The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others.
The standoff between bondholders and the UAW underscores the difficulty surrounding GM's attempt to reorganize without the coercion of bankruptcy. Key players in the Obama administration are pointing to the lack of progress as a reason that bankruptcy could be unavoidable.
At Chrysler, the U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed. In bankruptcies, such senior secured lenders typically get most of their money back.
Some senior lenders believe they would get more than 70 cents for each dollar of their secured loans if Chrysler is broken up and sold under bankruptcy, said people familiar with the talks. Other lenders don't have an exact number nailed down and are awaiting detailed figures from the auto maker on its assets.
All of the 40-plus lenders and investors are nonetheless incensed by the last Treasury offer: that they accept about 15 cents per dollar of face value of their loans.
The government wants to keep the automakers out of bankruptcy because it wants to maximize gains for employees. GM's pension, thank God, was actually overfunded last time I looked, so at least retirees won't lose the income they've planned on as so many do in these legacy industry bankruptcies--the PBGC fund top benefit is well under a little over* $50K per annum. But the health benefits will probably vanish, as will a lot of jobs, and the union contracts all get torn up.
But it's trying too hard to maximize that value. It has no credible threat of nationalization with congress in its current mood, so why would bondholders take a deal where they barely recover any of their money? Social welfare might (might) be maximized by keeping these conpanies as big as possible, but I doubt the bondholders feel any personal obligation to bear that cost. They've already lost at least 30 cents out of every dollar they gave the auto companies.
This is what modern American bankruptcy is for. If you look at systems where senior creditors have too much power, there's evidence that they will screw the junior debtholders by taking the money and running, rather than trying to maximize enterprise value. (Though, to be fair, there's also evidence that maximizing enterprise value entails much higher administrative costs.) The administration essentially has a hold-out problem, and unless it nationalizes, or sweetens the deal considerably, you need bankruptcy to resolve it.
The administration seems to be negotiating like a sovereign, which, of course, it is. But GM is not. Unlike Argentina, it can't just default and flip off the bondholders. When it defaults, its creditors can put it into bankruptcy. The administration seems to be trying to prevent that in order to preserve stakeholder value--but the recovery in bankruptcy is essentially the floor of what the creditors will accept.
Or maybe this is all some elaborate Kabuki ritual, where the government pretends to be talking tough in order to placate Big Labor, while quietly waiting for the inevitable. Either way, it seems like a giant waste of time.
* Sorry, folks; I was working from memory, and they've upped their maximum guarantee
Would bankruptcy enable GM and Chrysler to jettison dealer contracts and/or get around the state laws that require all vehicle sales to go through franchised dealerships? If these goals could be met, and GM and Chrysler vehicles sold in the same manner as Dell computers (to use an expression from this blog), it's possible that the companies could be restored to health - very sound health, to be precise. And I doubt many people other than dealership employees would mourn the end of the dealership-sales model.
I believe that bankruptcy is the only inexpensive way that they can relieve themselves of these dealer relationships.
"GM's pension, thank God, was actually overfunded last time I looked, so at least retirees won't lose the income they've planned on as so many do in these legacy industry bankruptcies"
So are you saying the pension funds (only the salaried is over funded) would not be liquidated in bankruptcy??. What's to keep the fund from being raided?.
Pensioners are going to be the most senior debtholders on the pension.
For example, if GM went into bankruptcy, the bank which gave the mortgage on GM's headquarters would get either the value of their loan or the building, because they have a specific claim to that and are the most senior debt holder on it.
The pensioners are owed a pension by GM, and have the most senior debt claims on the pension fund.
If the fund were under-funded, they would lose some portion in bankruptcy.
If the GM tower were worth more than the mortgage on it, the foreclosing bank would be in pretty good shape, like the pension holders are. Of course it's worth very little, but that's how the example works.
I assumed from reading about other bankruptcies that the retirement fund was just another asset used to cover other company debts leaving retirees getting only cents on the dollar for their pension.
