U.S. Following the GM Model of Failure

Bankrupt Nation: A Financial Journalist Explains Why All Our Debts Are Coming Due

Originally Published on June 15, 2008

Washington Post - The over-confidence in their financial futures, combined with a pattern of half-conscious decisions to avoid tough choices at the expense of tomorrow, helped ruin GM, the NYC subway and the City of San Diego.

For a married couple, talking about money can be hard. But the cost of using a credit card to put off the conversation is almost always worse. So it is with a company, a city or a country. In While America Aged, financial journalist Roger Lowenstein uses the stories of three deeply encumbered institutions -- General Motors, the New York City subway system, and the City of San Diego -- as examples, not only of the way most individual Americans conduct their personal finances, but also of how the country as a whole has long lived beyond its means. What these institutions have in common is a sad history of over-confidence in their financial futures, combined with a pattern of half-conscious decisions by all involved -- labor and management, politicians and voters -- to avoid tough choices at the expense of tomorrow. And, as it happens, that tomorrow is now.

Lowenstein's account of how pension debt undid General Motors is particularly telling. In 1949, management and the United Auto Workers were battling over the terms of their next contract. Times were flush as Americans flocked to buy autos in the postwar boom, so GM management was eager to avoid a strike. Meanwhile, autoworkers lacked pensions and feared correctly that the country was still far away from adopting universal health care. These circumstances created an opportunity for a seemingly perfect bargain that came to be known as the "Treaty of Detroit."

GM jumped at a UAW proposal that, in lieu of large wage increases, would set up a pension plan and offer half-price health insurance. The short-term costs would be minimal because, as the UAW pointed out, the average GM worker then had only seven years of experience and a mere fifth were over 50. Left unconsidered was the inevitability that these workers would age, and that if GM did not put aside sufficient funds to pay for their future benefits, the next generation of GM managers and workers would be saddled with an impossible encumbrance.

And that's what happened. Time and again, management and labor struck deals for more generous future benefits without taking into account the resulting liability. As actuaries warned of a long-term buildup of pension debt, GM made the debt disappear on paper by using sunny assumptions about the company's growth prospects -- assumptions that ignored the competition GM would face from foreign automakers that did not have to build huge pension and retiree health care costs into the prices of their cars. By the mid-1990s, GM was compelled to pour so much into its pension fund to make up its deficit that, with the same money, it could have acquired half of Toyota or funded the development of market-dominating, high-efficiency cars to better compete.

This pattern recurred throughout American industry during the second half of the 20th century, and it accounts for much of the decline in the country's industrial competitiveness as well as for myriad market distortions. Railroads, for example, have always been far more energy efficient than trucks and in recent years have made spectacular gains in labor efficiency. Yet among the freight railroads carry is a huge legacy of pension debt under the industry's government-administered and historically underfunded pension plan, which now costs 16 percent of payroll. Most truckers, by contrast, don't even have pensions, let alone have to carry the burden of paying for drivers long since retired. That difference in legacy cost is enough to keep a lot of freight barreling down crowded highways on energy-guzzling trucks instead of going by rail.

The federal government's pension bailout agency, the Pension Benefits Guarantee Corporation, itself faces a liability of more than $14 billion as it pays off the benefits of more than 1.3 million people whose plans have failed. Many other businesses, from Sears to IBM, have frozen their pension funds and shifted workers into defined contribution, or 401(k) plans, which require workers to bear the full risk if their investments lose value. As Teresa Ghilarducci points out in When I'm Sixty-Four, another new book on America's crumbling pension system, these trends leave the next generation of retirees in sorry shape. According to Ghilarducci, the average balance in the 401(k) plans of people approaching retirement age is just $59,000. At today's interest rates, that buys an annuity yielding less than $500 a month, with no adjustment for inflation. A report released last Thursday by the McKinsey Global Institute finds that 69 percent of Americans approaching retirement age lack sufficient funds to avoid a significant decline in their standard of living.

Lowenstein also chronicles the enormous debts now coming due for state and local pension plans. Ever wondered why it costs $2 to ride the New York City subway? Lowenstein will show you that much of the fare goes to cover rides taken in the 1960s and '70s -- that is, for unfunded pension debt. San Diego's municipal pension fund was $1.7 billion in the hole by 2005, a debt equivalent to $6,000 for every family of four in the city.

