Re: [A-List] SIMPLY STAGGERING: GM took an $8.6 billion loss for 2005

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

If a government bail out comes for GM, it would be in the pension
obligations.


Detroit, namely Ford and General Motors, with their most profitable
models being the gas-guzzling trucks and sport utility vehicles (SUVs)
that can take more than $100 to fill their tanks, are going down the
same route with their pension obligations. General Motors Acceptance
Corp (GMAC), a huge $300 billion credit-finance company, is facing
financial problems created by the falling dollar, rising interest rates,
and falling auto sales. GMAC debt, at about $260 billion, has fallen to
junk status. GM's pension fund is underfunded by $17 billion, at only
80% of its obligations. The prospect of a private pension collapse is
more pressing than the accounting crisis in Social Security. As Ford and
GM fall into financial stress, their extended network of parts and
material suppliers is also falling into insolvency.

The result is that the PBGC will fail financially as more companies
default on their pension obligations, the same away the Federal Deposit
Insurance Corp (FDIC) did during the savings and loan crisis of the
1980s. On September 2, Labor Day 1974, the landmark Employee Retirement
Income Security Act (ERISA) became law in the US, with the government
insuring pensions for millions of workers. Since then, PBGC has paid
more than $8 billion in benefits to retirees under
private-sector-defined benefit pension plans in the agency's care.

PBGC already administers the retirement benefits of almost 500,000
workers and retirees who were covered by about 2,700 terminated pension
plans. Nearly half of them worked in five major industries: primary
metals; airlines; industrial machinery; motor vehicles and parts; and
rubber and plastics. PBGC insures more than 44,000 private-sector
pension plans covering some 42 million workers, about one in every three
US workers. Before PBGC was created, many workers labored without
assurance of receiving the pensions they earned. In those not-so-good
old days, there were instances where thousands of people lost all
retirement benefits when their companies failed and could not keep
pension commitments. Because of PBGC, this can no longer happen. When
business failures occur and companies can no longer support their
defined benefit pensions, PBGC will pay worker benefits as ERISA
provides. But with entire industries going down the drain, PBGC, an
insurance enterprise operating on the actuary principle of occasional
unit default within healthy industries, cannot shoulder the cost of
industrywide defaults without a federal bailout. Fifty-dollar oil will
accelerate this crisis in government pension insurance.
http://www.atimes.com/atimes/Global_Economy/GE26Dj02.html

The perils of zero interest rates
With near-zero interest rates, borrowers find it easier to meet their
interest payments to banks and the credit market, allowing loans to
remain performing even if the borrowing firms are structurally
unprofitable. A clear example of this is the financial arms of the US
auto giants and their use of the commercial paper market.


General Motors Acceptance Corp (GMAC) now contributes more 90% of the
distressed automaker's earnings. GMAC is a financial-services unit that
finances more than cars; its main market is now home mortgages. GM is
considering selling part of GMAC. Being detached from GM might allow
GMAC to improve its credit rating, now kept down by the parent company's
astronomical losses of more than $1 billion each quarter, and thereby
cutting its borrowing costs and boosting its profits from interest-rate
spreads. The sale of a big stake would also strengthen GM's balance
sheet but would also reduce the profit contribution from the unit that
has kept the parent firm afloat. Already, GM's profit from financing has
been tightening as rising interest rates cut consumer loan demand.

Total US mortgage volume dropped 30% in 2004, to $2.7 trillion, as
interest rates jumped close to 100 basis points that summer. This was
particularly bad news for GMAC, which had benefited from a boom in home
refinancing. Its mortgage profits fell 10% in 2004, to $1.1 billion.
Still, GMAC earnings were expected to hit $2.5 billion in 2005,
guaranteeing a dividend to GM in excess of $2 billion. But that is down
from $2.9 billion in 2004.

Deflation makes it harder for borrowers to repay loan principal.
Deflation weakens debt-to-equity ratios. A high nominal interest rate in
an inflationary environment can be a negative real interest rate after
inflation adjustment, in which case banks are actually paying their
borrowers. Conversely, a zero nominal interest rate can be a high real
rate in a deflationary environment.

http://www.atimes.com/atimes/Global_Economy/HA11Dj01.html

The late-April 2005 downgrades of the debt of GM and Ford Motor to junk
status roiled the bond markets.

