Jay Alix Now Takes Credit for GM Bailout

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.

Ruggles Writes: Alix IS highly respected, or at least he has been. The country of Japan once paid him huge dollars to analyze their own economic system. But I am reading this article with a grain of sale. It seems to me to be somewhat self serving for a Johnny Come Lately to come in 5 years after the fact to take a large measure of credit. I'll try to follow up this post with documentation either for or against.

Steve Rattner mentions Alix Partners only once, on page 197 of his book "Overhaul." Regarding resentment of Team Auto's bankruptcy specialist Harry Wilson, who rubbed many at GM the wrong way, Rattner writes in the book:

"To hear Harry and his even younger aides imply that the company was slow, inept, and out of date was insulting, to put it mildly. "Who does this little prick think he is?" they would sometimes mutter after a meeting with Harry. But not everyone connected with GM responded this way. Longtime advisers from such firms as Morgan Stanley, Alix Partners, and Evercore generally nodded in agreement with Team Auto's requests and "prescriptions," which often echoed their own past recomendations to their reluctant client."

I had been told by numerous sources that Wagoner threatened to fire any GM employee who even whispered the word bankruptcy. Here's Alix saying the Section 363 sales was his idea, presented to Wagoner on December 8, 2008, days before the Bush Administration extended the bridge loans that allowed GM to survive until the Obama Administration came in to inherit the mess. It IS clear, however, that there had been many steps taken by Wagoner and his executive team leading up to the bankruptcy that helped facilitate the unprecedented 40 day walk through Chapter 11 bankruptcy court. Regardless, after presiding over about $80 billion in losses, Wagoner left GM in March 2009 with a substantial "Golden Parachute." Sources differ on whether he was fired by the President, Larry Summers, or Steve Rattner, or just offered to step down and had his offer accepted. His record at GM was mixed at best.

Forbes: October 2013

By Jay Alix

....

In the popular version of the company’s turnaround story, as GM teetered toward liquidation in 2009, an Obama-appointed SWAT team, led by financier Steven Rattner, swept in and hatched a radical plan: Through a novel use of the bankruptcy code they would save the company by segregating and spinning out its valuable assets, while Washington furnished billions in taxpayer funds to make sure the company was viable.

...

GM’s extraordinary turnaround began long before Wagoner went to Washington in search of a massive loan to keep GM alive. My involvement in that story began in GM’s darkest days, five years ago on Sunday, Nov. 23, 2008, when I visited Wagoner at his home....

“Filing bankruptcy may be inevitable, Rick. But it doesn’t have to be a company-killing bankruptcy,” I said. “I think we can create a unique strategy that allows GM to survive bankruptcy.” .... I proposed that GM split into two very separate parts before filing: “NewCo,” a new company with a clean balance sheet, taking on GM’s best brands and operations; and “OldCo,” the leftover GM with most of the liabilities. ...we would use Bankruptcy Code Section 363, which allows a company to sell assets under a court-approved sale. Typically, 363 is used to sell specific assets, from a chair and desk to a factory or division, but not the entire stand-alone company. Under this strategy GM could postpone filing a plan of reorganization and a disclosure statement, which consume months and fuel a blizzard of litigation while market share and enterprise value bleed away.

... I volunteered to help GM on a pro bono basis. But what I could never anticipate was how deep and strong the opposition to my plan would ultimately be.

On Tuesday, Dec. 2, I pulled into GM’s Detroit headquarters at 7 a.m. after most of the company’s executives had already arrived for work. I was given a small cubicle and conference room on the 38th floor, a spacious but empty place that held GM’s corporate boardroom and a warren of cubicles reserved for visiting executives and board members.

Spending 18 hours a day digging through the numbers in GM’s filings, I began working in greater detail on the outlines of the plan and making some assumptions on what assets should be transferred to NewCo and what would stay in OldCo, which I dubbed Motors Liquidation. There were thousands of crucial questions that had to be asked and answered with management: Which brands and factories would survive? Which ones would the company have to give up? What would be the endgame strategy? What would be the enterprise value of NewCo? The liquidation value of OldCo?

...three alternative plans. First, they hoped to avoid bankruptcy altogether, believing the government would provide enough funding to bring GM through the crisis. At least two cabinet members in the Bush Administration and others had provided assurances to Rick and board members that government help would be forthcoming.

Second was a “prepackaged” bankruptcy plan being developed by general counsel Robert Osborne with Harvey R. Miller, the dean of the bankruptcy bar and senior partner at Weil, Gotshal & Manges. Under this plan, GM would prepare a reorganization in cooperation with its bond creditors that would take effect once the company went into a Chapter 11 bankruptcy. The goal of a so-called prepack is to shorten and simplify the bankruptcy process....

And third was the NewCo plan, based on years of experience at AlixPartners, where we had a major role in 50 of the 180 largest bankruptcies over $1 billion in the past 15 years. GM had also retained Martin Bienenstock, the restructuring and corporate governance leader from Dewey & LeBoeuf, to help develop the NewCo plan as well....

