GM Spirals the Drain (Part 2)

[DanS]

Regardless, the Japanese and European transplants don't offer it and likely won't offer it, so keeping the benefit means that Detroit is not competitive even to South Carolina.

The inclusion of the language in the bill ensures that Detroit will not be competitive. Full stop. They can dress it up however they wish.

[Dinner]

The Auto Csar supposedly will have the power to force concessions from all interested parties because if he doesn't like the deal then he can demand all the bailout money be returned which would mean the companies would go bankrupt. That gives him a lot of leverage over management, unions, bond holder, suppliers, etc...

The good news is since 2005 they've had a two tier pay system where new employees actually make about the same as the transplants, have a 401k instead of a pension, and other such changes. In the 2005 deal the UAW also agreed to pay all of the retiree healthcare costs after 2010 in exchange for GM paying into a trust fund from 2005-2010. (LINK) so really the retirement health care problem is solved just like most of the pension problems will be solved in 2010 because GM and UAW worked out a similar deal for pensions.

For current employees MSNBC is saying employees will be required to pay more which is a good thing for GM's bottom line. Currently employees only pay 5% of the cost of health care while the national average is 30%. The Car Csar stands a pretty good chance of forcing everyone to accept the 30% figure too since the alternative is for everyone to get fired. Also people are talking about throwing out the old union contracts entirely and instead just copying the contract used by NUMMI in California (Toyota & GM's joint venture) which is supposedly only 1/5 the size of the standard UAW contract and allows for a lot more flexibility.

Lastly, there is a really good chance that GM's total debt load can be reduced substantially. In 1979 Chrysler negotiated a 50% reduction in its total company debt (bond holders were told their choices were to accept 50% or get stiffed so bondholders accept a 50% reduction) and GM stands a good chance of doing the same. All in all the company should be in pretty good shape in 2010 if it can make it that far.

[DanS]

The retirement health care is not at all solved after 2010. First, the companies have to come up with the tens of billions of dollars to pay the trust fund up-front. Second, they still have ongoing annual obligations.

It's a benefit that few other workers in the US have. If they are to be viable, they will not have the benefit. Simple as that.

[Dinner]

Originally posted by DanS
Regardless, the Japanese and European transplants don't offer it and likely won't offer it, so keeping the benefit means that Detroit is not competitive even to South Carolina.

The inclusion of the language in the bill is a poison pill that ensures that Detroit will not be competitive. Full stop.

You realize that the UAW will be taking over both retiree health care and their pensions in 2010, right?

GM has already made 3/5ths of the payments to the trust funds so they just have to make the 2009 & 2010 payments and then the whole tar baby becomes the UAW's problem and GM can wish its hands of the whole thing. All the new employees get 401ks instead of traditional pensions.

[snoopy369]

Yeah, people given the name 'czar' have done real well in the past.

For example, him, this group of characters, or these punks.

Also, what exactly is the (positive) difference between (auto czar) and (bankruptcy judge), beyond the $15b? Just curious.

[Dinner]

Originally posted by DanS
The retirement health care is not at all solved after 2010. First, the companies have to come up with the tens of billions of dollars to pay the trust fund up-front. Second, they still have ongoing annual obligations.

It's a benefit that few other workers in the US have. If they are to be viable, they will not have the benefit. Simple as that.

What annual costs? The link I listed said that the 2005 deal between GM and the UAW agreed for GM to make 5 once yearly payments into a trust fund with the final payment due in 2010. After that the entire trust fund becomes the responsibility of the UAW and GM has no further obligations.

[Dinner]

Originally posted by snoopy369

Also, what exactly is the (positive) difference between (auto czar) and (bankruptcy judge), beyond the $15b? Just curious.

The companies effectively get restructured just like they would in bankruptcy but officially don't declare bankruptcy. This is good because, despite what a few posters here have said, most people won't buy a car from a company in bankruptcy. After your home your car is the next biggest investment people make so most people don't want to take risks on a $30,000 purchase.

The loans made to Chrysler in 1979 all got paid back and taxpayers made $350 million off of the deal so what's the problem? We can restructure the companies without risking that a judge will order them into liquidation which just might happen in a bankruptcy.

[DanS]

They will still have substantial annual obligations to top up those accounts -- if nothing else, more people retire every year, after all.

The $36 billion that is yet to be paid up-front covers the currently retired folks. Of course, GM doesn't have this money, so apparently it's coming out of our pockets via Uncle Sam. And why should we be paying a bankrupt company so that they can offer a benefit that nobody else gets?

It's fundamentally an uncompetitive benefit.

[DanS]

Seriously, Oerdin. A bankruptcy court would delete that benefit right away. Because eliminating this benefit would help greatly in making the automakers competitive and viable long-term, we should all wish that the automakers take a trip through bankruptcy.

[Dinner]

I'm positive a new pension deal will be part of the bailout so it will be interesting to see what deal is finally agreed upon.

[DanS]

Pensions are different than retiree health care. Two separate benefits.

[Dinner]

I think everyone knows pensions are different from retiree health care, Dan. GM agreed to set up trust funds for both in 2005 and then that ends it for them. That was the whole point of the deal. GM wanted to transition to a 401k system so they agreed to pay big money up front into a trust fund and then for the UAW to take over the whole system after that. It will be up to the UAW to invest the money and keep the pension and retiree health care trusts viable after that.

GM doesn't have to top them up as you suggested. The whole point of the deal is they pay money now up front and then get out of any future obligations. The UAW is on the hook for any future costs or if they badly manage the trust funds.

[snoopy369]

Waiwaiwaiwaiwait. Pensions are different from retiree health care ... how?

Pension: a monetary fund for old people to do whatever they want with (like, buy health insurance).
Retiree health care: a monetary fund for old people with which to buy health insurance.

What's the difference exactly (from GM's point of view)?

[DanS]

Pensions are guaranteed up to a certain amount by the federal government and are a customary benefit. GM's pension payments are very lucrative, but in a bankruptcy, the payments would be shaved to something more reasonable (probably roughly a 20% pension cut).

Retiree health care is not guaranteed by the federal government and not a customary benefit. This benefit probably would be done away with entirely in a bankruptcy.

[Dinner]

I still contend that much of GM's problems come down to the nature of American capitalism vs Japanese or German capitalism. Ford isn't even asking for a bailout and that's due in no small part because the Ford family still owns a large percentage of the Ford Motor Company. The family is interested in the long term survival of the company so they hoarded money and resisted attempts by hedge funds to raid the company. The hedge funds are generally short term investors who buy up a stock in a company with large cash holdings, agitate for the cash holdings to be distributed in large dividend payments, and then dump the stock. This means the company's rainy day fund gets wiped out and it gets no long term benefits out of the process.

This is what happened to GM. It once had a $30 billion rainy day fund to help it survive a downturn like the one we're having now but hedge funds raided them then got out of town leaving the company in the shape it is now. Ford didn't suffer this fate because the Ford family successfully resisted the raids and that's why they don't need a bailout while GM does. I note that in both Germany and Japan shareholders have less power then in the US so hedge funds simply can't raid the large industrial firms in those countries like they do in the US.

Don't get me wrong GM's management stupidly gave in to a lot of dumb UAW demands and that's the main underlying problem. But the fact the that the company's rainy day fund got raided by hedge funds is the immediate reason they're out of cash the moment sales slipped. No rainy day fund means they're in trouble the moment there is a rainy day.