Senator Corker's Corker - Automaker bailout

[ziggy29]

It's not that the rest of us don't care about the auto industry or auto workers. But you can't ask the rest of us to subsidize them for wages and benefits that the rest of us lost long ago or never had...

Nailed it.

When a rising tide is lifting all boats, it's easier to be genuinely happy for what others have and what has been promised to them, as your own fortunes look better even as you don't get the same guarantees.

But then the tide goes out....

And as much as I try not to be jealous or envious or resentful, times like these remind you how much concepts like job security and guaranteed retirement benefits are absolutely golden. And when those who don't have that deal are likely going to be required to pay more to "rescue" that deal for others -- even as they watch their own retirement hopes crash and burn and their own jobs increasingly called into question -- a little bit of creeping resentment and disgust is tough to avoid.

This is part of the moral hazard of the bailout mentality -- as more and more groups get theirs, the resentment among people whose interests are being propped up goes away -- but as some people remain "un-bailed out," their share of the cost rises even as they say, with increasing anger, "where's MY rescue?" Who's going to give my employer a bunch of money to keep my job safe? Who's going to rescue my 401K and IRA and prop up my retirement?

I hate that I feel that way -- I'd rather just be happy for others -- but the bailout mentality which will ultimately cost me many thousands of dollars to prop up "everyone else" makes that increasingly difficult. I'm not proud of those emotions -- it's not a healthy burden on the soul -- but I thnk it's largely human nature.

 

[Gone4Good]

• One, give existing bondholders 30 cents on the dollar to help reduce their overall debt load.
Etc."

My question- how can this be legal? Doesn't it turn the founding priciple of bankruptcy law on its head? Senior ogligations are to be paid in full before junior obligations get anything. I know that this is often negotiated down, but Corker is proposing that equity remain in the stock, while the bondholders be forced to accept 1/3 face.

My understanding is that this would have been done via a debt for equity swap, similar to what would happen in bankruptcy. Existing shareholders would be essentially wiped out.

And I also don't think the idea was to impose this via a Congressional decree, but rather to say that these conditions must be met by a date certain in 2009 or the "bridge loan" comes due. This all seems perfectly legal to me.

 

[frayne]

From a Local Chattanooga TV Station Website;

Tennessee's junior senator played a key role in this week's battle for an auto bailout. Republican Senator Bob Corker vocally opposed the house plan and negotiated until the last minute trying to work out a deal.
He's getting both praise and criticism from folks on the streets of Chattanooga.
Senator Bob Corker, (R) TN, "This has been quite a volatile period.
With just two years under his belt, Tennessee Senator Bob Corker finds himself right in the middle of all the action...
Sen. Corker, "Harry Reid has literally beeped in twice saying he needs to see me immediately."
Even getting urgent summons from Senate Majority Leader Harry Reid.
Corker's spot on the U-S Senate Banking, Housing and Urban Affairs Committee put him in a prime position to influence the Auto Bailout bill.
He strongly opposed the House version of the bill, offering an alternative in the Senate.
Valentina Jones, "I'm very disappointed."
He's getting some heat with its failure.
Jones, "He's a rich man what do he care. He doesn't have to worry about putting a meal on the table for his kids, we do so I'm very disappointed, again to say the least."Jackson Andrews, "I thought Bob Corker had an excellent plan."
But others stand strongly in the hometown Senator's corner.
Jackson Andrews, "I was sorry to see it didn't get passed. He's really set the ground work for what I hope is going to be a compromise solution that can be if it doesn't happen in this administration can happen in the next administration."
Criticism also comes from Detroit, the home of the auto industry...calling Corker and other Southern republicans hypocrites for supporting Volkswagen while opposing a bail out for american carmakers.
Corker counters that he gave tremendous incentives twice to the GM plant in Springhill.
Sen. Corker, "It's a really hollow statement but the Detroit Free Press has certainly worn me out about this over the past week and I probably will not travel through Detroit anytime soon."
Senator Corker is scheduled to be on CBS's Face the Nation with Bob Schiefer Sunday at 10:30 right here on WDEF News 12. to discuss the failure of the auto bail out bill.

 

[HFWR]

I'd like to point out, again, that statements like "no one wants their cars" are [moderator edit - language]...

Auto Sales - Markets Data Center - WSJ.com

Note that D3 vehicles hold the numbers 1, 2, 7, 8, 11, 12, 13, 15, 18, and 20 in the top 20.

