China's a Bubble-2

"It is still on the market, but Charles Tong, the developer of Tomson Riviera, a luxury riverfront complex in the heart of the financial district here [Shanghai], says he is having no trouble finding takers for similarly priced units. 'We're selling three to four apartments every month,' said Mr. Tong, seated in a white Versace easy chair. 'Now, people here want something more luxurious; they'd like a new lifestyle.' ... When other recent booms collapsed--in the [US], for instance--they depressed entire economies. In China's case, a bursting bubble could affect much of the world. China is the fastest-growing large economy and, so far, a main engine pulling the world out of recession. ... Last year, a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable. And with prices soaring, developers are scrambling to build more mansions, villas and high-rise apartments with names like Rich Gate, Park Avenue and Palais de Fortune. ... In the city of Tianjin, in north China, developers have created a $3 billion 'floating city,' a series of islands built on a natural reservoir, featuring villias, shopping malls, a water amusement park and what they say will be the world's largest indoor ski resort. 'This is wild,' said Andy Xie, a former Morgan Stanley economist who is now an independent analyst. 'By all tradtional measures, like rental yield, this is a bubble.' Speculators are snapping up properties on the expectation that prices will continue to rise, as prices have nearly every year for more than a decade. ... Prices [in Shanghai] have risen more than 150 percent since 2003, pushing the price of a typical 1,100 square foot apartment up to $200,000, according to real estate experts. (Shanghai residents typically earn less than $5,000 a year.) ... The apartment complex's entrance has original artworks by Salvador Dali and well-known Chinese artists. The apartments, a few of which have been decorated by Armani and Fendi, as well as Versace, lease for $7,000 to $17,000 a month--to high-level executives from companies like General Motors. ... Despite the fear of a bubble here, Mr. Tong said prices were just right, particularly because of so much hidden wealth in China. The publicly listed company is controlled by his family. ... The most recent apartment sold for about $2,300 a square foot. The average luxury apartment in Manhattan sold for just under $1,900 a squarte foot in the fourth quarter of 2009, according to Prudential Dougals Elliman real estate", David Barboza at the NYT, 5 March 2010, link:

http://www.nytimes.com/2010/03/05/business/global/05yuan.html.

Jonathan Swift's "Laputa" rises in China. A 1,100 square foot condo in Houston could be had for $80,000 to $250,000 depending upon location. To some extent we are seeing the same effects of monetary inflation in China as say in Argentina, where people are "selling" the local currency to buy real goods. China's a bubble!

Pravda Gets It!

"But unlike the perpetrators of the Watergate scandal, who wound up looking at jail time, Geithner evidently has a golden parachute waiting at Goldman Sachs [GS], not coincidentally the largest recipient of the AIG bailout. ... Hank Paulson, Geithner's predecessor, was CEO of [GS] before coming to the Treasury. Geithner, who has come up through the ranks of government, could be walking through the revolving door in the other direction. ... Critics are calling the New York Fed's [FRBNY] decision a back-door bailout for the banks, which received 100 cents on the dollar for contract that would have been worth far less had AIG been put through bankruptcy proceedings in the normal way. ... The [FRBNY] is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom of information requests, unlike the [Fed]. This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed's bailout progrqams. It's as though the [FRBNY] was a black-ops outfit for nation's central bank. ... Eevn after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, [Geithner] still had the audacity to claim the 'sanctity of contracts' in the dealings with these companies like AIG. ... The contention that the Fed had no choice is also belied by a recent holding in the Lehman Brothers bankruptcy, in which New York Bankruptcy Judge James Peck set aside the same type of onvestment contracts that Secretaries Paulson and Geithner repeatedly swore under oath had to be paid in full in the case of AIG", my emphasis, Ellen Brown (EB) at Pravda, 8 February 2010, link: http://english.pravda.ru/business/finance/112085-aig_gate-0.

EB is a Los Angeles attorney. Why is this in Pravda? Is the American press afraid of the Vampire Squid (VS)? I disagree with one thing EB wrote. Timmy Boy will not leave Treasury for a VS position, but more likely BlackRock or Pimco. Timmy's joining VS would be too obvious.

