Much ado about GM, Part 2 of 3

In our first installment, we introduced you to the current battle for the fate of General Motors. We highlighted why they share some if not all of the blame for their current situation. We talked about the various sides involved in one way or another with the situation of GM. Today we tackle the big question, what many deemed “unthinkable” previously, what bankruptcy would mean for General Motors and you.

Now many have called on for General Motors to declare bankruptcy. Many of these folks believe that this filing would completely destroy the company. While this may be a possibility, people tend to confuse between the type of bankruptcy that GM most likely would file and the one they may have in their mind.

Corporations, in dire straights, tend to either file a Chapter 7 or Chapter 11 Bankruptcy. The former is the complete liquidation of the going business concern. The latter puts the company in receivership, that is it is allowed to continue operations but with the end goal of meeting the obligations to it's creditors. The company is reorganized as asset sales are used to pay off debt, management is normally replaced, and shares in the company are usually made null and void. OK, I grant you, this is actually an oversimplification, but these are the main pillars of Chapter 11 Bankruptcy. Creditors, including corporate bond holders are first in line to try and get their money from the sale of assets or refinancing.

Yet there are other ramifications as well. If it is perceived that General Motors would attempt a Chapter 11, various actors within this business play would begin to move to secure their holdings. These range from the UAW to the dealerships. Now this could play out in stages, of course it's pure conjecture, but it is a good idea of how it could play out.

Stage 1: The Gathering Storm

Triggers

Certain triggers need to be hit in order for this financial tragedy to reach its climax. In bankruptcy, this is often failure to pay back a creditor. Now General Motors currently has about $16 billion in cash, but has a burn rate of $6.9 billion/quarter. According to industry insiders, one needs a minimum of $10-12 billion just to keep operations humming along at a low level. Should the company see no return to profitability by the end of the first quarter next year, it will be at that minimal level.

It's at this point that creditors begin to wonder who will get screwed first. Also, around this point, or I should say by this point, the company will have begun scaling down operations. Word on the Street will be that the firm will begin missing payments to it's suppliers and it's creditors. This may or may not be true, but if history is any case with other past major corporate bankruptcies, these rumors will begin to fly. Indeed, it is this specter that has already seen one insurer who provides coverage to suppliers pull out of GM.

Eventually, perhaps by the second quarter, General Motors will begin to be late on their payments to their suppliers. They may also issue a statement that bondholders will see a delay in their interest payments as well. The price of their corporate bonds will sink to probably half of what they are going for now if not more. Now assume as this is all going on, that Congress and the new Obama Administration are trying to put through a relief plan. Yet, like the previous attempt, there was a hiccup. There is a good possibility that the Republicans will use this as a wedge against the new Democratic Congress, and stall the bill anyway they can (the most affected states are "blue").

In the interim, pressure builds on the management of the company as bond holders and creditors begin to demand assurances of some sort. The stock by now is at or below a dollar. Word is leaked that the company can no longer afford to insure it's debt. A panic ensues not just on GM debt and securities, but also those of Ford. Then it happens, fearing that it would face a tougher time if it stalls the filing, GM announces that it will go into Chapter 11.

Stage 2: The bankruptcy tsunami hits everywhere

The filing is released over the wire, immediatly suppliers who have not taken action call up GM. General Motors stock is halted given the volume of orders, by proxy, Ford falls below a dollar on the heaviest volume in the share's history. On CNBC, Phil LeBeau is reporting that management will order all production shut until it can secure needed supplies. Despite many facilities having between 30 days to 120 days worth of supplies, management feels that it needs to make sure that beyond that they can remain operational.

So now that General Motors has declared Chapter 11 Bankruptcy, what happens next? Or more specifically who gets hit? Below we go into as many parties as possible that will be affected by the filing. Due to time and space constraints, I cannot go into every possible "victim."

