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GM Bankruptcy Judge Approves Obama Administration’s Exit Plan

Don Miller — Tue, 07 Jul 2009 13:00:46 +0000

A federal judge handed the Obama administration an important victory in its push to steer the automobile industry back to health Sunday, approving the sale of General Motors Corp.’s (OTC: GMGMQ) most profitable assets to a new government-run company.

The move removes an important barrier to the company’s plan to exit bankruptcy.

Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York issued a ruling saying the sale was GM’s only option and that it would “prevent the death of the patient on the operating table,” according to Reuters.

The 87-page ruling rejected appeals from a group of bondholders, tort claimants and unions who had objected to the plan.

“As nobody can seriously dispute, the only alternative to an immediate sale is liquidation — a disastrous result for GM’s creditors, its employees, the suppliers who depend on GM for their own existence, and the communities in which GM operates,” Gerber said in the opinion.

When the sale is completed, it would transfer GM’s “good assets” – including the Chevrolet, Cadillac, Buick and GMC brands – to a new company majority-owned by the U.S. Treasury. It would also pave the way for the new GM to exit bankruptcy in less than two months, one month earlier than the government’s projection.

The plan would allow the company to jettison unwanted property to the old GM, including 16 automotive plants in Delaware, Ohio, New York, Indiana, Pennsylvania, Virginia and Michigan. The Treasury will also provide the estate with $1.175 billion to unwind the remaining assets, up from original projections of $950 million after creditors complained about possibly getting stuck with liquidation costs.

The U.S. government would own 60% of the new GM in return for $50 billion in loans, the Canadian government would get 11.7% for $9 billion in loans, and workers would receive a 17.5% stake for relinquishing future health-care benefits.

Bondholders would be forced to convert about $27 billion in bonds into about 10% of stock in the new company, plus warrants with a total value of $7.4 billion. New GM’s total equity is anticipated to be worth more than $38 billion, according to Bloomberg News.

During three days of hearings, the workers and bondholders objected to the plan, saying the “new GM” is just “old GM” minus a slew of liabilities. They contend the company would market nothing new, pedaling the same cars and trucks, made by the same workers managed by the same executives.

Gerber dismissed the bondholders’ assertion that GM should restructure under a Chapter 11 reorganization plan, which would let creditors vote on details of the plan, saying the argument was unrealistic.

“In the event of liquidation, creditors now trying to increase their incremental recoveries would get nothing,” he ruled.

Gerber’s ruling also torpedoed arguments from dealers whose contracts are being terminated, groups of car-accident victims who said they would now be unable to sue GM for their injuries, and others who claimed that the U.S. government had been overbearing in its negotiations to restructure the automaker.
Gerber issued a typical four-day stay of the order approving the sale, which allows for possible appeals.

Steve Jakubowki, a lawyer for product-liability claimants said he would appeal the ruling even though GM recently revised its bankruptcy plan to take on claims from future car-accident victims.

“This issue is too important, too unsettled and too many people’s lives hang in the balance for me not to pursue this appeal through to the end,” Jakubowski told The Wall Street Journal.

Gerber ruled that the sale could be “free and clear of claims,” because his hands were tied by precedents established in the second judicial circuit during the bankruptcy filed by Chrysler LLC. The second judicial circuit encompasses Gerber’s court.

But in the end, Gerber concluded that the government’s plan was the only one that makes sense.

“GM cannot survive with its continuing losses … and without the governmental funding that will expire in a matter of days,” Gerber wrote.

The ruling marks the second big victory for the Obama administration’s auto task force, which will be charged with supervising the liquidation of the remaining assets. The task force had previously engineered the sale of Chrysler to a consortium headed by Italy’s Fiat S.p.A. (ADR OTC:FIATY).

Source: GM Bankruptcy Judge Approves Obama Administration’s Exit Plan

Great Britain – The “Rust Belt” of Global Finance

Martin Hutchinson — Fri, 23 Jan 2009 12:20:51 +0000

Think about Michigan or about Ohio’s Mahoning Valley in the 1980s. Both were famous for industries that were world leaders in their time. Yet, once those industries decayed, large parts of both areas became wastelands of home foreclosures, crime and alcoholism.