Uncle Sam, Speculator

"Critics of the Troubled Asset Relief Program said the government was giving away taxpayer funds when it invested in financial institutions last fall. The government insisted the investments would show a profit. Who was right? So far, it seems the government, according to a report from SNL Financial. ... Including warrants and dividends, government has received $44.7 billion back. The total rate of return to the Treasury for all companies that have repaid TARP funds and redeemed their warrants is 10.16%, according to SNL data. The warrant repurchases have accounted for a large portion of the returns--7.15%. ... The biggest returns are chalked up from Goldman Sachs Group, Morgan Stanley [MS] and American Express, which yielded 14.18%, 12.68% and 12.23%, respectively. ... And this analysis doesn't include huge government investments in American International Group or the mortgage giants Freddie Mac or Fannie Mae, let alone TARP funds funneled to auto makers General Motors and Chrysler", Stephen Grocer at the WSJ, 28 August 2009, link: http://blogs.wsj.com/deals/2009/08/27/tarp-scorecard-paybacks-have-yielded-total-return-of-1016/

"Taxpayers are getting a reward for the trillions of their dollars US authorities put at risk in a bid to save the financial system. But they still face big potential losses from the rescue effort, which will remain on the government's books for many years. ... The government didn't set out to turn a profit; it set out to prevent the collapse of the financial system and the damage that would have caused to the economy. ... The Treasury is sitting on some very large risks, including $248.8 billion in investments to banks and [AIG] that haven't yet been paid back, and many of those banks are in a weaker position than those that have returned their [TARP] money. ... 'It is not a bad return for all of the extra added benefits [of stabilizing the financial system],' said John-Patrick O'Sullivan, a senior banking analyst at SNL Financial, a research firm specializing in banks. ... Dividend and warrant payments from those firms worked out to a 7% annualized rate of return for the government on its investments, he estimated. ... On a portfolio that averaged $2.1 trillion, the net income in the first half of the year amounted to roughly a 1.5% annualized return, not a large return, but more than what the Fed would have earned had it put the same sum in short-term Treasury bills", my emphasis, Jon Hilsenrath at the WSJ, 1 September 2009, link: http://online.wsj.com/article/SB125176287995474339.html.

"Indeed, during the Great Panic of 2008, American taxpayers reluctantly made a series of very expensive investments in blue-chip companies--Fannie Mae, AIG, General Motors. But it's been hard to see the returns of these efforts, since they were designed to avert a total meldown. ... We can't extrapolate the early returns to the broader pool, due to what economists call adverse selection. In engliosh, it means the healthiest banks fled like thieves (not the flacks: that's hyperbole!) once they could raise private capital, leaving behind the weaker institutions", my emphasis, Daniel Gross (DGI) at Newsweek, 7 September 2009.

Yves Smith (YS) slams the similar FT and NYT articles at Naked Capitalism, 31 August 2009, link: http://www.nakedcapitalism.com/2009/08/more-bogus-bailout-reporting-as-big-banks-repay-money-us-sees-a-profit.html. Between the FT, NYT and WSJ, it appears these stories were coordinated. Yes YS, "the spin is in". Why not? Look at the wonderful job Zimbabwe Ben (ZB) has done as Fed Head. That's why these stories are appearing now, to provide cover for ZB's recent reappointment. YS writes, "Credit 101 is that your best borrowers repay first". Amen.

Are these SNL guys kidding? 10.16% is a good return on these "investments"? SNL excluded the value of guarantees from the investment "base". $40.6 billion in, $44.7 billion back, a 10.16% profit. Wow. MS was $6.71 in October, it's $29.53 now, a 340% increase in 11 months. 10.16% on the "investments" which were repaid does nothing for me. It excludes the effects of public subsidies to these firms through suppressed interest rates. Would there be any "return" if the public's "lost interest" is included? Compare Uncle Sam's return with Lloyd Blankfein's, my 6 September 2009 post: http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.

How does DG know what the "investments" were designed to do? I think they were designed to bail out Wall Street. At least he recognizes "adverse selection". DG's piece reminded me of the "old days", i.e., when Newsweek had more critical economics columnists like Henry Hazlitt, 1946-66 and Millton Friedman, 1966-84. How we could use them now.

YS is almost certainly correct, these look like planted stories. SNL must be composed of fools, or worse. The Fed's "making" a profit is preposterous. It issues non-interest bearing paper called Federal Reserve Notes! Imagine, the "capital market line" is so flat, that the Fed's portfolio of garbage only made 1.5% over T-bills. This might mean T-bills are garbage. Got gold? Get more. Got T-bills, have an anxiety attack!

