For those of us who came of age in Detroit, the new twist in the long-running game show starring General Motors and the United Auto Workers is simply stunning. It used to be called Family Feud. Now, it's Let's Make a Deal.
The change was inspired, in no small part, by the Delphi horror show. Delphi, formerly GM's parts division, has famously gone Chapter 11, with Chairman Robert S. Miller Jr. talking about seeking a roughly two-thirds reduction in salary and benefits.
Any GM UAW worker or retiree who can count can see that accepting what amounts to about a 20 percent cut in medical benefits beats risking what's likely to happen to the guys at the Delphi plant across the street.
Two key numbers help explain why the UAW is being nice: $2,950 and $1,330. The first is the monthly pension of a UAW worker retiring this year at age 50 after 30 years with GM. The second is what he would get if GM croaked and the federal pension-insurance agency had to step in. In addition, health care cuts in a GM bankruptcy would be far more severe than what's being discussed now. This scary prospect led to last week's GM-UAW agreement to cut $3 billion from GM's annual health care expenses.
But when you crunch the numbers, you see that the cuts aren't really that big a deal to GM. Of the $3 billion in annual health care savings, only $1 billion is in cash. The other $2 billion is an accounting entry, but not real money.
Here's how it works. If UAW members ratify the deal, GM can reduce its estimated obligation for retirees' future health benefits by $15 billion, to about $62 billion. This would allow GM to record a $2 billion annual gain for seven years.
These cuts and other initiatives will buy time for GM, but they won't solve its fundamental problem: getting U.S. consumers to buy GM vehicles for more than they cost to make. That depends partly on cost cuts, of course -- but also on GM being able to step up its car-making game.
For shareholders, however, the big GM news was not the health care agreement but rather the company's talk of selling a majority stake in its lucrative finance company GMAC. Chief executive G. Richard Wagoner pitched this idea as being a way to help GMAC recover its investment-grade rating, which disappeared when GM's did. Such a sale could fetch $10 billion or more and would certainly thrill shareholders.
However, reducing its ownership in GMAC to just a minority stake would greatly limit GM's ability to tap GMAC's profits to meet its obligations, including its pension funds.
Those funds are in good shape now by corporate pension accounting standards. But by the Pension Benefit Guaranty Corp.'s math, they're more than $20 billion underwater. The difference is that corporate accounting assumes that pension funds will stay in business indefinitely, while the PBGC assumes the plans are being terminated today and that it must buy annuities to cover commitments to current and future beneficiaries.
It's not clear if the PBGC will try to block a GM sale of a sizeable GMAC stake -- or at the very least try to get GM to devote some of the proceeds to pension funding. The PBGC recently faced such a choice when Ford sold Hertz for $6 billion, but despite some early rumblings, it took no action.
What would it do about GMAC? "We will await the [GMAC] transaction to see if it poses a risk to the pension plan," a PBGC spokesman told me. If the agency fails to act, it will be a defining moment. While GM shareholders would win big, U.S. taxpayers could lose big if the PBGC ultimately has to cover GM's pensions. GM declined to comment on the PBGC.
Delphi has a part in our GM-UAW drama, too, because GM guaranteed pension benefits for some of Delphi's hourly workers as part of the 1999 deal that separated the two companies. GM says its Delphi liability for pensions and other stuff is between zero and $12 billion. (Yes, the range is absurdly wide -- but I can't help it, it's what GM says.)
However, data I got from the PBGC under the Freedom of Information Act will help a bit. The PBGC says the plan for Delphi hourly workers is underwater by $7.5 billion, and the plan for salaried workers is underwater by $3.3 billion.
The agency estimates it's on the hook for $4.1 billion at Delphi, which leaves a $6.7 billion hole. GM's on the hook for part of the hourly plan, which represents about 70 percent of the shortfall. It feels to me like a possible liability of $4 billion or so if Delphi terminates the hourly workers' plan. GM and Delphi both declined to comment.
Delphi promises to turn into an incredible hairball, with the UAW, GM and Delphi duking it out to see who gets to suffer the least pain. It should be great TV. Motown Steel Cage Match, anyone?
Sloan is Newsweek's Wall Street editor. His e-mail is email@example.com.