Rick Wagoner lost control of General Motors this week. Forget about his title; game over for the embattled former Duke basketball wannabe. There’s a new sheriff at GM – and it’s a bunch of Wall Street guys that few on Main Street can name. It’s the hedge funds that have been acquiring GM’s bonds. So here’s how these guys will play The General to make a killing on the pending government bailout:
First, they’ve been reading TTAC. The money men know GM can’t possibly turn the business around without a major restructuring. That means fewer brands, dealers, a busted UAW and a balance sheet that looks healthy, rather than one destined for the emergency room. They know that one of two things has to happen. Option one: bankruptcy. It’s the most obvious choice, but one to be avoided at all costs (as per GM management).
Option two: a non-C11 cram-down on all the creditors, the unions and anyone else to whom the GM monster owes money. Either way, every one of these creditors will end-up with a bunch of paper (new equity or new debt), but no cash for the credit already extended.
The bond market sees this coming. GM’s non-bank debt– mostly unsecured obligations– trades between 10 and 20 cents on the dollar. Translation: anyone holding GM paper has very little prospect of getting paid in full when the debts come due. Right now, GM’s attempting the cram-down on those bondholders (and the United Auto Workers). GM CEO Rick Wagoner hopes to trade debt for equity– or perhaps arrange a debt exchange– with GM’s bondholders. That’ll show Congress that he’s “making progress.”
But Red Ink Rick seems to have forgotten that Wall Street “hedgies” control GM’s debt. And they want to make money soon rather than never later. And the plain truth is that the hedge fund playas are going to win this game with or without a GM bankruptcy. Either GM gives them the terms they want, now, or GM will have to file. The hedge fund boys don’t care which way GM goes. In either scenario, they’ll end up controlling the company.
Their terms are simple: give the hedge funds enough new shares now so they can control the General’s Board of Directors. All indications are that GM’s bending to their demands. At the same time, the bondholders are demanding that Wagoner show them the rest of the plan he’s going to present to Congress that proves GM can avoid C11. That means better terms from the UAW labor agreements and the VEBA health care program, killing some brands and dealers, and making even more cost cuts.
And if GM files? No big deal. The government won’t let GM be liquidated. Nor will it nationalize the automaker. The reorganization will happen fast. Again, the bondholders will get to call the shots– right behind the $5b or so of secured bank debt. It’s a pittance in the scope of GM’s total liabilities; the automaker’s bond debt totals nearly $36b or so.
Assuming the hedge funds have been acquiring GM’s bond debt for pennies on the dollar, their total outlay might be around $4 to $8b. That’s not a lot of money, considering that the Feds are likely to put in another $12b or so of your hard-earned taxes. And that’s AFTER the group haircut.
The hedge funds will end-up calling the shots at a company that does $150b in sales with a global franchise and a new balance sheet financed by the taxpayers. Better yet, it’s a company that must be structured in a way to make money. The government wants to get paid back; the Feds will be sure that everyone gives enough so the company can be profitable. And that works for the hedge funds too– they got in on the cheap for a company guaranteed not to fail. (Ish.)
But don’t expect the hedge fund guys to show-up at the Capitol this week. In fact, they’ll stay well out of the limelight while Congress worries about Rick’s mode of transport to D.C. All the hedge funds want is a plan that works, and money from Congress. And then they can steer the wheels at a new GM, one that’s got a new balance sheet, a new management and a slimmed down North American business that makes money. It’s a good bet to take.
How much would a newly profitable GM be worth?
So, how is this better than if the government had nationalized GM for less money than the no-strings attached 25 billion dollar bailout? Those hedgies are going to get paid, one way or another. And in this case, I can see no other way than that the government bailout money will end up in private pockets.
Because a government bailout or nationalization does nothing for GM’s long term prospects. They will still have crushing debt, poor products, poor management, and an onerous union contract.
BTW: Today’s Dilbert might as well be a staff meeting at GM. (Dilbert)
maybe, just maybe, they’ll implement Return to Greatness and then GM will regain it’s glory. would absolutely love to show how wrong Red Ink Rick has been. again I’ll state that the whole problem is not what most people think. we really don’t have a cost issue, it’s a revenue issue. what is needed is the plan to sell cars. it’s truly that simple.
