GM and Chrysler: Why's Bankruptcy So Expensive? 28 comments
February 21, 2009
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Matt Miller asks a really good question:
Can anyone explain why GM and Chrysler say they'll need $100 billion and $25 billion in financing respectively if they have to file bankruptcy, but far far less if they stay out under the latest hat-in-hand plans they've brought to DC? The enormous difference in magnitudes feels like it's part of Detroit's rhetorical blackmail to get the fix it wants (i.e. not bankruptcy), but maybe I'm missing something.
If Matt's missing it, I'm missing it too. Given that bankruptcy is likely to be more successful at bailing in the companies' creditors than the current round of negotiations, how could it end up substantially more expensive for the goverment?
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I'm always amazed at the people who scream about fair wages. The problem is that they are looking at it solely from the employees perspective. Sure, everyone would like to have a job that provides the means to buy a 200K+ home, two vehicles, toys, name brand clothes etc.... but fair wages can not be measured purely by the lifestyle the employee desires. When you pay an employee 20 bucks an hour but the production generated by that employee is only worth 15, the employee no doubt thinks its fair but the company can't make it. Like it or not, the auto industry is huge but there are far more out there who live on wages that auto workers and you would no doubt consider unfair and if we were suddenly forced to purchase GM, Chrysler or only at places other than walmart, many of those people would not be able to afford necessities. The auto industry needs to get over itself. Its big but it is not too big to fail.
Based upon the poisonous statements made by many of you I would doubt that you would purchase a domestic auto simply because of your prejudices. For those of us still want to make decisions because we want value, would you make a major purchase like an automobile from a bankrupt company? I would say few of us would because we don't know whether the warranty will mean anything in a few months
Chapter 11 for GM or Chrysler or Ford ulimately leads to Chapter 7: Insolvency and dissolution of assets.
Americans and Canadians should care about this because you are throwing away what is left of your manufacturing base and employment opportunities for people at all skill levels. The US has horrific trade deficits spawned out of a taste for all things foreign. It's amazing to read many of the remarks that show how little American's care about their own people. For all of the flag waving and "patriotism" you show the world, it's clear that you don't know how to show it to your own. Good Luck!
On Feb 21 01:54 PM Minderbender wrote:
> It's simple. The automotive industry is very high investment intensive
> and extremely sensitive to volumes sold. All past examples of automotive
> companies going through bankruptcy (or similar receiverships) show
> that sales drop significantly, and do not recover. Much less income,
> means much more money required in DIP financing to survive. In fact,
> given GM's size, it would unlikely recover. It really is a matter
> of a a loan now, avoiding the process of any sort of receivership,
> and hoping that total industry sales pick up within 4-6 months -
> or near certainly of liquidation. The choice is: does America want
> to have a development and manufacturing industrial base, or not.
> We already suffer from consuming too much and not producing enough
> (opposite of Japan and China). You really are putting America at
> risk if you fail to carry GM through this dip in sales. Clean ideology
> and pure bankruptcy based on GMs failure to get their business model
> correct are my perspective -- but I'm not willing to destroy the
> core competence and industrial base of the nation to get there. GM
> has offloaded its health burden and cut over 500000 employees in
> the last 10-15 years (worldwide), among other measures, to where
> it is in fact viable in less-than-normal econmic times, and very
> profitable now in normal economic times. On the positive side, GM
> has many technologies nearly ready for production that now will achieve
> fuel efficiency and green national objectives. This is more than
> just GM surviving or not - its about the survival of the American
> ability to produce and compete.
On Feb 21 04:19 PM Borscht wrote:
> There are plenty of foreign car makers to take GM and Chrysler's
> place.
On Feb 21 04:45 PM Shadrach wrote:
> Larry,
>
> I'm always amazed at the people who scream about fair wages. The
> problem is that they are looking at it solely from the employees
> perspective. Sure, everyone would like to have a job that provides
> the means to buy a 200K+ home, two vehicles, toys, name brand clothes
> etc.... but fair wages can not be measured purely by the lifestyle
> the employee desires. When you pay an employee 20 bucks an hour but
> the production generated by that employee is only worth 15, the employee
> no doubt thinks its fair but the company can't make it. Like it or
> not, the auto industry is huge but there are far more out there who
> live on wages that auto workers and you would no doubt consider unfair
> and if we were suddenly forced to purchase GM, Chrysler or only at
> places other than walmart, many of those people would not be able
> to afford necessities. The auto industry needs to get over itself.
> Its big but it is not too big to fail.
