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Author Topic: Just wondering who is to blame for GM bankruptcy?  (Read 25715 times)
bunnyslots
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« Reply #25 on: May 29, 2009, 06:04:10 PM »

  Fed Flash
Diane Swonk, Chief Economist, Mesirow Financial
   
   
 
     
Friday, May 29, 2009 - 9:05 a.m.

GM, Michigan and the Broader Economy

I have written little about the General Motors (GM) bankruptcy, in part because everyone seems to already have an opinion (regardless of whether or not they understand the situation), and in part because this topic cuts a little too close to home. My dad, who is a GM white-collar retiree, is marking his 14th consecutive day in the hospital after a "routine surgery" turned ugly.

I talk to him many times a day, sometimes just so he can hear another human voice - the ICU is a lonely place. Now, more so he can talk about GM, its history and what brought us to this point.

Everyone has their favorite scapegoat; Dad sees the situation much more broadly, as a confluence of events, some within and some outside of GM's control.

Most would like to blame GM's management and the UAW for bringing GM down. The reality, however, is much more complicated. GM was and still is a company with too many stakeholders and not enough steak to feed them all.

One of the hungriest (and least understood) groups is the dealer, some of whom waited out this year selling only 35 cars in the hopes of receiving a big GM payoff when GM moved to close them. Indeed, one could argue that the dealers had more to do with GM's inability to downsize than any other single group, including the UAW. State laws forced GM to pay off even the least profitable dealers to close, which made it more costly for GM to close auto dealers and streamline its vehicle lines than to keep them open and oversupplied, even in the worst of economic times.

More fundamentally, there are the smaller Tier 2 and Tier 3 suppliers who are not only threatened by GM's demise, but could also threaten more viable producers inside and outside of the auto industry if they were to fail.

I could go on, but I will stop here and share the conclusions that my dad and I came to, in a rare moment of agreement with regard to GM and the economy:

The damage to the U.S. economy caused by a GM bankruptcy is already baked into the cake. The loss in production capacity and cost to the broader economy is not so different than it would be if GM were able to avert a bankruptcy at this stage.
GM probably has less than a 50% chance of surviving over the longer-term with its new structure - the track record of success for employee-owned companies with such bitter employee relations is not good. That said, a new meaner, leaner GM might actually pull it off. If it doesn't, we have plenty of automakers to fill the void, including both Ford and Toyota in our own back yard in the Midwest.
The key to a broader economy is the smaller suppliers, which the government will focus heavily on to keep in business. Investment from abroad in this part of the industry is also picking up, most notably from China, which will ironically help save us from the worst of the collateral damage from a GM failure. 
The psychological damage to stakeholders, including the state of Michigan, has already been done. The key today is that we can finally put the GM we once knew to rest, and focus on where we have to go next.
The elimination of uncertainty regarding GM is actually a positive, as it had paralyzed not only GM, but much of the rest of the economy, as manufacturers and consumers tried to figure out where to place their bets. Indeed, uncertainty regarding where one might get one's new vehicle serviced surpassed both the economy and financing as reasons for keeping vehicle buyers on the sidelines in recent months. This, coupled with scrap rates that are running as much as 40% ahead of sales, suggests that we could see quite a pop in sales once the uncertainty regarding GM is eliminated.
The Bottom Line: The Detroit-based auto industry as we knew it died a long time ago. Finally putting it to rest may allow us to move forward.

As for my dad, he will survive and be just fine, if not a little sad. It's been a long haul, his insides have been torn apart much like those of GM, but he is getting crabby and tired of being in the hospital, which is the best sign yet that he will soon be out. If he and I can move on, so can the rest of us, and there is much more to that story than I could even begin to share here.
 
 
 
 
Just another view
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« Reply #26 on: May 29, 2009, 08:22:31 PM »



If I want to pay $$ for my gas guzzling SUV then fine. I'll pay.  Don't force little tin cans on me .

