Still No Road To Recovery In Detroit (F)(GM)

The Administration’s blue ribbon panel assigned the task of  deciding what should happen to GM (GM) and Chrysler has, as would be expected, said that it wants to keep the two companies out of Chapter 11. Whether it will ever be stated in public, the job losses that would come from bankruptcies in Detroit could undermine the government’s stimulus package by putting a million people out of work. So, the incentive to find a solution is great and that should give the UAW and the creditors of the two car companies a great deal of leverage.

The group that is advising the Treasury on the Detroit problem signaled, according to The Wall Street Journal, that “it sees viable futures for both GM and Chrysler, but only if there are sacrifices from their managements, unions and GM’s bondholders. The team will also lay out a firm timeline for action.”

The two barriers to fixing the car companies, at least for the time being, have nothing to do with management. The UAW and creditors are the hold-outs blocking a solution. Both have cut deals with Ford (F), but, because of its relatively strong balance sheet, bondholders received  good terms for converting some of their debt to equity. GM has already said it cannot be that generous.

The government is playing its hand of cards poorly by showing any indication that it wants to salvage the wrecks of GM and Chrysler. Creditors will use the statements from the task force as a sign that Detroit is considered “too big to fail”.  Once that has been established, holding out for better debt-for-equity terms becomes easier. The FT has pointed out that creditors have been reluctant for some time about cutting a deal with the car companies

The same set of principles holds true for the UAW, but is can add to its leverage the belief that the Administration is comparatively “pro-labor” and will try to avoid showing organized labor that it is unsympathetic to its cause. Those two factors put the UAW is an usually strong position.

The task force has said too much. Creditors and the UAW can bargain hard. They no longer need to worry about the downside.

Douglas A. McIntyre