|This article appears in the May 20, 2005 issue of Executive Intelligence Review.
The Battle To Save GM Is the
Battle To Save the Nation
by Nancy Spannaus
The battle lines are drawn around the future of the U.S. auto industry, particularly the General Motors Corporationand the outcome of that battle may well determine the future of the United States as an industrial power. On the one side is the international banking establishment, which has signalled loud and clear its intent to strip and bury the productive core of the industry, in a desperate attempt to save their financial assets and power. On the other side, are the forces led by Lyndon LaRouche, who has the only plan on the table for protecting, and expanding, the machine-tool capability and skilled labor force which the auto industry represents.
As LaRouche's May 10 leaflet explains (see box), a successful outcome in the battle to save GM requires immediate action by the U.S. Senate. Delay in implementing the necessary measures will in effect hand the victory to the predatory financier oligarchy, and spell disaster for the future of the nation, and the world.
There is no more blunt voice for the financial oligarchy than the London Economist, which speaks for the City of London financial circles. In an article in its May 6 edition, entitled "Two Piles of Junk?" the magazine said that "it remains to be seen how long both firms [GM and Forded.] can remain solvent if their core operations continue to bleed money and their legacy costs continue to grow. Bankruptcy no longer seems far-fetched. Indeed, the opportunity to emerge from Chapter 11 as smaller, leaner operations ... may be starting to look like an appealing option."
The Economist report, coming after the downgrading of GM and Ford stock to junk, and the circling of vultures, such as "King of Las Vegas" Kirk Kerkorian and "bankruptcy specialist" Wilbur Ross, around the auto industry, dramatically underscores LaRouche's warnings. Either leading figures in the Senate, the Democratic Party at large, and the financial community come together now to promote an emergency action plan such as the one LaRouche issued on April 13 (see EIR, April 22 or www.larouchepac.com), or it will soon be too late.
A Financial Explosion
When LaRouche first warned back in late February about the impending disaster around General Motors, he pointed to two aspects of the danger. On the one side, there is the vital physical capability which the company represents, as the core of perhaps a half-million people in the high-skilled machine-tool center of the U.S. economy. On the other, there is the danger that pulling the plug on GM, which has created a huge, unsustainable financial pyramid of speculation in real estate, derivatives, and other iffy investments, could detonate the already bankrupt world financial system.
A series of panicked warning signals about hedge fund losses that have appeared in the week following the May 5 downgrading, imply that this second danger may be playing itself out right now.
"GM Earthquake Shatters Hedge Fund Industry," read the headline of the normally staid (to say the least) paper of the Swiss banking establishment, the Neue Zürcher Zeitung, on May 12. "The Tick, Tick of GM in Hedge Fund Derviatives," headlined a Bloomberg wire on May 13. "The market has been on edge. People still have memories about Long-Term Capital Management," the huge hedge fund that blew out in 1998, noted a trader interviewed by Bloomberg on May 11.
In this case, it is prudent to assume that where there's smoke, there's fire. Indications are rife that the downgrading of GM and Ford, which "experts" (other than LaRouche) erroneously indicated was not going to occur for months, created problems in the stock and corporate bond markets, which in turn created severe problems for several large hedge funds. In the recent period, the hedge funds had sharply increased their exposure to so-called collateralized debt obligations (CDOs), in order to increase their short-term profits. Standard and Poor's announced May 10 that its downgrading of Ford and GM would affect 561 outstanding CDO transactions, a report echoed by Bank of America, which reported the same day that many hedge funds had suffered sharp losses.
"This is the perfect storm to implode some hedge funds," warned independent market analyst Dennis Gartman in a newsletter on May 11. "We expect the rush to the door to be painful," cautioned analysts at Merrill Lynch & Co.
