Was The Bailout Really Needed
There has been much said for and against the need for the General Motors bailout.
Public officials from many auto industry-related organizations, the Obama administration – from the top down, and with very few exceptions most members of Congress, all proclaimed that GM was too big to be allowed to fail.
Too many jobs, , and hundreds of small support businesses, would be lost. And too much of our economy depended on the survival of GM.
Failure would be so catastrophic that not only would it undo all that had been done to save our financial markets, it would topple other segments of our economy, like dominoes, right down to the mom and pop diners that depended on auto industry worker’s lunch money.
This may be true, had GM been forced to liquidate, and completely cease operations.
There is an important “maybe” here. There are other very knowledgeable business and bankruptcy experts that have different opinions. Many believe GM would have been granted Chapter 11 status without government intervention. They believe this would have been much more beneficial to both the company and our economy.
They believe bankruptcy would have allowed GM to:
The point being, the same options afforded any other business that seeks Chapter 11 protection in order to reorganize into a profitable company would have been available to GM.
If Todd, and other similar bankruptcy law experts are correct, then why was the Obama administration so focused on a bailout-only solution?
How General Motors Was Really Saved: The Untold True Story Of The Most Important Bankruptcy In Us History
This story appears in the November 17, 2013 issue of Forbes.
Jay Alix engineered the plan that saved General Motors. Below, he tells his story for the first… time. Credit: Chris Arace for Forbes
Editor’s Note: Lots of people–including President Obama–have trumpeted their role in the success of the government-backed turnaround plan that saved General Motors, the most important industrial company in the history of the United States.
But on the fifth anniversary of the crisis, Forbes presents an exclusive, unprecedented look at what really happened during GM’s darkest days, how a tiny band of corporate outsiders and turnaround experts convened in Detroit and hatched a radical plan that ultimately set the foundation for the salvation of the company.
Author Jay Alix, one of the most respected experts on corporate bankruptcy in America, was the architect of that plan, and now, for the first time, he reveals How General Motors Was Really Saved.
For months the news was horrific, a pounding beat of warm-up obituaries for what once had been America’s greatest and most influential corporation: General Motors. At death’s door or already in the graveyard were Bear Stearns, Lehman Brothers, Merrill Lynch, AIG and Citibank. The mood was apocalyptic.
Early on that November Sunday I called Wagoner at his home in a Detroit suburb. I asked to see him right away, explaining that I had a new idea that could help save the company.
“And what is that exactly?” he pressed me.
Years Later: A Look Back On The Automotive Bankruptcy
DETROIT The unthinkable happened 10 years ago when Chrysler and General Motors tumbled into bankruptcy — a fate that awaited Detroit a few years later.
The Big Three were able to overcome the indignity to survive nearly a decade after they almost lost everything.
Chrysler filed for bankruptcy April 30, 2009. A little over a month later, General Motors, one of the world’s most powerful companies, filed for bankruptcy June 1, 2009.
It was a perfect storm. In late 2008, a global recession hit. Combined with several years of declining automobile sales and gas at more than $4 a gallon, it led to an automotive crisis that deeply impacted Detroit.
There was economic wreckage everywhere. Companies like Lehman Brothers, Merrill Lynch and Citibank were in ruins, which is why the automakers turned to the federal government.
“Of course, we went to the banks,” said Bob Lutz. “Of course, we went to private institutions, and of course, when we went to the banks and said, ‘We need a few billion to tide us over,’ they just turned their pockets inside out and said, ‘We’re in worse shape than you are.'”
Automakers were frustrated with the signs that few people in Washington D.C., understood the reach of an industry that affected one in every eight American jobs.
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Lessons From Gms Failure
Here are a few of the invaluable lessons investors can learn from GM:
Proposed Sale Of Opel And Vauxhall
On May 30, 2009, it was announced that a deal had been reached to transfer New Opel assets to a separate company majority-owned by a consortium led by Sberbank of Russia , Magna International of Canada , and Opel employees and car dealers . GM was expected to keep a 35% minority stake in the new company. It was announced on November 3, 2009, that the GM board had decided not to sell off Opel. However, after the reorganization in 2017, Opel and Vauxhall would later be sold to Groupe PSA for $2.3 billion.