Having said that, I absolutely support getting their cost structures down as a requirement for any "bailout".

 

[Midpack]

I thought Corker said they could have had an agreement if the UAW would only agree to 'a date certain' vs 'everything is on the table and we'll look at it.' I think all parties including the UAW need to face some hard choices including real deadlines. Corker supposedly had specifics in his proposal for management, bondholders and all interested parties including the UAW.

If the UAW is not the problem, all they have to do is propose an actual deadline, and then Corker has the ball. What am I missing?

 

[Midpack]

I'd like to point out, again, that statements like "no one wants their cars" are [moderator edit - language]...

Auto Sales - Markets Data Center - WSJ.com

Note that D3 vehicles hold the numbers 1, 2, 7, 8, 11, 12, 13, 15, 18, and 20 in the top 20.

Having said that, I absolutely support getting their cost structures down as a requirement for any "bailout".

That's been posted here before, and nobody seriously meant no one. But GM once had 50% market share, Ford and Chrysler have also had massive declines over the decades, so they have lost tens if not hundreds of millions of customers over the decades - so there are millions of someones that don't want their cars. By their own admission, the D3 are now not selling enough units to sustain themselves with current cost structure. A revised cost structure based on current volumes, will ultimately fail if they continue to lose market share/unit volume. So demand is a part of the question and there's reason for concern given the decades long trend...

 

[Gone4Good]

When Lehman failed they were larger than GM is today, but they were allowed to fail.

There is a pretty solid consensus that allowing Lehman to fail was a mistake. It is because of the near disastrous results of the Lehman experiment that policy makers and economists are a bit gun shy about letting GM go. In normal times, GM would not be too big to fail. Neither would Lehman or Bear have been. But these are not normal times.

I'm on the fence on this one, but I think I'd take a chance on bankruptcy. I'm not convinced that GM poses systemic risk (but I was wrong on Lehman). Meanwhile, I am convinced that the inevitable government meddling following any auto-maker bailout will be far worse. We've already seen Congress try to mandate the types of cars the companies will make. Just wait until they want to close a plant or sever a dealer relationship in the district of a powerful Congressman. Either way we go will be an unmitigated disaster.

As crazy as it sounds, I'd almost prefer to give the automakers money with NO Congressional oversight. $30MM bucks for GM with standard HY covenants (i.e. no dividends to shareholders, etc.) and an absolute prohibition on future public money. "Here's your bridge loan and your last chance. Either make it work, or file for bankruptcy." I guarantee the outcome from that relationship will be far superior to an open ended commitment and a "Car Czar".

 

[haha]

I'd like to point out, again, that statements like "no one wants their cars" are [moderator edit - language]...

Auto Sales - Markets Data Center - WSJ.com

Note that D3 vehicles hold the numbers 1, 2, 7, 8, 11, 12, 13, 15, 18, and 20 in the top 20.

Having said that, I absolutely support getting their cost structures down as a requirement for any "bailout".

I agree. Parked in my garage at this apartment in a building inhabited mostly be young people there are two Jettas, my Subaru, one Honda CRV, one Taurus, one Jeep, one Monte Carlo, one small Chevy I don't its name, and one Toyota. So almost half are US makers. Only my Subaru is actually manufactured in Japan.

Originally Posted by . . . Yrs to Go
My understanding is that this would have been done via a debt for equity swap, similar to what would happen in bankruptcy. Existing shareholders would be essentially wiped out.

And I also don't think the idea was to impose this via a Congressional decree, but rather to say that these conditions must be met by a date certain in 2009 or the "bridge loan" comes due. This all seems perfectly legal to me.

Well, maybe you could explain how it conforms to law. Why ever buy a senior security, if on a whim the company can do a debt for equity swap?

You have debt when the company succeeds, equity when it fails.

Great buy!

Ha

 

[Midpack]

There is a pretty solid consensus that allowing Lehman to fail was a mistake. It is because of the near disastrous results of the Lehman experiment that policy makers and economists are a bit gun shy about letting GM go. In normal times, GM would not be too big to fail. Neither would Lehman or Bear have been. But these are not normal times.

