occasionally, the encounter is more compassionate. In 1962, the social critic Michael Harrington published The Other America, which called attention to what he described as a “vicious circle of poverty” that “twists and deforms the spirit”.

Around the turn of this century, hedge funds in New York and its environs took a growing interest in coalmines. Coal never had huge appeal to Wall Street investors – mines were dirty, old-fashioned and bound up by union contracts that made them difficult to buy and sell. But in the late 1990s, the growing economies of Asia began to consume more and more energy, which investors predicted would drive up demand halfway around the world, in Appalachia. In 1997, the Hobet mine, a 25-year-old operation in rural West Virginia, was acquired for the first time by a public company, Arch Coal. It embarked on a major expansion, dynamiting mountaintops and dumping the debris into rivers and streams. As the Hobet mine grew, it consumed the ridges and communities around it. Seen from the air, the mine came to resemble a giant grey amoeba – 22 miles from end to end – eating its way across the mountains.

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Up close, the effects were far more intimate. When Wall Street came to coal country, it triggered a cascade of repercussions that were largely invisible to the outside world but of existential importance to people nearby.

Down a hillside from the Hobet mine, the Caudill family had lived and hunted and farmed for a century. Their homeplace, as they called it, was 30 hectares (75 acres) of woods and water. The Caudills were hardly critics of mining; many were miners themselves. John Caudill was an explosives expert until one day, in the 30s, a blast went off early and left him blind. His mining days were over, but his land was abundant, and John and his wife went on to have 10 children. They grew potatoes, corn, lettuce, tomatoes, beets and beans; they hunted game in the forests and foraged for berries and ginseng. Behind the house, a hill was dense with hemlocks, ferns and peach trees.

One by one, the Caudill kids grew up and left for school and work. They settled into the surrounding towns, but stayed close enough to return to the homeplace on weekends. John’s grandson, Jerry Thompson, grew up a half-hour down a dirt road. “I could probably count on one hand the number of Sundays I missed,” he said. His grandmother’s menu never changed: fried chicken, mashed potatoes, green beans, corn and cake. “You’d just wander the property for hours. I would have a lot of cousins there, and we would ramble through the barns and climb up the mountains and wade in the creek and hunt for crawdads.”

Before long, the Hobet mine surrounded the land on three sides, and Arch Coal wanted to buy the Caudills out. Some were eager to sell. “We’re not wealthy people, and some of us are better off than others,” Thompson said. One cousin told him, “I’ve got two boys I got to put through college. I can’t pass this up because I’ll never see $50,000 again.” He thought, “He’s right; it was a good decision for him.”

In the end, nine family members agreed to sell, but six refused, and Jerry was one of them. Arch sued all of them, arguing that storing coalmine debris constituted, in legal terms, “the highest and best use of the property”. The case reached the West Virginia supreme court, where a justice asked, sceptically, “The highest and best use of the land is dumping?”

Phil Melick, a lawyer for the company, replied: “It has become that.” He added: “The use of land changes over time. The value of land changes over time.”

Surely, the justice said, the family’s value of the property was not simply economic? It was, Melick maintained. “It has to be measured economically,” he said, “or it can’t be measured at all.”

To their surprise, the Caudills won their case, after a fashion. They could keep 10 hectares – but the victory was fleeting. Beneath their feet, the land was becoming unrecognisable. Chemicals produced by the mountaintop mine were redrawing the landscape in a bizarre tableau. In streams, the leaves and sticks developed a thick copper crust from the buildup of carbonate, and rocks turned an inky black from deposits of manganese. In the Mud River, which ran beside the Caudills’ property, a US Forest Service biologist collected fish larvae with two eyes on one side of the head. He traced the disfigurements to selenium, a byproduct of mining, and warned, in a report, of an ecosystem “on the brink of a major toxic event”. (In 2010, the journal Science published a study of 78 West Virginia streams near mountaintop-removal mines, which found that nearly all of them had elevated levels of selenium.)

