What to Expect if GM Doesn't Learn from Chrysler 22 comments
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As I mentioned in a recent post Legal Issues Affecting Chrysler:
…the dissident lenders have a valid complaint. Unfortunately, they are swimming upstream. They are not only in the minority among Chrysler’s creditors in opposing the Fiat deal, but in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup (C) and JP Morgan (JPM)).
Sure enough, a few days later, many of Chrysler’s dissident lenders dropped their opposition to the Fiat/Chrysler (FIATY.PK) deal (see Chrysler Lenders Drop Opposition). According to the Washington Post:
The small but staunch lenders group that stood against the sale of Chrysler disbanded Friday, removing the only major obstacle in the Obama administration’s plan to quickly restructure the automaker in bankruptcy court.
The breakup of the organized opposition improves the government’s odds of getting Chrysler out of bankruptcy quickly and could portend a similar road for General Motors (GM) should it also be forced to file for protection.
Now that Chrysler’s dissident lenders have caved, it is becoming increasingly likely that Chrysler’s bankruptcy will be a surgical one after all, contrary to my initial expectations (see Chrysler Bankruptcy: Anything but Surgical). I did not anticipate that the dissident lenders would so quickly reach their legal fee threshold.
…the legal costs…were a factor in dropping the public objection.
Irrespective of their financial wherewithal, dropping their opposition to the deal was probably a wise decision on the part of dissident creditors. They saw the writing on the wall. They weren’t going to win. And it’s no fun taking on the federal government, …even in the best of circumstances.
But now the question becomes: What does this all mean for GM?
Several weeks ago, in an Op-Ed for Advertising Age (subscription only, see GM and Chrysler: Finally a Sensible Approach or Ad Age Op-Ed for background) I wrote:
Should Chrysler go bankrupt (a likely outcome), the federal government gets to play a strong hand against GM. Allowing Chrysler to go bankrupt should be enough to wake up GM’s creditors and the UAW to the reality that US taxpayers will not support them indefinitely. It therefore acts as a signal to GM that the Obama administration is serious.
Sure enough, in a press conference held today, Fritz Henderson, CEO of GM, admitted that keeping GM out of bankruptcy will be difficult (see GM CEO Says Tasks are Large). From the Associated Press:
Bankruptcy protection for the biggest U.S. automaker is becoming more probable with a deadline just over two weeks away, the company’s top executive told reporters Monday.
General Motors Corp. CEO Fritz Henderson is still holding out hope that the company can restructure without court protection, but he says the tasks to complete before a June 1 government-imposed deadline are large.
“Certainly the task that we have in front of us is large,” Henderson said during a conference call to update the company’s restructuring efforts. “There is still an opportunity and still a chance for it to be done outside of a court process.”
…the company must reach concessionary agreements with unions, persuade thousands of bondholders to exchange $27 billion in debt for 10 percent of GM’s stock, cut thousands of dealers, close plants and lay off more salaried workers.
Of all stakeholders, the largest impediment to an out-of-court restructuring will come from GM’s bondholders, as was the case with Chrysler (although in Chrysler’s case there were only bank lenders, not bondholders). According to the Associated Press:
GM cannot modify its stock exchange offer to bondholders because the company has been told by the Treasury Department that it cannot go above 10 percent of the company’s equity, Henderson said.
A committee representing the bondholders has counteroffered seeking a 58 percent ownership stake.
Here we go again. As with Chrysler, the senior creditors want one thing, and the government wants something else. So does the federal government get GM bondholders to accept a massive haircut of the type that they were effectively able to cram down the throats of Chrysler’s lenders?
This is where Chrysler’s situation and GM’s situation diverge.
The debt restructuring problems they both face are the same in theory. But in the case of Chrysler, it was much easier for the federal government to get Chrysler’s lenders to accept a haircut because the majority of its first lien debt sat with banks that accepted TARP money (e.g., Citigroup and JP Morgan). The government could therefore exert tremendous influence over these lenders.
Not so in the case of GM. GM’s bondholders are a much more diffuse bunch with disparate interests. Moreover, the government has much less of a direct influence over GM’s bondholders.
GM is obviously a much larger organization than Chrysler. So sorting out the details in bankruptcy will therefore be more complex. Nevertheless, be prepared for a longer, more drawn out, more complex negotiation with bondholders for GM than for Chrysler, unless the Obama administration can find some way to effectively use outcomes of the Chrysler case to convince GM’s bondholders to take their medicine outside the court system (e.g., by demonstrating the triumph of the “fresh start” provision over the “absolute priority” rule - see Legal Issues Affecting Chrysler).
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On the opther hand, maybe that would be a Good thing - discipline now, as opposed to later.
On May 12 09:40 AM rick12345 wrote:
> Spoken like a true financiar. I'll sum up the situation quickly for
> you. Both companies, with ford soon to follow, went bust because
> nobody wants to buy a GM or chrysler vehicle. They're boring, out
> of date, and most importantly, its the "car that mum or dad used
> to drive".
