GM history in the second half of the 20th century is a story of executive arrogance, missed opportunities, poor decision-making and reckless finance.

After WW2, everyone was making money hand-over-fist, and GM became known as “Generous Motors.” Starting in the mid-1950s, rather than risk a strike that could slow production and sales, GM chose to kick the can down the road. When it came to wages, and benefits, the execs made the union contracts, guaranteed pension benefits, health care costs someone in the future’s problem.

Then the future arrived.

The industrial giant went from owning their market, to being an insolvent, hollowed out rust bucket of a company. The website The Truth About Cars started a GM Deathwatch several years before the company finally succumbed to its own failures.

Contrary to popular belief, it wasn’t the credit crisis and recession that killed GM — the crisis merely revealed the structural deficiencies that were there all along. The company had diversified into auto finance, then home finance, all the while designing boring, poorly manufactured machines that got poor gas mileage and were vastly inferior to their European and Japanese counterparts. Insolvency was inevitable.

The weakened mid-western firm lacked the lobbying muscle to force an ill advised bailout. Rather than give GM the Hank Paulson bank treatment — throw trillions at them and hope for the best — Uncle Sam actually took an intelligent approach to the issue.

But even a weakened giant, a shadow of its former self, GM was still a substantial employer. That had political ramifications in an election year. Instead of letting them do the Lehman Brothers face plant into the pavement, the choice was made for a prepackaged bankruptcy.

This was the single best decision of the bailout era.

It seemed to be the only decision that was not made in a panic. It adhered to the rules of capitalism — when your company is insolvent, it goes into reorganization or dissolution. The brutal, Darwinian rules of the market and of bankruptcy applied — not the influence of lobbyists, or special favors from Senators. The Treasury Secretary’s former gig was not running an auto company, he ran a Wall Street bank — so there could be no special favors expected to come from that quarter either.

Instead, Uncle Sam’s involvement was to provide Debtor-in-Possession financing. The bankruptcy plan was obvious: Wipe out shareholders, give bond holders a haircut, fire management, pare the company down to a sustainable size without sentiment.

This was what was done. A turnaround plan was created and executed. If the company met its milestones, the firm would be taken public, which would allow the government to significantly reduce its stake and exposure to GM. The Fed also helped, keeping financing rates at ultra low levels.

The long term stock sale plan would lead to the taxpayers being made nearly whole. All told, it was a wild success. Malcolm Gladwell argued that Rick Waggoner should get more credit and Steve Rattner less, for GM’s effective turnaround; many of the new models that are now doing so well were first created and planned for under Waggoner’s tenure 5 years ago.

So what is arguably the most successful bailout of the 2007-2010 era was in fact a non-bailout: It was a bankruptcy reorganization that eliminated the most toxic aspects of a century old rust bucket of a company. The new firm has clean books, is well capitalized, is without crushing debt, has a less onerous labor contract, pension and health care obligations. Its hard not to see how this was anything but a ginormous winner for all involved.

Which brings me to the Banks.

Currently, the United States has a weakened financial sector. Many of the largest Banks are technically insolvent, but thanks to an accounting rule change, are not required to admit this simple mathematical fact. They are carrying an enormous amount of bad loans on their books. They are sitting on several million REOs — bank owned foreclosures for which there is essentially no market. This shadow inventory of houses amounts to years worth of sales, not mentioning the depressing effect the excess supply will have on prices.

The reckless lending of the 2000s was merely the tip of the iceberg. From start to finish, the engaged in all manners of irresponsible behavior. When a company’s actions are so reckless it compromises the firm’s ability to survive, why would we expect it to have performed any of its other duties competently? They didn’t, which is why we have learned about how poorly the banks not only made these loans, but also administered, securitized, serviced, and foreclosed on them. The entire process was reckless, it was done on the cheap, riddled with errors, fraud and felonious behavior.

It has become a national embarrassment.

The bank bailout plan was ill conceived and poorly executed. Trillions were thrown at them before Uncle Sam had any idea as to how much debt was actually on the books. What were once considered decent holdings were eventually revealed to be highly toxic assets.

Recapitalizing the banks is a huge priority. But after the first round of trillions were given away to the banks, the public was disgusted. The politicians lost their appetite for overt bailouts. But the banks were still under-capitalized, their balance sheets were still laden with junk. A direct transfer of taxpayer monies was out of the question.

An easy backdoor was found: Arbitrage the Fed and Treasury. Zero interest rates and QE allowed giant Wall Street banks to borrow at no cost from the Fed, and then turn around and lend this same zero cost money back to the Treasury at 3% or so. Do this for another 10 years or so, and the banks would be recapitalized. By then, maybe there might even be a market for all those REOs. Sure, that would mire the nation in a decade long Japanese-like slump. Hey, at least the bonuses would be paid on time.

The motto of the bank bailouts: To hell with the banking system, save the banks!

The results should not be surprising. The banks remain in a weakened condition, perilously at risk for additional problems in RE. Despite the massive liquidity, Credit still remains tight. If financing is the fuel that drives the economy, the US is running on fumes.

