Archive for the ‘Bankruptcy Watch’ Category

Repeating the same mistake

Wednesday, June 3rd, 2009

A number of sources are reporting that GM and Chrysler’s new car sales are “better than analyst projections” – in the case of GM – only down 30% from last year, instead of the expected 39%.  (See any “spin” there?)

So assuming that’s actually true, why the counterintuitive result of people returning to the showrooms of companies about to go into bankruptcy?  

Here is my guess:   One of the early companies that got the Tim Geithner “bailout treatment” was GMAC.   GMAC makes car loans (mostly for GM cars).   They borrow money using bonds and then use that money to fund car loans.   GMAC got clobbered by the Federal Reserve forcing down interest rates – they had borrowed a -lot- of money for terms of up to 10 years and more (longer than a car load lasts). 

When the Federal Reserve pushed down interest rates, GMAC ended up having to make loans for less than what they were having to pay for the money.   The value of GMAC’s bonds began to drop, and as people started to worry that GMAC would never recover, the credit rating and price of the GMAC bonds became close to worthless, which then seriously hampered GM’s’ ability to sell new cars, to the point that GM was referring potential buyers to banks and other lenders instead of GMAC.

So one of the first things Paulson and Geithner did was to flood GMAC with cheap money, and combine the activities of GMAC with Chrysler’s financing company.   In December 2008, The US Treasury injected $6 billion, and converted GMAC into a “bank” (GMAC having never paid into FDIC and not having any “deposits”).  GMAC acquired a small bank to make that magic happen – it was named GMAC Bank, and now Ally Bank.

Remember the woman before the election who announced when Obama was elected that she would not have to pay her mortgage and would get a free car?  People scoffed at how naive she must have been.  The joke’s on us.  Remember Oprah’s Free Chicken Dinner giveaway and how word spread  so quickly within the community that there wasn’t enough free chicken to hand out?

Given Obama and Geithner’s obvious desire to manage failure, it seems very probable to me that they sent the word to GMAC to “just forget the credit scores” – we’ve got your backs – the same way the government “backstopped” Freddie Mac and Fannie Mae for home mortgages.  So GM and Chrysler may be selling cars to people who can’t possibly qualify for the car loan in normal times, or at interest rates that don’t reflect the risk of repossession down the road. 

Toyota’s sales were down 47% – they don’t have the luxury of ignoring credit risk.   The more the government gets involved, the more they change the competitive environment.   While they may not take over Ford, the competitive advantage that being financed by the government may ultimately drive you out of business – until a few years from now when GMAC is holding a worthless portfolio of uncollectible loans, and then we have a hole another trillion deeper.

Just like a woman can’t be half-pregnant, you can’t half-nationalize an industry.

The Other GM Shoe – unemployment insurance

Monday, June 1st, 2009

Back when I was working for GM (not as an employee – as a contract person), I learned a number of curious counterintuitive things – like people with seniority wanted to be laid off first during slow times.  Doing so, they would get 90+ percent of their pay and continue to vest in their pensions, then could work “off the books” doing construction work for cash or just tour the country in a motor home on an extended vacation.  The low seniority people were the ones who had to show up for work and make the cars.  It wasn’t called Generous Motors for nothing.

Another quirk was that the State of Michigan gave GM special exemptions on how Unemployment Insurance is supposed to work.   It’s a bit complicated, but there is a state and a federal fund with different sources of money.    The basic principle of funding is that each employer keeps a “balance” in the fund – how much they’ve paid in, and the amount of benefits paid out.  If a company gets in a deficit position, their contribution rate goes up to help rebuild the fund.   Other employers temporarily are subsidizing the ones (like GM) with lots of unemployed workers.

Well, GM had incorporated Unemployment Insurance into their business model.  When GM didn’t need all its workers, it would lay them off and let the State pay them.  Normally doing that would risk that those employees could drift away and when GM needed to restart the line, it would have to rehire and retrain people – so their agreement with the Unemployment folks was that GM workers collecting unemployment were NOT required to look for a new job to keep getting the check.  [Yes, I know that is a scam too] The Fund just became a way to subsidize GM at the expense of other employers.  Michigan didn’t want to lose GM, and many of those other businesses were indirectly in business because of GM so they were not in a position to complain.  This was in the 1980s, and also unemployment benefits were taxed differently than today.

Since GM will be declaring bankruptcy and shutting a lot of plants, those GM workers will be on unemployment for a LONG time, with no real assurance that GM will ever be in a position to pay back into the state uninsurance funds – especially in states where GM is going to shut down its only facility.

Look for a bunch of State Unemployment Funds screaming “we’re out of money” (It’s already started because the condition of the economy in general).  Not only are people collecting unemployment, but a lot fewer employers are paying into the fund.  Look for demands for a Federal Bailout  (did you read that IRS taxes paid in April were down 36% year over year?… yet Bloomberg and the economists think things are about to “turn around”)

In the spirit of just making problems worse, the Democratic party solution to this is to always feel compassion for The Worker – by extending unemployment so long that people forget what it is like to work.   Other employers become so burdened down with the costs and the artifically high costs of labor that they shut down or move to other countries to get out from under.

Do what you’ve always done, you’ll get what you always got.

Bankruptcy Watch – Filene’s Basement

Monday, April 27th, 2009

According to Bloomberg, clothing retailer Filene’s Basement is preparing for bankruptcy.   The company had previously been through bankruptcy in 1999, and is currently owned by a company that specializes in liquidating companies, so this isn’t a huge surprise.   They do intend to try to renegotiate leases with the shopping centers where they are located – which might further push some shopping center operators into problems.