From my perspective Wagoner had been unfairly treated by many politicians and the media. Since taking over as CEO in 2000, working closely with Fritz and vice chairman Bob Lutz, Rick orchestrated large, dramatic changes at the company. They closed GM’s quality, productivity and fuel-economy gaps with the world’s best automakers, winning numerous car and truck awards. They built a highly profitable business in China, the world’s biggest potential car market. They reduced the company’s workforce by 143,000 employees, to 243,000. They reached a historic agreement with the UAW that cut in half hourly pay for new employees and significantly scaled back the traditional retiree benefit packages that had been crippling the company, while also funding over $100 billion in unfunded retiree obligations. And he was able to accomplish all these changes without causing massive disruptions among GM’s dealers or major strikes with the unions.

Ultimately, those structural changes positioned the company not only to survive but also to bring about the extraordinary turnaround. But now, with the economy and the company in free fall, all of that hard work seemed to be forgotten.

....

“Rick, do not resign ... until we get the three things...

“We have to get government funding of $40 billion to $50 billion. Plus, we need an agreement with the government and GM’s board to do the NewCo plan. And we must put a qualified successor in place. It must be Fritz and not some government guy. It’s going to be painful for you, but you’ve got to stay on the horse until we get all three.”

When we gathered for a telephonic board meeting on Dec. 15, the mood was urgent, the tension high. Only two weeks after arriving at GM I was about to present the plan to the board of directors in a conference room outside Wagoner’s office. Also on the phone were the company’s lawyers and investment bankers.

... we were just two weeks away from running out of cash.

Miller [and] ... Other attorneys chimed in, claiming the plan oversimplified the situation and there would be major problems with it. Yet another added that this would not be viewed well by the court and doubted any judge would allow it. Collectively, they characterized it as a long shot, discouraging the directors .... Unbeknownst to me [inside counsel] had previously proposed the idea to GM’s board, naively believing GM could complete a prepack bankruptcy in 30 days....

... Kent Kresa, the former CEO of Northrop Grumman and a GM board member since 2003 [spoke:]

“I understand this has some risk attached to it, but we’re in a very risky state right now,” he said. “And I understand it may even be unusual and unprecedented. But it’s certainly creative, and quite frankly, it’s the most innovative idea we’ve heard so far that has real potential in it. I think it deserves further consideration and development.”

Rick then addressed another lawyer on the call, Martin Bienenstock.

“Well, I’ve actually studied the problem, too, and there’s a way for this to work,” said Bienenstock. “Almost all bankruptcies are unique and the Code does allow for the transfer of assets. I can’t imagine a judge taking on this problem and not wanting to solve it. We’ve done a preliminary analysis, and it’s not as crazy as it sounds. It’s unique and compelling.”

“Okay, we’ve heard both sides of it,” Rick said after others spoke, smartly bringing the debate to a reasonable close. “I suggest we continue working to develop both the prepack plan and the NewCo option, while seeking the funding to avoid Chapter 11 if at all possible.”

The meeting adjourned without a vote....the next weeks I worked closely with Bienenstock, assistant general counsel Mike Millikin, Al Koch of AlixPartners and GM senior vice president John Smith on the NewCo plan. We huddled dozens of times with Wagoner and Henderson to work out which brands GM would ultimately have to give up (Hummer, Saturn, Saab and Pontiac) and which ones it would keep (Chevrolet, Cadillac, GMC and Buick). Informed debate and deep analysis of structural costs led to decisions about projects, factories, brands and countries.

On Sunday afternoon, Mar. 29, Wagoner called me. It was a call I had hoped would never come–but here it was. ...

Wagoner told me Henderson would be named CEO. “What about the bankruptcy?” I asked. “They’re enamored with the 363 NewCo plan. They seem bound and determined to make us file Chapter 11 and do NewCo. … This is really tough,” he said.

“I’m so sorry,” I said, pausing, “but … you got the money. They’re doing the NewCo plan, and Fritz is your successor. … You’ve succeeded. You got the three things.” ....

.... The strategy I pitched to Wagoner in his living room four and a half months earlier was the plan chosen by Team Auto in a meeting on Apr. 3, 2009 in Washington. Treasury agreed to fully fund NewCo with equity, and thus it became the chosen path to save the company.

[...and more on subsequent events]

Mike Smitka: As per Ruggles, this is fascinating, though as Ruggles points out none of the various insider accounts mention Alix as the source of the idea, though (I checked) contemporary news accounts do credit him and the others he mentions as outside advisors to GM. My suspicion is that the Task Force had staff who independently considered §363 – a quick news database search found lots of references in fall 2008 to §363 bankruptcies of this sort, including a panel at a bankruptcy lawyer conference labeling it a "hot topic". Similarly, on 20 February 2009 the WSJ blog [Deal Journal] posted of a Heidi N Moore interview with Mark Roe of Harvard Law School suggesting it as the obvious approach. In any case, both their performance in public and Rattner's account of interactions in private cast doubt on the ability of GM's finance operation to pull together details, and the sub-text I read in the Alix story is that until the very end GM's board remained fixated on unrealistic scenarios. Alix however focuses on Wagoner and does not point out that most of the board was replaced. But the latter deserves a post of its own, moribund boards of moribund companies. Chrysler under Iaccoca, GM under Roger Smith, Nissan for the 20 years prior to its acquisition by Renault...there are all too many examples.