This was more than just the usual tradeoff between profit and pollution, another turn in the cycle of industry and cleanup. Mountaintop removal was, fundamentally, a more destructive realm of technology. It had barely existed until the 90s, and it took some time before scientists could measure the effects on the land and the people. For ecologists, the southern Appalachians was a singular domain – one of the most productive, diverse temperate hardwood forests on the planet. For aeons, the hills had contained more species of salamander than anywhere else, and a lush canopy that attracts neotropical migratory birds across thousands of miles to hatch their next generation. But a mountaintop mine altered the land from top to bottom: after blasting off the peaks – which miners call the “overburden” – bulldozers pushed the debris down the hillsides, where it blanketed the streams and rivers. Rainwater filtered down through a strange human-made stew of metal, pyrite, sulphur, silica, salts and coal, exposed to the air for the first time. The rain mingled with the chemicals and percolated down the hills, funnelling into the brooks and streams and, finally, into the rivers on the valley floor, which sustained the people of southern West Virginia.

Water from an abandoned mine in the Appalachian mountains of West Virginia.

Emily Bernhardt, a Duke University biologist, who spent years tracking the effects of the Hobet mine, told me: “The aquatic insects coming out of these streams are loaded with selenium, and then the spiders that are eating them become loaded with selenium, and it causes deformities in fish and birds.” The effects distorted the food chain. Normally, tiny insects hatched in the water would fly into the woods, sustaining toads, turtles and birds. But downstream, scientists discovered that some species had been replaced by flies usually found in wastewater treatment plants. By 2009, the damage was impossible to ignore. In a typical study, biologists tracking a migratory bird called the cerulean warbler found that its population had fallen by 82% in 40 years. The 2010 report in Science concluded that the impacts of mountaintop-removal mining on water, biodiversity and forest productivity were “pervasive and irreversible”. Mountaintop mines had buried more than 1,000 miles of streams across Appalachia, and, according to the EPA, altered 2,200 sq miles of land – an area bigger than Delaware.

Before long, scientists discovered impacts on the people, too. Each explosion at the top of a mountain released elements usually kept underground – lead, arsenic, selenium, manganese. The dust floated down on to the drinking water, the back-yard furniture, and through the open windows. Researchers led by Michael Hendryx, a professor of public health at West Virginia University, published startling links between mountaintop mines and health problems of those in proximity to it, including cancer, cardiovascular disease and birth defects. Between 1979 and 2005, the 70 Appalachian counties that relied most on mining had recorded, on average, more than 2,000 excess deaths each year. Viewed one way, those deaths were the cost of progress, the price of prosperity that coal could bring. But Hendryx also debunked that argument: the deaths cost $41bn a year in expenses and lost income, which was $18bn more than coal had earned the counties in salaries, tax revenue and other economic benefits. Even in the pure economic terms that the companies used, Hendryx observed, mountaintop mining had been a terrible deal for the people who lived there.

One afternoon, I hiked up through the woods behind the Caudills’ house to see the changes in the land. By law, mines are required to “remediate” their terrain, returning it to an approximation of its former condition. But, far from the public eye, the standards can be comically lax. After climbing through the trees for a while, I emerged into a sun-drenched bowl of stone and dirt, the size of a small stadium. In the centre was a human-made pond, ringed in rubber tubing, full of water that was murky and still. Above the pond, a gravel driveway connected it to a mesa left behind after a peak had been blasted away. Technically, the driveway was a “stream”. For most of human history, the area had been a dense forest. Now it was a strangely lunar place.

Down the road, I stopped at another mesa that had once been a peak. Under the law, mining companies have to spread fertiliser and fast-growing plants, so tall grasses and broomsedge waved in the wind.

It looked less like an Appalachian mountain than a grassland in Mongolia. I mentioned that analogy to Bernhardt, and she said the likeness was more than just aesthetic. “You have these new flat Appalachian ‘plains’ that are covered in Asian grasses and Russian olive trees. The rock itself is so alkaline, there’s not many Appalachian species that can grow in it.” And they had begun to be populated by alien species – birds of the Great Plains that had moved into the remnants of old coalmines. “You create these unique and weird habitats,” she said.

The consequences of big-money mining were percolating through families and the broader culture, too, in ways that the country was only beginning to calculate. Jerry Thompson became a vice-president at a manufacturer of home-construction materials. “I’m a business guy. I understand profits, and I understand margins,” he told me. “But the destruction has been amazing to me. It has been so disruptive to so many people. Not just our family. There were families and there were homes and there were kids and there were lives being made. And it’s just all gone.” Thompson was well acquainted with the free-market arguments for expanding the mine; after all, nobody had physically coerced his family to sell. But in practice, he wondered, were they really free to make their own economic choices? “Do you want to raise your family in the middle of a mountaintop-removal site? Probably not,” Thompson said. “I guess you can say you had a choice. But did you?”

