Delphi's bankruptcy leads to predictable devastation
Delphi's bankruptcy leads to predictable devastation
http://www.azcentral.com/arizonarepublic/business/articles/1011talton11.html#Oct. 11, 2005 12:00 AM The "news from home" is not good. The weekend brought the bankruptcy court filing by Delphi, the giant auto-parts supplier that spun off a few years ago from General Motors Corp.
The next steps were tragically predictable: Most of Delphi's U.S. factories will be closed or sold, and it may walk away from its pension obligations. The great fire sale of American industrial might, which took 100 years to build, continues.
This is a familiar story: using bankruptcy court to stiff veteran employees and avoid responsibility for decades of management malpractice. The devastation will be incalculable in the Midwestern towns that were the heart of the American auto industry, places that are the old hometowns of many Arizonans. In addition to the potential loss of jobs and payrolls, communities also stand to lose taxes for schools and city services.
These stories about the difference between Delphi's treatment of their blue-collar workers and their executives demonstrate a typical attitude that U.S. corporations have toward their employees: Execs are highly prized commodities who are given top-dollar for the promise of their loyalty; loyal workers are a liability or an expense. And this treatment is not reserved for hourly workers. Delphi recently cut healthcare benefits for its salaried retirees as well.
Delphi execs get severance boost
BY MARK PHELAN
FREE PRESS BUSINESS WRITER
October 8, 2005
http://www.freep.com/money/autonews/delphi-bar18e_20051008.htm
With reports circulating that Delphi Corp. could file for bankruptcy as early as today, the company promised about 21 of its top executives Friday that they'd get more money if they are fired or laid off.
The Troy-based maker of almost every part you'll find on a car, from brakes to satellite radio receivers, wants to encourage those leaders to stick with the company, even if it files for bankruptcy. Delphi is the nation's largest auto supplier and the fourth-largest company in Michigan.
But the richer benefits for top executives were just another insult to many of the company's blue-collar workers, who found out Thursday that the company wants to cut their pay as much as 63% and reduce health care and retirement benefits.
"They always take care of their own," said Randy Burley, 56, of Lockport, N.Y., who works at a Delphi radiator plant. "And people complain we make too much money."
With it appearing more and more likely that Delphi will file for bankruptcy, investors fled the company's stock Friday, driving the price down 49% to close at $1.12 per share.
Until Friday, severance packages for Delphi's white-collar employees were capped at 12 months of pay. But in a report to the federal agency that supervises publicly traded companies, Delphi said the top executives are now eligible for up to 18 months of pay and some of their regular bonus.
That change does not apply to Robert S. (Steve) Miller, Delphi's chairman and chief executive, who works under an exclusive contract -- $1.5 million a year and a $3-million signing bonus -- he negotiated before joining the company earlier this year. But the changes were a result of a review of Delphi's compensation and benefit programs Miller initiated.
The old separation policy "wasn't competitive" for the top executives, said company spokesperson Claudia Baucus. Delphi's top five executives, not including Miller, were paid between $800,000 and $1 million last year, she said.
But Patrick Keenan, a law professor at the University of Detroit Mercy, said rich severance packages are difficult for workers to swallow when they are being asked to sacrifice for the company.
"The idea is to keep the company's top executives, but there's something borderline immoral about these golden parachutes," he said.
Delphi has struggled financially since being spun off from GM in 1999 for many reasons, including union contracts it carried over from the automaker that paid its factory employees far more than competing parts makers. Delphi lost money three of the past four years and another $741 million in just the first six months of this year.
Miller was brought in to fix the company in June. He repeatedly has said Delphi would file for bankruptcy before the nation's bankruptcy laws change Oct. 17 if its unions did not accept substantial concessions and GM, which remains Delphi's biggest customer, did not provide financial assistance.
The UAW hasn't agreed to Delphi's demands, which include cutting wages from $25-$27 an hour to $10-$12 an hour, closing or selling factories, fewer holidays, shorter vacations and higher health care premiums, according to newsletters sent to employees Thursday. One of those memos, from UAW Local 292 in Kokomo, Ind., said GM had not agreed to help Delphi and that "there are no discussions being held between GM and Delphi."
By filing for bankruptcy, Delphi could use the court's broad powers to wipe out its debts, impose lower wages and benefits on workers, and force GM and other automakers to pay more for some of the parts they buy and pick up some of the cost for its retired workers.
The goal would be to rebuild Delphi into a profitable company by making its costs and prices competitive with those of major rivals such as Lear Corp. and ArvinMeritor Inc.
