What to do about GM?

[Burls]

I was watching Charlie Rose the other day.
The guest was Bill Ackman, a major investor and hedge fund manager of Pershing Square Capital Management LP.
Ackman says that the best thing to do would be to allow GM to declare Chapter 11, instead of bailing it out.
Why?
Because GM has got itself into a position where it is carrying such a huge debt load that it is no longer a viable business.
Giving GM bailout money would just mean that it could continue to pay its creditors for the next few months.
If GM declared bankruptcy, its debts would be erased, and ownership of GM would go into the hands of its creditors.
GM wouldn't cease to exist.
It would just have new owners.
At that point, GM would finally have the potential of being a viable business again.
The Federal Government could then arrange a retooling loan that the new GM would be able to pay back.
But any money the Federal Government sends to the present GM ain't coming back.
It's just throwing money into a black hole of debt that the present GM has no hope of paying off.

[ArlJim78]

i think this is actually the correct thing to do. but since GM is my companies largest customer and they owe us millions, it could be painful.


I have to say though, a bailout probably just delays the inevitable, I don't think they can make it in the long run with the current structure.

[Burls]

Another bonus is that the new GM would be rid of the incompetent executives of the present GM as well as their expensive termination contracts.
The same would hold for the prohibitively expensive obligations that the auto workers union has against the present GM.
The new owners of the new GM would have a lot more freedom to set up a viable set of working arrangements.
'Bankruptcy' isn't always a bad word.

[sammy the sage]

I have a buick LeSabre...replaced 3/4 power window's at $300+ a pop....less 70k miles on car.........

I picked up an off-duty Fla. state trooper/wife/2 daughter's yesterday at the post office...stranded by personal car...LeSabre...

gave them a ride home...asked him if he'd ever replaced power windows...he said ALL 4.....

So if SHODDY workmanship,..(or even worse...planned failure)... big union, $40k day ceo should be rewarded...

then by all means...bail them out... :( :mad:

on a side note...Trooper tried to tip me...I refused...although did ask for get outta jail card! :lol:

[witchdoctor]

Interesting take on the auto industry.

http://www.middletownjournal.com/o/content/oh/story/opinions/editorial/2008/11/13/swg111308thomas.html

Half of the $50 billion the auto industry wants is for health care for its current and retired employees. This is the result of increasing UAW demands, strikes and threats of strikes unless health care and pension benefits were regularly increased. While in the past UAW settled for some benefit decreases while bargaining with the Big Three U.S. automakers, according to the Wall Street Journal in September of 2006, "on average, GM pays $81.18 an hour in wages and benefits to its U.S. hourly workers." Those increased costs, including the cost of health care, were passed along to consumers, adding $1,600 to the price of every vehicle GM produced.



While many in the Democratic Party have focused on "corporate greed" and "fairness," according to Sherk, "competition, not corporate greed, is the real problem facing labor unions.

(More at link)

[xtb]

...the best thing to do would be to allow GM to declare Chapter 11, instead of bailing it out.


I agree wholeheartedly.

(Unless it jeopardizes production of the new Camaro.)

[Marshall Bennett]

Chapter 11 may seem the way to go for many . For the 1.2 million that may be out of a job at Ford & GM I'm not so sure . A bailout of sorts almost definately seems in order , whether anyone here likes it or not . With a government that throws money away willingly at the drop of a hat , does this seem so unusual ?

[HUSKER55]

Does anybody have an idea as to how to say NO? I would think that letting them go under might be the best thing. The workers know how to build cars. Instead of bailing out failing companies, let the employees start new companies, just like the pioneers did. For some of those workers it was their grandfathers.

If we were to invest in the upstarts, I would think the long term payoff would be better for everyone from investor, company, government, economy and etc.
Would that really be the worst thing we could do?

[dutchboy]

Assembly line worker at the big 3 makes about 80 per hour or 160,000 per year.

Non union in a southern state makes about 60% of that. Still a pretty good living.

There fixed costs are just too high. Try to reduce the labor costs and they go on strike. There is no way they can survive as is.