I think a filing is still likely. It’s the only way the major players will take things seriously.
But if The Hedges up with GM, they ought to pull a Boeing and move to Nashville, Fort Worth or Atlanta.
Send a message (and boxes of Depends) to Michigan’s statehouse and congressional delegation about the future of the North American auto industry.
There is a way for the little guy to buy bonds in both Ford and GM easily. Many are traded as stocks on the stock exchange, and come in $25 increments. These are actual bonds, representing debts, not preferred stocks which would be equity and will probably be wiped out. The cheapest GM “baby bond” now is GPM trading at 13.9 cents/dollar, and the cheapest Ford bond is XKN trading at 17.0 cents on the dollar. Here is how to figure out those numbers.
1) Take GPM representing a $25 debt, closing at $4.10 Friday.
2) GPM will pay $0.78 cents in interest to anyone holding the stock on 12/31, payable 1/15/09
3) Assuming GM won’t go bankrupt by then, that means that $0.62 cents of interest is currently “baked into” the current $4.10 price, so the real price is about $3.48, or 13.9 cents on the dollar
4) Even if GM goes bankrupt by 1/15, you are paying 4.10/25 or 16.4 cents/dollar
Symbol Price Price-interest Cents/Dollar
GM Debt
GPM 4.1 3.48 $0.139
GBM 3.99 3.63 $0.145
GXM 4.05 3.74 $0.150
GMW 4.4 4.12 $0.165
GMS 4.51 4.15 $0.166
RGM 4.3 4.17 $0.167
CYP 5 4.18 $0.167
HGM 4.55 4.19 $0.168
XGM 4.5 4.22 $0.169
BGM 4.54 4.41 $0.176
GRM 8.4 8.39 $0.336
Ford Debt
XKN 4.3 4.24 $0.170
DKL 5.3 4.56 $0.182
KSK 4.7 4.57 $0.183
PJE 5.5 4.76 $0.190
PIJ 4.98 4.77 $0.191
KVU 5.7 4.98 $0.199
XVF 6 5.28 $0.211
FPRA 5.5 5.49 $0.220
Tzk 6 5.94 $0.237
FCZ 7.3 7.02 $0.281
FCJ 7.4 7.34 $0.294
I think we are trying to solve a problem without solution. I think that Rick and His Court (GM board) know the game and knew 5-8 years ago that call will be made on their bullshit promises. The New Shylocks (hedge funds) are not that new in principal. There is no way GM can manufacture cars for quick pace market place.
Granted hedge funds will go for control and will gain control but I see end result the same as Chrysler’s. We have no culture (any longer!) to run successful manufacturing company in this country. This task requires leadership, all we have (can offer) greed. We don’t have to look afar: Cerberus own Chrysler already.
I don’t think there will be any “Return To Greatness”, GM’s glory days of dominating the U.S. market are over. What it needs to do is to figure out how to be a company that can live off a smaller slice of the pie and somehow still be profitable. If that means killing brands, closing plants, eliminating dealerships and downsizing it’s labor force then so be it. Right now GM is collapsing under it’s own weight.
In the worldwide car business, the only country that requires the private sector to assume crushing debt costs in health care is the good old USA. I do not know the statistics, but I would bet that those obligations aside, our actual labor costs to be less than Germany,France, Italy, and maybe Japan. The public might as well get ready to put $30 billion more into the pot, and buy out the private health insurers and convert, en masse, to single-payer. I think Ev Dirksen said it best ” a billion here a billion there- pretty soon you’re talking real money”. (paraphrase mine) Why not get it over with? The status quo, where you can be totally wiped out by a single disastrous calamity, is preposterous in a country with our GNP.As you can see, the old, tired socialism arguments only last until your own ass is targeted. Wall St. believes wholeheartedly that the taxpayers should assume the risks and losses, but they keep the profits and equity. Old Karl must be smiling.
But if The Hedges up with GM, they ought to pull a Boeing and move to Nashville, Fort Worth or Atlanta.
Send a message (and boxes of Depends) to Michigan’s statehouse and congressional delegation about the future of the North American auto industry.
Because, after all, since the feds have stolen transferred almost a trillion dollars of wealth out of the industrial Midwest to the south, southwest and DC area, it’s only fair to move the rest of the good paying jobs away too.
