Two of the Big Three Could Be Facing Bankruptcy

[KC]

Well, it's finally about to happen. With the deadline on the auto bailouts looming near, it's becoming more and more certain that two of the big three automakers are probably going to end up filing Chapter 11 Bankruptcy Protection:


Time Is Running Out For Chrysler! Bankruptcy "95% Certain"

With a week to go before the deadline runs out on Chrysler (http://consumerist.com/tag/chrysler/)'s bailout — it's looking less and less likely that the automaker will be saved from liquidation. Yesterday, a report from Bloomberg described the likelihood of liquidation at 95%.


Chrysler LLC has a 95 percent probability of entering bankruptcy as time dwindles before its April 30 deadline to cut debt and complete an alliance with Italy's Fiat SpA, an industry analyst said.


The likeliest outcome of a Chrysler filing for court protection would be the purchase of some factories and brands by automakers including Fiat, said Michael Robinet, head of global forecasting for CSM Worldwide Inc. in Northville, Michigan.
"Nobody has a good idea about what's going to" exist of the third-largest U.S. automaker once it goes into bankruptcy, Robinet said in a speech today in Detroit.

The bleak news came after lenders rejected an offer by the Treasury department that would have reduced Chrysler's debt. Now a new offer is on the table. The latest word on the deal comes from the Wall Street Journal:

The Treasury now proposes that the banks and other lenders accept as payment 22% of the $6.9 billion they are owed plus a 5% equity stake in Chrysler, said several people familiar with the matter.


That's up from an earlier Treasury proposal that the banks and other lenders accept 15% of what Chrysler owes them and receive no Chrysler stock.
Chrysler's lenders, including JP Morgan Chase, and Citigroup, rejected the first offer and proposed that Chrysler pay back 65% of it's debt as well as offer a seat on its board.



Consumerist (http://consumerist.com/5224458/time-is-running-out-for-chrysler-bankruptcy-95-certain)It should be noted here that while Chrysler is pretty much for sure going to file Chapter 11, some are starting to predict that it will still ultimately end up filing Chapter 7, which would put a lot of people out of their jobs and be a large contributor to the second wave of the crisis that is about to commence in a few months.



General Motors Defaults, Idles Plants

General Motors (http://consumerist.com/tag/general-motors/) is projected to default on its next bond payment—the last before the June 1st government-imposed restructuring deadline. Next freeway exit: bankruptcy. From the Wall Street Journal (http://online.wsj.com/article/BT-CO-20090422-717345.html):
GM (http://consumerist.com/tag/gm/) Chief Financial Officer Ray Young - who told reporters that the auto maker had no plans to meet the June 1 interest payment - may have done investors a favor by reminding everyone of the harsh reality ahead. "People should be getting the sleep out of their eyes and seeing it's over," said Marilyn Cohen, president of retail bond investment manager Envision Capital. "I would imagine they're going to file any minute...Not making a payment - it's going to show them that this time, they mean it."
Later this week, GM will also announce its plans to idle fifteen plants in North America (http://www.bloomberg.com/apps/news?pid=20601087&sid=audd4rT3aiUU) for at least a week (but likely most of the summer) and going through with other planned cutbacks (http://www.bloomberg.com/apps/news?pid=20601103&sid=aZX.4e9AMYwo) sooner than originally planned.


Consumerist (http://consumerist.com/5223600/general-motors-defaults-idles-plants)GM will most likely file for Chapter 11 and will probably follow the lines of Obama's original prepackaged bankruptcy program and what everybody was saying would happen for a while now:



President Barack Obama has determined that a prepackaged bankruptcy is the best way for General Motors Corp. to restructure and become a competitive automaker, Bloomberg reported, quoting people familiar with the matter.


Obama also is prepared to let Chrysler LLC go bankrupt and be sold off piecemeal if the third-largest U.S. automaker can't form an alliance with Fiat SpA, Bloomberg said, citing members of Congress who have been briefed on the subject and two other people familiar with the administration's deliberations.


Obama on Monday gave GM 60 days to come up with deeper cost and debt reductions than the biggest U.S. automaker had proposed in a viability plan submitted last month.


But a "quick and surgical" bankruptcy the Obama administration described as an option appears to be inevitable, the people familiar with the matter said in the Bloomberg report.


Yahoo! News (http://news.yahoo.com/s/nm/20090401/bs_nm/us_usa_autos_obama)What this means is that while this "planned bankruptcy" gets implemented as a "controlled procedure" the media and the administration will portray an air of calm and control. "Nothing to see here folks!" Nothing, except, you know, thousands upon thousands being laid off (and that's before Chrysler implements Chapter 7).

[Guerrilla22]

Not much one can say, I think everyone knew this coming though.

[KC]

One hurdle has been cleared, but I doubt they will be able to complete everything required of them by the 30th:


UAW in accord with Chrysler

DETROIT, April 26 - The United Auto Workers said on Sunday the union had reached agreement with Chrysler LLC, Italian automaker Fiat SpA and the U.S. government on concessions to its 2007 contract and healthcare trust.