Wall Street has returned to business as usual. The Street is nothing if not savvy. Just as a shark detects blood in the water, the Street can smell weakness and exploit it like no other industry. Once they figured how to play chicken — mutual assured destruction –  with the entire global economy, there would be no restraining them.

~~~

Compare the differences between the banks and GM/Chrysler, and will see the full folly of how we rescued the financial sector.

Instead of letting insolvent banks fail, we turned over the keys to the castle. We could have fired the incompetent management that caused the problems — but most of these execs are still in the same highly placed positions in their firms. In terms of senior personnel, the industry is literally unchanged.

Bad debt? Still on the books.

Sufficient capital? Many years away.

Business model? The same highly leveraged reckless strategy that got them into trouble in the first place

Regulatory Oversight? A modest improvement which the newly elected, bought and paid for Congress, seems hellbent on overturning.

If you want to understand why we should never have bailed out the banks, just look at the differences between the Auto and Banking industries. One is healthy, with a likely cost of near zero. The other remains a debacle, whose costs are incalculable are likely to be an economic drag for years if not decades.

Too bad the minds behind the bank bailouts did not have the foresight to appreciate the full advantages of prepackaged bankruptcy for the sector . . .

>

Previously:

Looking at the 1980 Chrysler Bailout (November 20th, 2008)

Why Are Banks So Different From Autos? (December 9th, 2008)

Why Bankruptcy For Autos But Not Banks? (February 23rd, 2009)

Banking Sector Remains (literally) Unchanged (January 4th, 2010)

Category: Bailouts, Corporate Management, Credit, Foreclosures, Real Estate, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

91 Responses to “Too Bad Banks Missed Out On the GM Treatment”

  1. UPDATE 11/19/10 5:43am

    If you haven’t read the decision of the Bankruptcy judge in General Motors, I strongly suggest you make this your weekend reading. It will provide lots of insight into the decision making process and why the outcome was what it was.

    I posted it here:
    http://www.ritholtz.com/blog/2010/11/in-re-chapter-11-general-motors-corp/

  2. VennData says:

    Where are all the clowns who said this wouldn’t work? Show yourselves.

    They all off huddling with the GOP who blew off their meeting today to discuss tax rates with Obama. If the deficit is such a problem, why can’t the GOP even show up for the meeting?

  3. “So what is arguably the most successful bailout of the 2007-2010 era was in fact a non-bailout: It was a bankruptcy reorganization.”

    I do not believe this is true — while I agree with the premise that GM’s restructuring (ie, removal of leverage from the corporate balance sheet) was ultimately a good thing and in the national interest, the manner of how the “bankruptcy” was handled and which constituencies benefitted will ultimately be seen as a major negative, if this is a precedent for future restructurings.

    Basically, politically connected cities benefitted from plant placements, unions benefitted at the expense of bondholders….if this had been a true ‘bankruptcy’ there would have been a much more equitable division of the pain….

    Also, I would question the success of GM if their idea of a great product is the $41,000 Volt….

    ~~~

    BR: With the tax credit, its a $32,780 car

  4. The criticisms about the GM bankruptcy were IMO mostly unfounded sour grapes by people who do not understand bankruptcy laws.

    These were unsecured bond holders — vulture investors who picked up GM’s bonds pre-bankruptcy, and miscalculated getting a windfall.

    I’ve explained this in the past: Wages are as a matter of public policy a fairly high unsecured creditor in BK court. Indeed, very often, owed wages are treated as a senior priority.

    Imagine if this were not the case: at the first sign of any trouble, the employees would all bolt. There could never be any turnaround under those rules.

    Funny, some people are willing to ascribe all manner of behavior changes to minor tax rate changes and more significant health care rules, but the most important aspect of a labor contract– getting paid for hours worked — apparently won’t affect behavior.Its just so much more clueless ideological nonsense …

  5. Michael M Thomas says:

    Somewhere along the way, GM moved from making and selling automobiles to making and selling loans with automobiles attached. The quality of the car didn’t matter; what did was making the loan. A natural next move: on to housing finance, which was all about loans with addresses attached. A useful symbol of this sort of thing is a headquarters move. In GM’s case, to New York, under then-CEO Frederick Donner, who was a finance guy.

  6. Freestate says:

    Excellent post, Barry. What is interesting is that Rattner in his book about the auto restructurings claims that he does not believe the same process could have been applied to the banks. When I read that I thought he was just trying to be politically correct and give the company line. And it was also interesting that Rattner said the manufacturing plants had figured out how to produce high quality cars (using Toyota’s lean manufacturing production method) without much help from the dysfunctional headquarters staff. He was going out of his way to say that Waggoner had little to do with the quality car product they were surprised to find.

  7. BR,

    LSS: the “pre-pack” was used to ‘bury the skeltons’ ..
    ~~
    on a different facet, here ” … In April, in a television commercial and a Wall Street Journal column headlined “The GM Bailout: Paid Back in Full,” GM’s then-CEO Ed Whitacre said “we have repaid our government loan, in full, with interest, five years ahead of the original schedule.” Rubbish.

    GM, which has received almost $50 billion in government subventions, repaid a $6.7 billion loan using other federal funds, a TARP-funded escrow account. Sen. Charles Grassley (R-Iowa) called this a “TARP money shuffle.” A commentator compared it to “paying off your Visa credit card with your MasterCard

    But those who thought the ethanol debacle defined outer limits of government foolishness pertaining to automobiles were, alas, mistaken.”

    Oh well… Maybe these things will just GROW ON US eventually… Right? But be advised, if you’re having a party in Atlanta, (and the beer is in TEXARKANA)… Well son, that’s 900 miles (each way)… 900 x 2 = 1,800… divided by 33 miles a pop = 54.5 “recharging” stops… Times 12 hours a charge = 655 hours of charging time (not including all the driving time)… 27 days! Plan accordingly! (Needless to say, these Volts are for when you have “nowhere to go, and a long time to get there”)…

    EAST BOUND & DOWN…”
    http://traders-anonymous.blogspot.com/2010/11/morning-audibles_18.html

    speaks to, some, of the other foibles, surely, to be found..

  8. BennyProfane says:

    After all of this broo haha over the past few days (Good Lord, the financial industry and media covering it can really be narcissistic when a HUGE!!! IPO gets rolled out like this. Like the rest of us could care), I’ve been wondering, and, I’m serious here: where in the hell did all of those pension and health care obligations go?

  9. The creditors — bondholders, UAW, US — Swapped out their claims for equity…

  10. OT:

    Freestate,

    see http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Edwards+Deming

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Edwards+Deming+Japan+Lean+Manufacturing+Toyota+Production+System+

    to get an idea of how the Japanese learned ‘their craft’ ..

    LSS: the ‘idea’ that the U.S. Manufacturers needed to learn ‘from the Japanese’ turns things upside-down..
    (probably, would be something found in the NYT, to boot..)

  11. wally says:

    A year or two is too early to conclude that an automobile company has in any way become ‘successful’. We have to see where they are in 5 years, 10 years, before we can can conclude that their problems were organization rather than engineering.

  12. notakid says:

    SO, what we are saying is that GM is/was TBTF. That’s rich.

    The banks are getting the same treatment , just with more forgiving terms.

  13. BennyProfane says:

    @Troutbum

    Who reads Motor Trend in a time when Top Gear can be had on YouTube?

    What was the runner up, one of those stupid retro muscle cars that Detroit is churning out in these “modern” times?

  14. KG says:

    The overall comparison of the difference in treatment of GM vs. the banks is right on the mark. It’s a sign of the corruption of our system that a Swedish-style prepackaged bankruptcy wasn’t seriously contemplated for the banks. (How could it have been with the insiders running the show?)

    I have no problem with “saving Michigan” – shouldn’t we want folks to prosper in all parts of the country?

    My big issue with the GM action is that, like highway infrastructure, the “revived” company is still committed to saving a dying industry/way of life – the automobile. As James Howard Kunstler put it: “Our inability to imagine living without cars is really impressive, and it may end up being a fatal obstacle for us to get where we have to go next. It may end up being the thing that really brings down American civilization.” If the government had closed GM and retooled it to create rolling stock for rail, light rail, and trolleys I’d have more confidence in the company’s long-term prospects.

  15. troutbum says:

    Hey Benny,

  16. troutbum says:

    Hey Benny,

    I read MT on line, BYW.
    Note that MT calls the Volt a “Game Changer”, the point is a restructured GM can compete!

  17. KG,

    Kunstler’s point “If the government had closed GM and retooled it to create rolling stock for rail, light rail, and trolleys I’d have more confidence …” is, almost, comical..

    see:
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=GM+killed+the+Interurban …you know, for starters..

  18. partimer1 says:

    I agree with your analysis completely except that WE didn’t CHOOSE to bail out the banks. so you know, Hank Paulson bailed out the banks, so that they can go on to get their year-end bonuses. That’s not the choice you and I can or would make. That’s why the whole country is so friggin pissed off, and they turned to health care or other BS to complain about.

  19. HEHEHE says:

    BR,

    I don’t think even the banks could get away with this GM bs:

    GM IPO risk factor page 30 of their prospectus:

    “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.

