GM

[tw]

Originally Posted by classicman

Didn't reducing retirees benefits also have an impact?

Once an employee retires, then that employee is no longer an expense to the company. Of course, that means the company is honest. Every day that employee works, the company puts a little more money in his pension fund. When the employee retires, only the pension fund - not the company - pays that retired employee.

But GM mortgaged everything to make management look good. GM stopped funding the pension fund decades ago so that the world's worse and most expensive cars would show a profit in the 1990s and 2000s. Why were pensions a problem for GM? In a world where bean counters screw everyone, the unfunded pension fund then gets blamed on union employees. When tens of $billions are owed to the pension fund, then GM knows a majority of Americans will blame the unions rather than blame what is taught in the business schools. GM did what any good business school graduate would do. Mortgage the company and then blame someone else.

Union costs were never a problem. Lying bean counters who stop funding pension were the problem. GM owed tens of $billions in unfunded pension obligations. Business school graduates who stifled innovation to make short term profits – that is GM's major problem. By shorting those $billions, GM could claim $millions of annual profits. Claim profits on cars that (if the bean counters were honest) should have forced GM into bankruptcy in 1991. Then when the spread sheets could not longer hide the truth, 'blame the unions' always works on an American public fed only by sound bytes. Unions never created any of this.

Once a bean counter is taught that “the purpose of a company is profits”, then his whole life purpose is similar to a mafia don. Do anything to make a profit. Unions did not create a problem that has existed in GM for more than 30 years. So who suffered because top management lied? Everyone except top GM management.

GM's pension problems are directly traceable to spread sheet spin. Other companies simply meet their pension obligations. GM stopped funding the pension funds in 1991 to avoid bankruptcy - to protect top management jobs and bonuses. 18 years later, the bills came due. So we should blame the unions? That is what GM did. GM called it legacy costs rather than call it by its real name - bean counter fraud.

[ZenGum]

So ... will UG change his position and agree with me, or hold his ground and agree with TW? Toughie ...

[Shawnee123]

I don't know, but I love this intelligent discourse. Did that sound dirty?

[classicman]

So simply stated, in one word, what you are saying is that the pensions & benefits for retirees are NOT a cost to a company?

[tw]

Originally Posted by classicman

So simply stated, in one word, what you are saying is that the pensions & benefits for retirees are NOT a cost to a company?

There is no one word. When the employee works one day, then one days penson is put into the fund. The day that employee retires, the company spends no more on the employee.

But when bean counters do their magic, then somehow those costs get mortgaged. Future generations must pay for that employee. Using propaganda, GM called that a legacy cost. Honda and Toyota have the same retired employees without any legacy costs. It's called honesty.

[classicman]

It was a yes or no question. From your answer, I'm forced to assume a yes answer. However, I find it very difficult to believe.

[tw]

Originally Posted by classicman

However, I find it very difficult to believe.

Pension and benefits are a cost to the company when the worker is working. Pension and benefits should not be a cost to the company when a worker is retires. So your answer is both "yes" and "no".

When a company is mortgaging its future to protect bean counter management, then pension and benefits remain a cost to the company years later. No 70 Horsepower per liter engines in all cars for 20 years. Cars that still required wheel alignment. Examples that say GM had no interest in honest accounting.

Any expense that remains unrealized for years is a profit to the company today. So now the answer is "yes". GM retired employees remain an expense to GM. GM did what was also situation normal on Wall Street.

You asked a question that is intentionally confusing. How many more "yes" and "nos" apply? Welcome to what was made acceptable in the 'new American finance' standards. Welcome to why finance people must be so heavily regulated. Welcome to the resulting melt down that happened 17 years later because GM management refused to address their management problems in 1991.

GM invented legacy costs without admitting to mafioso objectives. Screw the product; only reap profits. Those who only want “yes and no” answers were easily sold GM lies - ie legacy costs. GM management got even more bonuses for mortgaging America's future for personal gain. More “yes and no” answers are for those who ignore details of reality. Answer to your question are multiple "yes" and "no".

[xoxoxoBruce]

Originally Posted by classicman

It was a yes or no question. From your answer, I'm forced to assume a yes answer. However, I find it very difficult to believe.

It's a qualified yes. GM did the same thing with the pension fund, that the Federal Government did with the Social Security Fund.

The deal was, that part of the huge profits they were making would go into the pension fund, and that would pay the pensions as they came due, with no drain on GM. But like the Feds, they stole the fucking money, so now it does impact GM.

[Urbane Guerrilla]

If there's a real difference in principle between a five-dollar lemonade stand and a five billion dollar auto company, I've yet to hear of it. What effect could scale have upon principles?

Somebody will doubtless tell me enlarged scale would afford "more opportunities" to game the system. But does it really, and is there any difference in principle thereby?