The agreement is subject to a ratification by UAW members that must be completed on Wednesday and meets requirements laid out by the U.S. Treasury as conditions to emergency loans that Chrysler received, the union said in a statement.

The agreement with the UAW follows an announcement that Canadian Auto Workers members had ratified a concessionary contract with Chrysler.

The agreements with the unions leaves negotiations with Chrysler lenders as one of the chief remaining obstacles for the automaker to meet a government imposed April 30 deadline.

The Obama administration gave Chrysler -- 80 percent controlled by private-equity firn Cerberus Capital Management LP -- to the end of April to negotiate labor cost cuts, a debt restructuring and cement an alliance with Fiat to maintain emergency funding.

Financial Times (http://www.ft.com/cms/s/0/a0feb182-32c4-11de-8116-00144feabdc0.html?ftcamp=rss&nclick_check=1)

[Agnapostate]

There's no rational impediment to nationalizing the remaining assets and weakening components of the industry, particularly since the financial class will not attempt to resist when bankruptcy is their only alternative. The only major impediment is the inane rhetoric in favor of the "free market," which is obviously ridiculous, considering the dependence of existing American capitalism on economic planning. Regardless, it remains a major impediment nonetheless.

[KC]

There's no rational impediment to nationalizing the remaining assets and weakening components of the industry, particularly since the financial class will not attempt to resist when bankruptcy is their only alternative. The only major impediment is the inane rhetoric in favor of the "free market," which is obviously ridiculous, considering the dependence of existing American capitalism on economic planning. Regardless, it remains a major impediment nonetheless.The only reason that the administration gave GM and Chrysler a "chance" is to appease those who eat up that kind of rhetoric and avoid the accusations of "socialist!" that they are inevitably going to be hearing. It is the exact same reasoning behind the "assessment" of failing banks that are obviously failing (although some aspects of that policy make more sense).

UPDATE:

GM just announced that it is dropping Pontiac (http://news.yahoo.com/s/nm/20090427/bs_nm/us_gm) as part of its last ditch effort to meet administration standards as the deadline looms near. Here's the important part:


GM Chief Executive Fritz Henderson also said the automaker would file for bankruptcy protection if an offer to exchange bonds for shares in the company failed to cut $27 billion in bond debt by about 90 percent or other changes faltered.

"I'm a believer in dealing with reality," Henderson told reporters, adding that the risk of a Chapter 11 filing by the automaker was now more likely.


The new GM that would emerge from the restructuring would be 89 percent-owned by the U.S. government and the United Auto Workers unions, provided that workers and officials approve plans to take an ownership stake in exchange for debt.


"The bond exchange needs to be successful for us to avoid bankruptcy," Henderson said. "It's not impossible, but bankruptcy is now more probable."


The process that we are experiencing is the nationalization of businesses that are deemed "too large to fail". This nationalization process is so convoluted because of the very fact that you touched on, Agnapostate. You will not hear anyone call this nationalizations except conservatives, who in this case are completely correct. And while this doesn't explicitly state it, the government has been discussing the conversion of its preferred stock in the banks that it retrieved through TARP to common stock, giving them not ownly ownership rights but voting rights as well. We might not see that come to fruition with GM, but it's already quite clear that even if that won't be the case, that the government is exerting a considerable amount of control over these companies simply because of the obligations attached to the loans given to them. It is not as crucial for the government to have control over GM as it is for them to have control over a considerable section of the financial market.


Interestingly, I've found this press release (http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/gmnews/viewmonthlyreleasedetail.do?domain=999&docid=53902), dated April 23, 2009, just 4 days before the above Yahoo! News story:



Contrary to media speculation, General Motors has not announced any changes to its long-term viability plan or to the future status of any of its brands. GM is continuing to review its restructuring plan to go further and faster and best ensure its future success. Additional information will be released as any decisions are finalized.


Also, I've just come across this Bloomberg article (http://www.bloomberg.com/apps/news?pid=20601087&sid=a2KvUxKmASGk&refer=home) which states that most GM Bondholders don't think that swapping debt for equity is going to work, and that Chapter 11 is the most likely outcome. This basically confirms my previous suspicions that the obligations that GM and Chrysler were required to meet to prevent a government nationalization and a controlled bankruptcy were completely unrealistic, and that this entire process was designed so that the government could claim that there was no other option and prevent a large backlash due to this nationalization. This entire process was simply realpolitik.

[cyu]

Excerpts from http://timesofindia.indiatimes.com/GM-set-to-be-owned-by-US-govt-union/articleshow/4457146.cms

"The new GM that would emerge from the restructuring would be 89%-owned by US government and the United Auto Workers unions, provided that workers and officials approve plans to take an ownership stake in exchange for debt."

The next question to ask is, how much power would politicians funded by campaign contributions have over the new GM, and how democratic would the union be?

[KC]

Excerpts from http://timesofindia.indiatimes.com/G...ow/4457146.cms (http://www.anonym.to/?http://timesofindia.indiatimes.com/GM-set-to-be-owned-by-US-govt-union/articleshow/4457146.cms)

"The new GM that would emerge from the restructuring would be 89%-owned by US government and the United Auto Workers unions, provided that workers and officials approve plans to take an ownership stake in exchange for debt."

