Doubtful That Chrysler, GM Will Avoid Bankruptcy

The Administration has given both General Motors Corp. (GM) and Chrysler a very short leash to avoid bankruptcy. Chrysler has just 30 days to merge with Fiat, and GM 60 days to come up with yet more cuts and concessions from its stakeholders. GM CEO Rick Wagoner, who was opposed to the idea of going into Chapter 11, was pushed out and replaced with Fritz Henderson, who seems more open to the idea.

I doubt the Chrysler merger will happen -- or that if it does happen, it will be successful. On paper, there does seem to be a good fit, but that was true of Chrysler and Mercedes as well, and just look at how well that turned out. At least Daimler AG (DAI) had a reputation of making good cars. Fiat, well, that's a different story. ("Fix It Again, Tony," anyone?) Just what Chrysler needs to shore up its image.

Over at GM, they have to get the bondholders to accept a big haircut and a swap of debt for equity. The current offer is $0.08 on the dollar in cash, $0.16 in new unsecured bonds and lots and lots of stock, enough so that the bondholders as a class will end up owning 90% of GM.

However, they are being intransigent. Many of the bonds are held by vulture investors who may be betting they will get a better deal if GM goes into Chapter 11. In all probability, they have a ton of CDS’s written on them, and know that they will get paid on those no matter what happens. The government will simply funnel more funds through AIG (AIG) to make them whole.

There is thus no guarantee that the bondholders will be negotiating in good faith. It is quite possible that they will make more money if GM goes bankrupt than if it survives.

The Obama team also said that the UAW must give up even more than it already has. The rejected plan called for 47,000 job cuts on top of the 100,000 that have been shed since 2005. Wages and benefits have already been cut to close to non-union transplant levels for experienced workers.

There is also a two-tiered pay structure so new workers (yeah, both of them) in the industry are getting only $14 an hour. The justifiably criticized "job bank" is long gone. Perhaps we could just repeal the 13th amendment to get labor costs down a little bit further? Its strange how those who thought that doing anything about labor contracts between AIG executives and AIG was going to undermine the entire system of contract law in this country are the ones who are most loudly demanding that the contracts with blue collar workers get drastically modified.

The only thing left on the labor side are the legacy costs, which go to retirees, not current workers. Of course, contracts where one side fulfills its side of the bargain over a lifetime -- those are expendable. Contracts that are in an economic (if not legal) sense fraudulent (i.e. writing of insurance like a product with no reserves to cover probable losses) are absolutely sacred and must be honored at 100 cents on the dollar.

The thought that a bankruptcy of a company like GM could be prepackaged and it would emerge out the other side in just a few months is a dream. GM is not an airline, and while the offer to guarantee the warranties will help a bit in maintaining sales while the firm is in Chapter 11, people are still going to wonder about the availability of spare parts down the road if they buy and new car from a bankrupt company.

No automaker in history has ever emerged from Chapter 11, so GM making it through to the other side would literally be unprecedented. OK, granted, it has been a long time since a US auto company had to file, so maybe times have changed. Still, a GM bankruptcy is going to look much more like Delphi (DPHIQ.PK) than Delta (DAL). Delphi entered bankruptcy in 2005 and is still under the court’s supervision.

If GM goes bankrupt, all the retirees will go onto Medicare, and the pension obligations will become the responsibility of the Pension Benefit Guarantee Corporation (PBGC). Unfortunately, the PBGC already has liabilities that exceed its $64 billion of assets (as of 9/30) by more than $11 billion (on a present value basis).

Making things worse, in late 2007 the PBGC changed its investment policy to become far more aggressive. A side-by-side comparison of the old asset allocation and the new one is shown below (larger version is available here). It’s probably a very safe bet that there is much less than $64 billion in the fund right now. Nice bit of market timing there -- too bad these geniuses couldn’t have been in charge of investing the Social Security surplus, too!

If GM and Chrysler were to go under, the liabilities of the PBGC would approximately double, especially when you figure in the likely following bankruptcies of dealers and suppliers. While the PBGC is not formally backed by the government, are we really going to bail out bankers and not middle income retirees? If GM and Chrysler -- and possibly Ford (F) down the road, though they are in marginally better shape right now -- go into Chapter 11, look for the PBGC to be the next institution with its hat in hand in Washington.

