Monday, November 10, 2008

Andy Martin Calls for GM Bankruptcy

I just received the following e-mail from Andy Martin.

>Three years ago I was swamped with calls from Wall Street after I said that General Motors should immediately file for bankruptcy. The 2005 column follows this column so you can see what I wrote then. It was prophetic.

Today I renew my call for General Motors to file for bankruptcy. Tomorrow. If GM delays, it will certainly derail Barack Obama's "first 100 days" and could end up derailing our national economic recovery.

GM mangers did not want to file in 2005 because they probably foresaw that bankruptcy could come some day, and they wanted to protect their executive pensions by insulating them from future creditor claims. In addition, GM's astronomical executive salaries could not survive a bankruptcy proceeding. Fair enough.

But GM's labor costs would be slashed as well in bankruptcy. In the long run, there is no way the existing labor cost structure can be preserved in the automobile industry. If GM and others move quickly, they can still save tens of thousands of good jobs and preserve good pay and good benefits. But every day's delay will cost the economy future jobs.

This weekend auto industry executives were in Washington seeking a bailout. Congress and the president should say no. The executives' demands place Barack Obama in a quandary. Michigan voted for Obama and the Democrats. Labor unions will claim that they want a bailout instead of a handout. But the Democrats and union leaders are living in a dream world. Repeat: every day that bankruptcy is delayed will cost every American economic security.

Today the auto industry has unsustainable wage levels and ridiculous benefits. They are the product of a bygone era in labor relations when the Big three enjoyed a practical monopoly in domestic sales. It's hard to believe but GM alone once controlled more than half of the U. S. auto industry. No more. Americans are no longer loyal to American automobiles.

But the high wages and extreme benefits of the past have survived in one form or another. Recently, auto companies have begun to shed their medical benefits programs, and to involve the United Auto Workers in benefit management. But the UAW can no more defy the laws of economics than GM's anemic management.

During the primary season John McCain was pilloried by politicians for stating the obvious: high wage jobs in the auto industry would not be returning and that "change" was coming. What businessman in his right mind would build a plant or invest in an existing plant in Michigan, Indiana or Ohio, when they could "go south" and save 25% of their labor costs? In some sort of suicide pact, the states where the auto industry was strongest voted for their own death sentence by supporting the Democrats.

Democrats can no more rewrite the laws of economics than Republicans.

GM's CEO tried to use scare tactics by saying that no one would buy a car from a bankrupt company. Oh yeah? Tens of millions of passengers flew on bankrupt airlines. In 2005 I showed why there is no fear of bankruptcy in today's economy.

So what happens if GM does not file for bankruptcy protection and keeps pounding the table demanding a bailout?

First, there will be confusion and delay. Nothing will happen for months. By then GM will be even weaker. Second, labor unions will try to strong-arm congress into voting bailout funds.

Frankly, the end of the road has arrived for the inflated, incompetent auto industry management. In President Reagan's time they got assistance in the form of import quotas to give them "time to retool." As soon as their prospects improved, up went salaries and wages and the public was forgotten. We are in yet another down cycle of auto production, and once again executives are in Washington begging for assistance and predicting dire consequences if no aid is forthcoming.

I predict even more dire consequences for the economy if aid does go to the auto companies.

First, there will be no pressure to cut or costs and modernize labor relations. Wage levels are still way too high in the northern UAW auto plants.

Second, resentment is already building against bailouts that preserve high wages and executive perks, and are paid for by poor and working families. It just is not fair, or right, for the least among us to support the wealthier. Wall Street took the bailouts and went back to its bad ways, again promising bonuses for bad management and poor performance. If Democrats do adopt "corporate welfare" in response to pressure from labor, the long-term economy and economic recovery will be weakened not strengthened.

Well, there you have it. Sadly, I can only prescribe a bitter pill for my friends in the UAW. But I also can promise them that if labor and management do not head for bankruptcy court this week, the next pill will be a suicide pill. Which is worse?

Fast bankruptcy action will save jobs and stimulate the economic recovery. Delay is death, for workers, managers and our economy.

Look at what I had to say three years ago about this identical problem:





(CHICAGO)(October 14, 2005) I got a letter in the mail this week. Delta Airlines was telling me they had filed for bankruptcy. They said "not to worry," my frequent flyer miles were safe and operations were normal. I also fly on United Airlines (in bankruptcy three [3] years) and Northwest Airlines (also filing for bankruptcy). US Airways just exited bankruptcy, after a second trip through the financial wringer.

What do all of these airline bankruptcies have to do with General Motors? Read on.

I first saw a prediction that General Motors could/should file for bankruptcy several months ago. The writers suggested that by some time later in this decade GM would have exhausted its financial resources, and would be forced into bankruptcy.

Last weekend a former GM subsidiary, Delphi Corporation, did file for bankruptcy. General Motors is potentially liable for up to $11 billion in retiree health premiums and pensions for Delphi's workers. That overhanging liability, as well as GM's steadily eroding financial position, causes me to write this column. GM should file for bankruptcy--now. Before it is too late.

GM is still a formidable worldwide enterprise. It has billions of dollars in cash resources, as well as "crown jewel" assets that are highly profitable and are currently subsidizing the money-losing automobile business. Why file for bankruptcy?

This is a painful column to write because I have enjoyed a close association with members of the UAW for thirty (30) years. Some of them have supported me in earlier political campaigns. I have a great deal of affection for and loyalty to the men and women on the shop floor. And I accurately predicted thirty years ago that unless America changed its trade policies, large areas of Illinois's manufacturing economy, notably in the Quad Cities, would be hollowed out and eventually destroyed. Unfortunately I was proven right.

