General Motors Death Watch 207: Saving General Motors

Ken Elias
by Ken Elias
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general motors death watch 207 saving general motors

General Motors will soon be a ward of the United States federal government. Make no mistake about it. Without some kind of massive financial injection– not a mere few billion dollars but tens of billions– there’s no real solution to the problems of GM’s legacy of epic, chronic mismanagement. We know that day of a government bailout will come-– and much sooner than even Wall Street wants to believe. In fact, it’s almost upon us.

The Chrysler “absorption” only proves that when you confront normally sane men (though maybe not that smart) with death and destruction, they will resort to a nuclear option, even if it defies their own best interests. Kind of like saying “if we’re going down, everyone else is going with us.” And that makes government intervention inevitable.

When Congress faces the bomb lobbed by GM, it will react in predictable fashion: by making sure that every group gets a shot at the bailout dough. First, labor. Got to protect jobs, especially high paying union jobs. That’s the street cred of the Democratic party. Second, the huge Midwest industrial base of suppliers. They’re vital to keeping the behemoth going. Third, dealers. Can’t throw them out on the street; every state has too many GM dealers already and most of them donate significantly to their respective state and federal politicians to keep their franchises safe from greedy automakers. Finally, all of the associated vendors that now pray every month that GM pays their bills. Well, they can’t be ignored either.

GM’s got a ton of allies in this fight. Besides the aforementioned groups, the biggest supporter of a massive government bailout may turn out to be the national and local media. GM spends upwards of three billion dollars on advertising in the United States every year. Its dealers spend god-knows-how-much additional millions on local TV, radio and print every wee. If that money disappears, there’s gonna be a world of hurt applied. So, sure enough, media owners (think Gannett, Viacom, GE-Universal, Comcast, your local newspaper, etc.) will lobby hard to make sure GM stays in business as is.

Keeping General Motors afloat with government dollars (i.e. your tax dollars) will be done in a manner that keeps the status quo. Same brands, same dealers and few job losses.

Of course, that’s exactly the wrong way to do it. Nothing will change. And while GM might make it through the short term, everything that’s wrong with the company today will merely continue on into the future: too many brands, excess dealers and a labor force that lives by entitlements. And let’s not forget about an executive management team that got us here in the first place. They’ll stay too.

There is an alternative.

The feds should arrange a pre-packaged bankruptcy of General Motors, whereby the Federal Government provides 100 percent of the Debtor-in-Possession financing. No one else can participate. Not private equity (think Appaloosa with Delphi), not the money center banks, and definitely not any investment banks (oh wait, they’re already gone).

GM must shed its excesses that have become unmanageable. TTAC and others have talked about this ad nauseam. Without a bankruptcy, there’s no way to rearrange GM’s balance sheet (without a nasty cram down of the current lenders, and that takes time and politics), wipe out the existing equity (not much left there), and simply get rid of the unnecessary brands and dealers. The laws can’t change just to accommodate General Motors and accomplish any of this if the corporation and its North American subsidiary remain intact and out of bankruptcy.

With a prepackaged bankruptcy-– overseen by a governmental administrator with an independent Board of Overseers-– GM can quickly emerge as a viable, but smaller company. Jobs will be lost. Factories shuttered. Suppliers and dealers will disappear, but not all. (Dealer franchise contracts are deemed executory contracts and can be terminated in a bankruptcy without compensation.)

The key point here: none of the existing GM stakeholders today would have an alternative option under this bankruptcy scenario. There simply aren’t any other lenders willing to provide GM any financing while in bankruptcy, and that would lead to a liquidation for which stakeholders wouldn’t get much. Hence, the government can and should dictate the terms everyone gets if it provides the debtor-in-possession funding.

This plan would cost less to the government (that’s you and me) than a politically-crafted bailout to keep General Motors afloat “as is.” A reorganization exit plan would also bring in new equity and debt to replace all government advances. GM would emerge as a living and breathing entity, not as a dead-corpse walking, as in any other government plan.

And that’s how the nuclear genie at GM can best be contained. Now, if only Washington DC would listen.