--Dirk van Dijk

Comments

[Cobra 1:]

Your right small business! I am hiring 11 people in the next ten days, engineers, project managers, clerical, support staff and 2 executives. The lowest paid person's salary will be around $40K with full benefits! And this is bad how? Because this is not the middle class? What in God green Earth do you call the middle class?

You wannabes that feel you are entitled to something will continue to wither and die, when you get the facts straight, NOT THE UNION LINE of union or the world will end and America will be a 3rd world country! Enough of your crap! Go off and fight against the people you actually work for GM and CHRYS! When they finally end up in BK, you can continue your fight and bitterness toward your next big bennie union job, whoops, forgot the union is dieing too. Sorry, confused the two for a minute!


On Apr 02 11:25 AM User 387439 wrote:

> More anti union, anti blue collar worker blabbering and baloney.
> You guys are undoubtedly either small business owners failing yet
> again in another rip off on small business loans, got too heavily
> invested in CDS or worse, and see AIG as a "must save" because it's
> in "high finance".
> If we were all on the Titanic you both would probably put yourselves
> and other rich folks on life boats and declare it's us poor , dumb,
> blue collars to go down, but save you butts. You guys are a laugh
> and just another great example of what truly is wrong with our country
> and the world of business/finance.

Apr 02 01:28 PM

[slowdown:]

Why....he actually did his job in protecting workers from pension retailation - if you don't know what it is...read the ERISA act. Once you understand it...we can have a discussion about what goes on when you don't belong to a union and you get close to retirement.
Keep in mind - 401K's did not gain popularity until the mid 90's. Prior to that - employers offered actual pensions as part of compensation (not an entitlement). I happen to have both (half and half). Personal opinion: the average joe will never retire on a 401K.

On Apr 02 10:39 AM Jeff B. wrote:

> Those of you who claim to care about "working
> families) ought to be pushing to have Ron Gettlefinger fired. His
> WW2 era thinking will likely force GM into bankrupcy, and then you'll
> see what the workers get --- zippo.

Apr 02 01:31 PM

[Cobra 1:]

I worked for a Ford dealer in 1990, you could have a credit rating in the 400's and they would get you financed! No bad decision there! I agree the ilk's of AIG, C, BAC, and all the rest should be tossed into BK! Its not my decision, I don't make the rules, and I certainly am not going to agree with your position of "if your not part of the union, your going to make America a 3rd world country!"

The credit decisions made just yesterday by Ford and GM to relax their lending standards again to the people with a 500 score, starts the cycles again, where did GMAC and FMCC get the money to lend? Yep that's right the TARP! Now when these slugs who have no business buying a new car fail in 4 to 6 months, who picks up the tab again? Yep you guessed it again, TARP! Your getting pretty good at this! In the mean time, PBO gets to tout how well he is doing and the MFG sector is alive and well! Bull crap, its more smoke and mirrors. This does nothing to start the economy, it simply adds more to the problem!


On Apr 02 12:58 PM User 387439 wrote:

> " Don't talk about saving and working hard...it barely has anything
> to do with getting ahead. From my spot in the back seat...only the
> crooks get ahead. "
>
> That is just what I'm talking about. For many people there is no
> "start over " again. They made their job choice when and where they
> had to with what choices, education, or opportunities that existed
> for them. Now, yes they are retired and are a "legacy cost". But
> the the attack mentality of certain individuals is to throw them
> away with the dishwater and criticize them? These few and petty
> individuals are fearful for their own repeated failure I think, and
> I can understand that. They have no power over this fickle financial
> system either. But I don't understand defending a debauched outfit
> like AIG and the greed, while attacking mostly honest hardworking
> laborers. Yes, GM, Chrysler, and Ford could have made some better
> decisions along the way. But they didn't defraud people of their
> money through unscrupulous and irresponsible CDS. Just the idea of
> making bad loans and essentially trying to trade off the risk was
> ludicrous. And then bonuses on top of that?