Having struggled for years to make my own writing on pension issues interesting enough for anyone to want to read, I particularly appreciate Lowenstein's use of real people to illustrate the deeper financial issues involved. Even if they sometimes contain too much detail, there is a kind of gripping, slow-motion train wreck quality to the long, sad stories Lowenstein tells about people and institutions in deep denial. And those stories certainly have a clear moral. Boiling it down to its essence on the book's final page, he concludes,

"The most effective remedy -- in pensions, health care, and even in Social Security -- is to banish the credit card. Benefits should not be charged to a future generation; they should be paid for now."

Sadly, though, even if we can refrain from borrowing more from our children, we will still bear the dead weight of past borrowing that now falls to us.

Roger Lowenstein, "While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis," Penguin Press.

U.S. Following the GM Model of Failure

50,000 General Motors Retirees Face Destruction of Benefits

July 17, 2009

World Socialist Web Site - Earlier this week the WSWS spoke to a General Motors IUE retiree who responded to our article on the bankruptcy court’s approval of the sales of GM assets.

Tom Micale is a retiree from the Delphi Battery plant (formerly Delco Battery) in New Brunswick, New Jersey, IUE Local 416.

WSWS: Tom, how long did you work at General Motors?

Tom Micale: I started working for GM when I was 19 years old. I retired in 1999 when I was 49. I worked for the Delphi division of General Motors, in New Brunswick. I retired shortly before General Motors got rid of Delphi.

We had a choice to retire under GM, or to continue with Delphi. I thought I was making the best decision by going with General Motors. They implied that when we retired we would have lifetime pension and lifetime health benefits, even though when I retired that wasn’t my goal.

A couple of years after I retired, I worked at a battery division at Delphi. Delphi got rid of the division. Within a year, Johnson Controls, which bought the battery operations in 2006, dumped the two battery plants that it had operated. The New Brunswick plant closed in 2007.

Delphi declared bankruptcy in October 2005, as you know.

So I thought that I had made the right decision go with GM. Then things began to happen to the economy, and later General Motors declared bankruptcy, that’s when this whole thing started.

When I saw what had happened with the UAW and their VEBA, I thought perhaps we would be all right. However, I started really researching the GM bankruptcy proceedings, and it came to my attention that things were not as they appeared to be.

WSWS: Now, you are one of the tens of thousands of IUE and other non-UAW retirees facing the immediate elimination of your benefits. What is happening at this point, as far as you know?

TM: We have not received any official notification, but I have read the bankruptcy court judge’s decision, and as of right now my medical benefits are with the “Motors Liquidation Company” of GM [“the bad company”].

I can’t verify it, but I have read that the “old GM” intends to file a request to the judge within a few days concerning the benefits to retirees, because it cuts too much into the monies they have. And I fully expect by the end of the month that that will occur, and that we will, in fact, have lost all of our benefits.

As far as my pension is concerned, I am on what they call a Supplemental Pension, which is a base pension. GM makes up the difference between the base pension and what I will get when I qualify for full Social Security. Although under the contract, I will be required to file for Social Security when I am 62 at reduced benefits, so it will be somewhat less than what I get on my supplemental.

I cannot find out—and I have researched it! ... I cannot find out whether or not the pension has gone with the new GM, or is staying with the old GM. If the benefits stay with the old GM, it is most likely they will turn the pension over to the government’s Pension Benefit Guaranty Corporation, and they do not pay supplemental pensions. So I would take a hit on my pension by about 60 percent, from $2,400 to a little over $900.

WSWS: To be cut that much is drastic.

TM: If I sound like I am crying the blues or something, stop me. I don’t want people to feel sorry for me. I feel fortunate compared to some of the other retirees. My wife and I lead very simple lives. We don’t spend a lot. I live in South Carolina. I paid for my house. I don’t owe money to the bank.

We don’t qualify for Medicare for five years. But whatever savings I have is sucked out by the medical industry in this country. My wife has rheumatoid arthritis and asthma. She was young, 40 years old, when she was diagnosed with it. That was twenty years ago. She has been on every kind of medication there is. The latest one is often given to cancer patients and people who have transplants.

