By on June 1, 2010

One year ago today, General Motors took the “unthinkable” step of filing for bankruptcy. It was a seminal moment in the history of the American auto industry: the day that once-dominant GM finally shed its illusions, faced up to reality, and plunged into the cold, cleansing waters of bankruptcy reorganization. Or, to use a more accurate metaphor, it was pushed in. After decades of decline masked by decades of PR-driven denial, GM had literally lost the ability to self-correct.

The Presidential task force had to reject numerous “viability plans” and forcibly fire GM’s sitting CEO before sending the company to the place where countless previous GM execs said the company could never end up: Chapter 11. Oh yes, and some money changed hands too. Although the majority of the American public preferred to let GM go out of business rather than rescue it, one year ago today GM took the step into bankruptcy safe in the knowledge that $50b of taxpayer cash awaited on the other side.

Was it all worth it? Only more time will tell. While we count the days (and dollars) leading up to GM’s IPO, only one thing is certain: this can not ever happen again. Intervening in a company that shows no interest in fixing itself fundamentally alters the structure of incentives and disincentives that are the heart of our capitalist system. And, as Paul Ingrassia so aptly points out in his one-year-after piece in today’s Wall Street Journal [sub], the fact that directors from GM’s previous “board of bystanders” stand ready to benefit from their own stunning inability to take responsibility for the company they oversaw, is simply unforgivable. TTAC joins Ingrassia in calling for the resignation of all GM board members who have served since before GM’s bankruptcy.

A year ago today, Paul Niedermeyer eulogized the dying automaker, by noting

for decades, GM has not been an automaker, but a wealth and capital-destroying dragon. Some $200 billion dollars in equity has been wiped out. Throw in another $27 billion in debt gone tits-up, as well as “your” contribution of some $45 billion: well over a quarter trillion dollars up in smoke.

That this could have gone on for so long is nothing short of an economic crime. The bailout of GM may well have been justified in the shaky economic moment that it occurred, but only if those who bear responsibility for decades of wealth destruction are shown the door. GM’s new management has made some progress in this area, although the retention of certain personnel indicates that there’s always more work to be done. But management changes are (relatively) easy: returning strong corporate governance to a boardroom that was characterized by apathy and impunity isn’t. And GM’s claim to a second shot at the American dream counts on breaking completely from the past.

Whether GM ever pays back the taxpayer investment in it remains very much to be seen, but on this point GM can still repay taxpayers in the most meaningful way possible: by forcing directors to take ownership of the wealth destruction they oversaw, and to leave the company. Tens of billions of dollars may or may not have been enough to re-make GM into a strong competitive automaker, but it was certainly enough to buy a little accountability. And if it hasn’t, well then what did it buy at all?

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11 Comments on “One Year Ago Today, General Motors Filed For Bankruptcy...”

  • avatar

    no excuse for any director from pre-bk to remain, not a good sign for sure. also a concern is the lack of new appointments of individuals with pertinent knowledge of the auto industry. we’ve had more than enough of these interlocking directors with their polished resumes and banking connections.

    • 0 avatar

      About the only reason if they were “objecting” directors under the old board. I never read BoD minutes, so I can’t say, but I don’t recall anyone on the pre-bankruptcy board trying very hard.

      I agree on you point about interlock: it’s a very serious problem in modern corporate oversight, and in the long term it is very harmful to the economy as a whole. There’s less incentive for directors to act independently, and for the interest of the company, but significant incentive to “not rock the boat” and act in the interests of the board itself.

      It gets even worse when officers of the company have seats on the board. I don’t think this is a good idea beyond notional representation, and it’s very much not a good idea for boards to be chaired and steered by company officers. I’m not completely sure that the president and CEO should be the same personal, but adding Chairman to that list makes it worse.

    • 0 avatar

      You are correct. There are striking differences from the 1980 Chrysler turnaround and today’s GM situation. With Chrysler, there was turnover among operational executives that was virtually total, and almost everyone brought in had industry experience. By the time Iacocca handed the reins to Bob Eaton, Chrysler had been rebuilt from the ground up and the results showed.

      Here, there has been nowhere near the turnover that I think is needed to rebuild GM. In this economy, you would think that there are lots of skilled, passionate people with relevant experience who have been downsized out of the auto industry or its suppliers. An industry outsider like Whitacre could lead an effective turnover, but only if he has some fresh lieutenants with auto (or at least heavy manufacturing) experience in key positions.

  • avatar

    In GM’s case the board of directors always represents top management and not the actual shareholder owners. This will not change. Everyone loves to blast the UAW but there are plenty of freeloaders on the top that are always willing to ride that gravy train all the way to bankruptcy again. Just keep the gravy flowing. Just ask Ross Perot he tried to change things but they forced him out. Its no accident that Ford took action they are controlled by the Ford family that actually has a stake. GM’s top people gave themselves bankruptcy proof pensions. They need to clean house.

    • 0 avatar

      I’d almost forgotten about Perot’s stint at GM in the 80s. He quit in frustration over GM’s culture nearly 25 years ago.

