On March 30, 2009, President Obama laid out a framework for General Motors to achieve viability that required the Company to rework its business plan, accelerate its operational restructuring and make far greater reductions in its outstanding liabilities. After two months of significant management engagement, General Motors has developed such a plan and has already begun to make progress toward its achievement. The Company has also secured commitments of meaningful sacrifice from all of its major stakeholder groups, sacrifices sufficient for this plan to proceed forward. As a result, the President has deemed GM’s plan viable and will be making available about $30 billion of additional federal assistance to support GM’s restructuring plan. To effectuate its plan, General Motors will use Section 363 of the bankruptcy code to clear away the remaining impediments to its successful re-launch.

For the better part of a century, The General Motors Corporation has been one of the most recognizable and largest businesses in the world. Today will rank as another historic day for the company—the end of an old General Motors, and the beginning of a new one.

General Motors Restructuring – Shared Sacrifice

The President made clear throughout this process that every one of the Company’s stakeholder would be expected to sacrifice, and that none would receive special treatment because of the involvement of the government. The resulting agreement is tough but fair, and has garnered broad support from GM’s major stakeholders:

* Operational restructuring: GM is undertaking a significant operational restructuring that will address past failures, dramatically improve its overall cost structure, and allow the company to move toward profitability even if the auto market recovers slowly. As a result of this restructuring, GM will lower its breakeven point to a 10 million annual car sales environment. Before the restructuring, GM’s breakeven point was in excess of 16 million annual car sales.
* The UAW has made important concessions on compensation and retiree health care that, while difficult, will help save jobs for active employees, pensions and health care for retirees, and make GM more competitive. In virtually every respect, the concessions that the UAW agreed to are more aggressive than what the Bush Administration originally demanded in its loan agreement with GM. Among other things, the UAW’s existing VEBA – to which GM has a $20bn obligation – will be replaced by a new VEBA as described below.
* The Steering Committee to a portion of GM bondholders has confirmed that bondholders representing at least 54% of GM’s unsecured bonds have agreed to exchange their portion of the Company’s $27.1 billion unsecured debt for their pro-rata share of 10% of the equity of new GM, plus warrants for an additional 15% of the new Company. The Steering Committee confirms that the number of individual and institutional bondholders that support this deal is now over 1,000. The bankruptcy court process will be used to confirm this treatment for those bondholders and other unsecured creditors that failed to accept or did not participate in the offer that was accepted by the aforementioned majority.
* Painful but necessary restructuring steps will also be implemented. In order to size GM’s footprint to its current share but also allow for volume growth when the economy and the automotive market rebound, GM has planned to reduce its plant operations. Today GM is announcing its intention to close 11 facilities and idle another 3 facilities.

Details on the Creation of New GM:

The newly organized GM will purchase substantially all of the assets of the old GM needed to implement its business plan out of a chapter 11 in exchange for the U.S. Government relinquishing the majority of its loans to GM.

* This new GM will establish an independent trust (VEBA) that will provide health care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion payable in three installments ending in 2017 and $6.5 billion in 9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company. The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.
* The GM qualified pension plans for both hourly and salaried employees will be transferred to the New GM as part of the purchase process.
* The U.S. Treasury is prepared to provide approximately $30.1 billion of financing to support GM through an expedited chapter 11 proceeding and transition the new GM through its restructuring plan. The U.S. Treasury does not anticipate providing any additional assistance to GM beyond this commitment. In exchange for funds already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred
stock in the new GM and approximately 60% of the equity of the new GM. The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by the VEBA and the Canadian government.
* The Governments of Canada and Ontario will participate alongside the U.S. Treasury by lending $9.5 billion to GM and New GM. The Canadian and Ontario governments will receive approximately $1.7 billion in debt and preferred stock, and approximately 12% of the equity of the new GM. Based on its substantial financial contribution, the Canadian government will also have the right to select one initial director.
* Based on these steps, the new GM will have far less debt and a world class balance sheet. This will allow the company the financial stability to weather future market downturns and generate significant excess free cash flow to invest in the business.
* The new GM will also pursue a commitment to build a new small car in an idled UAW factory, which when in place will increase the share of U.S. production for U.S. sale from its current level of about 66% to over 70%.