The UAW faces a cruel dilemma. It can cut wages slowly and hope GM survives. Or it can seek to maintain its current levels of wages and benefits, initially see jobs slowly disappear, and eventually see the whole enterprise disappear. Yes, GM could disappear. It would be dismembered first, and then disappear.

Why should GM file now? There are several persuasive reasons why it should accept the horrible alternative of corporate reorganization immediately and file for bankruptcy relief.

First, if GM files now, shareholders will be able to influence the reorganization process and likely retain a massive equity ownership interest in the firm. If GM waits several years to file, shareholders will be wiped out, the way airline shareholders are being erased from the picture. So, the sooner GM seeks corporate reorganization relief in bankruptcy court, the more shareholders will be able to salvage from their investment.

Firms that are financially strong when they enter bankruptcy will be financially stronger when they exit.

Second, there is no realistic prospect that under current conditions the UAW will agree to significant wage and benefit reductions. Mentally, psychologically union leaders and workers are not prepared to accept the inevitable. Therefore GM will continue to die a slow death, as employees demand a financial return that can no longer be provided by the enterprise, and as it struggles to complete in the world economy. A bankruptcy filing would force everyone involved to confront reality. Now, before it is too late.

GM management has been poor to atrocious but part of that poor performance is based on an increasingly global automobile market and GM's inability to justify UAW wages in a competitive environment. Non-union auto workers in southern states earn less, receive fewer benefits and less generous pensions, and work under conditions that are more stringent. GM workers are not prepared to accept similar conditions. (If they act now, they won't have to.)

Third, UAW employees are likely to do significantly better if GM files for bankruptcy now, than if the UAW waits for GM to bleed and hemorrhage to the point of financial exhaustion several years down the line and then seeks bankruptcy protection. The sooner GM files the more leverage UAW employees will have to protect their wages, pensions and benefits. (Yes, this column is called "Contrarian Commentary" for a reason.)

Fourth, there is no longer any stigma to corporate bankruptcies. Are people avoiding United Airlines because of its endless bankruptcy proceedings? Doubtful. And United just snagged almost $3 billion in new financing to exit bankruptcy. Delta Airlines' comfort letter to its customers, telling them their benefits are safe and airline operations are normal, is the norm today. People love to engage in patriotic breast beating; until it comes time for them to shop and spend their hard-earned dollars. Then they usually buy the lowest price offering. And that is why GM is suffering. American automobile buyers do not want to pay UAW wages any longer. Something has to give. Or give back.

Fifth, which is a combination of the first and third reasons, if GM files now the legitimate owners of GM will be able to retain their stake, instead of corporate undertakers earning unconscionable profits from financial manipulation in bankruptcy court. Wilbur Ross, a wise Wall Street operator, has made billions by buying bankrupt companies after they file, using reorganization to profit himself, and then dumping employees on the street.

The same thing happened at K-Mart, where outright fraud appears to have been committed to cheat employees, shareholders and creditors, while a handful of speculators profited from insider information and made a billion dollar killing.

Bankruptcy courts are literally a "necessary evil," and they are very evil indeed. Shysters and scum bags do everything they can to profit at the expense of legitimate stakeholders in a business. But they succeed only because the stakeholders themselves refuse to face reality and act realistically. If GM management and workers march into bankruptcy when the firm is financially strong, the "vulture investors" can be kept at bay. If GM delays, the vultures will win, and the employees and shareholders will take the big hit so that Wall Street ogres can fatten their own wallets.

Kirk Krikorian, a legendary shrewd investor, has recently been buying GM stock. Obviously, he does not expect the firm to go under. But he wants the company to reorganize its assets and operations. If GM agrees to Krikorian's demands he will make millions in the short run, but only ensure that GM continues to weaken financially and ultimately ends up in bankruptcy court.

So, if at first you thought my proposal that GM file for bankruptcy was absurd, I submit you were wrong, wrong, wrong. Contrarian that I am, I think workers, managers and shareholders must face the inevitable before it is inevitable. They must act to control their own destiny instead of allowing speculators such as Krikorian and vultures such as Ross to profit at the expense of little people.

I first visited Wall Street over forty years ago. I have followed the stock market for almost fifty years. I have seen firsthand what corruption and shenanigans take place in the bankruptcy courts when a company seeks relief only after it is prostrate: the vultures profit and employees are punished with the loss of their jobs, benefits and pensions. I don't want the same thing to happen to my UAW friends and supporters on the shop floor at GM.

I don't know what management, labor and shareholders should agree to as a realistic solution for GM to survive. But I do know how that future will look if these groups don't go to bankruptcy court now, and ask a judge to help while the firm is still financially flush and able to control its own destiny.

Airline employees have been devastated and virtually wiped out in the airline bankruptcies because those firms waited too long before seeking protection. No one ever thought the airlines could fail, and indeed they have not stopped flying. But paychecks have been slashed, benefits evaporated, and pensions disappeared. I don't want the same for GM.

GM is an honorable enterprise. Its employees are great people. I believe that GM helped save America after 9/11 when, instead of closing its plants in response to falling demand, GM opened up the throttle and "Kept America Moving." GM has never received any appreciation for this bold policy that rescued the economy. Now it is GM that needs a rescue. Once again, bold leadership, bold vision, and bold action are needed to "Keep America Moving."

1 comment:

Anonymous said...

This is great, it clarified some contradictions I had seen.