Delphi Bankruptcy: The Saga at Delphi

Mike Shedlock discusses the ramifications of auto parts supplier Delphi’s Bankruptcy, for its workers, executives, General Motors, and the US middle class.

THE WRITING WAS on the wall last week when executives at Delphi asked the United Auto Workers union for substantial concessions, including a cut of more than two-thirds to wages and benefits, according to a union official’s letter sent to Delphi UAW workers. Also included in the concession request was the elimination of a costly program giving full pay to laid-off workers.

While that “offer” was in the works, Delphi improved severance package for senior executives right before filing for bankruptcy:

“Auto supplier Delphi Corp. said Friday it has beefed up severance packages for top executives in order to encourage them to stay on as the company prepares for a major restructuring that could include bankruptcy…

“In a filing with the U.S. Securities and Exchange Commission, Delphi said 21 top executives will be eligible for 18 months of severance pay and at least a portion of their bonus if Delphi terminates their employment or they leave for ‘good reason.’ Previously, severance packages were capped at 12 months.

“Delphi said it made the change after determining its severance package for top executives wasn’t competitive. The new agreement doesn’t apply to Delphi’s Chairman and Chief Executive Officer Robert S. Miller, a restructuring expert who joined the company in July. Miller’s base salary is $1.5 million.”

Delphi Bankruptcy: Unconscionable

This is simply unconscionable. Demanding 67% reductions in pay and benefits while boosting the pay of top execs is disgusting. Yes, the wage contracts at Delphi were not sustainable, but whose fault was that? Did not management agree to those wages and benefits? Delphi said it made the change after determining its severance package for top executives wasn’t competitive. Competitive? Competitive with what?


Delphi execs make out like bandits with guaranteed pay and benefits, and will no doubt be given massive numbers of shares of the new company coming out of bankruptcy. That is the kicker to this lie. Did those execs really need any more “sweetening” to stay on? What risk is there now with guaranteed pay, a more competitive company, and probable mass firing of workers to drastically reduce expenses? There would have been far more risk for those execs to try and weather this mess through. Had they done that, perhaps they would have merited increased benefits. Once again, Corporate America proves there is no limit to greed.

Do we need a Corporate America motto? Here are a few ideas:

“If you can get away with something, act fast before the opportunity passes.”
“Screw the workers, there’s always a job for them at Wal-Mart.”
“I need a new yacht more than my subordinates need their next meal.”

Somehow none of those seems exactly right. I am open to suggestions.

As for mass firings, it seems the axes are ready to chop headcounts according to this headline: “Delphi CEO Sees Major Job Cuts”:

“Delphi Corp., the U.S. auto-parts supplier that filed for Chapter 11 bankruptcy protection Saturday, plans to shut down or sell off a substantial part of its U.S. operations, the Wall Street Journal reported Monday…

“Miller said Delphi’s troubles would require the company to divest, consolidate, or close ‘a substantial segment’ of its 45 manufacturing sites in the United States and Canada, which employ 49,000 workers.

“He said he also plans to renegotiate the contracts and retirement plans of Delphi’s 33,000 union workers and 12,000 retirees, the paper reported…

“UAW President Ron Gettelfinger in a statement called the filing a ‘bitter pill’ and criticized Delphi for sweetening the severance packages of 21 top executives the day before seeking bankruptcy protection.”

Delphi Bankruptcy: Bad News for GM

Delphi going under is not exactly good news for GM. It seems that GM may be liable for between $4 and $11 billion worth of Delphi benefits.

Let’s take a look at what one article is saying.

According to Reuters, “GM Shares Hit by Delphi Fallout”:

“General Motors Corp. shares fell sharply on Monday after the largest automaker warned the bankruptcy of its biggest parts supplier, Delphi Corp., could cost GM as much as $12 billion…

“GM said the Delphi filing did not necessarily make the automaker liable for post-retirement health-care and pension benefits for employees at Delphi.

“But its range of exposure — under benefit guarantees the automaker made as part of the 1999 spinoff — extends from potentially no material impact to up to $11 billion, with amounts closer to the midpoint more possible than either end, GM said…

“Citing fallout from the Delphi bankruptcy, Banc of America cut its rating on GM to ‘sell’ from ‘neutral’ and cut its price target on GM shares to $18 from $32.

“Banc of America also increased its estimate of the likelihood that GM itself would file for bankruptcy to 30% from 10%.

“Standard & Poor’s on Monday cut GM’s debt ratings deeper into junk status and said it may cut them again.”

Stephen Roach at Morgan Stanly chimed in on the U.S. automotive mess today in Pondering Delphi. Let’s tune in:

“Delphi’s bankruptcy is a big deal. It is emblematic of a new set of pressures bearing down on the United States. 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 United States 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…

“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 United States. 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 U.S. government. For saving-short America, those risks will only increase an already daunting current-account financing problem…


“The point is that the United States 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 U.S. 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 U.S. 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 U.S.-centric global growth and asset allocation…

“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 U.S. dollar, U.S. bonds, spreads on risky assets (emerging-market debt and high-yield corporates), and energy prices. And who wouldn’t like gold in this climate?”

Delphi Bankruptcy: The Implications for the US Middle Class

I agree with every point that Roach made. His piece was entirely on target. What everyone seemed to miss in this Delphi/GM saga, however, are the implications for the U.S. middle class. Pension plans are being junked left and right. Telecom companies were first, followed by airlines and auto parts suppliers, and next will be the auto manufacturers themselves. Banc of America raised the odds of a GM bankruptcy today to 30%. I think it is closer to 95%. It is just a matter of time. If you did not know this before, you do now: Retirement and pension benefits from any union are now suspect. All United Auto Workers are especially vulnerable.

Furthermore, U.S. asset prices are about to be put under stress in the next recession. Consumer debt is at all-time highs and consumer spending is based on the unsustainable model of forever rising real estate prices. Wages and benefits and pension plans are being eroded at the same time. The squeeze on the middle class is already enormous. Meanwhile, the Fed is merrily hiking away, fighting a housing bubble it created. A housing bust will make matters far worse.

Lost in all the commentary was the fact that Delphi execs fired yet another “class warfare” missile today.

A middle class crisis is looming. It’s just a matter of time.

Mike Shedlock ~ “Mish”
October 18, 2005


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