I Was Wrong About GM Bankruptcy

By Dirk van Dijk

It now appears that General Motors (GMGMQ.PK) will shortly leave Chapter 11. Like the Chrysler bankruptcy, I was wrong to think that it would be an extremely long and drawn-out affair. While having two of the big three go into bankruptcy was bad news for the economy, their short stay in bankruptcy means that the damage is going to be much less than I feared.

That said, the previous shareholders have been wiped out, and many of the creditors -- including some pretty senior ones -- got not just a haircut but a shaved head.

The government (61% U.S. and 11.7% Canada) and the UAW (17.5% in the Health Care Trust) will control the new GM. I hope that the government does not plan on being the controlling shareholder forever, but on the other hand I don’t want to see it totally lose the almost $50 billion that it has dumped into GM (and Chrysler) -- first in an attempt to keep them out of Chapter 11, and then in an effort to make the prepackaged bankruptcy go as smoothly as possible.

Clearly, they failed on the first measure, but on the second they succeeded beyond my wildest imagination. The Sunday nigh ruling by Judge Robert Gerber, allowing the sale of the "good assets" to the "new GM" will allow this to go forward far faster than I had imagined. The only real alternative was the liquidation of the company, which would have yielded very little to the creditors and caused far more economic disruption.

The new GM, unburdened by most of the liabilities of the old GM, will be in a much stronger position to compete. Ford (F) in particular should be concerned about this, as it had most of the same problems as the old GM had (just not quite as severe), and it was able to avoid the government handout/bankruptcy route.

However, the overall auto market faces severe headwinds with unemployment and the savings rate rising. So it is not like the good times are coming back anytime soon. Eventually, though, the big auto parts suppliers like TRW Automotive (TRW) and Tenneco (TEN) will have their biggest customer back. It will not be as big as it used to be, but at least it will still exist

Comments

[Davewmart:]

In my view the auto industry is not in a temporary dip in sales, but is likely to have entered into new, much lower sales territory, as I can't see the economy in the US and the West or Japan recovering to any marked extent and the fundamental element of financing for new cars is likely to be in tight supply.
Assuming that this thesis is correct, I would value the insights of commentators here on the survival prospects of the various manufacturers.

Jul 07 05:02 AM

[Steven Hansen:]

there was never a choice about the gm going into bankruptcy - too much legacy costs, too small sales volumes.

will gm survive? companies survive by giving the market what they need at the right price keeping their cost down and quality up.

i worry about political involvement - a product the government wants you to have. if somehow they guess correctly - things will work.

gm has never been able to produce a profitable small car. china has yet to unleash any of its products into the usa but i can not envision an american made small car being able to compete with the chinese small car.

the greener we go, the more advantage foreign manufacturers will have in our market.

at this point i would not be betting on a gm with political board members some hard choices need to be made, and politics will prevent good decisions.

Jul 07 05:19 AM

[Detfan:]

GM is fine and will be great in the future. They were on track to be profitable THIS year without the economy falling off a cliff. They are now at break even on 10M SAAR, which we will exceed in the coming months. GM will make $5,000 per vehicle more in 2010 than they did in 2004. GM has made all the right moves for several years to posture them for tremendous success. The government involvement, obviously, is very minimal, as I see products coming out on schedule with more beautiful cars coming soon. With the renaissance of great new product launches over the last 4 years, GM's market share has stabilized and retail share is actually increaing now, as people buy the new Malibu, CTS, Enclave, Camaro, etc. GM's comittment to fuel economy has transformed them over the last few years to the company that has more industry leading vehicles in mileage than any other manufacturer. The next successful launch is the 2010 Chevy Equinox, which I drove last week. It gets 20% better mileage than the Toyota Rav-4 and Honda CR-V, and highway mileage beats even the Ford Escape Hybrid. Interior is class leading, with more features included at each trim level than the competition. Yes, the future looks very bright for GM, especially in light of their explosive growth in emerging markets around the world, using their new global platforms that are now the envy of the industry. Look for the stock from the IPO next year to systematically be bought back by GM until we see a private stock holding company again.