I hope you are correct.
Thanks.
Wasn't the pension fund split off from GM a while ago for this very reason?
The Canadian GM pension fund is seriously underfunded, somewhere around 47% short.
Derek
I know the Union pension is no longer under GM control and is run by the Union. The salaried pension is, I believe, still under GM control (for whatever reason, they are two totally different entities).
I read something a month or so ago that said salaried retirees could keep recieving full pension for the next 12 years if GM didn't put in another dime. So it's over funded by a large amount. I've also heard the Union pension is under funded but I don't know by how much.
Is it still called a "haircut" if you're being asked to take 15 cents on the dollar instead of 70? Sounds more like a decapitation to me but then I'm not in the bond-game...
It could be kabuki theater, but I doubt it. If I held senior, secured debt here, I would sue any fund manager that agreed to a hair cut below the recovery rate from pure liquidation.
Thinking about it, I wonder how much of the bond holders also on default insurance on the bonds. So in other words if they go bankrupt the insurance covers the bond, if they don't go bankrupt, you get the full value as well.
Why negotiate a loss when you get full value no matter what?
of course, there's the small issue, can the people who issued the insurance cover the default... but... shh don't mention that
... the PBGC fund top benefit is well under $50K per annum ...
Untrue.
James is correct. For pensions terminated in 2009, the new limit is 54k per annum, for those retiring at age 65. For those retiring later, then the PBGC guarantees a higher amount.
http://www.pbgc.gov/media/news-archive/news-releases/2008/pr09-03.html
Maybe they should put everyone in a room with Joe Biden, and he can give them a witty and biting scolding.
I am a union-hater - I freely admit it. I think that unions, in the context of the modern economy, are nothing but a drag on innovation and don't really help their members much either. They are basically a tax on business that is paid directly to the coffers of the Democrat Party. And that's just private sector unions - public sector unions are greedy parasites - so greedy they are actually killing their hosts (see e.g. Kah-li-for-neea). Their salaries go up while the rest of the workforce has been stagnant AND they have their sweet retirement benefits.
All that said, I am glad that the GM pensions are apparently in good shape - despite the fact that the UAW members were stupid enough to support union leaders who eventually helped to kill their jobs and their industry, most of them are still good people with dependents to support, and I am happy their pensions are safe.
Now on to the bankruptcy - who would ever accept an 85% haircut? Even if the actual bond holders are covered by CDS, the CDS issuers are going to want to maximize liquidation value (fun CDS fact - you only get paid out when you turn over the bond to the CDS issuer, since they get the chance to try to recover something). On the other hand, if the CDS issuer is already at the government teat, they may be ordered to commit seppeku on this. . .
... GM's pension, thank God, was actually overfunded last time I looked, ...
Apparently you haven't looked recently .
WOW!. Well, it was at one point not too long ago over funded....
"The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others."
So how has Ford been able to exact concessions from the UAW and its bondholders? Might this be because it hasn't been the recipient of a federal bailout, and thus the union and the bondholders didn't hold out for a better deal from the taxpayers?
Ironically enough, it's likely because Ford has been seen to be in the weaker position up until recently. This position has allowed Ford to take a more aggressive stance in negotiations.
Generous Motors, on the other hand, has been in a much worse position, much due to their unwillingness to downsize in the face of declining sales. This was complete managerial incompetence. They still wanted to be, and acted like they still were, top dog. Makes it difficult to enact concessions as the top dog.
This was true in 2006, when Ford borrowed all that money, but it hasn't been true this year, when Ford got its most recent concessions from bondholders and the union.
Agreed. Like I said, "until recently" Ford was in the weaker position. Convincing the unions to accept major concessions such as these takes quite a bit of time. Results do not occur instantaneously, hence GM's trouble in getting it's concessions despite its recent aggresiveness.
These changes do not happen instantaneously.
