How General Motors Was Really Saved | Hacker News Reader

How General Motors Was Really Saved

forbes.com

62 pointsShivetya44 comments

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]

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.

"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."

That's a very ignorant statement.

General Motors and Alfred Sloan had a massive impact on the way that organizations were designed and managed for over 50 years - they were the first to ever systematically design and execute a managed, decentralized organization of that magnitude.

Peter Drucker's 1946 classic "Concept of the Corporation" was the first major study of a large corporation (GM) and a deep analysis of the implications that the new "society of organizations" would have on our culture, politics, and lives. Sloan's "My Years at General Motors" in 1964 was a management treatise that was blueprint through at least the early 80s.

Others would have filled their shoes, but history would be tremendously different.

> 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?

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.)

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/SB124105303238271343

> What the hell, Forbes?

It's not Forbes, at least not the Forbes anyone would have expected anything decent from.

Whenever you see a Forbes url like forbes.com/sites/USERNAME/blah... you are just reading some guys blog on forbes.com

I don't know that there is really any resembling research and an editor at Forbes any more.

It says right at the top of the article that it appeared in the print edition of Forbes.

The summary is very much appreciated. I read the first two pages of the article, had barely gotten any real information other than the author's personal and biased experience.

The whole thing felt very self serving and not very informative.

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...

2. http://www.marketwatch.com/story/gm-to-cover-future-liabilit...

3. http://www.bankruptcylitigationblog.com/archives/bankruptcy-...

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...

Yea this guy really trivializes the fact that GM got a $50 billion dollar loan on incredibly favorable terms from the USG when the banking industry was reeling. No matter how brilliant his plan was it would have all amounted to nothing had they not gotten that money, so congress/the Obama administration (and even the Bush administration) can take all the credit they want.

That's why GM means "government motors", then again Tesla is no better. Maybe it's time for America to get out of the auto manufacturing business altogether, just like Britain did. We do still have factories here mind; they're just owned by people like Honda.

I'd sort of agree but when you stop producing vehicles domestically and rely on foreign manufacturers building cars in your country you lose a lot of the surrounding infrastructure since much of the design and testing is done abroad.

The ability to produce a car and similar heavy-industry type production is a strategic asset (which is I think one reason why the French government has been so supportive of it's native car industry for so many years even when French cars didn't sell well outside of France).

It's a hard balance, support an unprofitable industry to protect a capacity you might one day need.

If I recall correctly the US has(had?) a policy where american flagged cargo ships that mostly traded in and around America had to be built in America, this made them much more expensive but kept the major ship yards in business as it was seen as a bad thing if that capacity was lost.

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.

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.

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]

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

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.

I didn't see any price spike

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.

underwater: the current market price for an asset you hold is less than the price you paid, or have the option to pay

Did you forget to count the wars?

The obvious success metric that springs to my mind is whether the outcome was positive for the United States in comparison to our best estimate of what would have happened if GM had ceased as a going concern because the government hadn't given them that money "to play with."

I found a passage in this article apropos to the discussion last week about "greatness versus family" (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.

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.

I can also write a blog post about how great I am, securing my legacy for posterity.

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.

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".

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

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.

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...

> 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.

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.

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

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.

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.

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.

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.

GM vehicles are also very US focused. There is nobody who drives a Chevrolet or something here.

Don't forget they bought Saab and basically ruined the brand within a couple of years with poor quality and no innovation.

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.

TL;DR anyone?

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.

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"?

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