

How General Motors Was Really Saved - Shivetya
http://www.forbes.com/sites/danbigman/2013/10/30/how-general-motors-was-really-saved-the-untold-true-story-of-the-most-important-bankruptcy-in-u-s-history/

======
davideous
Summary:

The author of this article came out of partial retirement to construct a novel
bankruptcy plan for GM, which is what GM used.

The normal route would be for GM to file bankruptcy and have the court approve
a restructuring. This restructuring plan would be fought over by creditors,
and GM would be "dead in the water" while this was happening and loose market
share. The author asserts this would have been a death blow to the reorganized
GM.

The novel plan was to split GM into two companies, "OldCo" and "NewCo," either
before or after filing for bankruptcy (the article was not very clear). NewCo
would emerge from the bankruptcy as the new GM, and OldCo would be liquidated.
The bankruptcy process would complete faster as the restructuring plan was
already "set" by splitting into two companies.

There was internal debate in GM about this plan. A more standard bankruptcy
was also being prepared. The Obama administration, in providing funding to GM,
decided for the NewCo/OldCo plan and also ousted the CEO of GM.

This article is written by the author of the NewCo/OldCo plan, so it may be
self-serving.

The article spends more time describing the process of and drama around
creating the plan than the details of the actual plan.

[edit for clarity and typos]

~~~
mynameishere
Thanks for the summary. As soon as I realized this was written by the guy who
came up with the plan, with him trumpeting his great success, I stopped
reading. Was there anything about how bondholders were robbed to pay off the
union?

Also:

 _General Motors, the most important industrial company_

What the hell, Forbes? Good god, if GM hadn't existed, _nothing would have
changed_. Ford or Chrysler or AMC or whoever would have filled their shoes.
Big deal.

~~~
wikiburner
_> Was there anything about how bondholders were robbed to pay off the union?_

I'm genuinely confused as to how this went unchallenged. Even if the
bankruptcy of G.M. resulted in pennies on the dollar, those pennies still
belonged to the share and debt holders, rather than their being arbitrarily
wiped out by the government in order to benefit the union.

Were there/Are there any lawsuits to address this?

~~~
skybrian
In a bankruptcy the shareholders get nothing. Debt comes before equity and the
union is one of the creditors.

(But in any case, the union is hardly the only beneficiary of keeping GM
afloat; it's not zero-sum.)

~~~
wikiburner
Yep, misspoke, just debt holders. Shareholders _usually_ receive nothing.

Regarding societal benefit of the bailout, even with imminent domain, the
government has to give the owners fair compensation. It can't simply step in
and disregard rule of law and pick and choose its preferred winners.

Keeping GM afloat in no way excuses the preferential treatment. The unions
hardly took a haircut at all compared to the bondholders:

[http://online.wsj.com/news/articles/SB1000142405270230376810...](http://online.wsj.com/news/articles/SB10001424052702303768104577462650268680454)

[http://online.wsj.com/news/articles/SB124105303238271343](http://online.wsj.com/news/articles/SB124105303238271343)

------
rl3
Chrysler and General Motors conveniently eschewed existing product liability
litigation during this time period, many of the cases involving plaintiffs
whom were seriously injured for life.[1]

GM also tried and failed to shed all future product liability claims involving
vehicles manufactured prior to the 2009 restructuring.[2]

Product liability cases in progress at the time were effectively wiped out;
the entity being litigated against ("Old GM") suddenly became an empty shell
("Motors Liquidation Company"), and most claims were settled for pennies on
the dollar.

Plaintiffs who wished to proceed with litigation against MLC despite this
would have had their cases moved from their current jurisdiction
(overwhelmingly state court) into the same jurisdiction as the bankruptcy
proceedings (federal district court in New York). This made proceeding with
litigation essentially futile: the introduction of prohibitive travel
expenses, transition to the wildly different procedural and evidentiary
standards of federal court, and an award sum (if any) a fraction of the
original claim amount.

The best and perhaps most ironic part, however, was that the plaintiffs who
did proceed would have the comfort of knowing that the defense attorneys
assigned to destroy what remained of them and their product liability tort
would be directly financed by the U.S. Department of the Treasury.

If anyone wants further reading, I recommend Steve Jakubowski's blog posts on
the subject. They mostly chronicle his arguments before the bankruptcy court
concerning successorship liability issues at the time, but he also does a
really good job of putting a human face on the matter.[3]

1\.
[http://money.cnn.com/2009/06/15/news/companies/auto_bankrupt...](http://money.cnn.com/2009/06/15/news/companies/auto_bankruptcy_plaintiffs/)

2\. [http://www.marketwatch.com/story/gm-to-cover-future-
liabilit...](http://www.marketwatch.com/story/gm-to-cover-future-liability-
claims-reports)

3\.
[http://www.bankruptcylitigationblog.com/archives/bankruptcy-...](http://www.bankruptcylitigationblog.com/archives/bankruptcy-
in-the-news-voyage-of-the-damned-the-gm-tort-claimants-opening-appellate-
brief-brother-can-you-spare-a-quarter.html)

------
bcoates
Huh, and I though GM was saved by the government giving them $50 billon
dollars to play with, of which they managed to lose $10 billion. I guess the
success criteria was that they didn't lose all of it?

