“How did you go bankrupt?”
“Two ways. Gradually, and then suddenly.”
Ernest Hemingway, The Sun Also Rises
I was on CNBC the other night with host Larry Kudlow, Paul J. Ingrassia, President Dow Jones Newswire and Robert Reich, former labor secretary. During the roundtable, Mr. Kudlow asked each of us if we thought General Motors should go bankrupt. I replied, “No, give them three months; the game is only half over. The coach and his team have three months of meetings and product planning to show us they can turn this around”. Reich then said that he thought that General Motors would go bankrupt.
I know that Chapter 11 filing, which provides protection from creditors, allows cuts in wages, benefits (and stops Job Banks altogether), without the UAW’s approval, would be the quick fix. Howe’ver, there is more systemically wrong in General Motors than those areas. If GM executives and the UAW can’t implement the necessary changes without bankruptcy filings can they implement the changes needed to bring them out of bankruptcy?
I don’t believe in Chapter 11, bankruptcy, or other forms of reorganization. I don’t think I am alone. There are millions of good, hardworking people that go to work every day with the proud intent of being able to pay the bills they have incurred for that month. But over 1.5 million people and 34,317 corporations filed for bankruptcy in 2004. Laws have recently been changed, but it used to mean that you kept most of your purchases and started over with a bad credit rating. One may have a clean slate on expenses, but they are the same people with the same bad spending habits.
For the same reasons that I don’t believe in a personal reorganization, I don’t believe in corporate reorganization. The mandates for corporate reorganizations are not strict enough and some of the ideas are half-baked.
First – when a corporation goes into bankruptcy, many times the top echelon stays in place, with the same bad habits, the same power, the same bonuses, and the same mindset. It should be a requirement of reorganization that the CEO, the CFO, and the board relinquish their positions if the company enters into bankruptcy.
Second – in 1974 our government founded The Pension Benefit Guaranty Corporation (PBGC), a federal corporation created under the Employee Retirement Income Security Act of 1974 (ERISA). The PBGC is a government corporation. Its employees are federal employees, but their salaries and all other operating expenses are paid out of the premiums of the ongoing corporations that have pension plans. For how long? If Congress decides that PBGC is under-funded, they can fund it with taxpayer money, making the PBGC a welfare organization.
PBGC requires every company that has a pension plan to pay $30 per person per year as insurance premiums. It’s one of the reasons that companies such as Hewlett-Packard and Verizon have frozen their pensions and are going to 401Ks. General Motors has 700,000 employees in their retirement plan and they will pay $21M per year for their coverage. Congress has effectively implemented another corporate tax on businesses.
There is also no transparency when it comes to the funding of pension plans. According to General Motors, their pension is a “fully funded pension”. The PBGC, according to a New York Times article, says the fund is underfunded by $31 billion. Because of the way companies calculate their pension funding versus the way the PBGC calculates it, there is a difference in their net value.
Companies are not required to tell shareholders and members of their pension how under-funded they are, according to the PBGC. The Financial Accounting Standards Board (FASB) should require a formula for calculating how funded a company is as an ongoing concern, or how under-funded the company is if the company goes into bankruptcy. The results should be transparent information to the shareholders, pension employees, and the public.
Third – If all other creditors have to line up to get paid at a percentage on the dollar why shouldn’t the employees in the company? Why should the government take over administering private companies’ liabilities? Companies’ pension assets should be divided by the people in the pension plan, prorating their years of service, and their salary and give it to them. General Motors has 90 billion dollars in their pension fund, for 700,000 members. Divide that money among the 700,000 based on years of service and their salary and let them invest it and be culpable for their own future.
Fourth – The current automobile climate is not the same as Chrysler’s reorganization days when there were only three big companies. According to a study done by Directions Research, 3 out of 4 Americans wouldn’t buy a car from a bankrupt company. A car may be the second most expensive purchase in a person’s life. It is not an airline ticket or an impulse purchase for which a person is looking for a good deal. One of the top three reasons people buy a certain car is resale value. Resale value is based on reliability, serviceability, meeting the obligation of a warranty and being able to find parts for the car. A car has less resale value if it’s a manufacturer and its parts supplier (e.g. Delphi) is in bankruptcy.
Paraphrasing Ingrassia, he said it best on Kudlow’s show; “GM has to start acting and working like they are scared of going under like the wolf is at the door.” High hopes and playing nice do not convert into reaching targets. General Motors’ business failure has evolved during a time of expansion in the economy. Waiting till 2007 to renegotiate their UAW contract is not going to work. Renegotiating on a historical contract instead of the current economic conditions will not work. Renegotiate now, get rid of job banks, stop giving dividends on stock, freeze the pension plan and go to a 401K, and get a new product out now. Build confidence in shareholders and buyers so that people want General Motors product because it is a valued commodity, both as an investment and a “best buy” for the price.