GM Stock Sale: Taxpayers and investors not as fortunate as UAW

[Mr. Wyndham]

Originally Posted by DGthe3

In all likelihood, the mess wouldn't have happened were it not for the credit crunch in late 2008...

I forgot to mention that 'little' detail.

[Berean]

Originally Posted by mickss

I don`t have a problem with an opinion article provided that it was sourced from a neutral and unbiased publication, but the Washington Times is to right what the New York Times is to the left. That whole article was nothing but an anti-administration and anti-union hit job.

Were there any facts that were wrong in the article?


Didn't think so.

[mickss]

This where GM`s slide started. This is a 5 year old article.
http://www.washingtonpost.com/wp-dyn...2005Apr18.html

General Motors Getting Eaten Alive by a Free Lunch

By Allan Sloan
Tuesday, April 19, 2005; Page E03

A free lunch can be the most expensive meal in the world. For living proof, look at General Motors. A big reason that GM has gotten into such trouble is that the pension and health care commitments it made to employees decades ago seemed to be a free lunch.

The United Autoworkers placed a high value on these benefits, but the accounting rules of the time placed no cost on GM's risk of providing them. So the UAW and GM made deals that were heavy on benefits, relatively light on wages.

Lower salaries meant that GM reported higher profits, which translated into higher stock prices -- and higher bonuses for executives. Commitments for pensions and "other post-employment benefits" -- known as OPEB in the accounting biz -- had little initial impact on GM's profit statement and didn't count as obligations on its balance sheet. So why not keep employees happy with generous benefits? It was a free lunch. Besides, GM's only major competitors at the time, Ford and Chrysler, were making similar deals.

Now, as we all can see, pension and health care obligations are eating GM alive. The bill for the "free" lunch has come in -- and GM is having trouble paying the tab. In the past two years, GM has put almost $30 billion into its pension funds and a trust to cover its OPEB obligations. Yet these accounts are still a combined $54 billion underwater.

"Any market economist would tell you that things that are 'free' are overconsumed," says Greg Taxin, chief executive of Glass, Lewis & Co. "That's true of pensions, it's true of OPEB, and it's true of stock options in the '90s." That's a lesson the SEC seems to have ignored, given last week's decision to let companies delay counting the value of options as an expense. But that's a topic for another day.

GM began its slide down the slippery slope in 1950, when it began picking up costs for medical insurance, pensions and retiree benefits. There was huge risk to GM in taking on these obligations -- but that didn't show up as a cost or balance-sheet liability. By 1973, the UAW says, GM was paying the entire health insurance bill for its employees, survivors and retirees, and had agreed to "30 and out" early retirement that granted workers full pensions after 30 years on the job, regardless of age.

These problems began to surface about 15 years ago because regulators changed the accounting rules. In 1992, GM says, it took a $20 billion non-cash charge to recognize pension obligations. Evolving rules then put OPEB on the balance sheet. Now, these obligations -- call it a combined $170 billion for U.S. operations -- are fully visible. And out-of-pocket costs for health care are eating GM alive.

GM spokesman Jerry Dubrowski says the company expects to pay $5.6 billion in health care costs this year for 1.1 million people covered by its plans. That's up from the $3.9 billion it shelled out in 2001 to cover 1.2 million people.

"At the time GM began offering these benefits, no one had any idea that the costs for prescription drugs and medical services would explode the way they have," Dubrowski said. True. But the UAW was astute (or lucky) enough to push the risk of covering these costs onto GM.

GM's pension funds are in pretty good shape, thanks to an $18.5 billion infusion two years ago. GM got this cash by selling bonds at relatively low rates, hoping to resolve its pension problems once and for all. This maneuver has been successful so far, but funding the pension plans has consumed much of GM's borrowing power and strained its balance sheet.

At the end of last year, GM says, its U.S. pension funds showed a $3 billion surplus. GM's pension accounting, which assumes that the funds will earn an average of 9 percent a year on their assets, is highly optimistic. But things are under control -- as long as GM stays solvent.

By contrast, OPEB is out of control. At year-end, OPEB was $57 billion in the hole, even though GM threw $9 billion into an OPEB trust in 2004. The company has no legal obligation to pre-fund these costs, but it's trying to show the financial markets and its workers that it's dealing with them. The OPEB trust has a hefty $20 billion of assets -- but GM calculates its obligations at a staggering $77 billion.