I was simply trying to add some perspective, people seem to think GM is the biggest company in the US and too big to fail. GM is miniscule compared to Citi for example. There were few questions in the mainstream population about letting Lehman fail, evidently not so with the D3. Lehman may have been a mistake, but we're going to survive that mistake don't you think? The numbers seem to suggest that the D3 are nowhere near as important as bailout proponents would have us believe. As far as I can tell, 'as goes GM, so goes the Country' and '1 in 6 people are directly or indirectly employed/affected by the auto industry' are overblown, tired old rhetoric that's simply no longer true and way out of date. Without these assumptions, is the bailout case as strong? Yet, you hear bailout supporters (especially the UAW and Democrats) reuse these 40-50 year old "facts" without any supporting evidence - and it works on the many in the mainstream.

1. I would love to see hard numbers on the $75/hour for autoworkers. How much is active employees wages & benefits, how much retiree benefits and other costs like Jobs Banks.
2. I would love to see the real employment numbers for domestic auto makers, suppliers and dealers and whoever else would be directly affected.

If someone has them, help us out, I've been trying to find facts with little success. I think this is a critical issue, one that we need to decide correctly, but the facts are hard to find. My opinion is based on less factual information than I'd like.

 

[Gone4Good]

Well, maybe you could explain how it conforms to law. Why ever buy a senior security, if on a whim the company can do a debt for equity swap?

You have debt when the company succeeds, equity when it fails.

Great buy!

Ha

It happens countless times in every economic downturn. But don't mistake me, this is not something that is compelled on bondholders, but rather coerced from them.

In the case where a bondholder has a claim for which a company is unable to make good, the bondholder has few remedies. One is to accelerate his claim and force a bankruptcy. Sometimes this is in the bondholders best interest. Sometimes it is not. When it is not, the bondholder is often offered to exchange his bonds for something else (more security in exchange for a lower coupon or longer maturity, equity in exchange for a lower principal balance, etc.). The bondholder need not accept this offer, but the alternative of bankruptcy may be seen as worse.

In fact, GMAC is currently trying to do something similar right now:

GMAC bond exchange flop threatens bank bid - Yahoo! News

GMAC is looking to swap $38 billion of outstanding debt for a smaller amount of new debt, as well as preferred shares and cash, in an effort to reduce its debt load and raise the capital it needs to qualify as a bank.

Before you say "I'd prefer to take my chances in bankruptcy" know that there is usually a good deal of the "prisoner's dilemma" game that goes on in this type of liability management. Typically bond indentures only require 50% of the holders to consent to a change in terms. Companies can offer security, or cash, or other inducements for those that consent, while leaving those who don't with a more junior position in a company with less cash. So while bondholder's as a group may be better off rejecting the terms of the exchange, individual bondholders who consent could be better off than they would be otherwise.

Welcome to the world of distressed bond investing . . . it's not for either the faint of heart or those without good legal representation.

----------

In the case of GM, the Government bridge loan would require debt be reduced to 30 cents on the dollar, or the bridge loan would come due (forcing bankruptcy). How GM arranged this would still need to be determined, but Corker said he was in touch with institutional bondholders (and presumably liability management bankers) and must have thought it could get done.

 

[Independent]

Does anybody have a source for expense detail for GM? All the income statements I can find, even in GM's SEC filings, have a single "cost of goods sold" line. I'd like to see the breakdown into wages, depreciation, parts, etc.

My problem is that the UAW claims that its members' total compensation is only 8.4% of the total retail cost of cars. If so, where is the other 91.6%?

I've scraped together a few crude estimates for GM based on scraps I can find here and there.
Total North American sales of about $100 billion.
UAW wages/benefits: $10 billion.
White collar wages/benefits: $7.5 billion.
Salaries/benefits paid at suppliers: $5 billion.
Interest on LT debt: $2.5 billion.
Advertising: $1 billion.
Depreciation: $3 billion (that's a really wild guess).

So I get revenue of $100 billion, and total expenses of $29 billion. I'm missing $70 billion in expenses. That's a huge error, but I can't find a source to clarify what's happening.

The "bailout" or "bankruptcy" questions is, If GM is going to be profitable, does cutting wages/benefits and interest expense really do the trick? Or is their problem in some other area?

 

[Gumby]

[*]I would love to see hard numbers on the $75/hour for autoworkers. How much is active employees wages & benefits, how much retiree benefits and other costs like Jobs Banks.
[*]I would love to see the real employment numbers for domestic auto makers, suppliers and dealers and whoever else would be directly affected.
[/LIST]If someone has them, help us out, I've been trying to find facts with little success. I think this is a critical issue, one that we need to decide correctly, but the facts are hard to find. My opinion is based on less factual information than I'd like.

Here is some information to start from the UAW website. They claim that the average auto worker makes a little over $27/hr and they list some of the things that are used to inflate the number to the $75 per hour meme.

