2005: Could Ford or GM use bankruptcy to remove their legacy healthcare liabilities?

AUDIENCE MEMBER: Hello. My name is Randall Bellows. I’m from Chicago. And many years ago, Lauren, my wife, did a portrait of you drinking a can of Coke. Next year I’ll bring one, drinking a can of Bud.

WARREN BUFFETT: I think you’d better stick with Coke. (Laughs)

AUDIENCE MEMBER: Oh, OK. I would like you to speculate on a couple of questions.

The first is, given the competitive disadvantage of General Motors and Ford with their huge health care liability costs for their employees and retirees, what do you think might happen there? Do you think there might be a bankruptcy to get rid of the liabilities or a government bailout?

And along that line, Charlie, you spoke several years ago about tort issues.

Do you feel there’s anything coming in the way of asbestos reform or correction for those issues and the insurance companies that have been paying those billions? Thank you.

WARREN BUFFETT: Well, I would say that Rick Wagoner at General Motors and Bill Ford at Ford, both have been handed, by managers of the past, extremely difficult hands to play.

They’re not the consequences of their own doing at all, but they have walked into what people call legacy situations.

But they have inherited a cost structure brought about by contracts that were put in place, maybe decades ago, that make it very difficult for them to be competitive in today’s world.

I mean, just imagine if Ford or General Motors had signed contracts that made them pay several thousand dollars a ton more for steel than their competitors did. I mean, it would — people would immediately feel that was untenable.

So, General Motors and Ford are in the position of having commitments, which are, in strong contractual terms, to pay sums for retired, particularly, workers in both the annuity field and in the health field that are staggeringly high compared to some of their competitors.

And their competitors can buy steel at the same price, and they can buy aluminum at the same price, they can buy rubber at the same price.

And when you get all through with it, if they have huge advantages on the health care and the annuity side, it’s not going to be a fair fight.

And those contracts, to some day — to some extent — go back to when General Motors had, for example, 50 percent-plus of the U.S. auto market. And now it has 25 percent. But I think even if it had 50 percent today it would be having trouble.

So, it’s a very, very tough situation. I’m not sure what I would do if you put me in charge of — I mean, as Bill Buckley said many years ago when he ran for mayor of New York, they said, “What’s the first thing you’re going to do if you get elected?” He said, “I’ll ask for a recount.” (Laughter)

Well, that’s a little the way I would feel if I got elected CEO of General Motors.

From the standpoint of the UAW, you know, they have a contract, they made a deal. And they’ve got $90 billion in the pension fund.

It’s kind of interesting. The pension fund of General Motors possesses roughly $90 billion. The health care fund has a little more, too, another 20-some billion as I remember.

The whole equity of General Motors is selling for about 14 billion. So after all these years, there’s 90 billion set aside for the retirees, and there’s 14 billion of equity value that’s been heading south for the owners.

And, it would seem that if General Motors had a steel contract that called for — let’s say there’s a ton of steel in every car — and I’m not saying there is — and if they were paying $2,000 a ton over market — or what their competitors were paying — people would say that that is not a viable situation for the long term.

But they’re in a similar situation because the contracts they voluntarily signed.

And part of the reason they signed those — and undoubtedly — was that they bore no accounting consequences at the time.

It’s a terrible mistake for managers not to think in terms of reality rather than the accounting numbers.

But back in the ’60s, you did not have to account for pensions on an accrual basis. And up till the ’90s, you didn’t have to account for health care — or the late ’80s, whenever it was — on an accrual basis.

And so people said, “Well, if we don’t have to count it, it isn’t real.” Well, believe me, it’s real. And the managers today are facing the consequences of that.

So, you know, they’ve got very tough hands to play.

And, you know, I read about it in the papers. I don’t know what’s going on there necessarily, but something will have to — in my view — something will have to give in that matter.

And before you answer the asbestos thing, Charlie, what do you think about them?

CHARLIE MUNGER: Warren gave a very optimistic prognosis — (laughter) — in my view.

I think — just because it hasn’t happened yet doesn’t mean that the problem isn’t real.

If you jump out of the window on the 42nd floor, and you’re still doing fine on the way down as you pass the 20th — (laughter) — it doesn’t mean you don’t have a serious problem. (Laughter)

If I were the governor of Michigan, or the president of the United States, or a director of General Motors or Ford, or a family member of Ford, I would want to address the problem right now.

I do not think it’s getting better or that Yehuda is going to come over the mountain with a magic wand and make it go away. I think it would be better faced.

WARREN BUFFETT: You want to try the asbestos? (Laughter)

Give us another cheery — (Laughter)

Around the office he’s known as Pollyanna. (Laughter)