Friday afternoon, UAW President Ron Gettelfinger told Bloomberg News at a management conference at the University of Toledo that "we're willing to find a way to avoid the bankruptcy route."
"If that's the route Delphi winds up going on, it's not because we haven't been willing to negotiate," Gettelfinger said.
GM is obligated to cover some costs for retired Delphi workers if the supplier files for bankruptcy. That agreement could cost GM anywhere from $2 billion to $8 billion by various estimates.
However, GM has an agreement that gives it a general, unsecured claim on Delphi's assets in bankruptcy. That could lead to GM being one of the owners of a new Delphi Corp. after it emerged from bankruptcy, according to bankruptcy experts and a GM executive who asked not to be identified by name because of the sensitivity of the situation.
Contact MARK PHELAN at 313-222-6731 or phelan@freepress.com. Free Press business writer Jason Roberson contributed to this report.
THE WORKERS: Take a 63% cut in pay? First reaction is anger
BY JASON ROBERSON and JOE GUY COLLIER FREE PRESS BUSINESS WRITERS
October 8, 2005
http://www.freep.com/money/autonews/delphi8e_20051008.htm
Delphi Corp. union workers across the country grappled Friday with how they would make ends meet if their employer, the nation's largest auto parts supplier, followed through on pay cuts of up to 63% to reduce costs and avoid filing for bankruptcy.
A 56-year-old Lockport, N.Y., man is considering hitting the open road again, driving a truck. A 70-year-old Livonia wife of a retired Delphi worker questions whether she'll be able to emotionally support her husband. A 55-year-old Flint worker and mother of a 13-year-old confessed she has no Plan B if her wages are cut.
Union flyers surfaced Thursday saying Delphi has demanded as much as a 63% wage cut, to $10 an hour, and for workers to pay 27% of their health-care costs, versus 7% currently. Pensions could be halved. Delphi has said it will have to file for bankruptcy protection by Oct. 17 if it doesn't get concessions from its unions and financial assistance from its former parent company, General Motors Corp.
Making matters worse, Friday's news of increased severance packages for Delphi's top 21 executives, whose pay is as much as $1 million a year, caused workers like Randy Burley, 56, of Lockport, N.Y. to curse.
"And people complain we make too much money," said Burley, whose plant in Lockport makes radiators. "Well listen, we get paid for the (expletive) we have to put up with."
Burley, a former truck driver who turned in his keys five years ago for a more stable job at Delphi, said if Delphi makes the proposed cuts he would "dust off the license and get back on the road."
Alice Wheeler, 55, a 32-year Delphi employee with a 13-year-old son, said her family is heavily dependent on her income.
Wheeler called the proposed cuts "scary, very scary," adding that she is willing to bend on vacation days and health plan co-pays, but "leave my money and my pension alone."
Retirement at risk
Judith Konarski, 70, has endured her husband's Delphi work-related stories for 35 years. Richard Konarski, 72, brought home rumors of layoffs, cutbacks and management struggles before retiring in the mid-1980s. At the time, Delphi was still part of GM.
"We're interested in all of this because we figure eventually they are going to come down on retirees," she said.
Janine Krasicky, 37, of Ferndale knows firsthand the anxiety of the Delphi workers. She was laid off twice, first in 2001 and then in 2003, from companies that made robots for the manufacturing industry. The second layoff cost her a $70,000-a-year marketing job.
The experience was unsettling, Krasicky said. The government paid her a small monthly unemployment check and she picked up a few projects for additional income. After the first layoff, she also started cutting back on expenses.
"When something like that happens to you, you realize how much frivolous time is spent shopping and buying lattes," Krasicky said.
After about six months of interviewing for jobs, including positions at Delphi, she decided to start her own marketing and public relations firm, J9 Media Solutions LLC, where she's now making more than she did before the layoff.
Displaced workers have to be creative in piecing together a career, Krasicky said.
"You really should look to do what you love to do," Krasicky said. "You can't harbor too much ill will. It's not going to do you any good. You have to move forward."
At McLouth Steel in Trenton in the 1980s, workers took pay cuts of 35% or more during the 1980s.
And 55-year-old Cleofus Wilson, known as Blue by his friends, remembers trying to juggle his family's bills.
"It was a rough situation," Wilson said. He cut back wherever he could.
"You didn't travel as much. You didn't go on vacations," said Wilson, who was a union representative for the United Steelworkers Local 2659. He left McLouth after a disability in 1990. McLouth closed in 1996.
If Delphi gets such drastic cuts, he said, workers will definitely need to control their costs.
"It'll be one of the tightest budgets you ever put yourself on," Wilson said.