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Organizing Gm For Collaboration Instead Of Conflict
The generalization is slightly unfair, but the point is that the trio actually isn’t divisive. If this were the old GM â the company that thought what was good for America was good for General Motors â that might be the case. That’s because the old GM was organized for conflict, with division heads fighting it out for resources and the mothership often lost in a labyrinth of ruinous financial complexity.
Instead, the current team is a model of earnest conflict transmuted into productive collaboration. If you’d quit paying attention to GM a few decades ago, you wouldn’t recognize the carmaker these days. If crosstown rival Ford is family, with all the issues that implies, then GM is a country.
Until Barra’s arrival, that assessment was true: Chapter 11 has chastened GM, but in 2010 the company still swaggered into the largest initial public offering in US history. The temptation was for GM to stage an imperious return to the corporate stage.
Barra, who had run both entire factories and human resources before being tapped by the board to become CEO in 2014, wasn’t going to stick to that script. Before the financial crisis, GM believed itself to be indispensable. Barra, better than anyone, knew that was false. GM wasn’t an empire. It was a fragile, if enormous, group of people who had to work together to survive and prosper.
These Companies Filed For Bankruptcy And Emerged Stronger Than Ever
When a company is on the brink of failure, it will often file for Chapter 11 bankruptcy protection. This allows the company to undergo a reorganization of its business affairs, debts, and assets. Sometimes businesses are successful at restructuring, while other times, they end up liquidating assets and closing up shop permanently.
Enron, WorldCom, and Lehman Brothers are some well-known examples of bankrupt companies that never came back. But there are companies that have managed to re-emerge from bankruptcy in better shape than before they went bust. These spectacular comebacks are from companies that either went bankrupt or came nail-bitingly close to doing so.
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The Legacy Of General Motors
General Motors was established in 1908, and grew steadily over the next twenty years. There were a number of factors that led to GM becoming one of the largest auto-manufacturers in the world:
GM was a spectacular company that grew through the years. Its pride in innovation helped it grow significantly through its inception, to the 1970s. However, this golden era couldnt last forever. GM made a number of mistakes over the next three decades that contributed to its eventual bankruptcy.
Why Was Chryslers Bailout Spared
Looking back, the bailout of Chrysler was an important milestone in U.S. history. It came at a time when the Cold War was at its height and the perceived economic decline of the U.S. was in full force. For many, the fall of an American icon would have led the country down a path of economic hardship that would be hard to break. However, there were many other reasons why Washington refused to allow this giant to disappear:
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Reasons Gm Is Headed To Bankruptcy
DETROIT — If just one big mistake had brought General Motors gm to its knees, maybe it could have been fixed and averted its march into bankruptcy court Monday.
But what put the huge company it once sold more than half the cars in the U.S. market and now controls less than 20% in such a hole was a series of missteps, an inability to change lanes quickly when the market or government veered and a heaping dose of bad luck.
“If there was one decision that was the lynchpin it would be easier to fix,” says Laura Marcero, a restructuring expert at Grant Thornton. “But these are systemic problems pervasive in the industry for decades.”
Now, GM is operating on $20 billion in government aid and will need billions more to reorganize. Over the weekend, GM put final pieces in place for a filing: a cost-cutting labor deal got union approval the U.S. and Germany brokered the sale of its European Opel unit to Canadian parts maker Magna and more than half its bondholders agreed to a deal to cut its debt.
Some would argue GM got here mostly because the sales-killing recession came just as it was about to turn around. “This has nothing to do with the management of the company over the years,” says David Cole, chairman of the Center for Automotive Research. “When you take sales down to Depression-era levels in a high-fixed-cost industry like this, it’s a killer.”