Taking the Taxpayers out of General Motors

Ruggles – 12/26/2012

What many stockholders and taxpayers had feared, had Mitt Romney won the recent Presidential election, is coming true anyway. The taxpayers (U. S. Treasury) are quickly being taken out of their remaining General Motors ownership BEFORE the positive impact of the many new and exciting redesigned GM products to be introduced in the next few months can have the chance to boost retained earnings and share price. Waiting another 18 to 24 months could reduce or eliminate the loss that will be taken on the original taxpayer investment.

Having recently arranged for an $11 billion line of credit, and with about $41 billion in available cash and credit, GM is buying the stock back directly from the U.S. Treasury. At least buying back stock directly from Treasury is probably much better than dumping the stock on the open market, thereby diluting the share value and causing the stock price to drop even further. At least that is this stockholder’s point of view.

“Car Czar” Steve Rattner describes the buy back as “welcome news.” I’m not so sure. He goes on to write in the New York Times:

“For General Motors, the separation will conclusively remove the appellation of “Government Motors,” a stigma that the Company had argued affected the buying decisions of a meaningful segment of consumers.”

The divorce will ultimately also liberate G.M. from a number of government-imposed restrictions, importantly including those relating to executive compensation. These restrictions adversely affected G.M.’s ability to recruit and retain talent. Now, compensation decisions will be made by the company’s board of directors, just as they are in every other public company in America.”

Steven Rattner

As an observation, once GM rids itself of taxpayer ownership, GM execs can also resume the use of corporate jets. And we know how car business execs hate to fly commercial.

Others might say, GM has traded the appellation of “Government Motors” for another appellation, “The Car Company on which the taxpayers lost billions.” Rattner himself estimates the loss will come in at about $14 billion. Other estimates are higher.

The taxpayers should pay $14 - $20 billion so GM execs can go back to their spendthrift ways, when waiting 18 months or so would have given the stock the opportunity to rebound based on the recovering economy and an almost complete makeover of their product line? Not in my world. While this writer is NOT a professional stock picker, many folks look to Forbes for financial advice. A December 10 article in Forbes recommended “Roll with GM for 2013,” and gave compelling reasons why.

Others investment experts have weighed in on the subject and most have recommended buying GM stock for 2013, despite the attempt from some naysayers to float a rumor predicting a near term bankruptcy from GM. Of course, these columns appeared before the stock buyback announcement. And the naysayers ignored facts, while misinterpreting others, to create their false assertions.

Ex GM CEO Ed Whitacre was shown the door after he claimed in a national television commercial that GM had repaid its government loans. This was word parsing at its worst, as GM had only returned unused loans it didn’t need. The commercial implied, even though it did not specifically state, that GM was no longer in hock to the government and U.S. taxpayers, which was certainly not true. Some might argue that GM is using tax payer money to buy back taxpayer stock, a move similar to the claim that sank Whitacre.

What would another 18 to 24 months hurt? The President won his second term. What can the political pressure be? Why not give the stock the chance to improve? Is GM actually claiming that the cap on compensation is why they have had high velocity executive churn since the restructuring?

Has the government been “heavy handed” in its ownerships of GM, except for the jets and executive compensation? Recalling the previous bailout of Chrysler in the 1980s, Lee Iacocca chafed under the government supervision he had to live with during that era, ESPECIALLY the one that kept his jet grounded. In addition, the Feds were pushing Chrysler to divest itself of its truck division. All it took was for Ronald Reagan to make a crack to Iacocca at a Statue of Liberty restoration event about how Iacocca should be grateful that Carter was in the White House, and not Reagan, when the bailout was approved and signed, and the Chrysler CEO was more than incensed. He took a huge risk and paid the Feds off early, forgoing over $300 million in interest savings to do so. Iacocca put Chrysler at risk from a cash position perspective, even though the gamble ultimately paid off, but he saved the truck division, which has been the largest source of profits for Chrysler since. And he got his jet back and stuck it to Reagan. So is it ego or legitimate business considerations driving this current GM stock buyback move?

More Rattner:

“In a perfect world, I would not be a seller of G.M. stock at this moment. For one thing, the company is still completing the reworking of its sluggish management processes in order to achieve faster and better decisions and lower costs.”

For another, G.M.’s financial problems slowed its development of new products during 2008 and 2009. Now, a passel of shiny new models offering great promise is about to hit showrooms.”

And in my view, G.M. stock remains undervalued, trading at about 7 times its projected 2013 earnings, compared with nearly 13 for the stock market as whole.”

I think the move is driven by GM ego and arrogance, a really bad sign, and is NOT in the best interests of the U.S. taxpayer. This does not change the fact that while the auto sector restructuring was not conceived and executed perfectly, on balance what was accomplished will be considered a feat by economic historians. The cost to have NOT done the restructuring is incalculable, and most certainly many times more costly than a measly $20 billion. Depression or “moral hazard?” That was the choice. And the “perfect can’t be the enemy of the good.” In my mind, this premature stock buyback adds unnecessary tarnish to an otherwise laudatory endeavor.

