First to blink, first to lose. That’s what GM’s creditors know. As does Ron Gettelfinger, the United Auto Workers (UAW) boss. And that’s why there isn’t enough time between now and February 17th– the congressional deadline for the next federal loan installment for GM– for General Motors to craft a workable deal to save this company. No one is going to blink. So no one will cave, and nothing gets done. Then what?
The loan terms of the bailout specified a raft of requirements that GM has to meet or else Treasury might call its loan and force the General to face a bankruptcy Judge. There are two key terms of GM’s federal loan agreement that will definitely not be met.
First, the unions have to meet wage/benefit parity with the foreign transplant non-unionized work force. That’s a non-starter for the UAW. In fact, two hours after the bailout was announced, Ron Gettelfinger announced his itention to get the new Democratic President and Administration to amend that “unfair term.” Why would the union boss offer GM concessions that he seeks to overturn? He wouldn’t And won’t.
In any case, active UAW members’ direct wage and benefits are already close to parity with the transplant workers’. The important differences involve work rules, job classifications, and a telephone book’s worth of nonsense that makes union workers more unwieldy (read: costly) than transplant workers. The loan terms seek to sweep all of this away.
But UAW members believe they have the right to these job protections– even at the taxpayers’ expense. And if all those hundreds of pages of the union contract disappear, what’s the point in having a union? Legally, the UAW must put any changes to its existing GM contract to a member vote. Which it would lose. Unless, as always, there’s a quid pro quo.
The UAW (and its media supporters) likes to point to its “historic health care giveback”: the agreement placing GM retiree health care obligations into a union-run benefit association (a.k.a. VEBA). That little “concession” cost GM approximately $10b in cash. Of course, GM doesn’t have the cash, and never will– unless the American taxpayer antes up some more Benjamins. Meanwhile, The General already deferred its first payment (with interest accruing).
The Treasury Department inserted terms in the bail out loan agreements requiring the UAW to take stock in the new GM for half of the VEBA cash contribution owed. But it’s harder to skim stock than cash, and lots of stock won’t pay the medical bills coming due for retirees either. So the debt for equity swap is simply not going to happen.
The second key loan agreement term: a two-thirds debt-for-equity swap imposed on GM’s financial creditors. Nope.
If you add up the General’s debt liabilities (auto operating company related), the figure approaches $66b. Subrtact the Government’s bailout loan of $13.4b and the UAW VEBA liability of $10b (two creditors that want cash payment, not stock), and GM still carries $43b of debt.
Then there’s $7b in current debt (debt owed in less than a year), consisting of short term obligations and current portion of long term debt. The chance that short term creditors will take a long term position in General Motors is ludicrous. Especially when Uncle Sam is on the hook, and considering the Treasury Department’s cavalry rescue of GMAC.
That leaves long term debt of $36b comprised of various unsecured bonds of varying maturities, foreign currency denominated debt, bank debt, convertible debt (at strike prices that will never be seen again), and other debt-like items such as capitalized leases and muni bonds. Somehow, GM has to get approximately $25b of this grab bag of debt converted to equity.
Convincing these parties to agree to swap for debt for equity is impossible. There are various priority considerations, the fact that stock of a new GM might just be worthless, and that muni bond holders and lessors have zero interest in stock. Bank lenders with collateral, bond holders with near term due dates, and smart hedge fund owners of GM’s public debt will hold out until the very end.
There’s no chance to arrange any kind of equity exchange on reasonable grounds outside of bankruptcy court. It just ain’t gonna happen without that filing. We know it, the government knows it, and bankruptcy and reorganization experts know it. The only ones who don’t get it is GM itself.
“Inside sources at GM” have spent the last couple of days “suggesting” to the press that The General won’t need any more money beyond the $13.4b bailout from the Treasury (and another $6b for GMAC). GM CEO Rick Wagoner joined his union boss to make the announcement on TV this morning.
Sure, $20b in government money would be enough to buy the survival of GM (and GMAC)– provided U.S. auto sales hit the low end forecast (between 10.5 and 12.0m units) AND the other guys takes the hit. But no one will blink.
And even if GM doesn’t need more money, it’s still a basket case of a company run by the executives who dug the hole. There is only one solution: bankruptcy. Let’s get on with it already.
The hedge on that is sales figures that will never happen in 2009. Never.
If they’re lucky, it might be an 8MM unit year. Might.