    Our management team for financial reporting, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. At December 31, 2009, because of the inability to sufficiently test the effectiveness of remediated internal controls, we concluded that our internal control over financial reporting was not effective. At September 30, 2010 we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weakness in our internal control over financial reporting that continued to exist. Until we have been able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of the Company’s various financing agreements. ”

    http://www.sec.gov/Archives/edgar/data/1467858/000119312510263484/d424b1.htm

    So what they are saying is they have no idea if they will be profitable or if any financial data in the prospectus is accurate and yet the IPO is oversubscribed. You’re witnessing a government sanctioned pump and dump. They’ll pawn this turd off on every mutual fund in the country and we’ll all take the loss a second go around in our 401-k’s.

  20. BR:

    For someone who has repeatedly railed at the violence done to the rule of law vis a vis the foreclosure mess, it seems ironic that you would hail GM and Chrysler’s bankruptcy as anything other than a slap in the face of well-settled bankruptcy principles.

    Ask GM’s secured bondholders how they feel about the UAW and how it got a preferred seat at the bankruptcy table when wages, health care and pension obligations, as unsecured debts, are never given priority over secured debts. Sure, they constitute the highest priority of unsecured creditors, or at least wages do, but never, until GM and Chrysler, did they rise to trump secured debt.

    I’d say you are simply jumping on the GM IPO bandwagon, and ignoring the great violence this bailout did to settled bankruptcy law. The federal government essentially just came in and remade the law to suit its needs–a priviledge never before granted to the financer of a debtor in possession.

    I believe you have also got the GM narrative wrong going forward. This is still a pathetic excuse of a company that will suffer tremendously as soon as the relatively good times in the auto industry just now are over.

    If GM’s lucky, when it fails again, it will again do so around election time.

    ~~~

    BR: There is a huge difference between secured creditors, and UNSECURED bond holders, and employees.

    Many of the unsecured bond holders were vulture investors who picked up GM bonds for pennies prior to the bankruptcy. They wanted to force a full blown liquidation, rather than have the government advance the $50 loan to GM/Chrysler.

    The liquidation would have been profitable to them, but might have been damaging to the economy. This is the risk they took. I was short AIG and LEH and FNM, and I understood the risk of govt intervention.

    The unsecured creditors and pre-BK bond buyers made a specualtive bet and miscalculated. Anyone who lent money to GM from 2003 forward made a similar bet. Judges in court consider the totality of the circumstances — the claims of the vulture bond buyers were not persuasive.

  21. BennyProfane says:

    @Troutbum

    A game changer?? Give me a break. 40 grand for a status toy in the middle of the Great Recession/New Depression? (don’t you dare tell me it’s over for the average schmuck) Krist, Every time there’s a car show they roll that thing out to prove that company still isn’t stuck in the 70′s, meanwhile they make all their money off of manhood enhancing pickup trucks and retro muscle cars.

  22. troutbum says:

    Benny,

    Can’t argue with much that you say, GM sells a lot of SUV’s and Trucks, here’s the data:

    http://media.gm.com/content/Pages/news/us/en/2010/Nov/1103_chevsales/_jcr_content/rightpar/sectioncontainer_1/par/download/file.res/Deliveries%20October%202010.pdf

    But I view MT as an informed observer of the auto scene, here’s their opinion:

    “ENGINEERING EXCELLENCE
    The Volt boasts some of the most advanced engineering ever seen in a mainstream American automobile. The power train allows the car to run as an EV, a series hybrid, or a parallel hybrid, depending on how far you drive and how you drive.”

    Read more: http://www.motortrend.com/oftheyear/car/1101_2011_motor_trend_car_of_the_year_chevrolet_volt/engineering_excellence.html#ixzz15eIfZ8Ud

  23. dad29 says:

    What Curmudgeon said (2nd graf).

    You’re usually pretty careful with details, Barry–and steamrolling secured bondholders is not a small detail.

    ~~~

    BR: Here is the BK decision — these were not secured creditors of GM, they were late purchased bondholders. VERY different standing in BK court.

  24. Here is why the BK court rejected those claims

    Decision:

    In this contested matter in the jointly administered chapter 11 cases of Debtors General Motors Corporation and certain of its subsidiaries (together, “GM”), the Debtors move for an order, pursuant to section 363 of the Bankruptcy Code, approving GM’s sale of the bulk of its assets (the “363 Transaction”), pursuant to a “Master Sale and Purchase Agreement” and related documents (the “MPA”), to Vehicle Acquisitions Holdings LLC (the “Purchaser”)—a purchaser sponsored by the U.S. Department of the Treasury (the “U.S. Treasury”)—free and clear of liens, claims, encumbrances, and other interests . . .

    GM’s motion is supported by the Creditors’ Committee; the U.S. Government (which has advanced approximately $50 billion to GM, and is GM’s largest pre- and post-petition creditor); the Governments of Canada and Ontario (which ultimately will have advanced about $9.1 billion); the UAW (an affiliate of which is GM’s single largest unsecured creditor); the indenture trustees for GM’s approximately $27 billion in unsecured bonds; and an ad hoc committee representing holders of a majority of those bonds.

    But the motion has engendered many objections and limited objections, by a variety of others. The objectors include, among others, a minority of the holders of GM’s unsecured bonds (most significantly, an ad hoc committee of three of them (the “F&D Bondholders Committee”), holding approximately .01% of GM’s bonds), who contend, among other things, that GM’s assets can be sold only under a chapter 11 plan, and that the proposed section 363 sale amounts to an impermissible “sub rosa” plan.

    As nobody can seriously dispute, the only alternative to an immediate sale is liquidation—a disastrous result for GM’s creditors, its employees, the suppliers who depend on GM for their own existence, and the communities in which GM operates. In the event of a liquidation, creditors now trying to increase their incremental recoveries would get nothing.

    Nor can the Court accept various objectors’ contention that there here is a sub rosa plan. GM’s assets simply are being sold, with the consideration to GM to be hereafter distributed to stakeholders, consistent with their statutory priorities, under a subsequent plan. Arrangements that will be made by the Purchaser do not affect the distribution of the Debtor’s property, and will address wholly different needs and concerns—arrangements that the Purchaser needs to create a new GM that will be lean and healthy enough to survive.

  25. BennyProfane says:

    troutbum

    MT has always been a tool for the industry. No self respecting gearhead would touch that rag, even if they were stuck in the dentist’s waiting room with Vogue and Weekly Reader as the only other choices.

    “The Volt boasts some of the most advanced engineering ever seen in a mainstream American automobile.”

    Typical. That’s like saying Subway offers the most advanced and the healthiest cuisine in the American fast food industry.

  26. wally says:

    “…the “revived” company is still committed to saving a dying industry/way of life – the automobile.”

    We have no option here. The US, with the exception of a few very limited areas, is completely structured around private personal transportation… towns, cities, small towns, agricultural areas, homes, how we shop, how we work… all infrastructure is now in place for that mode only.

  27. Edoc says:

    If someone can point to a description of events whereby we let the major banks fail and yet we all live happily ever after, I’d be interested to read that. It can’t be set in Narnia, though.

  28. wally says:

    “…but never, until GM and Chrysler, did they rise to trump secured debt>

    Sorry, but in my book people come before cash. I think workers rank ahead of investors in every moral sense.

  29. Buchlajoe says:

    “This was the single best decision of the bailout era.”

    I do not agree. The single best decision of the bailout era was letting Lehman die.

  30. “The US, with the exception of a few very limited areas, is completely structured around private personal transportation… towns, cities, small towns, agricultural areas, homes, how we shop, how we work… all infrastructure is now in place for that mode only.”

    Indeed true, and shameful, and all for a developer’s extra buck. This over-dependence on oil-fueled personal transportation constitutes a huge chink in our economic armor.

  31. BennyProfane says:

    65% of our oil comes from other countries. Our greatest national security threat.

  32. “Sorry, but in my book people come before cash. I think workers rank ahead of investors in every moral sense.”

    That may be your moral sense, but it is not well-settled bankruptcy law, at least before GM and Chrysler.

    If the idea that a secured bondholder should come before unsecured pension and health care obligations insults your sense of equity, consider this–would the bondholders have lent money secured by the company’s assets if they knew the worker’s claims could trump theirs? What good would their security have been? Would there have been any workers to make claims had the bondholders not lent the money?

  33. Thor says:

    The criticisms about the GM bankruptcy were IMO mostly unfounded sour grapes by people who do not understabd bankruptcy laws.

    Sour grapes indeed. These very same people are now saying fraudclosurer is just some “sloppy paperwork” or “deadbeat homeowners trying to get something for nothing”

    You could practically swim in the hypocrisy.

  34. Rugby1 says:

    BR,

    For one of the very few times I completely disagree with you. “HEHEHE” points it out best. By admitting that they have no internal control framework and cannot accuratelyconduct financial reporting they DO NOT KNOW IF THEY WERE PROFTIABLE! How is the acceptable? The SEC shoudl slam their foot on the throat of GM, just like they would if they were any other company trying to go IPO with that disclosure. Those last three quarters of profits are going to be washed away in a coming restatement.

    Furthermore the company did not dir itself of all it’s obligations. They still operate under a laborious management and cost structure that remains higher than most competitors. It is better than it once was but it still sucks.

    I will not address the breaking of the rule of law as several other individuals have done that in a much more succinct fashion.

