The pro and con argument regards the 'bail-out' of the Big 3, and particularly GM, continues unabated. Around Capital Hill, the Washington politicos of Obama's camp, Detroit and the public at large that rely on the automotive sector north and south of the re-enlivened Mason-Dixie line that separates what many recognise as the over-bloated UAW responsible northern states and the economically efficient southern states that are the success story of 21st century US auto-sector capitalism – even if ironically for the most part foreign owned.
As the Big 3 re-consider their respective and collective position(s) after the reportedly poor performances of Detroit's 3 CEO's at the recent Congressional hearing, there is the notion that the industry will prick the Congressional consciousness by driving a caravan of 200 or so eco-tech vehicles to DC.
Such a parade could well be viewed by the likes of Pelosi and Reid as little more than a cynical PR stunt generated to gain the public's goodwill to effectively 'lean' on Congress, and create the retort that the initial $25bn green-tech monies have already been signed off by Bush awaiting accessibility. Instead the additional $25bn 'bridging loan' will be heavily dependent upon Nancy Pelosi call to submit medium to long-term strategic viability plans that philosophically and numerically demonstrate a tenable and profitable road-map forward.
These funds, predominantly in GM's favour given its size and need - of a reported $13-14bn – are viewed as either 'lifelines' through the recessionary period, or wasted feeding a veritable 'money-pit' that will falter soon after burning through the appropriated cash - the parallel to the distressed banking sector all to painful.
But if the argument be fought on fiscal accountability grounds, Wagoner could well have a strong card, if not an ace, up his sleeve. For unlike the risk-laden, overtly laissez-faire attitude of the likes of Chuck Prince previously at Citi and Dick Fuld previously at Lehman Bros, Wagoner can point to the financial prudence GM has demonstrated with its own employee pension fund obligation. Although full year 2008 figures are not available yet, a recent story from the New York Times highlights that GM has been topping-up its fund obligation since its under-par position earlier this decade, illustrating acute use of accounting rules and no tax advantages, and keen to publicise its social responsibility.
That rebuilt its fund from sizable budget deficits in 2001/2002 (of $20bn) to break-even in 2003/2004 to growing impressive surpluses between 2005-2007. Importantly it learned from the tech stock bubble of 2000, and cautiously switched from the typical corporate portfolio holding of 25% equities to a far reduced level of 15%, preferring the safety of coupon payments from US Treasury Bonds and US Blue-chip Bonds – the dividends able to fulfill the present-day requirement of $7bn per annum. That conservative approach was contra to the general fund manager sentiment of the 2003-07 period where stocks boomed, but has now been seen as a wise precautionary against the credit-crunch created stock-market collapse of the last year, ranging from 45%-90% depending on sector, and demonstrating that even what were regarded as defensive stocks have not performed to expectation.
That fiscal foresight in protecting its ability to pay its pension obligations could well be the critically advantageous 'silver bullet' issue for GM and Congress' view of its self-governance.
Of course the 15% asset allocation to stocks will have been heavily knocked, and we are yet to find out how that write-down affects 2008 pension budget figures – importantly whether it remains in surplus. Very basic maths assumes that even a full loss of that 15% allocation would still leave the budget balanced, so the level of surplus depends on exactly which stocks the GM Pension Fund holds – and for that it is a case of “watch this space” for FY2008 results in the new year.
The crux is that Wagoner et al are endeavouring to avoid the possibility of bankruptcy that would be so so damaging to not only the Big 3, but the sector as a whole and the American economy – both sides of the all to academically re-emerged Mason-Dixie. And the pensions issue may well be GM's tour de force.
For even if GM were to enter into even a supposedly quick pre-packaged Chapter 11 – something investment-auto-motives believes would be very tricky, indeed onerous, to create – it would leave Washington with that $7bn per annum pensions bill. Would it want to add to its already massive liabilities by that annual amount, and even if so for a temporary period, a Chapter 11 re-structure would very probably result in the that liability not being put back onto a restructured GM's books and left instead with government and the over-laden tax-payer.
However, GM's success in running its pension fund, with the additional irony that it has done so by effectively buying US Government debt to feed its own coffers, could make all the difference to its future outlook, and access to that $25bn 'bridge-loan'. Perhaps especially pertinent now that the Federal Reserve has stated it will undertake a 2-step $800bn initiative to unfreeze credit markets to consumers aswell as home-buyers and SMEs.
And as for that implied 200 car green-tech caravan, its route into Washington will be all to serendipitous, expect Detroit and the Japanese to band together, but GM will want to come via the northern DC suburb of Chevy Chase rather than (Toyota's) Tacoma. Still, organising the caravan route is the least of all US car-maker's problems; the real road-map to create is a strategic and operational one.
One that we believe should over the next decade change the innate structure and profitability of the US auto-industry - the government acting in the role of fiscal supporter and process invigilator.
