11 September 2008

Delphi liquidation

In early August, General Motors agreed to yet another infusion of capital into bankrupt auto parts manufacturer Delphi. Specifically, it said that it would increase the size of an expected loan from $650 million to the $950 million now seen as the minimum in liquidity for any newly viable Delphi.

The background to all this, aptly described in a recent book on America's pension crises by Roger Lowenstein, takes us at least as far into the hinterlands of memory as 1950.

That was the year of a crucial settlement between GM and the United Auto Workers union under Walter Reuther. GM felt flush at that time. It had earned record profits in 1949 and had just declared a stockholder dividend of $190 million. Only labor unrest could disturb its serenity, and it decided to buy off the union by picking up half of the tab for the members' hospital and medical insurance, and offering a pension of $125 a month—the equivalent of $1,040 a month in 2008 dollars.

Fortune hailed this as "the Treaty of Detroit." In his 1963 memoir, Alfred Sloan, who was GM's chairman at the time of this "treaty," patted himself on the back over introducing "an element of reason, and of predictability" into GM's labor relations.

But it was easy to fudge the issue of adequate funding for those promises. This became easier in subsequent contract talks, when the issue wasn't creating a pension system but embellishing the benefits offered in the existing system.

Forward now quickly to 1999. It was in that year that GM spun Delphi off into (nominal) independence. It was also the year that an analyst at Goldman Sachs analyzed the significance that pension numbers had come to hold for the parent. The analyst, Gary Lapidus, concluded that 90% of GM's value was committed to its retirees.

"For various reasons," Mr. Lowenstein wrote, "Delphi was even less prepared the handle the legacy burden than General Motors. Its pension plan, $1.7 billion in the red at the time of the spin-off, had been falling deeper in the hole ever since. Delphi was a strange creation—a newborn conceived with the hardened arteries of an old man."

The spinoff and the continuing mutual dependence of Delphi and GM meant that the same losses, required by pension and health benefit obligations, that otherwise would have accumulated within a single corporate entity were now split between two. Mr. Lowenstein cited estimates that Delphi has been producing spark plugs for $2.05 each. The same plugs can be purchased in China for $1.05. By contract, GM buys them from Delphi for $1.70. Each party to the supply contract is suffering a loss. GM is paying 65 cents more than it otherwise would, and its supplier is losing 35 for the privilege of making the sale.

GM's management seems increasingly to be coming around to the conclusion that the federal government should take health care costs off its hands through a nationalized insurance system. In a 10Q quarterly report filed with the Securities and Exchange Commission in May 2006, the company said that it "will support public policies at the federal and state level that will enable all Americans to have health insurance."

All this provides background for a story that appeared in the Wall Street Journal on August 29. Despite even the latest agreement by GM to up its ante, there may bot be any feasible re-organization plan for Delphi on the horizon. It might be necessary for the court to liquidate Delphi, and in the process to return its physical assets, the plants, to the parent company.

The pension obligations already vested would presumably go back to GM's balance sheet as well. As Batman said (back when "Batman" was a corny television show, not an increasingly dark movie franchise): "Sometimes you just can't get rid of a bomb."

5 comments:

Anonymous said...

I share a love/hate relationship with digital memory because of the way prices are always dropping. I hate buying Micro SD Cards for my R4 / R4i at (seemingly) a bargain price only to see it become ten percent cheaper a couple of weeks later.

(Submitted by Nintendo DS running [url=http://www.leetboss.com/video-games/r4i-r4-sdhc-nintendo-ds]R4i[/url] SPPost)

Anonymous said...

Hello!


Mansour Engineering committed to creating quality finished projects for Mansour Engineering clients

[url=http://www.mansour.ca] click here to go to Mansour Engineering[/url]


http://www.mansour.ca

Anonymous said...

Good evening

We do not agree with this year BRITs 2010 decision.

Please go to see our little poll

http://micropoll.com/t/KDqOnZBCWt

Lady Gaga can not be better than Madonna

Poll supported by BRIT awards 2010 sponsor femmestyle
[url=http://www.femmestyle.ch/tips/index.html]nach schönheitsoperationen[/url]

BRITs.co.uk - tickets left standing!! This Competition is now closed
OK

Anonymous said...

Hello,

When ever I surf on web I come to this website[url=http://www.weightrapidloss.com/lose-10-pounds-in-2-weeks-quick-weight-loss-tips].[/url]You have really contiributed very good info here cfaille.blogspot.com. Do you pay attention towards your health?. Here is a fact for you. Research displays that almost 90% of all U.S. grownups are either chubby or overweight[url=http://www.weightrapidloss.com/lose-10-pounds-in-2-weeks-quick-weight-loss-tips].[/url] So if you're one of these individuals, you're not alone. In fact, most of us need to lose a few pounds once in a while to get sexy and perfect six pack abs. Now the question is how you are planning to have quick weight loss? You can easily lose with with little effort. You need to improve some of you daily habbits to achive weight loss in short span of time.

About me: I am author of [url=http://www.weightrapidloss.com/lose-10-pounds-in-2-weeks-quick-weight-loss-tips]Quick weight loss tips[/url]. I am also health trainer who can help you lose weight quickly. If you do not want to go under painful training program than you may also try [url=http://www.weightrapidloss.com/acai-berry-for-quick-weight-loss]Acai Berry[/url] or [url=http://www.weightrapidloss.com/colon-cleanse-for-weight-loss]Colon Cleansing[/url] for quick weight loss.

Anonymous said...

Good day

Finally you can sell your used and new products FREE on the new advance http://www.BuySellDirect.net


http://www.BuySellDirect.net is 100% FREE for all

Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.