Will GM Again Go Bankrupt?

...there's not a shred of data to support BK Round II...

I've received an email making the rounds claiming General Motors is destined for bankruptcy before the end of Obama II. I've now heard the same pronouncement from several other directions. However, just because someone thinks that government support during GM's bankruptcy process was wrong does not mean it hasn't worked. I won't address any specific claim, in part because none that I have encountered looked at GM's sales data, much less perused their financial reports. It is though appropriate to ask what leads a firm towards bankruptcy, and whether there's evidence GM is heading that way.

Bankruptcy 101:Firms go bankrupt because they run out of cash.

Companies lose money all the time; they may even, temporarily or otherwise, be in a position where they're unable to pay off their creditors. But as long as they can continue to meet payroll and reimburse suppliers and contractors, they can stay in business. For a company to go bankrupt, it must run out of cash. That could be due to chance events that catch firms short, as when the sudden collapse of Lehman undermined liquidity across the financial system. It can happen because a firm, while profitable, expands too fast and has bills come due that it can't pay because its customers have yet to pay. Most often, of course, it's a result of cumulative losses that impair a firm's ability to borrow, and eventually the losses drain it of cash. Once it runs out, it has no option but to file for Chapter 11. It then needs put together a restructuring plan and to find lenders to provide cash in the interim. Failing that, a firm faces dissolution, Chapter 7, when it simply (well, for a large firm not so simply) shuts downs and a trustee then liquidates anything that might have value.

In GM's case it had a core business that appeared sustainable: new car and truck models in the pipeline, factories that were actually high in productivity. It also had fundamentally unprofitable operations, and owed too many people too much money. To survive it thus needed to shut down parts of its operations, and unload debt. But to restart the new company needed cash to pay workers and suppliers. As it happened, the 2008-9 financial crisis meant neither existing bondholders nor investment banks were willing to fight for a piece of the new GM; risk finance wasn't available on any terms. Only the government proved willing and able to provide the substantial working capital – "DIP" financing – GM required. That was what made GM's bankruptcy process unusual: with only one party involved, negotiating a speedy exit from bankruptcy took weeks, not years.

So that leads to one fundamental question: will GM run out of cash in the near term? The answer comes in two parts:

1. is GM cashflow positive?
2. does GM have access to (undrawn) credit lines?

Of course GM may face longer term issues that undermine cashflow and render its credit lines inadequate. The natural followup questions are thus:

1. is GM profitable?
2. are they doing well in their two largest markets, that is, does their core business seem to be faring well?
3. are their non-core businesses doing so poorly elsewhere as to threaten corporate viability?
4. are there other red flags?

First the main points:

1. is GM cashflow positive?
   Companies go bankrupt not because they lose money but because they run out of cash. That was what happened in Spring 2009 (and was also why GM needed new money – additional loans – to keep operating). GM is no longer running through cash, it is adding to cash. In 2012Q3 it had +$3.1 billion in net cash flow and +$1.2 billion in automotive free cash flow (up from 2011Q3 levels of +$1.8 bil and +$0.3 bil, respectively).
   So there's no evidence that GM has problems. Overall it has $37.5 billion in automotive liquidity, versus global revenue of $37.6 billion. Their balance sheet is healthy – that after all is a basic outcome of a successful bankruptcy.
2. does GM have access to (undrawn) credit lines?
   GM just negotiated $11 billion of additional credit lines, replacing roughly $5 billion in existing lines. They have access to twice as much liquidity in the event of another recession, and at a lower interest rate (e.g., no longer at "junk bond" rates). Remember, access to liquidity was the key differentiator between Ford and GM in 2009: Ford was pro-active, drawing down all their credit lines and mortgaging everything they owned, down to the Blue Oval, while selling of Volvo, Jaguar, Mazda and anything else that wasn't a core asset, even if it meant receiving bargain-basement prices. GM had fewer such assets, and waited too long and so couldn't draw down their credit lines. GM is determined not to get caught short again.
   Meanwhile, because it did not go through bankruptcy, Ford is still loaded with debt. Its balance sheet is much less healthy than that of GM.

Now to the subsidiary points:

1. is GM profitable?
   Yes. On an EBIT (earnings before interest and tax) basis GM earned $2.3 billion, up from $2.2 billion in 2011Q3 – despite the ongoing bloodbath among the mass-market producers in Europe. GM earned money in Asia, in Latin America, in North America and on their (presently small) finance operations. Profits were down to $1.8 billion in North America (from $2.2 billion) but remain healthy.
2. are they doing well in their two largest markets?
   Here the answer is easy: sales are up for all US brands, cars and trucks. GM is no longer a non-player in any segment. In the US market share is stable while fleet sales are down to sensible levels and used car residual values are up. Sales in China are increasing at double-digit rates in a stagnant market. They continue to invest in new capacity and new models, and (given profitability) are able to use China as a vehicle [pun intended] to launch new technologies.
   By the predicted date of bankruptcy (2016) GM will have launched 23 new models and 13 new powertrains. They will remain at the top end in fuel efficiency, something that consumers are slowly starting to realize. Of course, everyone else is launching a plethora of new models. But unlike Chrysler, new model development never came to a standstill.
3. are they faring so poorly elsewhere as to threaten corporate viability?
   Europe is bad; Opel has lost money for most of the past two decades. Of course overall sales are down roughly 20%, so at the moment everyone else is losing money there, too (except possibly VW); autos remain a high fixed-cost industry. Ford has already shuttered plants; so have various suppliers. At some point GM will decide whether they should remain in the market or exit; so far they have only slated the Bochum plant for closure, though they have cut shifts elsewhere.
4. what other red flags are there?
   Despite its bankruptcy, GM remains liable for white-collar pensions. (Thank goodness! – that would have left taxpayers with liabilities through the Pension Benefit Guarantee Corporation, yet hurt pensioneers because of the modest cap on PBGC payments. Of course we bear an indirect cost because GM's share price remains lower…) They continue to address legacy costs, in contrast to their lackadaisical approach in the pre-bankruptcy era. In particular, they just consummated a neat deal with Prudential to offer lump-sum payments to (white collar) retirees and thereby remove the drain on cash to pay pensions by turning it into a one-time payment. It's not a full solution, but it does cover 30% of white-collar retirees.
   It also continues to provide healthcare coverage to current employees (but not pre-2009 white-collar retirees). However this does not distinguish GM from any other automotive firm producing in the United States.
   One millstone around GM's neck in 2008 was its financial arm, GMAC, which had gone hand over fist into real estate lending. GMAC however is gone, with those operations moving into what is now Ally Bank. Whether Ally can implement a profitable business model or will remain a dud bank remains to be seen; if it fails, however, that will no longer affect GM. Meanwhile, banks and other financial institutions have re-entered the auto finance business, so that dealers can get "floor plan" (loans to cover their inventory) and car buyers can get loans. GM will over time rebuild an in-house financial arm, to provide a more reliable source of such financing -- GM has a strong incentive to keep lending to dealers, while banks have a history of leaving when times are tough. Of course, that means GM can charge a premium on its loans. But as long as it sticks close to its knitting – no more chasing after real estate or other financial fads – such lending operations will not threaten the rest of GM. In any case, it will take many years for these operations to grow in scale. A decade hence, when current management has retired, we could see a larger GM finance arm get caught up in a bubble. Between its smaller scale and a management determined not to get burned again, there is no risk on that front over the next 5-6 years.
   Finally, I do not know what sort of liabilities might remain if GM closes large portions of Opel. However, because the rest of the world provides healthcare coverage, legacy costs will so large as to threaten the company, in contrast to 2009, when as a group retirees were GM's biggest creditor.

To summarize, there's not a shred of evidence to support BK Round II. GM has a healthy balance sheet and positive cash flow, and strong positives in all markets outside Europe. Potential threats are too small in magnitude to undermine the overall firm. There is absolutely nothing to suggest GM is in danger, now or in the next 3-4 years.

That however does not mean that you should buy GM's stock, as opposed to its cars and tracks! I have no particular insight into whether GM's share price is high or low; an economist doesn't receive a crystal ball when they receive their PhD. Arguing that case requires doing an analysis of whether today's price adequately reflects likely profits over the next several years (if you take a "fundamental" approach) or arguing that market fads will lead to higher demand for its shares (a "psychological" approach, technical or otherwise). I'm not trained in that, and try not to opine one way or the other.

As for me, the 2013 Chevy Malibu remains on my short-list to replace a 1998 Volvo for which my mechanic has issued a "DNR" directive...at the moment I'm leaning towards the Ford C-Max hybrid, but my wife has the deciding vote.

...mike smitka...

Acknowledgments: in May 2010 my students (and I!) were treated to a lecture on this issue at Ford's headquarters by CFO Lewis Booth, who he spent 2 hours explaining how Ford itself (barely) avoided bankruptcy. "No cash = Bankruptcy" was central to how he organized that story, which I hope he will write up at some point.

Addendum: Some of this brouhaha apparently stems from a Louis Woodhill Forbes article

"General Motors Is Headed For Bankruptcy -- Again" that focuses on the evaluation of a single model, the Malibu, in Car and Driver. That article does not provide sales data on the Malibu, nor the impression of other car magazines. Having test-driven competitive models over the past couple weeks, the Malibu is by far the quietest and smoothest. Forbes (or rather Car and Driver) criticizes its rear legroom and failure to lead in mpg. If mgp were what sold cars, fine, but canvassing car lots clearly shows that's not dominant in American minds. Others have the headline (such as The Week) but in fact merely describe GM as having challenges, far short of the "bankrupt again" headline.