Sure, I agree. But you may have to build that SUV yourself. Because the car manufactures that were building them have filed for assistance from the government to keep them afloat. So if the Government is helping to bail them out they have a financial interest in the company. To let them operate the way they have been that has put them into bankruptcy would be fiscally irresponsible. They have to force them to change their product so their investment is not lost.
Remember the definition of insanity. Doing the same thing over and over and expecting a different result. Duh! frying pan
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« Reply #27 on: May 29, 2009, 08:24:53 PM »

Interesting, so he is says state laws mandate the car manufacturer to assume all loss and liability of the dealer? Funny I thought the dealer came across with all the capitol for land, building and inventory and then bought franchise license items, signage and sihned a contract to abide by rules and regs set down by the manufacturer. My buddy has a Holiday Inn, they can come in and tell him what modifications they want done to the buiding, paint and other items to be somewhat compatible with other Holiday Inns, if he does not comply, he loses the franchise license and the name comes off everything. Strange how they can single out the auto industry.  Scratch Head

 Dan (tacman)

Don't forget, a certain political party gets its rocks off forcing others to do things like get a small car or ban firearms.
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« Reply #28 on: May 29, 2009, 08:27:16 PM »

Pensions are not really a problem. Companies underfunding them and borowing from them are. GM was in trouble 10 years ago. It just took the latest resession to burst this zit.

First off a pension is a benefit, benefits are not a right, they are part of a compensation package used to attract skilled workers.
The more attractive the compensation is equates to a wider gene pool of candidates you get to choose from.

When a company borrows (or underfunds) a pension program there is no real reflection on this in the income statement. So say 60mm that should go into the pension program gets diverted to current expenses and a company does not post a loss or even shows a increase in profit. OF course if your expenses are magically paid there is a profit. Profit makes the stock go up, executives receive a good portion of their compensation from options.  This should never be allowed.

GM has no right to bitch that their former employees with bloated pensions are to blame. If the pension program was not underfunded this would be a mute issue. The fact is the pension fund is empty and monies from operations are needed to cover the plans carrying costs. In its essence this is no different than taking a cash advance on your visa, and using those funds to make last months minimum payment. Brilliant...at least until which point you max it out and now you not only have a big liability but your monthly minimum payment is now erroding the money you do earn  

I believe that if a pension fund is established the company should be expected to fully fund it and if it is indexed they need to have a independent actuary evaluate if the funding is suffient to carry it otherwise require it to be topped off. The administration of the funds should also be a third party so if the company goes under the pension would be carried.

Many companies no longer choose to set up a pension program and opt for the 401k contribution method that is a fixed cost (ie 5%) with no future liability. its much cheaper.

One of the big costs that GM never expected is the rising cost of health care. When I was packaged out of my job(not from GM). I was given the option of COBRA - Continuation of Benefits.... My monthly health care cost with a 2000/yr deductable and 80% coverage was over 1200/mth for a family of four.  OUCH. No wonder so many people don't have coverage. As a manager benefits for the employees was budgeted at 43% of an salary. If you compare that to Canada at 21% there is a signficant difference in cost to the company.

 

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« Reply #29 on: May 29, 2009, 10:42:40 PM »

Jay your post is right on the money.
There are many pensions that are under funded currently.
Some want to blame unions, but they have to remember that contracts are NEGOTIATED. Which means a give and take until an agreement between management and labor has been met.
If management agrees to a benefit  and does not properly fund it they end up in the hole when it's time to pay the piper.
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« Reply #30 on: May 30, 2009, 01:13:50 AM »

http://www.washingtonpost.com/wp-dyn/articles/A64599-2005Apr18.html
http://www.businessweek.com/magazine/content/04_03/b3866073_mz020.htm
http://www.freedomunderground.org/view.php?v=3&t=3&aid=1243
http://www.bestcashcow.com/corporate_news/article/sam_cass/plan-to-save-automakers-borrow-from-pension-funds

GM hasn't ever borrowed from their pension fund to my knowledge. It's not like they are behaving like the federal government, borrowing from Social Security for decades, until it's in need of restructuring to be able to continue paying benefits.