A disused mining facility in central Appalachia.

A generation after the mountaintop mine started devouring the Caudill family homeplace, the long-run effect was a hollowing out, an extraction of the place and experience that had once bound them together. The court case had been divisive, and there wasn’t much to come back to on a Sunday. Thompson’s cousin Ronda Harper told me bluntly: “After that, the family just kind of fell apart.” Once a summer, they still had a reunion, but the family was never the same again.

You could visit the land, Harper said, but, “You feel lost when you look at it. The wildlife has been buried, the streams and creatures, the wildflowers, trillium, and so many beautiful flowers that you would see when you would walk up behind the house.” The way she talked about the land reminded me of a line from Emerson: “We see the world piece by piece, as the sun, the moon, the animal, the tree; but the whole, of which these are shining parts, is the soul.”

Over the years, Vivian Stockman, a local environmentalist, worked on scores of cases like the Caudills’, in which people lost their land to mines and pollution. “You hear all the time, ‘We grew up poor, but we didn’t know it,'” she told me. Poverty can be as much about power as it is about possessions; they hadn’t felt poor until someone came along and showed them how little power they really had.

For all the growth of mountaintop mining, it could not disguise the larger fact that coal was in decline. Old mines were running empty; new competition was rising from natural gas and other sources of energy.

Jobs were dwindling, because the industry relied more and more on machines. But, in the 2010s, Wall Street investors glimpsed another new opportunity to enlist the coal industry in a profitable bet.

Financial speculators believed that China’s appetite for metallurgical coal, which is used to make steel, would continue to rise, and they thought American companies could grow and be ready for that demand. Bankers helped coal companies to borrow billions of dollars for expansion, and to shed unprofitable mines and obligations, and earned a percentage on every deal.

As a cost-saving manoeuvre, in 2007, Peabody Energy, the world’s largest coal company, spun off some of its least productive elements, including 10 unionised mines in West Virginia and Kentucky, and $557m in healthcare obligations to retirees. The new company, named Patriot Coal, was born at a disadvantage: it contained 40% of Peabody’s healthcare liabilities, and only 13% of its productive coal reserves. In a call with investors, Peabody’s CFO, Rick Navarre, said: “Our legacy liabilities, expenses and cashflows will be nearly cut in half.”

A miner protesting against Peabody Energy in St Louis in 2013.

Patriot Coal, the spin-off, acquired some new operations – the Hobet mine, next to the Caudill homeplace, was one of them – but within a few years, Patriot was ailing. Wall Street’s bet on Asia had been wrong. China’s economic growth was slowing; the American companies faced unexpected competition from Australia, and, in five years, a glut of metallurgical coal had dropped the price by half. Appalachian coal companies, saddled by billions in debt, started to collapse. In the case of Patriot Coal, it had nearly three times as many retirees as active employees, and, in the first half of 2012, its losses totalled $430m.

By 2016, six of the biggest coal companies had declared bankruptcy, wiping out not only 33,500 jobs in Appalachia, but also billions in tax revenue that would have gone to schools, hospitals, roads and other infrastructure.

Patriot Coal filed for bankruptcy. In response, the miners’ union sued Peabody Energy, accusing it of setting up Patriot as a financial ploy to escape pension and healthcare commitments – a ploy that miners call a “liability dump”. (Peabody denied it.)

The union urged miners and their families to write letters to the court, to make the case for upholding their benefits. More than 1,000 letters arrived. Most were handwritten; some contained family pictures, and lists of ailments and medications. I found them all tucked away in court files, among the legal documents. Reading them today, the letters feel, in retrospect, like a premonition of the US’s rising discontent – testimonies of humiliation and injustice and desperation. Dona J Becchelli, the wife of a retired Patriot miner in Kincaid, Illinois, wrote, “Please, please do not let another large company turn our history back in time. Our great country cannot continue to allow the corporate world to see only the money. We are here; we are people who have built this country on our broken backs and deaths. We only ask for what we have always worked for and were legally given.”