The implosion of hedge funds, which have participated in derivative trades that have gone sour, raises a big red flag to knowledgeable investors, and that flag reads "Long-Term Capital Management." The example is telling. LTCM, a Connecticut company which worked closely with the major Wall St. banks, only had working capital of $2.2 billion, but it had used that money to purchase $125 billion in securities, which it then used as collateral to participate in $1.25 trillion in derivative trades. Thus, when the Russian bond market imploded in August 1998, causing losses in the derivatives markets, the impact spread like wildfire, threatening to bring the entire financial system to a standstill. It was only the emergency intervention of the bankers, mediated through the New York Fed, to pour immediate cash into LTCM to cover some of the exposed positions, that permitted the damage to be contained sufficiently to save the bankrupt system.
Could it happen again? The bankers know it can, because the financial authorities did nothing to change the gambling system that caused LTCM. In fact, the financial system is even more riddled with unpayable gambling debts today, and one sudden series of bad bets, could bring the whole house of cards tumbling down.
A Physical Solution
The proper political perspective, enforced by the sovereign power of the U.S. government in the way LaRouche has proposed, could, of course, bring the financial problems which are spinning off GM and the rest of the auto industry under control. Unpayable speculative debts can be set aside, to be sorted out later, and Federal credit can be utilized to maintain payments for the physically productive component of the industry, while protecting it from financial predators. To do this requires only the political will.
The real danger lies in the efforts currently being taken by the incompetent GM management, and their financial creditors and advisors, to actually destroy the productive power of the auto industry. This is occurring both in the United States and Western Europe, as management moves to try to violate union contracts, shuts down plants, and even threatens to break up the company.
On the top of the target list for the GM management are the obligations to pay health care and pensions for their workers and retirees. Exemplary of the outlook was the position put forward by former General Electric CEO Jack Welsh on May 8, in which he declared that the unions had to agree to reduce the huge health costs which GM, by contract, is obligated to pay. Not mentioned, but obviously also on the chopping block, are GM's pension obligations, which are estimated to amount to $90 billion.
It is widely rumored that, if GM doesn't get cooperation from the United Auto Workers (UAW) in reducing these costs, it would use the threat, or actuality, of declaring bankruptcy in order to shed them.
Another prominent proposal being bandied about as some kind of "solution" for the GM crisis, is the idea of splitting up the company. In the United States, the most common proposal is to split General Motors' finance arm, GMAC, off from the production unit. Since GMAC, the speculative arm, is the only portion of the company that is making money (for now), it is expected that such a move would be preparatory to a declaration of bankruptcy for GM itself. In Germany, GM's Opel company has been secretly attempting to sell off components of its plant in Kaiserslautern, in violation of its recent contract with the IG Metall union, which called for preserving the unity of the plant, and for ensuring a certain level of jobs and production. It is not clear what the company will do, now that the union has discovered the maneuvering, and threatened to take action.
Meanwhile, GM continues to shut down production facilities, such as the Baltimore, Maryland and Lansing, Michigan plants which we profile below. It is not currently known whether the physical plant and equipment from these plants is being removed and shipped overseas, but such a pattern has prevailed in the past. As for the workers, their inability to work and care for their families represents not only a net drain on their communities, but also threatens to result in the demoralization and collapse of a skilled labor force which is very much needed by the economy as a whole.
Crisis To Get Worse
There is no question but that, even barring a general financial blowout, the immediate financial crisis around General Motors and Ford is going to get much worse, very fast. On May 13, Moody's joined Standard & Poor's in downgrading Ford's credit, although its rating remains above junk. At any point, Moody's and Fitch could take further action against GM's debt.
The end of May will be a turning point for GM, Ford, and the bond market. Under current rules, Lehman Brothers will then have to drop the bonds of both GM and Ford ($292 billion for GM, $161 billion for Ford), from its U.S. investment-grade index, and add them to its junk bond index. This will have implications for some holders of GM and Ford bonds. Bond dealers expect turmoil as the junk bond markets absorb $452 billion in new junk, an amount more than 15 times the amount of debt that flooded the market when WorldCom, previously the largest "fallen angel," lost its investment-grade rating.
In June, GM is faced with the demand for a major debt rollover, not to mention more by the end of the year. At this point, the company can only borrow by providing security, in terms of income streams, to the lenders. Unless there is a turnaround in policy like that proposed by LaRouche, bankruptcy and a dismantling of capability are only a matter of time.