    However I will say this. The company is so poorly managed that without further direct intervention by the government it will definitely fail. In fact I would be happy to bet you $1,000 that in 9 months it is trading under $10 a share. Even with GE purchasing 25,000 Volts (a loss leader and of course GE used TARP money) the company is a dog. I plan to make a strong profit shorting the crap out of GM. Care to wager?

    ~~~

    BR: My key point is we should not have prevented the banks from going thru this process. (I really don’t care about GM’s stock)

  35. Rugby1 says:

    Sorry for the duel post I was not done editing and hit submit!

    BR,

    For one of the very few times I completely disagree with you. “HEHEHE” points it out best. By admitting that they have no internal control framework and cannot accurately conduct financial reporting they DO NOT KNOW IF THEY WERE PROFTIABLE! How is the acceptable? The SEC should slam their foot on the throat of GM, just like they would if they were any other company trying to go IPO with that disclosure. Those last three quarters of profits are going to be washed away in a coming restatement.

    Furthermore the company did not rid itself of all it’s obligations. They still operate under a laborious management and cost structure that remains higher than most competitors. It is better than it once was but it still sucks.

    I will not address the breaking of the rule of law as several other individuals have done that in a much more succinct fashion.

    However I will say this. The company is so poorly managed that without further direct intervention by the government it will definitely fail. In fact I would be happy to bet you $1,000 that in 9 months it is trading under $10 a share. Even with GE purchasing 25,000 Volts (a loss leader and of course GE used TARP money) the company is a dog. I plan to make a strong profit shorting the crap out of GM. Care to wager?

  36. [...] was the single best decision of the bailout era,” Barry Ritholtz writes about GM over at The Big Picture. “It seemed to be the only decision that was not made in a panic. It [...]

  37. obsvr-1 says:

    When you are to compare the GM (automotive bailouts) to the banks, then the GM deal is far superior, however given that this was a “modify the rules” bankruptcy then it is still stigmatized as an outside the law reorganization.

    To focus on GM, in the end the gov’t received common shares (61%) of new-GM, essentially at 41$ per share (DIP financing). Today they sold about half of those shares at 33$, not a savvy business deal from any investment oriented perspective. The gov’t will have to sell the rest of the shares at an avg of 48$ to break even. There is another $1B loan outstanding at the Old-GM that will likely have to be written off and there is the GMAC (Ally) bailout to the tune of 17B exposure which will likely result in a large loss.

    So if you consider the secondary, tertiary, societal and political aspects of the GM “bankruptcy” reorganization it is very successful, but in no way should anyone shout success from an investment only perspective – otherwise the bankruptcy could have been done in the free market w/o gov’t assistance and backstopping.

  38. carleric says:

    General Motors was the worst run company in the United States prior to their bnkruptcy. What makes anyone think anything has changed? I opposed the “bailout” thinly disguised as a bankruptcy. Was it better option than the protection afforded the banks? Yes, yes, yes. However, anyone who thinks GM will ever be a success, that the taxpayers will ever get their money back is a dreamer. You have to mke a competitive product at a competitive price. Ford seems able to do tht but GM can not and will not alter their culture to ever compete……juat another cost to the taxpayers, a sop to the UAW and more money down a rathole.

  39. AHodge says:

    In case you missed it on the latest from GM bailout Czar Rattner.
    his huge $ SEC settlement for wrongdoing w the NY pension funds, bloomerg today

    “Rattner delivered special favors and conducted sham transactions that corrupted the retirement fund’s investment process,” said David Rosenfeld, associate director of the SEC’s regional office in New York”.

    while i feel nation at least got some job preservation value from GM bailout…..
    it is reasonable to assume there was some Rattner crookedness in his epicenter of GM dealings also….?

  40. markd says:

    Where does bankruptcy law say the bondholders get 100 cents on the dollar?

    I know a Lehman bondholder who got a letter from the master saying it looks like he’ll be getting 8 cents on the dollar. I daresay the Lehman employees got what was coming to them (sadly, management did not)

    If I recall GM bondholders got 29 cents on the dollar

  41. AHodge says:

    amen curb your risk
    best andmost sensible post here

  42. notakid says:

    “This was the single best decision of the bailout era.”

    A low bar indeed! This thing is a dog and another example of why there will be no recovery with these type of policies in place.

    That one could think that a few banks failing or this dog being put down is the end of the world or even the “system” shows a system that deserves to end.

    ~~~

    BR: No argument from me . . .

  43. @markd:

    Bankruptcy law doesn’t say anywhere that anyone gets anything. It only prioritizes interests in the carcass of a dead or dying company. Secured creditors come before unsecured creditors. If they (secureds) only get a few cents on the dollar, then the unsecureds should get nothing. That’s not what happened in GM’s case. Secureds took a haircut, while some of the unsecureds (UAW pensions and healthcare) received more than nothing.

  44. AHodge says:

    Correction
    Rattner only charged by the SEC this morning, not settled
    charge remains the same
    “Rattner delivered special favors and conducted sham transactions that corrupted the retirement fund’s investment process,” said David Rosenfeld, associate director of the SEC’s regional office in New York”.

  45. tractorguy says:

    As a very, very low level salaried retiree of GM, I would ask BR how he reconciles stockholders, bondholders, suppliers and salaried retirees taking major losses, but the UAW arbitrarily being the recipient of a major portion of the company in effect creating a UAW/Democrat slush fund worth $30 billion plus funded for the lifetime of the UAW ?

    ~~~

    BR: The bankruptcy rule is that employee compensation cannot be discharged in bankruptcy. They are a super senior creditor.

    The management of GM made a foolish contract 50 years ago, promising generous wages, healthcare and pension benefits. When the company went under, the full amount owed was in excess of the value of the firm. Without a deal (in theory) the union could have grabbed nearly the whole company.

    Why do employees get treated as super senior creditors? It is a public policy issue — Imagine if this were not the case: at the first sign of any trouble, the employees would all bolt. There could never be any turnaround under those rules, the first sign of trouble, these firms go belly up cause their staff departs.

  46. AHodge says:

    more correction
    Rattner settled with the SEC today, presumably civil on the NY pension fund charges
    but NY atty general Cuomo same time filing criminal? charges on same thing, seeking securities dealing disbarment among other things.
    Rattner was a bush pick, but maintained by D’s?

  47. AHodge says:

    Curmudge
    you clearly a big legal expert on whats supposed to happen, on your own personal planet.
    In the real legal world
    defined by what judges actually rule.
    the unsecured creditors get leverage and dollars by holding up settlement.
    and your crazy MERS system probably not forclosure enforceable in many courts w/o further legislation.
    you certainly not showcasing why anyone would pay for your council on how judges are going to rule?

  48. blueveiner says:

    My assumption is that anyone here embracing the IPO has not read through the prospectus or ammendments. Opacity is the order of the day, which is true with how GM reported its financials in the past. Show me the cash flow statement, in its entirety, that suggests any sustained cash flow from operations. It doesn’t exist; seriously, the financials section omits it. The games are already afoot with the financing sub and with pushing a ton of inventory onto dealer lots. That’s not a revenue recognition issue confined only to GM, but the true sales picture is much harder to discern. At least a few news organizations have reported on the pension overhang- didn’t we learn our lessons when that was the topic of the day in 2002-2004?

    For all you Volt Fanboys, take a look at Edmunds review. Very hard to make any case for ownership if “…the arithmetic tells us that the running cost of this Volt tester while in our care was equivalent to a gas-only car that achieves 30.9 mpg on 91 octane. It also turns out the Volt’s miles driven on electricity cost us more money than if it’d simply consumed gasoline instead.” Hybrids may be an emotional purchase, $45k is a lot of dough to plunk down for a vehicle that can’t compete with basic, gasoline-powered alternatives.

    There is going to be a great book written by a hedge fund manager that manged to short GM into oblivion twice. Who knows, that same fund manager may be helping GM with its product plans, too, a ala MBS selection by Paulson, etc. “Yeah, what you guys need to do is produce the Volt, and resurrect the Aztec, Cimmarron, and Vega. That will be a great new product portfolio….”

  49. curbyourrisk says:

    Barry you fail to mention that the entire bankruptcy process went against bankruptcy law. Our company was a major supplier to GM and they owed us quite a bit of money when it happened, AGIANST MY OPINION as I had rejected the last 3 credit applications. When it came time for the bankruptcy, we were notified and made a critical vendor. We were promised to be paid in full for everything. In order for that to happen we had to sign away ALL RIGHTS, but the Government said THEY promised they would pay eventually (notice not GM). We reviewed the contract repeatedly and had outside counsel even go over it with our inhouse counsel. WE EFFECTIVELY GAVE UP ANY AND ALL RIGHTS WE HAD TO CLAIMS, PAST DUES AND WE HAD TO ADHERE TO THEIR TERMS THROUGHOUT THE BANKRUPTCY PROCEDURE. Since when does a bankrupt company make the rules? The US Government rewote bankruptcy law throughout the process and now many of the companeis we deal with (funny how its only the ones owned y priovate equity) are citing the GM bankruptcy for their own and attempting the same debt for equity swaps labeling us critical vendors and gauranteeing payment in return for giving up our rights through out the proceedings.