[http://www.nbcnews.com/business/u-s-reports-9-7-billion-
loss...](http://www.nbcnews.com/business/u-s-reports-9-7-billion-loss-general-
motors-bailout-8C11490659)

~~~
parasubvert
GM did not lose that money, that was the money lost on government stock sales.

The government chose to sell its shares underwater for political reasons.
Americans, unlike Europeans and Canadians, don't long tolerate partially
nationalized companies, even if it makes them money.

The $10b loss is probably a lot smaller than the impact on the deficit if GM
were allowed to go bankrupt. Keep in mind that most US deficits these past few
years were not due to the stimulus, TARP, or any Obama legislation - they were
due to the automatic stabilizers (medicaid, EI, food stamps, etc.) that have
been law for decades, and skyrocketed with the financial crisis due to the
vast numbers of people (over 1.5% of the entire US population) dropping out of
the labour force between late 2008 and late 2009. It's up to 2.8% now.

~~~
yetanotherphd
there is no such thing as "underwater" when it comes to stocks. In a big
liquid market, like the stock market for big companies, the price reflects the
true value.

~~~
lotharbot
Even for big companies, the stock market isn't always liquid enough over the
short term to reflect the true value. In March of 2008, a lot of big company
stocks were selling for well under their expected long-term value because
there simply weren't enough buyers with enough liquidity to keep up with the
selling frenzy.

Temporary spikes in supply (or demand) can drastically distort the value of
any asset.

[EDIT: clarity]

~~~
yetanotherphd
But that was at the height of the financial crisis, that doesn't apply to gm
stock today

~~~
lotharbot
It doesn't apply to the amount of gm stock an individual investor might hold,
but it does apply to the amount of gm stock the government holds. Putting 26%
of the company on the market would qualify as a spike in supply, and would
distort the price.

~~~
yetanotherphd
I didn't see any price spike

~~~
lotharbot
I didn't say "price spike", I said "distort the price". There is no question
that the government's large stake in GM -- and their desire to unload it over
the next 6 months or so -- means that there is some degree of "oversupply" of
GM stock. Investors, whether buyers or sellers, have to factor that into their
decisions regarding GM stock.

I'm not convinced that the market for GM stock is sufficiently liquid to
mitigate that.

------
AndrewKemendo
I found a passage in this article apropos to the discussion last week about
"greatness versus family"
([https://news.ycombinator.com/item?id=6601421](https://news.ycombinator.com/item?id=6601421)):

>But for the past eight years I had backed away from business and my firm,
AlixPartners, to care for my daughters after the death of my wife. I was
essentially “retired.” But GM’s enveloping crisis and my friendship with
Wagoner would bring me out.

I mentioned then, what I reinforce now: you will not be remembered widely
(positively) for how good of a parent/husband you are. What Forbes published
was not this man's struggle with grief and selfless devotion to his daughters.
Alix did not write about how great of a father he was or how big of an impact
he made on his children and family. The most important thing that Mr. Alix did
was literally re-prioritize his time away from his grieving family toward the
re-structuring of a massive organization.

If and when the time comes to choose between time with your family and time
creating your impact on the wider world, forgoing the latter in order to do
the former will ensure that your legacy dies only a few years after you do.

~~~
recuter
Nobody reads Forbes. Jay Alix is not widely known now and will return to
obscurity within his life time, you have funny ideas about legacy.

------
cromwellian
Seems to rest on the notion of Obama "taking full credit". I don't think
anyone believes Obama parachuted into GM to lead it like George Washington
across the Potomac. Rather, they were extended a loan to give them time to
turn around. Without executing on a plan, money alone would not have rescued
the company, but without the government loan, they would have been doomed as
no one in the private sector was capable of raising or loaning tens of
billions in cash in 2008.

I'm guessing this will form a future right wing talking point in the redstate
blogosphere, again, trying to rewrite Obama's term in office and diminish each
one of his policy achievements. So now the talking point will be "It wasn't
the government loan, it was these awesome plans hatched by the private
sector." After all, we can't have any evidence of government policies
succeeding.

It's a kind of white-washing, call it 'private washing', to downplay or
trivialize any involvement of the public sector in the success of the private.