So in everyones mind a bond holder and an employee are of equal standing? So when a company goes illiquid unpaid wages should be treated as just another unpaid debt? I certainly hope none of your employers fail.
A bond is a loan, a loan is a risk. An employment contract is not a risk investment, just ask the guys at AIG and Fannie who want those bonuses.
Remind me not to lend you anything.
I could be wrong, but unpaid wages will typically have higher seniority than unsecured debt. But think about it this way - it's not like bonds are for evil rich people and salaries are for the poor. Those same workers have their pensions tied up in plenty of bonds, I'm sure. If *those* companies default, the pension fund loses out. Would it be fair to deny one group a pension payment so that someone else can get their salary? Both are income to a member of the middle class. Arguably, the old-timer actually needs it more. A debt is a debt.
Should employees get paid what they're owed for work they've done? Of course.
Should the Union contracts be ripped up, the work rules completely eliminated, and a lot of people fired?
Of course.
Is that going to happen short of bankruptcy?
Not a chance.
So I'm really looking forward to GM declaring bankruptcy, and hoping the bond holders will tell GM, and Obama, to get lost.
Roger Tompkins: You are looking for class warfare when there isn't any. The pension fund, owed wages etc. are not at issue here.
Derek
Question - how much of this debt has been scooped up by so-called "vulture" funds at way below face value, knowing full well that a default is likely? There is an enormous industry that specializes in buying up debt in companies that are likely to declare bankruptcy. These investors then use their knowledge of the restructuring process to extract as much value for themselves as possible. Bankruptcy isn't a catastrophe for them - it's a business model. Let's say for argument's sake, a $100 bond was actually bought for $50 by one of these investors. Asking him to accept 30 cents on the dollar is actually more like asking him to accept 60 cents for every dollar he invested. Moreover, the risk of default (and the risk of not being paid in full, and even the risk of the govt doing something pretty drastic and shake up the usual restructuring ladder) was well known to such investors, and was priced in to what they paid. So, are they major players here, anyone know?
And to extend the example further, if that same investor gets 70 cents on the dollar, he is actually making 20 cents for the 50 cents he put in! A 40% return, although on the face of it, it's a 30% loss. You can see how this can be lucrative if you know what you're doing.
Thanks for pointing this out. I seem to recall that they let GM fund the pension with its soon-to-be-worthless stock.
It seemed to me the unions & GM were basically playing a game where they would demand both a salary that GM could barley afford on an ongoing basis and considerable benifits which were always deferred.
Had GM done well the unions would have out well finanically, but were really pretty much destined to go bankrupt. The unions/workers probably did this as a negotiatating tactic. GM did this since they knew they wouldn't really have to pay and it would postpone the problem.
No defined benifit plan is sustainable in the face of increasing lifespans. Realistically, almost everyone my generation and younger is going to have to work until we die. However, since much more sedentiary work is available I don't see this as a problem in and of itself.
This last comment was meant to be in reply to James B. Shearer
GM's 10k as of 12/31/08 stated company stock is less than
GM owned EDS, which it spun off about 7yrs ago or so and at that time they put alot of EDS shares into the pension plan, and some EDS shares were spun off the GM shareholders. They also owned Hughes, which owned Direct TV, and sold that to affiliates of News Corp around 2002 or so, and again I think that some of the proceeds of the Hughes sale were put in the GM pension plan, that is what you may be thinking of.
More interestingly in GM's 10K is that at 12/31/08 they had 6% of their total assets in "Other" which included hedge funds and private equity - this would be about $4.8 Bn compared to 13%, or about $14 Bn, as of 12/31/07. They don't say but I'd reasonably conclude given valuations etc the c. $9Bn fall was due to poor investment returns.
