Tag Archives: UAW

My Op-ed on AFL-CIO President Trumka

The McClatchy Newspapers have picked up my op-ed on Richard Trumka, the new AFL-CIO President.  So far it’s run in the Providence (RI) JournalBuffalo NewsSacramento Bee, the Pittsburgh Tribune and the Bellingham (WA) HeraldAFL CIO.

Here is the introduction:

America’s leading union federation, the AFL-CIO, just elevated longtime Secretary-Treasurer Richard Trumka to its presidency, replacing the plodding 75-year-old John Sweeney and providing hope that organized labor will finally get the breath of fresh air it has needed for many years.

To reverse labor’s slow descent into irrelevance will require a bold shift by Trumka, ironically perhaps, back to trade unionism’s first principles, including advocacy of “bread and butter” improvements in pay and working conditions and support for workers abroad.

Once before in its long history, American labor found itself socially isolated, facing intransigent employers, feckless politicians and a challenging combination of rapid technological change and a multi-ethnic immigrant workforce.

You can read the rest here.

GM Bankruptcy and Labor: From Sit Down Strikes to Credit Default Swaps

w-1937-overpassThe United Auto Workers gave organized labor a beachhead in the American economy with the great sit down strikes of 1937. Some seven decades later organized capital is looking to expel what remains of the UAW from GM and at the same time complete the isolation of the trade union to low wage immigrant labor based segments of the economy and the public sector. A labor movement that does not have leverage in the most productive center of an economy cannot hope to influence national social policy or progressive politics.

Unlike the bloody Battle of the Overpass pictured above, however, today’s attack on labor is being wielded with complex financial instruments, instruments of fictitious capital.  At GM, bond holders who hold credit default swaps have disrupted the ordinary incentive structure in a corporation entering the so-called “zone of bankruptcy”.

Traditionally, holders of bonds were deserving of protection as the company approached bankruptcy because insiders could be tempted to use their control over corporate resources to loot the firm and leave less for those who had a higher priority for repayment in bankruptcy.  Thus, courts have held recently that as a company like GM looked more likely to need the protection of bankruptcy its board of directors would have a legal obligation to shift its ordinary fiduciary duty to protect shareholders to the bond holders.

But the emergence of derivative instruments like credit default swaps (CDS) has twisted our ordinary understanding of incentives in corporate governance. Credit default swaps are speculative instruments created to offer a way for investors to bet on the value of bonds that ordinarily would not be open for speculation.  The purchaser of credit default swap “protection” pays an annual premium that amounts to several percentage points of the value of the underlying bond (perhaps 2% on a $10 million investment which translates into $200,000 in annual premiums to the “seller” of the protection).  If a “default” event were to occur on the bond – such as the failure by the issuer of the bond to make an interest payment or in extreme circumstances outright default on the bond – then the seller of the CDS protection must pay the buyer of the protection a certain amount (typically the difference between the par value and the current (depressed) market value of the bond). 

Hence, the term CDS: the credit is the original bond, the default is the event that triggers payoff, and the swap refers to the fact that by putting a CDS in place, the risk of owning the bond has shifted from the bondholder to the seller of protection.  One huge seller of protection on bonds was AIG and it sold a huge amount of CDS protection on sub prime mortgage bonds that have now turned out to be worthless. That has obligated AIG to make good on its promises – which they are doing with taxpayer money.

At GM, it turns out that one default event that will trigger repayment to bondholders is the filing of bankruptcy itself. So investors who bought GM bonds at par, e.g., valued at 100 cents on the dollar now hold bonds that are valued at far less, perhaps 20 cents on the dollar. If GM files for bankruptcy then the seller of CDS protection to a GM bondholder would owe the bondholder at least 80 cents on the dollar, if not more as the bond fell in price. So on $10 mn of GM bonds the payoff would be $8 mn plus the $2 mn that the bondholder could get by selling the bonds. If the bonds fell to zero in price, the holders could get the full $10 mn.

