A recent NY Times op ed gave plaudits to a Senate investigation held in the 1930’s to discover the causes of the Great Depression. But the power of congressional investigators is vastly overstated and overrated. They can be stymied by resourceful, deep-pocketed corporations. Considering the current attitudes of US automakers, it’s unrealistic to expect any voluntary disclosure to Congress, any meaningful disclosure to taxpayers. But, as the Bermie Maddoff liquidation shows, bankruptcy court is another matter entirely. The trustee in the Madoff liquidation/investigation can ask the bankruptcy court to authorize subpoenas, which can be used to compel production of documents and to compel witnesses to testify. The prospect literally scares GM and Chrysler witless.
Both GM and Chrysler have much to hide. Have hidden much. GM has a long and ignoble history of overstating and restating its accounts, by billions of dollars. In 2006, GM revised profit figures for six years previous, and restated reported earnings for 2005. There are also no less than three ongoing SEC investigations into its dealings. All secret.
The company’s CEO and Chairman (former Chief Financial Officer) Rick Wagoner has been moving money around for a long time– selling assets, arranging deferred payments to the union, negotiating with creditors of their bankrupt former subsidiary Delphi, creating financial instruments with the automaker’s financial arm (GMAC), transferring cash from GM’s international subsidies and much, much more. Despite the fact that the U.S. government is now on the hook for $17.4b in loans, we, the taxpayer, have not seen GM’s books.
Cerberus, Chrysler’s private equity owner, and [still] the holder of a 49 percent share in the recently federally cash-infused GMAC ($6b), is also shrouded in secrecy. The Wall Street Journal recently unearthed the fact that Cerberus mortgaged Chrysler’s Auburn Hills HQ under its own name when it purchased Chrysler from Daimler. What else don’t we know? We don’t know how much rent Cerberus is charging Chrysler. We don’t know how much of Chrysler’s other assets Cerberus mortgaged to pay back private investors and/or raise capital. We don’t know what arrangements Cerberus made with GM re: GMAC.
When GM and Chrysler went to Congress to plead their case for federal loans, politicians demanded a look at the books. Both automakers withheld “commercially sensitive” information. In other words, they received their money without full disclosure. When discussing their situation in front of the cameras, both automakers used terms that sounded like accounting terms– with no accepted meaning in accounting parlance. At the same time, GM and Chrysler deployed public relations groups to plant incomplete and misleading news articles, issue biased press releases, and draft op ed pieces that fooled main street media and confused any real disclosure.
A Chapter 11 filing is a process of legal discovery. In a Chapter 11 case, the court forms an official committee/committees of creditors. Any official committee can ask the bankruptcy court to issue subpoenas relating to the company’s acts, conduct, property, liabilities and financial condition.
The subpoenas can compel company officers– and others– to produce documents. They can also force witnesses to testify under oath. Committees can use their investigative powers to try to find assets to pay creditors. For example, if the bankruptcy court could establish the exact financial relationship between GM NA and its foreign subsidiaries. By the same token, if GM made preferential payments to some creditors, the committee could reveal this fact.
Committees also investigate transactions between a debtor company and its officers, directors and shareholders, seeking to determine if any improper transfers were made. If Cerberus leveraged Chrysler cash or assets to benefit Cerberus’ investors/shareholders and/or assumed debt that left Chrysler without sufficient operating capital, these facts will come out.
While the public has a right to know where it’s money went, there are limits to what a bankruptcy investigation can expose. A creditors committee’s findings won’t become a public document. Investigatory depositions of company officers and directors are not open to the public. The committee is interested in getting the highest possible recovery for the group it represents, not a general disclosure of what went wrong and why.
That said, if criminal or illegal activities are exposed, the bankruptcy judge would refer the case to a criminal prosecutor. And leaks to the press are not uncommon. All of which means if GM or Chrysler were to file for C11, both companies would face intense scrutiny of their business dealings.
Meanwhile, the absence of information about the current financial condition of GM or Chrysler and the detailed terms of Treasury loans to automakers is deeply troublesome. Our new president has stated his commitment to a “higher standard of accountability and transparency.” It remains to be seen if he will do anything to require adequate disclosure by recipients of federal loans, or whether it will be business as usual.
Either way, if and when federal bankruptcy court get involved with Chrysler, GM and/or Ford, it’s hardly likely that their management teams would emerge unscathed. In a battle between fear and greed, fear wins.
I think that the bottom line to all of these bailouts, etc. is that our government has worked for the uber rich members of our society for the past few decades. And so begins our sad decline into our status of a formerly great nation.
