We own GM now I guess

[the]

"Substantial"? Not at all, relative to it's bargaining position.

In a fair deal, parties bargain from their positions. They give something to get something, i.e., an exchange of value.

The UAW had NO bargaining position. It had NOTHING to offer in exchange for what it is getting. In a legitimate bky, the UAW is wiped out. It's very existence is gone.

Yet, because of politics, it doesn't need to have anything to trade in exchange for the huge value it is getting.

For starters, it is getting OWNERSHIP of 20% of the company. Substantial legacy costs and benefits will remain in place. it is getting huge amounts. Given that it had nothing to trade, what it is getting it outrageous, and is only possible because of politics, the UAW's ownership of the white house, and the ensuing end run around Bankruptcy law and the rights of the non-favored parties (such as bondholders, taxpayers, etc.).

The concept that this is a fair deal, the right thing to do, not an end run around the law, not politics instead of business, is, really, laughable.

[Zeke]

Originally Posted by the

"Substantial"? Not at all, relative to it's bargaining position.

In a fair deal, parties bargain from their positions. They give something to get something, i.e., an exchange of value.

The UAW had NO bargaining position. It had NOTHING to offer in exchange for what it is getting. In a legitimate bky, the UAW is wiped out. It's very existence is gone.

Yet, because of politics, it doesn't need to have anything to trade in exchange for the huge value it is getting.

For starters, it is getting OWNERSHIP of 20% of the company. Substantial legacy costs and benefits will remain in place. it is getting huge amounts. Given that it had nothing to trade, what it is getting it outrageous, and is only possible because of politics, the UAW's ownership of the white house, and the ensuing end run around Bankruptcy law and the rights of the non-favored parties (such as bondholders, taxpayers, etc.).

The concept that this is a fair deal, the right thing to do, not an end run around the law, not politics instead of business, is, really, laughable.

As I said earlier, I hate to see the retirees and soon-to-be retirees (if there is such a thing) get hosed. However, what you say seems very logical, especially the UAW 20% ownership. That actually seems like a classic conflict of interest.

Make no mistake, I'm pro union. The thing is, I would change the way unions work in a big way. For one thing, I would not allow a single union to represent all workers in a single or related industries. They should compete for contracts just as the companies do.

And, they should be solely responsible for all member's benefits thru trusts. That way there would be no legacy costs. Thirdly, they should be more regulated than anyone AFA what they do with the money. Actually, non profit status would be something to look at.

Again, I digress, a habit. I don't know if my overhauled concept of a labor union would have helped GM.

[jyl]

Well, I think GM was contractually obligated to contribute $20BN to the VEBA that it now won't have to. That's not trivial, and probably worth some degree of ownership stake.

I still don't understand who you think "should" own the restructured GM. If the govt is putting up most of the money, shouldn't the taxpayer own most of the new company? I can't see the govt putting up $30BN or more, and the benefit going to bondholders and equityholders. I think people would fuss about that.

[competentone]

Originally Posted by Hebrewhomeboy

Well said. I'll just chalk my GM stocks up to a total loss I guess.

Grab the 75 cents if you can -- though I think you'll be trading on the pink sheets on Tuesday -- and will probably be worth a lot less than 75 cents.

[competentone]

Originally Posted by jyl

Wait a minute. The taxpayer is providing several tens of billions to fund GM's restructuring. But you propose the taxpayer not receive any ownership stake?

Then who would own the restructured GM including those tens of billions of dollars?

I've been checking my brokerage accounts all afternoon looking for those new GM shares to show up in my account.

Obama has sad that the taxpayers are now "reluctant" GM shareholders. I'm a taxpayer, so I'm looking for my shares -- so I can sell them and get out of the position I do not want.

Seriously, I don't see why the government doesn't immediately issue GM stock to all taxpayers on record (those who actually pay taxes, not just file a return), then let the marketplace take over from there.

[the]

Originally Posted by jyl

I still don't understand who you think "should" own the restructured GM. If the govt is putting up most of the money, shouldn't the taxpayer own most of the new company? I can't see the govt putting up $30BN or more, and the benefit going to bondholders and equityholders. I think people would fuss about that.