From all indications, GM’s burn rate has dropped a tiny bit. But it’s nowhere near 1.5B a month, which what it would have to drop to to make that money last for 2009.
So everything is basically where it was a year ago. The only option is C11. Then push the reset button.
The correct answer is “D” none of the above. The Obama administration will rip up the current rules and then scratch another LARGE check to be funded by the taxpayers……….and the beat goes on………
Even the MSM has picked up on the death-rattle.
As TexN says, the rules will be changed simply to allow the tens of thousands of newly unemployed to hit the system over time instead of all at once.
Otherwise the govt would have called BS when the worst case scenarios called for a 12M year.
TexN-Hate to say it, but you’re probably right.
Bunter
Same-old, same-old.
Gettlefinger won’t blink. The retirees will die off and the loaded hourly labor cost will come down…in 2012. By then, Obama’s check writing will have guaranteed all of the union vote towards his second term.
And somehow, Bawney Fwank and Cwis Dodd will walk away with a couple million taxpayer dollars out of this deal too.
Goodnight, Comrades.
If they’re lucky, it might be an 8MM unit year. Might.
Only if the economy completely tanks. With the number of older cars getting crushed, 9-10 million units is about what’s needed to replace the cars leaving the fleet.
Terms in the House of Representatives are for two years, so I would give GM at most two years before Chapter 11.
And I wouldn’t count on Obama that much either, he’s gone very moderate with the Cabinet. He didn’t run to become a one-term president, and UAW money isn’t going to matter for the 2nd term; votes in the south and west are.
Also, for all these people saying things like “we’ve already given them money, we can’t let them fail now”, please see the actions Cerberus, or GM bond holders. They didn’t double down on their bad investments. You don’t put good money after bad.
Right now we’re at slightly less than $25 billion down the drain with GM, Chrysler and GMAC, there’s at least $100 billion more that would be required.
It’s hard to imagine Obama not asking Congress to waste more taxpayer money with this ridiculous boondoggle.
AMEN on all your points.
One other possibility here – a large distraction may occur once it becomes published/clear that Chrysler ain’t gonna make it. (I know it’s obvious to us but once the patient is declared dead by the MSM stuff will start happening quickly.All eyes turn towards who buys what parts (Jeep, minivans, pickups, etc.) and how many UAW jobs get saved/axed.
GM gets involved in these negotiations again and somehow buys themselves some more time/money to ‘absorb’ some of Chrysler and avoid the supposed automaker apocalypse.
At the very least, it takes a month or so to get the public’s eyes back on GM.
Only if the economy completely tanks. With the number of older cars getting crushed, 9-10 million units is about what’s needed to replace the cars leaving the fleet.
Look at the number of cars that have been put into the system over the last 5 years. Look at the average cars per household. Look at the number of unemployed. Look at the current inventories of new and used cars already on the ground.
Completely tanks is a relative term. All indicators are that 2009 is going to be worse than 2008. 8MM provides for that which must be replaced, plus those who still have the means to make discretionary purchases.
The current figures indicate most still solvent Americans greatest focus is on shoring up their own balance sheet. I see cars taking a lot longer to hit the gravel at Pick-N-Pull.
If GM ‘absorbs’ part of Chrysler, say Jeep and/or minivans, would they also pick up part of Chrysler’s $4b federal debt?
Obama was there for the original Bailout BS. Im sure he was more involved then Bush was. I dont expect anything serious to change.
What i dont understand why there is such a problem getting the union to conform. its quite simple really…”do this or else we go under and you dont have a job”. There really shouldnt be much negotiating.
theoretically, could GM just say “sorry guys, we can afford the union any more. If you still want a job get in line over there and fill out an application”. Im sure there would be lawsuits but couldnt GM just tie that up in court for a few years?
I think Mr Elias is essentially correct (like he was before Xmas about GM tanking without quick help), but the big unknown is government intervention. There may be enough in the upcoming ‘stimulus’ package to save GM.
Yeah, it’ll be ugly, but the MSM may pull out all stops pimping this thing. After all, the news business may also want its slice of bailout pie.
How this may play politically is beyond me. A ~$trillion stimulus buys a lot of votes. But it also stirs resentment in unexpected places. A lot of rust belt workers in old-line unions (like steel) who took the pension and health care haircuts are wondering why UAW workers are different.
