What General Motors' Bankruptcy Means For You
According to early news reports, General Motors will file for bankruptcy one hour from now, at 8:00 am Eastern Time this morning. GM was officially born as a company on September 16, 1908. Its long history is a reminder that no company will survive forever regardless of its performance; like humans, corporations are mortal and if you want to see one fail, you just have to wait long enough.
Bankruptcy isn’t truly death, however. General Motors has the opportunity to restructure, shedding its poor performing businesses. Thanks to a massive government bailout, GM can renegotiate with its creditors. The government will own 60%, a controlling share, of the new General Motors. With this massive restructuring, you can expect a new GM that will look and and operate quite differently, and the changes will affect many different people throughout the world. Here is how GM’s bankruptcy might affect you.
General Motors employees and retirees
By the end of next year, General Motors predicts it will cut 20,000 jobs. 2,400 dealerships and 12 plants across the country will be closed. This is after the company has been reducing its staff consistently throughout the decade. 300,000 employees at dealerships will be affected by the cuts.
General Motors retirees will see their benefits, such as health insurance, reduced.
Suppliers and other companies that rely on General Motors will also be affected. There will be job reductions throughout the entire automotive industry.
General Motors vehicle owners
Not much will change for General Motors’ customers. Warranties will continue to be valid, with a government guarantee for back-up insurance. Maintenance and other service might be more expensive with fewer parts suppliers and dealerships available to provide competition in the marketplace.
GM will eliminate a number of its brands to focus on the vehicles that show a potential for profit. The company will have to be more aware of the marketplace and remain as flexible as possible to respond to market demand. This could mean some new, more fuel efficient cars if this remains a priority. With the Administration pushing for tougher regulations in the automotive industry, this may be a necessity regardless of popular interest.
General Motors stockholders and bondholders
If you own GM’s stock, you have already been affected by the anticipated bankruptcy. The stock price, currently trading at $0.75 per share, has fallen 95.74% over the past year. Any investment held in General Motors will only be recovered if the restructuring is a success and the government relinquishes its equity.
During the bankruptcy, GM’s stock will likely be unavailable to trade. Standard & Poors will likely remove General Motors from the S&P 500 and the same fate is predicted for GM’s inclusion in the Dow Jones Industrial Average. The company was already removed from the S&P 100 last year. This presents one drawback of index investing: failing companies are often represented as thee value of their shares fall to zero, but fast-growing companies, which would normally balance out those that fail, are not picked up by the index until they have already experienced their greatest growth.
If you invested in a corporate bond from GM, you will lose your investment. Your bond rights will be replaced by a portion of stock in the new General Motors.
Overall thoughts for the consumer
With any luck, General Motors will emerge from bankruptcy and from government control a leaner company ready to compete in the automotive industry. General Motors’ current state shouldn’t be a reason to drive potential customers away from their vehicles. GM’s cars should continue to be evaluated on their performance, safety features, fuel economy, cost to own, and pleasure, just like any other vehicle produced by any other corporation.
I have been helping my girlfriend shop for a car during the past couple of weeks, and we’ve noticed in the dealerships we have visited that there is very little in stock. Lots are half empty, and this does not apply to General Motors only, or even only “domestic” automotive makers. The prices for what we can find are somewhat competitive right now, but I expect prices to rise over the next few months as the industry reacts to the loss of jobs, suppliers, and competition.