The Shareholders

As stated previously, most Chapter 11 filings wipe out the shareholders of a company's stock. Eventually, should the company emerge out of receivership, they will float a new set of shares. Yet this does not help those who could not sell their stock in General Motors.

Institutional investors like pension funds, hedge funds, equity vehicles like open-ended sector-specific or index specific mutual funds will take a beating. Besides the shares they own in General Motors, shares in companies related to the auto industry will also fall. From auto parts suppliers to financing companies that don't even deal in auto loans will fall; for the market, it is only another excuse to go down. Depending on the velocity of the collapse in prices, expect black box systems to activate like they did in previous market sell offs, these "artificial intelligence" (I use that term loosely) programs to begin their shorting of stocks or futures. This will in turn cause the market to go down even further. Though GM's market capitalization is no where near where it used to be, if you add in all those companies' float that have some sort of relation with the motor company, you start to see how things can get out of hand.

The Employees within the company

General Motors employs about 284,000 people all over the world, half of this figure are within the United States. This does not include folks who work at the dealerships. Now a bankruptcy filing most likely would cause the company to halt or slow down exponentially operations overseas. This could lead to a reduction of between half to all of the 142,000 employees overseas. Domestically, expect similar results, as suppliers and creditors begin to balk at aiding the company without assurances from the government.

It is already said that the company has excess production capacity. Any Chapter 11 filing will immediately entail the sale of assets to meet creditor demands. This would mean the elimination of product lines as the sale of land and dismantling of factories for scrap or what have you to get cash. Remember, bankruptcy filings of this sort is for the corporation to get as much cash as possible to meet it's obligations. Employees who worked on the now-discontinued lines will most certainly be out of job.

The United Auto Workers will also be without an leverage here. Chapter 11 filings tend to give the advantage to management versus the labor organization. The filing will do to the UAW's contracts what it did to the shareholders' stock, make them worthless. The unions could protest and refuse to go back to work, but this would only force the company to seek more drastic means of raising cash or worse...Chapter 7 which is total liquidation of the company.

I would suspect, that to keep even minimal operations, a judge most likely will preside over any sort of labor negotiation. Now I will admit, I am not aware of any laws on the books in Michigan that may state the otherwise, they could have legislation in place that could keep some of the contracts' specifications in place. But I suspect that GM will put the screws on the state and federal government, and thus the judges, and will offer the UAW one of those "offers they can't refuse."

This could mean the elimination of the current hourly or salary wages already bargained for. Benefits would be suspended. Though the UAW had a grand bargain with the company over the transference of health benefits and pensions, a bankruptcy filing throws that out the window. Essentially, everyone, and by the way that includes white collar works as well, will start from scratch.

Pensions and the PBGC

A bankruptcy filing will cause any GM-managed pension to be shifted over to the Pension Benefit Guaranty Corporation (PBGC). Any funds still residing within GM will be taken to meet the demands of other creditors. The filing will also have an adverse effect on all retirees.

The PBGC is already suspected to be underfunded. I really wish CNBC would allow better usage of their video for net usage. A few weeks ago, the director of the Pension Benefits Guaranty Corporation was on Fast Money, and he was grilled. When asked how the fund that makes up the PBGC is doing, he was upfront that they are running a small deficit. Yet the shocker came when he says that the fund tracks that of the S&P 500. Well, since October, my friends, the "Spoo" has been down almost 33%!

Regardless, the Pension corp doesn't have enough cash to meet the demands of those already retired and those who will be. It probably will get funding from Uncle Sam to meet it's needs should this calamity occur. But given that GM declared bankruptcy and precarious nature of the pension corp itself, the PBGC would use this as provide GM's pensioners with a lower payout. The money is simply not there for those retirees from the PBGC.

Health insurance for workers and retirees

The one small consolation to those who retired from GM is that there is Medicare. It isn't much, but the situation for those who have yet to retire will be much worse. During this time, there was a transition going on where GM would turn over the management of health benefits to the unions, in return the company was supposed to grant them several billion dollars. This is known as the Voluntary Employees Benefit Association or VEBA. In a bankruptcy filing, all this as well goes out the window. A preview of this came last July, which caused something of an uproar.