[chickenhead]

while I'd like to see them go into bankruptcy for their own good, it's not gonna happen (at least not until later, after we dump a bunch of money on them first.)

I'd rather see them just give the laid off workers $50 billion, rather than the corporation. It would be better for everyone.

[ddog]

Does anybody have an idea as to how to say NO? I would think that letting them go under might be the best thing. The workers know how to build cars. Instead of bailing out failing companies, let the employees start new companies, just like the pioneers did. For some of those workers it was their grandfathers.

If we were to invest in the upstarts, I would think the long term payoff would be better for everyone from investor, company, government, economy and etc.
Would that really be the worst thing we could do?

In this case and at this time, yes , by a mile.
This is easily solved.

haircuts , yes unions will take them as opposed to no jobs,mgmt stays on with freeze on compensation until gvt is payed back.
gvt puts in whatever is needed to take chrysler and gm and merge them along with cutting models and plants and whatever nbr of workers the current sales minus 20% will support.

everything is geared to that level of revenue.

[prospector]

how about this statement today...

" Even as Detroit's Big Three teeter on collapse, United Auto Workers President Ron Gettelfinger said Saturday that workers will not make any more concessions and that getting the automakers back on their feet means figuring out a way to turn around the slumping economy."

if the union is not willing to take cuts, i say let them go under...$80/hour plus benefits is too much for the auto industry..no union pay/benefits cuts...no bailout..

[Burls]

if the union is not willing to take cuts, i say let them go under...$80/hour plus benefits is too much for the auto industry..no union pay/benefits cuts...no bailout..
Usually, I'm on the side of the working man.
But in this case, let GM go under.
Those workers can come back and work for the newly restructured GM after it files for Ch 11.

The same kinds of considerations apply to the management, of course.
If they want to bring in some superstar executives from the outside to reestablish GM after Ch 11, the bulk of their performance has to be result based.

[dutchboy]

I have seen a few news articles where they show the inside of a plant. It appears most of the work is being done by automated robots with few people around. Most of the welding seems to be automated.

I assume the union workers that have been replaced by automation are still on GM's payroll.

[Marshall Bennett]

Seems like the same could hold true for executives , they can seldom be found when a question about their business becomes public . When they are found they're at some vacation resort with other executives . Automation from top to bottom .

[highnote]

Here is John Mauldin's take on a GM bailout:

Is GM too Big to Let Fail?

(Let me say at the outset I am truly sorry for those who have lost their jobs or are facing the possibility of a job loss, whether at GM or any other firm. I have been there, as have most people at one time or another.)

I wrote in 2004 that GM was essentially bankrupt. They owed more in pension obligations than it seemed likely they would be able to pay, without major restructuring of the union contracts. I was not alone in such an assessment, although there were not many of us. Now that assessment is common wisdom.

Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of "millions" of auto-related jobs. GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000. Another 5 million jobs are directly related to the three auto companies. GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years. (Edd Snyder at Roadtrip blog)

How did we get to a place where the market cap of GM is a mere $1.8 billion and its stock price has dropped from $87 in early 1999 to $3.10 today? (See chart below.) Where Rod Lache of Deutsche Bank has a "price target" of zero for GM? "Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," Lache wrote.

The litany of reasons is long. At the top of the list are union contracts which mandate high costs and pension plans which cannot be met. Then there is the problem of many years of poorly designed cars, although they are now getting their act together. We can also discuss poor management and bloated costs, like paying multiple thousands of workers who are not actually working. GM is structured for the 50% market share they used to command, whereas now they only have 20%.

Wilbur Ross, a well-known multi-billionaire investor, was on CNBC saying that allowing GM to go bankrupt would throw the country into what sounded like a depression. Of course, he does have an auto parts company which supplies GM; so he, as my Dad would say, does have a dog in that hunt.



Ross said that we as a nation are to blame for GM's problems (I am not making this up) because we do not have a national industrial policy. The US allowed other automotive companies to build plants in states that had lower labor costs, and that is the reason GM is uncompetitive. GM pays an average of $33 an hour, and those selfish other companies pay a mere $19 plus a host of benefits.

