Coyote Blog

Person Who Will Lose a Lot of Money in GM Bankrupcy Says that GM Bankrupcy Would Be Bad

Via the AZ Republic:

Fritz Henderson, president and chief operating officer of GM, said that choosing the bankruptcy route would further erode consumer confidence in the automaker and "we want them to be confident in their ability to buy our cars and trucks."

In order to save the value of their executive stock portfolios, which are a large part of their compensation, auto executives are promoting the line now that consumers will for some reason stop buying GM cars if the company is operating under Chapter 11 protection.

The auto-makers real strategy is to get some kind of money, almost any amount will do, from the government ASAP.  It really doesn't matter how much, because with their cash burn rate almost any amount Congress gives them right now will not last much more than 6 months, and certainly will not be enough to reach recovery (their requests go up by a few billion each time they appear in front of Congress).  Automakers are facing potentially several years of recession, and any real restructuring would take 5 years or more (and even that is doubtful since the industry has had 30 years of notice on these issues and have not done anything).  But if they get some cash, then there will be a psychological pull for Congress to put in more.  They will say -- well, you've already put in $5 billion.  If you don't put in another X billion, that first 5 will have been wasted  (few people understand that "sunk costs are sunk" and Congress is no exception).  This is how expensive transit projects are funded.

The position that customers will stop buying the product due to some loss of confidence in chapter 11 doesn't hold up.  Most every airline traveler has flown on an airline operating under chapter 11 in the last 10 years or so, and if I can have enough confidence that an aircraft is being adequately maintained in bankruptcy, I can probably muster the courage to buy a car.  I presume the issue here is downstream warranty support.  But this is about the last thing that would ever be slashed in a chapter 11.   For God sakes, airlines have never even substantially disavowed frequent flier miles in a bankruptcy, surely a much more obvious target than warranty repairs. 

I would argue that it is uncertainty that is driving any loss of confidence  (in fact, sales have plummeted already, ahead of any chapter 11).  A chapter 11 filing would actually increase certainty, as those running the receivership could quickly communicate principles to be followed in the bankruptcy, such as protection of warranties. Right now, people have a perception that in a bankruptcy, GM would go *poof*.  Once it actually files a chapter 11, the media and executives would switch modes from fanning panic to actually explaining how receivership works. 

In fact, if there is any fear on the issue of long-term warranty support, it is being created by executives like Henderson who are fanning the flames of fear in a brinkmanship game to try to avoid chapter 11.  If he were really worried about this loss of confidence, he and other auto executives would be out there assuring people that their cars and servicing and dealers will also survive a chapter 11 filing.  But he is not.  This is totally disingenuous. 

More on why GM should be allowed to fail here and here.

A Bit More Hope Than I Thought

GM, as reported by Reason's Hit and Run, has actually already had something of a breakthrough in labor costs, at least for new employees:

The current veteran UAW member at GM today has an average base wage of $28.12 an hour, but the cost of benefits, including pension and future retiree health care costs, nearly triples the cost to GM to $78.21, according to the Center for Automotive Research.

By comparison, new hires will be paid between $14 and $16.23 an hour. And even as they start to accumulate raises tied to seniority, the far less lucrative benefit package will limit GM's cost for those employees to $25.65 an hour.

So this puts GM in the position of shoving experienced employees out the door as fast as they can, to make way for lower cost employees hired under this new deal.  Apparently GM also has more flexibility to manage costs in a downturn.  Good news, assuming they can accelerate a 20 year demographic transition to about 6 months, avoid giving away too much to these newer workers when times are good again, and arrest market share declines with better cars. Oh, and I presume the UAW has not abandoned seniority, which means that in recession-driven layoffs over the next year, GM must being by laying off these much cheaper younger workers.  Layoffs will actually mix their labor cost upwards.

I still don't want to bail them out.  Like numerous other industries, from steel to airlines, there is no reason GM shouldn't have to pass through Chapter 11 on the road to recovery.  However, the argument that GM is turning a corner if we just give them a little help seems to be persuasive with many folks around me, so much so I am tempted to buy some GM stock as a way to go long on my prediction of the creeping corporate state.

Update:  On the other hand, this is a sign that GM may be scraping the bottom of the barrel for cash:

Cash-strapped General Motors Corp. said Monday it will delay reimbursing its dealers for rebates and other sales incentives, an indication that the company is starting to have cash-flow problems....

Erich Merkle, lead auto analyst at the consulting firm Crowe Horwath LLP, said GM wouldn't delay payments if it had enough cash.

"I don't even think they've got 60 days," Merkle said. "Their cash position is probably getting pretty weak right now, and it's cutting into those minimum reserves that they need on hand."