Wages and labor costs - UAW Bargaining 2007

 

[Gumby]

Before you say "I'd prefer to take my chances in bankruptcy" know that there is usually a good deal of the "prisoner's dilemma" game that goes on in this type of liability management. Typically bond indentures only require 50% of the holders to consent to a change in terms. Companies can offer security, or cash, or other inducements for those that consent, while leaving those who don't with a more junior position in a company with less cash. So while bondholder's as a group may be better off rejecting the terms of the exchange, individual bondholders who consent could be better off than they would be otherwise.

But to reduce the interest payments and/or principal amount requires unanimity, per the Trust Indenture Act of 1939.

 

[ziggy29]

Here is some information to start from the UAW website. They claim that the average auto worker makes a little over $27/hr and they list some of the things that are used to inflate the number to the $75 per hour meme.

$27 sounds about right as a base wage. Unfortunately this piece only mentions the straight hourly wage. It says nothing about what the fully burdened hourly wage is (including benefits and other employment costs). So in reality it hasn't debunked the $75 claim when all costs are included, and it looks to me they duck that question for very obvious reasons.

And the other complicating factor is that current UAW contracts basically have multiple tiers of workers, the "haves" with the gold-plated retirements and the "have nots" with only tanking 401Ks. This being an average, you have to believe that the have-nots make considerably less than $27 on straight wages while the haves likely get quite a bit more than that. (Of course, there aren't all that many "have nots" yet because they haven't done much hiring in a long time.)

But this link also shows something very illustrative: about 180,000 active employees and 540,000 retired beneficiaries (retired workers and surviving spouses). There are three retirees for every active employee!

 

[Midpack]

Here is some information to start from the UAW website. They claim that the average auto worker makes a little over $27/hr and they list some of the things that are used to inflate the number to the $75 per hour meme.

Wages and labor costs - UAW Bargaining 2007

Thanks, if nothing else it shows how onerous the legacy costs are. 180,681 active employees with 540,344 retirees and surviving spouses (not sure where the Jobs Bank folks are). Everyone has known for at least 10 years that the legacy costs would eventually make it impossible for D3 to compete, if they haven't already. Every domestic industry has had to confront this issue, all have either adjusted or gone under. The management, the UAW and the many politicians are holding on to times long gone by. The D3 are going to have to confront it sooner or later, sure looks like it's time. Bailouts are not the answer if it means the rest of us subsidize active and retiree wages and benefits ongoing that almost no one else has...

 

[ERD50]

1. I would love to see hard numbers on the $75/hour for autoworkers. How much is active employees wages & benefits, how much retiree benefits and other costs like Jobs Banks.

If someone has them, help us out, I've been trying to find facts with little success.

I came across this yesterday -tells part of the story - not exactly what I wanted, but close:

http://www.reuters.com/article/marketsNews/idINN1246948520081212?rpc=44&sp=true

Here are details of the average hourly labor cost of UAW workers employed at Ford and those employed by non-U.S. based automakers with plants in the United States. The figures are similar across the three Detroit automakers.


WAGES: Base wages and cost of living adjustments
UAW: $29
Transplants: $26


WAGE RELATED: Paid vacation, overtime, holidays, night and weekend pay, break time
UAW: $14
Transplants: $9


BENEFITS: Healthcare, training, etc
UAW: $12
Transplants: $11


LEGACY COSTS (Without VEBA): Pension and healthcare benefits for retirees
UAW: $16
Transplants: $3


LEGACY COSTS (With VEBA): Pension and healthcare benefits for retirees
UAW: $3
Transplants: $3


TOTAL LABOR COST:
UAW (without VEBA): $71
UAW (with VEBA): $58
Transplants: $49
Source: Ford.
Note: Average wage assumes 20 percent entry-level employees.

Again, I think legacy costs are best describes on a per sales $ figure, but at $3 post VEBA and on par with others, it's a fairly moot point.

So it looks like post VEBA, approx $9 an hour delta. In light of tax $ going into this, yes, I think that $9 should be flattened, and I think the VEBA thing should be pushed up to today.

I dunno how you would control wages going forward. It's ridiculous to tell the UAW that they must be in-line with other plants, what's the point, how are you going to administer it? More govt involvement?

So in some ways, I think bankruptcy is the cleanest - let them all start with a clean sheet. The D3 would need to restructure in some way that the Unions cannot hold them hostage by way of strike and keep compensation artificially high. And the workers need to restructure in some way that the D3 cannot hold too much power to keep compensation artificially low either.