Jul 07 07:11 AM

[ex GM emp:]

When it comes to economics, Americans are a pretty dumb lot. They'll ship their jobs and the security of their country overseas because a product was cheaper if made there. We'll do the same with autos when they start coming in from China. In five to ten years, there won't be much left of the domestic auto industry. Even the scrub wages of the southern auto transplant industry will be too much for the oncoming train of India and Chinese competition.

Jul 07 08:18 AM

[Speedzzter:]

The biggest long-term problem for GM and Chrysler is partisan politicization. A significant percentage of their most loyal "buy American" customers were alienated by the Obama-UAW-Democrat "seizure" of these companies and the stage-managed "show" bankruptcies. Many also vehemently object to "bailouts," notwithstanding that decades of failed regulatory policies and unfunded mandates crippled Detroit's competitiveness.

Now GM and Chrysler are viewed by perhaps as many as thirty percent of potential customers as clients of big labor and the Democrats. GM and Chrysler will have a difficult time luring these conservative "conscientious objectors" back into the fold.

Jul 07 09:22 AM

[User 158164:]

Somewhere between Davewmart and Detfan is reality. Every recession you hear the "the economy will never be the same again" and they are right, the economy comes back different, and usually better. I remember the late 80's doom and gloom, followed by the 90's unemployment so low a blind felon could get a job as a night watchman.

On the other hand, GM is facing world wide competition from Volkswagon, Fiat, Toyota, a resurgent Ford, Honda, and now a slew of Chinese and Indian companies. If they all take only 2% market share, just in sheer numbers of companies it will be a hard row to hoe.

Buy back the stock? Yeah, that was a winning strategy in the 90's - $25 Billion in stock buy backs and now that stock is worth zero. The smart money spends money on product, not stock buy backs.

GM has some excellent product now, I have a Silverado with ZERO issues and I have driven the new Camaro and it is world class. They need to keep that quality up.

Most of what I read about the UAW is based on stuff they read before the new contract, and even more changes have taken place with the crisis. I never met the guy "making $80 an hour sweeping floors" in the first place. Most of that crap was just BS anyway. There are some horror stories, but I can tell you some horror stories about non-union shops also. Somehow a truck a minute spits out the back door, so someone must doing some work.

I know there are some retards talking boycotting, yeah that makes sense. Put Americans out of work solely because you don't like the President and drive down the value of the company so that you the taxpayer loses money in some kind of childish hissy fit. Fortunately I think those numbers are small and their job at the car wash does not buy a new car anyway.

In other words, if you are looking at the future for GM, I think you can be pretty optimistic, but realistic.

I think more important to the question is not what will GM do, but will this country EVER develop a sensible manufacturing policy that will get us back to work.

Jul 07 11:19 AM

[John Lounsbury:]

Dirk - - -

Good to read some humble reassessment of your own work. It is not easy to do that (personal experience speaking).

One thing you wrote that has not received comments yet:

"The new GM, unburdened by most of the liabilities of the old GM, will be in a much stronger position to compete. Ford (F) in particular should be concerned about this, as it had most of the same problems as the old GM had (just not quite as severe), and it was able to avoid the government handout/bankruptcy route."

If GM does succeed in getting th future right (some commenters say they will and others dispute it), how will Ford survive? Ford is still laboring under some of the same burdens GM has shed. survive.

On another note, If GM and Chrysler turn out to be considered success stories when historians look back, is it likely that the taxpayer will ever get all of the $50 billion plus invested back directly? Probably not, in my opinion. The question then will be to determine if all the indirect benefits are sufficient to offset the direct taxpayer loss.

Of course, there is always the ultimate fantasy: GM grows to a market cap of $100 billion and the taxpayer gets $61 billion selling the 61% ownership. Compare this with the market cap of some other companies: $16 b for Ford, $113 b for Coca Cola, $133 b for IBM, $202 b for Microsoft and $326 b for Exxon Mobil.

As I said, the ultimate fantasy.

