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Ford, GM and Health Care: Was Hillary Clinton Right?
May 9, 2005

There is a false notion abroad in the land that the auto industry no longer matters to the long-term health of the American economy. On this point, we must differ. The credit downgrade of GM (NYSE:GM) and Ford (NYSE:F) last week, in the case of the former by a full two ratings notches, signals the beginning of a difficult and increasingly painful process of aligning legal commitments to existing resources that mirrors the larger debate in Washington over Social Security and Medicare.

Unfortunately, the Texas contingent that controls the White House, despite the President's courage in addressing the public sector financial issues related to the Baby Boomers, has yet to acknowledge how this demographic reality affects the private sector. Fed Chairman Alan Greenspan has painted a clear picture of the mismatch between real assets and the Social Security and Medicare liabilities enshrined in current law, but few in Washington are willing to extend this analysis to private industry, in part because the already daunting arithmetic of Social Security and Medicare deficits becomes outright awful when one ponders the huge pension and health care funding shortfalls on the balance sheets of the largest and oldest American companies.

Think of it this way: Even were GM and F to suddenly produce products that were superior to those of the various foreign competitors, and at a lower price, the accumulated retirement and health care liabilities to current and retired workers would still threaten their solvency. This is why F CEO Bill Ford and his counterpart at GM, Rick Wagoner, have consistently hammered away at the issue of health care reform, both in Washington and in other venues.

We hate so say it, but Senator Hillary Clinton (D-NY) may have been right when she suggested a national solution to health care. Why do we invoke the name of a socialist like Hillary Clinton? Because one way or another, despite all of the free market, tax-cutting protestations of the Bush Administration and their conservative supporters in Congress and around the country, the health care liabilities of GM, F and many other industrial companies are going to be handed to Washington. Talking about tax cuts in the face of this approaching fiscal tidal wave is like a consumer using a high-interest credit card to make mortgage payments. Seen in this light, talking about "privatization" of Social Security is equally ridiculous.

We recently asked our friend Bill Rochelle, head of the bankruptcy practice at Fulbright & Jaworski in New York how many US auto parts companies had filed for bankruptcy in the past two years. His reply was telling: "I have stopped counting," said Rochelle, who has been deeply involved in airline bankruptcy litigation. "It is easier to count the ones that have not yet filed."

As the smaller suppliers supporting the US auto industry have dwindled in numbers, already strapped communities across the US are experiencing new waves of redundancies and plant closures, robbing cities and hamlets of employment and tax revenues. Even though some significant names have already sought the protection of the courts, these stories have mostly been relegates to the inside pages of the business section, thereby leaving the rosy scenario beloved by the Bush Administration's economic team apparently intact.

To see how this scenario will unfold, study the relationship between F and its former subsidiary, Visteon (NYSE:VC). VC and its counterpart, Delphi Corp (NYSE:DPH), the two largest suppliers of parts to Ford and GM, respectively, are both headed inexorably for bankruptcy. The main reason for the filings will be financial, but the larger context will be the need to use the legal authority of the US Bankruptcy Court to void onerous labor agreements with the UAW and, in the process, walk away from pension and health care liabilities to hundreds of thousands of current and retired auto workers.

As in the case of the steel and airline industries, these commitment will be handed to the Pension Benefit Guarantee Corp., which will administer what real assets have been allocated to meet these commitments and haircut the benefits to meet the available resources. This is a present day problem, but the roots of the situation go back nearly half a century.

Near the end of 1945, a young naval officer named Henry Ford II took control of his family's company as his enfeebled grandfather neared death. Henry and the Ford family had fought for several months earlier to wrest control of F from Henry I's cronies and, once this was accomplished, Henry II turned his attention to making peace with the unions, which had fought to organize the Blue Oval's plants for nearly four decades. As today, F was in serious financial trouble and only the forbearance of GM and Washington kept the company afloat after years of non-management by the great inventor.

Even as Henry II was sitting down to talks with the union leadership, the UAW struck GM in November 1945, starting a battle with the vastly stronger automaker that was a signal to the entire industry that unions were about to claim their share of the pie. In the first few months after taking over late in 1945, Henry II made little progress with the UAW; but early in 1946 he gave an acclaimed speech on "The Challenge of Human Engineering," setting out to change the tone and quality of the discussions with the increasingly powerful union.

Already facing hostility from post-WWII Washington, which effectively told Henry II to raise wages without increasing prices, the son of Edsel Ford showed himself the pragmatist and defused years of tension with the UAW in less than six months. He bought a peace that kept the UAW from striking F plants for decades. But Henry II's compromise also marked the beginning of a long period of accommodation of union demands which have over the next half century become the single biggest factor affecting the ability of the US auto industry to compete with foreign-based manufacturers.

Today, the accumulated cost of the compromises made by F, GM and the entire auto industry with the UAW decades ago threatens the very viability of that industry. While the credit downgrades of F and GM were big news last week, few noticed when the major rating agencies severely downgraded VC and DPH a month earlier. For those credulous cretins on Wall Street who expressed surprise at S&P;'s downgrade of F and GM, the impending insolvency of Detroit's largest parts makers will be a real thrill - and will bring home to Washington and Wall Street the full dimension of the larger American problem.

Unfortunately, this story does not yet have a happy ending because, unlike President Bush, the Congress lacks the courage to address these issues with honesty, at least in public. We believe that VC and DPH will be forced into bankruptcy, perhaps as early as the end of 2005. These giants, who together have nearly $50 billion in revenue and directly employ 260,000 Americans, will use the power of the courts to void their labor contracts and other commitments to workers. The PBGC will assume the pension liabilities for VC and DPH workers, who are still covered by the global labor agreements with the automakers.

Then Bill Ford and Rick Wagoner will look at the recalcitrant leadership of the UAW and say very politely: "Can you hear me now?"

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