By on November 29, 2008

Speculation is rife that GM plans on shutting down or selling Saab, Pontiac and/or another brand as a prelude to a federal bailout. Common sense and recent history suggest that any such move will create a raft of breach of contract claims by jilted dealers and suppliers. As Oldsmobile’s demise proves, there’s only one possible resolution to the resulting feeding frenzy: cash termination payments. If, however, GM filed for Chapter 11 bankruptcy, these breach of contract claims would become nothing more than unsecured claims– which are resolved within the debtor’s C11 reorganization. The claimants would be legally barred from costly state court litigation. In a stroke, GM would be transformed. How great is that? But wait, there’s more!

Suppose Saab’s potential new owners want to make the moribund brand profitable by using different suppliers. Outside of C11, fuhgeddaboutit. The resulting lawsuits would daunt even the most dauntless would-be rescuer. Inside Chapter 11, GM can terminate Saab’s supplier agreements without legal blowback. Creditors asserting liens and security interests on GM’s assets are prevented from delaying their sale; litigation over the validity of disputed claims is prohibited. Since the suppliers’ termination claims become unsecured claims, the affected manufacturers would receive no cash payments. None. In fact, GM can use the money “saved” to aid the profitable operations it intends to keep. And the savior gets to do it their way.

As regular readers know, GM’s renaissance is hamstrung by its bloated dealer network– which is protected by 50 state franchise laws. If GM is to match tri-branded Toyota’s slim-line 1200 dealer network, The General’s existing dealer agreements need to be terminated or modified. Outside C11, Oldsmobile. Under the terms of federal loans (or loan guarantees) for GM, the resulting legislation could amend the Federal Bankruptcy Code to create a “GM exemption.” A U.S. District Court could receive exclusive jurisdiction over any and all auto dealer termination claim. No fuss, no muss, no “ongoing situation” a la Oldsmobile.

A disadvantage (apparently) to GM in Chapter 11: the rules of reorganization require full and complete disclosure of the automaker’s financial status and future profit (you remember profit?) projections. Truth be told, “limited disclosure” to taxpayers is nothing more than contrived non-disclosure– which is insulting, misleading and dangerous. By “encouraging” GM to file, the feds would be forcing GM to open its books to full public scrutiny.

This would help end GM’s stifling corporate culture. It would encourage a new broom, and the introduction of a key concept long missing from Renaissance Center: accountability. In fact, prior to December 8, 2008, GM should be required to make a written SEC filing disclosing the identity of:

a. its 100 largest bondholders;
b. its 50 largest trade creditors/suppliers; and
c. its 20 largest common shareholders.

Knowing how much debt is concentrated with which bondholders helps us gauge the prospects for conversion of debt into equity. Knowing the amounts owed to the largest trade creditors helps us understand how quickly creditors/suppliers can be organized and the terms of a Chapter 11 prepack negotiated. [Much of this information is readily available from paid providers of financial data– but not to the public.] This information will also disclose who benefits most from a taxpayer-funded automaker bailout/rescue.

Sorry for the digression. But in corporate restructurings, whether in or out of bankruptcy, there are obvious concerns about management’s competency. It’s rare for creditors or potential lenders to blindly swallow/follow management’s restructuring recommendations. Captains of sinking ships should not get the chance to prove that they were right and the iceberg was wrong. Congress needs its own independent restructuring experts to decide if sinking automakers can be salvaged. Again, Chapter 11 helps bring the automaker out of the shadows and into the light, where it belongs, for its own good.

By the same token, a Chapter 11 filing would eliminate the uncertainty now surrounding GM and its brands. While there’s no doubt that GM’s sales would crater, an “everything must go” sale would create a new buzz for the company’s vehciles. With a compelling public spokesperson at the helm (shades of Lee Iaccoca), GM could ask for– and receive– public sympathy and support for a fresh start. With the right brands, PR guidance and corporate policies (e.g. U.S.-built products or a new committment to green machines ), GM would have a genuinely compelling– and credible– story to tell.

In short, GM’s fear of chapter 11 is entirely misplaced. After the hearings next week, I will propose a 100-day plan for a GM restructuring in a prepackaged Chapter 11. Meanwhile, there are question that need asking. And ask them I will.

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18 Comments on “Editorial: General Motors Death Watch 221: Why GM Should Stop Worrying And Learn to Love C11...”


  • avatar
    Bill Wade

    With a compelling public spokesperson at the helm (shades of Lee Iaccoca), GM could ask for– and receive– public sympathy and support for a fresh start.

    Uh, no.

  • avatar
    becurb

    By Richard N. Tilton

    In short, GM’s fear of chapter 11 is entirely misplaced.

    I think the only “fear” of Chapter 11 at GM relates to Red Ink Rick and Co. having to admit that they are incompetent, and give up their place at the trough.