The benefit of a DIP lender wouldn't go to the "bondholders and equityholders." The equity holders (i.e., shareholders) are generally wiped out in a bky. Since equity holders do not have a voting block, Obama has no problem with them getting wiped out under bky law, so they are gone.

The "benefit" generally goes to the existing creditors, including the bond holders.

The DIP lender also gets a "benefit" in that they are paid interest. This would normally be done pursuant to a legitimate Chapter 11 Plan, which Plan is prepared by the Company, not by Obama. In the event that the DIP lender (i.e., the govt in this case) is not paid according to the Plan as confirmed by the court, they could then get an ownership interest. But the DIP lender doesn't take over the Company at the outset (or, in this case, since it is the Govt, nationalize the company).

What Obama has done is basically turn the Bky law upside down/circumvent the parts that he doesn't like, to favor his "favored" political constituents, and screw the ones that he doesn't favor.

[Shaun @ Tru6]

Wall Street approved.

[the]

BTW, this Nationalization of GM, and flaunting of the law, won't work. The Govt will downsize GM's production of automobiles as much as possible, because producing automobiles will forevermore be a money losing endeavor for GM.

In other words, the more cars they produce, the more money they will lose. To minimize that, production will be greatly curtailed.

GM will then go along as a money-losing concern for several years, burning though taxpayer dollars by the billion. Taken from taxpayers, and given to the politically favored, as an implicit entitlement/welfare program.

But ultimately, the few remaining brands of GM (Chevy, GMC, Cadillac) will be sold off to other makers.

GM is over.

[Jim Richards]

Anyone prepared to offer GM DIP financing other than the US Gov't?

[jyl]

"the", the point that you and I disagree on is on the source of DIP financing. I think there was none to be had from private banks. Partly because restructuring GM is a very risky undertaking and most likely not all of the DIP funds will be recovered. And partly because the big banks are desperately scraping to find a billion here and a billion there. They just don't have $30BN to spare. So the govt was the only one who could provide the money.

Having provided the money, what should the govt get in return? A creditor's position would saddle GM with annual payments of $5BN if the loan were to be repaid in 10 years with interest commensurate with the risk. GM can't be profitable with that kind of debt load.

Even if it could, you'd still have the govt advancing $30BN to permit GM to be owned by some big banks. That would not be politically palatable.

It is a crappy situation. But GM was beyond saving by anyone but the govt, and if the govt (taxpayer) saves GM, the govt has to get something in return.

Now, should GM have been saved at all, or left to liquidate as Jeff wants? We've debated that in other threads.

[the]

At this point, probably not. Although maybe the brands could have been sold off, or some other alternatives explored.

But, anyways, as they say

"Never let a good crisis go to waste."

- Rahm Emmanual

They are certainly making the most of this particular one.

[the]

Originally Posted by jyl

"the", the point that you and I disagree on is on the source of DIP financing. I think there was none to be had from private banks. Partly because restructuring GM is a very risky undertaking and most likely not all of the DIP funds will be recovered. And partly because the big banks are desperately scraping to find a billion here and a billion there. They just don't have $30BN to spare. So the govt was the only one who could provide the money.

Having provided the money, what should the govt get in return? A creditor's position would saddle GM with annual payments of $5BN if the loan were to be repaid in 10 years with interest commensurate with the risk. GM can't be profitable with that kind of debt load.

Even if it could, you'd still have the govt advancing $30BN to permit GM to be owned by some big banks. That would not be politically palatable.

It is a crappy situation. But GM was beyond saving by anyone but the govt, and if the govt (taxpayer) saves GM, the govt has to get something in return.

Now, should GM have been saved at all, or left to liquidate as Jeff wants? We've debated that in other threads.

I disagree with much of that, but in any event, none of it has anything to do with depriving GM of the ability to use all of the tools available to it under the Bky Code, vis a vis the UAW, to give it the best chance of emerging. What was done was politics leading to bad business decisions, and ultimately an unworkable Chapter 11 plan.

What the govt has done will lead to the eventual demise of GM (see post 48 above).

[competentone]

Originally Posted by Hebrewhomeboy

Well said. I'll just chalk my GM stocks up to a total loss I guess.