The decline of the global financial services industry from its unsustainable 2006 peak may produce a similar effect in a once economically thriving country – Britain.

Thirty years ago, Britain had its own rust-belt problems. The British automobile industry, a shining star until the Morris Motor Co.’s Lord Nuffield died in 1963 (remember 1959’s hot new model, the Mini?), was subjected to a series of government-directed merger deals in the 1960s, and the resulting mess, British Leyland, was nationalized in 1975, amid appalling losses.

The steel industry was nationalized in 1950, denationalized in 1954, and nationalized again in 1965; not surprisingly, the political football became a byword for high costs, strikes and inefficiency. Even Rolls-Royce Ltd., Brian’s premier high-tech company and maker of both luxury automobiles and aircraft engines, was effectively bankrupted and forced into public ownership in 1971.

In 1979, however, Margaret H. Thatcher became prime minister. Whereas her American contemporary, U.S. President Ronald Reagan, had little direct effect on U.S. industry, Thatcher had a huge direct effect on the shape of the British economy – she had little option, since the government owned so much of it. She forced British Leyland to shrink drastically, privatized British Steel, British Telecom and Rolls-Royce, and dramatically downsized British Coal after a yearlong face-off with the miners union.

At the same time, she deregulated the City of London’s financial-services business on a supposed “level-playing-field” basis, allowing foreign banks to dominate it and effectively putting the 200-year-old London merchant banks out of business.

Thatcher’s restructuring of British manufacturing, together with her tax cuts and government spending restraint, put Britain on a growth path that lasted a generation. Even after her Labour Party political opponents under Tony Blair gained power in 1997, growth continued, although government spending began creeping back upwards, and is now slightly above its 1970’s peak as a percentage of the economy.

Her restructuring of the City of London brought immense wealth to London itself, as huge global banks deployed increasing amounts of resources to growing their London-based international finance businesses. By 2006, London was rivaling New York as a financial center, even though the base of British domestic business was a fraction of that available from the giant U.S economy.

Traders, hedge fund managers, private-equity managers and dealmakers in general were paid fabulous sums. Since London residents were not liable to British tax on their non-U.K. income, the city also attracted footloose glitterati of all kinds, from the Indian steel billionaire Lakshmi Mittal to the seedier but immensely rich top members of the Russian mafia.

In the United States, financial services doubled its share of gross domestic product (GDP) and trebled its share of Standard and Poor’s 500 Index profits between 1980 and 2006; in London, the growth was even greater and its dominance of the economy more extreme. House prices, too, became far more overblown in Britain than in any but the most speculative areas of the United States.

The 2006 celebrations of the twentieth anniversary of the Financial Services Act of 1986, Thatcher’s deregulatory bombshell, rejoiced in London’s newfound wealth, sneered at the relative impoverishment of Britain’s provinces and missed one key weakness of the economy: Almost none of the major institutions generating such fabulous wealth were owned or headquartered in Britain. When London-based “masters of the universe” wanted to speak to those controlling the huge amounts of capital they deployed, they had to pick up the phone to New York, Frankfurt, Paris, Tokyo or Dubai.

Now, the financial services business is in trouble. What’s more, the parts of the business in which London specialized are in most trouble. Securitization and derivatives were the two immediate causes of the credit crisis, while the 50% declines in the emerging-market stock markets have made the exorbitant fees of the private-equity and hedge-fund managers seem extortionate.

It is now abundantly clear that the financial services sector has incurred gigantic losses and that even when those losses have been subsidized by some unfortunate group of taxpayers, the sector is likely to end up being far smaller than it was. In fact, as a share of the economy the sector will probably end up being only a little larger than it was back in the 1970s.

For Britain, this has three appalling costs.