That is just a simple example and there are lots of complexities in this situation. In fact, for example, GM bonds are trading at a different price points – somewhere between 6 and 12 cents on the dollar. There is a net exposure for sellers of CDS protection of about 2.4 billion dollars on a total of 34 billion dollars of outstanding CDS positions (sellers of CDS protection sometimes buy CDS protection themselves to hedge against events such as this, but unlike regulated insurers they do not have to have any actual cash reserves to use to pay off in case of such a catastrophic event.) CDS protection also requires an upfront payment that increases as the bond falls in value, so at GM it costs $5 mn a year to protect $10 mn in bonds today (4.5 mn upfront and then a payment of 5% a year or $500,000).  Of course, that makes the bonds illiquid today or at least uninsurable.

But here is the key point: GM under US government pressure has offered current bond holders the “opportunity” to exchange their current bonds for common stock in a restructured GM. The bond holders would end up with 10 percent of the equity with the government owning 50% and the UAW’s VEBA owning 39%. Current shareholders would end up with one percent.  Apparently, though, bond holders with CDS protection believe that their CDS payoff if GM files for bankruptcy is worth more than the eventual value of the 10 percent common stock position. 

Now look at this deal from the viewpoint of current GM managers. If the bond holders turn down the exchange offer, GM files for bankruptcy which leaves the managers in control (they become in bankruptcy parlance a “debtor in possession”) and they get several months to put together a plan of reorganization. That may lead to the wipe out of the bond holders anyway but they won’t care because they will have received their CDS payout!  But here is the magic: the payout to bond holders is not made by GM or GM managers – it will be made by the sellers of the CDS protection, perhaps AIG or JPMorgan, and perhaps with taxpayer dollars! Thus, GM is freed of its bond obligations paid off with “other people’s money” and they remain in control of the company now free to use the power of a federal judge to tear up the UAW contract and their remaining obligations to pay billions into the healthcare VEBA.

And once they have cleared their books of the bonds, the VEBA and the UAW, they are free to ramp up offshore production to India and China, as they have been planning for several years.

By the way, GM bondholders were warned of bankruptcy risk at GM when they bought their bonds. They got the benefits of mandatory disclosure of risk factors affecting GM when the bonds were first issued. But the rank and file members of the UAW who “bought” the proposed multi-billion dollar VEBA to manage their health care plan were told by UAW President Ron Gettelfinger that their health care would be safe from GM bankuptcy “for 80 years.” So no CDS protection was purchased by the UAW to protect its payment obligations from GM.

The Financial Times has more on this issue here.  There is some interesting discussion of the issue on the blog Naked Capitalism here. And here is a video of an investor explaining how CDS protection is wreaking havoc in another bankrupt company.

Who Will Really Own Chrysler? (Hint: Initials are “U.A.W.”)

Despite widespread reports that the United Auto Workers union will emerge as the controlling shareholder of a restructured Chrysler, that is not formally true. But a closer look suggests that UAW President Ron Gettelfinger’s recent comments that the UAW will not own a majority stake in Chrysler are not exactly right either.

The 55% stake that current Chrysler owners propose to issue will go to the Voluntary Employee Beneficiary Association, or VEBA, set up as a result of collective bargaining negotiations between the UAW and the Big Three in late 2007 and early 2008. To secure ratification of those dramatically concessionary deals, the UAW and Big Three promised auto workers their health care plans would be secure for “80 years” under the new off balance sheet VEBA. 

It turns out that may not be the case. Originally, the Big Three promised to put sufficient assets into the VEBA to pay health care obligations and to secure those assets from any risk of bankruptcy. But over the last year the companies got into further trouble and have now sought agreement with the union and its retired members to substitute equity for cash payments. Of course, that means the VEBA is directly linked to the financial health, or rather lack thereof, of the Big Three.

(By the way, to be clear, there is only one VEBA, for all three auto companies but it manages three separate health care plans with separate asset contributions owed in different amounts and structures from each of the auto companies.)

