October 30th, 2005

When the Delphi Corporation declared bankruptcy on Saturday October 8, 2005, the American Labor Movement, as we know it, came to an end.

Samuel Gompers, the English immigrant who became the first president of the American Federation of Labor (AF of L), is, we can say with confidence, rolling over in his grave.

The same can be said for Walter Reuther, the son of German immigrants, who became the powerful president of the United Auto Workers (UAW) from the 1930s through the 1960s.

In the good old days the unions often had the power to cripple the companies, and the companies in turn would put the unions down when their turn came. The results were ongoing seesaw wars for more than a century where the winner was the one that could inflict the most pain on the other.

All that has now changed. No longer are strikes settled with bricks and clubs and men on horses. Today there are no clear-cut winners or losers. Lawyers conduct the negotiations and the puppets are the union members and stockholders.

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The Delphi bankruptcy was a watershed event because it conclusively marked the end of a major international corporation’s working under conditions of labor contracts that could no longer be fulfilled in today’s world of globalization.

Time ran out and the well ran dry as Delphi paying its workers wages and benefits averaging $65 an hour was no longer able to compete with companies paying their workers $25 an hour. Delphi was forced to declare bankruptcy, and when it did the rubber band broke. In the flying business that is known as running out of airspeed and altitude at the same time.

Delphi is this country’s largest auto-parts supplier and employs about 185,000 people worldwide. Delphi was a subsidiary of General Motors until it was spun-off in April 1999. The key players in this extraordinary drama are Delphi, the UAW, GM and the Pension Benefit Guarantee Corp (PBGC).

The importance of Delphi’s bankruptcy is that it will have an enormous and immediate ripple effect, especially on the United Auto Workers, General Motors and the rest of the automobile industry.

Immediately after the news of Delphi’s bankruptcy Standard and Poor’s downgraded GM’s debt from its BB junk rating to an even lower junk rating of BB minus. GMAC’s (GM’s finance subsidiary) debt was not downgraded but was left with its BB junk rating intact, and its bonds rose as GM proposed selling a major interest. GM’s residential-mortgage unit’s debt rating remained at BBB minus.

Recently General Motors’ benchmark 8 3/8% debentures of 2033 have sold as low as 71 (71 cents on the dollar) to yield 12%. GM had $284 Billion of debt outstanding at the end of June 2005.

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Robert S. “Steve” Miller, Delphi Chairman and CEO, has said that the workers’ pension benefits are in jeopardy unless they ”work for about a third of their old pay.” We can assure you that the United Auto Workers (UAW) will not accept a 2/3rds pay cut under any but the most draconian conditions.

Mr. Miller also warned that the US was “witnessing the slow agonizing death of defined benefits as industrial compensation policy.”

On October 21st Delphi said in an offer to the UAW that it wants to reduce wages from an average $27 or more to $9 per hour. Some of its 34,000 U.S. hourly workers’ pay would be cut by more than 60%.

It was reported on October 28th that the Delphi “proposal would also freeze the pension plan and accept no new participants after Jan 1. Delphi also could reduce retiree benefits or terminate the pension plan, and hourly workers would be asked to pay health care deductibles for the first time.” AP

“I lie awake nights worrying about their (Delphi workers’) welfare. They don’t deserve this.” Miller said. AP

Mr. Miller said of Ron Gettelfinger, president of the UAW: “I wouldn’t want to be in his shoes for all the tea in China. He’s going to have to help half a million workers get used to the idea that globalization has taken away the ability to have someone who mows the lawn or sweeps the floor get $65 an hour.”
The pre-bankruptcy UAW-Delphi labor contracts cost around $65 an hour when healthcare, pensions and other benefits were included, according to the company.

Delphi’s October 8th bankruptcy has brought home the irrefutable fact that today’s US wage rates are being set in China and Mexico.

Now more than ever, the value of an education for those entering the workforce is of paramount importance. It is the very best present a parent can give to a child. Despite this common knowledge, education today in many parts of America is a joke, a very unfunny and sad joke that guarantees second-class citizenship.

The days of joining a union for a high paying lifetime job are over, and American unions’ membership rolls have been declining as a result. For example, UAW membership from 1979 to 2005 has dropped from 1.5 million to 655,000. High-priced work of all types is being outsourced not only to China, India and Mexico but also to American companies that have a competitive workforce.

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Others affected by Delphi’s problems in addition to its employees, pensioners, stock and bondholders, are GM, Ford and virtually all other companies whose workers are represented by the UAW --- i. e. America’s manufacturing base.

It is not a revelation that the major issues continue to be wages, pensions and health benefits. None of these is new. What is new is the reality after the Delphi bankruptcy that these benefits will be significantly reduced as the money is not there to pay for them.

Delphi, for example, could have a call on GM of up to $12 Billion for its workers’ pension benefit shortfall according to the terms of the spin-off. Reportedly Delphi’s pensions could be underfunded by as much as $10.8 Billion.

Despite contract guarantees between GM and Delphi, we do not believe GM, a company that lost almost $4 Billion in the first nine months of this year, will be able to fulfill those obligations.

The Pension Benefit Guaranty Corporation (PBGC), a US government agency, will become involved if Delphi’s pension problems are not resolved. The PBGC said it would cover about $4.1 Billion of Delphi’s $10.8 Billion of underfunded pensions if Delphi decided to terminate its pension obligations. If that were to happen, what becomes of the $6.7 Billion difference?

A noteworthy problem is that the PBGC itself presently has a $23.3 Billion deficit. In addition “the PBGC also (in addition to airlines) acknowledged that the agency faced a more dangerous exposure in the manufacturing industry, which it estimates to be $48bn.” FT 10/12/05

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Partially as a result of Delphi’s bankruptcy, GM announced negotiations with the UAW on October 18th that resulted in a cut of $3 Billion in its annual health bill. This was an important move dealing with GM’s $77.5 Billion healthcare liabilities.

“GM is the largest private healthcare provider in the US with 1.1 million workers, pensioners and dependants reliant on its healthcare payments and a cash bill it forecasts at $5.6 billion this year.” FT 10/18/05

Rick Wagoner, GM’s chairman and CEO said the deal cut with the UAW was the “single biggest cost reduction in a single day in the history of GM.”
Now Ford and Daimler-Chrysler want concessions. The game will become very interesting as the Big 3 contracts end in Sept 2007 meaning that union ratification of these negotiations is necessary.

If American workers’ wages and benefits – especially healthcare - are not brought under control soon, the possibility of other major bankruptcies may come closer to becoming a reality.

Workers and pensioners have every reason to be concerned. This is a watershed moment for organized labor and American industry that was kicked off by Delphi’s October 8, 2005 declaration of bankruptcy.

The above developments and their ripple effects will have an enormous impact on stock and bond markets as well as on millions of Americans and those who do business with America.

“So bye, bye Miss American Pie, drove my Chevy to the levee but the levee was dry and them good old boys were drinkin’ whiskey and rye singin’ this’ll be the day that I die, this’ll be the day that I die.” AMERICAN PIE by Don McLean

John W. Hamilton

October 30, 2005

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e-mail: jwh@hamiltonadvisors.com

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