She started it two weeks ago, and it costs $1,600 a month. Not including her other medicines. With the medicine I take—I have heart disease—our costs for medication alone are $2,400 a month. And that doesn’t include doctor’s bills.

If I deplete my savings, and I would say that will happen within the next five years, only then will I qualify for Medicare or any form of charity care. If the benefits from GM are cut, we will eventually have to apply for charity!

I have to tell you, this is a shock, an absolute shock to me. I never expected this.

I also care for my mother who has Alzheimer’s disease. She was in a nursing home, but I couldn’t leave her there. I’ve cared for her for three years, and also my wife’s two brothers for the last six years. They’re legally blind and totally deaf. They each get a small Social Security payment, which helps defray some of their costs, but the time is totally spent at home doing this.

WSWS: Could you tell me more about the decision of GM to file under Section 363 of the Bankruptcy Code and not Section 1114, which provides more protection?

TM: In my opinion it was all worked out beforehand by the government. It is unprecedented for a company the size of General Motors to go through bankruptcy in 40 days. It should have taken years.

At Delphi, which was one of their suppliers and a much smaller company, it has been four years and they are still working through bankruptcy. It’s just unprecedented, and I believe the whole thing was orchestrated before it ever got to a judge. Not only do I feel GM orchestrated this, I believe the government of this country orchestrated this. We are collateral damage.

WSWS: What do you think of the role of the UAW? It hasn’t said anything in defense of the IUE retirees.

TM: I think its great for the UAW to negotiate a VEBA and have a little bumper on their bumpers. From 1986-89 I was the shop chairman of the IUE, or shop steward, so I was involved in the union at that time as an officer. I can see it from the other side. What I see, however, is the total lack of support between the UAW and the other smaller unions. The unions have morphed into something that is no longer for the workingman, but merely better than nothing.

WSWS: This agreement was not negotiated for the benefit of the UAW workers, but for the benefit of the UAW officials. The last contract will bring new hires in at half the wages.

TM: I have to be honest here. I did the same thing to my local. I bowed to the pressure from my own plant, from those about to retire and from the IUE, and I was the one who negotiated our first ... what we called “competitive agreement.” It was a two-tier agreement, which brought people in at half our wages. It was the biggest and greatest mistake I have made in my life, and I have made many!

I regret it to this day. But the unions have gotten away from the principle of solidarity. Like I say, I was only in office three years, but during that time I got to see how the unions really operated. I was not disappointed that I lost the election, and I lost the election because of the two-tier wage system.

People brought in at lower wages were convinced that the man who ran against me would get their wages back, which would never happen. This was a real eye-opener for me. I had expected better until I saw how a union operated on the national level.

WSWS: Barack Obama came in saying he was going to save jobs.

TM: I supported Obama. In the last 30 years, there have only been two presidents I’ve voted for. I believed Obama. I am gravely disappointed since he took office; he is barely doing anything he said he was going to do. When he does, it is more heavily weighted, like the Republicans, for the wealthy in this country. The rest of us are just incidental, despite what he says.

We have a Congress that is majority Democrat, but again it shows that the Democratic Party does not have the courage to do anything. For example, they are supposedly working on this health plan, which I wholeheartedly support. But I don’t expect that anything will come from this Congress that’s going to help me or most Americans. It’s going to be a token.

I don’t have any confidence in them. I’ve lost my entire faith in this so-called representative government. It’s a shame. After 59 years of living in this country and following the rules, I’m just losing faith in the way things are done.

The health care plan will be a boondoggle for the health care providers. The elite in this country do not want a national health care system. As long as we pay taxes and buy their products, that for them is the bottom line.

The auto industry was doing poorly because the entire economy was doing poorly. When people tell me the autoworkers made too much money, they don’t understand we paid for those benefits by the hard work we did. I made a good living, but we paid for this with our sacrificing.

WSWS: They are trying to condition people to accept lower living standards. Those gains were the result of a long history of struggle. It was socialist-minded workers in the 1930s who led the struggles to form industrial unions.

TM: There is still on the local level a belief in the principles of the unions, but at the International level it is something entirely different. I saw it first-hand. Featherbedding, and “let’s not make waves” ... I hate it. It’s at the expense of the common, working man. That is why I am still trying to contact retirees, and so on. I want to bring some attention to the plight of the retirees.

