If the bullish scenario plays out this week, flows are likely to be tilted more so to North America ...
Few Winners in Detroit's Demise
05/21/2009 1:46 pm EST
The sale of Chrysler LLC to Fiat proceeds in bankruptcy court, while General Motors (NYSE: GM) is next in line—it could file for Chapter 11 protection by June 1st.
As this whole sad saga unfolds, it's become clear that lots of people and principles have been damaged, and few will get much out of it.
The federal government has assumed a huge role in the reorganization of two giant corporations, one publicly held and one privately owned.
Billions of dollars of taxpayer money have helped prop up two companies whose businesses had basically failed.
Principles at the core of our system—creditors' rights to get their debt repaid, maybe even Fifth Amendment property rights—have taken a body blow.
And the United Auto Workers union, which appeared to come out on top in the Chrysler deal, won't gain much as its long, slow demise continues.
The only partial winners I can see in all this are foreign-owned automakers and maybe Ford Motor (NYSE: F), which will get to fight over a much-diminished US auto market.
You know the story, so I'll be brief (and you can find a good history here): The US auto industry emerged intact from World War II with essentially no foreign competition. The UAW under Walter Reuther and auto companies' managements initiated a social compact that ensured higher wages, fewer work hours, and generous health care benefits to auto workers and retirees.
But when gasoline prices soared in the 1970s, US automakers had nothing but gas guzzlers to sell, opening the door for Japanese manufacturers like Toyota, Nissan, and Honda to grab market share, a process that has continued for decades. The Japanese and Germans kept making better and better cars while Detroit's quality languished.
Meanwhile, the UAW kept pushing for more benefits for its members, seemingly oblivious to their employers' problems. As recently as 11 years ago, it launched a tough strike against GM that caused $2 billion in losses.
Meanwhile, GM and Chrysler concentrated on trucks and sport utility vehicles, which were huge profit generators. Recently the companies have improved quality and the UAW did start making concessions on wages and health-care benefits, but it was too late.
When gasoline prices topped $4.00 a gallon last year and a deep recession followed, the game was up: GM and Chrysler (controlled by private equity firm Cerberus Capital Management) went hat in hand—in their private jets—to Washington, DC, the "bailer-outer" of last resort. Neither a Republican administration on its way out nor a Democratic administration on its way in was willing to take the heat for the failure of two of the once-Big Three. Taxpayers would, though.
And that price has been heavy indeed, beyond the billions of dollars we've already loaned or given to these wheezing behemoths.
Most notably, the UAW got 55% of reorganized Chrysler (and one seat on the board of directors). Eventually the union will have to sell that stock to defray more than $10 billion in health care costs for some 80,000 retirees.
But the UAW, an unsecured creditor, will get paid ahead of secured creditors—major banks as well as pension and hedge funds that hold Chrysler's debt.
Lynn M. LoPucki, a professor at UCLA Law School and an expert on the bankruptcy courts, says this is unprecedented.
"There's nothing like Chrysler and GM that has ever been in the bankruptcy courts," he says, adding that the secured creditors "had the right to the entire value of the company."
The creditors fought at first, claiming that the sale to Fiat was "improper" and "that a secured creditor's interest is protected in bankruptcy under the Fifth Amendment," according to their complaint.
It cited the final "taking" clause of that amendment, which reads "nor shall private property be taken for public use, without just compensation."
Courts' rulings on this clause have been mixed, but the dispute ended quickly when the so-called "non-TARP creditors" caved to White House pressure and dropped their claims for $6.9 billion. They wound up with only $2 billion, 29 cents on the dollar. Three pension funds that are secured lenders to Chrysler are now balking, but the attorney for the "non-TARP" creditors, Thomas Lauria of White & Case LLP, didn't respond to an e-mail message requesting comment.
The outcome at GM may turn out even worse. Although it's much bigger than Chrysler and is generally thought to make better cars, GM faces an even trickier path in bankruptcy court.
"It's going to be very, very hard," says Charles B. Craver, an expert in labor law at The George Washington University Law School. "I don't know what will be left. The creditors could end up with nothing."
Unlike Chrysler, GM has no buyer lined up—except for maybe the US government. Despite many protests to the contrary, some form of government control of GM is very much on the table, says Professor LoPucki of UCLA.
Indeed, GM's own SEC filing of April 27th states flatly: "One alternative we are considering is a sale…of most or substantially all of the company's operating assets, including its subsidiaries, to a new operating entity…formed by and controlled by the US Treasury."
I tried to learn more about this, but the Treasury's press office didn't get back to me.
But the biggest problem GM or Chrysler may face is a much smaller auto market. From almost 18 million in 2000, total US vehicle sales plunged to 13.2 million in 2008, and were selling at only a 10.6-million annual clip by the fourth quarter.
This year sales may hit 12 million or so, and even if they eventually rebound to 14 million a year, that's a 20% drop from 2000's levels—and bad, bad news for US manufacturers.
Meanwhile, the UAW is a shadow of its former self. From a peak of over 1.5 million members in the early 1980s, the once-mighty union now has some 431,000 dues-paying members—and huge stakes in companies that may not have a future.
That's why its "victory" in the Chrysler bankruptcy—and perhaps GM's to come—may be a pyrrhic one: Fifty-five percent of nothing is, well, nothing. Unless you're counting on taxpayers to pick up the tab.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own.
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