Jul 07 12:11 PM

[Mad Hedge F...:]

that still doesn't help the old investors. It’s not often that the investor’s relations department of a company you follow sends you an e-mail telling you their stock is worthless. Neverless, that was the message I received from General Motors (GMGMQ) yesterday. Since the company filed for chapter 11, it has traded between $0.25 and $2.25, and has often been the best percentage gainer of the day ($0.50 to $0.75 is a 50% move up). No doubt, most of this is hedge fund buying of stock to close out short positions. Otherwise, the bean counters may force you to carry the positions for years, tying up capital and deferring your performance bonus. But then again, there are always some dummies out there who think the stock is cheap at $0.25, on its way back up to $150.

Jul 07 12:15 PM

[User 158164:]

Madmoron, you continue your habit of posting the same old post over and over, it just shows you are a dope. Wow, you figured out how to cut and paste. Congratulations.

In case you missed it, GM is in bankruptcy right now. Since obviously for you and sever other low intelligence "investors" don't understand what the "q.pk" means and continue to trade a stock that WILL, not might, WILL go to zero sooner or later, GM rightly covered their tails by sending you an email. They sent it to you because you are dense enough to actually still own stock, which shows how stupid you really are. Morons like you will continue to trade it waiting for the music to stop and then you will be upset to find there are no chairs at all.

Perhaps this is a lame attempt to get people more stupid than you people to run the stock up for your gain. Again, you show what a stupid loser you are.

Go back to Japan and stay there, they can have you.

Jul 07 01:16 PM

[a. palmer jr.:]

There were more than just a few people who got screwed when GM went bankrupt. It appears to me that the people who normally get money in a bankruptcy were left out in this case. i.e. bondholders, stockholders, vendors, etc. I know Americans are pretty easy to put one over on, but honestly, how many of those people who can put 2 and 2 together will remember this screwing when they go to purchase a new car. I know that, all other things equal, GM wouldn't be my first choice, or second.

Jul 07 07:56 PM

[Big Bubbette:]

Can someone explain how this is allowed under our Constitution? I understand there is no viable company like Youngstown Sheet & Tube to take this to the Supreme Court. A sad day for our Country.

Jul 07 08:44 PM

[Deweyp:]

Finally, someone with a sensible comment. Very well said.


On Jul 07 11:19 AM User 158164 wrote:

> Somewhere between Davewmart and Detfan is reality. Every recession
> you hear the "the economy will never be the same again" and they
> are right, the economy comes back different, and usually better.
> I remember the late 80's doom and gloom, followed by the 90's unemployment
> so low a blind felon could get a job as a night watchman.
>
> On the other hand, GM is facing world wide competition from Volkswagon,
> Fiat, Toyota, a resurgent Ford, Honda, and now a slew of Chinese
> and Indian companies. If they all take only 2% market share, just
> in sheer numbers of companies it will be a hard row to hoe.
>
> Buy back the stock? Yeah, that was a winning strategy in the 90's
> - $25 Billion in stock buy backs and now that stock is worth zero.
> The smart money spends money on product, not stock buy backs.
>
> GM has some excellent product now, I have a Silverado with ZERO issues
> and I have driven the new Camaro and it is world class. They need
> to keep that quality up.
>
> Most of what I read about the UAW is based on stuff they read before
> the new contract, and even more changes have taken place with the
> crisis. I never met the guy "making $80 an hour sweeping floors"
> in the first place. Most of that crap was just BS anyway. There
> are some horror stories, but I can tell you some horror stories about
> non-union shops also. Somehow a truck a minute spits out the back
> door, so someone must doing some work.
>
> I know there are some retards talking boycotting, yeah that makes
> sense. Put Americans out of work solely because you don't like the
> President and drive down the value of the company so that you the
> taxpayer loses money in some kind of childish hissy fit. Fortunately
> I think those numbers are small and their job at the car wash does
> not buy a new car anyway.
>
> In other words, if you are looking at the future for GM, I think
> you can be pretty optimistic, but realistic.
>
> I think more important to the question is not what will GM do, but
> will this country EVER develop a sensible manufacturing policy that
> will get us back to work.

