Editorial: General Motors Death Watch 226: First to Blink

First to blink, first to lose. That’s what GM’s creditors know. As does Ron Gettelfinger, the United Auto Workers (UAW) boss. And that’s why there isn’t enough time between now and February 17th– the congressional deadline for the next federal loan installment for GM– for General Motors to craft a workable deal to save this company. No one is going to blink. So no one will cave, and nothing gets done. Then what?

The loan terms of the bailout specified a raft of requirements that GM has to meet or else Treasury might call its loan and force the General to face a bankruptcy Judge. There are two key terms of GM’s federal loan agreement that will definitely not be met.

First, the unions have to meet wage/benefit parity with the foreign transplant non-unionized work force. That’s a non-starter for the UAW. In fact, two hours after the bailout was announced, Ron Gettelfinger announced his itention to get the new Democratic President and Administration to amend that “unfair term.” Why would the union boss offer GM concessions that he seeks to overturn? He wouldn’t And won’t.

In any case, active UAW members’ direct wage and benefits are already close to parity with the transplant workers’. The important differences involve work rules, job classifications, and a telephone book’s worth of nonsense that makes union workers more unwieldy (read: costly) than transplant workers. The loan terms seek to sweep all of this away.

But UAW members believe they have the right to these job protections– even at the taxpayers’ expense. And if all those hundreds of pages of the union contract disappear, what’s the point in having a union? Legally, the UAW must put any changes to its existing GM contract to a member vote. Which it would lose. Unless, as always, there’s a quid pro quo.

The UAW (and its media supporters) likes to point to its “historic health care giveback”: the agreement placing GM retiree health care obligations into a union-run benefit association (a.k.a. VEBA). That little “concession” cost GM approximately $10b in cash. Of course, GM doesn’t have the cash, and never will– unless the American taxpayer antes up some more Benjamins. Meanwhile, The General already deferred its first payment (with interest accruing).

The Treasury Department inserted terms in the bail out loan agreements requiring the UAW to take stock in the new GM for half of the VEBA cash contribution owed. But it’s harder to skim stock than cash, and lots of stock won’t pay the medical bills coming due for retirees either. So the debt for equity swap is simply not going to happen.

The second key loan agreement term: a two-thirds debt-for-equity swap imposed on GM’s financial creditors. Nope.

If you add up the General’s debt liabilities (auto operating company related), the figure approaches $66b. Subrtact the Government’s bailout loan of $13.4b and the UAW VEBA liability of $10b (two creditors that want cash payment, not stock), and GM still carries $43b of debt.

Then there’s $7b in current debt (debt owed in less than a year), consisting of short term obligations and current portion of long term debt. The chance that short term creditors will take a long term position in General Motors is ludicrous. Especially when Uncle Sam is on the hook, and considering the Treasury Department’s cavalry rescue of GMAC.

That leaves long term debt of $36b comprised of various unsecured bonds of varying maturities, foreign currency denominated debt, bank debt, convertible debt (at strike prices that will never be seen again), and other debt-like items such as capitalized leases and muni bonds. Somehow, GM has to get approximately $25b of this grab bag of debt converted to equity.

Convincing these parties to agree to swap for debt for equity is impossible. There are various priority considerations, the fact that stock of a new GM might just be worthless, and that muni bond holders and lessors have zero interest in stock. Bank lenders with collateral, bond holders with near term due dates, and smart hedge fund owners of GM’s public debt will hold out until the very end.

There’s no chance to arrange any kind of equity exchange on reasonable grounds outside of bankruptcy court. It just ain’t gonna happen without that filing. We know it, the government knows it, and bankruptcy and reorganization experts know it. The only ones who don’t get it is GM itself.

“Inside sources at GM” have spent the last couple of days “suggesting” to the press that The General won’t need any more money beyond the $13.4b bailout from the Treasury (and another $6b for GMAC). GM CEO Rick Wagoner joined his union boss to make the announcement on TV this morning.

Sure, $20b in government money would be enough to buy the survival of GM (and GMAC)– provided U.S. auto sales hit the low end forecast (between 10.5 and 12.0m units) AND the other guys takes the hit. But no one will blink.

And even if GM doesn’t need more money, it’s still a basket case of a company run by the executives who dug the hole. There is only one solution: bankruptcy. Let’s get on with it already.