Michigan averaged 81 cents in federal spending per dollar paid in taxes. All the states in the industrial Midwest have a net loss. Even California, because of all the defense plants that have been moved to the deep south, is now getting screwed, getting back only $0.75/$1.00. New Jersey really gets screwed at $0.65. But as a region, the rustbelt takes the biggest hit. Illinois alone lost almost $400 billion over the past 30 years.
The money paid for Sen. Shelby’s Mercedes, Hyundai and Kia plants (through fungibility of state funds) and for the roads and ramps leading to those plants. The Big 3 haven’t been exporting jobs out of Michigan, it’s been the federal gov’t.
1981-2005 average of in-state federal spending per the state’s dollars of federal tax paid. Note, only three of the southern or southwest states are under a dollar and only one, Texas isn’t close to breaking even. The rest do very, very well on everyone else’s dime. BTW, the delta is increasing. Over time, the southern states’ take has gone up.
Alabama $1.40
Arizona $1.17
Arkansas $1.33
Florida $1.05
Georgia $0.99
Kentucky $1.27
Louisiana $1.24 (even without Katrina related spending in ’04 and ’05 it averaged $1.19)
Maryland $1.25
Mississippi $1.69 (without Katrina related spending in ’04 and ’05’ $1.67)
Missouri $1.34
New Mexico $1.97 (in 1st place)
North Carolina $0.97
Oklahoma $1.18
South Carolina $1.26
Tennessee $1.16
Texas $0.90
Virginia $1.46
West Virginia $1.46
Washington D.C, of course is off the charts at $5.45 in federal spending per tax dollar paid.
Because of all the highly paid federal employees, Maryland is the wealthiest per capita state and 9 of the richest 20 counties are in the DC suburbs of MD and VA.
@Ken Elias & @gsorter:
I don’t know anything about the order of precedence in which financial obligations are cleared under C11.
Bondholders are not cleared out?
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@olddavid: you could always just move to France and start paying the 60% income tax there.
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@Ronnie Schrieber: I never understand how they slice those stats. The answers always seem different.
http://money.cnn.com/2007/08/28/real_estate/wealthiest_states/index.htm
http://wealth.mongabay.com/tables/100_income_zip_codes-10000.html
http://en.wikipedia.org/wiki/Household_income_in_the_United_States#Income_by_state
http://en.wikipedia.org/wiki/Highest-income_states_in_the_United_States
GM could use C11 to strip down its assets, sink its legacy costs, and, emerge as a lean mean profit machine. They could have done that back when Mr. F wrote Death Watch Number 1, or even before that.
The problem is not the lack of tools, it is the lack of management direction. C11 cannot fix that problem. If current management were able to wave a magic wand, achieve everything that C11 permits, and get a pot full of government financing to boot, there would still be no reason to expect them to do a better job running the reorganized company than they did with the rich company they were handed.
In other words, the current management could be given the goose that laid the golden egg, and they still would not be able to cook a decent omelet.
Abandon Hope, All Ye Who Enter.
BTW, Mr. F. why not put links to all 221 of these editorial classics on a single page so we can peruse your brilliant foresight at our leisure?
willman- The old adage of passing it on is always appropriate when dealing in taxes. If I make $10 per hour and get taxed 25%, is it not the same as making $15 and paying 50% (the top I paid while working in Canada)? The difference is that the population seems to actually care about each other in a fundamental way that I don’t feel here. Of course, the next noise I will hear will be the catcalls questioning my patriotism, you don’t like it move, etc. etc. But, if anything has shown up in our present mess, its the sense of entitlement our executive class has convinced itself that is its’ due. If we’re going to go broke, let’s at least do it in style………we can ALL be millionaires! Bring back the Weimar Republic! Do I hear Kurt Weill?
@willman,
If you note, all three of the state rankings you linked to have Maryland as #1. That’s because of all the fat cat federal employees who live there.
@olddavid
The sense of entitlement of public employees (who have guaranteed pensions exceeds anything in the executive suites in the Motor City. Not only do public employees have benefits far more generous than anything available to the vast majority of private sector workers, many of them belong to unions who give campaign contributions to the politicians who negotiate their contracts.