As far as underfunding the pension funds, you can blame the double recession we've had over the past decade, since those pension funds are tied to the stock market (same as the rest of the pension funds nowadays). Any decrease in the value of those investments will underfund the plan, no mismanagement or borrowing necessary.

As I stated previously, this is not particular to GM (or Ford, Chrysler, etc.). It's common to any pension plan that winds up with growing costs, reduced value of investments, and more people drawing from the fund. There's a reason why companies don't offer pensions any more, but the pension plan is one thing the UAW had refused to give up over the past decades. If GM wanted to stay in business, they had to accept the UAW's refusal or shut the doors many years ago.

If the UAW workers wind up out of a job, it's partially their fault for failing to negotiate. But, the retirees have nothing to worry about, since if GM does fail, the taxpayers are liable for the retirees' benefits as they are federally protected. It's the current employed members who will take it in the shorts, along with the taxpayer. Anyone who thinks that chicken isn't going to come home to roost should read this:


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 stated, many companies have shifted to defined contribution systems, the inability to do so for the US auto manufacturers has been the albatross around it's neck. It has not only reduced the money for investment, it's reduced the money available for R&D.

But, there's a downside to the defined contribution plans also:

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.


Here's more reading to lighten the mood:


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.



Putting the blame solely on GM is disingenuous, the UAW was a willing participant in the festivities.


Now, I've got to give credit where credit is due. I'm no genuis, the above bolded statements were mostly written by Phillip Longman:
http://www.newamerica.net/people/phillip_longman

Anyone interested in why this is happening should really take a look at what this guy has written, he's been predicting our current economy since 1987. applause

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« Reply #31 on: May 30, 2009, 01:48:20 AM »

I say that the blame game has gone far enough(my opinion).  I am hoping that G.M. pulls out of this and forges on.  I hope they continue with some of the advanced technology that they were working on before the bottom fell out.  Let's hope that the economy picks up and everyone prospers.

Thanks and have a great weekend,
Wayne
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« Reply #32 on: June 01, 2009, 02:25:41 AM »

How could GM possibly succeed with the UAW strapped around their neck?  Imagine having to run a company where you must pay your employees DOUBLE what foreign countries are paying as well as benefits for all employees past. 


I blame the failure on the UAW's GREED -  let them get shares of a bankrupt worthless company.

And I wonder why I stay out of this section?.


ROTFLMAO...I just spent 30 mins typing a response to all of the above post and attached a Doc. and when I hit post it said it was to large...and lost ALL OF IT gggrrrrr!!!!
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« Reply #33 on: June 01, 2009, 03:49:58 AM »

And I wonder why I stay out of this section?.


ROTFLMAO...I just spent 30 mins typing a response to all of the above post and attached a Doc. and when I hit post it said it was to large...and lost ALL OF IT gggrrrrr!!!!

As the officially certified longest-winded NLG member -- who has also experienced your frustration -- I offer the following advice.

If you find that you have put more than five minutes into creating a post, start copying the entire contents of the text box to your clipboard by pressing <Ctrl>A <Ctrl>C  while the cursor is blinking in the text box (important: Only the text box contents should be highlighted. If the entire web page is highlighted, you didn't copy your post). Repeat this action every few minutes or every time that you feel satisfied with the latest changes to the post.

If you reach the 10-minute mark, open an MS Word document, repeat the above copy, and then paste the contents into the Word document to further protect the data. That way, you won't lose the post if you accidentally copy something stupid to the clipboard. Again, paste a new copy into Word every few minutes just as above.