Ken Elias
Ken Elias

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  • Matt51 Matt51 on Oct 26, 2008

    There is a real disconnect - blue collar wages have been declining in real terms since 1973. Just as Henry Ford found out positive sales benefit when he increased his workers wages, Detroit is getting hammered to some extent because cars are no longer affordable to the masses. They escaped for a while by going to five and six year loans and leases. I about crap in my pants when I read rags such as Car and Drive telling me how affordable a $25K Malibu is. I had to help my permanent student daughter buy a used car when hers was totaled by an uninsured driver. I had to go to Chicago to buy a Suzuki Forenza with 40K miles for $5800, which is what she got from insurance. Most clean used cars are 6K and up now. For people making $10 an hour, there is no such thing as an affordable new car. Now that Suzuki has discontinued their Daewoos, pretty much all that is left are the base Kia and the Chevy Aveo, but even those are now out of reach of masses of Americans. Wiping out GM debt in Chapter 11 would help, but the broader issue is how to make money in a mass market industry, when maybe only a small percentage of Americans can afford a $25,000 car. Henry Ford II was worried about affordability of cars with all the new 1970's regulations. He was right to be worried. Someone wrote a 1970 Dodge Challenger at $3200 would be $16,000 in todays inflation adjusted dollars. OK, I want my Challenger to be $16,000. Could Chrysler make money at this price? No.

  • Quasimondo Quasimondo on Oct 26, 2008
    I’m not paying for another Amtrak and USPS. A bigger dumber more costly burden on my tax dollars, and my childrens and grand childrens. I paid for one of their sh*t products, a 2000 not 1986, and it continues to cost me money and a giant headache(with less than 100K miles). If GM becomes a nationalized blood sucking leach on my taxes I am going to seriously start looking for another country to pay taxes to. As if you really have any say in the matter. Your tax dollars are going towards a $700B bailout of investment banks (which I'm sure you wrote your congressman & senator to vote no on). Your tax dollars went toward purchasing 80-percent of a company that's even more mismanaged than GM that still doled out bonuses and pay for lavish hunting trips after getting bailed out. And your congressmen didn't even have a chance to vote on that. You may cry and stomp your feet and hold your breath until your face turns blue all you want, it's not going to make a difference. In the end, you'll be paying for this whether you want to or not.
  • Ernesto Perez There's a line in the movie Armageddon where Bruce Willis says " is this the best idea NASA came up with?". Don't quote me. I'm asking is this the best idea NY came up with? What's next? Charging pedestrians to walk in certain parts of the city? Every year the price for everything gets more expensive and most of the services we pay for gets worse. Obviously more money is not the solution. What we need are better ideas, strategies and inventions. You want to charge drivers in the city - then put tolls on the free bridges like the Brooklyn, Manhattan and Williamsburg bridges. There's always a better way or product. It's just the idiots on top think they know best.
  • Carsofchaos The bike lanes aren't even close to carrying "more than the car lanes replaced". You clearly don't drive in Midtown Manhattan on a daily like I do.
  • Carsofchaos The problem with congestion, dear friends, is not the cars per se. I drive into the city daily and the problem is this:Your average street in the area used to be 4 lanes. Now it is a bus lane, a bike lane (now you're down to two lanes), then you have delivery trucks double parking, along with the Uber and Lyft drivers also double parking. So your 4 lane avenue is now a 1.5 lane avenue. Do you now see the problem? Congestion pricing will fix none of these things....what it WILL do is fund persion plans.
  • FreedMike Many F150s I encounter are autonomously driven...and by that I mean they're driving themselves because the dips**ts at the wheel are paying attention to everything else but the road.
  • Tassos A "small car", TIM????????????This is the GLE. Have you even ever SEEN the huge thing at a dealer's??? NOT even the GLC,and Merc has TWO classes even SMALLER than the C (The A and the B, you guessed it? You must be a GENIUS!).THe E is a "MIDSIZED" crossover, NOT A SMALL ONE BY ANY STRETCH OF THE IMAGINATION, oh CLUELESS one.I AM SICK AND TIRED OF THE NONSENSE you post here every god damned day.And I BET you will never even CORRECT your NONSENSE, much less APOLOGIZE for your cluelessness and unprofessionalism.