    Unfortunately for the rule of law, but we have not yet been burned by this. Sure we have lost money due to the degredation of the value of the money as we waited for the eventual payments, but it was a bad precedent set by the government. For those of you who do not value the letter of the law I can see how this was a success, but for me I do not. Yes, the GM IPO will be a success…as the government is still partial owner of the company and there is no way they will allow themselves to look negative in any light. BUT, as I still review this company I see a company that is once again destined to fail. They should have been bankrupted Chapter 7 style. A company would have come and replaced them. There was enough talent from the shell that coud have easily started a new company, AND there was enough capitalout there to fully back one. We would ahve had a new company that does not suffer from the stigma of being a completely UTTER FAILURE for the last 20 years.

    ~~~

    BR: I think your interpretation of bankruptcy law is lacking.

    I certainly don’t see how the NY BK court rewrote the rules of bankruptcy. (Read the BK Court decision)

    The law is a priority of claims, and I believe most BK courts in practice treat employees as super senior creditors. If you were an unsecured creditor, that was a risk your firm took. They could have gone COD, but they extended credit to GM.

    Much of the claims of contractual abrogation came not from creditors to GM, but from vulture specs who bought paper in the secondary market at pennies on the dollar, then tried to force a liquidation rather than a reorg.

    They miscalculated, then screamed bloody murder. (Boo hoo)

  50. Fred C Dobbs says:

    The ‘bankruptcy’ was a farce, and BR and the rest of you have done a good job exposing it. But Edoc has a point, and this is my response.

    Big Government (BG) has the right and power to seize banks that are “failing” and it does, week-by-week, with little disruption of service to depositors or loss of depositor funds, unless their deposits exceed the BG ‘insured’ maximum amount. The seized banks are merged into another bank whose capital is large enough to technically meet the BG required minimum capital requirements for the larger (combined) entity. The ‘management’ of the disappearing bank, are surplus, and are fired, saving the surviving bank a lot of money. BG does this almost every week, and Barry regularly shows us charts that support this.

    What BG doesn’t do is close the Big Banks (BB), even though it could and should do so for a lot of sufficient reasons. There are several techniques the BG regulators could but forebear using to do this. One easily understood way is to force BB to return to ‘mark to market’ accounting. This would cause their capital to be reduced by the amount of deferred losses they would then have to take. Most of the BB would fail the honest application of this and other rules. This is why they are rightfully called ‘zombies.’

    Why does BB forebear closing BB banks? One problem is the ‘too big to fail’ argument. This is just plain silly. Other nations have closed their to big to fail banks and the nations and their banking systems went on as before. Check out what the IMF did to Thailand in the late ’90s or Sweden did a few years later. So, it can be done, it is not an impossibility.

    If possible, why not? Because of the power of BB. The bank lobby has been and is probably the strongest, most powerful lobby in the US. Everyone wants or may need in the future some money, and like the robbers, everyone goes to the bank to get some. Banks hand out awards to kids in school, sponsor all sorts of events, hustle legislators at all levels of government. Banks put a ‘confident’ person, a people person, in to manage their offices. They spend a lot of money advertising. And so on it goes. What is true for the small bank is even ‘truthier’ for the BB. Everyone fawns over the CEO of the biggest bank, and in fawning actually think he or she is smart and knows what he or she is doing. In fact they don’t know anything more than you or I, for none can predict with certainty anything. If we predict snow will fall on New Year’s Day, and it does, we are just lucky. Glass-Steagell was lifted because BB CEOs saw a chance to enlarge their power, grow the size of their companies, and jack their salary and bonus up. It was a mis-match in cultures, the stock jockeys on Wall Street making money only if they took risks, and the bank managers making money if they took no risks. A properly-run bank is a boring bank, run by a non-agressive, low testosterone-fueled executive. A properly-run Wall Street firm is run by high testosterone-executives, and people with guys who live and die by taking huge risks with other people’s money. The IQ difference is apparent. This clash in cultures created a competition inside the companies, and in many cases is yet to be resolved. Risk-taking results in higher yo-yo results, and risk-aversion results in lower yo-you results.

    For everyone’s good, BG needs to take the risk-takers out of the BB, reduce the BB in size (so they can fail, and taxpayers don’t get stuck with the bill), prosecute the worst offenders as an example, and return banking to the boring state it was from 1933 (when deposit insurance began) to 1978 (when Merrill Lynch acquired a bank and entered the banking business).

    What is lacking is political will. Check out which members of Congress are in the grip of BB. Point out the contradiction in cultures with banks in Wall Street business and vice versa.

  51. NoKidding says:

    VennData: “Where are all the clowns who said this wouldn’t work? Show yourselves.”

    Still here. Its a nice puff piece, lets talk again in 1 year.

  52. Cynic_FA says:

    BR says “I’ve exlpained this in the past: the public policy is that in BK court, owed wages are treated as a senior priority”

    This is not what happened. The pension benifits and lifetime health benifits of the UAW were treated as senior priority. The American taxpayer took the back seat. In the TARP the tresury received 5% PFD stock and warrants. In GM the UAW recieved 9% PFD stock and warrants. The treasury received 61% of the common equity and needs $44 to break even. Selling at $33 in the IPO they are losing almost $7 billion dollars. The Union preserved $38 billion of unfunded pension and health care benifits throughout the bankruptcy. The treasury should have taken half the bailout as a long term bond senior to the VEBA lifetime health care benifits of the UAW.

    Pension and health benifits are not fully protected in bankruptcy. The Delphi white collar workers lost 40% of their retirment benifits. The Delphi UAW workers were protected in bankruptcy.

    ~~~

    BR: Contractual health care and pension are like wages. So that outcome between two different contracts — white collar managers and UAW covered employees — is not surprising.

    BK outcomes are always fact dependent — the specifics of the case, the judge, the overall elements.

    None of this guarantees that the outcomes will be perfect — but the general rules apply . . .

  53. Marc P says:

    Despite BR’s enthusiasm, let’s remember that there is a difference between raising money and making money.

    In 2005, GM lost $16 Billion when the economy was at its peak and anyone could get a car loan. It lost $5.8 billion in 2006 and $4.3 billion in 2007. The recession did not kill GM. GM killed GM.

    I will cheer them towards success, but I do not share BR’s optimism.

    From a policy POV, the test is not whether GM becomes profitable. The government chose to take some of its limited money and limited intellectual bandwidth and apply it to saving GM. That meant it did not take that money and intellectual bandwidth to apply elsewhere. To approve of the GM bailout is to say that there was no better place for America to put its money at that time. I see no evidence backing that up.

    ~~~

    BR
    : I’ve said nothing about their ability to make a profit — I have been discussing the righteousness of putting GM thru BK versus transferring taxpayer monies to banks . . .

  54. machinehead says:

    Amen, Brother Barry. Testify, bro!

    Haircuts for bondholders — never mind them skinny scissors; hand me the electric hedge trimmer!

  55. [...] The big banks should have gotten the GM (GM) treatment.  (Big Picture) [...]

  56. jz says:

    Fantastic post, Barry. One of your best ever.

  57. Secured creditors come before claims for wages earned pre-petition. Of course, with ongoing concerns, i.e., Chapter 11, post-petition wages have to be afforded higher priority, else no one would continue to work after the bankruptcy is filed.

    But that’s not really the issue here. The issue here is that the claims of secured bond holders were given a lower priority than were the claims of the union for its pensions and healthcare obligations. Pensions and healthcare are not secured claims. Giving an unsecured claim priority over a secured claim upends about all the bankruptcy case and statutory law that has developed since provisions for bankruptcy were included in the Constitution.

    And to this:
    “Curmudge
    you clearly a big legal expert on whats supposed to happen, on your own personal planet.
    In the real legal world
    defined by what judges actually rule.
    the unsecured creditors get leverage and dollars by holding up settlement.
    and your crazy MERS system probably not forclosure enforceable in many courts w/o further legislation.
    you certainly not showcasing why anyone would pay for your council on how judges are going to rule?”

    ~Man, you nailed it. In the real legal world, the federal government does whatever it fucking wants to do when it decides to payback its union supporters, and you are right, I am no expert on reading the tea leaves of how that will ultimately work out. In the real legal world, the law is whatever whomever has the biggest stick, or stockpile of nuclear weapons or controls the currency-printing presses says it is. Which is to say, in your real legal world, there are no laws, only men. What a paradise.

  58. machinehead says:

    Sad but true, Professor Curmudgeon.

    And fantastically dangerous, when you combine no rule of law with the ‘zero tolerance’ mentality which has taught Americans to blindly follow orders like good Germans.

    As in, ‘Step into the porno-scanner and put your hands in the air.’

    It’s a recipe for disaster.

  59. magus12 says:

    Following the above post from The Curmudgeon, I’m one of those unfortunate few with a share of old GM, a crappy Saturn Ion3 made in 2007 with the repair and replace record to prove it, and am left with another 3 years of payments, although I don’t expect the car to last that long. Got bupkus in the settlement but noted with angry amusement the legal fees involved in taking GM through the prepackaged bankruptcy. Over $900 per hour per attorney billed, over $200 per hour per paralegal (PARALEGAL) billed.