Principles for Managing Ownership Stake

Consistent with the goal of clearly limiting the government’s role as a reluctant equity owner but careful steward of taxpayer resources, the Obama Administration has established four core principles that will guide the government’s management of ownership interests in private firms. These principles will apply to the U.S. government’s equity stake in GM:

* The government has no desire to own equity stakes in companies any longer than necessary, and will seek to dispose of its ownership interests as soon as practicable. Our goal is to promote strong and viable companies that can quickly be profitable and contribute to economic growth and jobs without government involvement.
* In exceptional cases where the U.S. government feels it is necessary to respond to a company’s request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth. When necessary, these conditions may include restructurings similar to that now underway at GM as well as changes to ensure a strong board of directors that selects management with a sound long-term vision to restore their companies to profitability and to end the need for government support as quickly as is practically feasible.
* After any up-front conditions are in place, the government will protect the taxpayers’ investment by managing its ownership stake in a hands-off, commercial manner. The government will not interfere with or exert control over day-to-day company operations. No government employees will serve on the boards or be employed by these companies.
* As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.

Warrantees:

* GM will continue to honor consumer warranties. This past week, the U.S. Treasury made available the Warranty Support Program to GM and $361 million was funded to a special vehicle available to provide a backstop on the orderly payment of warranties for cars sold during this restructuring period.

The Bankruptcy Process

During this process, GM will continue operating in the ordinary course. From an operating perspective, the day after the filing will not be materially different from the day before the filing. The following parties will be treated as described below:

* Employees: Employees will get paid in the ordinary course, including salary, wages and ordinary benefits. Assuming the sale moves forward as expected, Pension Plan and VEBA funding will be transferred to New GM.
* Suppliers: GM will seek authority at its “first day” hearing to continue to pay suppliers in the ordinary course. In addition, the U.S. Treasury’s Supplier Support Program will continue to operate, and GM suppliers benefiting from the program will continue to receive that support.
* Dealers: GM will seek authority at its “first day” hearing to honor its customer warranties in the ordinary course. Moreover, GM will seek to continue to honor its dealer incentives for those dealers who are expected to continue to be part of GM’s distribution network going forward. There are some dealers that GM has identified that will not continue with GM. It is expected that the terminated dealers will be offered an agreement to orderly wind down their operations over the next 18 months
* UAW: The modified labor agreement reached between the UAW and GM will be operative and will be assumed by the New GM.
Big Thanks BNO

Courtesy of SA Editor Rachael

Barron’s highlights the notable picks and pans of a group of well-respected investment managers who met last week for the Ira Sohn Investment Research Conference.

• David Einhorn, head of Greenlight Capital, is bearish on Moody’s (MCO) because of its ‘shattered brand.’ (Einhorn was on the mark at last year’s conference with his bearish call on Lehman Brothers.)
• Steve Mandel, who runs Lone Pine Capital, noted the great value of some franchises compared to ‘struggling’ stocks that are popular as recovery plays. He likes Strayer (STRA), a for-profit education company, with strong management and good growth potential. The stock isn’t cheap but he sees plenty of room for upside growth.
• Mark Kingdon, of Kingdon Capital Management, likes Bank of America (BAC), and thinks the stock could double in a year.

FREE Trend analysis for BAC Here

By Steve Gelsi, MarketWatch

NEW YORK (MarketWatch) — Senior officials in the Obama administration said late Sunday the U.S. government will provide $30 billion in financing to General Motors Corp. to allow it to continue to operate through a historic Chapter 11 bankruptcy, expected to last an estimated 60 to 90 days.

Officials confirmed that a majority of GM /quotes/comstock/13*!gm/quotes/nls/gm (GM 0.75, -0.37, -33.04%) bond holders approved the deal to allow the ailing car maker to restructure $27 billion in debt. See full story on GM bondholders.

“For the better part of a century, the General Motors Corporation has been one of the most recognizable and largest businesses in the world,” one senior U.S. official said in a prepared statement to reporters. “Today will rank as another historic day for the company — the end of an old General Motors, and the beginning of a new one.”

Describing the process as “painful but necessary,” officials said GM will move ahead with plans to close 11 facilities will idle three more. Specific numbers of layoffs will come from GM, officials said.

The U.S. government will own 60% of equity in the new General Motors, with little or no control over day-to-day affairs. The U.S. government will receive approximately $8.8 billion in debt and preferred stock and will name some of the new company’s board members.

Officials did not confirm or deny reports that Al Koch, a turnaround specialist, will serve as chief restructuring officer.

An additional $9.5 billion will be lent to GM by Canada and the Province of Ontario, with the Canadian government in line to own 12% of the new GM and receive approximately $1.7 billion in debt and preferred stock. The Canadian government will also have the right to select one initial director.

President Barack Obama is expected to speak about the GM bankruptcy on Monday, with the company also planning a formal announcement before the stock market opens.

Government says it’s done lending to GM

Officials said the government would eventually sell its stake in General Motors, but did not lay out a target date. On the conference call with reporters, the officials said they didn’t expect GM to require any more funding from the government.

“The government has no desire to own stakes in companies and will actively seek to dispose ownership interest,” an official said. “The goal is to promote strong companies that can become profitable quickly.”