As the bankruptcies accumulated, some Wall Street investors glimpsed one more opportunity: with enough money, and the right manoeuvres in bankruptcy court, they could pick off prime morsels from dying companies, shed expenses and pocket the proceeds. On Wall Street, some of the specialists in “distressed” investments were known as “vultures”. A Bloomberg profile of Mark Brodsky, a prominent vulture investor nicknamed “The Terminator”, reported that his critics called him a “bully”, an “extortionist” and a “suppository”. (Brodsky maintained that firms like his “do a lot of constructive things”.)

Brodsky’s firm, Aurelius Capital Management, invested in Patriot Coal, as did another vulture firm: Knighthead Capital Management, which was cofounded by a veteran investor named Ara D Cohen. Like many of his peers, Cohen lived a long way from Appalachia – in the Golden Triangle, the most prosperous sliver of Greenwich, Connecticut. There he owned a Georgian manor of 17,000 sq ft and 27 rooms, with two pools (indoor and outdoor), a home cinema, a billiards room, an elevator, and a giant chess set.

Knighthead provided an infusion of cash, ostensibly to keep Patriot afloat, but, effectively, to gain more control of it. Kevin Barrett, a lawyer who represented West Virginia in negotiations over the cost of environmental cleanup, told me, “They did exactly what hedge funds do: they stepped in and went to the board meetings and controlled the management.” Vulture investors have a reliable playbook. One explained: “You can try to strong-arm management and get them to sell assets and do shit. Try to settle with the government at some discounted value on the reclamation claims.”

In February 2013, Patriot asked the bankruptcy court for permission to pay more than $7m in retention bonuses to managers, so they wouldn’t flee during bankruptcy. The court agreed. It was awkward timing; barely a month later, the company announced an unusually audacious effort to cut costs: it asked the bankruptcy court for permission to abandon a union contract that provided health insurance for 23,000 retired miners and dependents, which could save the company at least $1.3bn.

The court agreed again. To coalminers and retirees, it was a distressing precedent; in the past, coal companies had dropped pension and healthcare benefits when they went out of business, but now Patriot was seeking to escape those obligations and stay in business.

A former Hobet miner whose healthcare coverage ended after the mining company's bankruptcy.

Cecil Roberts, the longtime president of the United Mine Workers of America, told me, “The bankruptcy judge simply hits the gavel and says: ‘You don’t have health care any more.’ I’m sure many people on Wall Street and across this country say: ‘That’s probably a good thing. Now the balance sheet gets cleaned up. It’s more inviting to investors.’ But that $1.3bn was supposed to go for people I grew up with and I’ve been around all my life, people up and down Cabin Creek, and Paint Creek, and over in Boone County, and Allegheny County, Mingo County, all through Indiana and Illinois. And they’re faced with huge medical bills.”

Roberts is a war horse of the labour movement, with three decades of experience in strikes and standoffs. But none of that equipped him for the language and strategies of Wall Street. “I’m thinking: ‘What the heck is a debtor-in-possession loan? And first liens?’ and all those things,” he told me. “Folks like Knighthead ride in here, and they’re calling the shots and say: ‘Get rid of the company! Sell it all, or sell it in pieces, and we can get our money back.'” He went on: “Average people can’t do these things, but when you’re a huge corporation, you can. That’s just not right. The bigger you are, the more rights you have? … Some of these entities couldn’t find Boone County on the map, but they’re making money off the people who live there. The question really is: what kind of country are we that this can happen?”

Roberts had the job of relaying the events in court to the miners who would be affected. “These are real people we’re talking about here who had earned these benefits, after 30 or 40 years of work,” he said. “They lost their healthcare because a company they never worked a day in their lives for has gone into bankruptcy.”

For a time, Patriot Coal recovered from bankruptcy and limped along. But in 2015 it went belly up again, and this time executives and investors such as Knighthead were not looking for a way to survive.

They made plans to recover whatever money they could by auctioning off the mines and equipment. Nobody, it seemed, would ever pay for the “remediation” at Hobet and scores of other places spoiled by mining.

In the fall of 2015, Barrett, the lawyer representing the state, filed a scathing criticism of Knighthead and other investors for threatening, as he put it, to “expose the people of the State of West Virginia to the serious public health and safety risks associated with unreclaimed land and untreated water”. Selling the most valuable assets for “hundreds of millions of dollars” would leave “not one dime” for the “mess left behind”, he wrote. “Instead, the banks and the hedge funds backing Patriot’s plan will walk off with all of that value and consideration, leaving a carcass.”

