GM Is Considering Bankruptcy

[Edstock]

reason and compromise

— what a concept.

 

[TStag]

You still don't understand, there is no Chapter 11 option.

If GM files, it will be Chapter 7 liquidation of assets and termination of all business.

 

There is no Chapter 11 option because restructuring does not help immediate cash flow problems.

All the Chapter 11 refinancing channels have dried up in the USA and ther is no funding apart from

what the US government is proposing. Without that funding immediately, GM is gone - Kaput!!!

 

You're seeing history about to happen.

 

 

Your making a rather large assumption that the US gov't wouldn't provide GM with credit during a Chapter 11 situation. As I say if warranties were protected under some scheme and the US Government provided the finance for Chapter 11 then what's the problem? You haven't answered that. No one has!

[LSFan00]

100 days of cash, and no labor union issues akin to this situation strongly differentiates the IBM analogy but it is probably the best one out there. Government loan guarantees do not correct this challenge between the two parties negotiating for an agreement much more painful and serious than any dress code changes (and no, we're at the point where it doesn't matter where you allocate the cost, or who you blame for it getting to this point today; it's there;

 

$70 per hour: right or wrong?

 

Felix Salmon argues that this figure for GM's labor costs is deceptive. Sort of, but it's actually quite apt at showing the core problem with GM.

 

Felix says that "the average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM's total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers."

 

This is not quite right. The reason that it is reasonable to include retirees in GM's labor costs is that the benefits paid to the retirees are still under negotiation by the union. In other words, the price for employing the people who are still working is giving a bunch of stuff to people who used to work for you.

 

If I understand it correctly, and GM uses standard accounting principles, GM's pension payout costs are only marginal contributors to the problem; the pension fund has to be advance funded, which means that most of the payout is covered by investment proceeds that are not accounted for as part of company profits. Only where there are shortfalls due to investment losses or exceptionally long-lived retirees does GM kick in extra.

 

The real cost center is retiree health care, and as noted above, this is negotiated as part of the labor contract for the current workers. Due, I'm told, to the UAW's slightly strange constitution, retirees have more voting power than current workers. That's why GM's medical costs rose at such a staggering rate; they were sacred to the real power in the union.

So from the worker's point of view, it is true, they are not getting $70 an hour worth of value (unless they're very close to retirement). They are making a large personal gift to the retirees in the union. But from the company's point of view, giving all that health care to other people is indeed part of the cost of their compensation. Likewise the "job bank" and other featherbedding provisions.

 

Now, you could argue that since the retiree cost is fixed, it shouldn't be calculated on an hourly basis. But there are lots of other kinds of fringe benefits that exhibit declining cost to scale--health insurance, for example. So I'm not sure that argument is quite right.

 

From a "government should prevent social collapse" standpoint, I would think the much more important goal of government intervention would be to force the UAW constitution to change allowing the union to make an intelligent decision to protect their current members, and let the retirees depend on federal healthcare programs. Root causes and blame can be apportioned over a 50 year time frame, but the next 40-60 days will require a rapid agreement about reduced expenditures to avoid bankruptcy (with or without guarantees).

[RichardJensen]

let the retirees depend on federal healthcare programs

been there, done that, bought the t-shirt.

 

After 2010 retiree health care is on the UAW.

[RichardJensen]

Your making a rather large assumption that the US gov't wouldn't provide GM with credit during a Chapter 11 situation.

Ffffffft. If the gov't won't provide GM with cash to prevent a Ch. 11, why would they provide GM with cash to facilitate it?

[battyr]

Ffffffft. If the gov't won't provide GM with cash to prevent a Ch. 11, why would they provide GM with cash to facilitate it?

 

What the government need to do is to prevent GM from going Ch. 7. If they have to go Ch. 11 to prevent it, good.

[RichardJensen]

What the government need to do is to prevent GM from going Ch. 7. If they have to go Ch. 11 to prevent it, good.

Read more. Get back to me.

 

Most businesses that are 'beyond hope' have a Ch. 11 filing that turns into a de facto Ch. 7:

 

http://en.wikipedia.org/wiki/Collins_&_Aikman

Edited November 23, 2008 by RichardJensen

[2005Explorer]

IBM: 1993.

http://leadership.wharton.upenn.edu/digest/02-03.shtml

 

 

More to the point: I don't think the US Gov't should directly write the loan package for GM. I think they should craft a suitable 'guarantee' package for private lenders that would require the lenders to do suitable due diligence. Perhaps by structuring the guarantee package such that the loan guarantees would be repaid at a sliding scale, based on a GM Ch. 11 filing--perhaps only a 75% guarantee if GM files Ch. 11 within a year of the loan, 80% within two years, 100% after 3 years.

 

The goal would be to avoid turning the loan package into a rubber stamp for failed practices (which no competent bank would do) while avoiding a scenario where GM has to file Ch. 11 because they can't get any other form of financing.

 

In fact, DIP financing could end up requiring gov't intervention as well, given the tightness of the credit markets and GM's substantial liquidity problems

 

So when IBM had 100 days of cash left they brought in new leadership to turn the ship around however GM is sticking with Rick until the end?

[RichardJensen]

That would be a big difference right there.

 

And, while LS asserted that '100 days of cash' is a difference between GM & IBM, 100 days is basically 3 months and a week, give or take.

 

Well, GM said at the beginning of November that they faced a liquidity crunch in the 1st quarter of next year.... Roughly 100 days after they released their earnings.

 

But they're doing nothing and hoping that Congress will rubber stamp GM's "like Ford, but not as painful" and "It's a magnificent gesture, but it does nothing for the bottom line" management philosophy.