First, the assets of its financial services sector are around 400% of its GDP, below only the much smaller Iceland, Switzerland and Ireland and twice the U.S. ratio (and most Swiss banks were notably cautious in the bubble). Because of the importance of Britain’s financial sector, its bank bailouts need to be nearly as large as those in the United States, yet its tax base is only one quarter the size.

Second, the downsizing of financial services will produce an immensely damaging decline in British asset prices, particularly those of London and southeast England housing, in which so many middle-class Britons have invested their entire life savings (investing in the stock market is much less embedded there than it is here in the United States). That will have a further unpleasant effect on bank loan portfolios, pension and insurance assets and the British tax base, which will deepen the economic downturn.

Third, and most serious, since the British financial services sector is almost entirely controlled from overseas, there is very little long-term reason why it should remain in Britain. After all, it’s not as if London’s climate is particularly attractive except to aficionados, while its infrastructure is appalling. The product areas in which London-based houses appeared to have a particular expertise have mostly been shown to be over-elaborate Ponzi schemes.

Even if the top management of a German, American or Japanese bank wishes to keep its stable of overpaid London financial whiz kids, it will have to deal with enormous shareholder and political opposition to do so. The Lehman Brothers Holdings Inc. (LEHMQ) bankruptcy, in which money was remitted at the last moment to the United States, so that London-based employees and creditors fared far worse than those in New York, is symptomatic of the “hollowing-out” process that is likely to continue for several years. Even the Russian mafia may find it prefers somewhere warmer.

Eventually, probably after a steep decline in the value of the British pound sterling and a major reorganization of the British economy, and at the cost of an enormous increase in British government debt, the inventive and entrepreneurial British will no doubt find new ways to make a living. In the meantime, I wouldn’t put my money there.

Source: Great Britain – The “Rust Belt” of Global Finance

Why GM is More Bailout-Worthy Than Citigroup

Martin Hutchinson — Fri, 05 Dec 2008 15:02:37 +0000

Financial journalists, most of whom spend more time writing about derivatives than carburetors, have been scathing about the possibility of an auto industry bailout, even though they’ve happily accepted multiple bailouts for the financial sector.

Of course, the reality is that bailouts are likely to do more harm than good in the long run, regardless of what sector they are in. But given the choice, I would rather bail out General Motors Corp. (GM) than Citigroup Inc. (C), because the automaker has a better long-term future.

The financial services industry got far too big during the 1995-2007 bubble. Its growth accelerated in the 1990s on the back of innovative new financing techniques such as derivatives and securitization, as well as a huge expansion in areas such as leveraged buyouts. As a result, its share of United States gross domestic product (GDP) has approximately doubled since the late 1970s.

It is now clear that many of the new financing techniques were misapplied or even spurious. The problem of separating loan origination from credit-risk assumption has become obvious, and so securitization will have a much more limited future.

Of the derivatives, credit default swaps are clearly destabilizing and will be tightly regulated. Many of the new market participants, such as hedge funds and private equity funds, should disappear, since they merely represented conduits through which higher fees could be charged rather than truly innovative investment choices. It is thus likely that the financial services business will revert to close to its previous share of GDP. That would involve a downsizing of its 2007 capacity by 50%.

The automobile industry, on the other hand, has no obvious need to become smaller. With global warming now high on the political agenda, its products need to change radically, employing new technologies that greatly reduce carbon emissions. However, the basic demand for personal transportation has not gone away.

Indeed, it is still expanding rapidly in the growth economies of emerging markets such as China and India. And U.S. urban geography, with its widely spread suburban developments, is wholly incompatible with a sharp drop in automobile usage and would be impossibly expensive to modify except over a very long term.

Why Citi Should Fail

Allowing a large bank such as Citigroup to disappear is probably beneficial. It reduces competition for other major banks, allows medium-sized banks to expand into the space opened up, and provides an appropriate penalty for decades of bad management. Citi was a leader in the Latin American loan crisis of the 1980s; its then-Chairman Walter B. Wriston famously opined that “countries don’t go bust,” a sentiment that has been repeatedly disproved.