This was already stated in my earlier post (http://www.revleft.com/vb/showpost.php?p=1427662&postcount=5) in the Yahoo! News article.


The next question to ask is, how much power would politicians funded by campaign contributions have over the new GM, and how democratic would the union be?

That depends on what kind of ownership they would obtain. Throughout this crisis government acquisitions have been through "purchasing" preferred stock or tying some form of obligations to the loans they are giving these companies. We have already seen with GM the use of such "obligations" by the setting of this deadline, and while the government will take over a significant portion of the company following GM's failure to meet obligations, it is not sure whether this control will be in the form of common or preferred stock.

From what I've been hearing the government, with respect to GM, is simply interested in preventing the company from failing. They are not as interested in maintaining control as they are in the banking institutions. So from here what I can see happening is that the government gains control through preferred stock and further influences its control over GM through the extension of credit that will inevitably occur after the transfer, and possibly through the bankruptcy protection as well.

I don't see the government taking a vested interest in any form of direct control over GM, such as obtaining control through the acquisition of common stock. Most likely it will happen through preferred stock and debt obligations.

As for the UAW, I think a more interesting question would be: What implications would this have for the shifting of power in the UAW? If the UAW controls a significant or commanding portion of control within the company, how will it affect its obligations to its GM members, or its members in different companies? The most extreme scenario that I can envision is that the UAW uses its control over GM workers to further exploit these workers and increase its ability to compete on the market. It could, for example, start attacking workers conditions of living (wages, benefits, healthcare, etc...).

Also, the union could be used as a weapon against other companies by getting union workers to agitate in favor of GM and against their own companies (either directly or indirectly). It could basically, then, become another tool that is used to compete in the marketplace and further exploit workers. However, that is just the worst case scenario, and I don't know enough about the UAW to comment on the likelihood of that happening.

[KC]

Chrysler Files for Bankruptcy to Seal Fiat Accord

April 30 (Bloomberg) -- Chrysler LLC (http://www.chryslerllc.com/en/), the automaker that survived a near-death experience in 1979, filed today for bankruptcy protection to streamline operations and shed debt in a reorganization that includes Italy’s Fiat SpA (http://www.bloomberg.com/apps/quote?ticker=F%3AIM) as a partner.

The iconic company, third biggest among U.S. automakers, missed a U.S. government deadline to come up with a restructuring plan by today that was rigorous enough to avoid bankruptcy and qualify for more bailout aid. The carmaker tried to negotiate an alliance with Fiat, reduce $6.9 billion in secured loans and cut $10.6 billion owed to a pension fund. Some lenders refused to slash the debt to $2.25 billion.

The carmaker and the government plan to use the bankruptcy process to revitalize Chrysler by putting its best assets, such as its Jeep and Dodge Ram brand (http://chryslerllc.com/)s, in a new company that wouldn’t be burdened by current costs and debt. A slimmed-down version of Chrysler, armed with Fiat’s small-car technology, would emerge from such a process, giving the carmaker a “new lease on life,” U.S. President Barack Obama said today.

Bloomberg (http://www.bloomberg.com/apps/news?pid=20601087&sid=ado1L9Jhe7oc&refer=home)

No surprise at all. Here's a significant blurb from the above article:


Chrysler, with about 54,000 employees, listed assets and debt of more than $1 billion in documents filed today in U.S. Bankruptcy Court in New York. Banks including Citigroup Inc. (http://www.bloomberg.com/apps/quote?ticker=C%3AUS), JPMorgan Chase & Co., Morgan Stanley (http://www.bloomberg.com/apps/quote?ticker=MS%3AUS) and Goldman Sachs Group Inc. had lent Chrysler $6.9 billion, secured by factories, real estate and other assets.

[cyu]

This was already stated in my earlier post (http://www.revleft.com/vb/showpost.php?p=1427662&postcount=5) in the Yahoo! News article.


Oops, sorry about that - that's what I get for not reading carefully =P


The most extreme scenario that I can envision is that the UAW uses its control over GM workers to further exploit these workers and increase its ability to compete on the market. It could, for example, start attacking workers conditions of living (wages, benefits, healthcare, etc...).

Indeed, from http://home.comcast.net/~chtongyu/histadrut.html

Increasingly, the managements of the Workers' Commonwealth occupy the role of a normal employer, concerned more with efficiency and profits than political ideology. For their part, the workers relate to their employers no differently from their counterparts in the capitalist economy. Indeed, as far as profits are concerned, Histadrut enterprises are no less eager for them than capitalist concerns...

the unthinkable happened -- strikes took place in Histadrut enterprises...

So the amount of democracy within the union becomes very important. Just as some governments are more democratic and transparent than others, some unions are also more democratic and transparent than others.

For example, do union members only get to elect the head of the union, and then that union head makes appointments that "trickle-down" to the rank-and-file? Or do the union members get to elect their immediate supervisors?