I have a feeling that GM’s own bankruptcy (separate from GMAC) would just reveal a bunch of cowardly idiots, and maybe some UAW corruption.
GM was brought to its knees by horrible management, too many brands, too many dealers and too many UAW workers working under too many work rules, culminating in too much corporate debt. Nothing particularly shady, just pathetic and disappointing.
GMAC’s bankruptcy, or Chrysler’s inevitable bankruptcy, now that might result in some prison sentences.
Lets be clear on something: in the nearest term (2-4 years) not a single domestic auto company is going into any chapter 11 negotiations. We (taxpayers) will continue to fund operations. So far billions were dispensed to management without any plans for improvement (you cant call the crap demonstrated to the nation a “plan”). The management will waste the money just like it wasted shareholders equity. For misappropriating shareholders equity CEO and CFO are judicially liable, for pissing away our tax dollars they are not.
GM is a public company. It produces unaudited financial statements every three months and an annual audit.
We don’t need any more information than what can be found in those disclosures to know that GM is in big trouble, with a low chance of recovery. The fact that no lender was eager to step up with DIP financing confirms that the information is sufficient to reject whatever plans that they have provided to date.
The bailout isn’t meant to fix them, it’s to prevent a market collapse. The timing of GM’s money bomb was terrible, in light of all of the other broader systemic problems that are accompanying this, so the feds had little choice. Having more data wouldn’t have changed anything.
I’m frankly not sure why Chrysler got thrown into the mix. Hopefully, the feds are busy working on finding a buyer that might be able to repay at least some of the money.
The loans are a done deal. No matter how you feel about the bailouts it’s in the taxpayers’ interest for GM & Chrysler to pay back the loans. What do the domestic manufacturers have to do to survive?
What do the domestic manufacturers have to do to survive?
Building stuff that people want might help. But obviously, they aren’t very interested in doing that. They would rather blame the universe outside of their Michigander bubble for their problems than do what successful companies do to make money.
GM is a public company. It produces unaudited financial statements every three months and an annual audit.
Related question: wasn’t the accuracy of the last set of audited statements noted in the auditor’s report? Or was it just doubts cast upon controls?
Related question: wasn’t the accuracy of the last set of audited statements noted in the auditor’s report?
There were some issues in earlier years involving the classification of some items.
Still, those disparities don’t change what’s wrong with the company. If the Congress hired an industry expert to review the numbers, it wouldn’t take much to identify that the problems are substantial and can’t be fixed with a “bridge loan.” I guess that it sounds better to call it a “loan”, instead of the grant that it is.
access page 78 of said annual report and view the disclosures related to “material weaknesses” again this year. next consider that Deloitte has been GM’s auditor for over seventy consecutive years, not evidence of an “arm’s length” relationship. then recall that this is the same audit company which oversaw Parmalat, the European conglomerate that imploded with a $5 Billion Cayman Island cash account that didn’t exist. same auditor GM had back when McNamara, a New Jersey dealer, burned GMAC for $400 Million in vans that didn’t exist. getting the warm and fuzzies? add in the “off balance sheet” accounting and you begin to get the idea of why I coined the term “Red Ink Rick”.
As suspected, there have got to be some scary skeletons in their closets. Sure, every corporation (and person) has ’em, but think about the sheer size of GM/Chrysler/Ford, and then dragging it out into the public? Ouch.
The lack of transparency is pretty ridiculous, though – bailout or not, general accounting practices are a nice story we tell ourselves to sleep at night.
US financial transparency and disclosure? Isn’t that the joke that is being chewed through the world over right now?
If a raft of unmentionables came out of a GM Ch11 what could they possibly say; Surprised??
Hardly…..but a good point well made, so thank you Richard Tilton.
Now if someone was to pick apart Cerberus, THAT would be interesting…..
@PeteMoran: wouldn’t that be the biggest motivation for a GM-Chrysler merger? Pawn off Chrysler so Cerebus won’t have to show any of its cards?
@ Tommy
Absolutely right. The lack of a Bush “Car Czar”, probably at Cerberus’ insistence, is the give-away that transparency was to be avoided, big time.
I’m not normally into conspiracy theories, but there’s one in there somewhere with Bush and Cerberus.
I think the American consumer has voted with their wallets. Bailouts will not solve the problem of not selling cars. Even if they made foreign brands, that is cars without American names since all three build outside of America,cost more through taxes and tariffs it will only drive up resale of the existing foreign cars and put a premium on the new.