I am not looking for the unions to support me in that. It’s something the people have to do themselves. If no one else will do it, I’ll be alone, walking on a picket line. But people in this country have do something and begin to take their country back.

There was a belief that this country had numerous classes, from the extremely poor to the middle class, right on up. There are two classes in this country now, the rich elite and everyone else. This past decade, it has hit us right in the face. In the past, the elite didn’t want us to know that. But now, they don’t even care, because they don’t think we’ll do anything and will be complacent.

The system is broken. I think at some point in time, this country will have a third party. My views have always been on the far left, which cross into socialism in many respects. That’s the way I feel. I honestly am for the working people. I think it is unacceptable that the poorest of the poor don’t have a meal.

U.S. Following the GM Model of Failure

Obama's Plan to Save GM: Bankruptcy, $30 Billion

June 1, 2009

AP - President Barack Obama pushed a humbled General Motors Corp. into bankruptcy on Monday and said the federal government will act as "reluctant shareholder" when it assumes a 60 percent ownership of the smaller carmaker that emerges.

The president said he hopes GM — once a proud symbol of American capitalism — would emerge quickly from bankruptcy court, and pledged up to $30 billion in additional federal assistance to help it get on its feet.

The government's partial stake in GM comes on top of a far smaller ownership of Chrysler LLC, as well as significant federal equity in banks, the AIG insurance giant, and two mortgage industry titans — all victims of an economic crisis unrivaled since the Great Depression...

For GM, Bankruptcy will be a Two-edged Sword

May 27, 2009

Fortune - ...GM continues to shrink like an iceberg in Lake Michigan. Its U.S. market share has already plunged from 21.9% to 19.2% this year. Taking out Hummer, Saab, Saturn, and Pontiac will bring it down to 16.4% at current rates. Since GM is in the process of axing 1,124 dealers, you can figure on it losing another point or so there as well.

For those keeping score at home, Toyota's (TM) U.S. market share was 16.1% for the first four months of the year; Ford's (F, Fortune 500) was 15.1%. GM could be a third-place company before long.

New government fuel economy regulations also face GM as it emerges from bankruptcy--39 miles per gallon for cars and 30 mpg for trucks by 2016. GM likes to brag about all the cars it makes that get 30 miles per gallon but it is still a long way from 39 mpg. It has already announced it is discontinuing its five high-performance models. Expect other high-horsepower models like Camaro to vanish as well.

The government is likely to loom larger in other GM actions post-bankruptcy, since it will own 70% of the company. Although it disclaims any interest in micromanaging the automaker, it wouldn't be human if it didn't try to make some helpful suggestions. Such as asking GM, why are you spending $1 billion on the Volt extended-range electric vehicle when you're not going to make a profit on it? Or, why do you need the GMC brand when it essentially duplicates the Chevrolet truck lineup?

And don't forget the United Auto Workers, who could wind up owning up to 20% of a reorganized GM. GM has already agreed to spare two plants that had been targeted for closure at the behest of the UAW. And it is taking back five UAW plants that had been mired in the bankruptcy of GM's old parts making unit, Delphi (DPHIQ, Fortune 500). What else is on the union's wish list?

So a restructured, post-bankruptcy GM may look a whole lot fitter than the old model. But it sure will be different, and it may not find life a whole lot easier.

GM Appears Headed for a Long, Complex Bankruptcy

May 26, 2009

McClatchy Newspapers - With a June 1 deadline fast approaching, General Motors reached tentative agreement with a key stakeholder, but by late Tuesday a bankruptcy filing looked all but inevitable. Such a bankruptcy proceeding is likely to be longer and messier for GM than Chrysler's recent bankruptcy was, industry experts said, and it's likely to trigger a chain reaction of bankruptcies among GM suppliers.

A GM bankruptcy filing is likely to be much more complex than Chrysler's recent Chapter 11 bankruptcy filing. Chrysler is a privately held company with fewer aggrieved stakeholders; GM is a publicly traded global corporation.

Nevertheless, the Obama administration has decided on the bankruptcy route for GM, and is now discovering what a long and winding road that's likely to be.