Bankruptcy Watch – GM

Monday, April 27th, 2009

GM is peering over the edge of the brink of default now.

GM presented its final offer today.  90% of the bondholders must accept their final offer or they go into Chapter 11.   Liveblogging comments are available here

Regardless of whether the company goes into bankruptcy, Pontiac is history.  (I bought an Oldsmobile about a week before they dumped that brand in 2001 – and my car dealer is long ago out of business – the Chevrolet dealer who last repaired my car is also now out of business).

Hummer is going to be sold off,  Saturn – which was going to be GM’s prototype for the future way to do business – is going to be shut down unless they can sell it.

The interesting question from the news conference is – some of the bondholders surely have credit default swaps that will be triggered if GM files chapter 11 – so the bondholders are motivated to vote against the plan, which will trigger the CDS and the lenders get their money back.

Looking forward to the next question, which companies are on the hook having sold those GM Credit Default Swaps – and will they fail when they have to pay off on the bet?   Or are they companies like AIG already on the Geithner bailout bandwagon?

This Bloomberg story contains a quote from a bond analyst in Vermont says the plan seems to be designed to ensure that it fails.  If adopted, GM’s common stock would be 89% owned by the UAW’s health insurance fund, the bondholders would have 10% equity, and the current GM stockholders would have the remaining 1%.

GM employee 401(k) plan sells all 75 million shares of GM

Friday, April 24th, 2009

Detroit News Story

The trustee of the GM Employee 401(k) plan has dumped all 75 million shares over the past 3 weeks for under $2 a share .  That leaves very little doubt that GM is going into bankruptcy.

– If this was done based on knowledge of a definite decision to proceed with bankrupcty, someone is in serious legal jeapordy.  It seems unlikely they aren’t aware of the situation and the law.   Trading on non-public information is a crime called “insider trading”.   “Tim Geithner told us it is okay” is not a legal defense.

– if your employer holds much of your 401(k) plan in company stock, you’re working for a bad employer.  GM (until recently) required 1/2 of all 401(k) contributions to be in GM Stock.

Bankruptcy Watch – Chrsyler

Thursday, April 23rd, 2009

According to the NY Times, the U.S. Treasury Department (translation: Tim Geithner) is preparing the paperwork for filing Chapter 11 next week when the April 30th deadline arrives and Chrysler hasn’t found a buyer.

Geither’s folks have been talking about surgical bankruptcies for both GM and Chrysler – splitting up the “good” and “bad” parts of the company, taking the good and giving them to the UAW and current workers – and leaving the bad parts with the creditors – but that’s not the way bankruptcy works. 

One creditor cannot dictate the terms of the bankruptcy settlement for the others, segregate assets for themselves and cut up the pie the way it wants  (putting the UAW’s claims in front of bondholders – for instance).   Neither can the “Debtor in Posession” do that (DIP is the entity runnning the company while it works through the bankruptcy). 

Those decisions are the role of the bankruptcy judge – and following the law and legal precedents of similar cases in the past.   The more creditors that agree on a single plan, the more likely the judge will accept that version of the plan. 

Section $1114 of the US bankruptcy code already has rules about how to deal with retiree health insurance when their former employer goes bankrupt.   In addition, special COBRA provisions have been added in the past few years allowing retirees to buy COBRA for the rest of their life, and a 65% tax credit to pay for most of it (if they are working for a company whose pension plan was taken over by the Pension Benefit Guaranty Corporation). 

[I am not a lawyer]

Update:  Daniel Howes writing for the Detroit News makes the same point.  He quotes Larry Denton, the former CEO of an auto parts supplier that has been through the process:

“If GM thinks they can package this in a 90-day period, that’s pretty naive. The judge can’t say, ‘I’m going to give this company a good deal here because of its size,'” Denton says. “He has to follow the law.”

Then again, the Rule of Law doesn’t seem to apply lately to the Obama administration’s actions.  Perhaps this is a dry run to see if Geithner can force through the GM bankruptcy in June on his terms.

Bankruptcy Watch – General Growth Properties

Thursday, April 16th, 2009

This one is huge and could directly affect you.  [Bloomberg story]

This bankruptcy has been rumored since before Christmas.  General Growth properties is the second largest shopping mall operator in the United States.  They owe $27 billion in debt they used to buy up around 200 shopping centers around the United States.

The debtor in possession which will run the company in bankruptcy is Pershing Share Capital Management, a private equity firm.

Bankruptcy Watch – General Motors

Tuesday, April 7th, 2009

Reuters Story

“Intense Preparations” are underway preparing for a possible GM bankruptcy, along the lines of Geither’s plan – to split the company into a “good GM” and a “bad GM”.

Reading between the lines, it sounds like the decision has been made – in a company as complex as GM, it takes a while for lawyers to write up the paperwork and anticipate possible objections the court or other parties (including countries in Europe) may have.

If GM “goes”, the automotive parts business will likely follow – as well as serious damage to the bondholders (most of the value of the bonds has already been “written off”, but forces everyone to adjust their valuation)

But don’t worry – the Federal Reserve has lots of “money” it can create to keep funding cascading bailouts of the companies that fail.

Bankruptcy Watch – Silicon Graphics files Chapter 11

Wednesday, April 1st, 2009

Reuters

Silicon Graphics makes high end servers for business and government customers – their niche in the computer business was high performance graphics systems like those used for Computer Aided Design (think car companies)

Chicago Sun-Times files chapter 11

Tuesday, March 31st, 2009

NY Times story here

Having most of the country’s major newspapers going under with the current political and financial environment will not be a good thing.  In addition to the Chicago Sun Times, the parent operates another 59 newspapers.