    Sorry, I’m pro-union. The mistakes occurred in the executive suite. Walter Reuther, when he was president of the UAW, wanted to take healthcare provisions out of the auto makers’ balance sheets. But the executives ruled against that. As for pensions, well, together with health care, who’s going to work there without those bennies? GM had perhaps the most bloated management and organization of all time. Their low cost cars starting in the 1970s sucked and couldn’t compete with the Japanese, thus giving the Japanese the keys to the kingdom. Their execs were overpaid. In the first quarter of 2008, GM lost $40 BILLION but Rick Waggoner still went home with enough cash and perks to choke a horse. And after Obama kicked him out, he was still due to get at least a $7 million golden parachute up to $24 million.

    So, the question of the day, considering GM’s IPO, is how will it do in the next decade? Cross your fingers that China still wants Buicks because the market in the US is going to be the pits.

  60. David Welch says:

    Automotive Blog: UAW cuts a deal with GM, but bankruptcy looms
    May 22, 2009

    The United Auto Workers reached a tentative deal with General Motors yesterday on some more concessions. The deal is supposed to mirror the one ratified by union workers at Chrysler at the end of April. It probably means that half of the $20 billion GM owes the union to start a retiree healthcare trust will be paid in stock instead of cash.

    GM will be clear to get rid of 21,000 workers, in part because of relaxed work rules that mean each plant needs fewer hands on deck. It should put the company on its way to lower labor costs from $6.4 billion this year to $4 billion in 2014. It’s also a big piece in either avoiding bankruptcy, which appears doubtful, or preparing for a quick exit from Chapter 11 if the company files in the next week or so.

    In conversations with GM executives and some of their advisors this week, bankruptcy appears to be a foregone conclusion. There’s almost no way GM can get 90% of the bondholders who own some $27 billion in GM debt to take a big cram down.

    GM may also need bankruptcy to get rid of the 1,600 dealers that the company wants to cut by the end of 2010. Some of them will just sell to other dealers, but plenty will need a swift kick from the company to go away.

    If those dealers want to sue, it’s big money from GM to buy out their franchise agreements. But in bankruptcy, GM can get rid of dealers much more easily. In fact, one executive told me that the only reason Pontiac was in the company’s original fix-it plan was that it would have saved more than a billion dollars if GM kept just one Pontiac model around. But once the company—absent former Chairman and CEO Rick Wagoner—became more open to bankruptcy, GM no longer needed to keep a token version of Pontiac to evade legal fees and settlement costs.

    These days, anything can happen. Perhaps if bondholders see what happen to the dissenting creditors in Chrysler’s bankruptcy (their group has fallen apart) they may take the deal and swap their debt for a stake in the new GM. But I doubt it.

    One sources close to the situation told me that GM and Treasury haven’t really thought they could avoid a Chapter 11 for some time. Negotiating with bondholders was almost a show. Almost no one thought they could get a deal done outside of court. So look for that filing just before June 1.

  61. @magus12:

    I’m not anti-union. Even if you believe the union did GM in, they only were able to do so because the management refused to do their jobs. No union can ever be ultimately blamed for a company’s failure. It is the owners and managers that make decisions affecting the welfare of the company, not the union. The union’s job is just to get the best deal for the workers that is possible.

    My point about the union has to do w/ the violence it did to bankruptcy law to allow their pension and health care claims a priority in bankruptcy over the secured creditors. So far as I’m aware, it’s the first time bondholders were forced to concede priority in such a manner.

    And I think you’re right about the next decade.

  62. BennyProfane says:

    magus12

    All the Buick owners in the US will be dead soon, anyway.

  63. Thor says:

    Is it just me, or is there a thinly veiled desire to see this company fail in some of these comments? I don’t understand that. You see the same comments about Apple every time there’s a thread on the company. What is that about?

  64. “Secured creditors come before claims for wages earned pre-petition. Of course, with ongoing concerns, i.e., Chapter 11, post-petition wages have to be afforded higher priority, else no one would continue to work after the bankruptcy is filed.”

    I agree with this and do not believe this is a “political” argument or nonsense….

    Page 3 of the pdf linked here shows the prority in a chapter 7:

    Secured creditors are first in line, and note that in liquidation there are dollar and time limits on compensation and pension claims….

    http://www.swlearning.com/finance/brigham/ffm10e/web_cd_appendixes/07B.pdf

    ~~~

    BR: BUZZZ! Wrong section of the law.

    Why are you citing me liquidation preferences in a case that was a reorganization?

    I know some creditors WANTED to force a liquidation, through a few 100k workers out of their jobs, and other consequences be damned — but that was not the decision of these creditors (and spec buyers).

  65. Cynic_FA says:

    Rugby 1 says: In fact I would be happy to bet you $1,000 that in 9 months it is trading under $10 a share. How do we escrow the money to assure payment?

    I will take that action! The Federal Reserve will be in the middle of QE3 in nine months and they will be buying asset backed car loan crap to provide a little boost to GM.

    The next big idea: Owner Loyalty checks for shareholders of GM. Anyone driving the competition who comes in to buy a GM vehicle and owns GM stock…gets an owner loyalty check for $1,000.

  66. [...] Also up for conversation: Too Bad Banks Missed Out On the GM Treatment [...]

  67. NoKidding says:

    Rugby and Cynic,

    Just buy opposing options. No need to escrow anything.

  68. Cynic_FA says:

    BR You are making the point that labor contracts take priority over bond holders. I said that the treasury took a junior position to the labor (pension and VEBA) . Presume I agree with your position that labor is superior to existing debt. I don’t agree that labor is superior to new debt for debtor in posession. If labor claims cannot be wiped out in BK why would anyone provide DIP financing?

    I don’t see any reason that the government investment takes a junior position to labor. This is strictly a government bailout of the too expensive to survive pension and health care benifits. I don’t see anything in your logic that would say the government money needed to be injected as junior to the union.

    ~~~

    BR: Because the value of the going concern is greater than the subsequent capital injection. The Treasury applied $50B in DIP financing — it looks like that will be a fair trade, and wont lose much money.

    Note that governments have other public policy objectives, and are not merely P&L focused

  69. philipat says:

    The Swedish model (Essentially the equivalent to a US prepackaged bankruptcy) worked very well for the Banks, as opposed to the Japanese/Wall St crony model adopted in the US. Outcomes will be the same.

  70. crankitto11 says:

    Brilliant analysis, Barry.

    We moved quickly and ruthlessly to liquidate the S&L mess in the late 80′s and early 9o’s, and soon the financial sector and the economy as a whole recovered in full.

    The Japanese didn’t after their stock and real estate markets tanked in the early 90′s, and what were some of the world’s richest and most feared banks turned into zombies with fictitious balance sheets that limped on lifelessly for 10 years. When the government finally forced a clean up and consolidation in the early 2000′s, the Japanese economy finally pulled out of the “lost decade.”

    I pray that we don’t experience the same madness.

  71. MotownMichael says:

    As somebody heavily involved in the auto industry, and been to virtually every assembly plant in North America, and many in Europe, I can tell you GM is a totally new company: the have not only great products, but world-class products now (Wait until you drive a Volt; its way cool), being a gasoline guy however I’ll take a Caddy CTS-V wagon against any European sedan, any day for comfort, drivability, etc. Most importantly their manufacturing processes are great now, are extremely automated. I read that after the new labor contracts, they will have an approximate $400 per vehicle labor cost advantage over Toyota. In this business, that’s huge. Not to mention GM has a huge market share in three of the most important emerging markets:China, Brazil and Russia. And yes, this is why I bought their stock today.

    Chrysler has been quiet, but they have also been making great, actually monumental strides, and is a sleeper, that will awaken in 6 months to 1 year with awesome cars, and they have gotten a handle on quality (See the new Jeep Grand Cherokee, it rocks, and you can tell the Italians are in charge of the interiors, the days of cheap plastic crap are over). I find it ironic, the Italians will be successful where Daimler was not.

    Obviously Ford has had many home runs of their own and were able to avoid bankruptcy, and also negotiated better labor contracts and reduced capacity in older facilities, but still has a lot of debt.- had GM and Chrysler liquidated, Ford however would have filed a month later, as the supplier base would have completely collapsed. What the government did was smart, as it also saved Ford- which is why their chairman thanked the Obama Admin for how the situation was handled.

    All three of these companies are currently profitable with our current low volumes in the US- hopefully it will hit close to 11.75m, BUT they will be immensely profitable once the volume returns to a normal 15-17m vehicles per year.

    Detroit is back baby! And it will be a competitive force once again.

    Is there a precedent for this of the US Government taking over a company, turning it around, and privatizing it? Yes, one of the most successful IPO’s of the time was Conrail.

    http://en.wikipedia.org/wiki/Consolidated_Rail_Corporation

    Which was created from the wreckage of the ill-fated Penn Central Railroad in the Northeastern US. Conrail was created by the US government on April fools day, 1976. They did the same thing: rationalized their route structure, changed their labor contracts, and learned how to operate efficiently after the railroads de-regulated under Jimmy Cater in the Staggers Rail Act of 1980. After considerable debate in Congress, the Conrail Privatization Act of 1986 was signed into law by President Reagan on October 21, 1986. The then largest initial public offering in US history came on March 26, 1987 when Conrail’s stock, worth $1.9 billion, was sold to private investors.

    In 1999, it was purchased by Norfolk Southern and CSX for $10 Billion. Investors got a great return, the taxpayers got their money back, and the US got a more efficient railroad transportation network. Uncle Sam fixed the railroad problem-

