By on March 3, 2009

Covering Detroit’s massive health care liabilities is perhaps the single greatest challenge facing those working on the auto industry bailout, reports the Washington Post. Detroit retirees in particular represent a huge commitment, as current health care benefits include dental, vision and prescription drug benefits for the low price of $11 per month. And as the automakers burn through their cash, they must come up with some way of maintaining or cutting benefits in the face of rising health care costs. GM currently carries $20B in health care obligations, over ten times its market capitalization. Chrysler owes $10B and Ford owes $3.2B of its total $13.2B VEBA commitment this year alone. With bailout plans calling for automakers to inject equity rather than tight cash into the VEBA system, a number of unintended consequences are being forecast.

In GM’s case, the biggest challenge is avoiding stock price degradation. At ten times its current market cap, GM must not only reduce the amount of equity it is being asked to put into VEBA, it must also convince investors that the VEBA deal will leave GM stronger than it was. Otherwise, GM’s already threatened stock could become a target for sell-offs. Especially considering it has over $30B in unsecured debt that it must also convert into equity. Needless to say these kinds of radical equity restructurings are rarely attempted, let alone completed, outside of bankruptcy court.

In the case of Ford, thedetroitbureau.com reports that the $1.6B that Dearborn must fork over in equity is equal to 25 percent of the company’s stock. This would make the VEBA board a major stockholder in Ford, a possibility that wories many. Five of the VEBA board’s 11 members are UAW members, and the other six are subject to union review. According to Steve Diamond, a professor of law at Santa Clara University [Ed. Go Broncos!] in California, the VEBA board is an opaque institution with a record of incomplete disclosure. Moreover, says Diamond, the union shouldn’t be allowed to negotiate the terms of VEBA. VEBA trustees “are the only ones that should have a say over the cash flow into the fund,” he argues.

In short, the Detroit automakers still owe more in union health care obligations alone than they are worth on the open market. And even with plans to put equity into VEBA instead of cash, and with the union accepting a 50 percent payout, this single obligation could bring any of the Detroit firms down. Or place them under union control. Needless to say, only bankruptcy proceedings can unburden the automakers fom this ruinous debt.

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12 Comments on “Bailout Watch 426: VEBA Equity Deal Could Give UAW 25 Percent Of Ford...”


  • avatar
    JG

    I don’t agree with the last line. The government will free the automakers from this ruinous debt, outside of bankruptcy.

  • avatar
    guyincognito

    Yeah but, the union would only get 25% of the, not enough to outvote the Ford family, common stock. I’m sure Ford would happily make that exchange.

  • avatar
    McDoughnut

    Without restarting the whole Socialized/Privatized Heathcare argument I just wanted to point out that the picture above (presumably a UAW member) is indicative of one of the greatest misconceptions within the autoworkers world.

    Theirs is an unshakable belief that if healthcare (theirs) were to be taken over by the gov’t that the only change would be in who pays (not them) and that benefits would pretty much remain the same.

    I wonder just how excited they’d be about this concept if they understood that they’d be trading one of the best private coverage plans ever – for something akin to Medicare/Medicaid coverage.

  • avatar
    BDB

    Medicare/Medicaid is actually pretty good if you can qualify for it.

    I have government healthcare (city employee, run through the state IIRC) and it’s pretty damn good.

  • avatar
    moedaman

    BDB :
    March 3rd, 2009 at 12:38 pm

    Medicare/Medicaid is actually pretty good if you can qualify for it.

    I have government healthcare (city employee, run through the state IIRC) and it’s pretty damn good.

    Well it goes without saying, if there is nationalized healthcare, the government employees will have better coverage than the average citizen.

  • avatar
    BDB

    “Well it goes without saying, if there is nationalized healthcare, the government employees will have better coverage than the average citizen.”

    What makes you think that? They’d extend whatever plan govt. employees and those who are on medicare and medicade to the rest of the population.

    One thing that has made it difficult for Detroit to remain competitive is they have to pickup the tab for their employee’s healthcare, while the Germans, the Japanese, and just about every other major automaking nation has universal healthcare totally unrelated to who you work for.

  • avatar

    first they came for….ah, forget about it.

  • avatar
    geeber

    BDB: I have government healthcare (city employee, run through the state IIRC) and it’s pretty damn good.

    I doubt that the health care provided by your employer, which is a unit of government, is the same as Medicare or Medicaid. Most municipal and state government employees in Pennsylvania, for example, enjoy a plan provided by a private insurer that contracts with the appropriate government unit. These plans are usually noted for their excellent coverage (and associated expense, which is borne by taxpayers).

    My father is retired from the federal government. My now-deceased grandfather (his father) also retired from the federal government, and his widow (my grandmother) still uses his plan.

    Both my father and grandmother are eligible for Medicare (he is 74, she is 95).

    Their employer provided medical coverage is through a private insurer, and it is MUCH more generous and comprehensive than the coverage provided by Medicare.

  • avatar
    McDoughnut

    I hate to say it (but I will ’cause its TTAC). It would just kill most Americans to look outside the contiguous 48 states for examples that would either reiterate or contradict any forward looking statements…..

    The conversation thread above is an example of such navel gazing.

    Canada (remember us? Hockey, cold weather, oil supplier, functional banking system) has socialized medicine for the masses and, in addition, civil servants receive extra insurance coverage – not unlike civil servants (Fed and State) in the US.

    My point is that Autoworkers aren’t grasping the fact that with national health care they won’t be getting the Gov’t Employee Health Insurance Plan. They’ll be getting what everyone else get’s – and in the US you call them “Poor People”.

  • avatar
    dzwax

    Emergency and critical care in the USA are quite good. Battlefield medicine if you will. A direct result of government policies and practices.

    Systemic medicine in the USA is a mess. We don’t cure anything, we just treat and practice.

  • avatar
    Robert Schwartz

    “GM’s already threatened stock could become a target for sell-offs.”

    Been there, done that, T-shirt. $2/shr. What difference does it make?

    Ford. The Ford Family owns stock with multiple votes per share. Having 25% of the outstanding public shares which get one vote per share, gives a right to buy coffee for $1.50 at McDonalds.

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