------
mattzito
Interesting article, but it seems somewhat disingenuous/self-serving/self-
aggrandizing to have the architect of the final plan write the article. I'd
much rather see a professional journalist interview and analyze the situation,
e.g. the book "Game Change".

~~~
sxcurry
Agree. Also, be sure to consider the source - Forbes. Hardly the bastion of
unbiased journalism.

------
eftpotrm
Exec summary: my plan to hide assets from creditors and prevent GM from
honestly meeting is liabilities was the only thing that saved the company. The
government's enormous pile of cash on absurdly favourable terms and without
which it wouldn't have worked wasn't actually that significant.

Hmmmmmmmmm.

------
pwg
Single page link for those who don't want to read an article that is broken
into five pages:

[http://www.forbes.com/sites/danbigman/2013/10/30/how-
general...](http://www.forbes.com/sites/danbigman/2013/10/30/how-general-
motors-was-really-saved-the-untold-true-story-of-the-most-important-
bankruptcy-in-u-s-history/print/)

------
chiph
> As a consultant with expertise in restructurings and turnarounds, I had
> completed a half-dozen assignments at GM over the years.

If he did that many restructurings at GM, something was seriously wrong with
their fundamentals. The question is: Did those things change after the
bankruptcy? I would hope that GM isn't still on the same path -- so far as
their product offerings, they don't seem to be flailing around as much as they
used to.

------
forgottenpaswrd
I thought they were saved by giving them $50 billion of the people of the US
so they could invest in stock and then using the printing machine(Fed's QE) to
make stock market fly.

Basically a transfer of wealth from the people to mega corporations,
orchestrated by politicians.

Now the mega corporation is doing as badly as before, but it will take a while
to waste such a big amount of wealth.

------
patrickg_zill
GM produces poor quality vehicles and had poor management. They deserved to
die but did not.

~~~
parasubvert
That's drastically oversimplifying things. GM vehicles are not uniformly poor
quality (GMC trucks retain very good ratings, for example, as do many
Chevrolets).

GM was illiquid due to the 2008 financial crisis, that set off a downward
spiral of cash flow.

Letting GM die would have had massive systemic effects on the economy:
suppliers and dependent businesses would have also gone bankrupt, and an
estimated half million people would have been out of work. The combined lost
GDP and higher unemployment, would have led to a much more severe downturn and
a much higher federal deficit than the $10b lost on the bailout due to the
automatic stabilizers for UI, food stamps, and medicaid, along with the
reduced taxation revenue of individuals.

None of this would have made sense of GM were not a going concern (i.e. it
couldn't make money anymore). Clearly it could, but it had massive issues that
made it fragile. Now it is less fragile.

The government probably could have tried to hold onto some of the 60% of
shares it owned for a profit, but politically, unlike Canadians or Europeans,
a partially nationalized firm is not something Americans enjoy ("Government
Motors"), so it made sense to take a loss early to save the political face.

~~~
bdcravens
GM has had problems well before 2008. Perhaps that put them over the edge, but
I recall reading articles around 2005 and 2006 talking about the performance
of companies like Toyota and Ford versus GM.

~~~
parasubvert
No doubt they had problems.

My point was that they weren't necessarily "this company should be liquidated"
problems, they were "this company needs to restructure its debt obligations
and rethink its strategy" problems.

GM retains its position as the world's #2 car maker by volume, behind Toyota,
and is profitable again. It's going to die some day, but probably has a lot of
life (and thus economic contribution) left in it. Sometimes governments step
in to prevent the "creative destruction" of the market to destroy its own
citizenry. The open question is where the limit should be.

~~~
flomo
GM almost went under in the 1990s as well, it was a long time coming.

The modern GM that survived has only superficial resemblance to the GM of old,
which not only had 50% domestic auto marketshare, but also built everything
from trains to refrigerators to satellites. The company that went bankrupt was
the one left holding the "legacy costs" bag.

------
Maven911
I honestly dont understand what was the restructuring genius that he is self-
alluding too. To me, he just happens to be in a lucky spot to be considered a
restructuring expert without any real turnaround skills.

------
zik
TL;DR anyone?

~~~
foobarian
Richard Crenna shows up at a retired corporate consultant's cabin and implores
him to return help save GM. He does so using an innovative restructuring which
the GM board chooses at the very last minute. Obama calls the GM CEO a
failure, but in fact the guy is awesome. When it's all over the consultant
returns to his cabin and broods out the rest of his days.

------
eriksank
Ok. So, they've managed to "save" that dinosaur from an instant death,
delaying the inevitable to a next, future round of corporate heroics. What
about all the smaller companies that had to dump their staff on the streets
and did not get massive bailouts for their "salvation"?