    I fully expect any “plan” that is presented to Congress will be mostly an attempt to explain why they should not be tossed out in the cold. The remaining 10% will be a reiteration of “jobs! jobs! jobs!”.

    Bruce

  • avatar
    Geotpf

    Bankruptcy of GM, or any other car maker, would cause sales to drop an additional 20-30 percent, on top of the 30-45 percent drop that has already occurred. A lot of people would not buy a vehicle from a bankrupt automaker. It’s not like an airline where consumers are only worried about the company being around until the plane lands. They would be afraid of their warranties, future availability of spare parts, and resale value. If GM enters Chapter 11 it will never get out of it. If your sales drop 75 percent in one year you are toast. That is not an unlikely scenerio in the event of a GM bankruptcy.

    Now, GM is probably toast anyways. But bankruptcy is not the cure.

    The cure is to sell more vehicles, at a price that makes GM money. I’ve seen no plan that will accoplish this, and, frankly, I can’t think of one myself.

  • avatar
    Jacob


    Bankruptcy of GM, or any other car maker, would cause sales to drop an additional 20-30 percent, on top of the 30-45 percent drop that has already occurred.

    Bankruptcy protection does not have to run forever. A restructured company could emerge out of it in less than a year. While there might be a sales drop in the first couple of months, a marketing campaign worth less than $50M would be sufficient to convince people that this is not the end of the company and its cars. In addition, the very-likely-in-the-event-of-C11 government bailout money could make up for the lost sales.

  • avatar

    As the current sales numbers show, bankruptcy is already accepted as a given, or “priced into the market,” as they say. Compare the Detroit sales to the sales of the transplants and imports, and you already see the 20 percent or so difference. Also as reported here, banks redline Detroit cars. They are also convinced that they will go under. The emperors already are without underwear. A decent C11 plan, with strong assurances for warranty and parts may even boost sales.

  • avatar
    Jimal

    In fact the only way for C11 to be a viable solution is if current and future warranties are honored. If they can somehow turn the contracts and money freed up by C11 into better product, they just MIGHT pull this out.

  • avatar
    compy386

    If GM were a small company all the things you said would be true. However, GM is huge. You remember how much money the lawyers and consultants sucked out of Delphi? How is it doing now? Stocks trading a 2 cents a share. I’m sure it’s not getting record business from anyone. Right now the credit market is pretty much frozen so how will GM get a bankruptcy lien? I don’t think there are many financiers out there willing to extend a line of credit to GM during bankruptcy. Suppliers won’t supply to GM without cash up front payments (accounts payable is not secured in bankruptcy). GM’s sales would absolutely plummet. Yeah people will feel sorry for GM, but not sorry enough to buy a 20k car without a good guarantee that the warranty will still be there. Or how about spare parts? GM’s sales would disintegrate and that includes places like China where GM is doing really well. You would effectively kill global GM through a bankruptcy process. There is a reason why GM is fighting tooth and nail to avoid bankruptcy. It really wouldn’t help GM

  • avatar
    Detroit Todd

    GM has some pretty smart lawyers and businessmen. Don’t laugh — it’s true.

    On paper, there is much to be gained for GM with a Ch. 11 filing. In reality, it would be a complete disaster. That is why we haven’t seen it done and, hopefully, we won’t.

    Even GM knows it needs to shed dealers, renegotiate debt, alter or cancel contracts with suppliers, etc. But the minute they pull out the bankruptcy gun, it will be wrestled away from them by senior debt holders and pointed at their heads. And the gun will be fired. A GM attempt at Ch. 11 reorganization would last about two weeks before being converted (either voluntarily or involuntarily) into a Ch. 7 liquidation.

    Not to mention that, regardless of the chapter (7 or 11), very few people will purchase a new car from a bankrupt company.

    The end result would be a bunch of dumb ass Wall Street money men (the same ones responsible for the current credit crises and who are absolutely clueless about the automobile industry) gaining control of GM. See Cerberus & Chrysler for how well that sort of thing works out.

    Or, even worse, Tata and/or Geely buy GM for pennies on the dollar, shut all N.A. production, and receive an instant (and huge) N.A. dealer network.

    Wanna see a real race to the bottom? Let GM file bankruptcy.

  • avatar
    phattie

    They have to show the world/USA that they are “trying everything” they can do to save to company… then, filing for C11 will be easier.

    Then, they can say that they tried and that Congress/Senate failed them.. it distracts the public from the poor management and crappy cars that got them here in the first place.

    Either way, its gonna be a rough ride.

  • avatar
    craiggbear

    To say that Chapter 11 would be a complete disaster suggests that the current state isn’t one already. This fear of disclosure suggests there is more corporate hanky panky that we may even know already, doesn’t it? This makes me think that ANY government support has to bring out the stuff from the closet.

    Otherwise, no way!

  • avatar
    slartybarfast

    ahhhhhhh woooooooo ahhh eyya whooo!!!!!!!!!!!

    sorry the photo made me feel a need to channel Slim Pickets.

