[Once again, our anonymous bankruptcy lawyer has put his skills to use on our behalf. His C11 plan’s a bit technical, and it sounds crazy, but it just might work.] The process kicks off with a GM Chapter 11 filing. The U.S. Treasury then gives GM a secured debtor-in possession line of credit for $40b. The line of credit is secured by a first security interest on all GM assets, being junior only to the existing secured line of credit. The fed’s $10b of the line of credit is used to support essential suppliers through loans and pre-payments, perhaps tracking the existing GM model for financing its suppliers.
On the first day of the case, the bankruptcy court gives interim approval to $5b of the total credit line and schedules a hearing ten days later to approve the balance of the $40b loan facility. It’s likely that GM would prepay essential suppliers before filing Chapter 11, and could get court approval to make pre-payments for post-chapter 11 shipments.
A GM chapter 11 case will be expedited. The chief judge assigns multiple judges to handle different aspects of the case, recognizing that speed is essential to a successful reorganization. The case is filed on a Friday evening; the initial financing approvals is in place before the markets open on Monday.
The reorganization plan itself is fairly straightforward:
-Taxpayers have a $40b first lien on all assets. If GM’s debtor-in-possession financing cannot be refinanced, then the taxpayers can negotiate the terms upon which they will extend their loan to GM. Taxpayers will get warrants to buy New Equity to reward them for the risk of financing GM in Chapter 11.
-$40b of bondholders get their pro rata share of any new unsecured debt issued by GM ( the New Debt) and their pro rata share of the new common shares (the New Equity) issued by New GM. No interest will be paid on the New Debt until taxpayers are paid in full.
-Trade payables of $39b, the $25b owed to the UAW, and any other unsecured claims, also get their pro rata share of the New Debt and New Equity.
-Old equity gets nothing
-New management gets a bonus incentive pool consisting of five percent of the new equity
-Old management gets their pick of a gold watch or a HUMMER
And there you have it. Although the size, scope and possible failure of a GM C11 is daunting to management, unions, suppliers and political representatives, a filing is the only way that taxpayer money can be protected– short of witholding federal funds entirely.
Wow, that sounds very plausible.
Of course, there’s not a chance in Hell it’ll happen this way.
The UAW will howl about the cramdown; the dealers will howl abut their existing franchises, and Wall Street will howl about NOT getting a piece of the Debtor-In -Possession action.
I don’t know enough about the C11 process to know how plausible and equitable this is.
Only one thing is clear to me: anyone buying GM stock is betting they’ll receive a handout they don’t deserve.
This company won’t be viable again without a massive reorganization in which many of the current employees are let go and the labor contract is radically rewritten.
Auto sales might be depressed for a while. GM will have to be rebuilt for the current sales level.
Yeah but, what about the 6 brands that will have to be shut down and all the factories, suppliers, and dealers that will go down with them?
Hmm… how’s this for a simple plan for the bailout:
Taxpayers give GM 50 billion… each taxpayer gets a Malibu in return. :D
guyincognito: What about them? They’re unsustainable in any future scenario. They must go.
How long can the Ford family delay the domino affect? Can’t see them agreeing to an equity wipeout.
So if Ford were to go C11 what sort of financial sleight of hand might the family use to try and protect the family jewels?
GM will need a charismatic leader to get the troops inspired after decades of decline.
My choice would be Colin Powell (reputedly an undercover car guy) or Roger Penske.
If this happens, highly unlikely as it is, will the Camaro and Corvette survive?
(This is a comment for many threads):
The imagined economic carnage throughout the economy from shutting down brands that aren’t selling amazes me. Yeah, if my company is making 300 whatzits a day and you sell me 300 widgets that I put in it, if I cut my sales to 0, you lose 300 sales.
But if my sales have already fallen to 0, aren’t you already out those sales?
Unless people actually believe GM is still building millions more vehicles than they’re actually selling and then warehousing them somewhere, and that the suppliers make money in that scenario, it’s unsupportable to whine about what’ll happen to the rest of the economy. To a large extent, it’s already done.