As a result of this restructuring, GM will lower its break-even point to sales of 10 million cars per year. Before the restructuring, GM needed to sell about 16 million car sales a year to turn a profit.

The UAW made “important concessions” on compensation and retirees health care, Obama administration officials said.

The new GM will establish an independent trust, known as a voluntary employee beneficiary association (VEBA), to provide health-care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion, payable in thee installments ending in 2017 and $6.5 billion in perpetual preferred stock. The independent trust will also receive 17.5% of the new GM and warrants to purchase an additional 2.5% stake in the company.

The UAW’s existing $20 billion pension obligations will disappear as part of the bankruptcy.

The new GM will pursue a commitment to build a new small car in an idled UAW factory, which, when in place, will increase the domestic-sales share of U.S.-produced vehicles from its current level of about 66% to over 70%.

Officials confirm $27 billion debt deal

The steering committee for a portion of GM creditors has confirmed that bondholders representing at least 54% of GM’s unsecured debt have agreed to exchange their portion of the company’s $27.1 billion unsecured paper for their pro-rata share of 10% of equity in the new GM, plus warrants for an additional 15% of the new company.

“The bankruptcy court process will be used to confirm this treatment for those bondholders and other unsecured creditors that failed to accept or did not participate in the offer that was accepted by the aforementioned majority,” the U.S. officials said.

GM will continue to honor its consumer warranties. This past week, the U.S. Treasury made available the Warranty Support Program to GM, with $361 million in funding to provide a backstop for the orderly payment of warranties for cars sold during the restructuring period.

Employees will continue to receive regular compensation, including salary, wages and ordinary benefits. GM will seek authority at its first-day hearing to continue to pay suppliers as normal.

“The Committee on Capital Markets Regulation, a diverse group of academics, former government officials, and business leaders, plans to present a comprehensive list of recommendations Tuesday calling for an overhaul of the rules supervising financial markets. The recommendations will likely attract attention from key government officials because of the people’s credentials who put together the report, called “The Global Financial Crisis: A Plan For Regulatory Reform.”

“Among others, the report was penned by R. Glenn Hubbard, dean of the Columbia Business School, John L. Thornton, Chairman of the Brookings Institution, Hal S. Scott, Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School, and Roel Campos, a former commissioner at the Securities and Exchange Commission. The report is thorough – the executive summary alone has 57 recommendations.

“Some of the key recommendations:

“1) Keep two or three regulators for the financial system – the Fed, a new US Financial Services Authority, and an investor and consumer protection agency. The USFSA ‘would regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions.’

“2) Mandate centralized clearing of credit default swaps. To the extent that some CDSs stay outside a centralized clearing process, the committee calls for higher capital requirements to ‘compensate for increased systemic risk of these contracts’.

“3) Don’t make a hasty decision to raise capital requirements across the financial sector until more analysis is done. But the committee does recommend higher capital requirements for megabanks, such as those with more than $250 billion in assets. ‘Given the concentration of risks to the government and taxpayer, we recommend that large institutions be held to a higher solvency standard than other institutions, which means they should hold more capital per unit of risk.’

“4) Strengthen the ‘leverage’ capital ratio, and debate whether the leverage ratio should be based on common equity rather than total Tier 1 capital.

“5) Give the Fed temporary authority to evaluate confidential information supplied by hedge funds.

“6) Relax acquisition rules to make it easier for private equity firms to pump money into the banking sector.

“7) Create a comprehensive policy called the Financial Company Resolution Act, that would be allowed to put any financial company into receivership, not just ‘systemically’ important ones.

“8) Ban or limit high-risk mortgages from being securitized.”

Source: Damian Paletta, The Wall Street Journal

Courtesy of The Pragmatic Capitalist

MUTUAL FUNDS INFLOWS SURGE

Mutual funds flows remain a fantastic way to gauge small investor sentiment which is often inversely correlated to future stock market returns.  Stock fund flows for April surged to 12.33 billion.  As you can see in the chart below stock fund flows have had a very high inverse correlation to stocks.  Small investors pull their funds at exactly the wrong time and invest at exactly the wrong time.  The early figures in May are also showing strong stock inflows with over $7B in flows for the first two weeks.  The last time we saw flows this high was right at the March ‘08 high.

Jack Welch’s Challenge

Dealbook:

“It was Jack Welch’s night to reign supreme once more.

That’s the assessment of Vanity Fair magazine, which along with Bloomberg News staged a panel discussion in Manhattan on Thursday evening on how the economy got into its current mess and how to get out of it. Vanity Fair said Mr. Welch, the former longtime chief executive of General Electric, was the audience favorite as he gave what it called “an unapologetic defense of old-school capitalism in a room teeming with past and future Masters of the Universe.”