Nothing in the private sector approaches that level of corrupt conflict of interest.
Of course, government employees like Dr.Lemming will be quick to tell us how many hours they put in and how it’s all about public service. But tell them that we all have to pull together and that we might not really be able to afford to make all gov’t employees pension millionaires and they’ll huff and puff about contracts and public trust. Because of how much the state of California puts into public employee pensions, a private sector worker would have to pay over $1.25 million to get an annuity that pays as much as gov’t pensions.
http://pensiontsunami.com/blog/?p=68
Ronnie Schreiber : Because of all the highly paid federal employees, Maryland is the wealthiest per capita state and 9 of the richest 20 counties are in the DC suburbs of MD and VA.
So why is this?
The reason these counties are so wealthy is that most of the Federal jobs require a college degree and many require advanced degrees. For example, 6% of all residents in Montgomery County Maryland aged 25 or older hold a PhD. (http://mcparkandplanning.org/research/documents/EducationalAttainment09192007.pdf) Most of these jobs are in mathematics, science, engineering, or economics. Many are foreign born PhDs since American kids don’t want to put in the effort to earn advanced degrees in the hard sciences. Maryland and Northern Virginia are wealthy because they have an educated work force working in advanced fields.
Your statment is true but only explains half of what is going on: Federal jobs pay well but require the employee to have taken time and expense to earn at least a college degree and more likely an advanced degree.
Morea,
Are you a government employee? Do you live in VA or MD? I’ll admit my selfish interests as a Michigan resident. Will you do likewise?
Since you raised the issue of half an explanation, where did the money come from for VA and MD to “invest” in an educated workforce or to attract advanced industries? It didn’t come from residents of those states but rather from the windfall those states get from the federal spending disparities I already cited. Taxpayers in the industrial Midwest subsidized those states’ “investments”. Maryland’s net gain on federal tax dollars 1981-2005 was $165.63 billion, Virginia’s $376.62 billion. With the feds pouring more than half a trillion dollars into the region, that can free up a bit of pocket change. Direct federal spending on projects and earmarks pays for things that would otherwise come out of state funds, freeing those funds for other things like business incentives. Indirect spending through salaries for fed emps and armed forces members (Norfolk is home to the Atlantic fleet) and for the operation of military bases and defense plants, means more income and sales taxes flow into state coffers.
Besides, the only thing those states did to get that money was to be lucky that the nation’s capital was moved from NYC to Washington DC. Federal agencies’ decisions to locate facilities in the DC suburbs is based on proximity to DC, not the number of PhDs who graduate from schools in MD and VA, otherwise they’d locate them in Cambridge or Berkley to be near MIT and CalTech. Most of Virginia’s high tech jobs are there because of the federal government and federal contracts.
Your image of Michigan as simply the home of smokestack industries is not entirely accurate. Michigan is perhaps the leading state in terms of robotics and there is indeed a high tech corridor between the metro Detroit area and Ann Arbor. Even with the job losses we’ve had here, Michigan is still a top 10 technology state. The M-14 freeway is lined with many high tech businesses like Perceptron and Carl Zeiss. Southeastern Michigan is home to over 7000 technology businesses.
Because of the size of the auto industry and the attention it gets most people don’t know how diversified the Michigan economy has been. It’s always been a major producer and developer of pharmaceuticals, with Parke-Davis being located on the west side of the state. We also design and make appliances due to Whirlpool’s headquarters in Benton Harbor. Because of the industrial nature of our biggest businesses here, most people also don’t realize that Michigan is also a major agricultural state, 3rd in Apples, 1st in sugar beets, just out of the top 10 in corn at 11th, also 11th in soybeans, 1st in tart cherries, 4th in sweet cherries. Michigan’s “thumb” area and the nearby Saginaw Valley / Bay area produces a large fraction of the nation’s dried beans. The famous bean soup on the menu every day in the US Senate cafeteria’s uses navy and great northern beans grown in Michigan. There is also a significant pulp wood industry as well as related paper mills. Michigan is the 8th largest agriculture exporting state.