Delphi Update-4

"The Pension Benefit Guaranty Corp. agreed to take on $6.2 billion in pension liabililies from bankrupt auto supplier Delphi Corp., putting in place a key piece in the bailout of the car industry but renewing pressure on a government agency facing hudge burdens as more companies fail. ... The pension rescue is the PBGC's second-largest ever, ranked by dollars, after that of United Airlines in 2005, which totaled $7.5 billion. ... Still, Delphi faces other formidable challenges. Lenders financing Delphi's stay in court have challenged the government's plan to move its assets to private-equity firm Platinum Equity calling it a 'secretly negotiated deal.' The plan, in which [General Motors] would provide funds alongside Platinum, would pay off lenders at about 20 cents in the dollar. The lenders say the payoff is unfairly low, since bankruptcy-court loans, known as debtor-in-possession financing, are typically paid back in full. Platinum has maintained it made the best offer. ... For the pension agency itself, Delphi could be just the beginning. About 135 companies have filed for bankruptcy this year, more than double the number for all of 2008. ... At a Senate hearing in May, Vince Snowbarger, PBGC's acting director, said the agency had enough funds to meet its obligations for many years because beneficiaries are paid out over the beneficiaries' lifetime and not in one lump sum. The agency is running a deficit, which it defines as losses from plans it has taken on plus estimated losses from plans it is likely to take over. Its deficit as of March 31 was $33.5 billion, more than three times what it recorded six monts earlier. 'Over the long term, the deficit must be addressed,' Mr. Snowbarger said at the hearing. ... The strain on the PBGC is similar to that felt by other government agencies grappling with the aftermath of the financial meltdown. ... The move by the PBGC clears billions of dollars in potential additional exposure to Delphi from GM, which is Delphi's former parent and itself just exited bankruptcy-court reorganization", Melanie Trottman, Mike Spector and John Stoll at the WSJ, 23 July 2009, link: http://online.wsj.com/article/SB124826066892471781.html.

"Delphi Corp.'s lenders prevailed in a bankruptcy auction and are poised to take control of the bankrupt auto-parts supplier, beating back a government-orchestrated deal to sell the company to [GM] and a California-based private-equity firm, said people familiar with the situation. Delphi's lenders prevailed in the auction by forgiving $3.5 billion in debt they are owed, a process known as credit bidding. The debt, a so-called debtor-in-possession loan, is owned by several investment funds led by Elliott Management and Silver Point Capital LP", Mike Spector at the WSJ, 28 July 2009, link: http://online.wsj.com/article/SB124874527824585671.html.

Didn't you know? Government liability guarantees are free?

Good show Judge Robert Drain.

Moribund Detroit

"Detroit's public-school system, beset by massive deficits and widespread corruption, is on the brink of following local icons GM and Chrysler into bankruptcy court. ... Such a filing would be unprecedented in the US. Although a few major urban school districts have come close; none has gone through with a bankruptcy, according to legal and education experts. ... Some experts say the Detroit case could be the fist in a string of Chapter 9 bankruptcies among school districts and other public entities battered by the economic crisis, and it could help shape that area of the law. 'Given the state of public finance,' says Samuel Gerdano, executive director of the American Bankruptcy Institute, 'I think the wave is coming.' ... Even after millions of dollars in budget cuts in the spring, including 29 school closings and thousands of layoffs, the district started the fiscal year this month with a $259 million deficit", Alex Kellogg at the WSJ, 21 July 2009, link:

http://online.wsj.com/article/SB124813472753066949.html.

Good luck Detroit. Do you still like muni bonds? Why?

Isn't "Defense" The Culprit?

"In contracts with the United Auto Workers, GM promised high wages, lifetime employment, generous pensions and comprehensive health insurance. All this now is ancient history: new workers get skimpier benefits. ... Since 1960, government has changed radically. Then, 52 percent of federal spending went for defense, 26 percent for 'payments to individuals'--the welfare state. By 2008, 61 percent went for 'payments to individuals,' 21 percent for defense. ... Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today's welfare--present consumption", Robert Samuelson (RS) at Newsweek, 29 June 2009.

Yes, RS. But isn't defense spending "busting the budget"? No. Social security and such will collapse. Bet on it.

