Chris Byron Rips Delphi, GM & Goldman

Discussion in 'Commodity Futures' started by Trader5287, Nov 14, 2005.

  1. Delphi mess - "What's taking place these days in the U.S. auto industry is simply astonishing.

    After years and even decades of self-destruction in slow motion, the ruination of the industry has abruptly shifted into overdrive.

    Like a scene out of a Buster Keaton silent movie, the wheels and fenders of Detroit's free-wheeling jalopy have suddenly begun popping off in all directions.

    By last week the situation for General Motors had become so desperate that speculation swirled regarding the odds that the company might soon be forced to file for outright bankruptcy, a move that would have seemed unthinkable only a few weeks ago.

    For the record, GM officials insist that no such move is even being contemplated. But the Detroit Free Press reported late last week that Bank of America is now advising investors that a Chapter 11 filing by GM is "inevitable" though not necessarily immediate.

    We'll turn in a minute to the details of the mess in which GM now finds itself — in large part as a consequence of having become entangled with Wall Street in a bit of misguided financial engineering six years ago.

    For now it is enough to know that the financial alchemy in question — cooked up for GM by the folks at Goldman Sachs and Merrill Lynch in 1999 — has already led to the bankruptcy collapse of GM's largest parts supplier, Delphi Corp., and is now threatening to drag down the world's largest automaker as well.

    The stakes in this mess are huge.

    In its own bankruptcy filing, which took place just last month, Delphi Corp. is now trying to waltz away from $19 billion of balance sheet debt and other liabilities.

    And a bankruptcy filing by GM could add anywhere from $40 billion to an unfathomable $445 billion more to the pot.

    Such a filing would dwarf the $103 billion bankruptcy collapse of WorldCom Inc. three years ago, the largest such failure on record. And like a financial version of Hurricane Katrina — which the experts likewise warned was coming but which everyone else pretty much ignored until it was too late — the storm surge from a GM bankruptcy would spread out tsunami-like from the Midwest until it reached into every nook and cranny of the economy.

    It seems utterly bizarre to be worrying over the threatened bankruptcy of the largest manufacturing company in the U.S. at a time when the economy is growing at a rate of nearly 4 percent annually, and when corporate profits are rising while unemployment remains stable at a manageable 5percent.

    BUT if the public has been caught off-guard by all this, it is proba bly because the rest of the country has long since tuned out the ceaseless, decades-long squabbling that has gone on between the CEOs and union bosses of Motown.

    Historically, there has been plenty of blame to be shared by everyone in this quarrel.

    But this time around the fault lies squarely with the greedy, cosseted suits of GM and Delphi.

    Like Siamese twins who have grown up to hate each other, the two groups have been conjoined since birth by a fatally flawed scheme to spin off GM's parts division, via an IPO, and turn it into the separate and freestanding company that is now known as Delphi Corp.

    The basic idea behind the spin-off was for the automaker to cash in on Wall Street's insatiable demand for IPOs. But there was a second purpose as well: to help the automaker begin to shed the biggest and most rapidly growing financial problem it faced — some $42 billion of unfunded post-retirement health and pension obligations for its employees, which GM was paying for day-to-day out of general corporate revenues.

    By spinning off Delphi as a separate company, GM could move some $4.5 billion of those debts off its balance sheet and onto Delphi's, thereby beginning to pare away the costs that foreign automakers (whose employees enjoyed elaborate government-funded health and retirement packages) didn't face.

    That at least was the theory. In reality, GM never got rid of the obligations because to make the IPO attractive to investors, as well as gain the support of the unions whose members would be switching employers in the deal, the company had to promise to pick up the pieces if Delphi itself failed to keep sending pension checks to its employees.

    Like a bad penny that pledge has now returned six year's later to threaten GM's very survival. As a free-standing business, Delphi has produced few of the promised rewards of independence.

    But Delphi has seen its own health and benefit obligations explode out of control, just like its former parent company.

    By the start of this year, those obligations topped $20 billion, with the unfunded portion alone doubling to nearly $10 billion.

    By the start of the year, the fellow who presided over all this at Delphi — a GM parts division lifer with the self-admiring name of J.T. Battenberg III — could see the handwriting on the wall.

