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Bankruptcy and the Detroit Three:

Jim's excellent post notes one-half of the argument against a Detroit bailout--that it is an unusually bad case for a bailout because of the need for long-term structural reform that a bailout is not going to provide.

But the other half of an argument against a bailout is that GM (or the others, but I'll use GM to illustrate the point) presents an unusually good case for Chapter 11 reorganization. GM is, in fact, the textbook example of what Chapter 11 was invented to do. GM almost certainly will not liquidate, and if it does, then this will almost certainly be beneficial from a social perspective because it will illustrate that the resources are better deployed elsewhere in the economy.

The fundamental question for any bankrupt business is whether the business is economically failed or financially failed.

Economically Failed: If the business is economically failed, then this means that the current deployment of assets to that company is economically inefficient--i.e., the opportunity cost of using the assets in this manner is less than their current deployment. For instance, if a typewriter manufacturer were to file bankruptcy today, it is likely that the firm would be economically failed. There is a limited market for typewriters and it is shrinking. The financial, physical, and human capital dedicated to typewriter manufacturing would probably be better redeployed to other places in the economy, such as to making computers.

Financially Failed: A financially failed firm is one where the value of the current asset deployment still exceeds the opportunity cost of the assets, but the firm is temporarily unable to generate sufficient revenue to cover its costs. This might be either because revenues are too low or costs are too high. For instance, when Texaco got tagged with a gigantic liability judgment by Pennzoil, Texaco was basically a healthy enterprise with one gigantic liability to deal with. When Boston Market filed bankruptcy, it used bankruptcy to close unprofitable stores (it basically expanded too fast)--there the liabilities were the contingent liabilities of landlord claims associated with closing the stores. When the Pittsburgh Penguins filed bankruptcy, there the idea was both to deal with certain liabilities (Mario Lemieux's unproductive contract) and also to try to generate more revenues by renegotiating bad contracts for sale of concessions, etc.

The basic idea of a financially failed enterprise is that there are economic rents or "going-concern surplus" from the current deployment of assets. The idea of a Chapter 11 reorganization is to preserve this going-concern surplus or economic rents.

GM is a classic example of a firm that looks like a financially failed rather than economically failed. We have both physical capital and human capital with high firm and industry-specific value, namely factories and uniniozed work forces, which value would be lost if those assets were redeployed. It also has at least some going-concern value in its goodwill and namebrands.

What GM needs to do is shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. It appears to need new management as well. Bankruptcy gives them the opportunity to do all that.

So GM will almost certainly reorganize, as will the other car companies. GM does not look like an economically-failed typewriter manufacturer at this point, but rather a financially-failed company that needs to reorganize and go forward.

Federal Assistance for a Reorganization: Which brings us to the final benefit of a reorganization over a bailout--reorganization forces a market test on the enterprise to determine what is economically valuable and what is not. A bailout will inherently be a political process. Political processes are not in any way designed to determine which assets are allocated in an economically-efficient manner.

Some have expressed concern that the credit crunch has made DIP financing temporarily unavailable. I have seen no strong evidence that this is the case, although it is certainly possible. But if this is the case, then this seems like this might be a proper place for governmental intervention--basically have the government provide the DIP financing or guarantee the DIP financing (thanks to my colleague Steve Eagle for suggesting this idea).

To the extent that there was a rationale for the TARP, it was that there was a liquidity crisis in financial markets, not a solvency crisis. The idea was to save healthy banks from a bank run, not unhealthy banks from their own bad decisions. Well, GM is unequivocally a solvency problem, not a liquidity problem. As George Will has observed, it is not a quesiton of whether GM will be allowed to fail, it already has failed.

But even though GM is insolvent, an absence of DIP financing to reorganize GM in Chapter 11 would presumably be a liquidity crisis. So whereas a straight GM bailout does not follow from the logic of the TARP, it is at least arguable that the provision of DIP financing as part of a reorganization filing is consistent with the underlying premises of the bailout. But it is crucial that this money be made available, if at all, only as part of a chapter 11 filing that forces new discipline and ideally only after a demonstration that there really is no private DIP financing available.