GM is trading on the pinks sheets today, symbol: GMGMQ

You can still get about 67 cents for a share right now. Sell, as it is going to zero.

Most buying is probably just shorts closing their positions; though there are probably a few "idiot" traders passing shares between themselves.

[jluetjen]

Originally Posted by jyl

The only protection of BK that GM is arguably not availing itself of is the power to nullify its UAW contract. Everything else - wiping out debt, terminating dealers, etc - it is doing.

First off, most of the posts seems to be starting from the default that GM is entitled to continue. This is not the case. GM needs to justify it's existence every to investors and lenders. If they can't demonstrate the ability to productively use the capital that has been entrusted to them, they deserve to lose their financing, or at least have their cost of capital go up.

So let's take a look at this bankruptcy...
1) Existing shareholders are wiped out. C'est La Vie!
2) Existing (non-UAW or non-US Treasury) bond holders are virtually wiped out. At best they are getting penny's on the dollar in GM stock -- at face value. As mentioned earlier, I would expect the stock to stay close to $0.00 for the foreseeable future.
3) UAW and US Treasury bond holders have been given the tangible assets of the company -- essentially screwing the bond holders in category 2 out of their fair value of the company.

Note that if stockholders and bond holders are being wiped out, the company should basically have been liquidated rather then restructured. I suspect that group 2 would most likely have done better if the company had gone into Chapter 7. The problem is that the company didn't do this earlier, which would seem to me to be a breech of fiduciary responsibility on the part of the Board of Directors. But then I'm no lawyer.

See my editorial comments below in red on the contract highlights.

So it's worth looking at that contract, i.e. the one the UAW just voted on. Here's what I've read about it so far (edit -adding to this as I read more):
- GM will close 14 plants and cut UAW-represented employees from 60K to 40K. GM will convert one or two closed plant to build small cars that it had planned to import from China. Is it going to be cheaper to manufacture in the US then in China? If not, then the company is accepting a condition which will result in a lower ROI
- GM will take over 5 Delphi plants and continue the UAW/Delphi contract there. This is just a blatant example of preserving jobs for the UAW. If Delphi isn't a viable supplier, they should be cut. For GM to be successful, they should be out looking for better deals from their parts suppliers or find alternative suppliers. This requires financially viable suppliers. They need to squeeze their supplier base in order to improve their profitability. For a bankrupt GM to take over a bankrupt Delphi and expect to wind up in an improved situation is silly. Two piles of ***** don't smell any better when you combine them. So the new GM is coming out of the gate saddled with a substandard sourcing strategy.
- GM's $57BN obligation for retiree medical will be cut by appx 75%. GM will pay about $10BN cash, plus equity. I've read this will cut the retiree medical cost per car to appx $300/car.I really don't know what this will do except forstall the inevitable. If the company stock is worthless, the retirees won't get much more then the the $10B -- but let's not trivialize the $10B, that value should really have been split across all of the bond holders in my book.
- GM can hire new unionized employees at the "Entry level" of $14/hr. In 2015, the number of such employees is capped at 20-25% of total hourly workforce. The traditional full UAW scale is $28/hr. In theory, if GM had 25% entry level and 75% traditional, its blended wage rate would be $24.50. Toyota is $26/hr and Honda is $24, by the way. However, at present GM has no need to hire new employees. At the current time this is worthless concession since they are overstaffed. It's not going to reduce their costs at all.
- Other cuts to overtime, COLA, bonuses, etc are supposed to total $1.5BN/yr savings
- The UAW gives up its right to strike. Any disputes between UAW and GM are resolved by binding arbitration. This looks meaningful, but it's really another concession to the UAW. Arbitration means that disputes will be inflicted on the company. Rather then negotiating to an compromise based needs and power positions, the decision will be made by an arbitirator -- who in many cases will "split the difference". In this sort of a decision process it just makes sense for both parties to ask for the stars. Since the Union's demands will not be constrained by financial realities, they will always be able to ask for more then GM, which will skew the results in their favor. This clause is a big gift to the UAW.
- I'm not sure what, if anything, happens to retiree's pension benefits. GM's plan is underfunded by appx $12BN. The rest of the world (excluding Government employees) has long since moved to defined contribution plans which allow people to diversify their investment positions. In some cases this GM bail-out has stuck-it to non-UAW investors who had their retirement money in GM to the benefit of the UAW. The fair thing would have been to let the UAW pension plan take the responsibility for the fact that they are so heavily beholden to GM.

