Wednesday, August 27, 2008
Delphi--the Plot Thickens
"The government is trying to force Delphi to transfer more than $1.5 billion of unfunded pension obligations to General Motors by Sept. 30. ... Delphi's efforts to put together a strategic plan to come out of bankruptcy fell apart in April. ... The Pension Benefit Guarantee Corporation, the federal agency that takes over pension funds terminated in distress, is warning that it would then lay immediate claim to $8 billion, diluting the claims of Delphi's other unsecured creditors, who are owed about $3.5 billion. ... As long as Delphi keeps its pension plan intact, the pension agency has no claims on the unsecured creditors' money. ... This year, G.M. has been preparing to take back a portion of the pension fund as part of Delphi's reorganization plan. Delphi has been allowed to skip its pension contributions while in bankruptcy, and it has also received waivers from the [IRS] that pushed the due dates into the future. ... Delphi does not have the $2.4 billion to spend on its pension fund. It does not have to produce that much cash on Sept., 30, because of an eight-month grace period, but as it falls behind schedule, the I.R.S. has the authority to impose excise taxes. Delphi disclosed in a filing with the [SEC] that it could be liable for as much as $3.4 billion in excise taxes on top of the $2.4 billion contribution. ... In addition to taking over part of Delphi's pension obligations, G.M. has committed itself to helping Delphi close manufacturing sites, financing buyouts, buying some of Delphi's output and taking over some of Delphi's retiree health obligations. ... Last spring's strategic plan had called for G.M. to receive compensation in the form of cash, notes and stock in the new Delphi after it came out out bankruptcy. But as Delphi's problems have deepened, G.M. wants to make sure its compensation will still be adequate, given its crucial role", my emphasis, Mary Williams Walsh at the NYT, 15 August 2008.
Delphi was carved out of GM on 1 January 1999. Delphi's CPAs were Deloitte & Touche (D&T). D&T also audits GM. D&T should never have been appointed Delphi's CPAs given GM and Delphi's relationship. Delphi replaced D&T with Ernst & Young for its 2006 audit. Delphi had some accounting restatements and accounting related lawsuits for 2000-03. It recorded a $202 million payment to GM in 2000 as a pension settlement instead of warranty expense. That Delphi could do this when D&T was on both sides of the transaction shows something. Something not too complementary to CPAs. GM should be forced to pony up all of Delphi's pension contributions. Now. If GM can't pay, it should join Delphi in bankruptcy. The two cases could be jointly administered.