Ted Frank (www):
NB that Circuit City filed for Chapter 11, and immediately rounded up $1.1 billion in DIP financing. If GM can't get DIP financing, it's because it's actually economically failed.
11.20.2008 10:14am
LAWYER:
Amen.
11.20.2008 10:32am
wfjag:
Given that the $700 Billion bailout is being used as an all things for all people, if the Treas. Sec. so wishes to give money (er, I mean "loan" money) to favored institutions, I don't see why, after a Chap. 11 filing, $25 Billion of the $700 Billion couldn't be loaned as DIP financing. However, until the car manufacturers formerly known as the Big 3 are in a position to address the multiple issues underlying their unprofitability (which cannot be done outside Chap. 11 proceedings), any loan to any of them is pouring more money down a rat hole.
11.20.2008 10:37am
Junior Assoc.:
Speaking as a transactional associate at a major (V10) firm with a thriving restructuring practice, I can vouch for the fact that DIP loans are extremely difficult to come by. Basically the only only lenders that are giving DIP loans are lenders with preexisting loans to the bk entities who are protecting their prior commitment. To the extent that I think the Federal Government should help the Big 3, a DIP loan/Federally guaranteed DIP loan sounds idea. Limited govt. downside, access to chapter 11 laws. . . certainly better than the $25 Billion christmas present that Detroit's asking for.
11.20.2008 11:12am
Junior Assoc.:
Ted Frank: Circuit's City DIP lender was a preexisting creditor that was protecting their prior investment. If GM is able to find any DIP financing, it will come from somebody who already has skin in the game, and there just aren't that many banks with the necessary liquidity to handle the type of DIP loans the Big 3 will need.
11.20.2008 11:14am
CatoRenasci (mail):
I would be very chary of having the government make or guarantee the DIP financing, because of (1) the inherent politicization of the process when government is involved, and (2) the likelihood that the government would then end up with a large ownership stake, which would perpetuate the politicization of the running of the companies and would (IMHO) only continue the problems and ensure their eventual liquidation.
11.20.2008 11:16am
DiverDan (mail):
It's been a while since I looked at the figures, which I'm sure have changed drastically since the downturn in the market, but anyone know (or have a good guess) how much the defined benefit pension plans for the Big 3 (or GM &Ford) are underfunded? I'm almost certain, unless Wall Street makes a remarkable turnaround between now &year end, that the numbers come December 31 will be staggering. That probably means that a "prepackaged" bankruptcy for either GM or Ford will be almost impossible, since getting rid of (or at least controlling) their legacy costs will be a sine qua non of any reorganization, and a huge withdrawal liability claim for turning over the UAW Pension Plans will likely make the PBGC the 500 pound gorilla in those Bankruptcies. Will Bankruptcies by GM &Ford be the straw that takes the PBGC into insolvency?
11.20.2008 11:20am
titus32:
NB that Circuit City filed for Chapter 11, and immediately rounded up $1.1 billion in DIP financing. If GM can't get DIP financing, it's because it's actually economically failed.

With the state of the capital markets, I disagree. DIP financing is very hard to come by these days.
11.20.2008 11:20am
Steve:
There's a very significant concern about whether consumers would continue to buy cars from a manufacturer going through bankruptcy, much moreso than with other industries.
11.20.2008 11:38am
A. Zarkov (mail):
DiverDan:

Excellent post. People advocate all kinds of solutions without sufficient consideration of the future ramifications. I don't know the defined benefit schedule for GM, but I suspect that it's pretty generous. Under PBGC (assuming it can stay solvent), the GM retirees would likely take a pretty big hit. This hit would reverberate through the economy.
11.20.2008 11:40am
Cold Warrior:
Excellent analysis. Actually, the best I've seen so far.

If DIP financing is hard to come by, then some limited, well-defined federal role -- a loan guaranty? -- would be in order.

One other point to keep in mind: The taxpayers will "bail out" GM, whether in ch 11 or outside of bankruptcy. PBGC will have to broker see kind of deal on a ch 11 since unfunded pension liabilities would sink the agency. Better to wrap that up in a comprehensive ch 11 plan rather than doing things piecemeal, in which the liabilities that will ultimately sink GM (pensions/retiree health chief among them) are left unaddressed.
11.20.2008 11:47am
Tony Tutins (mail):
The taxpayers have already given AIG -- a company that offshores its profits but does not go to the governments of Bermuda and Barbados for its bailouts -- $123 billion, with nothing to show for it. Considering the parts they source locally, GM is responsible for the jobs of a lot of Americans.

