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."
Showing posts with label Delphi. Show all posts
Showing posts with label Delphi. Show all posts
11 September 2008
23 June 2007
Bankruptcy as education
The chapter 11 process is and should be a very public, very transparent one. There shouldn't be any secrets about what goes on when a company asks a court to protect it from its creditors, then re-structures its debt and in time, if all goes well, re-emerges from into the marketplace from outside the court's protective wings.
There shouldn't be any secrets for a couple of good reasons. The most obvious is that many of the parties interested in the proceedings are likely to get cheated to the extent back-room deals can be cut. They'll be cheated anyway, in a sense (it is the whole point of the process to cheat somebody!), but the distribution of the losses always shifts to the disadvantage of those who don't have the pull in those back rooms.
That, then, is enough: don't let the players step into the back rooms. Keep everything in the arena.
Still, there's another and a better reason for openness. Corporate bankruptcy proceedings can be a medium whence the public can learn about the nature of the business cycle, and can in time perhaps be roused to do something about these boom and busts that so dislocate our lives.
In boom time, when credit is easy, when the banks not only lower their interest rates and compete with each other but are eager to give away their money, then times are so good for business that managerial sloppiness goes unpunished. People who have no aptitude for business end up running large ones, and they can fool themselves into thinking they have a calling for it so long as the money stays easy.
The problem, of course, is that while they’re fooling themselves and working through these loans, other people come to depend on them: employees, suppliers, creditors. The marginal and the sloppy work themselves into the social fabric. The goodness of such ‘good times’ is deceiving, because rot is building up.
At some point the lenders have to stop being so generous. Whether this takes place with the prodding of a central bank is another question, but a turn will take place.
The more liquid institutions are among the first victims of a turn. As the expansion crawls to a stop, every trader, every brokers, everyone who hangs casually around an exchange building, knows the turn is coming. Somebody will call in a margin that will force somebody else to liquidate. Nobody wants to be the liquidate, so they all become very cautious at the same time, and as counter-parties they all become demanding at the same time.
Long-Term Capital Management goes down before Enron does. Why? Because Enron had assets other than cash – assets that couldn’t be marked immediately to market – pipelines and generators. For the same reason, Enron with its “asset lite” philosophy, had to seek bankruptcy protection before a necessarily asset-heavy firm such as Delphi did.
(Delphi is an auto parts manufacturer that sought chapter 11 refuge in the autumn of 2005 and remains there still.)
The bankruptcy system is the best public forum for the documentation of the boom-bust cycle. Immersion there in could teach people painlessly that the way up is the way down, that the cheap credit that allows for the build-up of the rot is the real cause of the subsequent collapse, even that “irrational enthusiasm” is a central banker’s term for the sort of dislocation that central banking can cause.
There shouldn't be any secrets for a couple of good reasons. The most obvious is that many of the parties interested in the proceedings are likely to get cheated to the extent back-room deals can be cut. They'll be cheated anyway, in a sense (it is the whole point of the process to cheat somebody!), but the distribution of the losses always shifts to the disadvantage of those who don't have the pull in those back rooms.
That, then, is enough: don't let the players step into the back rooms. Keep everything in the arena.
Still, there's another and a better reason for openness. Corporate bankruptcy proceedings can be a medium whence the public can learn about the nature of the business cycle, and can in time perhaps be roused to do something about these boom and busts that so dislocate our lives.
In boom time, when credit is easy, when the banks not only lower their interest rates and compete with each other but are eager to give away their money, then times are so good for business that managerial sloppiness goes unpunished. People who have no aptitude for business end up running large ones, and they can fool themselves into thinking they have a calling for it so long as the money stays easy.
The problem, of course, is that while they’re fooling themselves and working through these loans, other people come to depend on them: employees, suppliers, creditors. The marginal and the sloppy work themselves into the social fabric. The goodness of such ‘good times’ is deceiving, because rot is building up.
At some point the lenders have to stop being so generous. Whether this takes place with the prodding of a central bank is another question, but a turn will take place.
The more liquid institutions are among the first victims of a turn. As the expansion crawls to a stop, every trader, every brokers, everyone who hangs casually around an exchange building, knows the turn is coming. Somebody will call in a margin that will force somebody else to liquidate. Nobody wants to be the liquidate, so they all become very cautious at the same time, and as counter-parties they all become demanding at the same time.
Long-Term Capital Management goes down before Enron does. Why? Because Enron had assets other than cash – assets that couldn’t be marked immediately to market – pipelines and generators. For the same reason, Enron with its “asset lite” philosophy, had to seek bankruptcy protection before a necessarily asset-heavy firm such as Delphi did.
(Delphi is an auto parts manufacturer that sought chapter 11 refuge in the autumn of 2005 and remains there still.)
The bankruptcy system is the best public forum for the documentation of the boom-bust cycle. Immersion there in could teach people painlessly that the way up is the way down, that the cheap credit that allows for the build-up of the rot is the real cause of the subsequent collapse, even that “irrational enthusiasm” is a central banker’s term for the sort of dislocation that central banking can cause.
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