"It's seems like almost every day we come upon some issue or question that didn't exist with Chrysler," said one person familiar with ongoing talks, who spoke only on the condition of anonymity as a matter of policy. "We do expect it to be a more complicated process and a longer process (in bankruptcy) . . . . It's not something we're afraid of, not something we have chosen, but it is what it is."

GM's global reach will complicate restructuring efforts.

"It is a completely different ballgame when you are looking at a company as geographically diverse as GM is . . . we've never had a company this large declare bankruptcy," said Rebecca Lindland, an auto industry analyst for forecaster IHS Global Insight.

Because GM is publicly traded, it must make a number of regulatory filings in coming days, and while the Obama administration may drive the process, it won't have control over the message as GM makes disclosures to its shareholders and investors.

The person familiar with the talks said this is "not necessarily be the timing we would choose" and warned of a "slightly confusing period for all of us" over the next week.

The United Auto Workers union, a major GM stakeholder, let word out Tuesday that it had reached tentative agreement with the automaker. Reports said that labor would get a 17.5 percent stake in a newly restructured GM and a seat on the board of directors.

The UAW also would receive $6.5 billion in preferred shares of the new GM, several news reports said, and these ownership stakes for the union come in exchange for health and welfare concessions agreed to by the UAW.

Lindland said the union might soon find itself in a place where it hasn't been before.

"They've always been insulated from the performance of GM," Lindland said. "That is about to change. With an equity state in General Motors, the fortunes of the union now go with the company."

Despite the UAW deal, the lack of agreement with the creditors who own more than $27 billion in GM corporate bonds makes a bankruptcy filing virtually certain. GM must get agreement from nine out of every 10 bondholders, who in turn would own 10 percent of the new GM. They're owed $1 billion in interest payments on June 1, money that the automaker says it doesn't have.

U.S. to Steer GM Toward Bankruptcy

May 22, 2009

The Washington Post - The Obama administration is preparing to send General Motors into bankruptcy as early as the end of next week under a plan that would give the automaker tens of billions of dollars more in public financing as the company seeks to shrink and reemerge as a global competitor, sources familiar with the discussions said.

The move comes as the administration prepares to lift the nation’s other faltering car company, Chrysler, from bankruptcy protection as soon as next week, industry sources said.

The shifts into and out of bankruptcy are landmarks in the Obama administration’s attempt to broker a historic restructuring of the American auto industry in the space of months.

The legal tactic is viewed by some as the best means of reviving the companies. But the speed of the government-led transformation has triggered complaints that the rights of investors and dealers are being trampled. Meanwhile, fears that a bankruptcy could lead to cascading business failures are spreading throughout GM’s vast chain of suppliers.

GM Closing 1,100 Dealerships

May 15, 2009

AP - General Motors Corp. on Friday told about 1,100 dealers, or nearly 20 percent of its U.S. network, that they will be fired by the automaker late next year because their sales are weak...

The cuts are part of a larger GM plan to drop 2,600, or nearly 42 percent of its 6,200 dealerships, as the automaker tries to restructure outside of bankruptcy court and become profitable again. Thousands of jobs will likely be lost, and governments will lose untold dollars in tax revenue as dealerships are forced to close.

Besides the 1,100 dealership cuts, the company will provide updates to about 470 Saturn, Hummer and Saab dealerships on the status of those brands, which it plans to sell.

Friday's cuts will not be the last. GM said it expects to lose more dealers through attrition. Ultimately, about 90 percent of the remaining dealerships will stay with GM, the company said...

GM Plans to Export Cars Built in China to U.S., Reports Say

May 13, 2009

General Motors Corp. plans to begin exports of vehicles made in China to the United States within two years, ramping up sales to more than 50,000 by 2014, reports said Wednesday. A spokeswoman for GM in China did not immediately respond to a request for comment on the reports, which were said to be based on a company recovery plan given to U.S. lawmakers.

GM intends to sell 17,335 made-in-China passenger cars in the U.S. market by 2011, the Shanghai Securities News and other reports said. By 2014 exports would triple to more than 51,000, it said. The main focus would be on exporting small cars similar to the Chevrolet Spark, the reports said.

If true, GM could end up becoming the first automaker to begin exporting to the U.S. from China: previously announced plans by Chinese manufacturers to crack the U.S. market have so far fizzled...