  • avatar
    willbodine

    GM is not Studebaker. When and if the General declares bankruptcy, either via Chap. 11 or 7, the assets will be sold. Real (factories, etc) and intellectual (brands, patents etc.) property has value, to someone.
    Most analysts see a future for the Chevrolet factories/brands and also Cadillac. Whether seperate or together, they could produce marketable vehicles virtually without interruption. Once the vehicle-buying public realizes this, sales should stablize if not rise.

  • avatar
    postjosh

    Geotpf :

    Bankruptcy of GM, or any other car maker, would cause sales to drop an additional 20-30 percent, on top of the 30-45 percent drop that has already occurred. A lot of people would not buy a vehicle from a bankrupt automaker.

    as was previously noted, this is already priced into the market. the only way c11 would be successful is if, it is directed by the new administration and congress. by directed, i mean that the gov’t needs to underwrite the guaranties on existing gm cars and those that will be sold under c11. also, the gov’t need to set up the post c11 debtor financing. also, the administration has to manage all the creditors by declaring it a national emergency to keep the factories working and not let that goal get bogged down in the courts.

    in addition, there has been a lot of talk of having the government finance the lion battery research that would make the volt and other electrics a reality. this type of thing has been done successfully before. essentially, the gov’t did this with such technologies as jet propulsion and the internet.

  • avatar

    GMs “problem” is GMNA. Way too many dealers from a time of a much bigger share, selling too many versions of mediocre vehicles that are just not getting traction in todays lousy market. Add UAWs wages, job banks, pensions and health care benefits and it is impossible to make a profit, let alone get close to parity with competitors. C11 for NA is the only way to break franchise and union contracts. Anybody that thinks selling or shutting down Saab or Pontiac FTM will somehow magically cure those problems, needs to hit that pipe…again.

    The puny part that Saab plays in this(and to some extent Saturn now that it sells “Opels”) is that it is a part of GM Europe that happens to be sold here. Those $20-40K GME cars(see Saab, Opel, gmeurope.com) that are made today, including their turbodiesels and even smaller engines and the hybrid systems, are the models that GMNA needs to truly compete. And GMs gotta stop bragging about 30mpg highway, when 40 or 50 is whats needed.

    We will see what we see when the $40K+ Volt shows up in two?? years, but before all GMNAs eggs seemingly get thrown in this basket, cars GM makes today(but just dosent sell here)need to be integrated.

  • avatar
    Detroit Todd

    To say that Chapter 11 would be a complete disaster suggests that the current state isn’t one already.

    It isn’t. True, the domestics were in trouble, but the instant cause of the current crisis is the credit crunch/shitty economy. Note that the importers are renting record space at the all the ports to store their unwanted vehicles. GM/Ford/Chrysler were in worse shape than the imports to begin with, so they are in more dire straits now.

    And the fact that the three domestic are (today) still in business, meeting payroll and selling cars means, on its face, that things are not (yet) a “complete disaster.”

    This fear of disclosure suggests there is more corporate hanky panky that we may even know already, doesn’t it? This makes me think that ANY government support has to bring out the stuff from the closet.

    What closet are speaking of? GM and Ford are publicly traded companies. They make innumberable filings with the SEC, their bondholders, their shareholders, etc. It’s all there in plain view.

    To the extent that you wish to see any proprietary information from GM or Ford, it ain’t gonna happen outside of a bankruptcy filing. In fact, it would be the height of irresponsiblity to do so.

    Otherwise, no way!

    Let our domestic manufacturing base die, but give billions more in no-questions-asked funds for lending institutions who drove us into this ditch in the first place, and who are using the money not to get credit flowing again (as was supposed to happen), but to buy one another up.

    America — what a country!

  • avatar

    Let our domestic manufacturing base die, but give billions more in no-questions-asked funds for lending institutions who drove us into this ditch in the first place, and who are using the money not to get credit flowing again (as was supposed to happen), but to buy one another up.

    GM should buy back Cerberus’ share of GMAC, merge GMNA into GMAC, recharter GMAC as a “bank” and then Paulson & Co. will start shoveling cash at them just like the big banks.

  • avatar
    cthill

    In a bankruptcy do not the current stock holders lose everything.

    Don’t the board of directors work (in theory) for the stock holders interest so shouldn’t they try to avoid bankruptcy if possible so the stock holders get something.

  • avatar

    GM management is entrenched. And so the first and foremost step to saving GM is to replace the management.

    New management can take a fresh look at how to save GM. Shed vehicle models, brands, dealers, suppliers, factories, real estate, overhead, unions, health care, pensions: how is it going to get done?

    Next, how is GM going to serve and delight consumers in the future and repair damaged brands? A daunting task that will take a decade.

    One thing is for sure: the same old tired and burnt out management is not going to succeed.


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