Cars are big purchases for almost everyone and faced with a choice of spending more for a better car or another piece of shit with bad head gaskets, a slipping transmission, and a terrible interior coupled with crap resale, most people are going to dig deeper and get a ToyoHonNissaHyundai.
Sorry, but the die is cast on this.
It’s hard to tell for sure, but it looks like GM and Ford are holding their own as car sales tumble. The foreign carmakers don’t seem to be picking up market share. Even Chrysler is finding a fair number of customers.
If Bush had not bailed out the carmakers (without any strings, no less), they might now be starting on the road to recovery. There’s a decent business there. Revenues are solid. Expenses are not too high compared to revenues. The tough medicine of bankruptcy might well cure GM, and maybe even Chrysler.
I’ve seen worse cases than these survive Chapter 11. Had Bush put someone like Mitt Romney in as a car czar, we might not be pissing billions away in loans to involvent companies.
@ tesla
Errr… Oh, I get it now. Thanks.
If the powers of Congressional investigators can be stymied by resourceful, deep-pocketed corporations, what stops said corporations from having the same influence over the powers of bankcruptcy committee officials?
‘Our new president has stated his commitment to a “higher standard of accountability and transparency.”’
Yes, we saw that commitment in the way he ran his campaign. Nothing to see here, move on.
@ Tesla,
Agreed. I can think of nobody better suited to be Car Czar than Romney. I’m sure he understands all the tactics Cerberus and GM might have employed with their balance sheets.
By Richard N. Tilton
A recent NY Times op ed gave plaudits to a Senate investigation held in the 1930’s to discover the causes of the Great Depression. But the power of congressional investigators is vastly overstated and overrated.
At first, I thought you had written “instigators”, but my subconscious reading center must have been working overtime. In any event, I’m sure there’s a level of truth to it, today, AND in the 30’s.
tesla deathwatcher :
I’ve seen worse cases than these survive Chapter 11. Had Bush put someone like Mitt Romney in as a car czar, we might not be pissing billions away in loans to involvent companies.
Look, I like Mitt. But we need to stop thinking that politicians, even those we like, have the answers. Or worse yet, “are” the answer.
The answer is within, not in .. er.. false idols. I dunno, that just came out…
MSM has already given Chrysler the kiss of the death. Here’s the AP.
My favorite quote, after the article cites that Chrysler’s year-over-year numbers are down by a staggering 53%:
Jonathan Macey, a Yale University law professor who has been critical of U.S. automakers’ management, said Chrysler’s sales numbers are “further evidence of an unviable entity.”
ZoomZoom, I agree with you that a politician is not the answer to the carmakers’ problems. But Romney is a better businessman (in my view) than he is a politician.
I met Romney very briefly 25 years ago, and was impressed. I followed his career since. He did a great job at Bain & Co., and in turning around the Salt Lake City Winter Olympics. I can’t really judge his job as governor of Massachusetts, but my sense is that he did reasonably well.
Couple Romney’s experience as a successful investor and business leader with his roots in Detroit and car executive father, and I think you have someone who could really turn Detroit around. Come up with a plan, knock heads around to get it started, and push it through to the end.
As Ci2Eye notes, GM and Cerberus are not going to fool Romney with any balance sheet baloney. He would cut through that with a knife.
We don’t need a cartoonish turnaround artist like Chainsaw Al Dunlap. Nor (I agree with you) do we need a politician. But a businessman with the balls and the brains, and the political savvy, of Mitt Romney just might be able to pull this off.
It is important to remember what the job of the accountant is, and what it is not.
The accountant is responsible for ensuring that the way GM presents data conforms with the proper rules and regulations. Generally Accepted Accounting Principles, in other words.
As part of the audit, the accountant test examines a variety of documents to ensure that the figures are correct. They also examine that cutoff periods are done correctly, that orders shipped match customer orders, and so forth.
The auditors also opine on financial controls, that is, how well the firm can find trouble within itself.
What an audit does not do, and in most cases a firm is not responsible for, is forensically examining a company. An Enron cannot be found because the fraud is designed by the management to cheat the accountant. In those situations, the accountant is blameless because it is out of scope for that sort of investigation. It’s a little like blaming a doctor because they did a catscan instead of an autopsy.
If Bush had not bailed out the carmakers (without any strings, no less), they might now be starting on the road to recovery. There’s a decent business there. Revenues are solid. Expenses are not too high compared to revenues. The tough medicine of bankruptcy might well cure GM, and maybe even Chrysler.
So, where are the high quality cars going to come from?
Maybe after C11 we’ll know who really put Tucker out of business.
But really what we will find is how pathetically these companies have been run, it will be a disgrace.