Experts Say GM Bankruptcy Almost Inevitable

May 10, 2009

AP - For General Motors Corp., the task at hand is so difficult that experts say a Chapter 11 bankruptcy filing is all but inevitable.

To remake itself outside of court, GM must persuade bondholders to swap $27 billion in debt for 10 percent of its risky stock. On top of that, the automaker must work out deals with its union, announce factory closures, cut or sell brands and force hundreds of dealers out of business — all in three weeks.

"I just don't see how it's possible, given all of the pieces," said Stephen J. Lubben, a professor at Seton Hall University School of Law who specializes in bankruptcy.

GM, which has received $15.4 billion in federal aid, faces a June 1 government deadline to complete its restructuring plan. If it can't finish in time, the company will follow Detroit competitor Chrysler LLC into bankruptcy protection...

Restructured GM to Build More Cars in Mexico, China and South Korea

May 8, 2009

Washington Post - The U.S. government is pouring billions into General Motors in hopes of reviving the domestic economy, but when the automaker completes its restructuring plan, many of the company's new jobs will be filled by workers overseas.

According to an outline the company has been sharing privately with Washington legislators, the number of cars that GM sells in the United States and builds in Mexico, China and South Korea will roughly double.

The proportion of GM cars sold domestically and manufactured in those low-wage countries will rise from 15 percent to 23 percent over the next five years, according to the figures contained in a 12-page presentation offered to lawmakers in response to their questions about overseas production...

GM Details Plans to Wipe Out Current Shareholders

May 6, 2009

Reuters - General Motors Corp on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.

The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.

The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM's shares could be worthless whether the company restructures out of court or in bankruptcy...

U.S. Following the GM Model of Failure

Treasury Would Own GM Majority Under Restructuring Plan

April 27, 2009

Detroit News - The U.S. Treasury Department would own a majority stake in General Motors Corp., have the right to appoint all of its directors and have veto power over all shareholder actions under the company's new restructuring plan unveiled Monday.

The Obama administration hasn't agreed to GM's plan yet -- ahead of a June 1 federal deadline. "The administration has made no final decision regarding the treatment of its current loan to GM or with respect to any future investments in the company," the Obama auto task force said in a statement.

White House spokesman Robert Gibbs said Monday the government has "no desire to run an auto company on a day-to-day basis."

But the dramatic move means that at least temporarily the U.S. government would have the right to call all of the shots at the Detroit automaker -- as part of its $15.4 billion in loans to GM to date. GM said Monday it expects to receive another $11.6 billion in loans from the government this year.

"As a result of its ownership of GM common stock, the U.S. Treasury will be able to elect all of our directors and to control the vote on substantially all matters brought for a stockholder vote," GM said in a statement. "In addition, through its stockholder voting rights and election of directors, and its role as a significant lender to us, the U.S. Treasury will be able to exercise significant influence and control over our business if it elects to do so."

Anthony Pratt, an auto analyst at PwC Automotive Institute in Detroit, said the government hasn't been afraid to exercise its influence to date -- noting that the Obama administration had forced out GM Chairman and CEO Rick Wagoner last month. "They have considerable clout," Pratt said of federal officials. "They will have considerably more authority, and I don't think they will be afraid to exercise that authority."

The Obama auto task force also directed GM to replace a majority of its board of directors...

GM's New Road Map: Partial Nationalization

April 28, 2009

Washington Post - Once a symbol of capitalist might and U.S. industrial prowess, General Motors would be half owned by the Treasury under a new sweeping plan that would also shut down GM's Pontiac operations, lay off 21,000 workers, and impose harsh terms on the company's bondholders... If the plan goes forward, it would mean a leaner and less indebted GM, formally controlled by the federal government...

"Government ownership is an unfortunate outcome of this, not a goal," said one person familiar with Obama administration deliberations and who spoke on condition of anonymity in order to preserve his relationships with officials. He said the government "could have gotten nothing for something, or something for something" and that it insisted on a 50 percent stake to leave open the potential to recover some of the $18 billion the Treasury Department has already lent GM and the additional $9 billion that it would inject under the new plan...