[ZenGum]

Originally Posted by Urbane Guerrilla

If there's a real difference in principle between a five-dollar lemonade stand and a five billion dollar auto company, I've yet to hear of it. What effect could scale have upon principles?

I almost put this in my first post, but I aim for shorter posts. They're more likely to get read.

If we keep things "in principle" or "in theory" then we are at risk of considering a spherical cow. That is, we have abstracted so far from reality that our findings are of little use. A lot of economic theory does this.

Is there a difference in principle between a lemonade stand and a car company? Well, true, much the same principles apply: supply, demand, costs, pricing, margin, return customers, etc etc.

In reality, if a lemonade stand is selling poor quality lemonade, any ambitious kid with $5 can start a competitor. Standard competition applies.
If a car company is selling poor quality cars, what happens? Start-up competitors? Hardly ever. People buy other cars. The company struggles, and either reforms, folds or gets taken over. Option A is status quo, B and C tend towards reduced competition.

The problem in a nutshell: in theory, there is no difference between theory and practice, but in practice, there often is.

It's an empirical question. Does a free market enhance competition? With respect to lemonade stands, probably yes. With respect to car companies, probably no. Look at car companies today. It is far too complicated for me to trace out, but most brands have been taken over by other companies. How many car companies does the US have today?

[Urbane Guerrilla]

Three, and the ones that aren't around any more weren't always merged, but simply closed shop.

Not necessarily the case for truck manufacture -- see the variegated history of White Motor Company, for one.

How old is Kia Motors? Wiki says its earliest incarnation was 1944 as a tubing and bike parts manufacturer. It set up shop in the US in 1992. How about Daewoo? Twenty-three years younger. And making cars for GM now... since 2001. Seems an example of capacity going on the market and being bought up.

All this hooraw and going through changes looks like free markets to me, particularly Daewoo's collapse as a conglomerate and its rebirths as sundry spinoff companies still doing what they started out as. This kind of thing goes on in free markets when a government makes a point of not muddying the waters. I'm not seeing a "reduction of competition" here. I get the feeling globalization is making such "reduction" an impossibility, as any entrepreneur can hurl himself at any market, anywhere on the globe these days.

Lemonade stands and auto manufacturing still obey the laws of economics.

[classicman]

The impact of pension accounting on companies' financial statements

[gvidas]

This American Life #403: NUMMI

A car plant in Fremont California that might have saved the U.S. car industry. In 1984, General Motors and Toyota opened NUMMI as a joint venture. Toyota showed GM the secrets of its production system: how it made cars of much higher quality and much lower cost than GM achieved. Frank Langfitt explains why GM didn't learn the lessons – until it was too late

Listening to it now.

[Undertoad]

That's the plot of Gung Ho.

[classicman]

The Lessons of the GM Bankruptcy

Today is the first anniversary of one of this country's less-than-crowning milestones: the bankruptcy of General Motors, once the largest and richest company in the country, and indeed the world.

Keeping GM alive, albeit in shrunken form, was an expensive undertaking for America's taxpayers: about $65 billion in all, if one counts government aid to the company's former financial arm, formerly GMAC, now renamed Ally Bank. For all that money we, as a country, should take away some lessons from the experience. The following get my vote for the three most important:

• Problems denied and solutions delayed will result in a painful and costly day of reckoning.
• In corporate governance, the right people count more than the right structure.
• Appearances can be deceiving.

GM's current board—appointed by the company's controlling shareholder, the U.S. government—has a handful of holdovers from the prior board. Maybe they aren't bad people, but they surely showed judgment that was beyond bad. As the new GM prepares for an initial public offering of stock—so that the government can recoup the taxpayer investment—it will need credibility at the board level. The holdover directors should resign.

As for appearances versus facts, the GM bailout—along with the similar exercise at Chrysler—offers ample evidence. The understandable objection to bailouts is that they foster moral hazard, the willingness to act recklessly without fear of consequences. Yet the bailouts of these two companies had painful consequences aplenty for the major actors.

Shareholders of both companies got wiped out. Creditors took major hits, including those who held secured debt at Chrysler. (Their loans to the company were reckless, the equivalent of subprime mortgage loans, but they did recover more than they would have in a Chrysler liquidation.) Many workers and executives lost their jobs. Many dealers lost franchises. The Jobs Bank was abolished, albeit belatedly. So was no-cost health insurance.

All this seems plenty of pain to discourage future moral hazard. Letting the companies liquidate would have produced far more pain, of course, but much of it would have fallen on innocent bystanders—the ordinary citizens who participate in an economy that was on its knees last spring. The Obama administration, to its credit, tried to walk a fine line: doing enough for Detroit to protect the economy, but not doing so much to foster future irresponsible behavior.

Nobody on any point of America's political spectrum really liked this bailout. But having paid for it, let's hope that we as a nation are willing to learn from it.

Link
This guy takes some major shots at Ford as well.