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It’s the End of GM as We Knew It

Posted Tuesday, May 26, 2009 - 6:53am

In about a week, we will witness the darkest day in American business history. That’s because on or about June 1, General Motors (GM) will likely file for Chapter 11 bankruptcy protection.

OK, it’s not like GM hasn’t been in a sort of quasi-bankruptcy for the past few months, with the government providing the billions in financing the company has required to forge deals with the UAW, the Canadian Auto Workers union, the taxpayer (who will end up owning a majority stake in the new GM), and …

Oh yeah, it’s déjà-vu all over again. We’ve got bondholders. We’ve got lots and lots of GM bondholders. Thousands, in fact, who are refusing to accept a debt-for-equity swap that would ask them to relinquish $27 billion in debt in return for a 10 percent stake in the new General. We were here last month with Chrysler’s creditors, but there were far fewer of them and, after Obama brought out the big stick of his massive approval ratings, the “rogue hedge funds” who were holding out caved and cleared the way for Chrysler to execute an alliance with Fiat.

It’s not going to be so easy with GM. Everyone saw this coming and, as a result, has been calling Chapter 11 a forgone conclusion for weeks. This is a disgusting sort of phony brinksmanship that serves only one purpose: to put a gaggle of investors who assumed too much risk at the front of the line to get paid once GM goes to bankruptcy court (thereby initiating the largest bankruptcy in the history of industrial manufacturing). That’s dumb money for you. After a slow start, the government has genuinely focused its attention on coming up with a good solution for both the Chrysler and GM dilemmas. The UAW has surrendered generations of hard-won gains and effectively sealed its eventual demise. But the bondholders … well, they just want to get paid. Anything.

GM is 100 years old. It has done some bad things and some good things. But it defines American business culture in the 20th century. In fact, you could argue that its great midcentury president Alfred Sloan invented what we now think of as the American corporation. It wouldn’t be a stretch to say that there would be no “business”—in the Tom Wolfe, Michael Lewis, pop-heroic modern day sense—without GM. Sloan created the idea that business was as much a state of mind as a profitable deployment of combined interests. Ford figured out how to make manufacturing an efficient, industrial process, but Sloan—an MIT grad—imagined business as an intellectual activity. Through GM and the advent of vertical integration, business and business management became an affair of the mind.

From a cultural standpoint, watching GM slide into probable bankruptcy with its dealer network shattered and one of its oldest brands, Pontiac, banished from the field is like being on the French border in 1812 and watching the remnants of Napoleon's Grand Armée return starved, frozen, and wrecked from their disastrous foray into Russia. We’ve kind of been taught to hate GM, at least since Roger and Me, but anyone in America who really values his freedom and citizenship owes a debt to GM. The same assembly lines that built Buicks built bombers. And then employed the men that flew them when the time for bombing and bombers was done.

For decades, GM was a blue-chip investment and a low-risk, boring place to park money and gather dividends until something snazzier came along. GM was the anti-derivative. GM's business involved putting something of value in one end and getting something of greater value out the other end. Steel and rubber became a Cadillac. From a financial perspective, GM served its purpose. But from a cultural perspective, GM’s impact was far grander, pervasive, international. It introduced a sort of tenure for the middle class. There were always high-wage jobs, and you didn’t need college to get them. At its peak, in the 1950s, Detroit, in its way, rivaled New York as a cosmopolitan citadel. Eventually, they wrote songs about its products. I can’t be the only who has noticed that GM’s last week as capital-G capital-M, as The General, began yesterday, Memorial Day.

You would have to have a cold and mercenary character to seek what’s coming for GM. You would have to enjoy the smiting of the good or the fall of the strong. You would have to be the type who would chuckle as the arrow pierced Achilles' heel.

You would have to be a GM bondholder.

Matthew DeBord has written about the auto industry for the Washington Post, the Los Angeles Times, the Huffington Post, and Car Design News.

Cadillac by Mike from USA/Wikipedia

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Submitted by mikanystrom on Wed, 05/27/2009 - 2:04am.