Jul 07 09:54 PM

[Davewmart:]

User 158164 said:
' Every recession you hear the "the economy will never be the same again" and they are right, the economy comes back different, and usually better. I remember the late 80's doom and gloom, followed by the 90's unemployment so low a blind felon could get a job as a night watchman.'

It is not my position that the economy will never come back, but it will in my view be a very long haul indeed.
The analogy with the recession of the 80's is incomplete, I believe, as debt levels are far higher, and resemble the 30's rather than the 80's.
I would agree with the Austrian position that until this is paid off or written off no real recovery is possible.
In addition to that, according to the IEA both fuel shortages and high prices are coming, as with current low oil prices the investment needed to produce more oil is just not happening.
To be specific, it is hard to see where growth will come from, or what will cause it, until a fundamental change has taken place in the world economy, including rectifying trade imbalances.
I certainly hope that I am mistaken, but if not I would expect the world economy to continue to track the 30's, taking another leg down shortly, perhaps by the end of the summer.

Jul 08 05:38 AM

[Bernard Thomas:]

The economy has come back better each time (during the past 25 years) becuase leverage became cheaper and more accessible each time. Those days are over. Now the economy will have to rely on productivity. The Fed is out of economic amphetimines. This recession is the crash after the high. Once withdrawal is over the economy will be based largely on consumers living only slightly above their means. The days of couples making $80,000 together buying a $350,000 (or higher) McMansion and a new Tahoe are over. Welcome to the world of 2,000 square-foot homes and $25,000 crossover SUVs or $22,000 sedans. Not good for Detroit, not good for homebuilders like KBH, Technical Olympic, etc.




On Jul 07 11:19 AM User 158164 wrote:

> Somewhere between Davewmart and Detfan is reality. Every recession
> you hear the "the economy will never be the same again" and they
> are right, the economy comes back different, and usually better.
> I remember the late 80's doom and gloom, followed by the 90's unemployment
> so low a blind felon could get a job as a night watchman.
>
> On the other hand, GM is facing world wide competition from Volkswagon,
> Fiat, Toyota, a resurgent Ford, Honda, and now a slew of Chinese
> and Indian companies. If they all take only 2% market share, just
> in sheer numbers of companies it will be a hard row to hoe.
>
> Buy back the stock? Yeah, that was a winning strategy in the 90's
> - $25 Billion in stock buy backs and now that stock is worth zero.
> The smart money spends money on product, not stock buy backs.
>
> GM has some excellent product now, I have a Silverado with ZERO issues
> and I have driven the new Camaro and it is world class. They need
> to keep that quality up.
>
> Most of what I read about the UAW is based on stuff they read before
> the new contract, and even more changes have taken place with the
> crisis. I never met the guy "making $80 an hour sweeping floors"
> in the first place. Most of that crap was just BS anyway. There are
> some horror stories, but I can tell you some horror stories about
> non-union shops also. Somehow a truck a minute spits out the back
> door, so someone must doing some work.
>
> I know there are some retards talking boycotting, yeah that makes
> sense. Put Americans out of work solely because you don't like the
> President and drive down the value of the company so that you the
> taxpayer loses money in some kind of childish hissy fit. Fortunately
> I think those numbers are small and their job at the car wash does
> not buy a new car anyway.
>
> In other words, if you are looking at the future for GM, I think
> you can be pretty optimistic, but realistic.
>
> I think more important to the question is not what will GM do, but
> will this country EVER develop a sensible manufacturing policy that
> will get us back to work.

Jul 08 08:38 AM

[Vienna:]

One thing that you should always keep in mind, that when companies restart, it goes into hype and all are celebrating the new start, fine.
But don't forget, all the old minds and habits are still there. I have seen this in CEE many times, old state companies that where taken private in the 1990's still work in their old fashion, due to management, development, production etc. still working according to their habits. It takes generations for change, and not just a few weeks.
Keep good track on what is going on, since a few years ahead you might see GM in the news again. And please don't tell me the US is significantly different in this. I have read a lot about the history of GM, Unions, management etc.