OKYO (Reuters) - The U.S. government would probably step in to support
General Motors Corp. (GM.N: Quote
<http://today.reuters.com/stocks/overview.aspx?symbol=GM.N>, Profile
<http://today.reuters.com/stocks/CompanyProfile.aspx?symbol=GM.N>,
Research
<http://today.reuters.com/stocks/ResearchReports.aspx?symbol=GM.N>) if
the world's No.1 auto maker fell into further difficulty, Hiroshi Okuda,
chairman of Toyota Motor Corp. (7203.T: Quote
<http://today.reuters.com/stocks/overview.aspx?symbol=7203.T>, Profile
<http://today.reuters.com/stocks/CompanyProfile.aspx?symbol=7203.T>,
Research
<http://today.reuters.com/stocks/ResearchReports.aspx?symbol=7203.T>),
said on Tuesday.

"GM is a U.S. industry icon," Okuda said. "The U.S. government won't
leave it if it tumbles into real difficulty," said Okuda, whose company
is widely expected to overtake GM as the world's biggest auto maker in
the next year or two.

"The company is in a tough condition," said Okuda, speaking as head of
the Japan Business Federation, Japan's biggest lobby.

Running through a list of GM's problems, Okuda noted that its market
share has been declining and that it had been so far unsuccessful in its
attempts to sell a financial unit.

He also cited a lack of appealing new models.

GM lost more than $4 billion in North America in the first nine months
of 2005, reflecting its declining market share and the costs of a
painful restructuring.

But GM Vice Chairman Robert Lutz reiterated on Monday that the company
was moving as fast as possible to turn itself around and had no
intention of filing for bankruptcy.

Toyota produced its 10th straight year of record U.S. sales in 2005,
with growth of 10.1 percent.

General Motors and China
China has also become something of a whipping boy in the US debate about
job loss to nations with super-low wages, based on a misguided
conclusion springing from the recent growth of China's trade surplus
with the United States to $124 billion in 2004. Total US trade deficit
for 2004 with all countries was $666.2 billion, $164 billion of which
was in oil imports at an average price of $32 per barrel. What has
happened is that other Asian exporting economies, notably Japan, South
Korea, Taiwan and Hong Kong, have moved much production to mainland
China on products destined for export to the United States. So China's
trade surplus with the US has soared while the US balance of trade with
other Asian economies has flattened or dipped slightly.

The chairman of Toyota Motor Corp, Hiroshi Okuda, is urging Japanese
auto makers to raise prices or find other ways to level the playing
field for ailing US rivals General Motors and Ford in hopes of heading
off a possible protectionist backlash in the crucial North American
market. The world's largest auto maker, General Motors, had $52.6
billion in cash and marketable securities on its balance sheet at the
end of the first quarter 2005, even as it reported a $1.1 billion net
loss for the quarter. The GM finance unit, GMAC, made $729 million
profit in the first quarter. And even though GMAC commercial paper was
cut to junk-bond status along with the debts of the rest of the company,
the finance unit still has sufficient access to cheap capital to keep
posting strong profits going forward. But GM has serious enough problems
that its executives would not even project when it might return to
profitability. The downgrade to junk-bond status is one warning sign.
Another is its market capitalization sliding below $19 billion, well
below its cash on hand of $52 billion, with a debt of $300 billion. This
means investors are saying that the company has negative value if its
cash is taken out. By contrast, and as an indication of a bubble
economy, Google's market capitalization, less than 11 months since its
initial public offering (IPO), has topped $81 billion, trading at 50
times estimated earnings, compared with 22 times for Time Warner, 21
times for Disney and 19 times for Viacom. Google sales in 2004 totaled
just $3.2 billion, while Time Warner stood at $42 billion. GM sales in
2004 totaled $193.5 billion with net income of $2.8 billion, yielding a
market capitalization of only 6.8 times earnings.