The Politics of the GM-Chrysler Bankruptcies

By David Ruggles

During the recent Republican debate held in Mitt Romney’s home state of Michigan, the presidential hopeful was asked about the “rescue” of General Motors and Chrysler. The premise of the moderator’s question was that since the automakers are now doing well, did Romney “regret his opposition to the rescue?” Romney answered, “The government finally followed my advice,” referencing his November 2008 op-ed in The New York Times entitled, “Let Detroit Go Bankrupt.” [Click to read the full article.]

Despite the inflammatory headline, Romney’s article was temperate and well-reasoned. Some readers might have assumed that the “bankruptcy” Romney recommended was a Chapter 7 liquidation, but that was not the case. The piece was written in the context of events of the day, in particular the Detroit Three CEOs appearing before Congress to request a “bailout.” The initial request was for $25 billion in loans or loan guarantees. That appeal later grew to $35 billion, while the total investment necessary to do the job, which has largely been repaid or secured with stock, ballooned to $81 billion.

In his op-ed, Romney stated that it would be better if the two companies in question, GM and Chrysler, were allowed to go through a “managed, pre-structured bankruptcy to allow them to restructure themselves.” Without such a restructuring, but with a “bailout,” Romney argued, the companies would continue on their current unsustainable path and would ultimately have to liquidate. “But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost,” Romney said in his piece.

Reached by telephone for this column, Steve Rattner, former chief of the Automotive Task Force, called Romney’s 2008 piece “prescient.” He praises Romney’s op-ed as “95% correct.” According to Rattner, the “Romney plan” was followed almost to the letter. The exception: there was “no debtor-in-possession financing available through private lenders, requiring the U.S. Treasury to fill that role,” he said. (Remember the financial system meltdown of 2008-9 – see the note at the bottom.)

After the “government finally took my advice” comment, though, Romney should have left it there. The Democrats seem to be trying to mischaracterize Romney’s stated position in the New York Times article by applying “liquidation” bankruptcy to Romney’s headline, instead of the reorganization he clearly recommended in the body of the column.

Even more confusing is that Romney himself currently seems to be mischaracterizing his own original position. Bloomberg writes: "In Michigan after Wednesday's Republican candidate debate, Mitt Romney defended his opposition to the government bailout that saved jobs in the tens of thousands at GM and Chrysler. (Again, see the note.) According to Romney, instead of asking the government to intervene, the companies should have entered into private sector bankruptcies immediately.”

Never one to waste an opportunity, former Michigan Gov. Jennifer Granholm, a Democrat, said in an interview with Bloomberg that “Romney's view was ‘a knife in the back’ to his home state."

Rattner, too, is puzzled. “I can’t understand how Romney can go from being so out in front of the auto company reorganizations to disavowing his almost perfect original position. In fact, GM CEO Rick Wagoner stubbornly refused to consider Chapter 11 bankruptcy for GM and had to be removed for the reorganization to go forward.”

By the time Pres. Barack Obama was inaugurated, the Bush administration had already advanced $17.4 billion in “bridge loans” from the Troubled Asset Relief Program to the two ailing automakers. Congress had turned down a “bailout” package despite Vice Pres. Dick Cheney admonishing his fellow Republicans, “Do you want to be known as the party of Hoover forever?”

Perhaps Romney is criticizing the Bush administration for the “bridge loans,” but last anyone checked, George W. Bush is not running for President again.

What is clear is that the rescue of the auto industry will be a hot topic in the upcoming 2012 elections. The President and the Democrats will be taking credit for what so far seems to be a good move, despite flaws in the “rescue’s” execution. The Republicans seem determined to claim that the “rescue” was a “bailout” and shouldn’t have been done.

In Republican frontrunner Romney’s case, he seems to be having a difficult time making up his mind what he thinks. His camp did not respond to a request for clarification of his position in advance of this column.

David Ruggles has spent his career in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the U.S. & Japan. Ruggles has been a dealer for Mercedes-Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru, and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Japan. He blogs at autosandeconomics.blogspot.com and writes regular columns for several publications.

Note: on this blog Ruggles and Smitka repeatedly examined this issue during 2008-9, arguing that, due to the interlinked nature of the supply chain, made visible in the aftershocks to the industry of the "3/11" Tohoku earthquake, the liquidation of GM would have forced suppliers and hence Toyota, Honda and the rest of manufacturing to close. Without inventory, dealers would have followed, while even repairs on existing vehicles would have become difficult because spare parts production would also have shut down. Remember, there was no private financing to handle normal Chapter 11 bankruptcy – the only alternative would have been immediate liquidation.

Car Czar Steve Rattner's New Book "Overhaul" Names Names!

David Ruggles

By David Ruggles

I've been waiting for this book since meeting Steve Rattner at a Federal Reserve conference in Detroit in May 2010. The subject of the conference was "After the Perfect Storm, Competitive Forces Shaping the Auto Industry. " Rattner gave a presentation that was largely a promotion for the book he was still working on, offering up fascinating anecdotes only an inside would be aware of, along with some juicy gossip. He also answered some questions from the attendees, which included numerous auto industry veterans, members of the press, and ex GM CEO Robert Stempel. The book is finally available and is MUST reading for anyone interested in the previously unknown details on how the auto industry bailout actually took place. I approached the book with a mixture of curiosity and skepticism due to my personal feelings about certain imperfections in the auto industry bailout, in particular the dealer terminations. I came away from the reading with a new found respect not only for the width and depth of the challenges faced by the Obama Administration's automotive task force, known as Team Auto, but a real appreciation for what they did for the country, in most cases at great personal sacrifice. In Rattner’s case, his personal attorney bill for dealing with the rigors of the vetting process cost him $400,000. The book did nothing toward mitigating my anger over the dealer terminations.