Further, consider the track record of bank bailouts vs car company bailouts: Continental Illinois Bank is a mere memory, whereas you can still buy a Chrysler minivan or Jeep today.
11.20.2008 12:08pm
PLR:
Hmmm. I completely agree with a Zywicki post, and have made the same points myself on other forums.

Might have to schedule a visit with my doctor.
11.20.2008 12:13pm
SpenceB:
["Jim's excellent post notes one-half of the argument against a Detroit bailout... But the other half of an argument against a bailout is that GM...presents an unusually good case for Chapter 11 reorganization."]


Unlikely that those 2 argument-halves are the only economic objections to a bailout.

However, this is primarily a law blog.

Surely, there are some legal/constitutional arguments against such a bailout ??
11.20.2008 12:39pm
Closet Libertarian (www):
Agree but why doesn't this apply to many banks too.
11.20.2008 12:41pm
first history:
If the Big 2.5 (Chrysler is now just a .5 auto manufacturer) go into bankruptcy, they shouldn't receive any financing from the US government, for the same reasons that they shouldn't receive a bailout before bankruptcy. Rather than liquidation, they should offer themselves to the highest bidder. I am sure that other auto companies, like Tata Motors (India) or various European or Japanese companies would be interested in all or part of the Big 2.5. There are even reports that Chinese automakers Shanghai Automotive Industry Corporation and Dongfeng Motor Corporation may be interested in GM and/or Chrysler.

If you can't beat them, join them.
11.20.2008 1:07pm
Cornellian (mail):
This year they get the $25 billion "loan." Next year they'll be back on Capitol Hill explaining why Washington needs to forgive repayment of the "loan" in the national interest. And after those two years have gone by, they'll still be making cars people don't want to buy.
11.20.2008 1:15pm
adam d. (mail) (www):
This may not be a buggy whip moment for car making in general, so it's not a case of 'economically failed', but it's difficult to imagine a set of circumstances in which so much really bad management that has persisted for so long suddenly becomes wise leadership capable of rebuilding these brands.

There's a poison pill in the form of an entrenched culture that will make the same mistakes over and over again. And when there's a poison pill, real economic assets (a trained workforce and some degree of brand loyalty are the examples you use in this case) are illusions. They're like gold on the other side of the rainbow. Can't ride the rainbow - can't get the gold.

It's probably not impossible for GM to reinvent itself, just hard, but that's what it'll have to do to make a bailout worthwhile.
11.20.2008 1:17pm
wooga:
You know which auto company really should have gotten a bailout? Powell Motors, run by Homer Simpson's brother. After all, they only went bankrupt because nobody would buy that over priced car known as "The Homer."

Maybe if Detroit would stop making crap cars like the Homer, I could get behind a bailout. Until then, they are economically non-viable junk manufacturers.
11.20.2008 1:53pm
Crunchy Frog:
first history: I'm not entirely convinced (okay, not at all actually) that it is a good idea to outsource any more of our manufacturing capability to Beijing.

As long as it is cheaper to build cars in the US as opposed to Europe and Japan, auto companies based there will export jobs here, which to my eyes is a Good Thing(TM). I don't see that being the case where China is concerned.
11.20.2008 2:13pm
A. Zarkov (mail):
There's no reason for anyone to buy a "Big Three" car. They are not cheaper or more reliable. One time I rented a car while my Honda was being repaired. The renter ran out of standard models and put me in Lincoln Continental. Later that day someone who knows me, asked by I was driving such a car as it seemed out of character. I assured him it was a rental and all was right in the universe again.

I'm getting ready to buy a new car, and I won't even consider anything other than a Honda or a Toyota. Since I always pay cash I get a good deal. I will even go way out of town to a desperate rural dealer to get the price I want.

I have a podcast by a Honda dealer who comes clean. He says he makes his money of those buyers who don't do their homework. Most do. Times are tough for dealers. Buy in December when business is slow because of the holidays. Now business is slow anyway. It should be a good time to buy for cash.

I'm sure many people have my attitude. How are the "Big Three" going to survive? It's too big a cost to take chances.
11.20.2008 2:21pm
David Welker (www):
I would be interested in an analysis of this proposal from an economic stimulus perspective. If GM were to restructure its contracts now, what sort of hit would the economy take?

The issue I have with Zywicki's analysis is that, besides the point that the government should bailout the auto makers loans AFTER bankruptcy instead of loans BEFORE bankruptcy, it seems that Zywicki's analysis does not take into consideration the conditions in the broader economy.