Death of Bankruptcy Law

"The US Supreme Court on Tuesday cleared the way for Chrysler LLC to exit bankruptcy court, lifting a stay on its proposed sale to a group including Italy's Fiat SpA. ... But the order is a setback for a group of Indiana pension funds and others who maintained the government's heavy-handed treatment of creditors in the case could chill private lending to distressed firms and alter the rules of bankruptcy reorganizations. ... Thomas Lauria, a White & Case [W&C] lawyer who led the legal challenge, said his experiences in the past month 'cause me to ... directly raise the question as to whether our judiciary is today able to fulfill its constitutional mission, that is, to ensure that the rule of law prevails--particularly in the face of perceived crisis.' ... The brief stay imposed by the high court on the Chrysler transaction shocked the administration Monday, provoking concerns that the White House's approach to restructuring the two firms [Chrysler and GM] might have been built on faulty legal logic", my emphasis, Mark Anderson & Neil King at the WSJ, 10 June 2009, link: http://online.wsj.com/article/SB124453532783397365.html.

"A government lawyer labeled him a terrorist. A top adviser to Chrysler LLC called him ridiculous. ... Late Tuesday, the court turned down the attorney's 11th-hour appeal on behalf of some Indiana pension funds. But Mr. Lauria, whom friends and foes alike say is tenacious to a fault, is likely to remain a thorn in the side of the administration's automotive task force. A hodgepodge of General Motors Corp. bondholders have asked him to represent them in a challenge to GM's bankruptcy filing. ... When the court cleared the way for the Chrysler sale, Mr. Lauria said he was disappointed, and added: 'I think it's pretty interesting that you can have a transaction as big as this, that impacts parties' rights as broadly as this, and no matter how hard you try, you can't get a substantive review from an appellate court.' ... Mr. Lauria's notoriety grew when he appeared May 1 on a Detroit radio station and said the administration had 'directly threatened' one of his clients, Perella Weinberg, and would use the White House press corps to 'destroy' his client. The firm and the White House denied the allegation, and Mr. Lauria eventually stopped commenting on it. ... As for Mr. Lauria, he says his experiences of the last month 'cause me to worry that there is something very wrong with the system'," my emphasis, Jeffrey McCracken and Neil King at the WSJ, 10 June 2009, link: http://online.wsj.com/article/SB124459032127399999.html.

"Judge Robert Drain ordered Delphi to hold an auction and allow bids to challenge the government-brokered sale to Platinum Equity. ... The ruling is a victory for a group of hedge funds that stand to lose 80% or more of their about $2.5 billion in debtor-in-possession, or DIP financing. ... The Delphi case is the latest in a debate over the administration's attitude toward creditors' rights in bankruptcy court. The federal government has been criticized in the Chrysler and General Motors Corp. bankruptcies for upending bankruptcy tradition and harming senior lenders in order to complete a transaction. 'The rule of law and commerical rights of lenders cannot bend in the face of political forces,' said Marc Abrams, a lawyer at Wilkie Farr & Gallagher LLP representing a group of hedge funds, in court Wednesday. ... Virtually all of Delphi's remaining assets--including its Troy, Mich. headquarters--would be sold to Platinum Equity, a Beverly Hills, Calif.--based private equity firm specializing in distressed companies. ... Platinum Chief Executive Tom Gores said in a statement his firm is 'uniquely equipped' to steady Delphi. 'Struggling companies need partners with strong operational capabilities, a deep understanding or their business and a track record of creating real value,' he said. ... Lenders argues that Platinum is a puppet of the government, which needs Delphi to emerge from bankruptcy for its GM bailout to succeed. ... Delphi's plan calls for some DIP lenders, including the most sentior creditors owed about $2.5 billion, to receive 20 cents on the dollar for their loans. ... 'A DIP loan should be money good,' said Mr. Abrams, whose clients include Silver Point Finance LLC and Monarch Alternative Capital LP. 'It's the T-bill of a bankruptcy claim'," my emphasis, Peter Lattman at the WSJ, 11 June 2009, link: http://online.wsj.com/article/SB124466769259803489.html.

POTUS Obama apparently missed Harvard's bankruptcy law class, not knowing of the absolute priority doctrine. Our "constitutional scholar", Obama uses "faulty legal logic"? Never. These are the last days. I agree with a W&C lawyer. Imagine, Obama was "shocked". What a scholar. I wonder what Sonia Baby's opinion is of this case or Elizabeth Warren's.

