A few brief notes on the GM announcement and press conference and the auto bailout in general:
From the NY Times live blog
- After restructuring, GM will be 89% owned by the U.S. government and the UAW via the union’s VEBA (health care trust fund). Feds to own about 50%.
- Bondholders are likely holding out in part because they hold credit default swaps that pay out in case of a GM bankruptcy.
That seems to suggest bankruptcy is going to happen and GM will be majority owned by the government with a minority stake by the UAW. Very interesting.
…Update… Now that I’ve dropped the kids off at school, I cant return to this. A few thoughts about negotiations are rebounding in my head. One glaringly obvious fact is the different way the financial and auto industries are being handled. But I also wonder if we aren’t getting a preview here of things to come if the insolvency of CitiGroup becomes too difficult to paper over.
What’s happening with GM and even more so with Chrysler this week is the end game of multiparty negotiations. Now that the UAW and CAW have agreed to what’s been demanded, the bondholders remain as the only holdouts. The bondholders are all big banks (esp. JP Morgan Chase), pension funds, and hedge funds. The negotiations have been pretty classic back and forth with the debtholders going for the maximum they can get, naturally.
In the case of Chrysler, we’ll know by Friday. Fiat is slated to get a 25-35% stake in return for management and engines for small cars. The facts that Fiat is not paying cash, and that the government pegged Chrysler’s survival to an alliance seems to put them in a strong position. One issue appears to be that the UAW extracted as a condition of approving its divestment that Daimler agreed to pay $1 billion to Chrysler if it went into bankruptcy and defaulted on its pensions. According to the NY Times, the government “reached an agreement” about this and other tax issues with Daimler, whatever that means. So the banks are hanging in the breeze, the last to come to the table and seemingly holding few bargaining chips since their investment is essentially worth nothing if Chrysler liquidates.
The question about credit default swaps that came up at the GM news conferences adds a twist. If bondholders do indeed have swaps as insurance, who is going to pay out the swaps if either company goes bust? If it’s AIG, that means it’s you and me (since AIG is 80% owned by the government).
For the UAW, this has to be an excruciating moment. The Canadian Auto Workers, historically much more militant and less inclined to concession bargaining, caved in saying the negotiations were “torturous and unfair” and they chose to “life to fight another day.” In other words, the choice was agree or face bankruptcy and potential wipe out of pensions and contracts. That the unions are on board ahead of time means (I hope) that they got the government(s) to commit to protecting their contracts and pensions.
At GM, the UAW appears to have agreed to a large minority stake in a company that is planning to fire about a third of their working membership. No doubt those laid off will be disproportionately high seniority workers, accelerating the downward trend of auto workers’ pay and finalizing the equalization of labor costs between the Big Three and the transplants. The level of trust between rank and file UAW members and their international representatives is not necessarily high. How with a union ownership stake effect that?
But as bad as it is, imagine the damage if this had gone down under Bush. Right into bankruptcy court. Contracts abrogated, pensions shunted off on the taxpayer. It’s too soon to tell what will happen with the UAW. Likely as not, they’ve done all they could. But it may be time for a merger with the United Steel Workers. Certainly, the Task Force is following the example of the USW in the ISG and other deals. Those deals have their able critics, but in the words of the CAW, the union lived to fight another day.