Wriston got his succession wrong in 1984, choosing the overaggressive retail banker John Reed (who had pioneered the unsolicited credit card offer in 1978 and lost $100 million – real money back then – in 1980 by doing so) over the capable corporate banker Tom Theobald.

Citi almost went bust in 1991, but was bailed out by Saudi Prince Alwaleed bin Talal. It assembled a financial services conglomerate in 1998 that proved unmanageable, and from 2003-2005 was prevented from making any more acquisitions because of its shaky position.

In short, Citi has been a classically mismanaged behemoth that, in any other industry would, have already collapsed.

Yet, its bailout risks more than $300 billion of taxpayer money, and to no obvious economic benefit.

Meanwhile, General Motors has been damaged by two factors: Misguided government regulation of the automobile industry, and a drastic societal shift away from unionized labor.

CAFÉ Backfires

GM had a 60% share of the U.S. market in the 1950s, and was recognized for large cars that performed distinctly better than their imported competitors and were well suited to U.S. driving conditions. Some expansion of foreign competition was inevitable, as Europe recovered and Japan became a major automobile producer, but GM was particularly hard hit by the Corporate Average Fuel Economy (CAFÉ) legislation. CAFÉ, which mandated fuel economy standards instead of simply raising the gasoline tax, put GM’s large models at a disadvantage to their smaller imported competitors.

However, U.S. automobile companies found a loophole, which is that its standards were limited to automobiles. Vehicles built on a truck chassis were exempt. That gave rise to the sports utility vehicle. Now, higher fuel costs, environmental concerns, and tighter CAFÉ standards have made the SUV an endangered species, but it was a Frankenstein’s monster that only existed because of government meddling.

If GM and the other U.S. automobile manufacturers go out of business, only their foreign competitors will benefit. Furthermore, they have an interdependent network of suppliers, with a total of 3 million employees, which could easily be forced into bankruptcy by the disappearance of their major customers. U.S. automobile manufacturers have important, and in some areas unique technological capabilities, whose loss would severely damage the U.S. economy as a whole.

The automobile business is unprofitable now, but will eventually return its previous size in the United States, as well as expand worldwide. So, while there is no capacity downsizing needed, capacity restructuring, away from SUVs and towards smaller cars, hybrids and innovative power technologies, is essential.

Ultimately, the right decision would have been to bail out General Motors and allow Citi to go to the wall.

The Case for Citi

Of course, there are important modifiers to this recommendation. In Citi’s case, its interconnection with the financial system as a whole is such that an immediate bankruptcy followed by years-long court proceedings could render many of its counterparties unviable and damage the global economy badly. Hence, an orderly liquidation is needed, with a receiver appointed to wind down Citi’s positions and sell the viable portion of its operations, making good on those obligations incurred by Citi that appear to have systemic importance. Even if the taxpayer made Citi’s counterparts completely whole, however, it would not have been as expensive as the bailout.

As for GM, it has labor costs and pension obligations making it uncompetitive with foreign-owned producers. Those “legacy” costs can most efficiently be removed through a Chapter 11 bankruptcy filing. The pension obligations will then fall on the taxpayer through the Pension Benefits Guaranty Corporation, while the labor contracts can be rewritten in a way that is competitive with the market in which GM operates. If a government subsidy is then needed to cover GM’s operating cash deficit during the recession, and the investment costs of transforming GM into a producer of environmentally friendly automobiles, it should be provided through a post bankruptcy “debtor-in-possession” financing.

There is nothing magic about banking that should allow the industry to be uniquely permitted access to taxpayer money when disaster hits. Only bank customers and the market should be protected. Conversely, the automobile industry plays an important role in the U.S. economy that is unlikely to be significantly downsized. So, there is considerable justification for assistance to GM and Ford Motor Co. (F), which have valuable capabilities and long-term competitiveness, though less for a bailout of the smaller and less industrially valuable Chrysler Corp.

Source: Why GM is More Bailout-Worthy Than Citigroup