An emergency plan
Financial advisers and counselors say planning and determination can get people through a tough spot.
Ideally, workers should have enough money to cover three to six months of expenses. If they don't, they might have to take some unconventional measures to get by.
The tried-and-true financial advice is never to borrow from a 401(k) plan and to keep setting aside money for retirement. But what do you do if you're suddenly taking home a Wendy's-size paycheck after years of making GM-size wages?
Reality check: If it comes to deciding between contributing to the 401(k) or paying the mortgage, you'd better opt to pay that mortgage and take money out of the 401(k), even if it means paying a tax penalty.
"If people need to suspend contributing to their 401(k), that's understandable," said David Kudla, chief executive and investment strategist for Mainstay Capital Management in Grand Blanc, which advises Delphi workers and others on their 401(k) plans.
"At the end of the day, you've got to do what you've got to do."
Tom Hakim, with Hakim Financial Inc. in Mt. Clemens, agreed that tapping a 401(k) is a last resort but might be necessary during a layoff or drastic wage cut.
What's important is getting past the initial anger at the company, Hakim said. Don't make decisions until you have a clear head, he said.
"Go though the emotions," he said. "Be mad at your boss and everyone on the planet and then step out of the fishbowl. Let's sit down and make a plan."
If people take action, they will get through the difficulties, said Wendy Karougian-Moore, a psychotherapist with the Westside Counseling Center in Southfield.
The financial problems will cause stress in the family, she said. People should talk about the problems and seek therapy if the stress gets overwhelming, Karougian-Moore said.
They should expect to spend six to eight months looking for another job, but shouldn't get discouraged, she said. Keep interviewing. Consider other careers or educational opportunities to do something different.
"It's tough but you have to have faith," Karougian-Moore said. "It's really important for people to know that this is not going to be forever."
Contact JASON ROBERSON at 313-222-8763 or jroberson@freepress.com. Free Press business writer Susan Tompor contributed to this report.
posted by Nadir at 10:46 PM
2 Comments:
Global: Pondering Delphi
Stephen Roach (New York)
Morgan Stanley
http://www.morganstanley.com/GEFdata/digests/20051010-mon.html
In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
Delphi’s bankruptcy is a big deal. It is emblematic of a new set of pressures bearing down on the US. The global rebalancing framework that I continue to embrace suggests that the world’s growth and asset return dynamic has only just begun a major tilt away from the US and dollar-based assets. If that’s the case, America will have little to offer in a low-return world for risk-averse and yield-hungry investors. Could Delphi be the long awaited wake-up call that drives this realization home?
Hindsight is always a great luxury. This would certainly have been the year for global investors to have avoided dollar-denominated assets. While the dollar itself has held up surprisingly well, US stocks and bonds have not. Year to date, the S&P 500 is down 1.3% versus a 9.5% increase for the All-Country World ex US Index (in US dollars). Returns in Japan, Europe, and most emerging markets have been terrific. Despite all the euphoria over sustained upside earnings surprises in the US, equity returns have been hammered by a wrenching compression of multiples. US sovereign bonds have also underperformed most of their global counterparts; year-to-date returns of 1.7% on 10-year Treasuries have fallen far short of above 9% returns for German bunds and emerging market debt. Only Japanese government bonds have lagged those in the US -- hardly surprising in light of the nascent recovery in the Japanese economy.
The single most important question for global asset allocation is whether this year’s under-performance of dollar-based assets is just an anomaly, or the beginning of a multiyear trend. For what it’s worth, I suspect it’s the latter. The metrics I continue to use suggest that there has been only scant progress on the road to global rebalancing. The disparity between the world’s current account surpluses and deficits continues to widen, likely to hit a record of nearly 5% of world GDP in 2006. America’s massive external deficit of 6.4% of GDP in the first half of 2005 -- on track to account for 70% of all the world’s deficits this year -- seems set to go from bad to worse over the next year, as the US saving shortfall is exacerbated by energy-related pressures on households and Katrina-related pressures on the Federal government. And the US consumption share remains at a record 71% of GDP, well in excess of shares in Europe (58%), Japan (55%), and China (42%). The world may have woken up to the imperatives of rebalancing. So far, however, there is very little to show in the morning after.
The good news is that the laggards of the world are on the mend. Restructuring and reforms are leading the way in the surplus-saving economies of Japan and Europe. Yet it is very different in America. Suffering its greatest shortfall of domestic saving in modern history -- a net national saving rate that has averaged just 1.5% of GDP since early 2002 -- the US lacks the internal wherewithal to support investment in public goods such as infrastructure, homeland security, and a safety net for the underclass (see my 9 September 2005 dispatch, “The Shoestring Economy”). When saving-short America needs funding, it turns to the rest of the world to provide the capital. Global lenders have been delighted to so -- and, so far, have offered the flows at extremely generous financing terms insofar as the dollar and real interest rates are concerned.