Be honest with yourself, if GM (for instance) received $15bn from Uncle Sam, but the government installed a “Carlos Ghosn”-style CEO and a new board of directors whose primary and secondary focuses was to see the money paid back and see GM build a sustainable future, respectively, would you be so downbeat about the bailouts?
And therein lies the problem…
The trouble is with this whole situation is not that Detroit received a bailout, but the inability to change.
People can see what’s going to happen a year down the line and what the 2 possible outcomes will be:
1. Refuse any more money and watch the biggest game of “Jenga” ever take place.
or
2. Give more money and wait another year.
The meetings with GM and the UAW illustrate this inability to change beautifully.
Here we have 2 parties, one who wants concessions and the other who wants the status quo. Understandably, both parties are going to be steadfast in their objectives, because they have people who they represent (The UAW have their members and GM have their shareholders (i.e American taxpayers)). But because no-one wants to walk away from the table in failure, what we will end up with is a compromise than benefits no-one. Hence, we go back to square 1.
Unless ALL parties (Management, union, dealers etc) accept that GM need to undergo nothing short of a renaissance, nothing will change. The longer is it prolonged, the bigger the “renaissance” needs to be.
If GM accepted this fact 3 years ago, then the bailout, wouldn’t be such a big problem. But conversely (in the interests of balance), GM shouldn’t HAVE to ask for a bailout, it should have been running its business properly from the start…..
P.S Blink 182 rock! Could we see a GM deathwatch with a reference to Green Day’s “American Idiot”? There should be plenty of scope it put that in!
I think that we should take a step back here. The problems outlined here show precisely why any version of Chapter 11, prepackaged or otherwise, won’t work.
In Chapter 11, the creditors have some degree of negotiating power. The government has shown considerable interest in the outcome, which shifts the game in the creditors’ favor. That interest and all of the public dialogue that runs with it impact how the creditors will respond, because they know that the government will pay up if backed into a corner, and because the politicians have greater considerations that will influence their decision making.
The federal government now has billions of dollars on the line. The federal claim that Uncle is a priority creditor is absolutely debatable, as it does not comply with current law. That claim will be litigated if push comes to shove.
Once this discussion entered the halls of government, the price tag went up. Just so long as the feds make it clear that failure is unacceptable, the price is going to stay up.
Chapter 11 is not really an option at this point, given all of these circumstances. Now, we’re just stuck.
The internal brain-washed mentality at GM reminds me of a similar mindset at Enron…so sad. Everyone outside of the company knows what the real deal is, yet the insiders and management still have the horse blinders on. It truly is remarkable and unbelievable.
It’s beyond debate that General Motors is carrying 3-5 times the debt load they can reasonably expect to service. It’s also beyond debate GM is wholly undercapitalized and has, for all practical purposes, no assets nor the sales volume to stem the huge ongoing debt run-up.
More loans just turn it from “really ugly” to “really, really ugly” when the day of reckoning comes. It’s down to picking the date and Chpt 7 vs. Chpt 11. Because of GM management intransigence, it’s going to take the suppliers banding together to force GM into Chpt 11 to stop the madness.
It’s obvious to everyone not living in a cave that the economy is continuing to contract at a striking rate. You will see up-ticks, call them “death rattles” if you want, but we have about half-again to go.
Four weeks ago I’d have said 9,325M units. Even that number is now looking weaker as the slope of the overall plunge continues to steepen.
General Motors better have a workable plan using 20% of the now-expected 9M total in their calculations. They won’t. The 12.5M expected units was an obscenity that should have gotten him thrown out of the hearings.
I don’t see how GM doesn’t go into bankruptcy court eventually. Consumers don’t know the names of every bank that received TARP money, but I assume most consumers know GM is in trouble and the government had to step in with a bailout. Some percentage of the population is probably boycotting GM on general principle right now. Every time Ron Gettelfinger or Rick Wagoner say something stupid, those consumers say OH HELL NO! In a down year with lots of excess manufacturing capacity, how bad are lost sales to Ford or other manufacturers going to hurt GM? Big price cuts are helping to win sales of leftover 2008 models, but Can GM survive if Ron and Rick continue to alienate potential customers in 2009?
The bailouts are here to stay and will continue until either the economy stabilizes and starts to grow again or the US dollar crashes.
Until either of those happens, Obama will provide as much cash as they need whenever they need it.