> No amount of restructuring will resurrect this pheonix, period. Unless
> they completely reinvent themselves, they will emerge no better than
> before. What they should have done is merged to form a new company
> with a new name and new ideas. A car for the 21st century..
As Dickens put it, "If that is what the law says, then the law is an ass." It is not in the national interest, or in the interest of long-term stability of our financial markets, for hedge funds to make oversized profits by sending a going concern into bankruptcy.
Not that I would shed any tears for GM, mind you; their downfall is well-deserved.
GM has to structure their own negotiations without the government talking to any of the parties behind their back. The FDIC totally undercut Wachovia and WaMu attempts to negotiate merger agreements by talking secretly with potential merger partners. Why would the UAW agree with anything GM management proposed if someone is telling them secretly, or openly, that the other parties (lenders, dealers, and government in this case) won't get more, and maybe even telling them what they can expect.
This is really starting to smell.
Current bondholders are junk bond investors, and they knew exactly what they were getting into.
The UAW members who worked 20 or 30 years to earn their pensions never had a chance to trade out of the deal for something more secure.
On May 12 10:29 AM robert.b.ferguson wrote:
> I find it ironic and funny and sad all at once. Obama wants the bond
> holders to take a hair cut just like they did at chrysler in order
> to pay back the UAW. However the bond holders here include pension
> funds some from other unions like the teachers unions and government
> employees unions.
And they will with much noise blame the evil greedy bondholders, when that inevitably fails and they file shortly thereafter.
On May 12 02:33 PM User 283977 wrote:
> All of those GM dealerships that are going to be cut are protected
> under state laws. It seems un-realistic to think that negotiations
> with all of those dealerships are going to be accomplished in the
> next 19 days (by June 1). While if they go bankrupt, they minimize
> obligations. It seems that bankruptcy is inevitable. The question
> is why continue the apparent charade that bankruptcy can be avoided?
> What does that additional time buy?
On May 12 01:01 PM Alan Young wrote:
> I have been advised (but have not independently confirmed) that the
> $27B in bonds has been offset by $34B in CDS. That is, the bondholders,
> collectively, will make more money from GM going bankrupt than from
> GM staying in business and making them whole by paying the bonds
> off. Of course, what they would prefer is that GM go to bankruptcy
> so they collect their CDS bets, AND get paid for the bonds in bankruptcy
> court.
>
> As Dickens put it, "If that is what the law says, then the law is
> an ass." It is not in the national interest, or in the interest of
> long-term stability of our financial markets, for hedge funds to
> make oversized profits by sending a going concern into bankruptcy.
>
>
> Not that I would shed any tears for GM, mind you; their downfall
> is well-deserved.
But the person who wrote the post about CDS is apparently unable to distinguish between gross and net.
There are about 35b gross CDS contracts outstanding on GM, but these go down to only 2-2.5b after netting, so less than 10% of all GM bonds are actually covered (even under the assumption that only bond holders hold CDS, which is highly unlikely).
On May 12 03:26 PM robert.b.ferguson wrote:
> Who is the payee for the debt swaps? AIG? It has been some time since
> GM was a going concern. They should have been allowed to fail before
> the bail outs.
Ignore the politics and both are quite easy. Insert politics and both are doomed to fail.
Note the lack of discussion about the actual products that GM and Chrysler make. It is fifth or sixth priority at best. The past Captains of industry would slap them all very hard. What a sham...shame.
On May 12 05:13 PM Hot Richard wrote:
> It always surprises me how complicated people make things like running
> a government and managing an auto business.
>
> Ignore the politics and both are quite easy. Insert politics and
> both are doomed to fail.
>
> Note the lack of discussion about the actual products that GM and
> Chrysler make. It is fifth or sixth priority at best. The past Captains
> of industry would slap them all very hard. What a sham...shame.
If the UAW gets a large share of the common, stock, then I expect the jack asses to keep giving themselves largess untill they run it into the ground again.
Utterly amazing.
That they evidently fail to grasp that if they took a wage only two times the national average or so, then they would most likely be golden, and able to guilt enough Americans into buying their cars for the forseeable future.
There is such a thing as the concept of "enough", as in enough wages in this case. They evidently would rather keep their excessive wages and go down with the ship, to the last man.
This reminds me of how I feed my dogs a treat such as a piece of good steak. I learned some time ago to have them sit or lie there, and then give them the last stuck - or piece. This, because if I give them a piece during my meal then they devour it in a few seconds and then look at me as if I have never given them anything in my life:)
So they sit there, knowing that they will get a piece of delicious something, and I give them the last piece and let them lick my fingers to show that it is the last, with the result that they are happy.
This reminds me, snapping back to the present, of the UAW posters here on this board in that they act as if we have no been supporting them for many years and have not ever given them a thing. Well, I hope this is the last of it.