    Preparing to cash in his chips, he announced in early February that he would step down and retire as chairman and CEO once a successor could be found.

    By June he was gone, leaving behind a company in chaos, with a collapsing stock price, soaring losses, and two widening federal investigations (one civil, the other criminal) into evidence of accounting fraud that surfaced just before he announced his retirement.

    But don't cry for J.T. Battenberg III, because he'll do fine in retirement, receiving more than $1.7 million annually through a company-financed pension plan set up specially for himself and a handful of Delphi's other top executives.

    By contrast, the company's U.S.-based hourly workers, some 63,000 in number, will be lucky if their own retirements allow for much more than eating cat food from a can.

    THAT is because Bat tenberg's shoot-the- wounded successor, one Robert S. ("Steve") Miller, whose previous achievements as a corporate fixer-upper include shepherding Bethlehem Steel into bankruptcy, took over in July and within 60 days had done the same for Delphi.

    As a bankrupt company, Delphi is now trying to push its unfunded pension nightmare, which has ballooned by another $2 billion since January and now totals more than $12 billion, back on GM

    For its part, GM is frantically trying to dodge the bullet by insisting that the U.S. Pension Benefit Guarantee Corp step in and take over. And since there are plenty of reasons to think the PBGC will resist, the employees themselves could wind up with nothing while dueling lawyers fight it out in court.

    Meanwhile, Shoot-the-Wounded Steve has unfurled his plan for bringing Delphi back from the brink and heading off outright liquidation: a new contract with the rank-and-file in which they agree to (A) an average 60 percent cut in pay, to a starting wage of barely $9 per hour, as well as (B) the elimination of all overtime, (C) the phase-out of all retirement plans, (D) a health-benefit package that begins with a family deductible of $1,800 per year, and various other draconian terms.

    One look at that and Delphi's unions are now talking strike. And though a work stoppage will certainly finish off Delphi, thereby wiping out the very jobs the unions want to protect, it could easily cost GM billions, pushing it into bankruptcy as well since Delphi is the company's largest supplier of parts.

    Why this whole situation was allowed to get so out of hand in the first place is a topic for another day.

    The larger question, of course, is what does this do to American leadership and prestige around the world when the fate of the mightiest economy on earth rests on the outcome of a fight between the executives and shop-floor workers of a six-year-old, bankrupt company that Wall Street had no business creating in the first place.

    Meanwhile, let's all hope that cooler heads prevail and that a strike, which would have calamitious consequences, doesn't happen."
  2. Scary story!

    People tend to ignore zchris byron becuase he writes for the lowly NYPost and not the mightier WSj or NYT. I di too.

    But he's been very prescient on many issues.
  3. I am loading up on a GM January bear put spread this week...looking for it to pick up a bit when the red tag news filters through. I will update my position when I open the trade.
  4. didn't wait...

    Long 6jan20 @ $1.25
    Short 6jan17.5 @ $0.70

    Out of pocket: $55/contract
  5. how many points in the dow is due to GM and Ford? I know GM is not a big cap company but its bk would have a devastating effect on the market psyche.
  6. they could always kick it out before the happy day
  7. agpilot


    To Trader5287
    Thanks for posting that cbyron@nypost news clip..
    What a contrast I've seen in my life time. I clearly remember in the early 1950's hearing adults talk about how powerful GM was. I heard comments that indicated that GM was the one of the most powerful companies in the world. It was the prime example of just how great America was.. What a slide down hill. I wonder if it's an example of internal problems yet to come in other areas in America.? Not a good omen.
    Thanks Trader5287... agpilot
  8. I think GM's story is an example of a systematic problem among Americans...consumer debt. When interest rates head north for real, we will have a huge problem because people won't be able to afford a mortgage refinance to cover their revolving debt. Furthermore, banks will be more risk averse and will require minimum monthlypayments of up to 4% on outstanding debt and rates will be in the upper do they get out of that?

  9. bighog

    bighog Guest

    Back a few posts: IF GM is not a big cap company......What is?........:D

    PS, no more GM posts , will let the company do what it will do and we will see how this all washes out.

    Elvis has left the building!!!!!!

    #10     Nov 15, 2005