If you reach the 20-minute mark, I suggest actually saving the Word document to your hard drive. You can always delete it after the fact. If you find yourself moving parts of the post around to recompose, or are working on a graphic display that has a lot of SMF commands that you're trying to tweak, then take the extra step of keeping more than one copy of the post in the Word document (instead of overwriting the last copy each time).
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« Reply #34 on: June 01, 2009, 05:14:13 PM »

As the officially certified longest-winded NLG member

 yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes


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Aw, you KNOW we LOVE you St garfield tfre garfield K!!!
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« Reply #35 on: June 02, 2009, 12:43:47 AM »

So when does the gov't start paying us our dividends? rotflmao rotflmao
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« Reply #36 on: June 02, 2009, 09:29:14 AM »

You really expect a profit to be made now? First they have to make sure they can cover all the raises for the UAW workers, who are now on the board. Oh, that's right, UAW gave concessions of reduced medical benefits to their retirees!  Duh! I wonder how much of a concession, what about current workers?

 Dan (tacman)
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« Reply #37 on: June 02, 2009, 11:46:44 AM »

I guess that if you believe that people who work for their entire working life for a company shouldn't be entitled to anything when they retire.  Perhaps G.M. should have funded the pensions and benefit plans at the time they agreed to them instead of wasting the money elsewhere. 
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« Reply #38 on: June 02, 2009, 03:23:37 PM »

I don't believe anyone is "owed" or "entitled" to anything ever. You never get what you deserve, you get what you negotiate.

Pensions are deferred earnings, not an entitlement, that under a  plan get socked away and paid to you later. They should be fully funded at all times and out of the companies hands to squander. I equate underfunding or pension borowing to theft.

65b of GMS 175b dept is a liability to its pension program.

If the company was unable to negotiate a sustainable labor contract then they should have closed the plant. To have negotiated a deal that in the longterm has hurt the shareholders (owners) and the US citizens is not only mismanagement but unethical and possibly criminal. So what if Ford and chrysler were paying this, unsustainable is unsutainable as we have found out. Just like in professional sports, the best players go to the team that pays the highest wages. GM did not have the bankroll to be top dog.



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« Reply #39 on: June 02, 2009, 04:04:48 PM »

That's what I'm saying.  If G.M. agreed to pay the pensions then they should have funded them at the time they agreed to it.  I guess since they were negotiated, they would be entitled to them then.  If, during negotiations, G.M. couldn't afford to pay for them , then should have taken it into consideration.  The bonuses were fully funded though.

W
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« Reply #40 on: June 02, 2009, 06:48:59 PM »

The pensions were funded. It's the economy they were invested in thsat brought the house of cards down. GM has been borrowing money to pay the difference for years, just to keep them funded.
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« Reply #41 on: June 02, 2009, 09:48:08 PM »

The pensions were under funded and haven't been fully funded.  The market crash was a big factor.

W
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« Reply #42 on: June 02, 2009, 10:01:54 PM »

I was watching the news and they were interviewing workers that stated that after 32 years, they were gonna get laid off. What type of pension is that? I thought only railroad workers got screwed with a 30 years service 63 years of age requirement. And then why stay if they are already maxed out?

 Dan (tacman)
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« Reply #43 on: June 03, 2009, 01:46:36 AM »

The pensions were under funded and haven't been fully funded.  The market crash was a big factor.

W

You maay want to read a couple of the links I posted...
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« Reply #44 on: June 30, 2009, 03:19:04 AM »

Damn,this is the first time I've been back to this thread since my last post  muted Yes,you are right as far as I should of "saved" it as I was typing !!! As far as GM being under funded on the pension....not in the last 8 years. Two years ago (maybe three) we were at 120% . Our buyout offer last May was 140K to quit (more than 10 yrs,less than 28).The one we had in Nov was like 30K( same rules as above) . Our offer in May was with GM borrowing the money from the pension fund. The second was so low because of the money Govt. loaned GM and part of the deal was they could not borrow against the pension fund. Now our offer that we have now is 80K cash and 25K car voucher. They are using the money that the Govt. gave for this(which the govt said they could) which seems like alot,however,we pay taxes on the 105K total.
As far as working on an assembly line making a living...sure,its a nice paycheck. Until,you need to get your wrist,hand,knee,shoulder,etc,cut open to repair the damage that it caused.

