By on June 29, 2009

The most definitive difference between Chrysler’s swift conversion from Old to New Chrysler and the General’s “reinvention”: the element of surprise. Or lack thereof. The General’s list of creditors on GM’s court filing (dealers, parts manufactures, advertising media, bondholders, et al.) are all painfully aware of what happens when “The Fix” is in. They now know what it means when The President of the United States promises the public that “we will get this done in a swift and expeditious manner.” Forewarned is forearmed. And there’s another crucial difference between Fiatsler’s transformation and the plans for Government Motors: the GM dealer body is a wealthier, more connected group of businessmen than the Chrysler dealer body. In other words, “Old” GM may not go so quietly into that good night.

While much has been made about GM’s financial face plant, the automaker’s dealer body as a whole has enjoyed decades of immense profits, largely on the back of Suburbans, Tahoes and Silverados. The GMT900 SUV platform wasn’t enough to save the corporate mothership, but it’s been a profit center to the GM dealer that the public cannot even begin to fathom.

When the new Suburban was introduced in 1992, the majority of the metro GM dealers retailed the product for up to $3,000 over MSRP. For several months. The Y2K Suburbans and Tahoes were sticker plus units. I recall buying three new Suburbans from Troy Aikman Chevrolet for full MSRP, titling them on my dealer license and selling them to dealers that same week at the Dallas Auto Auction for $1,500 over MSRP. When the supply caught the demand curve, dealers discounted the model—all the way down to full MSRP. Dealers still made thousands of dollars per unit.

The same story unfolded for the Suburban’s horizontally-challenged little brothers (Tahoe/Yukon). The truck trough didn’t dry up even (especially?) when GM built a $75,000 Suburban called Escalade EXT. The Suburbans delivered huge profits to dealers all through the ’90s, into the next century. Same story for GM’s pickup trucks, only more so. If the gas price shock hadn’t happened, if the economy was still relatively robust, a GM franchise would still be a license to print money. Why do you think there were so many of them?

Up until the crash, GM dealers amassed huge fortunes. They used this money to gain tremendous political power, on every level (local, country, state and federal). As TTAC points out, car dealer cash fueled the political ambitions of presidential aspirant and current Secretary of State Hillary Clinton. Some dealers, being dealers, pissed-away their money. Others, many of whom recently received their walking papers from GM, have a significant war chest and an embarrassment of riches stashed in the political favor bank. As you can imagine, they’re not afraid to use either.

GM dealers witnessed the shellacking that Chrysler dealers just received. Even the ones that survived the recent dealer cull know that their time may be at hand. The Chrysler dealers took a few swings at the Obama politico machine but did not have the raw muscle to connect their punch. Take it from me, the GM dealer body is tooled-up, ready for a brawl.

Chrysler was “sold” to Fiat, the UAW and American taxpayers. There is no “buyer” for GM other than the feds. It’s just a default with a forgiveness. This would be a realistic strategy—if The General was not disowning a large percentage of its dealer body during this transition. But they are. Which puts the company’s new owners, politicians, straight in the middle of the dealers’ crosshairs.

The General’s bankruptcy will get hamstrung in court. The National Automotive Dealers Association and state dealer associations are going to have more success wrestling this bear back into its cage than we saw with Chrysler. GM’s C11 is in real danger of becoming so convoluted with legitimate legal concerns that the bankruptcy will end up converting to a Chapter 7 liquidation. The brands and assets will be carved out into packages and sold to the top dollar suitors.

The news story of the future is not which dealer was terminated but that all dealers are suspended until the liquidation sales have commenced. Dealers will put on their best-pressed suits to court the new owners of their family heirloom name plates, while rapidly encouraging them to become their districts’ new Chevrolet, Cadillac, Buick, Hummer, and possibly even Pontiac dealers, just as many of their grandfathers and great grandfathers did in the middle of the twentieth century.

Either that or The Presidential Task Force of Automobiles will dip into the public purse once again and arrange enormous payouts to abandoned dealers. After all, politicians can resist anything except political pressure. But any such payoffs will worsen GM’s reputation as a welfare queen, and sour voters to the whole project. No matter how you look at it, this dog won’t hunt.

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19 Comments on “Editorial: GM Chapter 7?...”


  • avatar

    I don’t think a C7 will happen. There’s just too much riding on this, and I don’t think President Obama wants to be known as the guy who killed GM.

    Expect more creativity in bankruptcy court, that’s my assumption.

  • avatar
    KixStart

    If the dealers are so wealthy, why don’t they buy GM? Then they get to call the shots.