Jul 08 11:38 AM

[billddrummer:]

On Jul 07 07:11 AM Detfan wrote:

> GM is fine and will be great in the future. They were on track to
> be profitable THIS year without the economy falling off a cliff.
> They are now at break even on 10M SAAR, which we will exceed in the
> coming months. GM will make $5,000 per vehicle more in 2010 than
> they did in 2004. GM has made all the right moves for several years
> to posture them for tremendous success. The government involvement,
> obviously, is very minimal, as I see products coming out on schedule
> with more beautiful cars coming soon. With the renaissance of great
> new product launches over the last 4 years, GM's market share has
> stabilized and retail share is actually increaing now, as people
> buy the new Malibu, CTS, Enclave, Camaro, etc. GM's comittment to
> fuel economy has transformed them over the last few years to the
> company that has more industry leading vehicles in mileage than any
> other manufacturer. The next successful launch is the 2010 Chevy
> Equinox, which I drove last week. It gets 20% better mileage than
> the Toyota Rav-4 and Honda CR-V, and highway mileage beats even the
> Ford Escape Hybrid. Interior is class leading, with more features
> included at each trim level than the competition. Yes, the future
> looks very bright for GM, especially in light of their explosive
> growth in emerging markets around the world, using their new global
> platforms that are now the envy of the industry. Look for the stock
> from the IPO next year to systematically be bought back by GM until
> we see a private stock holding company again.

Did you know that GM lost $37,000 a car last year?

Jul 08 11:45 AM

[Michael Terry:]

Okay, GM has not left bankruptcy, nor will it for years. They will soon consumate a 363 sale of assets to NGMCO. This is not exiting bankruptcy - unsecured's, see how long it takes to get your equity. While the 363 sale is a valuable part of bankruptcy law, it is being twisted and contorted beyond recognition by this administration and the court (jesters).

This company will not be EBIT breakeven at 10MM SAAR unless the contribution margin stays at 30% (which even Ratner, with his impressive auto background says it wont be 30%) and they lose no further share.

As far as GM being politicized, look at the share owned by the UAW relative to their claim - is this not a policy driven result? Do you think the UAW will use their share to help further the ends of the company or the union?

Jul 08 12:25 PM

[levin70:]

The only real alternative was the liquidation of the company, which would have yielded very little to the creditors

I've seen this bandied about so many times, but I have yet to see anyone, including the OP, back up this statement with facts.

And as for GM shedding its liabilities, the only liabilities shed were those of the bondholders. Correct me if I am wrong, but the UAW took no cuts in pay or benefits, so GM is still as unprofitable making cars today as it was before bankruptcy. The only difference is a reduction in total losses for $2 billion per year in reduced interest expense. But what;s the real difference between 6 billion annual loss and 8 billion, it;s still losing money on every car it builds.

Regards

Jul 08 03:24 PM

[Kint:]

Good to see someone own up to their predictions.. unlike some talking heads.. <cough> Cramer </cough>

Jul 08 03:57 PM

[Speedzzter:]

User 158164: "I know there are some retards talking boycotting, yeah that makes sense. Put Americans out of work solely because you don't like the President and drive down the value of the company so that you the taxpayer loses money in some kind of childish hissy fit. Fortunately I think those numbers are small and their job at the car wash does not buy a new car anyway."

Actually, its the folks working at the car wash who were more likely to vote for the current administration and who will have few objections to government ownership and greater receptivity to "bailouts" and other forms of welfare subsidies.

A fair number of regular and loyal Detroit 3 buyers (many of which did not vote for Obama and and who tend to be disproportionately among the upper middle and upper classes) are objectors. If only a plurality of these regular customers abandon GM or Chrysler in the current depressed market, it may have measurable effects on the recovery of these automakers.