Apr 02 01:39 PM

[Cobra 1:]

Maybe that's where the problem is! An MBA, WOW! I am not overly educated, just a simple BSEE, I have an IRA that's halved, I have a 401K that's more than halved, I don't care! I'm 44 in a couple days, I have 25 more years to enjoy the work I do and save outside of my "safe investments". I understood when I agreed to have money withdrawn from my check to have put into a 401K that there was risk, so did you! Did you stop putting money in when the market began to slide? No, SHUT UP!

I'm sick of all the people in these forums bitching about how they got screwed! You made a decision to invest in a tax free 401K when you started your job, you choose to invest in which ever category from T-Bills to high risk/high return. Which ever you choose, you knew the score going in. AIG and all the other can die for all I care. I just lost 5 months ago, close to $700K because Circuit City filed BK, it happens, I can bitch to the highest mountain tops or get over it and try again.

This is, America, if you don't like it here then move the hell to Canada or Africa, on your MBA salary, if you put anything away, you will be a rich man in Africa, you can live the rest of your life out in relative luxury! I hope you like the benefits you get there!


On Apr 02 12:11 PM slowdown wrote:

> Are you kidding me? I put myself through school (seekingalpha.com/symbo...)
> and worked my ass off to get what I had three years ago only to see
> it halved by idiots running the finacial sector in the country pretty
> much committing fraud. Had nothing to do with unions had nothing
> to do with entitlements...had everything to do with investments that
> were supposed to be rock solid and my compensation package and the
> economy that's in the ditch. Don't talk about saving and working
> hard...it barely has anything to do with getting ahead. From my
> spot in the back seat...only the crooks get ahead.

Apr 02 01:51 PM

[User 387439:]

There he goes again. This snake man "Cobra" never addresses what a poster says, he just attacks with more trash. The automakers books are now an open subject. Yours aren't. As far as we know you are full of "hot air". How do we know you are hiring any people and at what wages? Also, how many of your businesses already tanked and you just get another loan and give yourself money till it runs out and you leave your "employees" in the lurch. Speaking of that, you seem to have an awful lot of time posting here and reading who knows what all day on the internet. All the while your "employees" are doing all the work. The nerve! Just another arm chair executive snapping the whip.
You lost and money on Circuit City and so you take it out on GM and the automakers? You're a real piece of work . LOL I'm laughing so hard at your "comments" my sides ache.

Apr 02 02:28 PM

[User 387439:]

Then stop reading "these forums" .

Cobra 1:
" I'm sick of all the people in these forums bitching about how they got screwed! "

The person doing the most complaining here seems to be you. LOL

BSEE? Emphasis on the "BS" I think. LOL

Apr 02 02:36 PM

[babyray:]

How anyone can defend AIG is beyond me!!They are the ones who caused this mess and they say they cant open up their contracts with their employees but the UAW has opened up and renegotiated thier contracts twice in the last 4 years. Also how anyone can compare jobs in small business to jobs in big corporations is also beyond me. The only people who make out when a small business is successful is the business owner. These are the same people who cry when the government wants to up the minimum wage 10 cents for petes sake.

Apr 02 04:19 PM

[Cobra 1:]

If you are referring to me, I am not comparing AIG to GM, just their business model. As for opening contract in the same comparison, its wrong no matter who is asking to do it. BUT, as the poster pointed out, AIG's business is very profitable, GM hasn't turned profits for how long? This is where I differ, I think and stats prove small business employs millions more than all the unions in North America by a multiple of 400. Small business is what makes up the middle class!

Mike Verkuylen is my name, you can see the speaking engagements I do around the country to large corporations around North America every year. Hot air is right! Its puts some serious money in my pocket that affords me the leisure to do what I want when I want.

Like my father always told me, never argue with an idiot, he will bring you down to his level and beat you with experience!




On Apr 02 04:19 PM babyray wrote:

> How anyone can defend AIG is beyond me!!They are the ones who caused
> this mess and they say they cant open up their contracts with their
> employees but the UAW has opened up and renegotiated thier contracts
> twice in the last 4 years. Also how anyone can compare jobs in small
> business to jobs in big corporations is also beyond me. The only
> people who make out when a small business is successful is the business
> owner. These are the same people who cry when the government wants
> to up the minimum wage 10 cents for petes sake.

