Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

The Oracle of Delphi

The October 12, 2005 edition of The Wall Street edition has two excellent articles on this past weekend's bankruptcy filing by Delphi, the large auto parts manufacturer spun off in 1999 from General Motors. Alan Murray wrote a piece entitled "Delphi Faced Reality -- Now It's GM's Turn" in which he highlights how Robert S. "Steve" Miller, the recently named CEO of Delphi, has put the automobile manufacturing industries' issues clearly and starkly on the table. Mr. Miller was enjoying his retirement when he was called earlier this year to draw upon his prior experience as cheif executive when Bethlehem Steel filed for bankruptcy, director of United Airlines when it did the same and earlier Steve Miller helped turn Chrysler around in 1980 and did two tours as cheif executive for parts maker Federal-Mogul. As Miller so clearly states, Delphi's two biggest problems are not only Detriot's, but also the nations: globalization and an aging population. Both are immutable and in just four months, Mr. Miller is addressing them rather than ignoring or fighting these two issues.

Mr. Miller's proposal would slash the wages and benefits of Delphi's current workers to roughly one third of their current levels. Further, he is favor of slashing the soaring cost of health-care benefits for retirees and leaving them to the Medicare program after they turn 65. Finally, he has posed a generational trade-off to current workers about Delphi's pension plan. This is the same choice the rest of the U.S. will face when Washington finally gets serious about overhauling Social Security and Medicare. In his prepared remarks, Mr. Miller said GM is clearly "headed dwon the same Chapter 11 path as Delphi, unless there is a dramatic change in the staggering legacy labor burden." It will be interesting to see how GM CEO Rick Wagoner responds next week after what is expected to be a dismal report on thrid-quarter activities. Will he follow the lead of Steve Miller or step aside and be replaced by someone else who will?

The article on the Review and Outlook page is entitled "The oracle of Delphi." It goes into much greater depth about their view that the Delphi bankruptcy filing is about globalization and the increasingly unsustainable expense of traditional business health and pension benefits in the U.S. The WSJ opines that Delphi's bankruptcy likely marks the death knell for the expansive system of defined-benefit retirement packages that workers in mature industries have long enjoyed. Compared to the automakers themselves, Delphi's $4.5 Billion pension obligation is relatively small fry as pension obligations go. In the wake of the airline bankruptcies of the last year or so, the need for the reform of the Pension Benefit Guarantee Corp. ("PBGC") and the moral hazard it creates has become all the more apparent. PBGC (and the U.S. taxpayer) are likely to face some very large expenses if Delphi's filing truly is an omen of what's to come.