The GM Reorg and The Government

Actually Jimmie, I'm not giving you a hard time at all. I find this issue very serious, and have no problem indicating as such. I'm laughing *with* you , not *at* you

 

It will be interesting to see. If the US Government ends up with controlling interest of a public company, I believe Ford's lawyers will have a different view (and if not Ford, some other car company will challenge this).

 

Well, it is a bold move on the part of the administration. And I don't disagree with your assessment. However, it will be interesting to see how it plays out, and whether there are court challenges to the move. Conservatives will be playing the "socialist" card (just as they did against FDR) which is just political rhetoric. The real question is whether this violates law.

What amazes me is how they went from solvent to insolvent almost overnight. Sounds like faulty bookkeeping (ala Enron). It also sounds like the entire wealth of the company was based on stock value rather than assets and sales - when the stock market went down so did the company.

 

I agree. It's even more painful when this whole scenario occurred in the 1970's with the oil embargo. It clearly accelerated Toyota, Honda, and Nissan into the US market and provided important insights into what many Americans were looking for in a car. Insights discarded.

It requires effort to so completely ignore the lessons from this period. Image how painful it was to many of the older hands that were trying to improve GM quality 20 years ago and stressed the need for a small car to be ignored till it was too late. The crowning blow is that Wagner was a finance guru. When will industry learn that pure financial manipulations do not make for long term success? (Let's not hold our breath.)

 

If I learned anything earning my Masters in Management it's that modern management is obsessed with quarterly reports and shareholder value. With this concentration of effort mid- and long-term planning goes out the window. Additionally, the only knowledge from the past that are considered are those that solve this quarter's issues.

I don't believe we can blaim management for riding the sport ute craze into the ground. It made Detroit et al a lot of money due to the high profit margins of these vehicles. Where they were short sighted was in not even considering it would end and that the price of gas would eventually change buyer's tastes. Good forward planning would have placed research into being ready for the change-over.

But the question still remains: based on past (and not that far in the past) performance and profits, why did GM crash so quickly? At the least the government, once it "owns" the company (legality notwithstanding) should take a long, hard look at where the money went and where it continues to go.

 

Food for thought:

 

I guess it depends on what you define as quickly. GM has not made a profit since 2003:

2004: + $3.7 Billion
2005: - $8.6 Billion
2006: - $2.0 Billion
2007: - $38.7 Billion
2008: - $30.9 Billion

It would be very difficult for any company to withstand those types of losses.

 

What JSH said.
This didn't happen overnight.
GM had been loosing market share for decades.
Their legacy costs have been increasing for many years (decades?).
They had very little preperation to be ready for a shift away from large vehicles.
This was a train wreck looking for a place to happen. If the bottom had not fallen out of the economy it would have happened in a few more years. However the economy falling apart sped up the process.

 

I wouldn't say the government "forced" GM into bankruptcy-- Just the opposite, the government PROLONGED GM's life for 6 months.

Remember what Wagoner said during his much-maligned private-jet trip to plead for financial help before Congress last fall-- He said without an immediate infusion of cash GM would have gone bankrupt back in December 2008.

The government gave them money (with strings attached, which we all agree is proper), and extended their life for 6 months.

The result is a more orderly prepackaged bankruptcy rather than the extremely messy Chapter-7 liquidation of GM in December 2008 like what Lehman Brothers went through. Remember a Chapter 7 would have COMPLETELY wiped out GM and its 6000 dealerships.

So would you rather have GM at NO value at all in December 2008, or some value preserved by government cash today? I don't think that's unconstitutional at all.

 

People seem to judge based on emotion, when the numbers are right in front of them to make a quantifiable decision. From what I've read we're on the hook for $50B ($20B so far, $30B to come) to GM as of now. I am also told the new GM will have about 40K hourly employees and 25K salaried employees. According to my math, we taxpayers are fronting more than three-quarters of a million $ to save each job at GM. To me that is unsustainable if not outright unconscionable. How much are taxpayers paying to save the jobs of everyone else who is out of work in this economy (including my wife)? Most taxpayers make less with wages & benefits than autoworkers, yet we need to subsidize them to save their jobs? And who says we won't sink more $ into GM...

I can't pin down a current number, but evidently GM will employ about 200K employees worldwide after the most recently announced layoffs. If you're wondering why I used the US only employment number above, it's because I certainly don't feel an obligation to protect jobs outside the US with my tax dollars.

 

That's my sentiment as well, which is exactly what I was trying to show PriusLewis who thinks the government is "forcing" GM into bankruptcy when the government at OUR expense first prolonged GM's life for 6 months and then worked out the deal that actually saves GM from extinction (i.e. Chapter-7 Liquidation).

Though there is some satisfaction you can take from the fact that the unions are now 15% part owners of GM and will not be able to resort to using strikes to extort higher wages and outrageous benefits.. At least until 2015. http://www.nytimes.com/2009/06/02/business/02uaw.html

 

OK, OK, I'm coming around to a different view on this. Anyone notice the timing of this bankruptcy? It conveniently coinsides with when GM would normally shut down for new model change-over. So they shut down, go through this streamlined bankruptcy, shed all debt, scrap their union contracts, scrap any and all dealer contracts, lose their current shareholders (in the process making their investment in the company worthless, and killing yet more thousands of people's retirements), get a huge infusion of cash, and come out the other end about where they would normally if they had been through a change-over (or a relatively short union strike). This whole thing was a set-up from the beginning by GM to allow them to screw everybody and come out smelling like a rose.

But I still believe the US Government owning controlling interest in a public corporation is Unconstitutional.

 

I see they are selling Hummer to China, so China can make them and probably also import them back into the US for sale. The worst of both worlds :-(

 

Thus setting them up to purchase controlling interest in GM from the US Government once this "bankruptcy" is concluded...

 

The timing has nothing to do with GM's model years. Remember last autumn Wagoner came to the U.S. Congress and said he needed money or else GM goes Chapter-7 bankrupt by December 2008.

As one of the strings attached to the government money GM received, a 6-month deadline to work out a reorganization seems to me a reasonable timeframe.

And there are plenty of precedents for the government to seize failing public corporations-- Remember the FDIC after the Savings and Loan Crisis back in the 1980s? Dozens of publicly-traded financial firms were seized by the FDIC because they were insolvent. If that hadn't been done, there would have been a Great Depression II in the 1980s.