JP Morgan Analyst: Pre-Packaged Bankruptcy Best Solution for GM 9 comments
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General Motors Corp. (GM), and to an extent, all of the Big Three U.S. automakers, face three major issues. High debt, costly United Auto Workers expenses and liabilities, and too many brands and dealers.
Outside of bankruptcy, the first two are addressable, says J.P. Morgan analyst Himanshu Patel. He feels the third can probably only be dealt with in a cost-effective manner through a pre-packaged bankruptcy for automakers – something President-Elect Barack Obama is said to be considering. But this must be accompanied by an immediate and unconditional federal backstop for GM’s past and future warranties around the world, Mr. Patel told clients.
Aside from general doubts about government-dictated product plans, he also said Washington’s focus on forcing GM to make greener cars is misguided since the 2007 energy bill already put this process in motion.
The analyst expects Congress will authorize a short-term bridge loan that will carry the Detroit Three to the Obama administration. The new president will then need to put together a second bailout that may be contingent on more comprehensive restructuring that involves labour, credits and perhaps brands and dealers.
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This article has 9 comments:
any bailout for those automakers.
Whoever pays tax should be allowed to vote.
Those who never pay any tax cannot vote. That
will be fair, you think ?
www.contrarianprofits....
Agree 100%.
They cretaed their own demise.
Can't blame anybody.
The following U.S. government policies, many of them having popular support, hurt the big three significantly relative to the foreign transplants:
1. Uneven union laws across states:
a. The 1935 U.S. government Wagner Act granted the right of workers in the private sector to organize labor unions and take place in strikes. What this effectively meant was the labor unions were allowed to seize the plant and prevent its use until they got what they wanted. This created the ridiculous result in the US that workers are paid in proportion to the pain they can inflict by shutting things down. Trains, docks, garbage collectors, police, … get high pay. People in low capital or less critical to safety related industries like restaurants and retail get paid low paid. The relationship of pay to skill, work ethic, hazards goes away. Soon after the Wagner act the UAW took over the auto industry; GM and Chrysler in 1937; Ford in 1941. With no foreign competition the UAW monopoly flourished for about 30 years.
b. The 1947 U.S. government Taft–Hartley Act tried to reign in the unions after a series of post-war strikes. While some provisions were national, the states were allowed to pass "right-to-work laws" that outlawed union shops. Such shops require workers to join the union and pay dues. Said state laws are serious impediments to union organization and viability because few people want to pay dues if not required.
c. The vast majority of foreign owned plants are in right-to-work states providing huge advantages in labor costs and productivity relative to the big three.
d. The big three would find it impossible to change the state laws where they are located due to union dominance of state governments. If they built in the South they have to accept the UAW because they would strike back in Michigan.
e. No other country has this crazy system to my knowledge.
2. Promoted defined benefit packages and kept them in the company name. Did you ever consider how totally stupid it is to pin an employee retirement package, meant to last about 50-60 years from first hire until death, to the viability of their company? The top 10 companies in 1950 were very different than in 2000, with the railroads taking a big dive since then. And in 2020 it will be totally different again. Defined benefit packages were a bad idea, promoted by the US government till this day, and the big three are paying the price. If a company is in decline, due to the other items mentioned here, their retiree pool grows relative to gross income and number of active workers. Costs rise and competitiveness goes down, sales decline in a vicious spiral. Note also that while someday the transplants will pay pensions here in the US, the bulk of their corporate salary people (engineers for instance) back home get pensions from the government. Again, a totally crazy concept promoted by the Feds with widespread public support. And again, affecting the big three orders of magnitude harder than the foreign auto companies.
In most western nations, if there is a defined benefit program, it is paid into a government fund and is divorced from the company. If the company fails, people don’t lose their pension. In the U.S., the Pension Benefit Guarantee Company, a quasi-government / private company (like Fanny-Mae) supposedly fills in when the company goes belly up. But it is really a welfare program, with maximum limits far lower than promised pensions for many salaried workers. The airline pilots at United Air Lines, the current poster child of how wonderful chapter 11 will be for the big three, got screwed out of a large percentage of their “guaranteed” pension. Apparently the courts have ruled bond holders have first dibs on people’s defined benefits supposedly “held in trust”. What a travesty; only in the worse run country in the western world. These plans were in lieu of 401k plans. They are not deferred compensation as some say. There is a pot of gold with the employees names on it.