-Old management gets their pick of a gold watch or a HUMMER
Let’s be generous… I think they should get a set of steak knives AND 3rd prize.
–chuck
What “lessons learned” examples are there for a consumer product mfg that goes belly up with regard to existing inventory? What happens to all those dealers?
What happens to customers with warranty claims? I wouldn’t be rushing out to buy a Malibu or CTS about now.
Is the assumption that this is done as a pre-pack? Getting 2/3rds vote for the class would probably be doable if it came with government money and the alternative was liquidation.
Also if the A/P gets equitized it is going to bankrupt a slew of suppliers (the public ones are obvious but there are hundreds of small suppliers with 20% or more revenue from GM).
Other than that it seems workable, but unless you reinstate the ongoing payables and get pre-approval from the bonds and UAW I don’t think its realistic to assume that a bankruptcy will be either quick or simple.
@ M1EK & JeremyR :
Right, except for the fact that Hummer, Saturn, Buick, Pontiac, GMC, and SAAB account for on the order of a million sales per year. While each brand has a dubious justification for existence, in total they still account for a huge chunk of the US market. If they were all to shut down, every major auto supplier would go down with them. Ford and Chrysler would immediately follow suit. Trimming the excess brands, absorbing some of that demand back into Chevrolet and Cadillac and then reshuffling manufacturing capacity and supply capacity to reflect that change doesn’t just happen.
These changes should have been in process for the last 30 years. Some bankruptcy judge, aided by government dollars isn’t going to slash and burn the whole industry in a few days. This is going to be painful, slow, and full of lawsuits. Don’t get me wrong, I’m not saying there’s an alternative, I am simply alluding to the dauntingly complex task at hand.
some Lou Reed…
and the lawyers said doo, doo, doo….
If they were all to shut down, every major auto supplier would go down with them. Ford and Chrysler would immediately follow suit.
But again, hasn’t GM already cut production of those models drastically? Which would imply that the auto suppliers’ sales have already drastically been cut?
indi500fan
Colin Powell is a pistonhead and nothin’ undercover about it. I remember reading in Time magazine (I think) shortly after he was first named Secretary of State that he was sadly going to have to put his hobby -restoring old Volvos- on hold. As I recall, they even had a picture of him with his hands dirty workin’ under the hood of one.
guy-the biggest chunk of those sales is GMC which is just a badge swap from a Chevy. Sink the brands.
Bunter
M1EK-I think your on the right track. Some suppliers would die, but they would see order jumps quickly from Ford and the (horrors!) New Domestics. I am dubious as to how much Cryco would do. They probably would die, their dealers, the Mopar clubs and rental agencies would miss them (did I miss anybody).
Bunter
/Chants Gold Watch…Gold Watch
As a taxpayer, I object to the concept. The taxpayer lien means little if the company later evaporates and is forced into Chapter 7. The taxpayer would end up with the same failed business, plus whatever portion of the $40 billion was lost in the process.
I have what I believe is a simpler idea:
First, take the existing inventory, better factories, cash and marketable securities, brands, and current payroll, and “sell” it to a qualified company that understands the car business and that will capitalize it. Have the government guarantee some of the debt to help make it work. The money paid by the buyer would go exclusively into the new GM as working capital; the old GM wouldn’t actually receive any of it at all.
Next, announce this sale to the public. Cry it out from the hills, GM has a new owner! Give big press conferences and get on the nightly news so that everyone knows about GM being in safe, solid hands.
[As part of this, keep Lutz as an (annoying) figurehead for the sake of consistency, and put a bit of Ford presence in it to make it seem as if it’s an American company, because it probably is really going to be owned by a bunch of furriners who have the money and who want a big piece of the US car market on the cheap.]
Finally, take the remaining mess of what is left of the GM corporation (liabilities, bad factories, useless assets, etc.) and file Chapter 7. Let the union, franchisees, bondholders, shareholders, etc. sue them, because there won’t be much left.
The federal government should avoid direct large interjections of cash into the new GM; that is a recipe for never getting the money back. Loan guarantees should be enough to get her done.
You could probably even apply political pressure on Toyota, Honda, Hyundai, etc. to loan some of what is needed to make it work. Uncle Sam can be rather, er, compelling when he wants to be.
