Feds Told GM To Drop Pontiac Or No Bailout, Lutz Says

[RichardJensen]

And toward that end, it's worth recalling that under a conventional bankruptcy, the bank providing the debtor-in-possession financing has the most senior status, and will hold a significant ownership stake in the restructured entity, and that the reduction of brands, lines, and retail presence are *all* typical aspects of Chapter 11 settlement.

Edited October 28, 2013 by RichardJensen

[RangerM]

 

Oh--one more thing--bankruptcy law *wasn't* changed for GM. Bankruptcy judges have a *wide* latitude, and the judge in this case certainly exercised it.

"Wide" would seem to be an understatement, given that Chrysler's secured creditors were coerced into taking 29 cents on the dollar whereas unsecured creditors were given 40 cents on the dollar. Further, those secured creditors were denied their deficiency claims altogether which would have classified the remaining unpaid balances as similar to unsecured creditors. The price offered to the secured creditors could have been deemed "fair and equitable" had there been a proper market test for competitive bids to the sale. But only bids that covered the unsecured VEBA liabilities were allowed, with exceptions allowed only with the approval of the UAW. Without that restriction, it's feasible that Chrysler would have been worth more liquidated than as a going concern, OR absent the restriction the going concern value would have been greater (since the buyer may have anticipated more favorable terms with labor). There is nothing in bankruptcy law that supports such restrictions that favor a group of (unsecured) creditors.

 

Unless there is a previous example where secured creditors were entirely denied their right to deficiency claim under similar circumstances (a faux market test, at best), I'd call that a precedent.

[RichardJensen]

You and I both know that this situation was unique.

 

And you and I both know that many investors purchased Chrysler & GM securities with the expectation of a government backstop--and that they likely paid a premium in expectation of that backstop. You and I both know that belief in that backstop was fundamentally unsound.

 

We also know that the government's PBGC obligations skewed the way the VEBA was handled. We know that there was no way private financing would have been possible so that it is similarly pointless to speculate about how a privately funded filing would have been handled.

 

And no bankruptcy court is trying to use these precedents for the benefit of some private entity, so the fears of the bankruptcy process being corrupted by these thoroughly unique events seem unfounded.

Edited October 29, 2013 by RichardJensen

[twintornados]

I'm sure the Chevy dealership across the street would be fine with that, right?

I would be willing to bet that the Chevrolet dealership across the street is likely owned by the same dealership chain...but in the slim case that it was not, the new agreements drawn up, post bankruptcy, would have addressed all that.

[JasonM]

"Wide" would seem to be an understatement, given that Chrysler's secured creditors were coerced into taking 29 cents on the dollar whereas unsecured creditors were given 40 cents on the dollar. Further, those secured creditors were denied their deficiency claims altogether which would have classified the remaining unpaid balances as similar to unsecured creditors. The price offered to the secured creditors could have been deemed "fair and equitable" had there been a proper market test for competitive bids to the sale. But only bids that covered the unsecured VEBA liabilities were allowed, with exceptions allowed only with the approval of the UAW. Without that restriction, it's feasible that Chrysler would have been worth more liquidated than as a going concern, OR absent the restriction the going concern value would have been greater (since the buyer may have anticipated more favorable terms with labor). There is nothing in bankruptcy law that supports such restrictions that favor a group of (unsecured) creditors.

 

Unless there is a previous example where secured creditors were entirely denied their right to deficiency claim under similar circumstances (a faux market test, at best), I'd call that a precedent.

 

Agreed. What went on with Chrysler was not an example of a judge exercising wide latitude.

[RichardJensen]

Agreed. What went on with Chrysler was not an example of a judge exercising wide latitude.

 

It was fair. As the single largest creditor, Treasury had every right to look after *their* interests in insisting on funding of the VEBA. People forget that Treasury had senior status by virtue of DIP financing. Treasury insisting on VEBA funding protected Treasury's interests. If other secured creditors were upset by this, I ask you: Which of them would have voluntarily harmed their own interest to benefit another party with less senior standing?

 

Further: Which of these entities that were harmed by the way the Chrysler and GM bankruptcies were handled stepped forward and offered DIP financing to GM and Chrysler?

Edited November 7, 2013 by RichardJensen

[RangerM]

 

It was fair. As the single largest creditor, Treasury had every right to look after *their* interests in insisting on funding of the VEBA. People forget that Treasury had senior status by virtue of DIP financing. Treasury insisting on VEBA funding protected Treasury's interests. If other secured creditors were upset by this, I ask you: Which of them would have voluntarily harmed their own interest to benefit another party with less senior standing?

 

Further: Which of these entities that were harmed by the way the Chrysler and GM bankruptcies were handled stepped forward and offered DIP financing to GM and Chrysler?

Treasury has a fiduciary responsibility to derive maximum benefit for all taxpayers; not just a politically-favored few.