What's more, GM says they're rising at 10.5 percent a year. Thus, even though President Bush's Medicare prescription drug benefit whacked $4 billion off GM's OPEB obligation last year -- thanks, George -- it covered barely half the year's increase in the liability.

If GM were making lots of money selling vehicles, this would all be manageable, sort of. GM could buy enough time for demographics to bail it out, as more retirees begin getting Social Security and Medicare, reducing GM's costs, and other retirees die off. Its ratio of retirees to workers, currently 2.5 to 1, would shrink. Alas, GM's vehicle business is in the tank. Unless GM starts making money on vehicles or gets a break from the UAW or the federal government, things are going to get really ugly. I hope that doesn't happen, but it easily could.

The bottom line: Whenever you offer someone a free lunch, make sure that you'll be able to pay the bill when it comes in.

[Berean]

I think some of you are missing the point. Which is, the union was treated far more favorably in the bankruptcy than the other creditors. The question is why? I think we know the answer but for some reason, some people don't want to hear it, or want to remain willfully ignorant.

The government politicized the GM bankruptcy for the benefit of the UAW and the taxpayer is now on the hook for the cost. It was a net transfer of money from the taxpayer to the UAW.

And this is one of the reasons many people resent GM's taxpayer bailout.

[Mr. Wyndham]

Originally Posted by Berean

I think some of you are missing the point. Which is, the union was treated far more favorably in the bankruptcy than the other creditors. The question is why? I think we know the answer but for some reason, some people don't want to hear it, or want to remain willfully ignorant.

The government politicized the GM bankruptcy for the benefit of the UAW and the taxpayer is now on the hook for the cost. It was a net transfer of money from the taxpayer to the UAW.

And this is one of the reasons many people resent GM's taxpayer bailout.

Nobody's missing any point. Very important obligations were made to the VEBA fund before bankruptcy. These obligations were weighted far and away more important than some other things, and slotted appropriately in order of priorities. It means cost savings above most other actions that could be made.

The 'taxpayer' is not on any hook. The TREASURY has been paid back for the loans, and it will slowly sell off its shares in the company so as to not shock the value. It's currently sold off 20% of its original 60. Most outlooks see the treasury making a positive return on this venture....so I don't understand this notion of a "net transfer"?

[Berean]

Originally Posted by Dragoneye

Nobody's missing any point. Very important obligations were made to the VEBA fund before bankruptcy. These obligations were weighted far and away more important than some other things, and slotted appropriately in order of priorities. It means cost savings above most other actions that could be made.

The 'taxpayer' is not on any hook. The TREASURY has been paid back for the loans, and it will slowly sell off its shares in the company so as to not shock the value. It's currently sold off 20% of its original 60. Most outlooks see the treasury making a positive return on this venture....so where's that "net transfer"?

I've noticed the only people who 'resent' this situation seem to be the ones who aren't really paying attention, or those who are and have preconceived notions they refuse to let go of.

In a regular bankruptcy proceeding, the SECURED creditors would have been given preference.

It's absurd to suggest the taxpayer isn't on the hook. MAYBE, the taxpayers will recover the 50 billion, but it isn't even close yet. Come back in a few years and we'll see. Until then, we're on the hook.

The UAW was given a far greater stake in the new company than the obligations would warrant in normal bankruptcy proceedings.

I've noticed that people who aren't willing to admit that aren't paying attention or have preconceived notions they refuse to let go of.

[Mr. Wyndham]

Originally Posted by Berean

In a regular bankruptcy proceeding, the SECURED creditors would have been given preference.

It's absurd to suggest the taxpayer isn't on the hook. MAYBE, the taxpayers will recover the 50 billion, but it isn't even close yet. Come back in a few years and we'll see. Until then, we're on the hook.

The UAW was given a far greater stake in the new company than the obligations would warrant in normal bankruptcy proceedings.

