General Motors has agreed to sell a majority stake in its financial arm, GMAC, to a group of investors for $14 billion over time to raise cash and let its profitable finance subsidiary shed its junk bond status. Meanwhile, promises are kept to employees and may be bankrupting the company.

General Motors today announced an agreement to sell a majority stake in its financial arm, GMAC, to a group of investors led by Cerberus Capital Management, in a deal intended to raise cash and let its profitable finance subsidiary shed its junk bond status. The initial sale is for $7.4 billion, with $10 billion expected by closing and a total of $14 billion over three years, a G.M. statement said.

The transaction could give G.M. some space to breathe at a time when the automaker is under increasing pressure to stabilize its finances, and as investors grow worried that the company could fall into bankruptcy. GMAC has been a lone bright spot for G.M., providing badly needed income as it reported deep losses at its automotive unit. Last year G.M. lost $10.6 billion, which would have been even more had the company not earned $2.4 billion at GMAC.

Yet some analysts question whether the sale of GMAC will be any more than a short-term fix.

With G.M.’s stock trading near an all-time low and its bonds rated as junk, the company reported losses of more than $10 billion last year. Unless it stops hemorrhaging money, it will have to limp itself into bankruptcy court — “a move with consequences that could cascade through the American economy, threatening up to 1 million jobs and changing the dreams of American workers,” according to CBS News’ “60 Minutes” yesterday recapping G.M.’s ongoing woes.

On Friday, G.M.’s biggest parts supplier, the Delphi Corporation, asked a bankruptcy court judge for permission to cancel its labor contracts and impose sharply lower wages on members of six unions, including its largest, the United Automobile Workers (UAW). G.M. owned Delphi until 1999 and is liable for the pension and health care benefits of workers who were at G.M. before the spinoff.

G.M. estimates its liability from the Delphi bankruptcy will be anywhere from $5.5 billion to $12 billion, meaning that the GMAC sale may not be enough to cover it, says an article in today’s New York Times.

General Motors chairman Rick Wagoner recently said: “We have a lot of employees. We have a lot of retirees, a lot of dependents. … Promises were made about benefits to those people that weren’t very expensive when they were made. And it’s really given us some financial challenges.”

One such challenge is that most of the people on G.M.’s payroll are no longer making cars. GM wants to shut down all or part of a dozen facilities and get rid of 30,000 workers by the end of 2008, but it’s hamstrung by its contract with the UAW, which says it would still have to pay these workers under something called the “jobs bank.”

“The job bank, that is people are paid to essentially full salary and aren’t working — can’t work. You can’t afford literally hundreds of millions of dollars in wages to people that aren’t working,” says David Cole, chairman of the Center for Automotive Research, a non-profit consulting firm in Ann Arbor, Mich. “So the way to deal with that is to buy ‘em out of their job. And that’s gonna be a big part of what’s happening in just the next few months.”

Every month, GM sends out nearly half a million pension checks to former workers, many of whom retired in their 50s after 30 years of service and live in communities where G.M. plants closed long ago.

The week before last, General Motors served up one of the biggest buyout packages in corporate history, offering 113,000 hourly employees anywhere $35,000 to $140,000 to walk away from their jobs or take early retirement, as were 13,000 Delphi workers. It has not estimated precisely what that would cost, although some say the buyout could cost G.M. up to $2 billion.

Delphi also said last week that it expected G.M. to offer incentives of $50,000 to its U.A.W. members if they would accept a significant pay cut. Otherwise, Delphi said, it would impose wages of $12.50 an hour. If Delphi were to do so, the U.A.W. warned, it could face a strike that could shut down G.M. and lead to its own bankruptcy filing.

The consensus is that the union may have to give up a lot more, either before or during next year’s contract negotiations, if General Motors is to avoid bankruptcy — an outcome that could allow the company to scrap its labor agreements, slash wages and pass off its pension obligations to the federal government.

Then there is the ever-rising cost of health care. GM has one of the most generous plans in America and provides it to 1.1 million people — retirees, workers and their dependents — at a cost of $6 billion a year. That’s more than any other company in America.

Says Gary Chaison, a professor of industrial relations at Clark University: “It comes to about $1,400 a car now,” he explains. “That’s what the health care premiums of the workers who make that car is. OK?”

Chaison says the health care costs are higher than the glass and steel used to make the vehicle. “Much more than any other part. What you’re doing when you’re buying a car is you’re spending a lot of money for the health care benefits of workers who are making that car,” he says.

It’s a cost most of GM’s foreign competitors don’t have because their workers are usually covered by some form of government health insurance in their own countries. Wagoner says it’s one of the promises GM made to workers made in good times that it can barely afford in bad.

Asked if he thinks those promises could be kept, Wagoner says, “We feel a responsibility to the people that those promises were made to. We also have a responsibility to insure that our business is successful in the future.”

Resources

GM’s Difficult Road Ahead
by Steve Kroft (correspondent)
CBS News “60 Minutes”, April 2, 2006

G.M. Makes Deal to Sell Majority Stake in Finance Unit
by Andrew Ross Sorkin and Micheline Maynard
New York Times, April 3, 2006

Earlier: Delphi Comes To Crossroads?

Delphi CEO: It’s the Industrialized Workforce, Not Just Us.