Under a Chapter 11 filing, GM could get a judge to cancel all health benefits or force a third party to take over such responsibility. Retirees who get some sort of health benefits package from GM could see those get curtailed or eliminated outright. If I were the UAW, I would begin to have something in place just in case. The same should be for non-retirees as well. Though scheduled to take over in 2010, any filing now or before then would force the unions to take action almost immediately. They could have a judge seek some sort of assistance, but if they wish to be labeled a creditor, I suspect they also will be way behind the line.

The suppliers

It is said that for every auto worker job, there is between 4-10 jobs connected to it. Suppliers are probably half those jobs. Any shut down of operations, even discontinued lines, will affect these companies. Expect them to almost begin scrambling to find new clients like perhaps a foreign car maker. Also expect them to announce cut backs in production and layoffs.

These suppliers, in turn, have suppliers who also will be feeling the pinch. A cascading effect will begin, as everyone from major contractors like GE to smaller independent tool and die shops take the hit and cut back. They will shut down lines if they can't get a customer, and for smaller enterprises, probably be out of business entirely. You have across the country, in smaller towns and cities, companies that have nothing more than small industries tied to one sector of the economy. This will also be going on across the globe as well, as GM's foreign operations are paired down, and foreign suppliers are forced to seek clients elsewhere or shut down.

Many smaller industrial companies already are struggling. Many face an onslaught against foreign competition that either has a cheaper work force or is subsidized in some manner. For these smaller "ma and pa" plants who employ between 100-500 workers, GM or one of it's supplier may have been one of their big time customers that just put them in the profitability column.

The Retailers and local economies

Dealerships will be especially hard it. Customers will be weary of purchasing an automobile from a company that just declared bankruptcy. Questions regarding warranties and service will be on their mind. Corporate clients who replace fleets of automobiles, like say those rental car companies, may also be hesitant on purchasing regardless of a volume discount.

Following the Chapter 11 filing, with news of production shutdowns, what's on the lot may very well be the last of the line. Dealerships that only specialized in a select brand of cars will also have to scramble to find a new supplier. What if they can't get those new 2009 or 2010 models? Expect massive die-offs of dealerships across the country, coupled with layoffs of salespersons and mechanics. Of course, with all those GM cars and trucks still on the road, there will be opportunities for the latter.

Local economies, especially those in places where a the auto industry served as the life blood, will get slammed. As production is wind down, workers facing an uncertain future will cut back in their spending.
Plant closings of suppliers or production lines of GM could render some towns what the end of the gold rush did to many in in the West.

Municipalities

The collapse in the local auto/industrial based economy will cause tax revenues to fall. This will require townships to either raise taxes, not exactly a great thing in a depressing economy, or go into the bond market. Yet here they will find difficulty. As it looks as if tax revenues will drop, coupled with the collapse of the financial industry, the cost to float a new bond will most assuredly be higher.

Counties will have to cut back in their spending. This will mean closure of facilities and roll back on services. Don't be surprised reading about how everyone from garbage men to teachers are now out of a job. This won't just be in states like Michigan, but also California and across the nation.

We now find ourselves in another situation, something that hasn't been discussed much. That is the situation involving credit default swaps and municipal bonds. None of the banks or financial institutions have come clean on this, yet this isn't surprising as they haven't with the ones dealing with mortgages. Yet even Forbes magazine (apologies, I can't find the article at the moment) had a column that discussed this very thing. Declining tax revenues will most likely raise the possibility of counties defaulting. This could lead to another wave of financial failures as the swaps come due. We don't know how many have been offset, and we won't know until the crap hits the fan.

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Well these are just some of the factors one must add into the equation of a bankruptcy filing by General Motors. I apologize if I didn't provide more evidence or links or what have you. My original version of this article piece was about 20-pages long, and I am already afraid I lost you somewhere on here already.