So who will be calling the shots at Chrysler with that huge 55% share – assuming a federal bankruptcy judge confirms the proposed deal (and that is far from certain)?

In theory it will be the board of trustees of the VEBA, also known as “the Committee” in public filings of the agreements behind the new structure. It is supposed to consist of 5 UAW representatives and 6 independent members.

But very little has been heard from this group. Despite their fiduciary obligation to protect retirees they do not seem to have objected to the very risky exchange of cash payments for equity in Chrysler. And the terms of the new Chrysler deal do not bode well either: despite owning more than half the company, apparently the VEBA will only get the right to appoint one board member out of nine.

In fact, it is a little unclear who really is on the VEBA board but one reliable source (Pension and Investments online magazine) lists the following individuals (since there are 6 listed here and none are UAW members this is likely the list of the so-called “independent” members):

Robert Naftaly, a former Blue Cross Blue Shield of Michigan executive, who will serve as the VEBA’s chairman.

Olena Berg-Lacey, a former assistant secretary of labor;

Marianne Udow-Phillips, director of the Center for Healthcare Quality and Transformation, Ann Arbor, Mich.;

Teresa Ghilarducci, a retirement policy guru at the New School for Social Research, New York;

David Baker Lewis, founder of Detroit-based law firm Lewis & Munday; and

Ed Welch, director of the Workers’ Compensation Center at Michigan State University’s School of Labor and Industrial Relations in East Lansing, Mich.

Of course, “independent” is a relative term. All six were presumably appointed with UAW President Ron Gettelfinger’s approval. They know that, he knows that. And the UAW controls the remaining five seats. In other words, the UAW only needs one vote from this group of six to completely control the VEBA itself and, in turn, Chrysler!

Now, how the supposedly independent Committee of 11 is supposed to defend the fiduciary interests of now and future auto worker retirees under such pressure is anybody’s guess.

Auto workers – meet the new boss, same as the old boss? We’ll see.

(You can read more here and here about the VEBA structure and the risks the UAW took with their retiree benefits.)

Asian Auto Companies Lead Race to Bottom

The Senate Republicans favorite Auto companies are leading the race to the bottom – not in their Asian sweatshops but right here in the United States.  See this important article in the Detroit Free Press.
I warned about the impact of the takeover of GM’s Fremont plant by Toyota back in 1985 in a letter that appeared in the New York Times:
A Dark Day for U.S. Workers Is Dawning at Toyota-G.M. Plant 

To the Editor:

A. H. Raskin heralds the opening of a new era in labor-management relations in the start-up of production at the Fremont, Calif., auto plant jointly managed by Toyota and General Motors (”An Industrial Breakthrough,” Op-Ed, July 23).

But those familiar with both Toyota and G.M. as trade unionists have a different view. Is the price of cooperation the permanent loss of jobs to speedup and automation? Of the original 6,000 workers employed at the plant, the new company, New United Motor Manufacturing Inc., will hire only 2,500. And those only after careful screening of attendance records, disciplinary incidents and attitudes toward labor-management relations. Nummi has pledged only that a majority plus one of these 2,500 will come from the old union shop.

A company rule book promises dismissal of any worker guilty of poor housekeeping, immoral conduct or indecency. Defining those concepts is to be left up to management.

The new arrangement is, in large part, the result of the United Auto Workers international going hat in hand to Toyota and General Motors. The union was willing to dissolve the original Fremont local with its long tradition of democratic activity. Old union activists must run a gantlet to return to their old jobs, and they have given up much of their former input in the new contract. The local no longer has the right to strike over work standards, there is no guarantee of time off for shop stewards for plant-floor representation, and everyone must participate in a work-group structure imported by Toyota from Japan.

If the labor record of Toyota in Japan is any indication, management will be able to take every advantage of the new labor structure. Despite persistent rumors on this side of the Pacific, job security is the privilege of a few who work at final assembly plants. Those who work for the thousands of subcontractors that provide up to 70 percent of an assembly line’s inventory are subject to brutal working conditions, irregular work and no effective union representation. Even the lifetime jobs have forced overtime, a pace that results in high illness and injury rates, and company housing compounds reminiscent of those in South Africa.