-Old management gets their pick of a gold watch or a HUMMER
I’m sorry but they should be getting a bill for over payment of service, very poor service at that. There should be no parting gifts for those losers.
M1EK I right. Once the market contracted in a big way there became an excess of suppliers and job in the industry. They have just been treading water for the near term. When the market went from 16 million to 12 million and now 10 million units projected the writing was on the wall.
It’s unfortunate but some of the those companies and people are just going to have to start making other stuff, maybe solar panels or wind turbines. The best suppliers and employees will survive and the rest will not and be forced to find other jobs.
The government giving them money to “save jobs” just isn’t going to solve anything just waste money with window dressing. It is either goingot cause them to keep making cars and trucks no one is buying that sit on lots or they get paid to not do anything so they can say they saved jobs in the industry. The best solution is to let the weak collapse (they basically already have) and provide support to get people and those suppliers doing other productive things in our economy. Help transition them to something in demand or that might be in demand in the near term.
Pch101,
I like your plan better but why the need for Lutz or a Ford presence –do most buyers even know who Lutz is? Or care, for that matter?
As for a Ford presence, could you elaborate?
why the need for Lutz or a Ford presence –do most buyers even know who Lutz is?
Many of the diehard GM fans and America First car buyers will object to the idea of a foreign-controlled General Motors. They will feel that the Commies are taking over, that the guv’mint sold them out, etc., and they will need to be appeased.
Keeping someone like Lutz in there as a mouthpiece would be part of an effort to keep these customers. The core buyers who remain will want continuity and red-white-and-blue, and some effort would need to be made to disguise the fact that this would most likely be a foreign takeover.
In any case, if kept in certain capacities, Lutz wouldn’t actually be so bad. He has had his share of both failure and success, and if confined to areas where he can stick to his strengths, he could be an asset and not just a figurehead.
For a management choice: how about Sergio Marchionne, who brought back Fiat from the dead? Although a couple of $billion from GM didn’t hurt…
It is nice to read sheister creativity writings.
By the time sheisters will be done with it it will cost 50 bn in legal fees, original owners will get babkes, government will be screwed in the long run and not a single car will be produced. However, Red Ink Rick will not be the biggest winner. Is this worth the price?
Here is an idea to our socialism: close GM, pay each union member his salary till he dies (not 62, 65 or whatever, but till he kicks the bucket) and US taxpayer will save 48 billion bucks. How I come to this: they get about 50K regular pay without overtime, there are 10,000 of them and they all die in 40 years. Even if there 100,000 of them it is really cheap compare to all other alternatives!
All well and good except: with the Democrats in power, there’s no way that the gov’t would give DIP financing to a reorganization that would cost UAW jobs and contracts. Or dealer franchises.
Entrenched interests wouldn’t stand for it. Period. So it won’t happen.
And its’ too bad. Only the gov’t can raise the kind of cash needed. But it won’t, not on terms that do GM any good.
Result: the only alternative is a bailout. That’s what’s going to happen.
Well, there’s at least SOME good news, this time from Delphi.
http://www.detroitnews.com/apps/pbcs.dll/article?AID=/20081111/AUTO01/811110432/1148
I say just give GM to the Chinese in lieu payment on our trade deficit with them, they’re already producing Chinese quality cars as it is now.
The Corvette will survive. Not sure about the Camaro once the current one has had a decent year or two.
The strongest bits of GM, Ford, and Chrysler will survive in some form or another. Not all of the factories will be closed down.
The main change will be:
1. Existing shareholders will be wiped out
2. Contracts, labor and otherwise, will be rewritten
3. Products and employees will be cut
Thinking it’s just a matter of finding the right CEO is simplistic BS. People like to believe it’s that simple, but it isn’t.
Just a thought.
Employee ownership?
Wipe the “slate clean” of all union commitments in whatever way is needed, present and past as much as possible.
Let the new “owners” decide if they are ready to do what is needed to become profitable again.
If it means working at minimum wage with no benefits, so be it.
Let future profits decide what renumerations to employees are feasible.