In the third quarter of this year, GM's operations burned through $7.5 billion in cash, offset somewhat by asset sales and financing activities.  But this is really a pre-recession burn rate.  What will the burn rate be over the next 6 months?  There is an argument to be made that $25 billion is not going to last even a year, particularly given the dynamic that layoffs will hit mostly the lower-cost workers, and a Democratic Congress and Administration that is handing over the money may well restrict GM's freedom of movement on layoffs anyway.  I can see the Obama administration now -- don't lay them off, lets put them all in a factory making green energy, uh, stuff.

Great Report on Earmarks

The Seattle Times has done a ton of work on earmarks, and has a report here.  Nothing here will be much of a surprise for earmark critics.  This was probably my favorite bit:

Last year, Congress promised to shed light on the secretive process. But the lists of earmarks are still buried in obscure documents that are difficult to find and search. Until Congress put them online a couple of weeks ago, the House disclosure letters, linking lawmakers to companies, were thick volumes of paper kept in a cabinet in the offices of the House Appropriations Committee.

When a reporter for the Congressional Quarterly pointed out how difficult it remains to pull all the information together, Rep. John Murtha, D-Pa., chairman of the committee that drafts the defense bill, had a quick answer: "Tough shit."

Murtha, for those who don't know, consistently leads the earmarking numbers, and came in #1 among Congressmen in reaping campaign donations from earmark recipients, bringing in over $1.6 million.  They have a database here where you can look up your Congressman (mine, John Shadegg, was one of the few with zero).  My sense is that this database is only from the military appropriation and that there are many more earmarks hidden out there in other bills, but it is a good start.  (hat tip Hit and Run)

The new, but not surprising, information for me was how Congress easily sidesteps the new disclosure rules. 

After months of investigating the $459 billion 2008 defense bill, The Times found:

• The hidden $3.5 billion included 155 earmarks, among them the most costly in the bill. Congress disclosed 2,043 earmarks worth $5 billion.

• The House broke the new rules at least 110 times by failing to disclose who was getting earmarks, making it difficult for the public to judge whether the money is being spent wisely.

• In at least 175 cases, senators did not list themselves in Senate records as earmark sponsors, appearing more fiscally responsible. But they told a different story to constituents back home in news releases, claiming credit for the earmarks and any new jobs.

The Times includes several irritating but entertaining stories of rent-seeking.  Take Cyberlux, for example.  What do you do when your company has sunk $50 million into a new product, has a $18 million a year burn rate, and only has $300,000 is revenues for the first six months of the year?  Why, you call your Congressman and generate revenues via earmarks, with a quick thank you in the form of company-sponsored fundraising for said representative.

And this certainly is a feel-good story for those rooting for the government to re-engineer the American auto industry:

Latrobe Specialty Steel of Latrobe, 40 miles east of Pittsburgh, makes specialty steel for aircraft parts.

In 2006, its parent company, Timken, spent $2.9 million lobbying Congress on various issues and persuaded lawmakers to ban the Defense Department from buying any products using foreign-made specialty steel. As the sole U.S. producer of certain kinds of specialty steel, Latrobe saw its orders climb. Timken then sold Latrobe to a group of investors in a $250 million deal.

But the buy-American restrictions for specialty steel caused serious problems for the Air Force, creating a 17-month lag in getting spare parts for aircraft used in the wars in Iraq and Afghanistan.

In May 2007, Latrobe said it needed to expand but complained of high electric bills and publicly threatened to build a new plant in Virginia or West Virginia instead. Pennsylvania offered grants and tax credits to the company worth $1.2 million.

In Congress, lawmakers were quietly lining up a much sweeter package.

In the defense bill passed in December, someone had inserted language that ultimately directed $18.4 million for "domestic expansion of essential vacuum induction melting furnace capacity and vacuum arc remelting furnace capacity."

"Latrobe Specialty Steel is the only domestic producer of that steel," Army Lt. Gen. William Mortensen said at a hearing.

A month after the bill passed, Latrobe began a $62 million expansion in its home state.

No one in Congress has admitted sponsoring the Latrobe earmark.

One congressman's fingerprints, however, weren't so easy to conceal. Latrobe sits in the congressional district of Rep. John Murtha, a Democrat who chairs the subcommittee that drafts the defense bill and wields the most power over defense earmarks.

Latrobe's officials have given $5,000 to Murtha's re-election fund in the past two years.

Also, Murtha had talked about giving taxpayer dollars to Latrobe. "We're trying to get together to see how we can work out an increased capacity for that particular company," Murtha said at a subcommittee hearing in April 2007. "I've talked to that producer. And what I'd like to see is them put some money in, us put some money in, and reduce the time it takes to get those spare parts out."...

The company would not comment on any discussions it had with Murtha. A spokeswoman defended getting the grant, saying it had been competitively bid. Even so, she acknowledged that Latrobe is the sole U.S. producer of certain specialty steels, a requirement for getting the money.