My first para got cutoff some how in my 8:40 post
as of 12/31/08 GM's holding of its own stock in the pension plan was less than $1m, and as of 12/31/07 it was about $17m. GM would probably be holding some of the fund assets in the S&P 500 index, and GM is a component of the S&P 500. Company's cant go too far holding their own stock in the pension plan though if you are a company in a major stock indext and you hold a pro rata share that is probably not a major issue.
The assets in the pension trust can only be used to pay the pensions. As noted earlier, there is a shortfall(as disclosed in GM's 10K).
In bankruptcy the company has the option to maintain the plan or to terminate the plan. If they choose to terminate the plan, the plan's obligations are assumed by the Pension Guaranty Benefit Corp. They then pay the benefits and can take the plan's assets. This essentially is what happened with the airline bankruptcies with Delta and Northwest, the union plans were terminated, and assumed by the PBGC. The gap that the PBGC has (the value of the liabilities assumed less the assets) is a claim against the company. Normally the PBGC claim for an unfunded plan is immediately attached as a secured interest in the company's assets, though I believe that if the company is already bankrupt the automatic stay provisions of bankruptcy preclude a lien, but it is a claim. I've not heard this aspect discussed much but my thinking is there is a pretty good chance GM would terminate its pension plan and dump on PBGC, like the airlines did.
The above provisions do not apply to Pensions, which are protected under ERISA and other legislation. The Health Care Liabilities in turn are just unsecured claims/IOU's of the workers against GM. These, unlike the pensions, are not substantially funded.
The question is how to the bonds rank vs the Health Care claims. My understanding is that the bonds are unsecured claims, and so are the healthcare liabilities. I think to litigate that even in a plain vanilla bankruptcy would be time consuming, andprobably very time consuming. So, frankly, I think what you have here is a game of chicken between the bondholders, the UAW and the Car Czar (or whomever).
The assets in the pension trust can only be used to pay the pensions ...
Apparently this is not correct .
... were tapped for billions of dollars over the past year for employee buyout programs, benefit increases and as part of the UAW's retiree health care trust deal.
Good catch sir, I missed that.
I think on some of the early retirement deals you can argue it is somewhat like getting a lump sum. I followed the airlines a while ago and recalled that prior to the bankruptcy alot of the vested pilots and stewardesses took early retirement with a lump sum option. In essence they were forcing a 'run' on the pension plan (not that the run was the reason for the bankruptcy).
They also entered into an amendment with the UAW wherein they made certain amendments to the healthcare programs for retirees and reduce some of the coverage (there is I believe a requirement for copays on drugs, for example). To help fund this they agreed to make special payments as additional pension.
So, I think they are still technically paying a 'pension' out of the 'pension funds' so the law holds. Though I'd agree this may be correct as a legal matter but the net effect clearly all they did was swap a portion of the OPEB liability for pension liability. As they saying goes a billion here and billion there and pretty soon you are talking real money.
It's really not possible to loot a large pension fund like GM's--the ERISA regulators are very not nice about things like that. As Sandtu points out, these things are normal pension events--when you buy out an employee early with a vested pension, you have to lump-sum his accrued benefit.
This is not accurate. The reason employees accept buyouts is that they are offered more than their currently vested benefit which is what they would receive if laid off. If these additional payments come out of the pension fund the funds assets are reduced without a corresponding reduction in liabilities impairing the funds health. The same is true for transfers to a health benefits fund. And increases in promised benefits increase liabilities without an increase in assets again impairing the funds health. The net effect of all these maneuvers is to benefit the company and the workers at the expense of the governement in the form of PBGC which is going to get stuck with the unfunded pension liabilites.
This is what modern American bankruptcy is for.
Exactly! Thank you.
The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others.
Given the international trend in legal theory towards declaring minimum subsistence levels to be fundamental "positive rights" that must be supplied by the government if people cannot obtain them without help, I worry that what we're seeing is sort of a creeping anti-capitalism where, for political reasons, union "rights" are more important than whether the business is viable.
Thank God people are reading Atlas Shrugged again.