But if the tobacco industry hopes to survive, it has little choice but to accept whatever the federal government offers it.

When the tobacco companies rejected Senator John McCain's bill in April, claiming it would sink the industry, anti-tobacco forces declared the industry was crying wolf. Although the deal would have raised the domestic price of cigarettes by at least $1.10 per pack over the next five years, tobacco sales abroad are booming where the price tag on a pack of cigarettes is two to three times as high as in the United States. Not exactly a recipe for total industry collapse, especially given the industry's considerable wealth of non-tobacco products.

But the threat of bankruptcy was real for the divisions of Philip Morris, RJR Nabisco, Loews, Brooke Group and B.A.T. that sell tobacco products within the United States. McCain's bill includes a provision protecting the assets of the parent companies, leaving only the domestic tobacco segments of the conglomerates vulnerable to litigation, and capping their exposure at $6.5 billion a year. Since these domestic subsidiaries control less than a third of the industry's total assets, it is unlikely they would be able to support themselves against litigation on their own for long. A few blockbuster judgements would either force the subsidiaries into Chapter 11-in which case they could continue selling cigarettes with the profits going to creditors rather than to the parent companies-or the parent companies could step in and pump money into a losing enterprise.

Wall Street analyst Gary Black of Sanford and Bernstein insisted the McCain bill would bankrupt the industry. Beyond the vulnerability of the subsidiaries, Black said the basic components of the deal would saddle tobacco companies with a burden too cumbersome to bear. In addition to the $516 billion Big Tobacco would have to pay to the federal government over the next 25 years, Black said the deal's look-back penalties would actually raise the price of cigarettes to $1.80 a pack. And according to Black, the $6.5 billion cap would hurt the industry more than it would help it. He described the cap as a giant piece of flypaper that would attract tens of thousands of new claims as lawyers line up to get their share of tobacco proceeds.

"As a shareholder, I would take the $1.10 excise tax Congress will likely impose if the industry does not accept the settlement and avoid the payments to the feds and the liability cap. The cap is worthless to the industry," Black said. Black's employer, Sanford & Bernstein is, in fact, one of the top ten shareholders of Phillip Morris stock with 30,830 thousand shares.

Tobacco executives may have found these hazards daunting, but it is hard to imagine that going to court without the protection of the settlement is any more inviting. By rejecting the settlement's safeguards and taking its chances in court, the tobacco industry has a much greater likelihood of crumbling.

"If this settlement doesn't go forward, the industry will be killed,"Mississippi Attorney General Mike Moore said in January. "There's no question in my mind. The state's lawsuits will put the industry into bankruptcy."

With a string of billion dollar settlements in state courts, the tobacco companies no longer look unbeatable. The industry's $5 to $6 billion deal with Minnesota last week was the sixth out-of-court settlement it has made since last June. In each case the industry offered double, triple or --in Mississippi's case-- quadruple the claim to avoid a trial. But it can't stall forever. Washington state is preparing to try its $3.5 billion damage suit this fall, with Massachusetts and Maryland waiting in the wings.

While legal experts have argued that not every state has a strong enough case to win a settlement or win in court, the gathering momentum for the plaintiffs in these cases makes the possibility of a tobacco victory unlikely. Already, some states have moved beyond just seeking Medicaid expenses to going after anti-trust, consumer protection, RICO claims and punitive damages. If the industry were to lose any of these cases, it would set a new standard for future cases. Big Tobacco, we can presume, doesn't want to see this happen.

So far, the industry has avoided having to pay a large judgment by settling its cases and allowing damages to be paid over 25 years. But the fact that the industry keeps settling will just encourage further litigation. When asbestos companies such as Johns-Manville decided to settle cases in the early 1980s, the number of lawsuits brought against them rose form 16,000 to 24,000 in less than a year and a half.

If just one state wins a large judgment against the tobacco companies, it could be the first step toward an industry-wide collapse. Market analysts and legal experts agree that RJR Nabisco and the smaller tobacco companies might lack the resources to pay the "good faith" bond they would be required to front to appeal the case. It wouldn't be the first time. In 1987, for instance, when Texaco lost a $10 billion judgment to Pennzoil, the company filed for bankruptcy because it could not afford the $10 billion appeal bond.