It also reinforced the importance to the nation of the Troubled Asset Relief Program (TARP), an idea proposed by Bush Administration Treasury Secretary Hank Paulson and passed by Congress after the Lehman Brothers collapse in the fall of 2008, without which it is unlikely that the auto industry bailout would have been possible.

Some unlikely heroes came to light, including President George W. Bush, Paulson, and even Vice President Dick Cheney. During the last days of the Bush Administration there was a meeting of Republican Senators who were holding up a bill in Congress proposed by the Bush Administration to bail out the U.S. auto industry, a bill which ultimately failed and forced the Bush Administration to use TARP funds to bridge the two ailing automakers over to the Obama administration. Cheney reportedly broke from his usual "laissez faire" “free market” economics stance in an unsuccessful but impassioned plea for a Congressional bailout saying, "Don't let this happen on our watch unless you want to be known as the party of Herbert Hoover forever."

George W. Bush, before taking the bold step of going against Republican Party ideologues in bridging GM and Chrysler to the new administration with TARP funds, said, “Frankly, there’s one other consideration, and that is, I feel an obligation to my successor. I feel it is good policy not to dump him a major catastrophe on his first day in office.”

Hank Paulson testifying before Congress, “Had the banks not returned or repaid their TARP money early out of fear of government involvement in their compensation practices, instead of loaning the money out to support the economy, it is probable the money to bailout GM and Chrysler wouldn’t have been available.” Paulson also made the point to the Bush Administration that, “There is no private debtor in possession financing available for either GM or Chrysler to go into Chapter 11 on their own.

The book is a chronicle of deadlines, heated and impassioned debate, personalities, “brinkmanship,” and harsh negotiations. There was serious debate among the Obama administration about just letting Chrysler go, as in the long run it was thought it was a lost cause and that letting it liquidate would help GM and Ford. At this point, Treasury Secretary Tim Geithner weighed in on the “fickle nature of public opinion. Right up until Lehman Brothers declared bankruptcy, public opinion favored letting the firm go down. In the ensuing chaos, the consensus had shifted overnight, and the government was believed to have made a terrible mistake by letting them collapse.”

It also became evident that letting Chrysler go would send a ripple throughout the supplier community causing a “run on the trade by suppliers refusing to supply parts if not paid in advance.

Called out in the book as Incompetents, Light Weights, or Obstructionists are such well known figures as: Sheila Bair, FDIC Chairman, Ray Young – GM CFO, Rick Wagner, ex GM CEO, Fritz Henderson, ex GM CEO, and a host of GM board members.

There are those called out for praise including Bob Corker, Republican Senator from Tennessee, Mark Zandi, Chief Economist for Moody’s Economy.com, and Ron Gettelfinger, Head of the United Auto Workers union.

Retired General Electric CEO Jack Welch was consulted frequently.

“Characters” include “Jimmie” Lee and Jamie Diman, of JP Morgan, Sergio Marchionne, CEO of Fiat, and, of course, Rahm Emanuel, President Obama’s Chief of Staff.

There are many unsung heroes who labored in near obscurity. Without the talent and effort of participants too numerous to list here, the bailout wouldn’t have happened. Of particular significance are Harry Wilson, Team Auto’s corporate restructuring specialist, Matt Feldman, Team Auto’s resident genius of bankruptcy law and driver of the Section 363 strategy that allowed for the speedy trips through bankruptcy court, and Brian Deese, Team Auto’s White House liaison. It was Harry Wilson who first proposed that taxpayers take an equity stake on GM to a large degree, and Chrysler to a lesser degree, to minimize the problem of sending them out into the marketplace with a huge load of debt, and the debt service that goes with it. This was probably the biggest decision, one fraught with “moral hazard,” that had to be made by the President.

The two men “driving the bus” were Larry Summers, head of the White House Counsel of Economic advisers, and Tim Geithner, Treasury Secretary, overseen by President Obama, who once asked about the U.S. automakers, “Why can’t they build a Corolla?” It must have been lost on the President that, in fact GM, and Toyota had built “Corollas” together in their joint venture Fremont CA plant that was shuttered as part of the restructuring.
Rattner doesn’t spend a lot of time on the dealer termination issue other than to emphasize that all industry experts he spoke to recommended thinning out the dealer body. I suspect the primary industry expert was Steve Girsky, a one time advisor to the UAW that was disqualified for Team Auto membership by virtue of that relationship. Girksy has been an outspoken advocate of fewer but larger dealers in the interest of efficiency, as he puts it.

Rattner also fails to mention input by the Pentagon to the Bush Administration over concern over a collapse of the country’s industrial base and how it would impact military procurement in the middle of 2 wars.