Article comments
I AGREE THE MONEY WENT TO FOREIGN COUNTRIES TO BUILD PLANTS AND I WAS TOLD WHEN GM MAKES MONEY IN OTHER COUNTRIES LIKE CHINA, BRAZIL, RUSSIA (WHERE THEY ARE UP 25% IN SALES) ALL THE MONEY MADE HAS TO STAY IN THOSE COUNTRIES BUT ALL THE FOREIGN COMPANIES IN THE US MANUFACTURING ALL THEIR MONEY MADE HAS TO GO TO THEIR COUNTRIES AND CANNOT STAY IN THE US. IS THIS TRUE? ALSO OUR FEDERAL GOVERNMENT BACKED BUILDING THEIR PLANTS OVER HERE IS THIS TRUE? I FEEL ALSO THAT THE GOOD THINGS WON BY UNIONS MADE LIFE MUCH BETTER IN OTHER JOBS AND CAREERS – IT RAISED THE QUALITY OF LIFE FOR MANY INDIVIDUALS – NOW A LOT OF THOSE JOBS ARE ALSO LOSING PENSIONS, INSURANCE, ETC. ALSO ANYONE THINKIING THE AUTO INDUSTRY WAS GOOD PAYING MONEY AND GOOD BENEFITS COULD HAVE WORKED FOR THEM – WHY DIDNT THEY” ALSO ARE OUR LEGISLATORS LETTING OVER 3 MILLION CARS BE SHIPPED IN TO THE US?
6/2/09 GM stockholders and bondholders monies and GM profits that could have gone to investors were used in building GM plants in foreign countries that are expected to reestablish the new GM. Why are the investors in the United States considered deserving to lose their monies?
Quick thoughts:
1 – It is fairly rare that equity ever recovers anything in BK.
2 – While it is true that the equity will likely be delisted, it will most likely trade OTC with a decent amount of liquidity (all things considered) right up until the emergence date.
In sum the most likely secnario is that currently outstanding GM stock will trade right up to the emergence date, at which point it will be cancelled and become worthless (unless you want to use it for wallpaper). All that being said, this reorg has been strange to date and there still may be a few twists coming.
It will be interesting to see what type of benefits are lost for the retirees – especially those over 65. I imagine they will need supplements while others will simply need the basics: health, dental, and vision insurance.
I for one will not buy a car made by the Government. What a joke. They can’t do anything right! So now they’ll build cars no one wants designed by Government built by the same union workers. So long GM, so long Chrysler. Fords forever!!
According to Obama, the government isn’t going to get involved with making cars or just about any management decisions. Even if the government does step in to make high-level management decisions, they certainly won’t be designing cars.
here in the UK it looks as though over 5000 workers are going to lose their jobs. Obviously GM has to look after its American workers first but all the same, the impact on families is going to be life changing. Sad times indeed for a once great car maker.
Joe —
In re: to the suppliers, people often quote that x% of suppliers will go out of business if GM fails. I take issue with that statement, though, because that number does not account for suppliers re-tooling to offer parts to other car manufacturers or even other industries.
I would like to see a more in-depth review of the supplier situation.
MLR
I think that retirees are getting a raw deal here. Bankruptcy or not, GM should honor their contractual obligations for former employees, many of whom made GM their entire career.
How do you propose “GM” do that. GM has no money. The Pension fund is vastly underfunded. The future health care costs are also not funded. Should the government just continue to write blank checks to cover the the obligations that GM promised but that it took no care to provide for nor had any business promising in the first place.
I for one don’t think the union employees who bargained for things that no other US employee gets deserve what they were “promised.”
How about the Enron employees who lost their pensions and their 401k. No one bailed them out. Why are GM employees a sacred cow?
They have been getting a far better deal than their labor is worth for decades. It’s time for them to wake up to reality. Even after the reductions they take when this is over, the structured means by which this bankruptcy is proceeding will ensure they still get a better deal than they deserve, just less of a better deal than they were getting.
The problem is they feel entitled to what they are getting and are not aware that its far more than the market is willing to bare as can be seen by comparing the employee cost of the unionized Detroit manufactors with their leaner “foreign” counterparts. They produce cars that consistently perform better in quality, reliability, & resale and they do it at lower labor costs and those people who are working there are making good wages and no one is complaining. And those “foreign” cars that I am talking about are made by Americans. Many Fords and GM are made in Canada and Mexico and now GM wants to move plants to China.
Puts a whole new spin on what is an “American” car!
“How about the Enron employees who lost their pensions and their 401”
The government backed the Enron pensions.
http://www.pbgc.gov/media/news-archive/news-releases/2004/pr04-48.html
“The problem is they feel entitled to what they are getting and are not aware that its far more than the market is willing to bare as can be seen by comparing the employee cost of the unionized Detroit manufactors with their leaner “foreign” counterparts.”