On May 12 07:15 PM Kman58 wrote:
> It is refreshing and good to see basic economics at work, and to
> rule in the end.
>
> If the UAW gets a large share of the common, stock, then I expect
> the jack asses to keep giving themselves largess untill they run
> it into the ground again.
>
> Utterly amazing.
>
> That they evidently fail to grasp that if they took a wage only two
> times the national average or so, then they would most likely be
> golden, and able to guilt enough Americans into buying their cars
> for the forseeable future.
>
> There is such a thing as the concept of "enough", as in enough wages
> in this case. They evidently would rather keep their excessive wages
> and go down with the ship, to the last man.
>
> This reminds me of how I feed my dogs a treat such as a piece of
> good steak. I learned some time ago to have them sit or lie there,
> and then give them the last stuck - or piece. This, because if I
> give them a piece during my meal then they devour it in a few seconds
> and then look at me as if I have never given them anything in my
> life:)
>
> So they sit there, knowing that they will get a piece of delicious
> something, and I give them the last piece and let them lick my fingers
> to show that it is the last, with the result that they are happy.
>
>
> This reminds me, snapping back to the present, of the UAW posters
> here on this board in that they act as if we have no been supporting
> them for many years and have not ever given them a thing. Well, I
> hope this is the last of it.
For those of us who put 30 or more hard working years into working at an auto company; it's not very comforting to think that the pensions that are part of our compensation package may be ripped away from us by the excessive lawyers fees and liquidation of a full bankruptcy. To me, I accepted employment at a company with the full compensation that was offered at the time I started and when I retired. To take that away after the fact, is stealing , even if it is deemed legal.
And to set matters straight, I was in the military for 4 years during Vietnam (1969 through 1973). Before that, I put myself through a technical college earning an Associate degree in industrial electronics.
After the military I worked for two computer service companies working on everything from small business systems to industrial numerical controls, automated inspection systems, industrial X-ray systems operating at 145,000 KVA, and more. It took me into companies in the medical field such as GE X-ray and CAT scan, Evinrude Motors, several small medical equipment manufacturers, and Delco Electronics where I made my General Motors connection. The pay scale was already dwindling in the field service business and I had a family and young kids. So am I too be blamed for taking a better paying job with heath insurance and a retirement package? I am not and have never been a "lazy auto worker" as most of the people I've worked with have neither been. Every line of work has it's fair share of "skaters" looking to do as little as possible. I resent those who want to label any line of workers as lazy and doing poor quality work. At General Motors quality was pushed and pushed every day. "Quality Creates Customer Enthusiasm" was pounded into us daily and we lived up to as best we could with the design, engineering and tools were were given to work with. If you screwed up on the job, you were taken off the line and made to look at what needed to be done to rectify the issue. . . repeatedly, until it was corrected. If you screwed up more than once you were given written reprimand and after 3 times you could be given 2 -3 days off with no pay. It happened and I saw it happen regularly at the plants I worked at.
There were even employees I saw thrown out for a week or month for "loitering" or not performing their job. It was occasional , but it was authorized by both the UAW and company. So they were an example to show others what would happen if you screwed up. There was never any free lunch where I worked at several GM plants.
And just so you don't go thinking I got everything on a silver platter; in order for me to hang onto my income and retirement package I had to move 3 times while working for GM. One of the moves cost me a reduction in wages for 3 years because of going from skilled trade to line work and because of the transfer agreement for plant transfers at that time. That was a 38% pay cut and I had a family and my wife had to quit her job because of the move and find another paying much less. There is much more , but the point is my situation was NOT unique.
As GM downsized and worked at plant and employee reductions while improving both quality and efficiency; this was the result for many people as downsizing and automation, as well as trying to adjust to the unfair competition of transplant and foreign auto makers.took place.
As I said before, GM, Ford, and Chrysler made their mistakes in product choice at times and marketing. So did Toyota, Honda, and the others. They all got on the big SUV and truck wagon too and look where those sales are for them as well as the Big 3. It was the greed of oil producers first ( high prices) and then the unscrupulous and undisciplined financial gurus that drew the last straw for US brand auto companies.
So if I am defensive of what people say about GM, Ford or any US brand automaker you need to walk a bit in the shoes of those like me as I have illustrated in this post. Give people some respect or you'll get the same crap that you dish out to them. We need to get behind each other in America. Not deride, mock, or bash those that work or have worked in the auto business. This is a disgrace to us as Americans and makes us a laughing stock in the countries that are pushing this global economy upon us.
Thanks for that CDS statistic.
One quibble: I believe that is the total outstanding, Not necessarily the amount held by bondholders. So some who stand to collect may Not actually have a seat at the hearing, as they are not creditors, but speculators.
Thadeus,
Your pension is guaranteed by the feds, if Zombie Chrysler can't pay.
Which is yet another of the moral hazards of a situation where the feds guarantee everything - every failure becomes a cost to the taxpayer, given the feds an excuse to sick their nose in.