I don't know if these changes to the UAW contract are "enough" but they certainly are substantial.

Unfortunately the UAW's (and the US Treasury's) "chickens will come home to roost".

1) Given the way that the existing bond holders have been treated, I can't imagine that GM is going to find many investors to lend it money without hefty interest rates to offset the risk. This is going to raise GM's cost of capital will have a profound impact on their future finances. My biggest fear is that BHO will try to make up for this by "doubling down" the US Treasury's investment, or worse mandating more market distorting controls on the financial markets.
2) In order for GM to raise capital for investments, they are going to be stuck having to sell stock -- which I don't think many investors will want to buy given the company's ROI history. This is going to also keep the value of the UAW's pension fund and the US Treasury's share depressed.
3) Even if GM were to exceed it's previous highest levels of sales growth (without access to the capital (aka: "Other people's money") needed to support the required investments, it's still going to be stuck at a level which won't drive an adequate ROI. Normally companies in mature markets where growth is limited like the automobile market, can improve their by ROI leveraging themselves, but as I said earlier I'd be really surprised if GM is going to be able to find many lenders lining up to give them a loan.

4) Finally, I believe that this will have a profound impact on the US Stock and Bond markets since investors are going to be wary of investing in any companies or markets that are at risk of getting "bailed out" by the US Government. This will increase the cost of capital to those companies, which will starve them of the funds needed to invest in new products and capacity which would drive the hoped for recovery. (I won't even go into the impact of the increased taxes proposed by the current administration...) The end result will be that the US economy will have a slower rebound which will reduce tax receipts and perpetuate the US Government's deficit problem.

The stink from this deal will linger longer then the smell from a dead skunk on the road.

[jyl]

Well, I don't disagree that this is a tough situation, and that the GM deal has some unattractive elements.

Should GM have been allowed to collapse and liquidate? Been debated here at length. If one' s view is "yes, let GM die", then of course everything done has been a mistake.

If one's view is "no, try to save GM", then no-one, including you and "the", have explained who, other than the govt, was going to come up with $30BN to fund GM's restructuring. And no-one has explained why the govt should hand over $30BN of taxpayer money plus ownership of GM to various large banks and other bondholders.

On squeezing the supplier base, I think we're getting to "blood from a stone" territory. Hayes and Visteon have filed BK, Lear just defaulted on its debt, scores of smaller suppliers have gone out of business, stock prices on Dana, American Axle, and other imply they will file BK too. GM cannot function without the suppliers who in effect build major modules of the cars, and the suppliers have their backs to the wall already.

On whether China or the US is the cheaper place to build cars - I have to believe China is. So from one perspective, every US GM plant should be closed, indeed every US factory closed, and 100% of production of everything moved to China. But I think the govt, and indeed most Americans, would like to avoid that.

Finally, is increased govt involvement in certain industries viewed negatively by investors? Of course it is. Would investors like those industries better if they actually collapsed? I doubt it. The banking industry is the best example of this - the market is worried about investing in it due to govt involvement, but nonetheless the banks are managing to raise capital right now, which they wouldn't be able to do at all if the govt hadn't stepped in to stop their death spiral back in 2H08. The auto industry is in the same boat right now.

[the]

Originally Posted by jyl

If one's view is "no, try to save GM", then no-one, including you and "the", have explained who, other than the govt, was going to come up with $30BN to fund GM's restructuring. And no-one has explained why the govt should hand over $30BN plus ownership of GM to various large banks and other bondholders.

.

It has been explained. The govt could loan the $30B without taking over control of the company. Like a normal DIP lender. Or it could take ownership control, but not exempt the UAW from bky law. Why it should do that is simple - because that's the only way GM would survive.

With the govt and the UAW now in ownership control, preparing the bky filing and Ch. 11 Plan, and injecting politics to, among other things pay back/protect the powerful voting block, you have a company that simply cannot/will not use the bky remedies available to it to successfully reorganize. Because of what was done, GM is over.