Give us a break...

Blaming the bondholders for GM's restructuring problems is silly. I loaned GM a few thousand dollars some years ago with no expectation of an upside, just the interest payments. In return, the other bondholders and I were supposed to get paid off before other creditors. That was the deal. That we're being offered, essentially, a penny on the dollar now is outrageous. I have no desire to kill GM. I teach in the Sloan building, cite his book to my students, got my degree from the same MIT department as him, and own---not one but---THREE cars made by GM. But the government is trying to screw the bondholders simply because we don't have any political clout. Bankruptcy it is....

Submitted by mooredse on Tue, 05/26/2009 - 10:20am.

Real Problem at GM

GM's problem is that it finds itself in a situation in which it cannot attract any Capital except what it is being given from Obama. And, it cannot raise any private capital as long as Obama is providing assistance. It is the number one market share automaker in the world, and falling like a dead weight because the U.S. government has gotten involved. Many Americans that own GM cars are not going to buy a car from GM once it becomes Government Motors, and I am sure there are even fewer that will buy because it is Government Motors.

So, it is clear that the Obamunists actions are pushing GM into bankruptcy and making the company less valuable. But why is this happening? Political pay-off to the unions that got him elected is certainly one reason; but it clear this is not going to be a winner for either party. The real reason is Obama’s insane love affair with the color green. The Obamunists have this idea that every American needs to buy a little bity car because they say so. They incorrectly correlate global warming to human activity in order to stir up political debate. Science clearly shows that the warming and cooling trends on this planet are cyclical and human beings are powerless to affect the trends. But with heads as big as the Obamunists, this just could not be so. Get a grip people. GM is a truck company. If the government wants to build small green cars, then get approval from Congress to do so.

So what is the likely outcome? One high probability prospect is that GM will die due to global warming.

The more interesting debate needs to turn to whether the government has the authority to do what it is doing in the current GM situation. Everyone is pointing to bankruptcy and a 363(b) sale of assets and has blindly assumed that the government has the authority to step into this situation and take-over the business. Legal minds need to say, not so fast. In GM’s case, the government’s “sub rosa plan” is to sell the valuable assets, with accompanying union contracts, to a new, “good” GM, and leave the money-losing assets in the original company, which is left in the street to bleed cash and die. One needs first to point out that 363(b) sales in bankruptcy are intended to apply in bankruptcy code to non-core assets, not the heart of a going concern. So the government’s plan on the surface is flawed, and I am sure they know this is the case.

The Obamunists need to come clean and tell the American people their real plan for GM, not hide behind a forced bankruptcy which is a disguised re-distribution of private property. The government does have the eminent domain authority and policing power to take any asset it needs under the U.S. Constitution if it deems such confiscation is in the public good. One can and should question whether making green cars at GM is in the public good and meets the test. Certainly there are other green car options, and will be many more if the market materializes. The preservation of the UAW certainly doesn't meet the test.

But even if one believes the government should own GM for the U.S. public good, then the current owners of the assets (stock and bondholders) have 5th amendment rights to be paid fair value for their assets by the government. Confiscating the assets of the business and doling them out to the UAW non-owners for $0 clearly does not meet the spirit of this right. As long as the government is involved in this situation, it is clear that the market value of GM is $0 because there is no profit to be found in a company which is chartered to make motorized vehicles, but is being re-structured as a political green car entity whose primary mandate is the indirect distribution of federal unemployment benefits and Medicare. This is nothing more than a back-door mechanism for taxing and re-distributing property, and is a very dangerous process that needs to be dealt a serious set-back.

Submitted by fijimf on Tue, 05/26/2009 - 1:03pm.

Bondholders

There is a reason bondholders are called bondholders and not shareholders or stakeholdes. They lent money with the understanding, and legally enforceable debenture agreements, that they would be paid first. Being sentimental over the brilliance of Alfred Sloan is no reason to continue to pour billions of dollars into a wealth destroying enterprise. Keeping GM afloat does no favor for the economy. It further ties up resources and capital that would be better employed elsewhere.