Finally, I think it is important to note that what Zywicki is advocating is still a government bailout of the auto industry. The only issue is the timing of the bailout. I think it is somewhat misleading to imply, as Zywicki does (probably accidentally), that he is not for a bailout. Instead of saying that is he not for a bailout he should say that he is not for the bailout that has been proposed.

It is pretty clear that what Zywicki has just proposed is also a bailout.
11.20.2008 2:36pm
autolykos:
LOL at characterizing union work-forces as an asset with high value. The Big 3 are in trouble almost entirely because they had unionized workforces forced on them by Congress decades ago (and the majority of their "bad decisions", such as reliance on SUVs and pushing cars into the supply chain, can be traced to the inflexibility generated by having union labor).

While your point about bankruptcy as a test of viability is theoretically correct, it ignores the effect that bankruptcy itself will have on any auto manufacturer. If people won't continue to buy cars from a manufacturer that's in bankruptcy, that manufacturer is going to fail. Even a relatively small shift in demand would be disastrous given their high fixed cost structures and capital requirements. It doesn't matter whether they have assets that would still be valuable at the other end of a bankruptcy. They'll never get there.

If I had to make one prediction, it's that Congress will find a way to royally screw this up and cost the US taxpayer much, much, much more than what it would cost to bailout the autos now, just like they did with Lehman.
11.20.2008 3:18pm
Allan Walstad (mail):

The taxpayers have already given AIG...

Tony, that's the slippery slope. And that's why you stay off the slippery slope.
11.20.2008 3:21pm
first history:
Crunchy Frog:

It has been apparent for years that the US is destined to be a economic client state of Europe and Asia; witness the electronics or steel industry: virtually nothing is made in the US (except specialty steels). Whether it is a good idea or not is inmaterial, it is what the market dictates. If Americans want cheap, well made cars, who cares if that means they are made in Japan, Korea, or China? America stopped defending its industrial base a long time ago. It's called globalization. Anyway, cars may still be made in the US, just the profits will go overseas.
11.20.2008 4:16pm
Adler Colleague:
Years ago, when I sat in Professor Zywicki's Bankruptcy class I thought to myself 'This guy's a genius'. Thanks for the confirmation. Your analysis brings to mind the famous Einstein quote: "Everything should be made as simple as possible, but not simpler." Now, if we could get the politicians to understand it......
11.20.2008 4:46pm
wfjag:

Crunchy Frog:
first history: I'm not entirely convinced (okay, not at all actually) that it is a good idea to outsource any more of our manufacturing capability to Beijing.

As long as it is cheaper to build cars in the US as opposed to Europe and Japan, auto companies based there will export jobs here, which to my eyes is a Good Thing(TM). I don't see that being the case where China is concerned.

While most people make the same assumption you do, it may be wrong. According to GM shows 3 new models for China, The International Herald Tribune, (AP) Nov. 18, 2008, about 61% of GM's sales are from outside the US, it's sales have increased 19% over the past decade, "[a]lthough GM's worldwide sales fell 11 percent in the third quarter, that was mainly due to contractions in the U.S. and European markets". Of the 3 new models to be sold in China (which will bring GM's offerings in China to 24 models), "[t]he Chevrolet Cruze, which will be manufactured in Shanghai", whereas "[t]he [Buick] Enclave [SUV] and the Cadillac CTS-V will be imported from the United States". China expects its auto sales to grow by 8% next year (down from 22% in 2007), but GM expects its sales in China to grow by 10% (down from 18.5% in 2007).

So, it appears that GM can profitably manufacture high end and larger cars in the US and export them to China. As I understand it, one reason there is not more of this is due to the "regulatory burden" the US &state governments place on manufacturers.

A problem not being discussed is the effect of regulatory burdens. While there are OSHA, vehicle safety, and environmental regulations and standards that are justified, there are also many that, at best, look like they fall into the "seemed like a good idea at the time, but have demonstrated no particular benefit" category. Still, once a regulation is promulgated, there's a government employee whose job it is to enforce it, but no one whose job it is to see if the regulation should be eliminated. Ergo, there's automatically an interest group for keeping - and likely expanding the reach of - the regulation.

If a President wanted to make a real impact, and be acting within his power as Chief Executive, he could order a comprehensive review of all federal regulations that affect auto manufacturing for the purpose of simplifying and consolidating them, and eliminating those that did not serve the purpose they were represented to serve, and follow up with legislative proposals to repeal laws that failed to provide a substantial benefit.

