What's Good For General Motors, Is Good For...?

A lot of bad business decisions have led to this seemingly inevitable next step in the General Motors story. General Motors declared bankruptcy this morning-- kind of. It's a modified version of bankruptcy. In effect, the government will take over-- though not operationally-- GM for a few years while it gets back on its feet-- and gobbles down another $30 billion in taxpayer bailouts (bringing the grand total to $50 billion), while closing between 12 and 20 factories and firing over 20,000 union workers. The U.S. government will own 60% of the stock in the restructured company and the Canadian government will own 12%. The other option would be liquidation, a sure fire catastrophe for the economy.

Forty percent of the company’s 6,000 dealers will close, the workers’ union will be forced to finance half of its $20 billion health care fund with stock of uncertain value in the restructured G.M., and bondholders, including many retirees, will be forced to take stock worth 10 cents for every dollar they lent the company.

The company’s last steps toward bankruptcy took place over the weekend as a majority of G.M. bondholders agreed not to challenge the filing in court and to exchange their debt for stock at about 10 cents of equity for every dollar owed by the company.

...[T]he White House on Sunday briefed reporters on a new set of principles for how the government should behave as a majority shareholder. It argued that the government’s role should be limited primarily to the beginning of the process-- selecting a board of directors and hiring experienced managers -- but that it should then recede, becoming a passive investor, one seeking to sell its stake quickly.

At the same time, Mr. Obama has laid out goals for all the Detroit automakers that will presumably affect their major strategic decisions. He has urged them, for example, to build smaller cars with significantly better fuel efficiency. But under the new principles, the White House would be discouraged from getting involved in G.M’s decisions about when and where to build such a car, or how long to keep producing it if it sells poorly.

Although this bankruptcy will impact Americans in every state, the 4 expected to be hit hardest are Michigan, Indiana, Ohio and Wisconsin, where there are a lot of pissed off workers-- and congressmen-- wanting to know why GM is taking taxpayer money-- lots of it-- and building cars in Mexico and South Korea. Late last night the White House released a "Restructuring Initiative" fact sheet which emphasizes the "shared sacrifice," that addresses past failures, and is meant to "dramatically improve its overall cost structure, and allow the company to move toward profitability even if the auto market recovers slowly. As a result of this restructuring, GM will lower its breakeven point to a 10 million annual car sales environment. Before the restructuring, GM’s breakeven point was about 16 million annual car sales." The UAW was forced to make huge concessions on compensation and retiree health care, and pensions, even more unfair than what the violently anti-worker Bush Regime demanded of the unions! And bond holders were pretty badly screwed as well.

The newly organized GM will purchase substantially all of the assets of the old GM needed to implement its business plan out of a chapter 11 in exchange for the U.S. Government relinquishing the majority of its loans to GM. 
 
·         This new GM will establish an independent trust (VEBA) that will provide health care benefits for GM’s retirees.  The VEBA will be funded by a note of $2.5 billion payable in three installments ending in 2017 and $6.5 billion in 9% perpetual preferred stock.  The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company.  The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.
 
·         The GM qualified pension plans for both hourly and salaried employees will be transferred to the New GM as part of the purchase process.
 
·         The U.S. Treasury is prepared to provide approximately $30.1 billion of debtor in possession financing to support GM through an expedited chapter 11 proceeding and transition the new GM through its restructuring plan. The U.S. Treasury does not anticipate providing any additional assistance to GM beyond this commitment. In exchange for funds already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred stock in the new GM and approximately 60% of the equity of the new GM.  The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by the VEBA and the Canadian government.
 
·         The Governments of Canada and Ontario will participate alongside the U.S. Treasury by lending $9.5 billion to GM and New GM. The Canadian and Ontario governments will receive approximately $1.7 billion in debt and preferred stock, and approximately 12% of the equity of the new GM.  Based on its substantial financial contribution, the Canadian government will also have the right to select one initial director.
 
·         The new GM will pursue a commitment to build a new small car in an idled UAW factory, which when in place will increase the share of U.S. production for U.S. sale from its current level of about 66% to over 70%...

·         GM will continue to honor consumer warranties. This past week, the U.S. Treasury made available the Warranty Support Program to GM and $361 million was funded to a special vehicle available to provide a backstop on the orderly payment of warranties for cars sold during this restructuring period.

During this process, GM will continue operating in the ordinary course. From an operating perspective, the day after the filing will not be materially different from the day before the filing. The following parties will be treated as described below:

·         Employees: Employees will get paid in the ordinary course, including salary, wages and ordinary benefits. Assuming the sale moves forward as expected, Pension Plan and VEBA funding will be transferred to New GM.
 
·         Suppliers: GM will seek authority at its “first day” hearing to continue to pay suppliers in the ordinary course. In addition, the U.S. Treasury’s Supplier Support Program will continue to operate, and GM suppliers benefiting from the program will continue to receive that support. 
 
