Bankruptcy Is Delphi's Trump Card

At first glance, you'd think Delphi Corp.'s (DPH ) recent hiring of turnaround specialist Robert S. "Steve" Miller Jr. as its chairman would be good news for General Motors Corp. (GM ) After all, GM still buys gear worth $15 billion annually from its troubled former parts unit. But in recent years, Miller was quick to restructure distressed parts maker Federal-Mogul Corp. (FDMLQ ) and Bethlehem Steel Corp. by seeking bankruptcy protection for both. And the last thing GM Chairman and Chief Executive G. Richard Wagoner Jr. needs right now is for his biggest supplier to head into Chapter 11.

Indeed, a bankrupt Delphi would only add to GM's own financial woes. Miller claims that many of Delphi's parts contracts with GM are unprofitable -- and if Delphi were to file for bankruptcy, Miller says he could cancel the money losers. Plus, if Delphi could no longer fund its obligations to its 12,000 union retirees until September, 2007, it could stick GM with up to $9 billion in pension and health-care benefits that are guaranteed under the spin-off agreement, says analyst Brian Johnson of Sanford C. Bernstein & Co. GM says its Delphi-related liabilities aren't that high, and Delphi is obligated to pay GM back. Still, it's clear the auto maker faces huge exposure if Delphi fails. Says Miller: "Wagoner needs to think about how he is going to manage the Delphi situation."