However, the chances of that are?
11.20.2008 6:02pm
mga (mail):
The Democrats are going to get major political heat from the unions to salvage the Big Three without meaningful restructuring, which is impossible. The solution is for Obama to guarantee the DIP financing and negotiate with the UAW for the federal government to eat a substantial part of the health and pension legacy costs that are the principal reason for the Big Three's uncompetitive position.

That would be a win for eveyone. The Big Three get the restructuring necesssary to survive, including shedding dealerships and unused property. The government avoids wasting money on a bailout that cannot work without restructuring. The retirees get benefits guaranteed by the government, not an entity that is going to go bankrupt sooner rather than later. Granted, the taxpayers are on the hook for lots of money but they are already on the hook for a substantial part of the pension obligation and Obama wants to nationalize health care. anyway.
11.20.2008 6:27pm
GD:
All these pension plans need to take a serious haircut if the government takes over. Put these retirees on the same payout plan as Social Security recipients. Why do they deserve more?
11.20.2008 7:45pm
DiverDan (mail):
mga suggests:


The solution is for Obama to guarantee the DIP financing and negotiate with the UAW for the federal government to eat a substantial part of the health and pension legacy costs that are the principal reason for the Big Three's uncompetitive position.


I would go along with that IF and ONLY IF: (1) Existing equity is COMPLETELY wiped out - if the Fed takes on ANY risk at all, shareholders must go home empty handed -- that is the price they must pay for acquiescing in piss-poor management over the years; (2) If the Fed is going to eat any portion of the Legacy Costs (which appears inevitable, as the Government will have to step in to avoid PBGC insolvency), the the UAW must agree to a haircut on existing pension obligations, and that ANY continuing pension or other retiree benefit programs for existing workers will be ONLY (and I do mean forever) pay-as-you-go, defined contribution plans, so that employee costs are fully known (and fully paid) at the time work is performed; and (3) existing management must either go, or justify their performance to (what ought to be) a very skeptical creditor body.

Of course, none of what has been discussed come close to a real solution. What is to be done about the hundreds of follow-on bankruptcy cases which will inevitably be filed by all of the independent parts suppliers and dealers? Is the Government going to do anything about customer warranty claims, either pre-bankruptcy or post-bankruptcy? Unless warranty issues are addressed, this will almost certainly kill any market for cars which GM/Ford/Chrysler might otherwise continue to produce during or after bankruptcy. Even past events will pose real issues; GM has already contributed a substantial sum to the Delphi Bankruptcy, and is on the hook for more - if GM terminates its obligation to support Delphi, the Delphi Reorganization crumbles. And does GM sue the Reorganized Delphi on the theory that its past contributions to keep Delphi running were fraudulent transfers?
11.20.2008 7:50pm
STB (mail):
I am not convinced that GM will be unable to obtain some sort of DIP facility; the question is whether it will be of sufficient amount and duration to make a Chapter 11 filing viable. Although I have not crunched the numbers, the company's burn rate and size suggest that the DIP needs to be much larger than we've seen in other bankruptcies - not only to meet the company's liquidity needs but also to reassure critical constituencies that they should continue to extend credit to/buy from GM.

Why are so many professionals and experts in this field so cynical? There are a lot of reasons - the size of the specialized DIP lending market is quite small (even though up considerably this year, the total dollar value of DIP loans for the year to date is less than $25 billion - and this includes DIP loans that were extended to protect existing commitments), fewer of these lenders appear to be coming forward even for large cases, and that the larger credit markets remain tight. The last point is a problem for a large facility because it seems foolhardy for one institution to bear all of the risk, so they'll want to syndicate the DIP...but where will they get participants?

Practically speaking, if GM files a freefall bankruptcy case (or even an ill-conceived pre-pack/pre-negotiated case), what bank wants to face the potential downside? After all, if the case goes south, they will have to choose between risking enormous losses (at a time when their credit capacities appear to be stretched) or be the evil bank that, in the public's eyes, forced GM to liquidate.
11.20.2008 9:44pm
fullerene:
There is a serious misconception that GM's pension obligations are dragging it down. This could not be more false. GM's pension is so overfunded that it need not make any payments until 2011 at the earliest. Indeed, this is the one thing GM has going for it. Not that I expect reality to penetrate the ideological cocoon people seem to be in on this issue.
11.20.2008 10:31pm
RPT (mail):
"GD:

All these pension plans need to take a serious haircut if the government takes over. Put these retirees on the same payout plan as Social Security recipients. Why do they deserve more?"

