At the same time as the Canadian Auto Workers union was announcing the overwhelming ratification of a new contract by 87% of its members with Chrysler LLC on Sunday evening, the United Auto Workers union in the U.S. issued a statement saying it, too, had reached a tentative deal with Chrysler that satisfied the U.S. Auto Task Force requirements to make labor costs competitive.
Chrysler has thus reached agreements with both of its unions to modify its contracts to meet the viability tests imposed by North American federal and regional governments for the continuation of bridge loans to ensure liquidity as the Great Recession marches on.
The UAW deal is pending, until its membership votes positively on the new four-year contract. Ratification is expected to come by Wednesday. It is also expected that the UAW will become a significant shareholder of 20% or more of the new company in return for giving up at least half of the $10.9 billion in cash payments due to it for the financing of member health care benefits, due to be administered next year by a Voluntary Employee Beneficiary Association, which was established in its 2007 contract with Chrysler.
The VEBA allowed Chrysler and its venture capital owners to remove health care liabilities from its weak balance sheet and transfer the risk to the UAW. By accepting virtually worthless Chrysler stock now, instead of cash, the union is in effect becoming a bigger proponent of free-market capitalism and risk taking than Chrysler bondholders, who want the government to socialize their risk on failed investments and make them whole.
While the latest developments are encouraging for people with sweat equity in the ailing automaker, as opposed to speculators in paper instruments who espouse free market ideology while in fact benefiting from “socialism for the rich” when their investments flounder and they turn to the government for relief, Chrysler still needs restructuring agreements with Fiat, for an alliance, and secured debtholders, aka the socialists, for drastic cuts in the amounts it previously borrowed.
The agreements are due before this Thursday, May 1, in order to meet the terms for continued taxpayer assistance imposed by President Obama’s Auto Task Force back in February. The administration has said that lacking agreements in all areas, Chrysler will be placed into receivership. With the stipulated agreements in place, it is prepared to advance Chrysler another $6 billion in taxpayer financed loans. A previous, similar bridge loan agreement between taxpayers with Chrysler under Lee Iacocca resulted in taxpayers making money.
This risk/reward concept applied to Chrysler, and GM, is apparently beyond the grasp of the U.S. Treasury Department when it deals with Wall Street, as it advances billions upon billions of taxpayer money to banks and hedge funds to cover their losses and assume their liabilities at 100% of value of financial instruments that should be trading at pennies on the dollar. No possible upside for taxpayers exists in these cases.
In a separate but related development, General Motors has scheduled a 9 am EDT press conference tomorrow, where it is expected that further plant closings, brand and dealer eliminations, and employee firings will be outlined. GM is facing a later, June 1, deadline than Chrysler, from the U.S. Treasury Department to complete its restructuring.