  • avatar
    psarhjinian

    If the dealers are so wealthy, why don’t they buy GM? Then they get to call the shots.

    I was wondering something similar. The only reason I can think is that, collectively, the dealer body is not as smart as they’re made out to be and truly did not see the writing on the wall with regards to GM and it’s likely future. They rode the money train, but it had to be painfully obvious that there was a last stop coming down the line, or that there’s no real chance of a second ride. Yes, it was lucrative while it lasted. No, you’re not getting that market back.

    I also highly doubt the dealer body wants control of GM for the same reason. These are not big-picture/long-term people, the kind of people you want running a manufacturing enterprise. I’d sooner have the UAW and the government in control as they’d at least be interested in keeping the enterprise viable in the long term. Dealers would run it into the ground in the most painful way possible as long as it maximized their profits.

    Allow me to cry crocodile tears for the dealers who didn’t see the massive, sucking black hole on the horizon. Another poster put it thusly (paraphrasing) “You, as a franchisee, need to keep up with and proactively address the viability of the brand you are franchising. If you own a donut shop and your supplier starts ordering cheaper foodstuffs from the Food, Beverage and Antifreeze Corporation of China, maybe you ought to speak up and do something”

    Another question: Why is GM doing a dealer cull at all? Could they not have offered a Chevy and/or Cadillac franchise to each BPG, Saturn, Saab and/or Hummer store they were going to terminate and then let the whole mess sort itself out through attrition? Are the laws such that a franchise conversion would really have been more expensive than an outright knifing?

  • avatar
    xyzzy

    kixstart wrote:
    If the dealers are so wealthy, why don’t they buy GM? Then they get to call the shots.

    Because they were making the money, GM wasn’t. They had the profits and GM had the losses. Why would they want to acquire the capital-intensive loss-making enterprise that enabled their profits? They don’t want to own GM for the same reason Coca-cola spun off its bottlers.

  • avatar

    very true, the dealers were banking while the factory was bleeding in many cases.

  • avatar
    Robert Schwartz

    “I believe The General’s bankruptcy will get hamstrung in court.”

    Not in Bankruptcy Court.

    Maybe Congress can do something.

  • avatar
    agenthex

    GM’s C11 is in real danger of becoming so convoluted with legitimate legal concerns that the bankruptcy will end up converting to a Chapter 7 liquidation. The brands and assets will be carved out into packages and sold to the top dollar suitors.

    This editorial might’ve only been wrong months back, but by now it’s embarrassing out of date also.

    Unless they outbid the gov (which they didn’t even try), it’s a forgone conclusion. The reason why they didn’t is because they can get someone else to pick up the tab. Responsibility for external costs is the last thing people in it for the money want.


    Whatever happens the taxpayer will pick up the tab.

    That’s absolutely correct, but not for the reasons wingers think it is. The hand grabbing from your pocket are a few clever business thieves manipulating a system intended for the benefit of the rest of us (ie gov), and wingers are ironically one of their tools of choice.

  • avatar

    @ agenthex : So if the Supreme court would have heard the Chrysler Dealer body case and in doing so postponed the Fiat sale for say 60 days. Then Fiat is watching the supreme court vs Chryco dealer case, gets the hi speed wobbles, and says ‘screw it, we’re out’

    Then what would have happened to Chry Co’s Ch 11, isn’t it very possible that it would have converted to a 7. And isn’t it also plausible to say that had the courts followed the law to the letter, and not crammed down so quick under the Obama opinion, that all hell would have broken loose.

    I think what the author is saying is that GM dealer body is a more sophisticated group, and if they have their way the aformentioned scenerio could likely occur. How is that out of date and false?

  • avatar
    Pch101

    Then what would have happened to Chry Co’s Ch 11, isn’t it very possible that it would have converted to a 7.

    Incorrect. The dealers aren’t even creditors here, so they have no claim vis-a-vis priority in the bankruptcy.

    The Supreme Court has already ruled that contracts can be terminated in bankruptcy. The dealers have no case. They may carry some political weight — we’ll see how that plays out — but legally, they’re SOL. As they should be.

  • avatar

    I know some GM dealers that would frantically argue your statment that they are not creditors. Not just on the dealer agreement/franchise, but the current unpaid warranty and incintive balances on the parts statment to GM.

  • avatar
    Pch101

    I know some GM dealers that would frantically argue your statment that they are not creditors.

    Then I can only assume that they have lawyers who are charging them by the hour to fight points that they can’t win.

    People can argue whatever they like, but that doesn’t mean that they’ll prevail. Under NLRB v. Bildisco, executory contracts can be terminated in bankruptcy. Under current law, the dealers are toast.