Didn't they have and perform under a contract that gives them the right to "deserve" more? How do you feel about your contracts? Can we vote on whether you are "deserving"? Or, how do you feel about just euthanising all of these "undeserving" blue collar workers. That would really reduce the pension and health care costs. Wow.
11.20.2008 11:02pm
RemberDaimler (mail):
Has anyone considered the Daimler/Chrysler experience? I would say that if they couldn't make reorganization work after years of trying, the prospects for Chrysler and probably the others are pretty bleak.
11.21.2008 12:13am
cubanbob (mail):
" fullerene:
There is a serious misconception that GM's pension obligations are dragging it down. This could not be more false. GM's pension is so overfunded that it need not make any payments until 2011 at the earliest. Indeed, this is the one thing GM has going for it. Not that I expect reality to penetrate the ideological cocoon people seem to be in on this issue."

Care to share with us the back up yo your assertion?

" RPT (mail):
"GD:

All these pension plans need to take a serious haircut if the government takes over. Put these retirees on the same payout plan as Social Security recipients. Why do they deserve more?"

Didn't they have and perform under a contract that gives them the right to "deserve" more? How do you feel about your contracts? Can we vote on whether you are "deserving"? Or, how do you feel about just euthanising all of these "undeserving" blue collar workers. That would really reduce the pension and health care costs. Wow."

Wow is right! I don't recall as a taxpayer signing on as a co-signer to their pensions. If social security and medicare is all the government is "guaranteeing" me I fail to see why I should be forced to guarantee them more than I would get.

The only way out of this mess is a reorganization with the government being one of the parties in the DIP financing. To make it fly and allay the fears of the buying public, the government will also have to be a player in the guarantee/extended guarantee market to make the buyers willing to commit to buying/leasing new vehicles. But as in the DIP financing, the government will have to have others in on deal with skin in the game as well to make the whole process a one off under extreme circumstances instead of a typical euro-socialist state enterprise and ultimate and far more costly failure.
11.21.2008 12:44am
I'm not buying:
@Steve:: I am presently in the market for a new car. I have made a decisions 8not* to buy from the big 3 because I don't think they will be around in 6 months. they are teetering on the edge.

But if they file Ch. 11, I *will* buy from them without reservation, because my purchase will have much safer. There will be a warranty fund/guarantee and a much more sound company.
11.21.2008 7:07am
DiverDan (mail):
fullerene states:


There is a serious misconception that GM's pension obligations are dragging it down. This could not be more false. GM's pension is so overfunded that it need not make any payments until 2011 at the earliest. Indeed, this is the one thing GM has going for it.


Even assuming that was true on some previous valuation date, the actuarial status of a defined benefit pension plan is the function of numerous factors, including: (a) the current value of pension fund trust assets, (b) the expected future return on those assets, (c) the current level of vested benefits, (d) the expected growth rate of benefits based upon contractual terms, and (e) actuarial assumptions about how long beneficiaries will be paid benefits (i.e., life expectancy). Assuming no changes at all in (c), (d), and (e), even small negative changes in the current value of assets can result in large changes in the funding level of a plan because of interest compounding. Similarly, small negative changes in assumed future earnings rates can have large effects on funding levels with the effects of compounding. I do not know the precise mix of investments in the multiple GM Pension Plans, but I'm willing to bet that come December 31, when the Plans need to be reassessed, there will be a substantial drop in the value of Plan assets - whatever portion was invested in Equity Securities will likely have dropped in value by 30% or more, whatever portion was invested in Real Estate will likely have dropped significantly in value, even the portion that was invested in Corporate Debt Securities will need to be reevaluated to adjust for creditworthiness of the issuers. Moreover, with the current interest rate climate (i.e., the Fed and every other G7 nation dropping interst rates), I doubt very much if the actuarial assumptions on future earnings of those assets will rise - it's more likely that assumed rate of growth will fall. With those changes, I would be very, very surprised if fullerene's statement, if true today, remains true with the next actuarial valuation.
11.21.2008 9:56am
John1256 (mail):
Cornellian (mail):
This year they get the $25 billion "loan." Next year they'll be back on Capitol Hill explaining why Washington needs to forgive repayment of the "loan" in the national interest. And after those two years have gone by, they'll still be making cars people don't want to buy.
------------------

This statement makes no sense whatsoever.