Ross evidently believes that because some states have lower taxes and right to work laws, that it is the responsibility of the taxpayer to give GM a certain type of immortality rather than suggest GM deal with its problems directly. I assume that Ross also sides with the French when they suggest that Ireland should raise taxes so they will not have to compete with Ireland for business. Such thinking is nonsense and is also unconstitutional.

Let's all acknowledge that having GM go bankrupt would not be a good thing. But it is not the end of the US automotive industry, nor even of GM. Let's think about what a GM bankruptcy might look like. In a bankruptcy, the debt holders line up to come up with a restructuring plan so that they can maximize the return of their loans or obligations. The shareholders get wiped out, but with GM down over 95%, that has largely been accomplished. That process has happened with airlines, steel companies, and tens of thousand of other companies. It is called creative destruction.

First, let's understand that the real owners of GM are the pension plans, as I wrote in 2004. They are the entities with the largest obligations and the most to lose. They are the biggest stakeholders in a successful GM. Giving them the responsibility for making a new, leaner, meaner GM with realistic union contracts would be rational; otherwise they would lose most of what they have.

Factories need to be closed. Auto sales are down to 11 million cars a year, the lowest since 1982, which was the last major recession. Automotive companies sold cars at such low prices in the last few years that sales went to 16 million a year. But the cars that have been sold will last for a long time. Few people are going to buy a new car when the old one is working fine, especially in a recession and a Muddle Through economy. Further, does GM really need eight automotive lines, some of which have been losing money for years?

A restructured GM with realistic costs could be quite competitive. They have some great cars. I drive one. It is four years old and so good I am likely to drive it for at least another four.

At some point after the restructuring, the pension plans could float the stock on the market and get some real value. If actual pensions need to be adjusted, then so be it. While that is sad for the GM pensioners, is it any sadder than for Delta or United Airlines or steel company pensioners who saw their benefits go down? For the vast majority of Americans, no one guarantees their full retirement. Why should auto trade unions be any different?

Taxpayers in one form or another are going to have to pay something. Unemployment costs, increased contributions to the Pension Benefit Guarantee Corporation, job training, relocation, and other costs will be borne. So, it is in our interest to get involved so as to minimize our costs, as well as help preserve as many jobs as possible.

Sadly, I think it is likely that a Democratic majority next year will quickly pass a bailout that will not solve any of the longer-term problems. Obama evidently wants to appoint an "automotive czar;" and the name being floated is the very liberal Michigan former Representative David Bonior, whose anti-trade and pro-union positions are well known. This is appointing the fox to guard the hen house. It is not a recipe for the restructuring that is needed.

The bailout for GM is a bailout for the trade unions and management (who not coincidentally both made large contributions to the Democratic Party and candidates). US consumers are simply going to buy fewer cars in the future. That is a fact. Spending $50 billion does not address that reality. That $50 billion can be better spent by helping workers who lose their jobs. Without serious reforms a bailout will simply postpone the problem, and there will be a need for more money in a few years. And do we think that the management which got GM into the current mess is the group to bring them out?

And as to the argument that "We bailed out Wall Street, so why not GM?" it doesn't hold water. What we did and are doing is to try and keep the financial system functioning, so we don't see the world economy simply shut down. But don't tell the 125,000 people who have lost jobs on Wall Street that it was a bailout. That number is likely to go to 200,000. No one thinks that a restructured GM would see anywhere close to half that number of job losses.

Do we protect Circuit City? Sun just announced plans to lay off 6,000 workers. Where is their bailout? Citibank announced 10,000 further job cuts today. This is a recession. And sadly that means a lot of jobs are going to be lost. GM workers should have no more right to their jobs than a Sun or Citibank or Circuit City worker.

