Denial seems to be the approach of way too many of principal participants in the sliding morass we call Chrysler and General Motors. The United Auto Workers (the big union) believe that their ties to the Democratic Party will protect their benefits and wage rates (as to current and retired UAW members) even as massive lay-offs appear to be inevitable; unions see themselves as vote-delivering and fund-raising machines. Their seeming assumption is that even in a formal Chapter 11 reorganization of General Motors, the Obama administration will put pressure on the trustee not only to preserve customer warranties but not to reject the collective bargaining agreement (a power that the bankruptcy court most certainly can exercise) as an executory contract. They’re not budging. Unfortunately, the federal court system doesn’t actually give the executive branch hegemony over the judicial side of our government; unions might be in for an exceptionally unpleasant surprise.
Banks and bondholders, both in the GM and Chrysler situations, appear to be reluctant voluntarily to trade their current senior creditor position above existing equity (the common shareholders) for common or even preferred stock in the going-forward new entities. But the staggering debt-load on both these entities would crush a restructured and downsized version of either.
GM offered its bond holders ($29 billion worth) $8.5 billion and 90% of GM stock. That was two weeks ago, and they balked. Too bad. The Department of the Treasury, which could force a GM bankruptcy, made it very clear that GM’s offer was way too generous; in a couple of days, the hardball government will dictate worse terms on a take-it-or-face-bankruptcy basis.
GM is clearly looking at massive downsizing, much more than the 47,000 layoffs they anticipated earlier, under a new government directive to get real and present a viable going-forward plan as a condition of additional government bailout support. They’ve got about a month and a half to figure it out (till the end of May), or the threat is that the government will guide them through a company-altering restructuring, probably involving use of Chapter 11 of the bankruptcy code. The trigger? The government just calls the $13.4 billion federal loan they gave GM, and the cards topple.
Chrysler has pretty much been told they have just a few days left (till the end of the month) to merge with Italian automaker, Fiat, or watch the government pull the rug out from under them (pull federal money out of the mix). And if that rug gets pulled, Chrysler may slide right past Chapter 11, which is GM’s increasingly probable reality, into a full Chapter 7 bankruptcy liquidation (sell-off) of assets.
Holders of Chrysler’s debt seem to be thinking that they would take less of a risk in complete liquidation than they would as shareholders in a continuing Chrysler Motors. The company would simply cease to exist in that scenario. Notwithstanding the market reality that Chrysler debt is trading at 12% of face value (April 10th Wall Street Journal), the prevailing myth among many of these debt-holders is that they would get 70 cents on the dollar in liquidation. But would they, in a melted economy? Who are the buyers? Inside experts see more like 11 to 43 cents. The government wants Chrysler bond holders ($7 billion worth) and other lenders to take a mere 15 cents on the dollar, which, to many creditors, is a simple non-starter.
When Chrysler was spun-off from Daimler into private ownership, one of the biggest cost-saving cutbacks was in engineering. They have already sold off their design facility in California . Literally, Chrysler has very little in the way of new technology and new models – especially in the small car (energy efficient) arena – assuming it even survives as a company. The Fiat merger, in which the Italian company would succeed to 35% of the new Chrysler, would result not only a healthier financial structure to Chrysler, but it also would bring engineering design and smaller cars (which would ultimately be built in the United States ) for a future market. It was informative when Chrysler Vice Chairman, Jim Press, got out of a very small blue Fiat car placed in the Chrysler booth at the NYC car show the other day.
GM is off-loading assets where they can. The division that produces the gas-guzzling Hummer has been on the block for some time: “Last year, when Hummer first went on the block, analysts estimated that it would go for between $500 million and $750 million. However, as consumers are still wary of new car purchases, Hummer is becoming a tougher sale. In addition to being a gas guzzler, it carries a steep $31,000 to $72,000 price tag at a time when consumer confidence is incredibly low. Current offers for the brand range from $100 million to $200 million, in addition to an acceptance of the company's liabilities and commitments to invest in engineering, marketing, and sales.” AOL’s Daily Finance, April 9th.
Earlier, folks argued that the government simply couldn’t let either GM or Chrysler fail. A bankruptcy of either, people noted, would collapse thousands of dealerships and trigger a domino of failing outsourced part suppliers that would destroy even the remaining U.S. (and even foreign) car makers who were not in trouble. Bankruptcy would leave parts manufacturers with unpaid bills for parts already sold to the potentially bankrupt GM and/or Chrysler, crash the demand for future parts, and even with governmental support among these smaller entities, many would be forced to shut their doors.
Modern car-making is heavily dependent on a litany of “just-in-time” delivery of outsourced parts – manufactured primarily by thousands of companies in states in a circle around Michigan – and the failure of a significant portion of parts companies means that local “healthier companies” (like Ford, Nissan, Toyota and Honda who have U.S. plants) will not be able to function either. So the talk went, the government could not possibly create a collapse that could cost as many as 3 million American jobs… effectively pushing the “rust belt” off a cliff.
That was before taxpayers and Congress men and women began to cry for greater accountability from the automakers. Detroit labeled that rising tide against their cause as duplicitous – car makers were not being treated nearly as well as the government was treating the financial behemoths that got us into this mess. The plea fell on deaf ears as the GM and Chrysler plans were rejected by the Obama administration, and the GM CEO was less than politely instructed by the government to leave.
Look at how the tune has changed (AOL’s Daily Finance, April 7th): “In November, CNN/Money quoted GM spokesman Dan Flores as saying, ‘Bankruptcy reorganization is not an option for GM because it would create more problems than it would solve.’… Contrast that with newly appointed CEO Fritz Henderson saying on Meet the Press that while bankruptcy is not inevitable that the automaker would seek protection from creditors that it was preparing for all contingencies.”
If the government takes down or restructures the “bad two” automakers, will it also subsidize consumers to trade their older, gas guzzling, polluting clunkers (a very successful German incentive plan) for newer, cleaner and more fuel efficient vehicles? Can it add “made in the United States ” without inciting a trade war? What will the American manufacturing sector of the economy look like when the recovery actually occurs? Anyway, it is stare-down-smack-down time in Detroit !
I’m Peter Dekom, and I approve this message.
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