[the]

you seem to recognize only 2 alternatives:

1) Liquidation.

or

2) Government intervention necessarily coupled with exempting the UAW from Bky law and giving the UAW a big ownership interest in GM.

[jluetjen]

Originally Posted by jyl

If one's view is "no, try to save GM", then no-one, including you and "the", have explained who, other than the govt, was going to come up with $30BN to fund GM's restructuring. And no-one has explained why the govt should hand over $30BN of taxpayer money plus ownership of GM to various large banks and other bondholders.

Why should GM be saved if no investors want to invest in it?

On squeezing the supplier base, I think we're getting to "blood from a stone" territory. Hayes and Visteon have filed BK, Lear just defaulted on its debt, scores of smaller suppliers have gone out of business, stock prices on Dana, American Axle, and other imply they will file BK too. GM cannot function without the suppliers who in effect build major modules of the cars, and the suppliers have their backs to the wall already.

Curious -- Honda, BMW, Toyota, Porsche and so on don't seem to have the same supplier problems. Or if they do, they seem to have been able to successfully manage themselves in spite of it. If GM wants to succeed, they are going to need to act like a successful company.

On whether China or the US is the cheaper place to build cars - I have to believe China is. So from one perspective, every US GM plant should be closed, indeed every US factory closed, and 100% of production of everything moved to China. But I think the govt, and indeed most Americans, would like to avoid that.

Not so. The Honda, Toyota and BMW plants in this country seem to be able to make a profitable go at it.

Finally, is increased govt involvement in certain industries viewed negatively by investors? Of course it is. Would investors like those industries better if they actually collapsed? I doubt it. The banking industry is the best example of this - the market is worried about investing in it due to govt involvement, but nonetheless the banks are managing to raise capital right now, which they wouldn't be able to do at all if the govt hadn't stepped in to stop their death spiral back in 2H08. The auto industry is in the same boat right now.

Industries don't collapse like that if there is a genuine need for the product. So yes, the buggy whip industry has collapsed and no one misses it. But there is still a strong demand for cars in the world. The collapse of GM and Chrysler is not the the collapse of the US car industry. It's just the collapse of GM and Chrysler. The customers who would have bought their cars will end up buying Fords, Hondas, Toyotas or other makes of cars, which will help those successful companies to be more successful. This increase in demand for those companies' products will result in increased demand on the successful companies' supplier base, which will drive the creation of jobs in those successful companies. Will as many new jobs be created as were lost at GM. No. But that's the point, there were too many unproductive jobs at GM.

[the]

the problem is, again, that political "immovable objects" have now been irrevocably injected into GM's Ch. 11 reorganization effort.

reorganizing GM using purely a business analysis, and all of the tools available to it under the law, would have been a big task, maybe impossible, but IMO likely possible.

with the politics injected in, and GM - as a business - essentially trying to reorganize with one hand tied behind it's back, it is now impossible.

It didn't have to be that way, the govt could have funded $30B without it. That was was chosen.

[jyl]

Originally Posted by the

It has been explained. The govt could loan the $30B without taking over control of the company. Like a normal DIP lender. Why it should do that is simple - because that's the only way GM would survive.

With the govt and the UAW now in ownership control, preparing the bky filing and Ch. 11 Plan, and injecting politics to, among other things pay back/protect the powerful voting block, you have a company that simply cannot/will not use the bky remedies available to it to successfully reorganize. Because of what was done, GM is over.

Do you believe GM could be viable while paying back a $30BN debt load plus reasonable interest? Say, $5BN debt service per year? Looking at the company's financials, I don't think so.

I guess the key issue, between your view and mine, is you think the continuing involvement of the UAW dooms GM's restructuring. (Putting words in your mouth.)

When I compare GM's new labor cost to the transplants' labor costs, I don't see so much difference. The playing field is getting more level. I also see that GM is able to close lots of plants, representing roughly 1/3 of hourlies.

Now, maybe some think the mere existence of the UAW is a fatal poison and there is no chance for Detroit until the union is stomped to death. I don't see that.