Now, would I be opposed to a bridge loan to help in the transition? No, because a viable Detroit is good for the country and will cost the taxpayer less in the long run than if we have to pick up their pension benefits. But any money must come with realistic reforms that put in charge new management and a realistic cost structure so GM can compete.
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[exactaplayer]

Another bonus is that the new GM would be rid of the incompetent executives of the present GM as well as their expensive termination contracts.
The same would hold for the prohibitively expensive obligations that the auto workers union has against the present GM.
The new owners of the new GM would have a lot more freedom to set up a viable set of working arrangements.
'Bankruptcy' isn't always a bad word.
Sir,
A few years back Delphi, a Gm spin off, went through bankruptcy. This resulted in a 50 percent paycut for the workers and $60 million in bonuses for the incompetent executives. Delphi had to get court approval for the bonuses. They said they didn't want to lose these "winners".

[Burls]

Sir,
A few years back Delphi, a Gm spin off, went through bankruptcy. This resulted in a 50 percent paycut for the workers and $60 million in bonuses for the incompetent executives. Delphi had to get court approval for the bonuses. They said they didn't want to lose these "winners".This is why I think the best plan would be to allow GM to go into bankruptcy and follow it up with a strategic Federal Government LOAN package that is designed to restructure the new GM in a way that would make it a viable entity able to pay that loan back.
Such a strategic plan would definitely have to forbid excessive demands by unions as well as this sort of nonsense on the part of management.

[Burls]

First, let's understand that the real owners of GM are the pension plans, ... They are the entities with the largest obligations and the most to lose. They are the biggest stakeholders in a successful GM. Giving them the responsibility for making a new, leaner, meaner GM with realistic union contracts would be rational; otherwise they would lose most of what they have. ...

At some point after the restructuring, the pension plans could float the stock on the market and get some real value. If actual pensions need to be adjusted, then so be it. While that is sad for the GM pensioners, is it any sadder than for Delta or United Airlines or steel company pensioners who saw their benefits go down? For the vast majority of Americans, no one guarantees their full retirement. Why should auto trade unions be any different? ...

Now, would I be opposed to a bridge loan to help in the transition? No, because a viable Detroit is good for the country and will cost the taxpayer less in the long run than if we have to pick up their pension benefits. But any money must come with realistic reforms that put in charge new management and a realistic cost structure so GM can compete.Right or wrong, I think I agree entirely with these three paragraphs. I would also say that the David Bonior scenario Maudlin envisages should be opposed. I hope the Obama administration doesn't go this way. If it does, then I would oppose the Obama administration in this regard. Only time will tell.

[lsbets]

It seems like if there is not a bailout this year, we're almost certain to give them 25 billion by the end of January. If we do that, it should come with some serious strings attached - and everyone at GM should share in the pain, after all most of us did not cause them to sign unrealistic contracts, build shitty cars, etc ....... So (and this should be the case for every bank getting a bailout) - all of the board members should have their pay reduced to minimum wage. They made millions in the past, they should be okay. Part of the package should be a restructuring of the pay for everyone else in the company - across the board pay cuts and reduction in benefits to get the company in a more competitive position going forward. Yeah a paycut sucks, but its better than getting paid nothing. After all, its our money being used to prop up the company, it would be nice to see something constructive happen other than "here's some cash, let us know if you need more."

[HUSKER55]

I was watching the finance channel on cable the other day and the CEO of GM? said that none of the strings should include the removal of management because the copanies needed their expertise to rebuild.

Several of the commentators and guests mentioned that alot of the money was going to pay pension plans, health care and then at the end they said restructuring the company and then they moved on.

Why don't the "experts" come out and say no bouses. Why don't the unions come forward and say they will take a hit. It is better than the street.

Their stocks are at extremely low prices right now. Why aren't they shoring up their stake in the company? Why aren't they buying stock to increase it's value?

At the current price how much control could a person have with $25B.

I say let one of the oil barons buy them out. Serve them all right. It would be interesting to see how the unions deal with the arabs.

[witchdoctor]

The UAW should put their money where their mouth is. With the stock so cheap, them buy up a large portion of the company and let the union make it viable. It is amazing what can happen when you have your own money on the line.