Hourly rates at Japanese plants in the USA are comparable to union hourly rates. Healthcare and pension benefits paid to retired employees are the major difference in labor costs between a nonUnion Toyota plant in the USA and a union GM plant.
“I for one don’t think the union employees who bargained for things that no other US employee gets deserve what they were “promised.”
You think that no US employee deserves pensions or health care in retirement? Nobody in the US deserves $28 / hr?
Jim,
I hope you will respond to what I type here as you either mis-stated or distorted everyone of my points.
Yes the government backed the enron pensions. They are required to under the pension benefit guarantee program. But that doesn’t back pensions 100%. Recipients can end up getting 60 or 50 cents on the dollar if there are no other funds available. If you read the article you quoted, the government took early action to freeze assets that enron had that could have flown to other creditors so that those assets combined with the amount that the pension benefit guarantee program was going to back would allow recipients to receive 100% of their payouts. But the government did not back the assets beyond their obligation under the PBGC. My point was there was no government bailout of the enron employees and their wasn’t. They had to fall under current law of the PBGC. GM’s pension will be backed by the PBGC. If they are able to freeze other assets and get the pensions whole, fine, I don’t know how the law works with respect to the government freezing other assets. But there is no reason the GM employees should be treated specially such that if there is not enough money between the PBGC and any other assets they can freeze from GM that the government would just give money to employees because GM promised things it either couldn’t deliver or didn’t take steps to deliver.
I never said anything about hourly wages, I specifically addressed only GM’s “obligations” to their employees and I called them out by name in the first paragraph, namely pensions and health benefits which are the two things you mention that separates the detroit manufactors from the Japanese in costs. This was in response to a comment about obligations to retirees as if these promises were sacred and could never be defaulted on. But the promises can no longer be delivered on by a defunct company. The employee benefit promises should not be bailed out by the government. There are plenty of examples, by the way, of companies going broke and employees get far less than 100 cents on the dollar after the PBGC takes over the pensions.
As for $28 per hour and thinking no one deserves that. Again, I never said that or anything about wages. Plenty of people deserve $28 per hour. I also never said no employee deserves pensions or health care in retirement. What I am saying is that the type of job that is performed by an auto worker is worth a certain amount. It’s worth what the market will pay. Unions distort that. And thus auto workers got what no other workers can get (other than a few other unions in other jobs) and that is namely a total compensation package that exceeds what their labor is worth. Most evidenced by excessive pension and health care benefits.
If the market for a product can bare paying health care costs that results in retirees costing the company more money in health care costs than workers who are still working for the company then by all means, go for it. However the immense power of the UAW allowed the auto workers to get concessions that no other employee could get, namely pay and benefits that as a whole package considerably exceeded all their non-union counter parts in the industry. And it strongly contributed to busting two of the big three and drastically hurt the third.
Clearly the banks have shown it doesn’t take unions for management to make stupid decisions. But employees are not owed the over compensation package and obligations they extracted when it all falls apart.
It is my believe that this considerable imablance in labor costs is why the US auto industry produces inferior unreliable cars compared to their japanese counterparts. I have witnessed multiple family members and multi friends purchase GM vehicle after GM vehicle only to have them constantly need to be repaired and hear the mechanic say oh yeah, that model is noted for that, they put a cheap component XYZ in when they should have put ABC in instead. Literally I have heard it more times than I can count on my fingers. I purchase nothing but japanese and have never once had an issue like that. Knock on wood, any mechanical vehicle can break down but when the manufactor is at such a cost disadvantage it has to come from somewhere and I am not going to subsidize their inferiority.
I don’t believe their is any reason the Japanese cars should be better. Americans can design just as good a car, but not when they have multiple thousands of dollars less to spend per car to produce the same vehicle. GM got away with it for a while by selling oversized overpriced SUVs to make up for getting creamed on the smaller cars but that fell has all fallen apart now.
