The Good, The Bad, and the Ugly

The Obama Administration’s plans for G.M. and Chrysler seem to be taking shape publicly for the first time, with selected leaks out of the Administration laying out a map of where this debacle might end up. Today’s Wall Street Journal lays out the blueprint, indicating that the Administration is planning on a bankruptcy filing by G.M. that would wipe out the recalcitrant stakeholders and start anew by breaking the company in two. The “good” or new G.M. would take the attractive assets, and the “bad” or “old” G.M. would be left with all else, including some retiree legacy costs. From the Wall Street Journal:

GM looks increasingly like it will be forced into filing for bankruptcy protection, sometime in mid-to-late May, and that the surviving “new GM” will retain select brands and some international operations, said several people familiar with the situation.

Stakes in this new GM could be given to creditors. It is also possible the new company could be sold whole or parts to investors or its shares sold in an initial public offering. The UAW’s retiree health-care fund would likely get either some shares or proceeds from the sale of the stock.

A key ingredient in acting on this plan is getting the UAW to agree to an entirely new contract, including major reductions in health-care benefits, said several people involved in the matter. “That’s the No.1 wild card here,” one of these people said Monday.

Under the plan, the “good” GM would not be expected to hold the tens of billions of dollars in retiree and health care obligations that hurt the auto maker in recent decades. Instead, those obligations would be transferred to an “old GM,” made up of less-desirable brands such as Hummer and Saturn, and underperforming plants and other assets.

At Chrysler the drill would be the same, with bondholders and labor both wiped out by the prospective filing. It is a doubtful prospect that Chrysler could ever emerge from such a filing.

While I am certainly no lawyer or expert in bankruptcy law it strikes me that the bondholders would fight a G.M. split to the death, and might be able to delay such a deal from moving forward quickly. But I believe that the Obama team is tired of the nonsense from both debt holders and labor, and intends to get what they need from both through negotiations, with the credible threat of bankruptcy to give both groups “incentive” to accept the inevitable. If they cannot they are now making clear that both groups will be run over by bankruptcy. But what is still not clear to me is how legacy costs will be apportioned through bankruptcy, and what will happen if the VEBA collapses. Much more to come.

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9 Responses to The Good, The Bad, and the Ugly

  1. Jules Gordon says:

    Your Honor,

    No matter what happens, what comes out the in the end must attract buyers to their products or else all is for not.

    Some Wisdom: The government is least capable of marketing a manufactured product. If Obama forces the new entities to manufacture green products that no one wants it will fail.

    Jules

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  2. Fred Mertz says:

    Almost totally agree with Jules.

    Lawmakers are worse than MBAs at car design, and GM has too many MBAs as it is. They need to purge management and start with visionary engineering again. Wonder why the Japanese and Europeans are so good at this? They’re run primarily by engineers.

    They also have to be willing to think long term, and no one is better than the Japanese at this. They are into their third generation Prius technology right now, and there is no doubt that drive train will become a standard. Honda has feet in both camps, the battery powered hybrid and hydrogen power. I think they have it about right. Hydrogen is probably the right long term bet.

    Contrast that thinking with the thinking that builds huge SUVs and basically ignores the reality of a future of $4/gal gasoline for short term profits, and you have the basis for the problem. Everyone was crowing how smart they were and how good the margins were, but where are those talking heads now?

    Car companies are not alone, though. Too much of US industry is stuck kowtowing to Wall Street and next quarter’s results. Oh, and GM: line up your interior designers and shoot them.

    -FM

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  3. Jules Gordon says:

    Your Honor,

    Fred, my potential campaign manager for my contemplated run for governor, has it right except, as the Los Angeles time put’s it, “the Prius goes from 60 to zero as gas prices fall” No one wants them in sufficient quantities. Also green investment is drying up for the same cost reason. Looks like it got be $4.00 gas for 6 months before people move green. Present technologies are interesting but not ready for prime time. If not impractical (200 mile limit) then too expensive to repair (thousand to change out batteries or hydrogen fuel cells).

    Fred,, have your people call my people.

    Jules

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  4. Fred Mertz says:

    That’s why you have to think long-term, especially if you’re running for Governor. Just like the MA transportation system, you have to anticipate the need and be ready to meet it, not just respond to the problems when they’re too big to solve. You’ll see that 4.00 gas before too much longer.

    Hybrids have similar mileage limits to normal cars, you may be thinking of all electrics like the Tesla. Hydrogens will fill up just as normal cars do, assuming the infrastructure is there. California is starting to build that infrastructure up for mass transit.

    It’s all coming: it’s just a question of where it’s going to be coming from. Both China and the Middle East have not stopped investing in green tech: if we do not continue to invest, we’ll lose the high ground, again.

    Get your platform together, sir!

    -FM

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  5. Jules Gordon says:

    Fred,

    I’m talking about hydrogen fuel cells tech. Is the California system for mass transit liquid hydrogen (replacement for gasoline)?

    Can’t build infrastructure for all potential technologies. Got to find out which will surplant gasoline if any.

    Jules

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  6. Jules Gordon says:

    Fred,

    Isn’t china building several coal burning power stations a week? seems to me the planned electric cars will have plenty of power. Clean cars, dirty air.

    Nor much of a trade off. The Hybrids will still need regular gas.

    Jules

    Like

  7. Fred Mertz says:

    Jules:

    Yes, they are, but in parallel, investing green. They are looking to steal a march on Detroit and everyone but possibly Japan on the next generation electrics: they are much simpler to build than current internal combustion drive trains, which negates some of the huge advantages that traditional companies have in manufacturing vehicles.

    In taking this skip step, they are centralizing (in the power plant) sources of pollution, which can be individually treated far more efficiently than an individual car, whose lifespan can be 15 years or more. Then, I assume they’ll be introducing more clean tech, which they can also sell around the world. Remember, they’re more dependent on foreign oil for growth than even we are.

    It’s definitely a step up from their diesels: the air is so thick there with particulate that I had trouble breathing within 15 minutes.

    Electrics are good, to a point: unless there is a fast charge technology equivalent to filling up at a station, they do not replace what we have. Hybrids that can charge batteries via internal combustion are the stopgap, but still burn mostly foreign fossil fuel.

    There are a number of technical issues yet to solve with the hydrogen economy, but I haven’t read anything that suggests to me that it simply cannot be done. There is a lot of doomsaying, but in the meantime, there’s the FCX out there for lease and testing from Honda. $20 to fill (at today’s fossil rates), range of 280 miles, 74 MPG. And it looks like a normal Honda. Not bad for first generation.

    http://www.ridelust.com/lease-a-hydrogen-fuel-cell-honda-fcx-clarity-in-california/

    The common thread between electrics and hydrogen is cheap, clean electricity.
    Were I “in charge”, I’d build nukes in the short term, renewables for the long term, and sunset coal, then oil as a means to generate electricity. Then let the motive technologies fight it out for market supremacy.

    -FM

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  8. Jules Gordon says:

    Fred,

    Be careful, some of your ideas sound free market. You could lose your Liberal membership.

    Jules

    Like

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