General Motors bankruptcy
From Invertopedia, the encyclopedia of how things fail
General Motors, founded in 1908[6], went into the 2008 recession and came out of the year with $30.9 billion of losses and its cash shrinking by more than $19 billion[1]. On June 1, 2009 it filed for Chapter 11 with $172.81 billion of debt against $82.29 billion of assets, the largest bankruptcy ever for an industrial company[1]. The government took a majority stake for a bailout of $49.5 billion[3][4], a smaller GM came out 40 days later[2], and taxpayers ended up $10.7 billion short[4].
Contents
The bet
GM's leaders believed the company could not survive bankruptcy. "I don't think the company will survive a bankruptcy," chief executive Rick Wagoner told a restructuring adviser[2]. Their first plan was to avoid it altogether, believing the government would lend enough to carry GM through the crisis[2].
Underneath was an older bet: that GM's size and its many brands, built on founder William Durant's idea of "a car for every purse and purpose"[6], would keep it on top. Going into bankruptcy it still had eight brands[5], sold through about 6,000 dealers[7].
What happened
| 1908 | William C. Durant founds General Motors, bringing several car companies under one roof.[6] |
|---|---|
| 2006 | Ford mortgages all of its assets to borrow about $25 billion. GM builds no such cushion.[1] |
| 2008 | GM's share of the North American market falls from 23.1% to 21.5%. It loses $30.9 billion and asks the Bush administration and Congress for help.[1][8] |
| Dec 31, 2008 | The Treasury agrees to lend GM up to $13.4 billion.[8] |
| Early 2009 | GM's annual report warns there is substantial doubt it can continue as a going concern.[8] |
| Mar 2009 | After GM misses a March 31 deadline to meet the government's conditions, President Obama forces out Wagoner and replaces him with Fritz Henderson.[1] |
| Jun 1, 2009 | GM files for Chapter 11 in New York. The federal government is to own 60% of the new company, and existing shareholders are expected to be wiped out.[6][2][5] |
| Jul 10, 2009 | The new GM leaves bankruptcy after 40 days.[2] |
| Nov 2010 | The new GM returns to the stock market in an initial public offering.[3] |
| Dec 9, 2013 | The Treasury sells its last GM shares. Taxpayers lose $10.7 billion on the deal.[4] |
The kill shot
GM ran out of cash, not time. Decades of retiree promises, too many brands and too many dealers left it with no cushion, so when the 2008 crash cut sales it had nothing to fall back on but the government.
By the end of 2008 GM had 377,000 US hourly retirees and 116,000 salaried retirees[8]. Bob Lutz later called the retiree health care and debt costs "a crushing burden"[7]. GM was also "over-dealered," Lutz said, with dealers fighting same-brand dealers nearby, discounting and hurting the brands[7]. And he admitted that GM "took our eye off the ball" on product in the 1970s, 1980s and early 1990s[7].
The difference between GM and Ford was the cushion. Ford had borrowed about $25 billion against all of its assets in 2006, and it got through the crash without bankruptcy, while GM and Chrysler did not have that money to fall back on[1]. In the quarter ended March 30, 2009, GM's revenue plunged almost 50 percent[6].
Red flags ignored
- The auditors' warning. GM's own annual report said there was substantial doubt it could continue as a going concern.[8]
- More retirees than it could carry. About 493,000 US retirees were counting on GM in 2008.[8]
- Eight brands for one market. Bankruptcy cut GM to four core brands: Chevrolet, Cadillac, Buick and GMC.[5]
- Shrinking share. North American market share slipped from 23.1% to 21.5% over the period GM reported on.[8]
- Hoping not to file. The first plan was to avoid bankruptcy with government money, not to prepare for it.[2]
The cost
The government put $49.5 billion into GM for 912 million shares[3], a 60.8% stake[4]. When the Treasury sold the last of them in December 2013, taxpayers had lost $10.7 billion[4]. GM's old shareholders lost their investment[3], and its shares fell as low as 74 cents just before the filing[5].
The restructuring cut 21,000 jobs, about 34% of GM's workforce, and 2,600 dealers[5]. GM's filing warned that the only other alternative was liquidation, which would "throw hundreds of thousands of persons out of work"[6].
The inversion
Build the cash cushion while times are good, and plan for bankruptcy before you need it. A company that assumes it is too big to fail stops cutting what it cannot afford, and ends up letting a judge and the government do the cutting.
What survived
A smaller GM. It came out of bankruptcy with Chevrolet, Cadillac, Buick and GMC[5], and was profitable for 15 straight quarters after leaving bankruptcy, earning almost $20 billion by late 2013[3]. One estimate, from the Center for Automotive Research, put the jobs saved by keeping GM and Chrysler afloat at 1.5 million[4].
References
- ^ “GM files for bankruptcy”. Associated Press via The Herald (Everett), June 1, 2009. The filing size, the $30.9 billion of losses and $19 billion cash drain, Ford's 2006 borrowing, and Wagoner's ouster.
- ^ “How General Motors Was Really Saved”. Forbes, October 30, 2013 (by Jay Alix, the adviser who proposed the sale plan). Wagoner's view that GM could not survive bankruptcy, the hope of avoiding it, the June 1, 2009 New York filing and the 40-day exit on July 10, 2009.
- ^ “End of the road for 'Government Motors'”. Wire services via NBC News, November 21, 2013. The 912 million shares for the $49.5 billion bailout, stockholders losing their investment, the November 2010 IPO, and 15 straight profitable quarters.
- ^ “Government Sells Last Shares In GM, Loses $10 Billion”. NPR via WFAE, December 9, 2013. The Treasury's final sale, the $10.7 billion taxpayer loss, the 60.8% stake and the 1.5 million jobs estimate.
- ^ “GM Files for Bankruptcy Protection; Judge OKs Chrysler Asset Sale”. PBS NewsHour, June 1, 2009. The four core brands, the 21,000 job cuts and 2,600 dealers, the ownership split and the 74-cent share price.
- ^ “General Motors files for bankruptcy protection”. Associated Press via Khaleej Times, June 1, 2009. GM's 1908 founding by Durant and the "car for every purse and purpose" strategy, shareholders expected to be wiped out, the first-quarter revenue drop and Henderson's liquidation warning.
- ^ “Recession Blocks GM's Road To Profitability”. NPR, July 10, 2009. Bob Lutz on GM's product failures, the crushing burden of legacy costs, and being over-dealered with 6,000 dealers.
- ^ “General Motors Corporation Form 10-K for 2008”. General Motors filing with the SEC, March 2009. The going-concern warning, the $13.4 billion Treasury loan, the retiree counts, and the drop in North American market share.