GM the “Failed Business Model” Pays Its Retiree Pensions; Exxon Doesn’t
I mentioned the other day that Nancy and Harry had instructed the Big Two and a Half to explain how it will deal with its pension funds (and healthcare) going forward.
Include proposals to address the payment of health care and pension obligations;
That suggested an unspoken worry–that if GM went bankrupt, the Pension Benefit Guarantee Corporation–the Federal Government–would have to pick up those obligations to retirees. If it had to do so, it would overwhelm the PRGC.
But an NYT story reveals the degree to which Congress really wants GM to stay in business–because right now, GM’s pension fund is in pretty good shape (h/t Scarecrow).
G.M. appears to have enough money in the pension fund to pay its more than 400,000 retirees their benefits for many years — even with the markets swooning around it. That is largely because of the conservative way G.M. has managed the fund recently, and it explains why G.M. has not joined the long list of companies pressing Congress for pension relief.
But this glimmer of hope in a bleak auto landscape could change drastically, particularly if G.M. struggles along for a few more years, only to go bankrupt.
That’s because–at a time when the Bush Administration was advocating privatizing social security and moving money into stocks, GM was moving out of stocks.
The G.M. pension is viable today because of the company’s response to the firestorm at the beginning of this decade, said Nancy C. Everett, chief executive of G.M. Asset Management. The unit manages the company’s domestic and foreign pension funds, as well as other big pools of company money.
[snip]
At the time of the tech crash, most pension funds had invested heavily in stocks, and stocks lost billions of dollars in value. At the same time, interest rates fell to unusually low levels, causing a painful mismatch, because low rates make retirees’ benefits more expensive for pension funds to pay. G.M.’s pension fund finished 2002 with a shortfall of almost $20 billion, by far the biggest of any American company.
[snip]
The big mismatch of 2002 showed pension officials that stocks could produce more volatility than a mature pension fund like G.M.’s could bear. The company could not wait for stock prices to come back up eventually, because it had 400,000 retirees waiting to be paid about $7 billion every year.
[snip]
Then, over several years, G.M. overhauled its investment portfolio, replacing billions of dollars worth of stocks with bonds, and adding derivatives to make the duration of the bonds better match the schedule of payments to retirees.
Just by way of comparison, let’s look at the energy sector–a sector, I’m sure, that Richard Shelby believes has a sound business model (h/t dakine).
Oil majors Exxon Mobil Corp (XOM.N: Quote, Profile, Research, Stock Buzz), ConocoPhillips (COP.N: Quote, Profile, Research, Stock Buzz) and other energy companies top the list of U.S. companies with severely underfunded pensions — a situation that may drain precious cash in a time of capital market volatility, especially at smaller firms.
A sell-off in crude oil and natural gas prices has already prompted many energy companies to rein in spending and conserve cash, but the sector may also see earnings pinched by contributions needed to make up for shortfalls in defined pension plans.
[snip]
Corporate defined pension plans have been hit hard by the sharp declines in the global stock markets this year. Standard & Poor’s estimated corporate retirement coffers in aggregate may end the year with a shortfall of more than $219 billion.
Exxon has the largest pension deficit of companies in the Standard & Poor’s 500 with a $6.7 billion shortfall, Conoco is fifth with a shortfall of $1.6 billion and Chevron Corp (CVX.N: Quote, Profile, Research, Stock Buzz) comes in at eighth with a pension deficit of $1.2 billion, according to fiscal 2007 data compiled by Citigroup Equity Research.
(Though apparently, Ford’s on the pension under-funding shit-list along with Exxon, so it’s not just big oil that’s not taking care of its obligations to its retirees.)
Just another data point for those who swear that GM can’t change its ways.
Thanks ew.
digg
Good Gawd… Exxon strapped for cash…? After earning $37 Billion in one quarter alone…??? Give me a break…!
Even better stated, “Just another data point for those who don’t know that GM already has changed its ways in many regards that seem to go unnoticed.”
I read about their pension and health funds as well.
I have to say that I was impressed by GM. I haven’t been impressed by anything the big 3 have done lately. But GM is doing better than I thought with it’s liabilities. Ford is actually doing better with its current cars, getting, I think, 16 or 17 top rated safety vehicles this year, the most of any manufacturer..
The only thing that distressed me was that GM is not going to fund their future liabilities for 2 or 3 years.
Anyway, I have changed my own mind after reading about their finances and considering the vast amounts of money we are throwing at our economic problems. If our economy needs that much money then it must really really really suck and maybe we should do something for them.
I say give GM and probably Ford enough to keep them going for at least 1 year, and probably 2 with the explicit requirement that they must restructure their wage and benefit schedules more in line with their competition. Also they must get rid of the “jobs bank” and other stupid work rules. The bosses must also sacrifice.
As for Chrysler, I am still leery of them, though I loved it when they were pioneering the minivan back in 84. It really helped with the kids. So maybe, just maybe, 1 year of support.