As for your implied slam at UofM and other universities here, while it’s true that Stanford undoubtedly had a role, the development of Silicon Valley probably had more to do with a private sector institution, Xerox’ PARC than Stanford. Speaking of engineering schools, the leading engineering school in MD, Johns Hopkins, is ranked 27th by the US News annual report, Virginia Tech is ranked 28th, and the University of Michigan is ranked 9th. While it’s not ranked #2 like Stanford, we do our share of producing the nation’s engineers. Checking law, medicine and the hard sciences at the graduate level, only in biology and medicine does Hopkins outrank UofMich, Michigan is tied with UofMD in physics and computer science, and in math and chemistry Michigan outranks all the schools in MD and VA. Not that ranking means everything. I’m sure there are community colleges that do a better job educating students than most of the Ivies. I never went to an Ivy League school but I do better on history and civics tests than most Harvard students.
You’ll earn a much greater salary as a UAW worker for many years before the mathematics PhD even catches up!
Do you have a problem with that?
Mathematicians’ salaries depend on if they’re academics or they work on Wall Street. A lot of the current financial mess is due to statisticians and math PhDs thinking they can quantify all risk, a risky assumption indeed.
If an autoworker makes more money than a math PhD, so be it. That’s how the market works. Autoworkers are far more likely to be engaged in creating wealth than most math PhDs. Most professional athletes make more money than most math PhDs (and autoworkers) too.
I don’t believe that having a piece of paper or having gone to a particular school entitles you to a high income.
Getting a good job because you went to a good school is not a meritocracy.
BTW, my son is a math & physics major.
My words about your fine state were intemperate. I only wished to point out the simple fact that Federal employees in Maryland and Northern Virginia are highly paid because they are highly educated. I edited my statement soon after I posted it, you must have seen my first (regrettably inflammatory) post.
“First, they’ve been reading TTAC.’ Ken/RF You should back a statement like that up. Otherwise it’s just hubris. So do you have a confirmation that wall street types, specifically multiple (not just one) hedge fund ‘guys’ have been reading TTAC?
windswords :
A joke. But also true.
Morea,
I didn’t find your remarks inflammatory or intemperate. If you’re a government employee, however, it does mean that you can’t discuss this subject without the bias of your own self-interest.
You didn’t answer my questions. Are you a public sector employee? If so, do you think that public employees are more conscientious than those working in the private sector, less conscientious, or about the same?
Federal employees are highly paid in general and have overly generous benefit packages regardless of their educational level. Their benefits are simply not available in the private sector.
We are moving to a society with two classes of people, government employees with high pay, generous benefits, and guaranteed pensions that automatically increase and on the other hand the poor zhlubs who work to support all those government employees. Frankly, if you live in California, you’d be a schmuck not to work for the state. You can retire after only 20 years, no age requirement, with a relatively lavish pension. Who the hell can retire after only 20 years in the private sector without some kind of penalty for early retirement?
The average salary for federal employees in the GS system is over $66,000, about what the highest paid UAW autoworker makes in base salary.
http://www.fedsmith.com/article/923/
“The average federal worker earned $100,178 in wages and benefits in 2004, which compared to $51,876 for the average private-sector worker, according to U.S. Bureau of Economic Analysis data.”
“Looking just at wages, federal workers earned an average $66,558, 56 percent more than the $42,635 earned by the average private worker.”
[Unlike federal employees] 40% of American workers do not have access to a retirement plan, let alone one that is geared to go up based on the rate of inflation.
Another reason for the wage inflation of federal employees is that people are sometimes promoted into higher paid jobs regardless of performance and the jobs are redefined to fit the definition of a higher grade to enable a worker to get paid more money without any real increase in responsibility.
Finally, the new report says the “pay gap” between federal workers and the rest of the economy is getting wider. “Since 1990, average compensation has increased 115 percent in the government and 69 percent in the private sector, while average wages have increased 104 percent the government and 65 percent in the private sector.”
http://www.fedsmith.com/article/1002/
in the 15 years between 1991 and 2005, federal employees got a higher increase in wage and benefits package [than the private sector] for 13 of those years. The only exceptions were in 2000 when private sector workers got an increase of 6% and federal employees received 3.3% and in 1998 when the feds got 3.3% and private sector employees took in 5.4%.