Way to go Lauria! If you need help making Molotov cocktails, call. Wow, a "White Shoe" law firm partner, like one in W&C, throwing Molotovs. Next Lauria will quote Kropotkin. The US rule of law is collapsing. Book suggestions: No Contest, by Ralph Nader and Wesley Smith, 1998 and Main Justice, James McGee, 1997. Lauria, how does it feel to be unable to get a meaningful appellate review? Welcome to the real world.

Wow, another "white shoe" law firm sees POTUS Obama's contempt for the law. I await the aggrieved parties taking real action. Like having PE partners march around the White House. They can probably find veterans of 1968's Paris Days of Rage, if they need help in planning the demonstrations. Well Eric Holder, Columbia law grad, have you anything to say about this? Or will you have the army fire on the protestors like 1932's "bonus army"? Will we face a "Yeltsin Moment", like in 1991, when Russian troops refused to fire on old Boris? Stay tuned! I last commented on Delphi on 11 October 2008, link: http://skepticaltexascpa.blogspot.com/2008/10/delphi-update-3.html. See also my 27 August 2008 comments, link: http://skepticaltexascpa.blogspot.com/2008/08/delphi-plot-thickens.html.

Toothless SEC-11

"Two former Enron lawyers resolved charges by the [SEC] that they helped executives at the defunct energy trader hide share sales and conceal losses. ... [They] admitted no wrongdoing. ... SEC spokesman John Heine said the settlement "filings speak for themselves'," Houston Chronicle, 17 January 2009.

"Without penalty, General Motors Corp. settled a [SEC] complaint related to accounting missteps the auto makers made in recent years, including disclosures related to pensions derivatives and precious metals. ... The SEC said GM settled the claims 'without admitting or denying' them, but agreed not to violate certain securities rules again", my emphasis, John Stoll and Kara Scannell at the WSJ, 23 January 2009.

I agree with Heine.

Another SEC triumph.

Chutzpah Unlimited

"Intense lobbying by banks and bankruptcy experts softened a key provision in the auto-bailout bill that would require government loans be repaid ahead of banks and other lenders. But the current language leaves unlcear just who would collect first in the event of a bankruptcy filing--taxpayers or existing creditors. ... The banks prime concern centered around a plan to make the U.S. government's $14 billion in rescue loans senior to other loans. They argued that this clause violated the Fifth Amendment of the U.S. Constitution, which prohibits the taking of private property without 'just compensation'. ... Historically, the only way a secured lender can be forced to take a backseat to another lender is in bankruptcy court, where a judge hears from the secured lenders and determines if those creditors are protected with additional collateral or other measures. ... 'It really sounds like a clear violation of the taking clause in the Constitutuion, to put the government ahead of all the other lenders. To go this route is a treacherous path riddled with all sorts of constitutional issues,' said Don Workman, head of the restructuring practice at the law firm of Baker Hostetler [BH]. ... It is still unclear what the practical effects of this language may be. Potentially, that could place the government behind the banks but ahead of the bondholders in repayment, say turnaround experts. Lenders said if left unresolved, the language could make banks and others even less willing to lend to troubled companies, for fear that the government could intervene in more situations. But the change may also anger policy makers, who have demanded the government and taxpayers be paid back first", my emphasis, Jeffrey McCracken & Elizabeth Williamson at the WSJ, 11 December 2008.

"GMAC LLC is racing to raise $1.25 billion in fresh capital necessary for the [Fed] to begin backstopping the company's finances. ... As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the [FDIC]. GMAC could also access the Fed's discount window for inexpensive, short-term emergency loans at a time when its borrowing costs have soared due to battered credit ratings. ... GMAC's shift to a bank holding company would greatly benefit GM", Aparajita Saha-Bubna at the WSJ, 15 December 2008.

"The key to any magic trick is to focus the audience's attention away from where the action is actually taking place. That is what Congress did in the failed auto bailout bill. Language in the proposed legislation seems to uphold the rights of existing car-company creditors while also protecting any taxpayer funds used to prop up Detroit. In reality, the bill raised a chilling prospect for debt investors: that in extreme situations the government could upend the traditional pecking order of the bankruptcy process. ... Creditors' rights became an issue in the proposed automobile bailout because the government planned to put its money first in line for repayment in the event of bankruptcy. That seems to be a no-brainer for taxpayers", my emphasis, David Reilly (DR) at the WSJ, 15 December 2008.