On Feb 21 06:39 PM k9s-4-k8 wrote:
> Let's face facts here. They have already seen a large dropoff in
> sales and have already set themselves up to request more and more
> at a later date because they're tieing everything to whether they
> see sales pick up in 6 or 8 months. That means they will keep the
> meter running through this slow period while on the taxpayer's dime
> leading to many tens of billions of taxpayer infusion which they
> will later point to as loss if we don't cough up more. It will be
> presented in a more diplomatic way of course, but the end result
> will be the same. So, bankruptcy tommorrow is the cheapest and best
> option. Additionally, if one was to pick a time to fundamentally
> restructure a company it should be when the economy sucks anyway
> so long as the government agrees to infuse capital after the bankruptcy
> filing.
Pension = 401K where the company puts money aside to pay old age benifits - it's part of total compensation. Usually managed by the company.
401K = pension where the employee contributes part of compensation and the company sometimes makes matching contributions to pay old age benifits - still part of total compensation. Usually managed by the employee.
Here's my issue with a 401K....managing it is a full time job unless you put all of the money in an income fund with guaranteed interest. Most people are too busy with their real jobs to mess with it or don't really understand it. I believe that moving from a company provided pension plan to an employee managed 401k is going to prove out to be a bad thing in the long run.
On Feb 21 06:32 PM John D wrote:
> Lets just suppose that there was not a CREDIT CRISIS right now and
> that everything was moving along .... North American auto companies
> were already well on the way to a leaner process - all 3 had a new
> agreement with the union to take the health care off their books
> - all 3 have raised the health care costs for salaried employees
> - all 3 have been downsizing (Big Time) before the financials screwed
> up and all 3 have changed the rules for their new hired salaried
> work force - they get 4% per year and you look after your own pension
> - no doubt this would have come up at the next contract talks as
> well ( I worked for GM 35 yrs and they always try it out on the salaried
> workforce 1st) - all 3 have made leaps and bounds in quality and
> productivity. They and all the tax payers would not be in any bind
> right now if it wasn't for the guys on Wall St that are still getting
> bonuses from the tax payer and you can bet the watch dogs from the
> Bush Admin who let this come about and failed to do their job by
> heading it off will still be getting their wages, bonuses and huge
> pensions.
If GM went Chapter 11 it would take the pension trust down with it so they are already planning to fight any transfer. Another reason C11 is really C7.
On Feb 22 12:25 AM Alex Filonov wrote:
> It's simple really: pension and retirees medical care obligations.
> In case of bankruptcy government takes part of these obligations
> on itself. And they are really big.
On Feb 21 06:39 PM k9s-4-k8 wrote:
> Let's face facts here. They have already seen a large dropoff in
> sales and have already set themselves up to request more and more
> at a later date because they're tieing everything to whether they
> see sales pick up in 6 or 8 months. That means they will keep the
> meter running through this slow period while on the taxpayer's dime
> leading to many tens of billions of taxpayer infusion which they
> will later point to as loss if we don't cough up more. It will be
> presented in a more diplomatic way of course, but the end result
> will be the same. So, bankruptcy tommorrow is the cheapest and best
> option. Additionally, if one was to pick a time to fundamentally
> restructure a company it should be when the economy sucks anyway
> so long as the government agrees to infuse capital after the bankruptcy
> filing.
The big three have already changed the rules, new hires are at $15.00 per hr. no pension - health care benefits are greatly reduced, productivity equals and surpasses foreign rivals,Quality is on par, if not for the bank fraud GM and Ford at least would be well into a great revival in the next 10 years
On Feb 22 12:04 PM Shadrach wrote:
> Slowdown, thank you for making my point. You are right, the employees
> are setting the scale but that mentality is precisely why manufacturing
> is dying in this country. If people want higher paying jobs, they
> should seek to better themselves to find a better job rather than
> better the job to suit themselves. You have every right to determine
> what your time is worth but if you can't make it at job A, you should
> go looking for job B rather than forcing job A to pay what you think
> its worth because clearly the american public does not think job
> A is worth what the big three have been paying. Who is the public
> to determine what your time is worth. Well, they aren't either but
> they get to make the final decision as to whether there is a company
> to employee you or not. I'm not endorsing the conditions people
> work in in places like mexico, korea, china etc.... but until American
> workers get over that entitlement mentality, manufacturing will continue
> to dwindle.
THEY WOULD HAVE TO RELEASE ALL DATA THRU THE COURT SYSTEM.
I WILL LET YOU PONDER ON THAT; IF THE AIRLINES CAN DO IT, SO CAN THE AUTO INDUSTRY.
WHEN IS AMERICA GOING TO WAKE UP AND SMELL THE SHIT.
> What actually amazes me is the lack of understanding of what a pension
> really is.
> Pension = 401K where the company puts money aside to pay old age
> benifits - it's part of total compensation. Usually managed by the
> company.
> 401K = pension where the employee contributes part of compensation
> and the company sometimes makes matching contributions to pay old
> age benifits - still part of total compensation. Usually managed
> by the employee.
> Here's my issue with a 401K....managing it is a full time job unless
> you put all of the money in an income fund with guaranteed interest.