Apr 02 05:44 PM

[Miken:]

My compliments to the author, I think he/she has outlined the complexities involved very well.

My approach would be to get it settled once and for all. I would gather all the stakeholders together and outline what I need from each one. That includes the UAW, bondholder representatives, suppliers, dealers, etc.

I would give them a couple of weeks, if I didn't get a positive response from all of them I would put myself in Chapter 11, the government be damned.

The people that I feel the most sorry for are the retirees. Oh I know many begrudge the retirees their 'lavish' packages, but don't judge too fast. My 88 year old mother who gets $800 per month from GM doesn't have a 55 foot yacht....but also didn't break the law. There has to be some resolution for these people.

Frankly I couldn't care less about the bondholders or the UAW. If it wouldn't hurt the innocents so much, I wouldn't mind to see both go out of existence.

Apr 02 06:56 PM

[uawgmstockh...:]

1. All non U.S. based auto companies are subsidized by there government, along with national heath care, How can U.S. carmakers compete with them? 2. How does a capitalistic economy compete with the rest of the world and their non capitalistic economies? 3. Did the administration of the eighties ever consider any of this? Wake up!

Apr 02 07:17 PM

[User 387439:]

Cobra (snakeman):

"AIG's business is very profitable, GM hasn't turned profits for how long? This is where I differ, "

Profitable, ripping people off. I guess that's why you think it's ok, you probably have the same ethics. You are surely full of hot air. And your numbers of what small business provides for employment come from where? And"millions"? Yes millions getting little pay and no retirement from self serving egotists like you. My sides still are aching from laughing at you. Wondering why you would be hiring in this kind of economy also. You are right about getting down to your level though. Why woould anyone want to do that? LOL :D

Apr 02 07:38 PM

[Auto Employee:]

Cobra is one of the biggest complainers on these forums and yet he complains about others speaking their mind. Cobra just go away I'm sure you won't be missed you windbag! My father gave me the same advice that is why I won't be responding to you again!

Apr 02 09:01 PM

[gzhao7081:]

Take it easy, Pal. No investment would have an GUARANTEED any life-time benefits. This is the reality.

Uncertainty, or risk is the one that we need to fight against, not whining against.

It is the spirit that matters. I found it hard to accept that American's (espeically UAW workers) lost their will to fight because of they have been spoiled so well in the past.

The process of fighting, and the power of will matters. I am not that overly concerned about the result, whether I can retire safely and richly in 20~30 years.

For the retirees of GM, I wish their pension plan would be partly guaranteed by the government. For the UAW workers, they need a kick in the ass to jumpstart.

My personally experience:
'Got out of school in early 2000. got into telecom business and saw the whole industry went into deep recession, got laid off twice.
Went back to grad school and finished my ph.d.
Got the job I enjoyed more the last year and still working hard to fullfill myself. '

I don't consider myself to be the wise, strong and lucky but I know that the key is to stay in the game, and do not worry about the guaranteed benefits.




On Apr 02 11:55 AM User 387439 wrote:

> Some 700,000 older and retired GM workers who invested their youthful
> energy for 30+ years might beg to differ. They don't have the luxury
> of time to start over. Not to mention all the suppliers, and support
> industry (transportation, steel, plastics, etc) that will go under
> and their people. You folks who have it in for GM, Chrysler, union
> workers and anyone else you like to deride, are no better than the
> AIG shysters and Berny Madoff. Wou think you are so energetic , intelligent,
> and self stating. Someone has to do the actual work in any business.
> You guys are the type to want to sit back and watch people work FOR
> you and skim the cream. I guess that isn't happening for you now
> either in this economy so you are really angry that your own gravy
> train might halt.
>
> " gzhao7081 wrote:
>
> Agree with Cobra 1 totoally. (sic)
>
> Pick up the book and start reading at night, stop going to the bars,
> movies, BBQs. Or, at least, you can learn new skills.
>
> You need to prepare yourself for the next challenge, not whining
> here!"