Still, GM made some key missteps that hastened its decline. Here are seven of the biggest:
4. Selling control of GMAC
Reorganizing For A New Future
The United States created a plan to help reorganize General Motors under Chapter 11. The new company, General Motors Company LLC, is entirely separate from the original General Motors. A variety of changes have been made to the structure of the company to ensure that it will be more successful in the future:
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The General Motors Bankruptcy Plan
Details of the government’s involvement in, and approval of, GM’s bankruptcy plan, , and technically, GM’s management), that were submitted to the Bankruptcy Court for approval were the determining factors deciding whether GM would be forced to liquidate, or allowed to file under Chapter 11 terms and emerge from the filings as a new company – to continue in business.
But in fact, it was a completely new process that the bankruptcy courts had never dealt with before – a government-subsidized reorganization plan that the court could only tinker with, and then rubber-stamp its approval.
General Motors Chapter 11 Reorganization
The 2009 General Motors Chapter 11 sale of the assets of automobile manufacturer General Motors and some of its subsidiaries was implemented through Chapter 11, Title 11, United States Code in the United States bankruptcy court for the Southern District of New York. The United States government-endorsed sale enabled the NGMCO Inc. to purchase the continuing operational assets of the old GM.Normal operations, including employee compensation, warranties, and other customer services were uninterrupted during the bankruptcy proceedings.Operations outside of the United States were not included in the court filing.
The company received $33 billion in debtor-in-possession financing to complete the process. GM filed for Chapter 11 reorganization in the Manhattan New York federal bankruptcy court on June 1, 2009, at approximately 8:00 am EDT. June 1, 2009, was the deadline to supply an acceptable viability plan to the U.S. Treasury. The filing reported US$82.29 billion in assets and US$172.81 billion in debt.
After the Chapter 11 filing, effective Monday, June 8, 2009, GM was removed from the Dow Jones Industrial Average and replaced by Cisco Systems. From Tuesday June 2, old GM stock has traded Over the Counter , initially under the symbol GMGMQ and subsequently under the symbol MTLQQ.
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Some Generally Excepted Tarp Fund Bailout Numbers
- $49.5 Billion – Conservative agreement of total TARP funds loaned or given to GM
- $30.1 Billion – Government purchase of GM stock – GM did not have enough financing to support a re-organization plan a bankruptcy court could accept, , so to get the money, the U.S. Government gave GM $30.1 billion dollars in exchange for 60% ownership of the New GM company
- *note: many sources add this to the TARP GM loans amounts to arrive at a total of taxpayer-funded loans to the GM bailout – to come up with the big $77 or $81 billion dollar numbers, but this is not correct, the $30.1 billion is not a loan that can be repaid – it can only be recovered through the sale of the government’s interest in GM ownership.
This explanation isn’t intended to detail the timeline or trail of TARP funds to GM, there are other sources for those details. The only purpose here was to paint a general image that it is BIG Money – regardless of the exact amount. As mentioned, the $49.5 billion is the conservative number that GM and the government acknowledge.
Chrysler ‘test Run’ Gives Us Hope For A Repeat Performance
DETROIT/WASHINGTON — The decision to push General Motors into a fast-track bankruptcy and revive the failed American industrial icon with unprecedented federal funding and oversight marks a huge gamble for the Obama administration
President Barack Obama expressed confidence Monday that GM could emerge quickly from bankruptcy, saying the government had been thrust into a reluctant position as controlling shareholder while agreeing to provide $30 billion in additional taxpayer funds for restructuring.
Our goal is to get GM back on its feet, take a hands-off approach and get out quickly, Obama said.
He spoke a day after a federal bankruptcy judge approved the sale of substantially all of Chrysler LLCs assets to a group led by Italys Fiat S.p.A., bolstering the governments confidence in its high-stakes efforts to save two of the nations automakers. Obama said Chrysler may emerge from its Chapter 11 proceedings within days.
Chryslers bankruptcy, also financed by the U.S. Treasury, has been widely seen as a test run for the much bigger and more complex reorganization of GM.
The administrations plan for GM centers on a quick-sale process that would allow a much smaller company to emerge from court protection within 60 to 90 days.
In bankruptcy, GM will be divided in two: a leaner New GM and an Old GM — which will include excess plants and equipment that will eventually be liquidated under court protection.
Bankruptcy data for General Motors and U.S.
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