  • avatar
    agenthex

    And isn’t it also plausible to say that had the courts followed the law to the letter, and not crammed down so quick under the Obama opinion,

    Resolving quickly is very much to the benefit of the taxpayers goals, and since there was no compelling argument otherwise (and nobody counterbid anyway), that’s what the courts held in to be in the best interest.

    At this point, holding up the courts is essentially taking the company hostage and shaking us down for more money since the resolution is going to be the same.

  • avatar

    I think you hit the nail on the head. Today 108 page list of objectors to the GM sale was posted on the document site. Just the logistics of a hearing beginnning tomorrow, June 30, followed by the quick pre-determined court approval takes us into next week. The appeal in the District Court again has a predetermined quick outcome and will be quickly kicked to supreme court. Out of the 11 seperate groups of objectors, the four with the best shot of a supreme court hearing are GM Bondholders groups and individuals, Unions other than UAW, Dealers, and tort claims. Hopefully the Supreme Court can have a full hearing in 90 days to allow for a more orderly Chapter 7 liquidation.

  • avatar
    agenthex

    Hopefully the Supreme Court can have a full hearing in 90 days to allow for a more orderly Chapter 7 liquidation.

    It’s funny a “bondholder” would desire this. Most likely they’re unsecured and would get nothing from chap 7 anyway.

    As just described, it’s a ploy to delay and get taxpayer money to go away.

  • avatar
    Pch101

    It’s funny a “bondholder” would desire this. Most likely they’re unsecured and would get nothing from chap 7 anyway.

    It does sound as if somebody hasn’t run the numbers.

    In the case of GM, the secureds are getting all the cash on hand. If the case went into 7, there wouldn’t be anything for the little people at all.

    It seems that there are some long-time bondholders who are shocked by this, and some small time speculators who bought recently who didn’t know what they were getting into. I pity the former for being naive. While I wish no ill upon the latter, there are times when people need to get schooled by their investments to learn from their mistakes; they screwed up, and it’s their own damned fault if they played it badly.

    If you bought GM bonds with erroneous expectations for how the markets work, then consider it to be a learning experience that you can use for next time. Whenever you speculate on a company that is approaching bankruptcy, you have to plan for the risks associated with the play.

  • avatar

    Pch101 &
    agenthex

    You two sound like a couple of henchmen from the PTFOA that go around to blog sites ironing out any wrinkles in efforts to keep the brainwash going strong. You’re probably just a couple of lawyers getting paid run electronic interference and smoke screen while big brother pulls off this caper. Keep up the good work

  • avatar
    Pch101

    You’re probably just a couple of lawyers getting paid run electronic interference and smoke screen while big brother pulls off this caper.

    That’s funny. I’ve been accused by posters here of being a Toyota employee, too.

    For what it’s worth, I’m neither a Toyota employee nor a lawyer. As I have noted elsewhere, I do have some professional experience in dealing with business bankruptcies and have learned enough about the law to understand it, but I’ve hired lawyers to handle the actual cases.

    Do you have a rebuttal to the factual aspects of my points? Is there something about NLRB v. Bildisco and Bildisco that makes you believe that dealer contracts can’t be terminated in a Chapter 11?

  • avatar
    agenthex

    You two sound like a couple of henchmen from the PTFOA that go around to blog sites ironing out any wrinkles in efforts to keep the brainwash going strong.

    What’s really disconcerting is that in a case of US taxpayer vs. institutional investor, so many taxpayers would side with the investors, and this is after the investors are more than fairly paid. You are right it’s brainwashing, just missed the part where you’re the victim.

    What would be helpful is if those concerned would read about how these bankruptcies work. There’s quite a lot of material out there given they happen with some regularity. Failing that, listening to people who’ve at least done the very basic homework is a good idea.

    In brief, the creditors are lined up to receive money from the recovery. Since GM has a lot of debt, and assets like car factories aren’t worth much if they’re not making cars, you have to be real close to the front of the line to get your money back. This usually describes chap7, but the S363 chap11 GM is using shares much of the same characteristics with their old assets “liquidated” and old creditors paid off.

    As for contracts and legal claims in general, one of the main attractions of S363 is that the new company is free and clear of the burdens of the old one. They can continued whichever ones they need for operations going forward, but the argument is that since chap7 is the alternative, something is better than nothing. So unless someone can demonstrate chap7 is not inevitable (note this editorial ironically argues the opposite), or someone can significantly outbid the gov (no one did), the usual losers in bankruptcy are up the creek sans paddle.

  • avatar
    Captain Tungsten

    ….or not…..


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