Mr. Welch went head to head with the other panelists and the moderator, DealBook’s Andrew Ross Sorkin. At one point, he challenged the Nobel Prize-winning economist Joseph Stiglitz on the role of unions, saying, “Give me a highly successful, unionized American industry.”

(Bloomberg) — China, the world’s second-biggest energy consumer, increased fuel prices by as much as 8 percent today, allowing the nation’s refiners to pass on climbing crude oil costs.

Prices charged by refiners to wholesalers for gasoline and diesel rose by 400 yuan ($58.57) a metric ton, the National Development and Reform Commission, China’s economic planning agency, said on its Web site late yesterday.

China Petroleum & Chemical Corp., or Sinopec, the nation’s biggest refiner, said on May 22 it will lose money turning oil into fuels should crude trade above $60 a barrel and the government prevent it from increasing prices. Crude oil climbed above $66 a barrel to a six-month high on May 29, capping its biggest monthly gain in a decade.

“The price increase is positive news for Sinopec,” said Qiu Xiaofeng, a Shanghai-based analyst at China Merchants Securities Ltd.

The ceiling for retail prices will increase by the same amount. The previous price charged by refiners for gasoline was 5,730 yuan. For diesel, it was 4,990 yuan.

Inflation in the world’s third-biggest economy fell for the third straight month in April, giving the government more room to raise prices. Consumer prices fell 1.5 percent in April from a year earlier.

Gasoline and diesel are used to power trucks, cars and small generators in China. The government controls prices under a mechanism introduced in December that takes into account crude-oil costs, taxes and a profit for refiners.

Trucks, Cars, Generators

China may change fuel prices when crude-oil costs change more than 4 percent over 22 straight working days, the National Development and Reform Commission said on May 8.

“This is a hard decision for the government,” Qiu said, adding that while policy makers want to keep domestic prices in line with international oil costs, they also are “worried about the impact that the price increase may have on the economy.”

The government raised fuel prices by as much as 5 percent on March 25 to reflect movements in global crude prices.

The latest increase was smaller than a Shanghai research agency, CBI China Co., and the Guangdong Oil & Gas Association had predicted. On May 7, they projected that prices might rise by 520 yuan a metric ton for gasoline and 500 yuan a ton for diesel.

Profit at Sinopec fell 47 percent last year before the pricing changes were introduced and because it was unable to pass on soaring oil costs to customers. The company’s share price has declined 23 percent in the past year, matching the drop in the Shanghai Composite Index.

$60 a Barrel

PetroChina Co., the nation’s second-biggest refiner, posted a fourfold increase in oil-processing losses last year. Oil reached a record $147.27 a barrel in July 2008.

Crude oil above $60 a barrel puts pressure on Chinese refiners, Gordon Kwan, the head of energy research at Mirae Asset Securities in Hong Kong, said in an e-mail on May 29. Every $1 increase in the oil price will require the government to hand out subsidies of about $7 million a day, he wrote.

China’s gross domestic product expanded 6.1 percent in the first quarter, the slowest pace in almost a decade, after exports collapsed because of the global recession.

Signs of a fledgling expansion prompted by a 4 trillion yuan ($586 billion) stimulus package have included gains in industrial output.

Production growth may accelerate to 8 percent this quarter and exceed 10 percent for the second half, the Ministry of Industry and Information Technology said in May. That compares with a 7.3 percent gain in April and 5.1 percent growth in the first quarter.

GGP Presentation-Ackman-Ira Sohn Conf-5!27!09 (2)

Courtesy of The Pragmatic Capitalist

“The decline in asset backed commercial paper continues unabated in a clear sign that the lending markets are still not healthy.   It’s hard to imagine that the U.S. can get back to 2006-2007 growth levels without a massive surge in securitization markets”

Courtesy of Henry Blodget of Clusterstock

In the middle of this decade, Americans bought 17 million cars per year (.8 per driver).  Now they’re buying 9 million (.4 per driver).  Detroit is terrified that Americans have discovered that they can get by on used cars, rental cars, and public transportation and that new car sales have been permanently hammered.

As with other sectors of the economy–retail sales, real estate, etc.–the most likely scenario is a “new normal” well below the peaks of recent years but above the current lows.  Some of the current paralysis is from fear about the economy rather than poverty or lack of desire.  But it’s also hard to imagine that each driver needs a new car every year.

So what’s the “new normal” for cars?  The chart below, from the New York Times, shows how cyclical the industry’s sales have been (until the last recession).  The crash in the oil crisis of the late 70s, leading into the recessions of the early 1980s, saw a similar decline.

Assuming the sales of the early and mid 1990s represent a non-bubble average, sales should eventually rebound to 14-15 million or so.

More from the New York Times >