    Disclosure, since they say you should invest in the business you know: I have positions in GM and Ford, but no other auto companies currently.

  72. MotownMichael says:

    I didn’t realize this-
    Old GM’s Creditors Make $5 Billion in IPO, Are Entitled to More-

    http://www.bloomberg.com/news/2010-11-18/old-gm-s-creditors-make-5-billion-in-stock-offering-are-entitled-to-more.html

  73. Sandra says:

    from: http://www.epi.org/analysis_and_opinion/entry/setting_the_record_straight_on_gm/

    Q. Doesn’t this agreement reverse many of the normal rules of bankruptcy and capitalism? Isn’t the government favoring UAW members over bondholders, who lent money to GM?

    A. Yes and no. This is a better deal than workers often get in bankruptcy, where it is common to see their collective bargaining agreements abrogated, their claims to retiree health benefits wiped out, and their pensions frozen or reduced. But the UAW and its retirees have already given up tens of billions of dollars in wage and health care concessions over the last four years and in this bankruptcy deal to help GM survive. And although GM will still be obligated to fund 75% of the health insurance coverage it promised them, the retirees are not guaranteed lifetime coverage. GM will first have to regain profitability, since half of its future payments to the VEBA will be in the form of company stock.

    GM’s current shareholders will see the stock they bought or inherited lose its entire value, and unsecured bondholders will have to accept 10% of the equity in the new GM rather than cash in payment on their bonds. Considering that they probably would not have received anything were it not for the government intervention, this outcome, while unfortunate, is fair. Secured bondholders, on the other hand, will have their bonds repaid in full. Bankruptcy law typically gives high priority to the claims of secured bondholders and that practice is being upheld in this case.

  74. curbyourrisk says:

    BR: I think your interpretation of bankruptcy law is sadly lacking.

    The law is that employees are super senior creditors, and if you think that was not the case, you should have sued on behalf of your position.

    Much of the claims of contractual abrogation came not from creditors to GM, but from vulture specs who bought paper in the secondary market at pennies on the dollar, then tried to force a liquidation rather than a reorg.

    They miscalculated, then screamed bloody murder. (Boo hoo)

    Actually none of that was what I was talking about. I never mentioned anything about employees. We were a supplier and we were eventually made whole, as were most of the suppliers. My point was to be made whole we had no choice but to sign 30 page contracts relinquishing ourselves of all rights. If you chose not to go along with the process you were immediately told….bankruptcy meant you did not get paid and tough shit. MY POINT is this set bad precedent and now we are going through this with A LOT of other companies. All want to do the same 30 day in and out bankruptcy and all CITE GM as why they should be allowed to do this. Funny thing is all of these companies were once thriving companies….who in the mid 2000′s were all bought by private equity. THEY SHOULD HAVE BEEN LIQUIDATED. Why the hell is chapter 7 even on the books if we won’t use it. I know everyone was screaming about all the OTHER companies that would go bye-bye. GUESS what we supply to all of them too…tons of tier 1 and tier 2 auto suppliers…. LOTS OF THEM WENT OUT OF BUSINESS ANYWAY. No one cried for them…. GM was was made a special case and the bankruptcy law was made a complete sham of. If you don’t realize that…than it is you who needs to learn a thing or two about bankruptcy law. Our company usually ends up on any creditor board during the bankruptcy because we are normally a pretty big supplier for them….. No such board in the GM case…the government called ALL the shots.

  75. curbyourrisk says:

    BR: Because the value of the going concern is greater than the subsequent capital injection. The Treasury applied $50B in DIP financing — it looks like that will be a fair trade, and wont lose much money.

    Note that governments have other public policy objectives, and are not merely P&L focused

    Just so you know the Government has already admitted to losing $9 billion on the IPO. That is almost 20%. They said they are OK with that. I don;t remember anyone asking us taxpayers if we were OK with that. Just what are their “OTHER” public policy objective you talk about?? Besides making sure the unions are paid back for electing Mr. Barry Soetoro.

    ~~~

    BR: If you ignore the $27B in losses that otherwise would have occurred. Remember, Uncle Sam was on the hook for PBGC and Health benefits had GM been liquidated

  76. curbyourrisk says:

    BR: BUZZZ! Wrong section of the law.

    Why are you citing me liquidation preferences in a case that was a reorganization?

    I know some creditors WANTED to force a liquidation, throw a few 100k workers out of their jobs, and other consequences be damned — but that was not the decision of these creditors (and spec buyers).

    It was A LOT more than some…..But no matter how many wanted, there was only 1 vote that matters. The government. The re-wrote bankruptcy law at every turn of this bankruptcy.

    ~~~

    BR: The Judge in the case noted it was less than 1% of the bondholders.

    Read the decision . . .

  77. Erik Larson says:

    GM Creditor Committee Includes UAW, Three Dealerships
    June 3 (Bloomberg)

    Bankrupt General Motors Corp.’s official committee of unsecured creditors includes the United Auto Workers union, owed $20.6 billion; Wilmington Trust Co., representing bondholders owed $22.8 billion; the Pension Benefit Guaranty Corp. and three GM dealerships.

    The 15-member group was selected today by U.S. Trustee Diana Adams at a meeting at the Hilton New York hotel in Manhattan.

    GM lawyer Harvey Miller said challenges by unsecured creditors won’t stop the “inevitable conclusion” of the case: the sale of Detroit-based GM to an entity owned mostly by the U.S. government, he said. The automaker sought Chapter 11 protection in New York June 1 after a plan to reorganize out of court failed.

    We don’t have a problem with the secured creditors,” said Miller, of the firm Weil Gotshal & Manges LLP in New York and who attended today’s meeting. “It’s not a situation where there’s a lot of flexibility. It’s a very unusual case.”

    GM won court approval yesterday to sell its best assets next month to a streamlined entity it plans to use to compete in world markets with the help of $65 billion in government loans.

    The automaker, the largest manufacturer to seek protection from creditors, also won permission June 1 from U.S. Bankruptcy Judge Robert Gerber in Manhattan to draw $15 billion from a $33.3 billion bankruptcy loan. GM yesterday said it had an agreement to sell its Hummer sport-utility vehicle unit.

    GM plans to form a new company in 60 to 90 days, built around its Cadillac, Chevrolet, Buick and GMC brands in the U.S. The lead bidder for the assets is the U.S. Treasury, which will provide the 100-year-old company with billions in loans that would be converted into a 60 percent equity stake.

    The GM case is In re General Motors Corp., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

  78. curbyourrisk says:

    BR: You said: I’ve expained this in the past: the public policy is that in BK court, owed wages are treated as a senior priority.

    I do not see how pension obligation are considered owed wages. They are promised wages.. When we have dealt with bankruptcies in the past we have sat on many creditor committees where the employees also had a seat. many times there were senior and secured due to the fact that they were owed BACK wages….. I agree with you that OWED wages are a super senior claim …. BUT I disagree that pensions s are senior creditors. THE PBGC was established to take care of those. The problem is….the GM bankruptcy would have broken the PBGC and they were treated completely different.

  79. wngoju says:

    BR – you should write a book on this. Wait…

  80. Several people — none of whom are BK attorneys — wrote in challenging my statement that wages get paid in reorgs as a high priority.

    One reader insisted they never do, and asked me for a source:

    The answer is Title 11, Chapter 5, SubChapter I, § 507

    § 507 Priorities

    (a) The following expenses and claims have priority in the following order:
    (1) First:
    (A) Allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition shall be applied and distributed in accordance with applicable nonbankruptcy law.
    (B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative to a governmental unit (unless such obligation is assigned voluntarily by the spouse, former spouse, child, parent, legal guardian, or responsible relative of the child for the purpose of collecting the debt) or are owed directly to or recoverable by a governmental unit under applicable nonbankruptcy law, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition be applied and distributed in accordance with applicable nonbankruptcy law.
    (C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302, the administrative expenses of the trustee allowed under paragraphs (1)(A), (2), and (6) of section 503 (b) shall be paid before payment of claims under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.
    (2) Second, administrative expenses allowed under section 503 (b) of this title, and any fees and charges assessed against the estate under chapter 123 of title 28.
    (3) Third, unsecured claims allowed under section 502 (f) of this title.
    (4) Fourth, allowed unsecured claims, but only to the extent of $10,000 for each individual or corporation, as the case may be, earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for—
    (A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual; or
    (B) sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independent contractor in the sale of goods or services for the debtor in the ordinary course of the debtor’s business if, and only if, during the 12 months preceding that date, at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor.
    (5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—
    (A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only
    (B) for each such plan, to the extent of—
    (i) the number of employees covered by each such plan multiplied by $10,000; less
    (ii) the aggregate amount paid to such employees under paragraph (4) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.
    (6) Sixth, allowed unsecured claims of persons—
    (A) engaged in the production or raising of grain, as defined in section 557 (b) of this title, against a debtor who owns or operates a grain storage facility, as defined in section 557 (b) of this title, for grain or the proceeds of grain, or