The teamwork system serves not to widen the skills of auto workers but to absorb from them as much information and loyalty as possible. The result for management is valuable: a constant hold over the work force 8 to 10 hours a day.

It was once thought by many of those who proudly defended the traditions of the trade-union movement that an independent and democratic organization was the single guarantee that workers’ interests would be protected. It was this principle that influenced the original Wagner Act and has motivated the American trade-union movement for a century or more. Now we are to toss blithely aside this tradition of democratic dissent, for cooperation, consensus and joint participation. These ideas seem more like Stalinist emulation campaigns than the principles of Eugene V. Debs and Samuel Gompers.

Archives: Toyota sweats U.S. labor costs | Freep.com | Detroit Free Press

D.C. to Detroit: "Drop Dead"

For Wall Street, $7 trillion, no questions asked. For Main Street, bupkus. 
Believe it or not this suggests to me that private capital still pins its hopes on globalization: the major source of opposition to the rescue came from southern Republicans like Bob Corker of Tennessee. 
These are politicians with foreign transplants in their home districts who stand to benefit from more problems in Detroit.
But in an odd way the Big Three win, too. Now they have all the excuse they need to shut down high wage good benefits jobs in Detroit and shift production to China and Mexico where police goons keep the unions at bay.
The world is flat, indeed.

Rescue Bid for Detroit Collapses in Senate – WSJ.com

The Death of the Auto Industry?

Snake oil salesman, um, I mean Nobel Prize economist Paul Krugman is once again doing what economists seem incapable of not doing: making a prediction.
This time he says the US auto industry is doomed. Presumably he means the Big Three, not the transplants from Asia and Europe. Though, if the Big Three are gone, at least from the US, then presumably the political pressure on Toyota or Daimler to locate plants here is reduced and they can all retreat to their slave labor camps in Mexico and China.
Of course, that is what Krugman really means. GM has long been trying to shed its dead capital invested here in the US. They know their capital is no longer worth a penny relative to what they can put in place in greenfield plants like those they are opening in Poland, China and Mexico. Of course, that same plant and equipment could be used to produce all sorts of useful products but such a transition would require some thoughtful planning, which is not the job of today’s socially irresponsible corporations.
Combine those new plants overseas with friendly police willing to kill union activists and the financial metrics are pretty darn attractive. 
So, listen to Krugman and you too can buy cars with blood on them.  Maybe Leonardo DiCaprio can make a movie about the new global auto industry.

Krugman: US Auto Industry Will Likely Disappear 

A Way Out for the Auto Industry

It’s not about competition – it’s about our standard of living

Opponents of the government loans to the Big Three Auto companies contend that if American companies cannot compete they should be allowed to go bankrupt. Thus, the Big Three executives received a cold shoulder when they showed up in Washington, D.C., this week, even after giving up their private jets.

But this misstates the problem. The real problem is not figuring out how to “compete” with organized labor’s brothers and sisters in Asia and Europe.

Instead, it is about all workers – here in the United States and around the world – fighting to maintain their basic standard of living in the midst of catastrophic financial crisis.

This crisis is about all workers not just autoworkers.

Big Three Management has failed its social responsibility

The key to defending and improving workers’ standard of living is the availability of good jobs for all producing socially useful products for all.

The current management of the Big Three has failed that basic social responsibility. And the leadership of the United Auto Workers has been unwilling to challenge the Big Three for their failure, choosing instead to “go along in order to get along.”

Instead, the UAW should draw on its finest traditions as more than just a narrow bread and butter labor union – when, for example during the civil rights era, it backed a broader concept of the public good.  

It should argue now for a restructured transportation industry. If the union does not step forward now, bankruptcy and union busting, much like that underway at Delphi, the auto parts supplier, will consume the entire auto industry. 