See the PBS Frontline episode here for what happened at United.
www.pbs.org/wgbh/pages.../
All of you with defined benefit plans are in jeopardy. The Feds can fix these laws by simply making pension funding shortfalls first in line for bankruptcy allocations. Put the vulture chapter 11 lawyers and banks second in line after peoples pensions (which are essentially saving accounts).
3. No national healthcare. This is killing all US industry because we are competing with foreign companies with virtually no health care costs at home. Again, for transplants, the tens of thousands of such people at corporate headquarters are not in the U.S., but back home with free insurance. I’m basically a free market person but U.S. healthcare is so screwed up, and the employer based care creating such a competitive disadvantage, I give up – company paid healthcare must go and something needs to replace it. Watch for a future blog entry on that topic. Even though the transplants provide health care for their workers this is again an order of magnitude bigger problem for the big three because: 1) Corporate staff is back home with free health care, transplant workers are younger and therefore healthier, big three also pays health insurance for a million retirees.
4. Blunt instrument CAFÉ laws. The original purpose of CAFE was to reduce depletion of finite fossil fuel supplies and/or to reduce foreign imports. The Global Warming theory did not exist when CAFE was instituted but CAFÉ supports this as well. These same goals are achieved in almost all other Western counties via very high (on order of $3-$6 per gallon) federal gasoline taxes. That is the primary reason the cars are smaller in Europe and Japan. Our cowardly government did not want to be associated with taxes so instead wrote CAFE laws so the big three could do the taxing. I would argue that such laws fell, and continue to fall, disproportionately on the big three. The laws regulate an average fuel economy for a fleet produced by a given company. This forced the big three to abandon the cars they made money on, and build cars they don’t make money on, usually at a loss. The economics are simple: it takes as many overpaid UAW workers to put a door on a $14000 focus as a $30000 F150. So the bigger and more expensive the car the better the big three can compete. The above mentioned economic disadvantages of the big three are exaggerated on small, lower cost cars. And yes, people expect small cars to cost less. Screwed again by the feds! Ford, for instance, has trucks providing over 50% of sales. A rapidly increasing percentage of these trucks are used in the trades; try carrying a load of bricks or even a saddle in a Focus. Why does the Ford commercial truck have to go into a CAFÉ formula when a Mack Truck or Caterpillar dump truck does not? In the rest of the world, where gas taxes are used to reduce fossil fuel consumption, each company is allowed to compete in the part of the vehicle market where they do best. The customer takes the cost of gasoline with tax into consideration when he decides what size and features he needs, and then shops the brands that play in that market. With CAFÉ, the big three were forced at gunpoint to build and sell small cars at a loss just so they could meet the consumer demand for larger cars and trucks with their greater utility (carried more people for instance). The Japanese entered the market in the small car nitch where their low cost and experience from the sane countries with gas taxes gave them the greatest advantage. The Japanese became associated with small cars and better gas mileage, although for the same size car and performance there was no difference on average.
It it were one or two of these items the big three might have competed better, but between the four the cost disadvantage in thousands per car and the hill too hard to climb. People seem to think Americans are superman, blessed with privilege, and the big three should have been able to overcome these odds against our oriental upstarts. In my opinion the big three did an amazing job lasting this long, as they are only mere mortals; doing the best they can given the stacked deck against them.
In the end it is not the above items that are killing the big three right now. These items and the recent gas spike put the big three in a weak position, but they were recovering with the help of the UAW. Cars sell on credit, and there is no money available. Houses are also credit sensitive, but the housing industry doesn’t have the large capital equipment (factories, labs, buildings) and huge staffs (engineers…) to keep feeding when there is a drop in sales. And the housing industry is dominated by illegal alien workers which they just let go.
This credit crisis in not of the big three’s making by any stretch of the imagination. The most likely biggest wrongdoers in the congress and the federal bureaucracy, will keep their jobs and pensions. The second biggest wrongdoers in the financial sector, are getting a trillion or so dollars of bailouts.
The big three are asking for a 5% loan and all this hate comes out in the press and the web. The gap between perception and reality is staggering.
is worker loyalty. Don't see that but instead
greed, and keep demanding. The second problem
is too many law suits in America. That alone push
the healthcare cost and all other cost sky high.
The jury system is a joke. Award billions to junk lawsuits.
Just getting harder & harder to do business in this
country. Look at Boeing, the union is now walking the
same path as UAW. They never LEARN. Period.