After that 1 or 2 years of life support, TOSS them ALL off the end of the pier and let them swim for their life.
I’d be willing to bet your stats are understated, maybe a lot. I haven’t looked at hard #s, but accounting legalities have allowed lots of slight of hand since around 2k… in affect allowing ‘em to tap retirement $$ w/out declaring so. Understating these things has become as routine as the drip drip drip TARP “infusion” targets.
I’d also bet they have considerable exposure to CDOs. Just look at who did their Research.
Wonder what CitiGroup’s retirement funds look like? I’d bet they’re as funky as are their assets.
…
We had a discussion around here some months ago, when shit really hit the fan on extent of CDO mess. There was speculation amongst regulars of extent of exposure. Discussion’s commenter(s) generally agreed insurance companies were not exposed. I recall asking why they thought that?
From everything I saw, they’d sold these things everywhere & they were AAA. And as it turns out… drip drip drip, all kinds of conservative funds (retirement) bought them: Florida, (now seeing) UC Benefits, (and or course good o’le reliable) Orange county… they’re everywhere.
Anyway, we know how that went… didn’t AIG have something to do w/insurance? And they’re up to their ass in more than CDOs. And what’s all those rumors of Hartford, MetLife etc. that sound just like pre-bankruptcy Lehman rumors?
GM at least, going to need more than 2 yrs. Their big hope (VOLT) 2+ yrs away, and even then they’re going to lose $$ on it… for how long, I don’t know. Ford appears to be in better shape.
I think you would be surprised at the things GM has in the pipeline, and it is not just the Volt. Take a look at the Vue green machine. Or the Chevy Cruze. GM has also done a lot more in consolidating production facilities, making them efficient, etc. than most realize. They really are already moving in the right direction; a (relatively speaking compared to the other money flowing out of Washington DC) 10-20 billion dollar bridge loan, that they will repay, just is not that much to ask.
Bob @5 – exactly.
More details on that here, and from here…
That Saturn was promised this quarter ‘08. Do you know if it’s available? Quick Google didn’t show me any availability.
Here is one report. I believe they are on sale, but they are still limited availability while they are fully stocked; but I am not positive of this.
Why do the Big 2.5 get the third degree when they ask for a *loan*, but when bankers come to town, Paulson trips all over his feet in eagerness to give them wheelbarrows full of money?
The whole process stinks. Billions for Bankers with barely any questions asked, but Brickbats for Blue collar industries that actually make things. What do we elect Democrats for, if this is the result? I know Obama isn’t president yet, but he should be leaning on Congress, and on Paulson. There are things that he can do.
Bob in HI
Yves Smith (Naked Capitalism) on state of economy (eg. toes up):
>>adding derivatives to make the duration of the bonds better match the schedule of payments to retirees.
derivative products have been the rage for some time in the financial markets… i think warren buffett might have said something to the effect that they are like the wmds of the financial world.. citicorp executives can alway say they didn’t know they were exposed to all of that bad shit.. remember berings bank – britian – where the trader managed to take down the whole bank?? he did it with derivatives.. anyway, like i said a few posts ago.. people are going to become a lot more familiar with financial dynamics and they aren’t going to like what they find out..
Bell, this is almost certainly a different kind of thing. If you hold the bonds, it makes sense to hedge against collapse of the bond issuer. It also makes sense that you would want to hedge against changes in interest rates, which might decrease the value of bonds that you want to sell.
As it happens, because of the gambling going on in the derivative market, this may not turn out as well as one might have hoped, because counterparties may not be able to pay off. Still, this isn’t like the weirdo gambling games played by naked buyers of protection.
OT for Bmaz,
Should Rusty Hardin pull the Roger Clemens defamation bunny out of the hat, I nominate Rusty for SCOTUS-a-no-no…
Has anyone gotten a record of GM’s political contributions in this presidential campaign?
The United Auto Workers backed Obama heavily with both money and campaign workers.
Is this Paulson/Bush getting even? Anyone who opposes the Criminal Crew pays dearly.
Morality, to me, means The Greatest Good for The Most People involved.
Iow, it is More Moral, imho, to provide a Safety Net – Jobs and Assistance – for All Citizens than it is to Bailout just the Bankers.
This highlights a Major Difference between Bush and Obama – the Immoral Bush wants his Irresponsible Money Buddies Taken-Care-Of First, then US as an after-thought.
If Bush gets his way, he’ll Spend All $700 Billion on his
Co-ConspiratorsHeedless, Entitled, Greed-Driven Friends – first – and whatever scraps are left-over, he’ll toss Obama’s way.Bush’s Immorality seeks to Bankrupt any chance of Obama being a Fiscally Moral Leader.
I have a question about Gmac who owns homecomings financial. (or is part owner with cerebus). There is a class action lawsuit on behalf of 800,000 people regarding the subprime company “homecomings financial”. It as I have diaried charges fraud, TILA and RESPA violations. Everything argued in the class action suit happened in my case.