Chrysler is doing better than anyone anticipated. Both companies are exceeding the conservative projections assigned to them.

There are still issues at GM as evidenced by yet another CEO change as GM board member Dan Ackerson is taking over as CEO after Ed Whitacre “retired“ after only a few months in the job. Rattner also chronicles the ongoing conflict between the old GM board members and the new ones. The are many “players” who will be unhappy with Rattner’s revelations, which is just one good reason to read it. He must have kept writing new chapters as things have unfolded, all the way up to publication of the book. There are chapters yet to be written, but any student of politics, economics, or the auto business needs to read this book.

Rattner's "Tell All"

I have been trying to resolve a mystery for months. When it was announced that General Motors and Chrysler were terminating dealers as a part of restructuring through bankruptcy, I smelled a rat. So did many who have been around the auto business for a while. Historically it has been a practice of auto manufacturers to add sales points as a method of driving volume and market share. Were we expected to think they no longer cherish these objectives? In a complete turnaround from their histories, they asserted that closing dealerships saved money for the manufacturer. The mystery? Whose idea was it? Who imposed it? I have speculated that it was forced on GM and Chrysler by the government’s Automotive Task Force in its zeal to impose a “Toyota Throughput” model. Both the manufacturers and the Auto Task Force blame the other for the dealer terminations.

Part of the answer came at the recent Auto Finance Summit held in Las Vegas at Red Rock Hotel and Casino. One of the high points was an address to attendees by Rick Wade, a member of the Automotive Task Force. During his address, he never specifically mentioned the decision to cut dealers, but his tone indicated that he thought everyone figured that dealer terminations were necessary to make GM and Chrysler viable. He came across as an enthusiastic, bright, and well-intentioned person who was placed in a position, with the other members of the Task Force, where important decisions had to be made quickly. He was quite pleased, as am I, that GM and Chrysler have been, at least temporarily, “saved.” Before being called to serve, Wade was certainly an auto industry outsider, for better or for worse.

But the real bombshell has been Steve Rattner’s recent article in Fortune magazine, where he reveals all sorts of interesting inside information. Rattner is the now-resigned head of the Automotive Task Force during the Chrysler and GM bankruptcies, the real “car czar.” Some of the information he reveals probably should have stayed “inside” for a while out of common courtesy and discretion. In particular, he shares his personal views on GM management, and Rick Wagoner in particular, in a particularly caustic manner. He reveals the content of private conversations. In his tell-all piece he also acknowledges the challenge of dealing with the N.Y. attorney general’s investigation of his former firm, Quadrangle, while simultaneously heading up the “Team Auto,” as they called themselves. He freely admits that he and his fellow task force members knew little of the auto business.

It is true Team Auto had no real precedent to rely on and faced a critical time schedule. It made me wonder why he was selected to the post in the first place. He must not be expecting to be considered for any important positions in the future as it is unlikely that anyone would speak candidly to him knowing his penchant for being less than discreet.

The Bush administration had “bridged” GM and Chrysler over to the Obama administration with an injection of $17.4 billion in TARP funds in late December 2008. The decision to use a Section 363 bankruptcy strategy to accomplish a quick “cleansing” of liabilities through Chapter 11 has at least temporarily saved the two companies and hundreds of thousands of jobs. For this, I commend Rattner and Team Auto. If things go as planned, GM will IPO in the next couple years and buy out the government’s stock holdings. Chrysler’s situation is much more fragile and depends on Fiat more than anyone should be comfortable with. But GM and Chrysler were saved at a time when their liquidation could have touched off a catastrophic chain of events in the auto industry and the overall economy.

So what about my mystery? Who made the decision to terminate dealers? I’m not talking about shutting down Pontiac and Saturn or selling Saab and Hummer. A business case can be made to support these decisions. I’m talking about decimating the Cadillac dealer network and terminating thousands of viable GM franchises across the country. I’m talking about terminating 789 Chrysler, Dodge, and Jeep franchises.

There was a recent article in Automotive News on Jim Press, Chrysler’s now discredited and terminated co-president, which itemizes many apparent contradictions in Press’ career. I distinctly recall Press and GM CEO Fritz Henderson during the Senate committee hearings itemizing the “savings” they would realize by terminating dealers. I didn’t hear anything that smacked of the truth. It is now disclosed that Press had his own private reservations about terminating dealers. Mark LaNeve, the recently deposed head of GM sales, has stated publicly that he is worried about GM’s lack of dealer coverage and its negative impact on sales and market penetration. He expressed concern about GM making orphans of 900,000 GM owners. Then there is the quote from Joe Eberhardt, Chrysler Group’s past senior vice president for sales and marketing: “When a company loses a dealer, its overhead costs stay the same and — at least in the short term — it loses a few hundred car sales. There's no immediate payback." Carl Woodward, a longtime CPA serving auto dealers, also disputes any claims of net savings to auto manufacturers by terminating dealers. In his 6,000-word article for Fortune, Rattner took no credit for the dealer terminations. I wonder why.

published in Auto Finance News