Time for a new transportation industry

The valuable physical plant and skilled workforce of current workers and recent retirees of the Big Three can be the basis of a new transportation industry that manufactures a wide range of products for both mass and individual transportation that are environmentally responsible. This new industry can be the basis for a revival of economic growth.

But such a solution cannot be entrusted to the titans of Wall Street, of hedge funds and private equity funds. The collapse this year of major investment banks makes clear that Wall Street no longer knows how to manage workers savings responsibly.

From the Big Three to a Public Trust Company

A new public trust company, or PTC, should be established immediately. The PTC will be managed transparently by trustees who will be elected by autoworkers and members of the communities in which the auto plants are located.

The PTC should be provided a government guarantee to issue long-term bonds at low interest rates that would be held by major pension funds and mutual funds. The cash raised should then be used to purchase the assets of the Big Three auto companies that will then be folded into the PTC.

The PTC will create a new national transportation plan that will be part of an effort to revitalize our cities and move to an environmentally and socially responsible economy managed democratically and transparently in the public interest.

UAW Chief Doesn’t Get It

Looking for something more to take out of the hides of workers to satisfy Wall Street, Republican Senator Corker demanded that the UAW take a haircut in the value of VEBA assets to match the write down taken by bondholders.

Unsecured debt of GM is now trading at a significant discount to its face value. Would the UAW be willing to write down the value of its VEBA assets in a similar fashion? Corker wanted to know. 

Gettelfinger seemed caught off guard by the question and said he couldn’t reply until he consulted with HIS Wall Street friends, Lazard Freres, the investment bank advising the UAW. 

The reality, of course, is that a huge chunk of the assets held by the GM VEBA is in the form of a $4 billion convertible note that is already far less valuable than the day it was issued. It is no stronger a financial instrument than the unsecured debt held by Corker’s Wall Street friends. 

So the right answer – which Brother Gettelfinger should have known – is that the UAW retirees are already suffering, right alongside those bondholders, from the travails of GM and the other two auto giants. In fact, that is precisely why the Big Three set up the VEBA’s the way they did – they hardly wanted fixed obligations knowing full well they would need “flexibility” to work through this period of trouble. 

It seems that only the UAW leadership is unaware that they too have been caught in the financial collapse in value impacting their industry.

Skeptics Remain as Automakers Return to Capitol Hill – NYTimes.com

Is UAW Violating Rights Owed to Retirees?

The UAW continues its descent into obsolescence today with an announcement that it will offer more concessions to help the Big Three bosses secure a safe and happy retirement. 
At the heart of the latest offer, however, appears to be a violation of the fiduciary obligations owed to retired auto workers. 
Last year, the UAW allowed the Big Three to shift retiree health care off its balance sheets into a new entity called a Voluntary Employee Beneficiary Association, or VEBA. The companies were obligated to fund the VEBA’s with billions in cash, securities and other obligations. Some of the money made it in before the current crisis. 
But now the New York Times is reporting that the UAW, without any right to do so, is offering to allow the Big Three to delay the much needed future financial flows to the VEBA’s. These are the same VEBA’s that were sold as “secure for 80 years” by the UAW when it wanted rank and file ratification of the most recent collective bargaining agreements.
In theory, the VEBA’s are independent trusts, controlled by a board of trustees that owes a fiduciary duty to the beneficiaries of the trust, current and future UAW retirees. 
The fiduciary obligations of a trustee are the strongest known in American law. In the landmark case of Meinhard v. Salmon in 1928, then Judge Cardozo described this solemn obligation thus:
“Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate.”
There is no evidence that the trustees of the Big Three VEBA’s have met this long established obligation in the unilateral decision by UAW President Gettelfinger to announce delays of funding to the VEBA’s. Current and future retirees should be outraged.
If this is the way in which the private sector deals with retiree health care at our most important corporations, what chance is there for a genuine national solution to the health care crisis?

Auto Union Says It Would Consider Reopening Contract – NYTimes.com