Here’s my worry. If a lawsuit is won, how might it be resolved? What might restitution look like if GMAC,GM go bankrupt?
Here’s a link to the suit…it is spot on for what happened to me and googling homecomings will find literally hundreds of posts that reinforce that these practices were occurring frequently.
http://www.homecomingsfinancia…..plaint.pdf
Does anyone know what might happen to all those people who might have lost their homes, and their credit to fraud and illegal behaviors from this company? Is there any chance of getting resolution? Do you think that this class action suit going forward has anything to do with the financial concerns they face?
One other thing…ditech has been advertising home loans like crazy. (a subsidiary of GMAC) (a name you can trust…they say on the ad). I have also read that there are scams out there offering “restructuring” for people facing foreclosure that are full of the kind of fraud in this lawsuit. Why are these practices not being stopped? Why haven’t they stopped playing in the subprime market when it so clearly has helped to create this mess? Shouldn’t the financial situation put some kind of pause on this kind of loan and this predatory behavior?
I thought GM sold off that part of GMAC. Either way, if there is BK you are done. Such a suit would be so far sown the creditor schedule there would be no hope of recovery even if not eliminated altogether. I still think they sold this off; Marcy may know more than I on this
I read that cerebus own 51%. And it at the very least still owns ditech per the current ads.
So they may be able to get free of this fraud and never be held accountable? What will happen to all those loans still out there? Of course it depends on who own homecomings, but the ads say that GMAC owns Ditech and they are running like crazy in my area, which suggests to me that they are still in the subprime market.
I googled who owns Homecomings financial and got nothing. It keeps coming back with the old site that states Homecomings Financial (a GMAC company). It says it on the website although the website has been all but shut down. It says that Ditech is it’s sister company. So who the hell has my loan? On Michael Reagan’s website I found a comment that said that Dick Cheney was part owner. (who knows?) I can’t help but think that this is the foundation for alot of the mess. (along with building the wrong cars).
There is no news and it affects not as many as will lose their jobs without a bail out but currently the lawsuit is on behalf of 800,000 people who have likely been affected by these illegal practices. That does not speak to the numbers of people who lost their homes and walked away after paying these illegal fees.
I think they are trying to get out from underneath the “potential losses” if this were finally to hit the mainstream media. To date, none of this fraud is being discussed regularly.
By the way, I understand that Toyota and other Japanese carmakers are going to their government with hat in hand. Will the righties try to blame this on unions too?
thank you Emptywheel – am pleasantly shocked about the state of the Pension Fund – thanks to Scarecrow as well.
Hope GM didn’t buy any of those mortgage derivitive thingees!
Richard Shelby is from Alabama.HOME of FOREIGN OWNED automaker assembly plants, LOTS of them. Ofcourse he will diss Detroit. He wants them to go out of business so the Japanese automakers and firms who boild cars in his state can buy them out in Detroit and take over their plants. No union,then!Here’s some links:[PDF] Automotive IndustryFile Format: PDF/Adobe Acrobat – View as HTML
Alabama is the home to Mercedes-Benz, Honda and Hyundai assembly plants. Other … The auto industry in Alabama accounted …. Alabama Auto Assembly Plants …
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North Alabama was the FIRST site for an auto-related plant in Alabama. Saginaw Steering Systems – now called Delphi – was built just north …
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Emptywheel, Good article. Make’s one feel a little better, thanks.
I do have some of jdmckay’s concerns abt if this financial mess hurt Fidelity Investments, they hold GM’s retiree’s fund and the worker’s & retiree’s investments funds. I think they might be a private company.
Andrew Card worked for the American Automobile Manufacturing Association (AAMA) 93 to 98 and it dissolved Dec 1998. The AAMA had 3 customers, the big 2 1/2. Did Card dissolved it? Then he worked as
(wiki). Then GM gave him a big send off party before he slide on over the Big WH and was schrub’s COS. Now for the past few years the auto co’s were having trouble why didn’t GM’s buddy at the WH help them out? Why did Bush ignore pleas from them during his last campaign cycle? It just doesn’t make sense. Does GM “want” to go bankrupt? They could get concessions they couldn’t get through the union negotiations, they can get rid of health care (just a few years before national health care is instituted), reduced wages, retiree’s financial obligations? Are some of these people sprouting at the mouth GM has to come in alignment with Toyota just a mouth piece for GM?
Would there be any difference if they went bankrupt under a Bush adm as opposed to a BO adm?
Oh ya, I wonder why Bush picked him as a COS? Did he even know him?
Card was a lobbyist for the AAMA.
http://quest.cjonline.com/stor…..7436.shtml
The investers were complaining about GM’s pensions being so costly in 2002 then why did they do so many buy outs these past few years putting thousands more on the pension rolls? I never did understand how that saved them money. The Delphi new hires are getting paid $15. and $7. plus they are paying a pension to the legacy workers.
http://www.detnews.com/2005/au…..134885.htm
Fidelity is laying off too, I wonder how bad it is over there?