 

You may claim they did, since Chrysler's operations were maintained, however since no proper market test was conducted to assess whether maximum value was as a going concern or as liquidated, we can never know

 

The decision to skew the circumstances of the market test (rendering it moot) was a political one.

[RichardJensen]

Treasury has a fiduciary responsibility to derive maximum benefit for all taxpayers; not just a politically-favored few.

 

I agree completely with this statement.

 

And that is precisely what Treasury did. Taxpayers would have had to bail out the PBGC if Chrysler and GM pensions were terminated. That would have *added* to the taxpayer cost of the bailout, rather than reducing it.

[jpd80]

 

I agree completely with this statement.

 

And that is precisely what Treasury did. Taxpayers would have had to bail out the PBGC if Chrysler and GM pensions were terminated. That would have *added* to the taxpayer cost of the bailout, rather than reducing it.

Exactly. Treasury looked at all situations in play and chose the lesser of several evils to cover as many people as possible.

There was no other DIP financing available, no other players in the market would even consider that action at that point in time

so in that sense, it gave the government unique position and perception of the actions and consequences that no other financial

entity was prepared to take.

Edited November 7, 2013 by jpd80

[RangerM]

 

Taxpayers would have had to bail out the PBGC if Chrysler and GM pensions were terminated. That would have *added* to the taxpayer cost of the bailout, rather than reducing it.

Opinion, given that we have little/no other evidence for comparison.

 

We know what the total VEBA obligations were at the time of the BKs (~$29-30B), but the PBGC would not have covered them 100%.

[RichardJensen]

Opinion, given that we have little/no other evidence for comparison.

 

 

Opinion?

 

The PBGC was insolvent in 2010

 

GM alone has over a million retirees. The PBGC is only paying benefits to 631,000 retirees. They were carrying a $23B deficit in 2010, and paid $5.6B in benefits. Had they been forced to take over GM and Chrysler, not only would premium payments cease on GM & Chrysler pension contributions, but PBGC payouts would almost certainly have doubled, if not trebled, within the year.

 

It is *hardly* a matter of *opinion* that terminating VEBA obligations would have INCREASED taxpayer expense. And there is zero question that it would have INCREASED taxpayer obligations.

Edited November 7, 2013 by RichardJensen

[RangerM]

It is *hardly* a matter of *opinion* that terminating VEBA obligations would have INCREASED taxpayer expense. And there is zero question that it would have INCREASED taxpayer obligations.

The question isn't whether or not taxpayer expense would have increased, it's if expenses would have been lower under an alternative scenario; especially one that didn't involve a political motivation.

 

We can disagree on this.

[RichardJensen]

The question isn't whether or not taxpayer expense would have increased, it's if expenses would have been lower

 

They wouldn't have been, the amount of money available was not infinite, and 100% of it came from government appropriations. The only difference would have been which party suffered loss.

 

In clear keeping with its fiduciary duties, Treasury acted to minimize taxpayer obligations, at the expense of private investors.

 

There is room for discussion on the political motivations behind certain actions-----especially, why Treasury opted to preserve Delphi's UAW pension, while offloading the salaried benefit onto PBGC, resulting in a class of Delphi retirees having their benefits slashed while another class had their benefits remain intact. The way in which GM, Treasury and Delphi execs conspired to transfer UAW pensions to GM, and thence through bankruptcy into an equity stake in new GM, certainly is questionable and certainly smacks of playing favorites. I think we're in agreement

 

There is room for discussion on whether private investors were justified in expecting a government backstop, having seen the way the government handled other bailouts.

 

But I don't think there's any room for discussion regarding the impact of terminated VEBA obligations on the taxpayer-backstopped PBGC. It would have been, unquestionably, an increase in taxpayer obligation incurred in order to make a small class of investors whole.

Edited November 8, 2013 by RichardJensen

[grbeck]

 

 

 

There is room for discussion on the political motivations behind certain actions-----especially, why Treasury opted to preserve Delphi's UAW pension, while offloading the salaried benefit onto PBGC, resulting in a class of Delphi retirees having their benefits slashed while another class had their benefits remain intact. The way in which GM, Treasury and Delphi execs conspired to transfer UAW pensions to GM, and thence through bankruptcy into an equity stake in new GM, certainly is questionable and certainly smacks of playing favorites. I think we're in agreement

 

 

 

The bigger problem here is that these moves essentially prevented the necessary cultural change in either the executive suite or UAW headquarters. I'm not getting a sense that GM management understands that the bankruptcy was the result of a failed corporate culture that produced too many mediocre products, and that GM's Sloan "brand ladder" structure had been a hindrance since at least the early 1980s. For example, a company that releases the current Malibu against the Camry, Accord and Fusion does not appear to understand how competitive this critical market segment really is. And people under the age of 65 do NOT consider a Buick to be more prestigious than a Chevrolet. (If anything, Chevrolet probably has a better public image, thanks to the Corvette and the full-size trucks and SUVs, which are well-regarded.)

 

From the UAW, I'm not getting a sense that union leadership and the rank-and-file realize that it's no longer 1936 or even 1966. At least not the ones who work for GM.