GM Told to Prepare for Bankruptcy Filing

April 14, 2009

Reuters - The U.S. Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by June 1, even though the automaker has publicly stated it could reorganize outside of court...

Bush OKs $17.4 Billion Bailout of the Auto Industry

December 19, 2008

Associated Press - Citing imminent danger to the national economy, President Bush ordered an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans and demanding tough concessions from the deeply troubled carmakers and their workers.

Detroit's Big Three cheered the action and vowed to rebuild their once-mighty industry, though they acknowledged the road would be anything but smooth as they fight their way back from the brink of bankruptcy.

The autoworkers union complained the deal was too harsh on its members, while Bush's fellow Republicans in Congress said it was bad business to bail out yet another big industry.

Bush, who signed the massive $700 billion rescue for financial institutions only this fall, said he was reluctant to approve yet another government bailout of private business. But he said that allowing the massive auto industry to collapse in the middle of what is already a severe downturn "could send our suffering economy into a deeper and longer recession."

Speaking at the White House, he also said he didn't want to "leave the next president to confront the demise of a major American industry in his first days of office..."

Some $13.4 billion of the money will be available this month and next — $9.4 billion of it for General Motors Corp. and $4 billion for Chrysler LLC, two auto giants that have said they could be facing bankruptcy soon without government help. GM is slated to receive the remaining $4 billion in loans after more money is released from the financial rescue account. Ford Motor Co. says it doesn't need federal cash now but would be badly damaged if one or both of the other two went under.

Under terms of the loans, the government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry. Bush said the companies' workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.

And he called for elimination of a "jobs bank" program — negotiated by the United Auto Workers and the companies — under which laid-off workers can receive about 95 percent of their pay and benefits for years. Early this month, the UAW agreed to suspend the program.

Meanwhile, Treasury Secretary Henry Paulson said Congress should release the second $350 billion from the financial rescue fund that it approved in October to bail out huge financial institutions. Tapping the fund for the auto industry basically exhausts the first half of the $700 billion total.

If the carmakers fail to prove viability by March 31, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans.

Friday's rescue plan retains the idea of a "car czar" to make sure the companies are keeping their promises and moving toward long-term viability...

As General Motors Goes, So Goes the Nation (Excerpt)

March 3, 2009

The Cutting Edge News - The story of General Motors is in many ways the story of America. In 1953, at the peak of its dominance, its President Charles Wilson declared before Congress that what was good for the country was good for GM and vice versa. Edwin Black’s award-winning book Internal Combustion quotes his exact words when during a Congressional hearing Wilson was asked whether he saw a conflict of interest in his becoming Secretary of Defense:

“I cannot conceive of one," replied Wilson, "because for years I thought what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big.”

GM’s rise to power and decline towards insolvency parallels the rise and fall of the Great American Republic. Overconfidence, hubris, lack of courage, foolish decisions made, and crucial decisions deferred have been the hallmarks of GM and the U.S. ...

The decline of GM is a testament to how poor strategic decisions over the course of decades will ultimately lead to collapse. The United States has followed the GM model of failure for the last three decades. The U.S. has too much debt, too much bureaucracy, too many government supported industries, too many agencies, too many employees, and $53 trillion of unfunded future liabilities. See any similarities to GM? Can the U.S. avoid the fate of GM, or is it too late?...

The best business decisions are made after open debate that includes dissenting opinions and arguments. Only great leaders allow this type of decision making. Alfred Sloan led GM for over 30 years, retiring in 1956. GM’s profit in 1955 had reached $1.2 billion ($8 billion in today’s dollars). It was on top of the world. In 1955, GM employed 624,000 Americans. Their market share peaked at 54 percent in 1954, the same year they sold their 50 millionth automobile.

After the retirement of Sloan, a visionary leader failed to materialize...

GM sold its soul to the devil of debt and its high margin to low mileage vehicles in the 1990’s. SUVs generated a profit of $10,000 to $15,000 per vehicle, even with GM’s bloated cost structure. Rather than improve their assembly line efficiency, product design and quality, or solidify their balance sheet, the company chose to use its GMAC subsidiary to make loans to subprime borrowers at 120 percent of the car’s value. After 9/11, GM showed their dedication to the flag by giving cars away with 0 percent financing. Amazingly, when you provide 0 percent financing to people with 550 credit scores, you can indeed sell millions of Escalades and Hummers.