A normal bankruptcy would have taken nearly two years for a company the size of General Motors....and I think it's beyond obvious that this was anything but a normal bankruptcy. Every valuable asset "old GM" had was fast-tracked into a new company, and everything else was left for creditors, etc to squabble over. As far as the VEBA fund the author has blown out of proportion...as I said -- the obligations GM had to the VEBA was deemed more important than the obligations it had to most other players. Not being an accountant I would tend to agree. No healthcare or other benefit responsibilities to hourly workers for the good part of 80 years will help them immensely.

I also believe it's absurd to pretend the taxpayer is going to feel any of this, outside of awesome new cars and trucks offered by the company. Once you pay those taxes, they're no longer yours. They belong to the people we've elected. So...it's rosie and cute to consider it "taxpayer" money; it sure makes for an emotional argument...but it's no more our money than is that $5.50 I just spent on a Whopper value meal.

The difference here is, where my burger money came from my pocket and is forever gone -- the loan money came out of a credit line set up in '07 for the development of 'green' cars and trucks. It wasn't 'new money', and it was paid back. The rest is up for opinion, I guess. 20% of what the government owned was bought back by the company...and now it's up to whether you think positively, or negatively about the chances the treasury will recover that other 40%. As I said, analysts are expecting there to be a full recoup, if not a little profit.

[2010-1SS-IBM]

Originally Posted by Dragoneye

Nobody felt entitled...and plenty people sacrificed.

Many employees had pay frozen, some had pay cut, all were worried about their future employment with the company. As I said before, TENS of thousands of employees were let go, many had benefits like healthcare cancelled after the age of 65, and all of this led to a smaller, more cost-effective company.

But at the cost of the livelihood of thousands. Does that make you feel better to know people lost their jobs?

Yes, it does, although not for any reason you'd understand, apparently. Hopefully GM has learned it's lesson, because they won't get bailed out again.

Originally Posted by Dragoneye

They do. You just seem to need to open your eyes a little wider, I'm afraid.

My eyes are wide open. Are yours?

[2010-1SS-IBM]

Originally Posted by DGthe3

The management responsible for causing GM's problems has been gone for a while. A lot of the problems were started decades ago, but in the ~5 years leading up to the bankruptcy, they were working to correct a number of those errors by working with the UAW to cut costs, streamlining operations, and refocusing on product. In all likelihood, the mess wouldn't have happened were it not for the credit crunch in late 2008, and they wouldn't have had to go to the government to secure cash. They could have either gotten more traditional loans, or they might not have needed them in the first place. So if you want to accuse those at the helm in 2009 for the bankruptcy, you're sadly mistaken. If anything, they were the best group GM had had in years. But even the best captain & crew can't save a sinking ship facing a tidal wave.

I'm glad to hear they were changing course, and I hate to sound like a broken record, but so what? IMO, none of that justifies the taxpayers taking a loss to bail them out. GM would have gotten restructured and sold if the government didn't step in. The UAW probably would have gotten less, their creditors probably would have gotten more, that's about the only difference.

On the flip side, bailing out GM added more debt to our government that's already overburdened. Furthermore, it jeopardizes the governments ability to provide social safety nets (welfare, unemployment benefits, Social Seuciryt and Medicare/Medicaid). And it creates another moral hazard (along with the banks, insurance companies, GSE's, etc...).

[a_Username]

Originally Posted by a_Username

Naw, it's not that lol. It's mostly just the terrible attempts at economics that's going on in here.

I'm serious, this thread is like the uninformed yelling contests at Capitol Hill.

[Mr. Wyndham]

Originally Posted by 2010-1SS-IBM

Yes, it does, although not for any reason you'd understand, apparently.

Don't be so quick to assume. I understand a whole helluva lot of things...doesn't mean I agree with whatever it is, though.

Originally Posted by 2010-1SS-IBM

My eyes are wide open. Are yours?

Quite. AND I have my contacts in.

Originally Posted by 2010-1SS-IBM

I'm glad to hear they were changing course, and I hate to sound like a broken record, but so what?

The 'so what' is the point DG made in that very same post: NO bankruptcy had the economy (see: NOT GM's fault) not taken a crap. And GM would have gotten liquidated, don't fool yourself. None of the brands could have survived on their own, and nobody had enough cash to buy them all, let along the resources to run them.