Weeks later, the case generated one final flurry of unflattering attention. Court filings revealed that executives were seeking to divert $18m from healthcare funds in order to pay bankruptcy lawyers, creditors, accountants and other costs. According to an investigation by ProPublica, the funds had been earmarked for 208 retirees, wives, and widows in Indiana, until executives took steps to steer it to the law firm Kirkland & Ellis and the consultancy Alvarez & Marsal. By that point, the presidential election was gathering steam, and Hillary Clinton made a point to say the move was “outrageous and must be stopped”.

Protesters opposed to mountaintop removal in Washington DC.

Patriot abandoned the idea, but it was only a brief reprieve. On 28 October 2015, Patriot Coal closed down for the last time. The mines had been sold off to a range of buyers around Appalachia. For a while, the health benefits kept going, but eventually, that fund ran dry. In October 2016, the union sent a letter to 12,500 retirees, informing them that their healthcare coverage was ending in 90 days. The cause: a “critical financial shortfall”.

In the years that followed, the dismantling of Patriot Coal became known as a precedent. “It was the test case,” Phil Smith, a union spokesperson, told me. Hedge funds went on to play powerful roles in the bankruptcies of other major coal companies, including Alpha Natural Resources, Walter Energy, and Westmoreland Coal. In every case, Smith said, the funds asked bankruptcy courts to drop their obligations for pension and healthcare costs. “They would buy up properties nobody else wanted for pennies on the dollar or an assumption of debt.”

The Patriot case had “created a roadmap” for extracting value from bankruptcies in Appalachia. (In 2017, Congress, under pressure from miners and unions, established a fund to protect the healthcare for 22,000 miners and dependents.)

As an old adage in the coal industry puts it: “The company gets the profits; the miners get the shaft.” But, to the men and women affected, Patriot and the cases that followed its pattern were the perfect illustration of a growing crisis: the laws and values of modern capitalism had been honed by lobbyists and political donors to advantage those with the most power already – to ensure that the winners kept winning. The looting of Patriot Coal was not illegal; the scandal, as the saying went, was that it was legal.

In a broad sense, Wall Street and Washington had come to practise a shared approach to the experience of Americans far away. The content of business and politics – the practical effect of a policy or a transaction – mattered less than the sheer facts of winning and advancing. A member of a vulture firm told me the decision to direct their power toward the coal industry was not a grand strategic decision to find value even in hard times; it was barely a decision at all. It was a few numbers on the page. “They were invested in coal because that’s what was distressed at the time,” he said.

Barrett, the attorney who represented West Virginia, had a view into both sides of the transaction: he had grown up near Huntington, the grandson of a miner, and left for New York, where he became a high-ranking corporate lawyer. Eventually, he started taking on cases in his home state, dividing his time between its state capital, Charleston, and a comfortable home in Westchester County, New York, not far from Greenwich and the Golden Triangle.

He was sometimes struck by how little his two worlds understood the experiences and motives of each other. “It never makes it out of the hills down here, and never makes it outside Greenwich and Manhattan up there,” he said. “I don’t know how much these hedge funds really care about what goes on in West Virginia, not for bad reasons, but just because they look at the world through their own perspective, which is dollars and cents and money movement. The effect on people just doesn’t enter into their calculus.”

Like so much about the US’s agonies in these years, the clearest accounting of history was inscribed on the land itself. In Greenwich, Ara Cohen, the cofounder of Knighthead Capital Management, eventually sold his Georgian manor in the Golden Triangle, in order to move to Florida. For the house, he received $17.5m – less than he had hoped, but enough to be the most expensive home sale in town that year.

Six hundred miles away, the Hobet Mine was eventually abandoned. Nobody was going to pay the millions required for environmental remediation. There was talk of building a Walmart up on the strange plateau, with its Asian grasses and Russian trees. But by then, almost all of the potential customers, like the Caudills, were long gone. The Walmart plan never happened.

Finally, the state settled on a very different use – a plan rich with unintended symbolism. In 2017, West Virginia announced that the mine would be put to use as a training ground for the Army National Guard. The barren landscape would be a classroom for teaching local soldiers how to parachute into foreign lands and survive in hostile environments.

This is an edited extract from Wildland by Evan Osnos, published by Bloomsbury and available at guardianbookshop.com

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