Manny Lopez swings, misses
Manny Lopez is the opinion editor of the Detroit News. On July 27, Lopez wrote an editorial entitled “Auto investors left out in the cold” in which he reminds the industry executives going into negotiations with the United Auto Workers that they work for the shareholders of the company. That is, to quote Lopez, “the people who have pumped their savings into these companies with the hope that their display of confidence will be rewarded.”
This brings up an image of a widowed grandmother living off her prudent investments of years ago when she scraped and saved and bought shares one at a time. That image may have been correct sometime in the past, but it’s certainly not a typical picture today, when those in the top 10% bracket own somewhere between 80 and 90 percent of stocks and bonds and many companies, including the Detroit automakers, don’t pay the dividends that Granny used to live on.
Lopez thinks his message is necessary in case the Detroit Three had any inclination to give away the farm, especially to unions which haven’t had a pay raise in eight years. He reminds industry executives that “Secured creditors at General Motors and Chrysler were dumped on during bankruptcy proceedings that were orchestrated by the Obama administration. They took a back seat to UAW interests and were left holding notes that were worth pennies on the dollar, if that much at all.”
Wait: I thought we were talking about Granny’s investments! Now the discussion has shifted to entities that loaned money based on an asset that would become theirs if the borrower defaulted. There is a big difference to anyone whose intellectual diet doesn’t consist of mental baloney.
What confuses me more is Lopez’s inclusion of Chrysler. Chrysler currently has only two stakeholders, Fiat S.p.A., which owns the majority of Chrysler, and the United Auto Workers’ Voluntary Employee Beneficiary Association (VEBA), which holds the rest. I guess they are the UAW interests to which Lopez is referring but, as I recall, the VEBA was set up to allow Chrysler to shift the liabilities for future healthcare benefits to the trust, saving itself billions of dollars.
Lopez blames the Obama Administration for the losses to the secured creditors. It’s more accurate to blame the Obama Administration for the fact there is still a Chrysler today and blame Cerberus Capital Management and/or Daimler AG for the creditor’s losses. Neither Barack Obama nor George W. Bush had anything to do with the fact Chrysler was run so poorly that reorganization or liquidation was the only way out. By the time President Obama took the oath of office, Chrysler’s creditors were already trying to salvage what they could. The same was true at GM. But perhaps Lopez has forgotten those days just as he’s forgotten how business finances operate.
Crossing the line from merely ignorant to actually offensive, Lopez maintains that one of the obstacles to the Detroit automakers’ recovery is the union negotiations that just began last week. He reckons the UAW will have Chrysler, Ford and GM back on the slippery slope to oblivion in no time. It won’t be the $50 million in compensation to Alan Mulally; not the millions that Dan Akerson spent on General Motors’ IPO instead of new product; not the reinstated raises for white-collar workers at Ford: just the United Auto Workers whose members haven’t had a raise since 2003.
I do expect the union negotiations will be interesting, after all, each side wants something the other doesn’t want to give up. However, the big concessions have already been made. In Chrysler’s case, the average hourly labor cost is already lower than that at Ford or GM and right in line with Toyota and Honda. In return, Chrysler has added workers and is investing in production facilities. There has been a reasonable quid pro quo and it is to be hoped the current negotiations will yield more of the same. But spitefully hoping the union takes it on the chin is the same as hoping the UAW decides it’s time to bring back the bad old days of sometimes violent confrontation and demands that, in the long run, did prove to be unaffordable.
Having alerted the automakers about the dire threat posed by the UAW, Lopez now turns to something he believes the automakers are withholding from the stockholders: a mountain of cash. Ford reportedly has $22 billion in automotive gross cash; GM has either $27 billion or $32 billion, depending on who is asking. Chrysler has $10.2 billion. All told, the Detroit Three have perhaps $64 billion and Lopez wants to know when they are going to start paying dividends. Ford hasn’t paid a dividend since 2006 and shows no signs of resuming the practice.
In fairness, Lopez does note that Ford stockholders who bought their shares at $3 have now quadrupled their investment. Those fortunate souls who bought in the week of October 17, 2009 when Ford stock was going for $1.43 have seen their investment grow more than 800 percent, which really isn’t bad for 20 months. But Lopez frets that stockholders might not get even more money and wonders what they will do then? Well, if we do the math, we find the savvy investor who bought a thousand shares of Ford stock at $1.43/share in October 2009 could sell them at today’s closing price of $12.35/share, making an after-tax profit of $7,852.00 on an investment of $1,430.00, a 549% return. Granny won’t have to sell the cow, after all.
Ford shareholders are doing well compared to those with GM stock. Shares of the General have fallen to a record low. U.S. taxpayers, who still own 26% of GM currently stand to lose about $13 billion. It must be very frustrating to be a GM stockholder, losing money while the company sits on billions that can’t be touched. Got to hand it to GM, some of their vehicles are a bit funky, but when it comes to financial manipulations, they are the Rolls-Royce of the auto industry.
Once again, though, we come back to the fact Chrysler has two, count ‘em, two, shareholders. Unlike GM, Chrysler hasn’t floated an IPO and has paid off its government loans, so there’s not a need to pay dividends, unless Lopez really wants Chrysler to pay them to the union retiree fund.
In reality, Akerson, Marchionne and Mulally aren’t playing Scrooge McDuck, admiring the stacks of greenbacks and swimming in pools of coins: the cash is used to fund product development, new facilities, expansion into new markets and other business needs that actually do enhance shareholder value.
Manny Lopez’s editorial was an example of what happens when one allows preconceived notions to crowd out reality. It’s also a lesson in what happens when one paints, or in this case, smears, with too broad a brush.
In the final analysis, it doesn’t appear so much that investors have been left out in the cold as it does that Manny Lopez has spent too much time in the summer heat.