Originally Posted by 2010-1SS-IBM

On the flip side, bailing out GM added more debt to our government that's already overburdened. Furthermore, it jeopardizes the governments ability to provide social safety nets (welfare, unemployment benefits, Social Seuciryt and Medicare/Medicaid). And it creates another moral hazard (along with the banks, insurance companies, GSE's, etc...).

Temporary debt (that once again, you'll NEVER feel), I'm not sure what relation social security has to this, and since when has saving millions upon millions of jobs via an uncomfortable solution been deemed 'immoral'?

[2010-1SS-IBM]

Originally Posted by Dragoneye

I also believe it's absurd to pretend the taxpayer is going to feel any of this, outside of awesome new cars and trucks offered by the company. Once you pay those taxes, they're no longer yours. They belong to the people we've elected. So...it's rosie and cute to consider it "taxpayer" money; it sure makes for an emotional argument...but it's no more our money than is that $5.50 I just spent on a Whopper value meal.

No, the money doesn't belong to the people we've elected. For one thing, they can be thrown in jail for improper use of public funds.

And while you may think it's absurd to think anybody will "feel any of this", you didn't think it was absurd when you talked about the disaster that would happen if we didn't give it to GM. Does that money magically become "better" when it's given to GM, as opposed to staying in the pockets of people who earned it?

Let's put it a different way; is it more productive to leave that money in the successful sectors of the economy, or take money from the successful sectors to give it to companies that drive themselves into bankruptcy?

Originally Posted by Dragoneye

The difference here is, where my burger money came from my pocket and is forever gone

No, it isn't. It went to the burger company, who will use to to pay their employees, suppliers and investors. You might happen to be one of those.

And, of course, you also now have a hamburger.

There's actually another term for a situation where one is forced to give up their money, and get nothing in return.

[2010-1SS-IBM]

Originally Posted by Dragoneye

The 'so what' is the point DG made in that very same post: NO bankruptcy had the economy (see: NOT GM's fault) not taken a crap. And GM would have gotten liquidated, don't fool yourself. None of the brands could have survived on their own, and nobody had enough cash to buy them all, let along the resources to run them.

They were worthless (bankrupt). Anybody who could fund them could have bought them.

Originally Posted by Dragoneye

Temporary debt (that once again, you'll NEVER feel), I'm not sure what relation social security has to this, and since when has saving millions upon millions of jobs via an uncomfortable solution been deemed 'immoral'?

If it's no big thing, can we have our money back then?

[Mr. Wyndham]

Originally Posted by 2010-1SS-IBM

No, the money doesn't belong to the people we've elected. For one thing, they can be thrown in jail for improper use of public funds.

It is completely theirs to allocate as they will as our leaders.

Originally Posted by 2010-1SS-IBM

And while you may think it's absurd to think anybody will "feel any of this", you didn't think it was absurd when you talked about the disaster that would happen if we didn't give it to GM. Does that money magically become "better" when it's given to GM, as opposed to staying in the pockets of people who earned it?

No, I didn't think it was absurd to worry about the repercussions of a giant corporation falling in the middle of a recession. The money doesn't become anything -- it gets used. In this case, it was used as a repayable (see: not 'given') crutch to help an ailing, but promising company from being destroyed by external conditions. And I didn't get a bill in the mail for my share of the loan/investment....so.....it didn't come out of my pocket. Not that it matters, I'd have gotten it all back, anyways.

Originally Posted by 2010-1SS-IBM

Let's put it a different way; is it more productive to leave that money in the successful sectors of the economy, or take money from the successful sectors to give it to companies that drive themselves into bankruptcy?

Well first, we need to change the condition of the question: They didn't drive themselves anywhere. And if the company was liquidated, they would have effected many of those successful sectors...so I suppose it's equally productive in the given chicken/egg scenario.

Originally Posted by 2010-1SS-IBM

No, it isn't. It went to the burger company, who will use to to pay their employees, suppliers and investors. You might happen to be one of those.

And, of course, you also now have a hamburger.

True. Here, we are being offered class-leading, innovative vehicles designed and built by many hardworking American employees, with parts from thousands of suppliers in every imaginable market, and the chance for a new set of investors to make some money off of the company.

Except I get my $5.50 back, too.