Here’s a chart from the Cato Institute that shows how the gap is growing between private sector wages and federal employee wages. Federal employees make more money to begin with and get higher wage increases.
In addition, federal employees have access to cash awards, time off awards, promotions, and within-grade step increases:
http://www.fedsmith.com/article/1209/
# In 2005, agencies awarded about 49,000 quality step increases that, on average, raised an employee’s basic pay by about $1,800.
# in 2005, there were about 178,000 promotions among full-time permanent federal civilian employees. The average pay increase as a result of a promotion was about $4000.
# About 56 percent of the federal workforce received a cash award averaging $1300 in 2005.
# 195,000 federal employees received time off awards during the year. The average time off: 26 hours
# About 111,000 employees in 2005 received cash awards (of about $700 each, on average) for exceptional performance as part of a group.
# About 400 federal employees were denied a within-grade increase in 2005.
That last one is shocking. Out of about 1.6-1.8 million federal employees in the GS system, only 400 were denied within-grade pay increases. When only 0.02% of employees are denied within-grade pay increases that means that merit and performance have nothing to do with those raises, the raises are automatic, regardless of performance. It also means that the vast majority of federal employees are likely to be at the top end of their GS pay grade, not the bottom.
windswords, All KE & RF have to do is check the IP address logs. Whenever Charles Johnson, @ Little Green Footballs, highlights some hypocrisy, bias or outright chicanery by the MSM, he’ll get a spike in traffic from the offending news outlet, like Reuters or the AP. For a while, he had a little applet on the home page that showed which news agencies were visiting his site.
Ronnie Schreiber: development of Silicon Valley probably had more to do with a private sector institution, Xerox’ PARC than Stanford
I grew up in Silicon Valley. Actually, it developed in the 1950s and 1960s, due to a combination of the two top-ranked science and engineering schools (Stanford and Berkeley), many second-ranked schools (San Jose State etc.), relatively cheap real estate in the 1950s and 1960s fruit orchards, and investment money available in San Francisco from the bankers and stock exchange there. Xerox PARC did groundbreaking research, but it was just one small research center that wasn’t even started until Silicon Valley was already thriving.
olddavid: In the worldwide car business, the only country that requires the private sector to assume crushing debt costs in health care is the good old USA.
Please show me the federal law that requires any company to provide health care insurance to employees.
Hint – there isn’t one.
The automakers and the UAW have been free to renegotiate the benefits coverage for employees and retirees. For years, the UAW refused to even consider this, and management never pushed it. Now it may be too late. But that is not the federal government’s fault.
If the UAW really believed in nationalized health care, it would have simply proposed shifting retirees to Medicare. It didn’t do this because it knows that Medicare coverage isn’t nearly as generous as the benefits its retirees currently enjoy (one reason why the domestics are staggering under a cost disadvantage), which makes its calls for nationalized health care disingenuous at best.
Please note that the transplant operations provide health insurance for active employees, but seem to be doing well.
Ronnie Schreiber: Indirect spending through salaries for fed emps and armed forces members (Norfolk is home to the Atlantic fleet) and for the operation of military bases and defense plants, means more income and sales taxes flow into state coffers.
As I explained before, two of the biggest drivers of federal spending are Medicare and Social Security. Both of these programs are aimed at senior citizens. The South and the West, with their milder weather, attract a disproportionate number of retirees, so those federal dollars will follow them.
Regarding all of those federal employees – yes, they are paid very well. But the simple fact is that neither candidate ran on a small government platform, and the candidate who won is the one who wanted to do more to expand the federal government.
Michigan went handily for him, and a large part of the reason he won the state is because the UAW worked to get out the vote for him.
Of course, most of those new federal employees are likely to be based in Rockville or Timonium, Maryland, and Alexandria or Vienna, Virginia, not Ann Arbor or Detroit.
But Michigan (not to mention the UAW) is only getting what it voted for, so my sympathy is quite limited.
Mr. Screiber, thank you for the additional information about Michigan. It seems sensationalistic doom-and-gloom media have again misled us, and that my longtime image of the state as one of great wealth and resources still holds true. Southern states are still far behind in high-value-added industries. Flint and the inner city of Detrot may not be prospering, but in general it appears Michigan’s economic muscle should be ample to meet whatever challenges may come its way.