·         Dealers: GM will seek authority at its “first day” hearing to honor its customer warranties in the ordinary course.  Moreover, GM will seek to continue to honor its dealer incentives for those dealers who are expected to continue to be part of GM’s distribution network going forward.  There are some dealers that GM has identified that will not continue with GM.  It is expected that the terminated dealers will be offered an agreement to orderly wind down their operations over the next 18 months

Michael Moore wrote an open letter to... Obama and everyone else about GM this morning. You can read the whole thing at the link. Here are a few of his conclusions and suggestions though:

1. Just as President Roosevelt did after the attack on Pearl Harbor, the President must tell the nation that we are at war and we must immediately convert our auto factories to factories that build mass transit vehicles and alternative energy devices. Within months in Flint in 1942, GM halted all car production and immediately used the assembly lines to build planes, tanks and machine guns. The conversion took no time at all. Everyone pitched in. The fascists were defeated.

We are now in a different kind of war-- a war that we have conducted against the ecosystem and has been conducted by our very own corporate leaders. This current war has two fronts. One is headquartered in Detroit. The products built in the factories of GM, Ford and Chrysler are some of the greatest weapons of mass destruction responsible for global warming and the melting of our polar icecaps. The things we call "cars" may have been fun to drive, but they are like a million daggers into the heart of Mother Nature. To continue to build them would only lead to the ruin of our species and much of the planet.

The other front in this war is being waged by the oil companies against you and me. They are committed to fleecing us whenever they can, and they have been reckless stewards of the finite amount of oil that is located under the surface of the earth. They know they are sucking it bone dry. And like the lumber tycoons of the early 20th century who didn't give a damn about future generations as they tore down every forest they could get their hands on, these oil barons are not telling the public what they know to be true-- that there are only a few more decades of useable oil on this planet. And as the end days of oil approach us, get ready for some very desperate people willing to kill and be killed just to get their hands on a gallon can of gasoline.

President Obama, now that he has taken control of GM, needs to convert the factories to new and needed uses immediately.

2. Don't put another $30 billion into the coffers of GM to build cars. Instead, use that money to keep the current workforce-- and most of those who have been laid off-- employed so that they can build the new modes of 21st century transportation. Let them start the conversion work now.

3. Announce that we will have bullet trains criss-crossing this country in the next five years. Japan is celebrating the 45th anniversary of its first bullet train this year. Now they have dozens of them. Average speed: 165 mph. Average time a train is late: under 30 seconds. They have had these high speed trains for nearly five decades -- and we don't even have one! The fact that the technology already exists for us to go from New York to L.A. in 17 hours by train, and that we haven't used it, is criminal. Let's hire the unemployed to build the new high speed lines all over the country. Chicago to Detroit in less than two hours. Miami to DC in under 7 hours. Denver to Dallas in five and a half. This can be done and done now.

4. Initiate a program to put light rail mass transit lines in all our large and medium-sized cities. Build those trains in the GM factories. And hire local people everywhere to install and run this system.

5. For people in rural areas not served by the train lines, have the GM plants produce energy efficient clean buses.

6. For the time being, have some factories build hybrid or all-electric cars (and batteries). It will take a few years for people to get used to the new ways to transport ourselves, so if we're going to have automobiles, let's have kinder, gentler ones. We can be building these next month (do not believe anyone who tells you it will take years to retool the factories-- that simply isn't true).

7. Transform some of the empty GM factories to facilities that build windmills, solar panels and other means of alternate forms of energy. We need tens of millions of solar panels right now. And there is an eager and skilled workforce who can build them.

8. Provide tax incentives for those who travel by hybrid car or bus or train. Also, credits for those who convert their home to alternative energy.

9. To help pay for this, impose a two-dollar tax on every gallon of gasoline. This will get people to switch to more energy saving cars or to use the new rail lines and rail cars the former autoworkers have built for them.

Well, that's a start. Please, please, please don't save GM so that a smaller version of it will simply do nothing more than build Chevys or Cadillacs. This is not a long-term solution. Don't throw bad money into a company whose tailpipe is malfunctioning, causing a strange odor to fill the car.

100 years ago this year, the founders of General Motors convinced the world to give up their horses and saddles and buggy whips to try a new form of transportation. Now it is time for us to say goodbye to the internal combustion engine. It seemed to serve us well for so long. We enjoyed the car hops at the A&W. We made out in the front-- and the back-- seat. We watched movies on large outdoor screens, went to the races at NASCAR tracks across the country, and saw the Pacific Ocean for the first time through the window down Hwy. 1. And now it's over. It's a new day and a new century. The President-- and the UAW-- must seize this moment and create a big batch of lemonade from this very sour and sad lemon.