Detroit makes up roughly half of the market in vehicle sales. Who exactly is buying those millions of cars? Aliens?

Are these customers being forced to buy domestic at gunpoint (but otherwise wouldn't)?
11.21.2008 10:46am
John1256 (mail):
A. Zarkov (mail):
There's no reason for anyone to buy a "Big Three" car. They are not cheaper or more reliable. One time I rented a car while my Honda was being repaired. The renter ran out of standard models and put me in Lincoln Continental. Later that day someone who knows me, asked by I was driving such a car as it seemed out of character. I assured him it was a rental and all was right in the universe again.

I'm getting ready to buy a new car, and I won't even consider anything other than a Honda or a Toyota. Since I always pay cash I get a good deal. I will even go way out of town to a desperate rural dealer to get the price I want.

I have a podcast by a Honda dealer who comes clean. He says he makes his money of those buyers who don't do their homework. Most do. Times are tough for dealers. Buy in December when business is slow because of the holidays. Now business is slow anyway. It should be a good time to buy for cash.

I'm sure many people have my attitude. How are the "Big Three" going to survive? It's too big a cost to take chances.
------------------------------------------------

This attitude is stuck in the 1980s.
A well-informed buyer who "does their homework" would not have such outdated attitudes about Detroit's products.
11.21.2008 10:54am
Aultimer:

John1256:
This attitude is stuck in the 1980s.
A well-informed buyer who "does their homework" would not have such outdated attitudes about Detroit's products.

Is my latest Auto issue of Consumer Reports also stuck in the 1980s?

Or are you suffering from the logic error that "initial quality" as reported by JD Power, based on poorly administered questionnaires is a better basis for an attitude?
11.21.2008 11:07am
Christopher Barger (mail):
A lot of good points here -- good discussion. I just wanted to inject some perspective from Detroit. I work at General Motors, and our studies have consistently indicated that the decline in consumer confidence related to filing Chapter 11 would be deadly for our business.

Fully 80% of consumers surveyed say they would not consider buying a car from a bankrupt automaker. Our position has consistently been that Chapter 11 would not be productive for us for that reason -- any benefit we would gain by being able to reorganize would be completely negated by the sharp decline in sales.

And in any case, much of the restructuring that has been suggested has already been undertaken -- new UAW agreements take effect in 2010 and we've reduced our workforce to compete with the transplants.
11.21.2008 1:04pm
Ryan Waxx (mail):
There's no reason for anyone to buy a "Big Three" car. They are not cheaper or more reliable.


There's no reason to buy one NEW. But the resale value drops faster than the actual life of the car does, for many domestic models. Buying one used... especially if the last owner was good is often a better deal than buying a price-inflated used toyota. Until of course it comes time to sell the car. But that is again a function of perception.
11.21.2008 1:11pm
DiverDan (mail):
I just had to check out fullerene's assertion that GM's pension plans were "so overfunded that it need not make any payments until 2011 at the earliest," so I went to see GM's latest 10-Q, filed with the SEC (that can be accessed through Edgar, at the SEC home page). According to GM's Consolidated Balance Sheet at 9/30/08, GM is showing liabilities of $45 Billion for underfunded Pension and Non-pension retiree benefit obligations as of September 30. It is true that GM will defease it's obligation to provide hourly-employee retiree medical benefits through a UAW-Sponsored VEBA effective January 1, 2010, but that still leaves GM on the hook for bargained for retiree medical benefits for all of 2009, and GM's payment obligations to the VEBA include $450 million by January 2010, plus $145 million per year for 20 years. The notes disclose that GM's pension fund reflected $2.1 Billion in asset losses in the 9 months ended 9/30/08 -- with the Stock market where it is today, anybody want to guess what that will look like by December 31? fullerene's assertion is just false, and wildly so. By December 31, 2008, GM's unfunded pension &other retiree benefit obligations will be at LEAST $45 Billion, PLUS any market losses in pension trust assets between 9/30 and 12/31.

On the liquidity side, GM had a current ratio (current assets divided by current liabilities) of only about .72 on September 30 - $50 Billion in Current Assets to $69 Billion in Current Liabilities -- that was dangerously low 2 months ago, before the current market liquidity crisis hit.
11.22.2008 1:54pm