Let us not forget that tobacco companies initiated settlement talks with Congress in the first place to avoid bankruptcy. Each case costs the industry $150,000 a year to fight. There are now approximately 500 cases pending against the industry including labor unions hoping to recover health and welfare benefits and individuals filing class action lawsuits. If that number were to double to 1,000, a low estimate considering the 400,000 people who die each year from smoke related illnesses, the industry would have to pay $150 million a year in litigation fees alone. Add settlements and court judgements to that figure, and the potential liability of the industry clearly exceeds its entire $150 billion market value.

Senior Vice President of Philip Morris Steve Parrish said the industry supported the June 1997 settlement deal because "we could find common ground...I think that the attorneys general, for example, realized that bankruptcy of the tobacco industry is not going to solve the youth smoking issue. It's not going to solve the public health issues that are addressed in this comprehensive resolution, because there will just be new manufacturers...There could very well be a black market. And I don't think anybody wants that." But tobacco changed its tune when the Senate voted a much tougher deal, raising the ante to $507 billion and eliminating most of the provision for immunity. They walked away from the bargaining table saying the new legislation would bankrupt the industry.

But chances are, no one involved in the tobacco negotiations will allow the industry to go down. Tobacco executives don't want to see the destiny of the business fall into the hands of a bankruptcy judge. And too much money is at stake for the country's healthcare system, for the attorneys trying these cases and especially for the investors and pension funds still holding tobacco stocks.

Legal experts agree that if the industry were to file for bankruptcy, it would almost surely file for a reorganization under Chapter 11, rather than declaring itself insolvent under Chapter 7. As mentioned earlier, Chapter 11 would allow tobacco companies to continue selling cigarettes to pay their debts. While the move would temporarily halt the onslaught of lawsuits, it would also transfer control of the companies to a bankruptcy judge. And a judge could make things very uncomfortable for tobacco companies by choosing to disclose all of the industry's documents to the public or demanding more direct disclaimers of possible health hazards of their products.

Bankruptcy lawyers and creditors would have first priority in getting to the industry's assets. Medicaid claimants would be next in line, but they could probably expect less money and a more difficult time getting it. Private lawyers trying the cases would rank low on the list of money recipients because they would have no direct claim on the industry's assets. Investors in tobacco stocks will be the last to see any money if the industry crashes. But many within the anti-tobacco movement say that is exactly what those who have profited from cigarettes deserve.

"They will have gambled and lost," said Stanton Glantz, Professor of Medicine at the University of California, San Francisco. "They will have bet that the stock was undervalued and that it would go up. I don't see why we should sympathize with someone who bet wrong on a product that kills people."

Tobacco shareholders have weathered these waves of litigation in the past and come out ahead. The price of tobacco stocks have dropped during previous waves of litigation -- first between 1959 and 1964, second between 1982 and 1987. In each case, the stocks rebounded after the industry survived the litigation.

Shareholders may not be so lucky in this third wave. Already stocks have reacted to every concession the industry has made in court.

For instance, during the middle of March, 1996, when the Liggett group settled with five states, Philip Morris stock dropped six points in one week, only to gradually rise again as investors scooped up what they saw as undervalued stock. Tobacco stocks cannot count on such buoyancy, however, after a large judgement against the industry or after a long series of state settlements.

Financial analysts such as Sanford & Bernstein's Gary Black have said stocks will continue to be undervalued until the fate of the industry is certain. That is another reason why tobacco executives, hoping to boost stock prices, began negotiating a settlement. But the McCain bill failed to offer the liability protections the industry had been hoping for, thus failing to provide shareholders with any certainty about tobacco's future in the market. No wonder the industry has rejected the deal.

But what about those who have an indirect stake in the market such as California public employees? These pension fund holders have been exposed to the risk of an industry bankruptcy without much say in the matter. The California Public Employees Retirement System (CalPERS), providing retirement and health benefits to over one million state employees, has over $1 billion invested in foreign and domestic tobacco stocks. A court judgement could cause the tobacco stocks to plummet and leave CalPERS holding the bag. While it may be easy to paint tobacco investors as gamblers, it's hard to see CalPERS members as anything but victims.

Few want to see the industry capsize. Too much can be gained in a settlement; too much will be lost in bankruptcy. The tobacco bosses had best swallow their pride and begin negotiating with Congress again, or be prepared to drag a lot of people down with a sinking ship.

Matt Isaacs is a freelance writer and a student at the University of California at Berkeley Graduate School of Journalism. He has worked with the Center for Investigative Reporting and FRONTLINE. His articles have appeared in the Bay Guardian, The Progressive and the Sacramento News and Review. He also produces a public policy radio show in San Francisco called CityVisions.

A shorter version of this article will appear in the June 1st issue of The Nation magazine.