The Delphi Chapter 11 filing needs to be seen in this context. It is yet another contingent liability for the shoestring economy. First of all, this is a major bankruptcy in the US, in and of itself -- the 13th largest in terms of assets and the largest auto-related filing in history. But the real twist comes in the form of potential spillover effects to GM. As part of the 1999 spin-off, GM agreed to guarantee pensions, post-retirement healthcare, and life insurance for certain Delphi UAW workers -- guarantees that our fixed income team believe amount to around $3.8 billion (see Monica Keany and Swee Lim, “Delphi Corp: What Will It Recover?” September 30, 2005). For a nation that long boasted, “What’s good for GM is good for America,” this is hardly a development to take lightly.
The Delphi bankruptcy raises two key questions -- the first about credit spreads. Liquidity-driven markets remain more that willing to treat Delphi as largely an idiosyncratic risk that does not pose broader credit problems for Corporate America. GM ripple effects may well draw that presumption into question -- especially for credit markets, where spreads remain historically tight. A second concern pertains to the funding of legacy costs. This is a big deal for the US. Dick Berner tells me that the Pension Benefit Guaranty Corporation puts the funding gap at $450 billion for single-employer plans and another $150 billion for multi-employer plans -- to say nothing of approximately $1.5 trillion for state and local government plans. Like all contingent liabilities, America and its creditors have long viewed this as a distant obligation. Delphi challenges that complacency, as do recent bankruptcy filings for Delta and Northwest Airlines. That, in turn, raises the risks of added fiscal funding strains on the US government. For saving-short America, those risks will only increase an already daunting current-account financing problem.
I do not want to blow the Delphi bankruptcy out of proportion. But unlike the failures of WorldCom and Enron that were traceable to accounting scandals, Delphi’s Chapter 11 filing reflects the pressures of global competition, bloated labor costs, and the enormous legacy costs of increasingly onerous retirement benefits. In that important respect, Delphi’s failure could well be yet another important milestone on the road to US restructuring -- especially insofar as its impacts on American workers are concerned. But there’s an important twist in 2005: America has long stood alone in embracing the “creative destruction” of corporate restructuring. The US penchant for shredding social contracts and forcing bad companies out of business is widely viewed as a unique aspect of “flexibility” that other nations were reluctant to embrace. America was the unquestioned front-runner in the global restructuring sweepstakes.
That was then. Today, the restructuring playing field has many more players than was the case in the 1980s and 1990s. That’s certainly been the case in Japan over the past several years and now appears to be so in Germany. The balance between headcount reductions and job creation is key in discerning the macro impacts of ongoing micro shifts in corporate performance. The first phase of restructuring is usually dominated by plant closings, outsourcing, and net job destruction -- a distinct negative for personal income generation and consumption. In the second phase, the balance shifts toward renewal, expansion, and net job creation -- conditions that foster a healing of consumer confidence and income generation, which eventually sets the stage for a pickup in private consumption. After a decade of restructuring, Japan may well be on the cusp of entering the healing phase. In Germany, corporate restructuring remains in the painful first phase -- although the gap between job reductions and creation has been narrowing this year. That’s usually a good leading indicator of a shift to the healing phase.
The point is that the US no longer has the restructuring story to itself -- a distinct shift from the climate of the past 20 years. Moreover, Delphi’s bankruptcy underscores the heavy lifting that still lies ahead for Corporate America and the US workforce. That, in turn, draws into question the relative restructuring premium that has benefited dollar-denominated assets over this period. Moreover, there is good reason to believe that the US model will now have to face some new and important challenges of its own -- not just the pension time bomb symbolized by Delphi but also the downside of another asset bubble, shifting political winds, new leadership at the Fed, and the inevitable current account adjustment. This spells unrelenting pressure on US-centric global growth and asset allocation.
Alas, liquidity-driven markets always seem to have a knack of creating a false sense of confidence that long outlasts underlying fundamentals. Most still believe that this year’s under-performance of dollar-denominated assets is an aberration that is about to be reversed. My guess is that dollar-overweight investors are now moving into the final phase of denial. In my view, the biggest anomalies in world financial markets remain the US dollar, US bonds, spreads on risky assets (emerging-market debt and high-yield corporates), and energy prices. And who wouldn’t like gold in this climate?
