Our Changing Globe

Archive for the ‘insolvency’ Category

General Motors Corp is hoping that a recent, but as yet uncompleted deal between Chrysler and the United Auto Workers can quickly be modified to meet its own needs, and GM’s Chief Executive Officer Fritz Henderson said yesterday on a conference call, “I would expect we’d be able to pick up the pace here in the next several weeks”.

Henderson, who became CEO after President Barack Obama caused Rick Wagoner to step down, added that he is waiting for Chrysler to settle with the United Auto Workers, “The UAW is actually negotiating with two companies today, and one company (Chrysler) has a deadline of thirty days, and one company (GM) has a deadline of sixty days”.

GM, which faces a June 1 bankruptcy deadline, has been trying since December to cut its $20.4 billion cash obligation to the health-care trust in half, and was told by the Obama administration in March that it needs to make far deeper reductions in its debts.

Chrysler and the UAW (United Auto Workers) are close to an agreement which would involve the company ceding an equity stake of about 20%, in exchange for reducing its obligations to a $10.6 billion medical fund.

Union leaders and automakers agreed in their 2007 contract talks to create the trusts, called VEBA (Voluntary Employee Beneficiary Associations), with the intention being that they would free the companies from future retiree health-care expenses, in exchange for upfront contributions.

The original VEBA agreement called for payments by GM of $32 billion, with the union assuming an estimated $47 billion in future health-care costs.

In addition, GM is trying to convince its bondholders to accept a cut in the value of their debt, and the latest plan is to make a formal offer before April 27, which would involve bondholders swapping their claims for equity.

In spite of the fact that many supposed financial experts are suggesting that the worst of the current economic crisis is already behind us there is little reason to believe that this is true and many reasons to believe that it isn’t.

We are without doubt in the grips of the worst financial crisis since the ‘Great Depression’ and in many ways the problems are more formidable because they are global and the U.S. banking and financial system has been left virtually insolvent by credit losses amounting to around $3 trillion.

Insolvency problems by their very nature limit the effectiveness of monetary stimulus packages and the risk of rising interest rates erodes the growth effects of fiscal stimulus packages so all the intended ‘policy remedies’ are likely to have only very limited effects.
So what needs to be done!

In my opinion, insolvent banks need to be shut down and the debt level of insolvent households will have be reduced and until that’s done we shouldn’t expect conditions to ease.

U.S. deficits are set to skyrocket over the next few years and perhaps the most worrying aspect of all this is that the countries that are presently supporting America’s deficits are the very ones that are its strategic rivals, such as Russia, China and a number of additional countries that are politically unstable!

New York, which not long ago was the financial capital of the world isn’t even the financial capital of the U.S. anymore and Washington now is!

To make things even worse, many the world’s emerging markets are now facing the threat of a ‘hard landing’ and if that happens there will be a kind of global “stag-deflation” which would mostly likely mean economic stagnation, recession and falling prices.

Meanwhile growing opportunities will exist for those that have money or secure jobs because they will be able to buy houses at fire sale prices and because banks need to lend money to exist they will have to lend it to riskier and riskier applicants.