Apr 02 10:56 PM

[slowdown:]

First - let me be clear - I don't belong to a union. I am white collared salaried employee - middle management. I don’t agree with everything the unions have been awarded over the years. On the otherhand - there were two people at that negotiating table that hammered out those contracts so I put some of the blame on the dumb-ass management that settled for some of those stupid things. Second - I personally have witnessed the discrimination, retaliation that goes on every time the guys at the top screw up. I'm not saying it happens in your firm...but believe me...it is alive and well in Corporate America. I'm pretty sure that you are well aware of the tactics used to get around the laws that used to protect us that have been rendered totally ineffective. It's just a fact of life at the moment. As passionate as you are about the union being thugs – I am just as passionate about upper management being thugs…and because I’ve personally been burned, you won’t convince me otherwise. They (the unionized workers) have the leverage to make sure they don’t get screwed over.
Last – I’m happy you are able to hire new employees – maybe you have been able to pick up some of our Engineers/Program Managers ect that were severed – not because the work went away…but because the work was moved out of the country.



On Apr 02 01:39 PM Cobra 1 wrote:

> I worked for a Ford dealer in 1990, you could have a credit rating
> in the 400's and they would get you financed! No bad decision there!
> I agree the ilk's of AIG, C, BAC, and all the rest should be tossed
> into BK! Its not my decision, I don't make the rules, and I certainly
> am not going to agree with your position of "if your not part of
> the union, your going to make America a 3rd world country!"
>
> The credit decisions made just yesterday by Ford and GM to relax
> their lending standards again to the people with a 500 score, starts
> the cycles again, where did GMAC and FMCC get the money to lend?
> Yep that's right the TARP! Now when these slugs who have no business
> buying a new car fail in 4 to 6 months, who picks up the tab again?
> Yep you guessed it again, TARP! Your getting pretty good at this!
> In the mean time, PBO gets to tout how well he is doing and the MFG
> sector is alive and well! Bull crap, its more smoke and mirrors.
> This does nothing to start the economy, it simply adds more to the
> problem!

Apr 03 12:11 AM

[slowdown:]

AIG's business practices were fraudulant at best and certianly were not SOX compliant and as a result their profit was overstated which is why we the taxpayers now own the company.


On Apr 02 05:44 PM Cobra 1 wrote:

> If you are referring to me, I am not comparing AIG to GM, just their
> business model. As for opening contract in the same comparison, its
> wrong no matter who is asking to do it. BUT, as the poster pointed
> out, AIG's business is very profitable, GM hasn't turned profits
> for how long? This is where I differ, I think and stats prove small
> business employs millions more than all the unions in North America
> by a multiple of 400. Small business is what makes up the middle
> class!
>
> Mike Verkuylen is my name, you can see the speaking engagements I
> do around the country to large corporations around North America
> every year. Hot air is right! Its puts some serious money in my pocket
> that affords me the leisure to do what I want when I want.
>
> Like my father always told me, never argue with an idiot, he will
> bring you down to his level and beat you with experience!
>
>

Apr 03 12:25 AM

[slowdown:]

I never said that belonging to a union would prevent us from becoming a third world country...I'm well aware that what is driving our incomes down is globalization. You said you were hiring ?? Ask your new employees how much of a pay cut they took. My salary is dropping 3% and my husband took a 40% cut. Our household income just took a giant leap backward....all the way to 1991. I do beleive that the unions have been slowing the process though.

On Apr 02 01:39 PM Cobra 1 wrote:

> I worked for a Ford dealer in 1990, you could have a credit rating
> in the 400's and they would get you financed! No bad decision there!
> I agree the ilk's of AIG, C, BAC, and all the rest should be tossed
> into BK! Its not my decision, I don't make the rules, and I certainly
> am not going to agree with your position of "if your not part of
> the union, your going to make America a 3rd world country!"
>
> The credit decisions made just yesterday by Ford and GM to relax
> their lending standards again to the people with a 500 score, starts
> the cycles again, where did GMAC and FMCC get the money to lend?
> Yep that's right the TARP! Now when these slugs who have no business
> buying a new car fail in 4 to 6 months, who picks up the tab again?
> Yep you guessed it again, TARP! Your getting pretty good at this!
> In the mean time, PBO gets to tout how well he is doing and the MFG
> sector is alive and well! Bull crap, its more smoke and mirrors.
> This does nothing to start the economy, it simply adds more to the
> problem!