I'm pretty sure that the way to do that it to diversify the industry, company-wise and location-wise. Having so much industry centered in Detroit created the problem that the D3 had power over wages, which results in a Union forming to fight that power, which results in one becoming dominant and distorting the free market. I think a bunch of factories in a bunch of states, owned by a bunch of different companies, with no single union breaks that lock on power on either side, and allows a free market to function.

-ERD50

 

[Midpack]

Outstanding posts guys, where have you been hiding this stuff! And why don't our representatives and media put these kinds of facts into the mix instead of all the unsubstantiated rhetoric that drives the discussion? Damn...

 

[HFWR]

And why don't our representatives and media put these kinds of facts into the mix instead of all the unsubstantiated rhetoric that drives the discussion? Damn...

Because we can't let the facts get in the way of our preconceived notions?

 

[Rustic23]

But this link also shows something very illustrative: about 180,000 active employees and 540,000 retired beneficiaries (retired workers and surviving spouses). There are three retirees for every active employee!

Does this sound like Social Security to anyone else? Looks like the D3 is an early model for the US retirement system.

 

[ERD50]

Does this sound like Social Security to anyone else? Looks like the D3 is an early model for the US retirement system.

This is depressingly true.

I think I need to go off and find that "Post a Happy-Thought Video" (or whatever it was called) thread...

-ERD50

 

[ziggy29]

Does this sound like Social Security to anyone else? Looks like the D3 is an early model for the US retirement system.

Actually, yes and no. (Mostly yes, IMO.)

Yes in that an unsustainable (and increasing) retiree-to-worker ratio can threaten the long-term viability of the retirement plan -- and Social Security and Medicare are staring down the barrel of that gun without reforms.

No in that at least in theory, DB pension plans are funded on behalf of the covered employees at the time the work is performed rather than a pay-as-you-go pure Ponzi-type strategy.

But I am sure there were actuarial assumptions, when setting levels of contribution to the pension fund, that the business would keep growing its profits and could thus keep feeding its pension fund larger and larger sums of money without threatening solvency. Which brings us back to "mostly yes."

 

[Gone4Good]

But to reduce the interest payments and/or principal amount requires unanimity, per the Trust Indenture Act of 1939.

Yes, but I don't necessarily need to amend the indenture to accomplish either.

To cut the principal amount I simply offer to exchange existing unsecured debt with a very low expected recovery value for a lesser face amount of new debt that ranks more senior. Each bondholder is free to act in his/her own perceived best interest without any need to get 100%, or even majority consent. But we're only offering the exchange to the first x% of bonds tendered (although we reserve the right to exchange all bonds that are tendered ). First come, first served . . . and unsecured bondholders who don't go along will find themselves getting squashed behind the increasing amounts of more senior debt offered to those who do.

As a practical matter though, in order to get down to 30 cents on the dollar, they'd almost certainly need 100% participation. GM's unsecured bonds look to me like they are pricing in 20% recovery expectations. The pitch to unsecured bondholder's would be something like "exchange your existing bonds for 25% face amount of new bonds and 75% equity. 100% participation is required. If you don't exchange your bonds, the government's bridge loan will accelerate and we'll be forced to file for bankruptcy. In which case you'll likely end up with only 20 cents, vs. the potential for 25 cents plus equity upside we're offering you. Pick your poison."

 

[Midpack]

This is depressingly true.

I think I need to go off and find that "Post a Happy-Thought Video" (or whatever it was called) thread...

-ERD50

I have a pretty good headache now too...let me know if you find the happy thread.

 

[Gumby]

and unsecured bondholders who don't go along will find themselves getting squashed behind the increasing amounts of more senior debt offered to those who do.

That would depend on whether there were any anti-layering or "equal and ratable" covenants. With the "covenant-lite" loans that became prevalent in 2006 and early 2007, these may not exist. Older debt might have them.

You are quite correct that it is a giant game of "chicken". A bondholder group, if they stick together, can exert quite a bit of leverage on the debtor.

 

[Gone4Good]

That would depend on whether there were any anti-layering or "equal and ratable" covenants.

Simple enough to include a mandatory consent to remove the negative pledge in the tender/exchange offer . . . now I only need 50.1% to get my principal reduction.

And true, bondholder groups can form and prevent this kind of thing, but they've got to be able to trust the other "prisoners".