Now,as far as the UAW causing the demise of GM...So far from the truth. As to what Jay said "I don't believe anyone is "owed" or "entitled" to anything ever. You never get what you deserve, you get what you negotiate." If we negotiate something in a CONTRACT,are we not entilted to it?...no need to even reply because I know the answer.

Our "contract" is good for five yrs.,but can be changed at will on certain aspects if GM and the UAW agree,if not it goes to a vote to rank and file . Now,here is my rant  yes . You workedfor this Co. 30+ yrs and you retired under these conditions....Now they say we cant afford to pay that any longer!!! So now that your on a fixed income we are going to deduct 80$ a month,cut your co-pays for the Dr.'s,and no more dental or eye<<<< which when then retired it was what they worked the last 30+ yrs for. I could care less if you think its right or wrong...That was the deal
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« Reply #45 on: June 30, 2009, 03:48:36 AM »

Was afraid of losing it again Smiley

Now in "our" contract (a contract does not cover you once you retire) we have ...Hell,to many to list.Anyways,we had raises,COLA,bonuses,holiday pay,etc. Which GM wanted to screw our retires and we gave up ALL of them(plus more) to help our retired UAW members.

Now,wanna hear something worse!
When I worked in Baltimore,we had union and mangement...which to me is like water and oil,and always will be. When I went to Delaware I was lucky to end up in the bodyshop as a coordinator (Wayne can explain my duties Smiley ) My whole time at GM we would do things that made me say WTF!. Now working close to mangement and seeing that they also said WTF...cant say I felt better  frying pan only thing was we(UAW) could bitch,they cant.

I just hate when someone says the collapse of GM is because of the UAW. ........guess thats enough for now  yes
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« Reply #46 on: June 30, 2009, 08:57:10 AM »

Randy, I think you hit on several of my key points.
1. The company should have never entered into a contract that they knew was going to be unstainable. There were lots of early warning signs that without some drastic change GM would be unable to sustain solvency. This is not the unions fault.
2. Pension plans should not be available to borrow from nor should they be underfunded and the administrative control should be a neutral third party.

I am glad to see that at least some of the money is making it to the rank and file.
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« Reply #47 on: July 02, 2009, 01:28:53 AM »

Jay,most of the points you stated were 100% true,except for this comment "administrative control should be a neutral third party." ...It should be 120% . Atleast when GM had control over my retirement I felt safe. Now that the UAW controls it  Duh! bawling

If anyone cares to do some reading....This is a guy who worked in Baltimore then Wilmington.  http://www.disgruntledautoworker.com/
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« Reply #48 on: July 02, 2009, 03:32:38 AM »

Having been a member of 3 unions in the past, I made my choice a long time ago to avoid them. The union priorities are

1: Politics
2: Members

I'm sure there are some who are happy working for unions, I just never could understand why the union would penalize an employer who paid bigger Christmas bonuses to employees who were more productive, notr coould I understand the members who complained that they deserved the bigger bonuses because they had seniority. Scratch Head

I have another story about a union and a strike (well, 2 actually), but those are for another time. Roll Eyes
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« Reply #49 on: July 04, 2009, 03:03:01 AM »

 bust gut laughing bust gut laughing ...Hi Britchter, Well,I can tell you have never been part of the UAW .1: Politics 2: Members <<<with this comment  yes . Before i started at GM I was a heavy equipment  operator and  when we worked on a state or Federal job,we were paid union scale. That was my knowledge of unions"....We were paid more  yes.  I've seen GM do things that would boggle your mind,however,I've seen the UAW do things that would only "please" them . If you dont understand what Im saying,read Doug's pages above. LOL,oh,I never agreed with him 100% (like I did Jay ) ,but he gets really close  Duh!
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