Apr 03 12:38 AM

[slowdown:]

You know...I still have my job and I'll probably have to work longer than I planned or wanted to just to recover some of what I lost. If it were my bad investment or spending habits that were the root cause of my investment losses - I'd be okay with it. But it wasn't. You see...I did everything right - paid my houses off...put money away for my kids education ....invested for retirement and moved most of my money into an income fund before the crash. So...now I'm not making as much money and have taken a pretty good hit on the real estate investements not because I made bad choices...but because of the illegal antics practiced in the Finacial sector. Pissed...you bet...it's one thing when you lose because of your own stupidity....quite another when you lose because of the fraudulant activities of others.


On Apr 02 01:51 PM Cobra 1 wrote:

> Maybe that's where the problem is! An MBA, WOW! I am not overly educated,
> just a simple BSEE, I have an IRA that's halved, I have a 401K that's
> more than halved, I don't care! I'm 44 in a couple days, I have 25
> more years to enjoy the work I do and save outside of my "safe investments".
> I understood when I agreed to have money withdrawn from my check
> to have put into a 401K that there was risk, so did you! Did you
> stop putting money in when the market began to slide? No, SHUT UP!
>
>
> I'm sick of all the people in these forums bitching about how they
> got screwed! You made a decision to invest in a tax free 401K when
> you started your job, you choose to invest in which ever category
> from T-Bills to high risk/high return. Which ever you choose, you
> knew the score going in. AIG and all the other can die for all I
> care. I just lost 5 months ago, close to $700K because Circuit City
> filed BK, it happens, I can bitch to the highest mountain tops or
> get over it and try again.
>
> This is, America, if you don't like it here then move the hell to
> Canada or Africa, on your MBA salary, if you put anything away, you
> will be a rich man in Africa, you can live the rest of your life
> out in relative luxury! I hope you like the benefits you get there!
>

Apr 03 01:13 AM

[Tony C:]

Did the Hummer brand ever make money for GM?
Sure Toyota jumped into large pickups at the wrong time, and they moved into SUVs as well. But did they bet the company on them like GM and Chrylser did?
It's OK to make risky choices when you have the money to cover them. Toyota does. Detroit?
Toyota made those moves without neglecting the car end of their business. Gas at $4? Send in more Prius. Should it stay at $2 they've got the trucks ready. Chrysler doesn't even make any small cars, and GM is still trying to unload Cobalts on unsuspecting buyers.



<<<Yeah...bash the Hummer maker and praise the FJ Cruiser maker (Toyota) that get's about the same mileage. Do your homework. All of the transplant OEM's were jumping on the SUV and Truck bandwagon. The proof is the unfinished or shuttered plants in the south. BTW...since the FJ launched well after the Hummer...I call it a Hummer wannabe.>>>

Apr 03 09:55 AM

[gzhao7081:]

But, in the eyes of the god, why should American's enjoy the superior buying power of their dolloar denominated sallary, which is totally unproportional to their productivity.

Because the US economy to world is exactly the AIG to financial sector?

Because it is "too big to fail"?

Then it deserves to taxing the rest of world into poverty to keep US a first tier country?




On Apr 03 12:38 AM slowdown wrote:

> I never said that belonging to a union would prevent us from becoming
> a third world country...I'm well aware that what is driving our incomes
> down is globalization. You said you were hiring ?? Ask your new employees
> how much of a pay cut they took. My salary is dropping 3% and my
> husband took a 40% cut. Our household income just took a giant leap
> backward....all the way to 1991. I do beleive that the unions have
> been slowing the process though.
>
> On Apr 02 01:39 PM Cobra 1 wrote:

Apr 03 12:30 PM

[henarl:]

Hey, just print up a bunch of billion dollar notes and bail EVERYBODY out with funny money. We can just skip the billionaire class and go straight to the Forbes trillionaire list.

Apr 03 08:29 PM