Crossposted at Taunter Media
The government's favorite public relations agency, the New York Times, has this from the auto task force:
The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite G.M.'s public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend.
The goal is to prepare for a fast "surgical" bankruptcy, the people who had been briefed on the plans said. G.M., which has been granted $13.4 billion in federal aid, insists that a quick restructuring is necessary so its image and sales are not damaged permanently.
To hasten the restructuring, the government would look to pull a "good GM" out of the bankruptcy estate almost immediately:
Treasury officials are examining one potential outcome in which the "good G.M." enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing, a person who had been briefed on the prospect said last week.
That sounds nice. What's left behind?
The rest of G.M. may require as much as $70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories, according to legal experts and federal officials.
I knew there was a catch somewhere...
First things first: the main reason for this article is posturing. The Dubya Administration (well, Bob Corker, but he was about the only Republican doing any work in December 2008) told GM that in exchange for emergency loans it needed to convert two thirds of its bonds and half of its UAW healthcare obligation (the VEBA) into equity.
Accomplishing these things would not restore GM to financial health. The company would still be cash flow negative and it would still have significantly negative book equity. But if somehow the bondholders and UAW agreed, the Obama Administration could declare victory and very quietly pump as much cash as necessary into the company without criticism from Corker and Shelby.
However, the folks on the task force are trying to create a genuinely sustainable industry, and since achieving this sustainable level really does require going through the bankruptcy courts, it's worth taking seriously the possibility that GM will file.
If GM went through with the plan on the table, we would quickly see a "good GM". Good GM would have the three core North American platforms/channels: Chevy, Cadillac, and Buick/GMC/Pontiac (I happen to think using one channel for Buick/GMC/Pontiac makes no sense, but so be it). It would have most but not all of its existing manufacturing capacity - the exact amount to be decided as folks hash out whether a mid-cycle auto build should be 9.5mm (current conditions), 12.0mm (current GM estimates), 16.0mm (most of the past decade), or 17.0mm (GM's estimate when the actual performance was 16.0mm).
The dip into bankruptcy would allow Good GM to drop at least a thousand dealers from its current Good GM lineup (obviously the Bad GM dealers are separate). This is essential to the long-term health of the company, as franchise laws make it almost impossible for a company to shed distribution channels outside of bankruptcy - and, in the case of GM, critically unfair, as termination payments would be going out to dealers at the same time as the UAW was seeing its healthcare benefits cut.
Good GM could also adjust its supply contracts to reflect the new build assumptions, although I suspect this savings will be less than hoped; GM already had a pretty good purchasing division, and the parts suppliers are at death's door. It isn't clear that they can offer any better terms to Good GM than they are already.
I would assume the equity in the foreign subs would ride with Good GM, since the businesses have common services, but the structuring may be a bit unclear if the government is buying assets out of bankruptcy (furthermore, there are issues with other nations not wanting to give aid to foreign subs if there is a chance the money will leak back to the US). Stay tuned for that one.
Bad GM has the rest of the brands (Saturn, HUMMER, SAAB) and all manner of problems. In its 10K, GM reported $176bn of liabilities and only $91bn of assets on 12/31/08 (even worse than their 2/17/09 predictions - I use these numbers while my previous posts used the 2/17 estimate).
It gets worse. $57bn of those liabilities are payables and accrued expenses. Let's assume that goes to Good GM, offset by the $20bn in receivables and inventory and the $13bn in cash (half of that cash has been spent since, but let's stick with the 10K). $119bn of liabilities against $58bn of assets.
$40bn of those assets are property. Almost all of that is needed to operate Good GM. But let's be nice and say Good GM takes only what is necessary to give it zero book equity - a very optimistic assumption. So it takes $24bn (24+13+20=57) and goes on its way.
The rest of the estate has $119bn of liabilities and $34bn of assets. Beginning to understand where they got the $70bn estimate?
The $45bn of debt (including our kind bridge loans) are gone. $74bn of liabilities and $34bn of assets (using my assumption that it is possible to hive off this much property - probably not). We are left with VEBA, pension, and deferred taxes, plus some minor stuff. $29bn, $25bn (and undercalculated), $17bn. Plus the dealer claims against the bankrupt estate, plus Delphi flowback claims. How badly will the Obama Administration - rephrase, how badly can the Obama Administration - let the UAW get hit?
These are guys who worked decades in lousy conditions breathing terrible fumes for promises GM is in no position to deliver. These are also guys who have dramatically outearned the average American and done so while working in a union that earned a reputation for making terrible products with extraordinarily restrictive work rules. Is it true today? Of course not; in fact, by most measures union plants are more productive than non-union plants (although CAW plants are persistently more productive than UAW plants - must be not having to worry about healthcare). But then, the UAW has not been about its active workers in thirty years; its main focus is on the retirees. And how are these Obama voters in the Great Lakes states who are counting on their benefits going to react when the PBGC gives them a massive haircut?
That's the giant challenge. But give the Administration credit: from North Korea to General Motors, mineral leases to hostage rescues, as long as the challenge does not involve a financial services firm, they have done their best to position us for the right answer.