      Another former BOD member to do the same thing was Jerry York, and that was just 4-5 years ago. After he quit he persuaded Kerkorian to try a takeover and get Ghosn to take on a good part of GM to save them.

      If the remaining BOD members were ones who opposed either of these attempts to save GM they should be shown the door post-haste.

    • 0 avatar

      Don’t forget Elmer Johnson … came into the company as an outside director, then became head of Legal … wrote a legendary analytical critique of the flaws in the GM culture and how to change it … the body-GM eventually rejected him like a foreign body … he eventually quit and went back to Chicago to practice law …

  • avatar

    “General Motors took the ‘unthinkable’ step of filing for bankruptcy. It was a seminal moment in the history of the American auto industry: the day that once-dominant GM finally shed its illusions, faced up to reality, and plunged into the cold, cleansing waters of bankruptcy reorganization…

    …one year ago today GM took the step into bankruptcy safe in the knowledge that $50b of taxpayer cash awaited on the other side.”

    Let’s notice that these statements are not compatible. GM either plunged into the cold water of reality OR it entered into a fraudulent, stage-managed bit of political manipulation – billed as a bankruptcy prodeeding – and ended up a cosseted ward of the state together with the Democrats’ partner-for-power the UAW.

  • avatar

    It’s true that in a pure free enterprise system, a company that cannot compete will fail and either competitors or entrepreneurs, or both, will step up. Unfortunately, we don’t have a pure capitalist system, but a heavily regulated one, the auto industry had become a closed system, and the economic conditions one year ago would have magnified the effects of such a large scale failure.

    Our regulatory system is a huge disincentive, having been built up over time, with each new development serving as an additional hurdle for new players. The industry is capital-intensive, labor-intensive in its specialization, and technology intensive. Look at all the new startups, and try to guess which ones, if any, will succeed. There’s a reason why the number of auto makers has shrunk over the years.

    The economy last June was in dire straits. The stock market had bottomed out in March after a breathtaking freefall the previous 9 months, and layoffs throughout the economy were accelerating. Car sales had cratered the second half of the previous year and existing makers were cutting back production, parts suppliers were going bankrupt, and credit for new car sales was drying up.

    There was no way existing or new players were going to make up for the economic hole a dead GM would have produced. Massive layoffs of GM workers and their materials and parts suppliers would have only accelerated the deterioration of the economy, with housing imploding and the banking system in crisis.

    I agree with the theory of free enterprise system, but the economic (and political) reality of the time required that GM be propped up, at least for a time. I happen to agree with what Henderson appeared to be doing, gradually cutting back on the sheer size of GM with sales of their Indian stake and Opel, in an attempt to allow GM to survive as a much smaller, leaner company.

    It’s apparent that Rattlesnake-Killer Ed, responding to pressure from the White House and it’s union clients, and drawing on his experience running a government-regulated monopoly, wants to keep the huge, bloated organization intact, and somehow grow it back to its former glory. I think GM’s chances are about the same as any rattlesnake Ed meets.

    • 0 avatar
      George B

      Lorenzo, the last thing the auto industry needs or wants is an additional manufacturer. There are too many auto manufacturers chasing too few customers. The market wants to react with a consolidation. GM is struggling to make a profit on cars at a price that the customer will pay while they’re fairly competent at building light trucks. The market wants GM to merge with someone else and quit building AVIS quality cars. The good parts need to become the truck division of a manufacturer with better management that’s competent at building passenger cars, but hasn’t figured out how to build trucks.

  • avatar

    I don’t know, but it strikes to me that most auto companies (and many big corporations) are still family-owned businesses. Even when they still have other shareholders

    Examples: Ford, PSA, Fiat, BMW, Tata, Geely, BYD, VW-Porsche, Toyota, just to name a few. I don’t know if there are others.

    But that people seems to really care about the fate of their companies, having inherited them or created them.

    Very different from GM case, in which I think it’s very difficult to know who was the “owner”. And now it’s even worse, it’s state owned for the most part, and at least from my experience in this country (not US), if it’s government property it doesn’t belong to anybody and hence why care.

    I hope that both GM and Chrysler can go out of this successfully

  • avatar

    @George B, the last thing I was recommending is another manufacturer. I was describing how a free entrprise system works, with new and existing companies rushing to fill a void left by a failed company.

    What I approved of is Henderson’s downsizing of the company to a more manageable form. You’re contending that the market wants GM to merge with somebody else, when GM is still too big. It has to downsize and sell off its far-flung operations in chunks small enough to be absorbed.

    Consolidation sounds good, but it would result in another “too big to fail” company that, like GM was, is too big to be managed properly. GM is the poster boy for large industrial complexes with too-high break even points, with its offerings spread too thin across too many segments, to maintain its mission, and too much managerial inertia to respond quickly to market changes. Toyota is seeing signs of that malaise, and VW is probably next to suffer.

    In horrific times, the big dinosaurs died off while smaller, more mobile and adaptable ones lived on to become birds. Likewise, a smaller company with a low break even point, excellence in a couple of segments and a focused management/engineering team nimble enough to respond to a changing market is capable of surviving the era of low sales that will probably exist for an extended period.

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