The problem is that GM's key products - its gas-guzzling sport-utility
vehicles (SUVs) - are seeing declining demand that has forced the
company to step up the cash-back offers needed to maintain sales. That
should not have been a surprise, given rising gasoline prices that,
because of a shortage of refining capacity, are not expected to
moderate. But GM has not responded effectively to sudden market changes.
Instead of introducing new vehicles to fit new market conditions, it has
tried to keep sales of unpopular vehicles strong through ever-increasing
financial incentives. It is very unwise for a high-cost producer to lead
a price war. The result was financial loss accompanying market-share
loss to more cost-effective foreign competitors.

GM is in talks with the United Auto Workers union (UAW) over its
health-care costs, which cost GM an average of $1,500 more per vehicle
than those of foreign competitors, even on cars and trucks made at the
Japanese auto makers' US plants. Some observers think the best
alternative could be to file for bankruptcy protection, and try to have
the court force health-care savings and other cutbacks on the UAW.
Another alternative is that only the auto operations file for
bankruptcy, thus preserving the corporation's finance unit and other
assets, such as its horde of cash. The rating agencies and stock market
are sending a clear message that they think GM will continue to lose
money for the foreseeable future and eventually go bankrupt. Bankruptcy
is a defensive strategic option or an unavoidable eventuality.

But even the profitability of GMAC, the finance unit, will be under
threat as the Fed raises short-term interest rates. The rising cost of
funds will make it more difficult for GMAC to offer attractive financial
incentives to sell unpopular GM cars. GM has been following the strategy
of GE, to try to turn itself into a global finance company that
incidentally also manufactures, selling its uncompetitive manufactured
products with aggressive compensatory vendor financing. This finance
game has overtaken the entire US economy, where all the profit is being
made by the financial sector, while its manufacturing base in the US
falls into decay through outsourcing to low-wage locations overseas.
GM's strategy now is to be the finance and marketing arm of an auto
sector in the process of being relocated from Detroit to China, while
maintaining its profit margin from finance.

When the outspoken Toyota chairman said he feared the possibility that
US policy could turn against Japanese auto makers if domestic giants
such as GM and Ford were to collapse, he was not being truly outspoken.
"Many people say the car industry wouldn't revisit the kind of trade
friction we saw in the past because Japanese auto makers are increasing
local production in the United States, but I don't think it's that
simple," Okuda said in a press conference. "General Motors Corp and Ford
Motor Co are symbols of US industry, and if they were to crumble it
could fan nationalistic sentiment. I always have a fear that that in
turn could manifest itself in policy decisions," he said, speaking as
the head of the nation's biggest business lobby, the Japan Business
Federation. But what was not said was that Toyota has a more serious
hidden apprehension than a revival of US protectionism from the collapse
of GM or Ford. What Toyota really wants is to keep GM manufacturing in
the US, where it can never achieve cost competitiveness, and not move
its manufacturing to China with a new business paradigm to compete with
Japanese auto makers there.

Okuda raised eyebrows and invited criticism on both sides of the Pacific
with his call for fraternal aid to US auto makers, such as by raising
Japanese product prices, as US producers reel under massive health-care
costs and sliding sales. It is a call for price-signaling if not
outright price-fixing. According to US anti-trust laws, inviting
competitors to match your price increases can be illegal
price-signaling, says lawyer Jim Weiss, former head of an antitrust unit
at the Justice Department.

GM has announce plans to cut at least 25,000 manufacturing jobs and
close more US assembly and component plants over the next few years.
Both GM and Ford have been cutting back output as they lose sales to
Asian brands led by Toyota, which now controls 13.4% of the US car
market, the world's biggest to date. But the Chinese market is looming
large as a new opportunity for GM, which ended 2004 with a market share
of 9.3% in China. The GM China Group includes seven joint ventures and
two wholly owned enterprises in China. In 2004, GM's vehicle sales in
China grew 27.2% on an annual basis to 492,014 units, an all-time high.
China's market is still in its infancy, with less than 5% of the
population able to afford even a tiny car. GM chairman and CEO Rick
Wagoner predicts China will overtake Japan as the world's second-largest
car market within five years.