Is Uncle Sam considering an auto maker or another banker bailout? BH's Workman should be called to Congress and told on television tell your clients, "if you want federal money, subordinate. Alternatively, we will let the auto makers go bankrupt. Which would your clients prefer?". Congress should call Vikram Pandit (VP) and ask him, if he thinks Citigroup should treat any federal auto bailout money as if it's debtor in possession financing. Then call in Kenneth Lewis (KL) and ask him what is the B of A's position. What will VP and KL say on television in front of millions as thousands of UAW members and other peasants with pitchforks surround the Capitol? That any financial institution would raise this issue is amazing. Until Unc puts money in, he holds the cards. For that matter, any bank which received federal bailout money should be prohibited from lobbying. The bank doesn't like it, give the money back. I don't see banks arguing the Fed's existence violates US dollar holders rights and for the Supremes to reverse the 1930s' "gold clause" cases. "For fear the government could intervene"? This is the banks' Alice In Wonderland world. Michael Savage, radio talk show host, speculated that what's really driving the auto bailout bill is the Bush administration's desire to protect Cerberus Capital which has positions in Chrysler and GMAC and is well-connected politically. Maybe.

Temporarily?

I agree DR, this is a "no-brainer". Either this is an auto bailout bill, or another bank bailout bill.

Delphi Update-3

"Delphi Corp. won court permission Thursday to shift $3.4 billion in pension liabilities to former parent General Motors Corp., part of a deal that boosts GM's contribution to Delphi's bankruptcy reorganization to$10.6 billion. ... Under the pension agreement with GM, the auto maker will take $3.4 billion in pension liabilites, up from $1.5 billion under an earlier agreement", David McLaughlin at the WSJ, 26 September 2008.

Good. Now will anyone sue GM and its "independent" CPA firm Deloitte & Touche, as GM should have reflected Delphi's pension liabilities as its own all along. I await GM's 30 September 2008 Form 10-Q to see how GM accounts for this.

Delphi Update-2

"The federal government's pension-insurance agency, frustrated by missed pension payments and the lack of a resolution with bankrupt auto-parts titan Delphi Corp., said it would go to court Friday to secure a claim on an additional $900 million in Delphi assets. ... The Pension Benefit Guaranty Corp., [PBGC] is trying to increase pressure on Delphi and its former parent, General Motors Corp. On Tuesday. the agency sent its second letter in the past month to GM and Delphi executives urging GM to absorb at least $1.5 billion in Delphi pension obligations before Sept. 30. ... The letter to Delphi and GM executives comes as GM and other Detroit auto makers are making a plea to lawmakers in Washington for as much as $50 billion in federal loans. ... Delphi's pension plan, which covers about 85,000 people, had obligations of $14.05 billion at the end of 2007, but was underfunded by $3.3 billion according to [SEC] filings", Jeffrey McCracken at the WSJ, 11 September 2008.

The PBGC should not have let Dephi be formed without GM fully funding Delphi's pension plan. Where was the PBGC in 1999? Where is the DOJ? Will anyone from GM get indicted over this? Or will the PBGC continue playing around in bankruptcy court? You might be amazed to see how quickly GM could find $1.5 billion, if GM's executives believed, one-by-one they would be sent to federal prison, should Delphi's pension liabilities not be paid.

Delphi Update

"Giant auto-parts maker Delphi Corp. is sliding deeper into trouble, raising doubts about its ability to survive as a stand-alone company. ... When GM spun off the company in 1999, it retained an obligation to fund pension and health-care benefits to former GM workers who moved to Delphi. Delphi's problems have already cost GM about $11 billion in cash and write-downs. ... Ray Young, the chief financial officer of [GM], said this month that the auto maker was having a 'constructive dialogue' with Delphi, but 'they have to understand there is only so much that we can do. They're going to have to do their own form of self help here.' ... Delphi's struggles threaten to further complicate GM's efforts to turn around its own North American operations", WSJ, 29 August 2008.

I don't see how Delphi's problems "further complicate GM's efforts". As I see it, Delphi was part of GM all along, just an "unconsolidated subsidiary". Delphi was created primarily to let GM offload pension liabilities on Uncle Sam.