Yes, I, too, am getting sick and tired of droning on endlessly about the coming rebalancing of an unbalanced world. The wait is always most painful at the end. Remember the early months of 2000? George Eliot put it best in Silas Marner: “The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent.”
http://www.copvcia.com/free/ww3/101205_world_stories.shtml#0
Comment by Mike Ruppert:
[Stephen Roach, the Morgan-Stanley analyst who warned of an Economic Armageddon this winter, is weighing in on Delphi. He has found the correct issue. More than $600 billion in pension funds may be at stake and it’s not likely that these dominoes can be stopped. There’s another $1.5 trillion of state and local pensions that are at risk. This is not just the pensions of Delphi and GM workers we’re talking about. It’s the pension of billions of schoolteachers, police officers and government workers whose pension funds are deep in GM and Delphi stock through mutual funds.
Mr. Roach is quite correct when he says that waiting for the shoe to drop is difficult. But he, like FTW, is more certain now that we should expect a shoe warehouse to be opening over our heads in a very short time. There are just no positive signs that the US economy can take any more really huge hits and the government remains as insolvent and incorrigible as ever. – MCR]
Comment by Stan Goff:
[“This would certainly have been the year for global investors to have avoided dollar-denominated assets.”
You can't avoid oil, and oil is still denominated in dollars - even when it is denominated in euros. Because euros quite simply can NOT be a substitute reserve currency. Not unless the Europeans are willing and able (in that uniquely American way) of running outrageous national debts that they can offset with a printing press. They cannot. They will not.
“While the dollar itself has held up surprisingly well, US stocks and bonds have not.”
The power of treasuries is not in their return but their inescapable extortion value. No one can sell dollars short without wiping out their own central bank reserve values. This is exactly why - although people have been saying for years that chickens will come home to roost - the chickens have stayed far afield. These dark predictions are being made based on an inaccurate model of global finance - the same one that obsessively watches stock markets - which are speculative activity against which the transnational ruling class is utterly insulated. The house never loses.
“The single most important question for global asset allocation is whether this year’s under-performance of dollar-based assets is just an anomaly, or the beginning of a multiyear trend. For what it’s worth, I suspect it’s the latter.”
The dollar will fall, but as an intentional policy of the US to export its own deflation. The cost-benefit analysis done by Europe, China, and others will determine that accepting this slap is still better than calling in Uncle Sam's markers. The trick in this system - which is definitely unsustainable - is that the abuser and the multiple abused are tied together like a Gordian knot. If the US economy crashes due to a catastrophic devaluation of the dollar, whom will the rest of the world sell to? That's precisely why these other nations continue to make loans to the US that they know damn well will never be repaid... and which finance a war designed to set them all up for future extortions.
“America’s massive external deficit of 6.4% of GDP in the first half of 2005 -- on track to account for 70% of all the world’s deficits this year -- seems set to go from bad to worse over the next year, as the US saving shortfall is exacerbated by energy-related pressures on households and Katrina-related pressures on the Federal government. And the US consumption share remains at a record 71% of GDP, well in excess of shares in Europe (58%), Japan (55%), and China (42%).”
Here's where the shoe will drop - in the 'burbs, when there is no place left to shift the losses outside the US, and the middle class has their pensions and economic security liquidated to cover the losses from yet another fictional-value asset bubble.
“When saving-short America needs funding, it turns to the rest of the world to provide the capital. Global lenders have been delighted to so -- and, so far, have offered the flows at extremely generous financing terms insofar as the dollar and real interest rates are concerned.”
And we know why.
“I do not want to blow the Delphi bankruptcy out of proportion. But unlike the failures of WorldCom and Enron that were traceable to accounting scandals, Delphi’s Chapter 11 filing reflects the pressures of global competition, bloated labor costs, and the enormous legacy costs of increasingly onerous retirement benefits.”
This is pure blame-the-victim bullshit... to be expected from Wall Street, even its dissenters.
“The first phase of restructuring is usually dominated by plant closings, outsourcing, and net job destruction -- a distinct negative for personal income generation and consumption. In the second phase, the balance shifts toward renewal, expansion, and net job creation -- conditions that foster a healing of consumer confidence and income generation, which eventually sets the stage for a pickup in private consumption.”
Fairy tale. No one can show a shred of evidence, using global statistics, that anything except the first phase is characteristic of neoliberalism.
“After a decade of restructuring, Japan may well be on the cusp of entering the healing phase. In Germany, corporate restructuring remains in the painful first phase -- although the gap between job reductions and creation has been narrowing this year. That’s usually a good leading indicator of a shift to the healing phase.”
Right. I'm holding my breath. –SG]
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