Just a thought; unsure if this method would be feasible or practical or whatever.
Employee ownership?
That’s not an entirely bad idea, because at least there might be snowball’s chance in hell of accountability at the upper management level. The issue is the old “herding cats” problem: there’s a lot of competing interests in employee-held companies, and a lot of fickle, short-term thinking. There needs to be strong stewardship in place to address that, and I can’t think many would relish that challenge.
Any government bail out right now will probably fail, since Pelosi’s, Reid’s, and Obama’s main goal with such will be to protect jobs, especially union ones; but to succeed as a profitable enterprise, lots and lots of jobs will need to be cut. The most likely scenerio is a government takeover which ends up just being a money pit until the government gives up and sells it for nothing to private investors who also fail; that is, American Leyland.
If the government props up GM(and the rest of them), it will be to keep people employed. They currently have an unsustainable business model and none competitive products. Their costs to manufacture are too high. They are unwilling to take any risks or do anything drastic. It’s just business as usual as it has been for the past forty plus years. Their products are stuck in a rut. Sales can only decrease and not increase.
I don’t think that recent fire sale sold near as much product as the first one did.
And what is GM going to do with all this money immediately anyways? Do they even know how they are going to spend it? It’s not like they have zero dollars left in their bank account.
Let’s get a list of how much the top execs at GM get paid each year. It just makes me sick that the company is in dire straits and the top guys still get paid millions.
Folks, let your voices be heard:
http://www.change.gov/page/s/yourvision
I did…
How about they get a promise not to clawback their salaries for the past umpteen years?
I’m still trying to figure out why I should give a flying flip about whether GM/Ford/Chrysco stay in business or not. For the last 25 years I’ve made a pest of myself going into their dealerships and asking for the following vehicle:
-full size 2drHT sedan
-rear wheel drive
-V8 engine
-column shifted manual transmission
-leather bench seats
-no radio
-no AC
-no power anything
-no airbags
-chrome metal bumpers, stainless steel grill
Every time, the salesmen lean back in their chairs, throw papers into the air, laugh themselves silly, call their salesmen buddies in to hear the part about the chrome bumpers and column shifted manual tranny, then promptly dry the tears from their laughing eyes and throw me out.
So to hell with them. Sorry, there it is.
I’m for selling off of GMs valuable assets via liquidation. It’s the simplest solution, provided that it’s not done like the Bear Stearns deal (behind closed doors).
The fact is that regardless of who owns the brands that matter (Chevrolet, Cadillac), they have products that are decent and will sell. That means that the factories that produce those products will continue to operate and that the suppliers supporting those products will still have business.
I find it disturbing that this situation is being portrayed a the “collapse of the US auto industry”. It is not. It’s the collapse of the US auto companies which is not the same thing.
Fast-forward a few years post-liquidation and I think you will find that Chevy trucks will still own much of the market, the Corvette (and some Cadillacs) will still be available and lots and lots of Americans will be making a decent living producing cars and parts for those cars.
I’m almost for letting GM fail, and letting people who never thought they’d be affected by it living the reality.
Almost.
It would be fun to watch, if only the imbeciles got hurt.
This video says they get their money next week because if they don’t; big drag on the economy.
Already getting 25 billion, plus another 25 billion!
http://www.wxyz.com/news/story.aspx?content_id=3eafa691-8a9b-4de4-b6a0-d0c9d89a0d52
The plan has two huge flaws.
First, it’s not enough money. With a five year product cycle and nothing in the works that will sell in the new CAFE market mandated last year by Congress, GM will need about $100 billion to make it.
Second, it’s pointless to do anything unless the UAW is eliminated, as in completely. No private equity is going to come in if the money is going to the UAW. That’s because leaving the UAW in place, even if they took pay cuts now, leaves them in place to hold-up the company for higher wages tomorrow. The UAW must die for GM to live.
Frankly, I am a put off by so much enthusiasm in these Death Watch articles. You may be right, but not before year 2011, at the earliest. U.S. WILL give them a 2 year lifeline to reinvent itself. After that, GM will be live or die of its own accord.