Will the PCAOB Do Anything?

"In the midst of an otherwise difficult time, auto maker [GM] is close to putting one problem behind it, announcing Thursday that the company has reached a $277 million settlement with a class of shareholders over alleged accounting irregularities. GM auditor Deloitte and Touche LLP [D&T] will kick in an additional $26 million, bringing the total settlement to $303 million. The settlement is still subject to court approval. ... In a statement, [D&T] said it was 'pleased' to be able to resolve the matter. 'Although it has strong defenses to these claims, Deloitte concluded that it was in the the best interest of the firm and its clients to settle this matter now rather than face the burden, expense and uncertainty of continued lititgation'," Ashby Jones at the WSJ, 9 August 2008.

I await the PCAOB taking any action against D&T in this matter. Well Mark Olson, what will you do about this? Kick sand in the face of another 97-pound weakling CPA firm?

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.

GM, the UAW and Uncle Sam Play "Chicken"

"Who shot General Motors [GM]? ... [GM] once manufactured half the cars on the American road, but now it sells barely 2 in 10. ... But none of GM's management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed [GM] of its financial flexibility and ultimately, of its cash. ... Detroit was too flush to envision it would ever face a financial strain. ... [GM] got into the dubious habit of steadily increasing worker benefits. In the '90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. ... GM acknowledged it its most recent annual report that from 1993 to 2007 it spent $103 billion 'to fund legacy pensions and retire health care.' ... The sorry decline of [GM] has proved [Walter] Reuther right: The government is the better provider of social insurance", my emphasis, Roger Lowenstein (RL) at the Houston Chronicle, 20 July 2008.

Nonsense. GM began offering pensions in 1950. So? They are deferred compensation. Does RL scream about Richard Fuld's stock options "robbing Lehman of its financial flexibility"? Why are pensions bad and stock options good? What does "robbed GM of its financial flexibility" mean? Any contract does that. As Oliver Wendell Holmes explained: that's what it means to make a contract! Why is a pension worse than a real estate lease? Why is Uncle Sam a "better provider of social insurance"? Because unlike GM, Uncle Sam has Helicoper Ben's printing press!

One tends to ignore what he doesn't account for. Until 1966's APB 8, companies did not account for future pension costs. They used Uncle Sam's "pay as you go method". SFAS 87 replaced APB 8 in 1986, amended in 2006 by SFAS 158, which still in my opinion, does not properly reflect a company's pension liabilities. Why did GM promise its employees pensions? My guess: GM and the UAW believed that sooner or later GM could dump its pension liabilities on Uncle Sam. In short, GM and the UAW have played a 58-year game of chicken with Uncle Sam. I say: let GM file bankruptcy if it "can't" pay its pensions.

Lawsuit, Lawsuit, Whose Got the Lawsuit?

"Delphi Corp. intends to transfer some of its pension liabilities to General Motors Corp. [GM], its former parent, to meet pension funding obligations as it works to exit bankruptcy protection", WSJ, 12 May 2008.

Delphi looked like a "fraudulent transfer" to me at its inception, an attempt by GM to offload some of its pension liabilities on Uncle Sam. I wonder if anyone will sue Deloitte & Touche, GM's CPAs in connection with Delphi's founding and apparent assumption of these liabililies. See my 7 October and 30 November 2007 posts mentioning Delphi.

Calling Deloitte Detroit

General Motors (GM) will form a VEBA to put billions of dollars in future employee healthcare expenses into it. However, "GM is still funding the trust, so it still has to pay the costs. ... The important thing is that the health care costs will now be off our balance sheet. ... Wouldn't it have made more sense to come up with a system that might have actually reduced those costs", Loren Steffy (LS) in the Houston Chronicle, 5 October.

Right on LS! As I have said before, when you see a "financing innovation" ask what it lets the new "owner"do the old one couldn't. This VEBA seems to lack economic substance. Will Deloitte insist GM consolidate the VEBA if it lacks substance and CPAs should elevate substance over form? Will Deloitte find time to have its employees consider this issue? With $73 million in GM fees last year, it appears Deloitte could spend five to ten hours considering this. Will the Mounties Dudley Do-right save Nell Fenwick tied to the train tracks from the oncoming train? Stay tuned for the next installment of this saga. As LS noted, GM didn't do so well in offloading Delphi's labor costs.