In our next segment, I will go on to some of the things that we should look into. Many of what I will say you, my Ming-like Economic Populists(Ming, I learned is Chinese for brilliant), have already stated. The fact is, in the long run, despite our misgivings of the company, I think it would be far more expensive to just allow them to go bankrupt.

Oh...wait...something you should know. In most bankruptcy filings...the management is replaced. So if we're lucky, a new set of folks will take over and this time get the job done right.

Meta: 

Comments

PBCG topic, Rep. Miller

Underfunded is right. They lost at least $3 billion dollars.

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Haha....

'Get's the job done right...' was a card you are. Ah well, some humor, even if black, is needed.

Like the BushWacker sez: 'Politics has consequences.' and if, as many in the GM states have done, yer vote again and again and again against your own economic interests 'cause the 'liberals', the blacks and the hippies socialist scum are takin' over...

Well.

Too damn bad sez I.

I got no sympathy for these narrow minded ignorant fools who for decades have pulled the lever for Republicans.

They are getting what they deserve. Too bad the rest of us have to suffer. But hey, folks in CA they jes luvved them some St. Ronnie. So, ignorance is not confined by state.

Eventually folks are gonna realize that something else that got started in FDR's day is something we still need.

Unions. Unions built along the line of SEIU not the sellout fat slobs of the UAW.

And no, I don't think it's a good idea for the rest of us to let them go bankrupt. I still care some about these fools...

....even though they've spent their whole lives hating folks like me.

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'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

Unions

Unions. Unions built along the line of SEIU not the sellout fat slobs of the UAW.

The SEIU is not a model for unions to look to. It has a number of democratic deficiencies, they foremost being the use of trusteeship in order for the national union to replace people who've risen through the ranks to leadership with college educated organizers with not work experience.

The UAW is a democratic union that works from the bottom up. Black Lake offers a number of opportunities for people who work on the line to go through courses so they can run for, and become, leaders in their locals.

Big difference. And this isn't just me yapping. A few years back their was a great article about this. I suggest that you read it before you praise the SEIU.

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SEIU will sell out working Professionals

They endorsed comprehensive immigration reform which was so loaded, positively loaded with guest worker Visas and had a huge target against Professional labor for global arbitrage. I mean the entire thing was about repressing wages amoung the best middle class job categories through manipulation of the immigration system and they endorsed it.

The AFL-CIO on the other hand opposed it (and yes the AFL-CIO is for "amnesty") which really exposes who was really standing up for workers across the board and who was not.

I couldn't believe they endorsed that bill, helped write it, pushed for it because their "Z" Visa well, those people, due to the "merit" restrictions on a green card would have never gotten citizenship but every damn person on the globe who would claim a college degree sure could have. What a nightmare that would have been for US labor if it had passed.

I really don't trust the SEIU for that one and I note they are not alone, there is real discord in their membership as well.

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Tell Me Grassley Isn't a Populist

Sen. Chuck Grassley wrote a letter to GM and the big three auto executives asking why they were not first and foremost cutting their own executive pay and compensation packages while coming to Congress begging.

I would like to see a whole host of conditions to bail out the big 3 auto makers. From hiring US citizens to beefing up alternative energy cars to making them some sort of contractor to retrofit all 18 wheeler trucks to natural gas....

but just handing them the money with no conditions seems like the bail out for the financial sector, and seemingly this is throwing US taxpayer money down the drain.

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Ammonia as a fuel

one of the things that I would like to see is the transitioning of the commercial trucking and agriculture sectors to the use of ammonia as a fuel. Stranded wind has a nice piece up about how it's possible to create fuel for engines using windpower.

Stranded wind is a great project, and it's a real winner. My hometown just got a new factory that will produce gearboxes for wind turbines. There is a huge potential for wind power on the Great Lakes, and this is heart of American manufacturing.