The steady drumbeat of Death Watch and bankruptcy FUD will become self-fulfilling. It’s like short selling a stock. Is that really what people want?
The steady drumbeat of Death Watch and bankruptcy FUD will become self-fulfilling.
So now it’s supposedly Mr. Farago’s fault that Detroit is in trouble. Imagine that — Rick Wagoner and Bob Lutz were no match for The Truth About Cars.
I think that we have an expression for that where I come from. It’s called “shooting the messenger,” and that’s never thought of as a good thing.
Not going to work. The feds will pony up cash after cash after cash because letting GM go to Chapter 11 will mean the loss of lots of jobs which they can’t stomach. Let alone loaning GM cash to file chap. 11. Get ready for a steady stream of money being funneled to GM year after year.
If the feds do nothing then they will eb blamed for not helping GM like they did the wall street fat cats. If they give GM some money and it files Chapter 11 they will be blamed for job losses so the only avenue is to continue to funnel money to GM and Ford. People will complain a bit but then the media will glam onto something else and all will be forgotten.
Meanwhile, look what happened with AIG yesterday. The old HUGE bailout was discarded and sweetened bigtime. And with no real proof that even the new bailout will work either, and that AIG won’t be back crying for, and getting, more. So our focus on the 2.8 and their suppliers and dealers is just one piece of this screwed up pie. And the credit card and commercial real estate trains are just beginning to derail. As I type this, Paulson is telling us how well it’s going so far.
While I’m against the bailout .. the fallout from a failed GM does a few things I’m not fond of:
– MI jobs: actual GM employees + suppliers + trucking + retail sales = everyone out of a job
– Ch11 suppliers stop shipment to other automakers, disrupting production & profits = further economic disaster
– Hundreds of thousands of disgruntled, recently fired, panicked people tend to get angry and RIOT
– Billions upon billions of dollars of equity in businesses, commercial & residential real estate are wiped out forever
So while I think this bankruptcy lawyer has some good ideas, overall I think he is smoking something good if he thinks what he’s laid out will happen.
GM is an incredibly large, convoluted company with thousands of restrictions on how things can get done thanks to all the debt covenants they already have. It is NOT anything close to a “normal” company. Witness the Delphi fiasco and the constant reminders of what GM is still liable for on their balance sheet.
GM needs to have new thinking, new strategy, and new owners. Without this, there won’t be any GM and what I’ve outlined above will just be the first six months of what we’ll be reading about.
It’s human nature to believe ANYTHING if it’s repeated enough. I don’t mind reasoned analysis of what’s wrong with GM and management. There’s plenty wrong with it. Wagoner should go now, as well as other clueless, insular GM executives.
But I’m convinced we are talking ourselves into an economy that will be worse for the incessant repetition of fear, uncertainty and doubt. I don’t own GM stock, and I don’t want them to fail. For a car nut, I’m saddened that I detect hints of glee in the editorials here at GM’s failings. And you don’t need a degree in psychology to recognize that.
Robert,
When was the last time you kicked back, put your feet up on the desk, and said “Ah, those idiots should have listened to me?” How different would things be now if GM had filed for bankruptcy a year ago, or 2 years ago when they actually had some assets? The end has been coming for a long time, and the products, demand, and products have not come through. Neither has the planning. Neither has the management. It seems to me that waiting to be forced under, instead of getting real help early on, has only guaranteed a worse outcome. At this point, I see no future for GM at all, except in a bunch of small pieces.
We keep hearing about how the money will go to help the big three retool for more economical cars….
Don’t they already sell more economical cars in other markets? Europe, South America, Africa?
No way do I want to pay for them to retool when they’ve already got products to sell – they just need to get them federalized. They’ve ALWAYS had more economical vehicles to sell but didn’t want to seel them here and compete with the other stuff they had here.
Let them build those cars in Mexico and Poland and wherever else they have cheap labor and sell cars here. The UAW is going to sqeal and cry and throw a tantrum but screw ’em – they have been part of the problem, not part of the solution.
Should old management really get their pick of a gold watch or a HUMMER? They should have to GIVE a HUMMER (not the car!) to the American automotive enthusiast!