Detroit Free Press columnist Tom Walsh reports that in 2003, GM and its
Chinese partners made $2,267 per car sold in China while in North
America, GM made about $145 per vehicle. GM and its Chinese partners had
a combined net profit of nearly $875 million. In North America, GM's net
profit last year was only $811 million on sales of 5.6 million cars and
trucks in the United States, Canada and Mexico. That means GM China was
nearly 15 times as profitable, per vehicle sold, as GM North America.
GM, for example, is selling Buick Regal models in China for more than
$40,000 each that are less powerful than a 3.8-liter Regal four-door
sedan that costs about $24,000 in the US.

"GM is making money hand over fist in China, selling cars as fast as
they can make them, at very attractive prices," said Kenneth Lieberthal,
a University of Michigan professor and China expert who was senior
director for Asian affairs on the US National Security Council under
president Bill Clinton. "Most of the jobs lost to Asia were lost years
ago. Now they're moving around Asia," said Lieberthal. "If what's good
for General Motors is good for America, as former GM president Charlie
Wilson once said, China's emergence as an economic powerhouse can't be
all bad," writes columnist Walsh.

Okuda told the press: "If you think about GM's current output volume and
vehicle lineup, laying off 25,000-30,000 employees is inevitable." But
within a decade, GM could be again the world's largest profitable car
producer if its China strategy is successful. And its success is
dependent on whether it can become a truly multinational corporation
instead of merely a transnational US corporation active in China.
Chinese consumers will relieve the global overcapacity problem in the
auto industry, but they cannot do so if transnational corporations keep
robbing them of consumption power by keeping Chinese wages low to siphon
profits home.

GM has been closing and idling plants over the past four years and will
have to cut its annual North American assembly capacity to 5 million
vehicles by the end of 2005 from 6 million in 2002. Meanwhile, top
Japanese auto makers are adding jobs and assembly lines in North America
to meet shifting demand there at the expense of GM and Ford, but not the
US economy, prompting executives, including Toyota president Fujio Cho,
to dismiss concerns that their success would reignite a political
backlash. Thus Okuda's concern is not about US protectionism, a concern
refuted by Toyota's own president. It is about GM plans in China.

Car companies now are merely brand-name designers and assemblers of a
generic world car. All cars today are assembled from parts produced all
over the world, wherever they can be produced at the lowest cost.
Different band-name designs package the same world car for varying
appeals in different market segments, some for speed and power, some for
styling and luxury, some for economy, etc. As US car-assembling giants
face market resistance, US auto-parts companies have begun to fall like
rows of dominoes, made worse by rising material and energy prices and
uncompetitive wages. Recently, auto-parts supplier Collins & Aikman Corp
became the latest to file for bankruptcy protection, lining up behind
fellow suppliers Meridian Automotive Systems, Tower Automotive Inc and
Intermet Corp. Whether those companies and the others that might join
them at the bankruptcy court will recover - and what form they will take
after bankruptcy - is an open question. A restructuring of the entire US
auto-manufacturing industry and its supplier network is shifting the
center of gravity outside the US, possibly to China.

Japan has its own ambitious plans for China, where Japanese car makers
have already invested more than $5 billion. Honda Motors just announced
that its joint venture in China has begun exporting made-in-China Hondas
to Europe. This is why the Japanese, with their own ambitious plans in
China, are thinking about helping Detroit, to keep a terminally ill
competitor on anemic life support, not to ward off US protectionism, but
to preempt unwanted US competition in China. A trade war between the US
and China will play directly into Japanese hands, not to mention the
European Union.

The sudden decline in the popularity of SUVs - on the basis of which US
auto companies have for more than a decade clocked big profits in the
era of cheap oil - has joined with rising material costs, mounting
worker-benefits costs and expensive unionized workforces to eat into
huge chunks of the sector's profits. Add to that the relentless pressure
from foreign auto makers, and the result has been a steep slide for any
company that relies on the Detroit auto makers for its bread and butter.
In April, while North American auto sales rose, both GM and Ford sales
of SUVs dropped - as did their total sales.