I think we’re in agreement that the benefits for the union members are high. You however call them “excessive pension and health care benefits.” I do not think their benefits are “excessive”. Why do you think that the pension and health care benefits of union auto workers are “excessive”? What are the pension & health care benefits? What are the pension and health care benefits at non union Toyota plants in the US?
The pensions of Enron and GM are backed equally by PBGC. yes there is a max on the amount the pensions are backed. I believe its $45,000 per year. DO you have any information Enron employees losing a % of their defined pension plan benefits? Enron employes did lose a lot in 401k’s but 401k’s losses are stock market losses and because Enron locked sales of stock for a time and the government doesn’t ensure that you won’t lose money in the stock market. So if Enron employees lost money in 401k’s then thats market risk. It sucks but thats how it works. Enron employees got a raw deal. I have no argument there. I pointed to the fact that Enron pensions are backed by PBGC because they are and Enron employees did not lose their pensions since the government did step in to save them as is the law.
You said” How about the Enron employees who lost their pensions and their 401k. No one bailed them out.” The government DID in fact bail out Enron pensions.
The government did not bail out Enron but they are bailing out GM. That is true. I’m not arguing that bailing out anyone is the best thing. Its certainly not the best situation for the government to be stepping in to save any of the banks or fianancial institutions or AIG or GM/Chrysler.
GM’s pension is not impacted by the bankruptcy. Not in any way.
GM’s retire medical trust is getting a % of the stock in the new company. The medical care for retired GM workers is a major financial obligation from GM. This is for retired people. Not people who are currently working at GM. The retired workers ARE taking a cut in their medical benefits becuase of the bankruptcy.
“It is my believe that this considerable imablance in labor costs is why the US auto industry produces inferior unreliable cars compared to their japanese counterparts”
I don’t agree with your conclusions. Actual labor costs are not a major % of the cost of any car. Labor is around 5-10% of the total. Japanese cars are not universally more reliable than US cars. Mercury and Ford rank higher than many Japanese car makers in reliability ratings. Mitsubishi and Suzuki don’t get very good reliability ratings and those are Japanese cars.
APEX,
Your ignorance is quite amusing! In what way is the blue collar worker who slaved for years working at these plants responsible for the greed or poor management of the higher ups?
In addition, in what way does punishing GM retirees vindicate what was done to Enron employees? Please explain your reasoning???
What do you propose GM retirees who can no longer work due to health issues do when their benefits are reduced? Probably go file for welfare and public aid like so many Enron employees were forced to do. So guess what? You’re going to foot the bill one way or another.
Your “buy foreign” mentality is one of the reasons we are in this predicament to begin with. The day Americans start taking pride in a job well done again and start investing in our country like many of the retirees you are referring to did, is the day we will get out of this hole we are now in. We need to start by holding the management of these companies accountable and rewarding those companies that re-invest in our country.
I’m curious as to how old you are? Put yourself in the place of most of these retirees who are having a hard time keeping up with the cost of living as it is. As the daughter of a GM retiree, I can personally tell you that he and many other like him, deserve every bit of their benefits and then some. As you walk through life, pray that the “boot” that kicks you when you are down (and chances are you will be one day) is more compassionate to the needs of others than you seem to be.
Excellent article. Two points I would love to see expanded.
Retirees – isn’t the retiree plan, both pension and health care, a fixed, moral obligation? I know from http://www.pbgc.gov/ (the pension benefit guarantee corp website) that pensions are guaranteed only to a certain limit. Does this bankruptcy mean those limits come into place and retirees suddenly find themselves with a reduced check?
Suppliers – What will the domino effect be here? The automotive supplier base is huge, every component, all the motors driving the windows, the electronics, the stereo, etc, all coming from a vendor. That alone will impact the economy.
Yet, the market looks to be up today.
Joe
I’m not surprised the market is up so far today. Investors, at least those whose who have the power to move the markets, have seen this coming. You couldn’t say today’s events were a surprise.
If the pension fund actually runs out of money then the government will have to step in. GM’s pension fund ended 2008 with over $80B in funds. The fund was 87% funded. So it may not be enough to last forever but its enough to last many years before its exhausted.