The Hedge Fund That Ate Detroit

GM spin-out, auto parts company Delphi, went into bankruptcy when it was clear that its labor costs were overwhelming its ability to produce income. It had all of the problems of old Detroit. Not only were hourly wages high, but the costs of medical insurance and retired workers where a tremendous drag on earnings.

Delphi asked the bankruptcy court to void union contracts so that it could restructure its costs. The UAW said that, if the petition were granted, it would strike Delphi and shut the company down. Since GM and other car companies depend on Delphi for parts, the strike could have crippled the car industry.

GM and Delphi have made progress in buying out union workers, so the next question was what catalysts would allow Delphi to exit bankruptcy and begin life anew as a public company. The answer came, as it does so often these days, from a hedge fund.

Appaloosa Management, run by David Tepper, has owned a large share of Delphi for some time. The hedge fund is discussing putting several billion into the company in exchange for owning one-third of the operation. If Delphi can rid itself of most of its legacy labor costs in the process, the company may actually be able to make significant money. If so, the hedge fund should do very well.

Delphi is not Detroit’s only deeply troubled company. Ford has already announced that it will attempt to cut annual operating costs by $5 billion. It has forecast that its share of the US market could fall as low as 13% to 14%. Ford’s share is now just above 17%, but that is down from 25% in the mid-1990.

If Ford cannot cut fast enough, and the unions could be a barrier, or if its share fall faster than forecast, bankruptcy may be the only relief for its legacy labor costs.

Someone should give Bill Ford a directory of hedge funds.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.