They can’t get the cash to the unemployed (lines too long) so this is just another option.
http://www.mlive.com/grpress/business/index.ssf/2009/01/unemployed_in_michigan_grow_fr.html”
Maybe the unemployment application stats will “stabilize” because the system to file for unemployment is at the limit of applications that it can accept per month…
To get a people’s communal minds off their problems create an external enemy and declare war upon it.
Will Obama declare war at the first opportunity (yeah, only Congress can declare “war” but the ever-increasing transfer of power to the executive branch over the decades has usurped the Constitution)?
A knock-down drag-out conventional war may lead to increased military spending. To produce fighting machines and equipment factories will need to be re-tooled and ramped up.
A cost-plus basis will ensure the manufacturers obtain a decent profit.
Big firms, little firms, tucked away here and there across the land are locked buildings with machine tools inside ready to be started up and manned (peopled?) to create the materiel of war.
From a little town of 1,200 in Nebraska where the aluminum casings for mortars are crafted to the hulking behemoth building where Abrahms main battle tanks are crafted, empty building await workers.
What would be interesting is if China becomes involved in the hostilities, assisting our foe, and we have to continue importing goods from China due to a lack of manufacturing capability here.
Oh my… as the sci-fi writer of yore predicted… perpetual war to keep the masses employed and their minds off internal troubles at home.
A vicious cycle wherein China and the USA battle eternally inside the bounds of a 3rd country, a perpetual stalemate eating up personnel and materiel, allowing our economies to stay afloat.
But the BIG 3 will stay afloat and the HIGHLY paid elites will remain affluent while the mere commoners, as before and before that, send their offspring to fight the elite’s war.
Business as usual in the land of the free and the home of the brave (and the brainwashed).
If GM accepted this fact 3 years ago…
You mean if GM was Ford? And if pigs management could fly…
War? That’s hard… I think a nationwide health care plan can fix it.
Imagine a plan that covers all people in the US.
It only provides 2 drugs (Prozac and Valium). That’s it.. nothing else.
Under the plan, these are drugs are freely available at all Walgreen’s by the pound.. You just walk in, fill a bucket or two and they weigh them on your way out the door (to track inventory in pounds)
Fixes pretty much everything… and is dirt cheap to implement…
Engineer: “And if management could fly.”
Well, they could before the Government took their airplanes away.
Mr. Elias. Good Article. You left out another bunch of pigs who want to be slopped. The dealers.
yournamehere asks:
theoretically, could GM just say “sorry guys, we can afford the union any more. If you still want a job get in line over there and fill out an application”.
The workers are the ones who voted the union in to represent them. They are the only ones who can get rid of them by voting them out. And they have never had to prove their worth without a union, so they will not do so.
IF they were to vote them out, they would have to wait a certain amount of time (maybe a year?) before they could bring in another union.
It ain’t gonna happen. Better the devil you know…
Ronnie Schreiber: With the number of older cars getting crushed, 9-10 million units is about what’s needed to replace the cars leaving the fleet.
Not necessarily. There are many people like my brother-in-law. He has two small children who are years from getting their license. He and his wife have four vehicles. He is looking to sell one of them (a 1998 Ford Ranger bought from a relative with 40,000 miles on the odometer) and has no intention of replacing it.
Look at the great depression. Sales tanked to ONE QUARTER of the pre-depression 1929 high, by 1932.
The vehicle fleet simply shrunk and was pared away by vehicles wearing out in their usual 60,000 to 80,000 miles. No car (except maybe Checker taxicabs) would reach 100,000 miles without at least having an engine rebuild.
Look at World War II. No cars were built from early 1942 through late 1945, about 3 1/2 years, and cars were in very short supply until about 1948. (How else did you think that Kaiser and Fraser could sell lumps literally with Continental tractor motors at Buick prices? They were AVAILABLE without a waiting list – unlike virtually every other car on the market until about 1947-1948).
It was getting desperate by 1945, with scrappage of vehicles meaning the US overall fleet of useable cars and trucks was getting to be below the point where it could sustain the economy (without resorting to breeding horses & dragging the buggies and waggons from the back 40 of the family farms).
Lets not forget that congress and the senate actually voted *against* this bailout – it wasn’t until Bush stepped in with TARP funds tht this whole ball got rolling.
Lets not attack the decisions of the incoming administration on this issue until we see what they do when they can call the shots here.
This is the car that Rick Wagoner should have driven to the bailout hearings. Check out the LICENSE PLATE! Very appropriate.
http://www.youtube.com/watch?v=l-pI5YDzw4M&feature=related“