> Most people are too busy with their real jobs to mess with it or
> don't really understand it. I believe that moving from a company
> provided pension plan to an employee managed 401k is going to prove
> out to be a bad thing in the long run.
Wrong! 401K plans are defined contribution plans where participants and employers can make contributions but don't necessarily have to. Companies are NOT required to fund in any specific year as they are what are known as profit sharing plans. Pensions are defined benefit plans. The money is all employer contributions and is based on years with the company, and age of participant which usually produces a fixed monthly distribution for life, life certain, or even joint life expectancy.
Also NEITHER are these plans managed by the company as they don't need the fiduciary responsibility.
There is an assumption with many commentators and analysts that a bankruptcy process would cause some short-term pain and loss of sales, but that pre-pack or cram-down plans come with a much higher guarantee of GM being positioned to be efficient and profitable again.
It would be useful to challenge these assumptions and back them up with realistic expectations.
The pain of a bankruptcy is unlikely to be short term - the loss of sales, based on past experiences of receiverships of one sort or another in automobile industry, tends to be extreme and nearly permanent.
Given that the automotive manufacturing business model (unlike airlines and many other industries and/or smaller sized businesses) is high capital intensive and volume driven, any break-even or profits extremely dependent on sales volume and revenues. (repeat: the sensitivity of volume & sales to the automotive company business model is critical to understanding the choices - commentators and many analysts have not appreciated and understood this properly to date).
GM is unlikely to be an exception to this past experience. The result of this is that any form of bankruptcy will likely simply end up in liquidation, and there is little assurance that GM would emerge, if with a pre-packaged process. Moreover, the disruption to the supply chain already on the brink leads to many, many other consequences - again, most analysts and commentators have not really done their homework and looked at the numbers, sensitivities and likely outcomes.
It would be useful if these assumptions were checked and included more fully in the commentary and analysis to provide a total picture.
The examples and data are limited, but also quite striking. See Appendix L of the GM restructuring plan submitted to Treasury.
Given GM's size and situation, plus their need for even higher volume break-even points, it appears that GM is more likely to end up in liquidation in such a process.
The other assumption that needs testing is whether GM gains very much with a bankruptcy process of any sort vs out-of-court restructing. Again, looking at the numbers, there really isn't much more to be had. Perhaps $2-4 billion more if the unsecured bondholders were completely wiped out vs the 25-35% they might receive in their current settlement. The other secured bondholders are the same banks that Treasury is asking to pony up DIP financing - not much to gain there. The health care obligaions are already being moved off the books, as well as being essentially cut in half - so there isn't much more to gain there. Ditto for the retirement - what's funded won't be taken away by a bankruptcy judge, and other shortfalls would just be transferred to the government i.e. the taxpayer; this really isn't the big issue.
The big issue is that any reduction in business model expenses and liabilities, including the debt and bonds, are just being replaced by DIP debt, and at even higher levels!
And this with less volumes and sales expected. It simply doesn't add up.
Again, the result is a very high expectation of eventual liquidation.
In the big picture, if one tests the assumptions and goes through the analysis thoroughly, is that it is liquidation, with the loss of most of the American automobile industrial base - or - an assessment of the national interest on whether the US needs or wants a heavy industrial manufacturing base and industry.
That's both a national security issue, and an economic consideration.
A nation that over-consumers and under-produces, like USA does, and a nation that still carries a very, very large and unsustainable trade deficit, will end up quite the sorry and sick case within a generation, if it is not close to that already.
The consideration is: let GM, Chrysler and much of the productive industrial base go and deal with the (un)expected consequences and unintended consequences, or - decide as policy that fixing, building up and maintaining the capabilities are worth the investment.
In this scenario, GM, UAW, and all the other players such as dealers, suppliers, bondholders, etc will need to take their cuts and haircuts and hard medicine - but they are doing most of that already if one reads the GM restructuring plan. The cuts and plans are dramatic.
Perhaps the treasury panel can squeeze a bit more out of UAW, dealers, management, etc, etc, but frankly, all the efforts to spend time there, beyond what is already quite dramatic, is likely ineffective or without much consequence relative to the small gains to be made, compared to what is already in the plan.
The choice ultimately, requires GM to execute all the cuts and haircuts in the next months, with the out-of-court restructuring as envisioned (but with due diligence and monitoring), and begin to build a consensus on a national policy for our industrial base, keeping the competences we have, building the competences that are missing but needed, and willing to cut out or deemphasise the waste or parts that aren't essential.
There is a lack of vision of what that could and should be.
The alternative vision, America with a greatly reduced heavy industrial base with all of the development, engineering, process, and technical skills, is not just devastating to the GDP and economy in the long run, but with the trade deficit and other imbalances, quite detrimental to America as a first rate first world country.
Not checking the assumptions, and not understanding the consequences within the context of the big picture, does not portend well for our national debate.