Giving away cars for free was so successful, GM decided to parlay their expertise into giving homes away for free. They bought Ditech in 1999, just in time to catch the greatest housing bubble of all time. Ditech was a pioneer in offering 125 percent loans, in which the borrower could get more than the property was worth. It specialized in no-documentation mortgages and stated income loans. How could lending someone 125 percent of a home’s value with no proof of income or assets possibly go wrong? To quote Claude Rains from Casablanca, “I'm shocked, shocked to find that gambling is going on in here!” GMAC surprisingly lost $8 billion in the last two years.

Luckily, the American taxpayer has stepped in to provide GMAC with $5 billion of TARP so they can continue to allow GM to sell more cars at a $2,000 loss per car. No need to worry, they’ve hired some Wall Street wizards from Citicorp who have figured out that they can make it up on volume. General Motors has lost $72.5 billion in the last three years. Yet the American taxpayer is still propping up this failed entity!

The United States peaked as a manufacturing economy in 1960, with manufacturing employees making up 26 percent of the workforce. They now make up less than 10 percent of the workforce. The U.S. decided to outsource manufacturing jobs because we were going to do the thinking for the world. Why get your hands dirty creating things when our brilliant MBA trained geniuses could turn loans to deadbeats and frauds into AAA-rated mortgage backed securities? The U.S. decided to take the easy path of financial engineering rather than the hard path of creating products that other countries would buy.

The trade deficit caused by decades of choices by government and industry reached $677 billion in 2008. These deficits were always unsustainable. Borrowing from the Chinese and Japanese to buy stuff produced by China and Japan could never go on forever. Instead of realizing this imbalance and taking actions to gradually rebalance the world financial system, our financial leaders and Federal Reserve reduced interest rates and encouraged the imbalance to grow, until it collapsed in 2008. Now their solution is to lower rates to 0 percent, devalue the currency, and encourage further borrowing. Sounds like choices made by GM in 2001.

When the country produced products that the world wanted, median family income rose at an annual rate of 3.7 percent above inflation. Since 1970, using government-manipulated inflation statistics, median family income has been stagnant. If a true inflation factor was applied, the median family has lower income today than they had 30 years ago. The only way people have “achieved” a better life is through the use of debt, which has been encouraged by the government, Federal Reserve and banks. This encouragement led to the collapse of the great American Ponzi scheme in 2008.

The decades of allowing our economy to be hollowed out and shipped to China is coming home to roost. Our financial geniuses have essentially brought down the worldwide financial system by selling foreign countries an alphabet soup of MBSs, CDOs and ARMs. Manufactured economics--not manufactured goods--has been our contribution to the world in the last eight years. Now, we have delegated the responsibility of our corporations to the U.S. government bureaucracy. Lee Iacocca explained years ago how well the government runs things, when he quipped:

“One of the things the government can't do is run anything. The only things our government runs are the post office and the railroads, and both of them are bankrupt.”

Rather than address the structural problems of our healthcare and social security systems, our government politicians push off the issues until after the next election. They have been doing this for 30 years. This is why former U.S. Comptroller General David Walker has described these cowardly politicians as displaying “laggardship” rather than leadership. Our elected leaders flounder from crisis to crisis using stopgap methods to plug holes in the ship of State while ignoring the huge iceberg on the horizon.

While the U.S. Titanic steams full speed ahead toward the iceberg of unfunded Social Security, Medicare and Medicaid liabilities, our politicians spend our tax dollars on digging holes and then filling them up again. As these future unfunded liabilities continue to rise, the government’s solution is to print money, keep interest rates at 0 percent, devalue the dollar, and hope for the best. The U.S. depends on foreigners to buy more than 50 percent of our newly issued debt. When you owe $10.7 trillion to others, you usually don’t get to dictate the terms. Today, the U.S. is asking foreigners to lend us money for 30 years at 3.5 percent while telling them that we will pay them back in dollars that will be worth 30 percent less in the next five years. Even a Wall Street CEO could figure out this isn’t a good investment.

The burning platform that is the U.S. economy is now a “ten alarm fire." Many say collapse is imminent. Where are the signs indicating that is not the case?