As the supply sector shrinks along with declining US auto makers' market
share, an industry that once seemed ripe for consolidation is now
plagued by the question of who would want to acquire companies in a
sector that has had such a hard time making money lately and will in the
foreseeable future. The pool of likely acquirers from within the sector
is also dwindling as virtually the whole sector slides in concert. It is
hard to consolidate when earnings are weak to non-existent, with no
access to capital markets, and equity merger and acquisition funds dry
up. Buying auto-supply companies that are dependent on the struggling US
auto makers for business is not the most attractive proposition at this
time for other companies. The only exception is a Chinese acquirer who
may buy to facilitate opportunities in the Chinese domestic market and
eventual entrance to the US market to increase long-term global market
share rather than immediate return. But with current political
controversy over Chinese acquisition of Maytag and Unocal, China will
likely adopt a wait-and-see posture on how US domestic politics on free
trade plays out. This delay will make bankruptcy more likely to a host
of distressed US companies in many sectors besides autos.

With General Motors' significant cash reserves, it could be several
years before the company is forced to face the music, despite its
dwindling market share and mounting loss. With more than $50 billion in
cash, even with losses at the rate of $5 billion a year, it will take 10
years before GM runs dry. Long before that, GM's China strategy may bear
fruit if no trade war erupts to derail its plan.

The US steel and airline industries have dumped under-funded pension
plans on the federal government's Pension Benefit Guaranty Corp (PBGC).
The auto industry may be next. Beyond the airline industry, the federal
insurance program faces tremendous exposure from the auto sector. PBGC
says the pension assets of auto makers and parts companies fall short of
the pension promises they have made to workers by up to $50 billion,
more than the $31 billion shortfall in the airline industry's pension
plans. A Credit Suisse First Boston analysis of pension plans in 54 US
industries, based on 2003 public filings, ranks the auto industry's
plans the weakest of all. Half a dozen auto-supply companies recently
sought protection under Chapter 11 of the Federal Bankruptcy Code, which
is likely to result in $837 million in unfunded pension obligations
being transferred to the PBGC. A total of 26 companies in the auto
industry have pension plans with assets that fall at least $50 million
short of obligations.

The company that worries the PBGC most to date is Delphi Corp, the Troy,
Michigan, parts operation of GM that was spun off in 1999. Delphi's
plans have pension obligations valued at $11.4 billion but assets of
only $7.4 billion. Delphi relies on GM for about half of its $28 billion
in annual revenue and is saddled with high labor and raw-materials costs
at the same time that GM's production is falling. PBGC calculates
pension liabilities based on what it would cost to pay retirement
benefits if the plans were terminated; companies give snapshots of the
current health of their plans, often a rosier view. PBGC says that if
Delphi were to turn over its pension plan to the agency today, the
under-funding would total $5.1 billion rather than the roughly $4
billion indicated by Delphi. UBS suggested in a recent report that
Delphi should consider a Chapter 11 filing, in part to shed its pension
obligations and to pressure the UAW to help it cut costs. "Bankruptcy
has become a management tool these days," the UBS report noted.

Bush administration proposals to bolster PBGC finances could intensify
the pressure on companies with low credit ratings. The plan calls for
flat-rate premiums for companies to jump to $30 annually from $19 for
each employee covered by a pension plan, and higher for companies with
low credit ratings. It also seeks to limit the ability of financially
weak companies to make new pension promises to workers.
http://www.atimes.com/atimes/Global_Economy/GG08Dj01.html



Michael Hudson wrote:

> Looks rather like the CREDITORS need to have GM and Ford nationalized to
> socialize the losses and repay them.
>    Michael
>
>
> On 1/28/06 9:57 AM, "Charles Brown" <cbrown@xxxxxxxxxxxxxxxxx> wrote:
>
>
>
> > * From: "Henry C.K. Liu"
> > More staggering is GM dividend payout of $2 which comes to 8.45% yield
> > on day of market share price. The payout amounts to $1.1 billion. With a
> > cash reserve of $19.2 billion and a bank credit line of $5.6 billion,
> > and effectively shut out of the commercial paper market,  and estimates
> > of $1.5 billion negative cashflow in case of a strike, GM will be
> > insolvent  in about 13 weeks. Benefit obligations to ex-GM workers who
> > transferred to bankrupt Delphi lies in the range of $3.6 billion to $12
> > billion, With numbers like that can bankruptcy be far behind, even if
> > the government bails out the pension obligations?
> >
> >
> >
> > ^^^^^^
> > CB; Looks like we need to nationalize GM and Ford.