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Wednesday, November 16, 2005 8:47 AM


Can GM be saved?


The problems at GM continue. Its stock price is near 52 week lows and GM is reportedly looking to sell a stake in its consumer financing unit to raise some $11-15 billion dollars to fund operations.

Not so fast says the Pension Benefit Guaranty Corp. It seems The PBGC may seek additional pension funding from GM to safeguard against a taxpayer bailout should GM go bankrupt sometime down the road according to the Wall Street Journal article Pension Agency Casts Shadow on GM Sale.

If General Motors Corp. raises $11 billion to $15 billion by selling a stake in its highly profitable consumer-finance arm, the U.S. agency that partly guarantees defined-benefit pension plans could demand that a chunk of the windfall go to GM's pension funds rather than to shareholders or to the development of new auto models.

Douglas Elliott, president of the Center on Federal Financial Institutions, a nonpartisan think tank, said a termination of GM's $100 billion pension plan could result in a claim on the PBGC larger than the total of all the previous claims on the agency since it was created in 1974.

"The PBGC could get some agreement on what GM will do with the proceeds from GMAC in return for protecting the buyer or approving the [General Motors Acceptance Corp.] transaction," said Brian Johnson, an analyst with Sanford C. Bernstein & Co.

Separately, the Securities and Exchange Commission is investigating whether the assumptions GM has used to calculate its pension liabilities are overly optimistic. Even a relatively small change in those assumptions could drop GM's pension funds into the red, according to GM's own measures.
At the heart of the issue is whether or not GM's pension funds are fully funded now. GM claims that its pension plans are fully funded. The PBGC calculates that the plans are underfunded by an estimated $31 billion. Technically both are correct under the arcane rules that govern pension accounting. On a practical basis, however, the PBGC is correct: GM's pension funds are enormously underfunded.

Meanwhile GM has sustained $3 billion in losses this year, its debt has been downgraded several times to junk status, GM is losing market share, and it appears the economy and car sales are both slowing as well. Although GM Chairman and Chief Executive Rick Wagoner has repeatedly stated that bankruptcy isn't an option, the S&P has placed the bankruptcy odds at 30%. GM's stock price is hovering near 52 week lows around $25.
The risks involved with GM spinning off part of GMAC and relying more on its core auto business are considerable, says Standard & Poor's Corp. auto analyst Scott Sprinzen. "We have a B-minus rating on, and we're still reviewing that rating," said Mr. Sprinzen. "It's still on credit watch, and we could lower the rating further, even if there's a transaction with GMAC. The risks are high, that's how we see it."

Mr. Wagoner acknowledged in a recent interview that spinning off GMAC will put more pressure on GM's auto business to perform, but said the spinoff is needed to secure GMAC a better credit rating.

"We're going at it to get GMAC back to an investment-grade credit rating, and, frankly, support the business purpose of GMAC, which is to support GM and its growth options," Mr. Wagoner said. "That's sort of step one in the discussion. What we will do with the proceeds is to be determined."
I think what Mr. Wagner means is "What GM is forced to do with the proceeds is to be determined." It will also be interesting to see if the PBGC or the bond markets forces GM to cut its dividend. Were that to happen in a timely enough manner (as in now), GM's stock would likely plunge but its bonds would likely gain. If the market forces the issue at a later date it might not be good for either. The point is all moot however, since in my mind the real debate is not whether GM will go bankrupt, but whether said bankruptcy occurs sooner rather than later.

The real question then should be how to handle the upcoming bankruptcy in the most equitable manner possible rather than wasting money trying to prevent it. I would not wish for GM pensioners to go through the torture that the airline industry employees just went through.

In that regard Mish actually has a five step plan to "save" GM.
Here it is:
  1. GM should sell off all its profitable units
  2. Fully fund its pension plan
  3. Declare bankruptcy
  4. Dissolve the union agreements
  5. Start all over on a smaller scale
Following are the benefits of the above proposal:
  • The plan would protect GM pensioners.
  • The plan would protect US taxpayers from a bailout.
  • The plan would reduce much of GM's cost disadvantage.
  • The plan would give a future GM some semblance of a fighting chance at competing in a global marketplace. Those that believe GM knows how to design and manufacture cars that people want would have their chance to prove it, without fighting excessive cost overheads.
  • The plan would remove unneeded auto manufacturing capacity that is depressing the sector.
GM is currently on collision course with bankruptcy anyway so it may as well happen in a manner that protects the most people. The 5 step program above would protect both GM pensioners and US taxpayers. No doubt union members will object to step number 4, but a reduction in the power of the UAW would appear to be a foregone conclusion anyway. All one has to do to see the writing on the wall is look at how the unions were treated in the airline bankruptcy proceedings. I see no reason to believe that the UAW would be treated any differently coming out of bankruptcy than the airline unions were when they came out of bankruptcy. Finally, the union may as well lock in a good deal for its pensioners right now as opposed to a poor one later that might also affect taxpayers to the tune of $30-100 billion or so.

The Mish proposal is unlikely to be implemented as Chairman and Chief Executive Rick Wagoner has declared repeatedly that "bankruptcy isn't an option". Furthermore GM stockholders and bondholders would not particularly be pleased with my plan to say the least. If a CEO has a duty to shareholders, then as a practical matter what anyone deems "fair" to pensioners or taxpayers is irrelevant. What that means of course is that regardless of the obvious benefits (or lack thereof) depending on your viewpoint as a GM shareholder or UAW worker, the Mish plan to save GM in a "fair and equitable manner" was a purely theoretical exercise that favored pensioners while ignoring huge implications to GM stockholders and bondholders. In that regard it can not be viewed as a serious proposal.

That said, to the extent that the PBGC is willing to force GM to fund its pension plan rather than fund its operations, we just might be following the proposed 5 steps anyway. If my read is correct, then the PBGC is determined to prevent an enormous mess from being dropped in its lap down the road. Given that forcing GM to fund its pension plan is likely to have negative shareholder implications, the PBGC just might be steering GM to a smaller taxpayer bailout sooner rather than a bigger taxpayer bailout later. Furthermore it would not surprise me to see new legislation protecting pensioners in the next Congress. Such a law would certainly not do GM share prices any good. For now, $31 billion seems like a lot of cash for GM to come up with and that does not take into consideration what might happen to its pension investments or its ongoing operational funding requirements in an economic downturn either. Hmmm. Are we back to square one? I believe we are.

Here is the bottom line: No matter what CEO Wagner believes about bankruptcy, it seems likely the market or the PBGC or perhaps even a new law protecting pension benefits over bondholders will force him to change his mind. If history is any guide, not only will GM go bankrupt, but pensioners will get the shaft and taxpayers will end up footing some of the bill. Right now, the PBGC seems like it is trying to minimize that taxpayer bill that will be coming due.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

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