    (B) engaged as a United States fisherman against a debtor who has acquired fish or fish produce from a fisherman through a sale or conversion, and who is engaged in operating a fish produce storage or processing facility—
    but only to the extent of $4,000 for each such individual.
    (7) Seventh, allowed unsecured claims of individuals, to the extent of $1,800 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
    (8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—
    (A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—
    (i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
    (ii) assessed within 240 days before the date of the filing of the petition, exclusive of—
    (I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and
    (II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days.[1]
    (iii) other than a tax of a kind specified in section 523 (a)(1)(B) or 523 (a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case;
    (B) a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition;
    (C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;
    (D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (4) of this subsection earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;
    (E) an excise tax on—
    (i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or
    (ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;
    (F) a customs duty arising out of the importation of merchandise—
    (i) entered for consumption within one year before the date of the filing of the petition;
    (ii) covered by an entry liquidated or reliquidated within one year before the date of the filing of the petition; or
    (iii) entered for consumption within four years before the date of the filing of the petition but unliquidated on such date, if the Secretary of the Treasury certifies that failure to liquidate such entry was due to an investigation pending on such date into assessment of antidumping or countervailing duties or fraud, or if information needed for the proper appraisement or classification of such merchandise was not available to the appropriate customs officer before such date; or
    (G) a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.
    An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.
    (9) Ninth, allowed unsecured claims based upon any commitment by the debtor to a Federal depository institutions regulatory agency (or predecessor to such agency) to maintain the capital of an insured depository institution.
    (10) Tenth, allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.
    (b) If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(2) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364 (d) of this title, then such creditor’s claim under such subsection shall have priority over every other claim allowable under such subsection.
    (c) For the purpose of subsection (a) of this section, a claim of a governmental unit arising from an erroneous refund or credit of a tax has the same priority as a claim for the tax to which such refund or credit relates.
    (d) An entity that is subrogated to the rights of a holder of a claim of a kind specified in subsection (a)(1), (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), or (a)(9) of this section is not subrogated to the right of the holder of such claim to priority under such subsection.

  81. Old GM Creditors Get $5 Billion From IPO, More If Shares Rise

    Creditors of General Motors Co.’s bankrupt predecessor, who will likely get about $5 billion from the new automaker’s $20 billion initial public offering, might be able to buy millions more new shares for as little as a third of yesterday’s price.

    GM’s bankrupt estate was issued 150 million shares, or 10 percent of stock in the new company, to help pay off creditors. At yesterday’s closing price of $34.19, that stock is worth about $5.1 billion.

    So-called Old GM has warrants that entitle it to buy about 273 million shares at between $10 and about $18 each, according to the company’s Nov. 17 filing with the U.S. Securities and Exchange Commission. If the shares rise, as CRT Capital Group LLC’s Kirk Ludtke expects, creditors stand to make even more.

    “We value the shares of the new GM at $45,” said Ludtke, a senior vice president at the Stamford, Connecticut-based brokerage firm.

    The bankruptcy estate is still resolving its liabilities, which were $35.7 billion as of Sept. 30, according to its last monthly operating report. If unsecured claims are certified as more than $35 billion, the estate would get at least 10 million new GM shares. Old GM filed for bankruptcy in June 2009.

    “Without the bankruptcy there would be a high probability that GM as we knew it would have been disassembled, dismembered, and you wouldn’t have this American icon still in existence,” said Harvey Miller, a lawyer with New York-based Weil Gotshal & Manges LLP who represented GM in its bankruptcy.

    GM rose as high as $35.99 before closing at 3.6 percent above the initial offering price in New York Stock Exchange composite trading yesterday.

  82. [...] Too Bad Banks Missed Out On the GM Treatment (November 18th, [...]

  83. [...] On second thought, maybe the banks should have gotten the GM pre-packaged BK deal.  (TBP) [...]

  84. curbyourrisk says:

    BR: “Several people — none of whom are BK attorneys — wrote in challenging my statement that wages get paid in reorgs as a high priority. One reader insisted they never do, and asked me for a source:”

    I hope you were not referring to me as I said….” do not see how pension obligation are considered owed wages. They are promised wages.. When we have dealt with bankruptcies in the past we have sat on many creditor committees where the employees also had a seat. many times there were senior and secured due to the fact that they were owed BACK wages….. I agree with you that OWED wages are a super senior claim …. BUT I disagree that pensions s are senior creditors. THE PBGC was established to take care of those. The problem is….the GM bankruptcy would have broken the PBGC and they were treated completely different.”
    (5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—
    (A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only
    (B) for each such plan, to the extent of—
    (i) the number of employees covered by each such plan multiplied by $10,000; less
    (ii) the aggregate amount paid to such employees under paragraph (4) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.
    (6) Sixth, allowed unsecured claims of persons—
    (A) engaged in the production or raising of grain, as defined in section 557 (b) of this title, against a debtor who owns or operates a grain storage facility, as defined in section 557 (b) of this title, for grain or the proceeds of grain, or
    (B) engaged as a United States fisherman against a debtor who has acquired fish or fish produce from a fisherman through a sale or conversion, and who is engaged in operating a fish produce storage or processing facility—
    but only to the extent of $4,000 for each such individual.”

    I do have to question this…as there are defined amounts owed here. I still do not see how or why the entire pension needed to be saved BY GM or the GOVERNMENT (tax payers) in this instance. That is what the PBGC was and is established for. If you are talking about this as to why the Pension made out….”

    ~~~

    BR: No it was someone who was long ago since banned from commenting here due to his incessant rudeness and misstatement of facts. He wont go away, and after a spittle flecked tirade swearing he was outta here, he subsequently emailed me “I cant quit you.”

  85. Edoc says:

    Thanks Fred C Dobbs.
    I understand that the bankruptcy process functions well under normal circumstances. My point was more about what might happen if the largest 5 or 6 banks which sit at the epicenter of the US credit/financial markets were allowed to crumble in the post-Lehman panic. Although we can pretend that people are rational, I don’t think the bankruptcy process would have calmed the chain of events that were likely to follow.

    Please note that I understand the major flaws in the policy that big government pursued, and I’m not defending them as any kind of ideal– I’m just skeptical that allowing the biggest banks to crater would have led to a better outcome during this period– even if over the longer term it was the right (and more ideologically pure) thing to do.

  86. No, you guys are quoting bad dope — the Unions did not take over GM. (Please stop repeating false statements).

    Here is the post bankruptcy, pre-IPO ownership stake:

    1. The federal government: 60%.
    2. The Canadian government and the Ontario provincial government: 12.5%
    3. An independent health care trust (VEBA) for GM retirees: 17.5%
    4. Unsecured bondholders: 10%

    The Union was not handed GM. The health care trust got 17.5% of the company in exchange for dropping ALL of their benefit claims, past present and future.

  87. blu82 says:

    I think curbyourrisk is correct. Barry Ritholtz keeps claiming that wages are a high priority unsecured creditor in BR. I have no doubt that they are. But, I do not think any union members had claims for unpaid wages. The payment of their wages were never interrupted. They had claims for other things (like pensions) that are usually wiped-out in Br but covered, to some extent, by the PBGC.

    So, why did the union obtain any ownership interest in Br.? How is it s good thing that the UAW received special treatment not normally given to to the unions of bankrupt companies? Why are they being rewared for being one of the main causes of the Br. in the first place. The GM and Chrysler bankruptcies were political abominations.

    ~~~

    BR: Rather than guess or hope or want or assume, why not do the research?

    I know that many of the people who have weighted in on this WANT it to be a specific outcome, and really do not care how BK works in practice.

    The Union haters clearly were sent over the edge of this — the liquidation option was exciting to them, and given that outcome did not happened they were terribly disappointed. I am not suggesting the creditors were well treated, but it was not the abomination the idealogues claimed.

    Again, don’t believe me: Here is the relevant statute: Title 11, Chapter 5, SubChapter I, § 507, and here is the Bankruptcy Court decision. IN RE: GENERAL MOTORS CORP

    Instead of wishing it was otherwise, try reading the law and the judges application of that law as it applied to Wages, health Care, and Unfunded guaranteed benefit pension plans.

  88. [...] in mind, the purpose of the GM complement was to point out how absurd the bank bailouts have [...]

  89. [...] Austan Goolsbee, Chairman of the Council of Economic Advisers, discusses the decisions on the American auto industry in light of the General Motors IPO. (See also Too Bad Banks Missed Out On the GM Treatment) [...]