Chrysler is in bankruptcy court. GM may be next.
Negotiations are underway to keep the auto giant from Chapter 11. Will they succeed?
Here are some numbers to keep in mind as the story unfolds.
GM has $27 billion in bonds outstanding. The company wants to convert those into stock controlling 10% of the company.
The Union's health care trust (VEBA) is owed $20 billion. GM wants to cut that in half and offer the VEBA 39% of GM's stock.
Existing shareholders? They'd end up with about 1% of the new GM with the government controlling 51%.
GM would still have a pension oblication of $13.6 billion and secured lenders who are owed $6 billion.
How far apart are the creditors and GM? Bondholders offered to take a 58% share in the company.
There is a big difference between 58% and 10%. If you accept GM's estimate that the company is worth about $65 billion, then this argument is about the difference between roughly $3.6 billion and $20.6 billion.
(That's the difference between $65 billion less the pension obligation, VEBA payment, the obligation to unsecured lenders at 10% and 58%.)
Keep in mind, GM bonds are trading in the market at about $2.7 billion.
Here's where Power Town comes in: the federal government wants to protect union health benefits. Normally they'd be wiped out in a bankruptcy. But the feds are putting up all the cash here to keep GM from liquidation.
When you have the cash, you have the leverage. This will be an interesting negotiation to watch.
Comments
The spoiled Union self interest has ruined the Companies ability to compete. Seems the corrupt Democratic Party is only enabling the problem. Ironically, the new Administration is only going to further empower the same weakness which left GM and Chrysler unable to compete, by failing to reform the overt cost of the irresponsible Union Labor agreements. The same reason why the Democratic Party did not want the Automaker to enter Bankruptcy, because it's special interest, the Unions, who would lose it's sweet contracts. We shall see if an effort resembling Amtrak emerges, which is largely subsidized via the Government. One wonders if we shall see favorable tax - incentives for the GM under heavy Democrat - Government Influence, vs. Ford. Perhaps other businesses will pay the price for not being tied to the Democratic Party effort. Especially under the guise of this massive 'cap and trade' tax plan. In regards to Unions, it matters little if one gets a bigger pay check in the week, or a larger pension plan, if the Company goes belly up because of the inability to compete. Nor does the front end incentive matter, if a Political Party continues to raise taxation, increase inflation, spending massive Governmental funds to float the Company, because in the end the cost of living for all is certain to raise, erasing such benefits in the long term. Every time the Democratic Party resorts to raising taxation to pay for it's self interest in Government, we all pay for it, especially the least fortunate. Just look at NJ, CA, MI, LA, etc. Having lived in France, Sweden, and a number of socialist - collectivist alternatives, this is not a healthy system to venture towards, as it is no utopia. With these poorer offerings, we will find less empowerment, a greater loss of freedoms, a higher cost of living, a lower standard of living, and an entrenchment of economic classes.
GM's problems stem from hyper excessive executive compensation and hyper excessive union consessions and compensation. The executives and workers are only concerned about their own obscene compensation packages instead of building superior cars. Even with this auto industry meltdown going on if you visit the GM showroom they are still up to their same old games just like the executives and the UAW. They should be left to fail.
Jindal2012,
Thanks for the comment.
Just wondering if it would be worse to let the company undergo a protracted bankruptcy.
It's a tough situation, no doubt.
Darren
I wonder how much GM is really worth. $65 billion?
This will indeed be interesting. I think that in the end, this will end up hurting Obama pretty badly. Leverage or no leverage, its un-American to circumvent age-old bankruptcy laws.