Something along the lines of the TVA that would involve the government in the creation of a wind energy sector through using the government as an investor in wind power projects would create a new basis for growth in American industry.

Switching the commercial trucking and ag sectors to the use of wind produced ammonia would allow for economic continuity if there were to be a major supply disruption.

We need both the ability to feed ourselves, and to move things around this country if we are going to have an effective economy. Ammonia is one path to that, and pulling commercial trucking and ag off of petroleum would cut our use substantially. As well, because there is a much lower number of retail outlets that service them, the transaction cost of building the new infrastructure would be much lower than for the broader auto sector.

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The best solution to the gross energy inefficiency ...

... of long haul trucking is "don't do that". Electrify the rail grid and take the majority of the trucks off the road.

However, for the short haul freight task that will remain for trucking, either biodiesel or ammonia or (as seems likeliest) both would be far more secure than reliance on petrodiesel.

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I heartilly...

...agree.

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'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

Unions and Immigration

I have believed for some time that a solution for industries who are the worst immigration Offenders - construction, landscaping, agriculture and hospitality - are the best candidates for unionization. I mean enforced unionization as a condition for entry to the U.S.

The idea is that
Union Matriculation = Border Control, for the 4 industries.
This could be the basis of a political compromise on immigration. The trick is to explain to employers that they would get rid of ICE the raids, and get a stable supply of labor. If collective bargaining is based on enforceable arbitration, employers would have little to lose. Wages would rise slowly. Cesar Chavez foresaw this long before me in agriculture.

Democrats have promised card-check registration. Maybe they could merge the drive to unionize with a different approach on immigration.
Burton Leed

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Burton Leed

Don't forget fast food

My mother works at a local McDonald's, and my stars are they an exploiter of immigrants. They supposedly have papers, but everyone knows that 90% of them aren't legit. On top of that, the local franchisee knows this and leverages it to the hilt.

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No has nothing to do with illegal immigration

This is the deal. If you want my money, every retiree must take an immediate 15% cut to its pension and an immediate cut to its healthcare services in the form of higher deductibles with zero possibility of an increase until such time that my money is paid and you have had as much as the borrowed money in cash reserves. Every union member must take an immediate 15% pay cut; there will be no termination benefit other than one months pay. Anyone going on strike is immediately terminated with no benefits. There is zero possibility of a pay increase until such time that the company has paid my money back and has as much cash in reserves. All executives must take a 50% pay cut, and none shall get more than $200K a year until such time that they have paid back the money. No Jets, no benefits of any kind besides the pay.

No possibility of a net cash transfer from US operations to foreign operations until such time that my money is paid back.

Then you will see that GM and Ford suddenly become world class car companies that can not just make cars but make lots of profits.

This is should be the deal. Take it or risk loosing it all.

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A better deal to me

Your method, cutting the costs of union employees, is rather short sighted- in that it harms the general economy almost as much as bankruptcy of the big three would. Every one of those union employees is also a consumer- a customer of YOUR work.

Here's where the big three stumbled, and inherent in there is the solution: They overproduced cars that the consumers don't want and can't afford.

I say give them their bailout as a $25 billion grant, not as a loan. But ALL of that money needs to be spent in such a way as to retool their factories to build 25% electric, 25% plug-in hybrid, 25% flex fuel electric drive train diesel, 25% flex-fuel electric drive train gasahol, for the 2010-2015 model years. After that, they can go back to building whatever they want, mix up the percentages, whatever. But what this will give America back is a half a shot at energy independence at the end of the depression, consumers a *REASON* to buy, and continue the good jobs that create consumers.

Similar opportunities exist in making every building in the United States into an ambient-energy power plant sufficient so that the electrical needs of every household are covered, leaving centrally generated energy for industrial use. And of course the information network to control it all.

But that would be too practical of use for the money, wouldn't it?

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Maximum jobs, not maximum profits.