To be sure, some of the "I'll never buy another GM car" talk from some Republicans and independents is overblown. But some of these customers really mean it. Add on the dealer terminations, which may degrade customer loyalty in some smaller and rural markets (e.g. not as many small GM and Chrysler dealers selling to their friends and neighbors at the small town country clubs, little league, and "chamber of commerce" meetings), and its clear that a potential image problem looms.

Marketers know that purchasing decisions involving vehicles are not completely rational. Emotions, brand image and other subjective perceptions play material roles in the retailing calculus. Thus, while talk of "boycotts" strikes some GM and Chrysler fan boys as irrational and "childish," it is unreasonable to expect that all or even most of GM and Chrysler's former customers will ignore the extraordinary linkage between these companies, the federal government, and the future political fortunes of the Democrats.

Jul 08 04:02 PM

[cameroni:]

This quick exit from Chapter 11 tells us that GM knew far in advance of the bankruptcy itself that it would be making a filing. The company must have invested seriously in preparation for a bankruptcy filing to have been in a position to know all the myriad facts and problems that would have to be resolved and to have a very specific strategy in advance for achieving it's goals.

Did the public get bamboozled into believing that mega stimulus might actually save the company? Were shareholders and creditors deceived by the company, board and Corp head office. So much so that they held on to losing stocks and bonds in the belief that GM was actually going to be in a real position to head off it's bankruptcy and remain solvent?

I think we will see litigation from those who did not sign off on the deal and from shareholders and third parties harmed by what looks to me like a hidden agenda was at play all along.

This exit was TOO fast.

Jul 08 07:31 PM

[jhartz:]

When I go to WIC to pick up my coupons for free milk, cheese, cereal, peanut butter, baby formula and eggs, I'll be expecting a free Chevy Tahoe now too.

How great is a government that takes care of their needy citizens like that? I'm just damned glad I voted for BHO. Who would have thought an eighth grade drop out, unemployed and unmarried mother of six would ever be able to afford such luxury? Don King was absolutely right..............ONLY IN AMERICA!!!!!!!!!

Jul 08 11:39 PM

[3DogKnight:]

User 158164: "I know there are some retards talking boycotting, yeah that makes sense. Put Americans out of work solely because you don't like the President and drive down the value of the company so that you the taxpayer loses money in some kind of childish hissy fit.

I guess I am one of those "retards" The politcal favortism given to the UAW over bondholders is sickening. I will NEVER purchase a vehicle from a UAW controlled automaker, nor will anyone in my family.

Jul 09 01:15 PM

[BeachRider:]

GM certainly received exceptional (but not illegal) support to get through bankruptcy. Were it not for the special support of the Bush and Obama administrations, emergence from bankruptcy would never have happened so quickly. Shedding Opel, Vauxhaul, Holden, Pontiac, Hummer, SAAB & Saturn has radically altered the corporate culture. The stock ownership by UAW was mostly in lieu of bankruptcy-surviving contracts for benefits and other concessions. Hopefully, the UAW's interests have become better aligned with the-new-GM. UAW's position does make it interesting from the viewpoint of trust-buster monitoring, though. The new GM will be an odd artifact of American Laws.
They are probably ahead of Ford right now, but even minor liquidity improvements will push the balance back to Ford.
One can only hope that corporate governance will provide a better linkage between common-stock holders and the BoD of the-new-GM. Stockholders will twinge from the decapitation that they recently endured, but will come back when there are sufficient profits. The new stockholders need much more vigilance to keep GM from these kinds of situations.

Jul 12 08:06 PM

[billddrummer:]

Good comments.

I wonder whether the big brained finance guys at GM actually studied breakeven cash flow analysis on their way to their math PHDs at Princeton, MIT and Harvard.

It reminds me of the old saying, "BS, MS, PhD, Bullsh**t, Moresh**t, Piled High & Deep."

Jul 17 01:39 AM

[jimhenry:]

Starting July 24 2009 consumers who would like to purchase a new car trading off their old gas guzzlers can use
the Cash For Clunkers program voucher.

Jimhenry
Blogger
cashforclunkersfacts.info
www.cashforclunkersfac...

Jul 17 05:44 AM