Edited November 8, 2013 by grbeck

[RichardJensen]

 

The bigger problem here is that these moves essentially prevented the necessary cultural change in either the executive suite or UAW headquarters

 

This is true. I'd argue that moral hazard is a far far greater issue at the banks than at GM, but that doesn't mean that moral hazard is not an issue at GM.

[jpd80]

Mind you, GMNA is now on target to get 10% return, there may be cultural change happening at GM,

it's fleet sales % is lower than Ford but a few good months for GM does not replicate the real change at Ford.

[BrewfanGRB]

The question isn't whether or not taxpayer expense would have increased, it's if expenses would have been lower under an alternative scenario; especially one that didn't involve a political motivation.

 

We can disagree on this.

People keep bringing this up and ignore the fact there was ONE alternative: liquidation. It's not arguable to assert that would have cost the TAXPAYERS less money. A liquidation would have unequivocally cost FAR more in tax dollars: more unemployment payments, ENORMOUS obligations forced onto the PBGC, the loss in federal income, FICA and state income tax payments by employees and the corporations.

 

The Chrysler bailout cost taxpayers effectively nothing (I don't have figures at hand on the govt's sale of the equity position). The GM bailout will cost about $10B. I'm a Ford guy and am proud they did it "right", but I'm also a reality guy. I don't play the "I'm just a simple taxpayer and $1 million is a LOT of money, much less a billion" cry fest. The REALITY is $10B just ISN'T a lot of money at the federal level. And the ALTERNATIVE was a cost of multiples of that...and the residual, ancillary and cascading effects...many of which would have been real pain to real people. A perhaps "unfair" result for financial institutions that probably had already made billions prior is of near zero concern in a relative sense.

[akirby]

The issue isn't whether $10B was a good investment. It was. The question is why shouldn't GM - who is now making billions in profit each quarter - pay it back? And don't forget about the reduction in Federal taxes. Also don't forget the old shareholders who got screwed.

[RichardJensen]

Mind you, GMNA is now on target to get 10% return, there may be cultural change happening at GM,

 

There isn't, though. Not from what I can see. It's still about the vanity projects and confused product line management (if anyone can tell me what Chevrolet stands for in a single sentence, I'll eat my hat.)

[MadManMoon]

 

There isn't, though. Not from what I can see. It's still about the vanity projects and confused product line management (if anyone can tell me what Chevrolet stands for in a single sentence, I'll eat my hat.)

 

Cracked Heads, Every Valve Rattles, Oil Leaks Every Time.

[jpd80]

 

There isn't, though. Not from what I can see. It's still about the vanity projects and confused product line management (if anyone can tell me what Chevrolet stands for in a single sentence, I'll eat my hat.)

The immediate metric for me is that increase in return for GMNA from 7.7% to 9.3%. a direct result of reducing fleet sale percentage.

 

In the past, the biggest criticisms of GM's business plan was its propensity to over produce and dump into fleets and retail with huge incentives.

This year, GM has remained much more disciplined on Production, inventory levels, fleet sales and incentive spending. So while GM has done

nothing to improve the identity or status of Chevrolet, it is making progress in other areas that arguably bring more immediate financial improvement.

The proof of that is GM now sits on something like $26 billion cash at hand.

 

It just depends whether GM can keep up its good work on fleets sales and whether that in turn allows it to concentrate of repositioning Chevrolet.

Edited November 9, 2013 by jpd80

[Pioneer]

The proof of that is GM now sits on something like $26 billion cash at hand.

 

The only thing $26 Billion proves to me is that by being irresponsible and having other people pay your bills, and never fully paying back what you owe, you have more money.

[RangerM]

Cash on hand means little, except the ability to self-finance ongoing operations.

 

GM went bankrupt with ~$14B cash on hand, because their debt was ~$95B.

[jpd80]

Cash on hand means little, except the ability to self-finance ongoing operations.

 

GM went bankrupt with ~$14B cash on hand, because their debt was ~$95B.

 

The point I was making was that even though the government stepped in as a lender of last resort and got burned on stock sell down,

GM see no obligation to make the US taxpayer whole, in there eyes, there's not debt became you can't legally enforce a moral obligation.

[BrewfanGRB]

The issue isn't whether $10B was a good investment. It was. The question is why shouldn't GM - who is now making billions in profit each quarter - pay it back? And don't forget about the reduction in Federal taxes. Also don't forget the old shareholders who got screwed.

Old shareholders who got screwed? What? By whom? How? If the federal govt hadn't stepped in, I guess I'm confused by any assertion that GM stock would'be been worth more than 0. I'm also confused by what the govt or GM should've done AT THAT TIME to make it worth something non-negligible. GM's ineptitude wasn't a surprise or even a fraud, really. (It wasn't Enron). Anyone who invested in GM stock or continued to hold it even 3 years prior to 2008 and thought "Eh, it'll be fine" was delusional.