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The GM & Chrysler Success

posted by Adam Levitin

During the State of the Union address, the President crowed about the success of the GM/Chrysler bailouts, noting that these companies were thriving again. An NPR program this evening was holding up GM/Chrysler as a beacon of hope for Kodak, as if bankruptcy were now the fountain of corporate youth.  

But this just begs the question of why did the GM/Chrysler bankruptcies work? What made these bankruptcies success stories? NPR raised the question, but had some lame answers, namely that it forced management to make decisions it hadn't wanted to do like cutting loser brands (Saturn, Pontiac). It might have helped focus management decision-making, but that alone can't be the answer, I think. I'm curious to hear readers' thoughts. A few thoughts of my own below the break.

(1) Deleveraging. This one should be obvious. A lot of GM/Chrysler creditors got paid very little, but the 363 sales enabled the firms' good assets to be reployed to companies that were not weighed down with tons of financial leverage and legacy liabilities (CBA terms, retiree benefits, dealerships). Deleveraging, however, only helps if the underlying business is competitive. Apparently it is.

I'm not a car afficianado, but I've got to say that this surprises me. I was not under the impression that GM/Chrysler were turning out particularly great cars in 2007-2008, and I don't have the sense that they're boasting radically different product lines now (I'll find out soon, however, at the DC Auto Show...). But maybe the answer is that they were producing reasonably good cars and now they're able to price them more competitively. Thoughts anyone?

(2) How much of a management shake-up did bankruptcy entail? Perhaps bankruptcy revitalized management. Still, I suspect that what management can do with firms of this size is fairly constrained. 

(3) GM/Chrysler did manage to avoid major layoffs of their own employees. But they also closed down a lot of dealerships. In other words, there was major job loss as a result of their bankruptcies. Not as bad as it might have been, but it wasn't a bloodless operation. The job loss from the dealerships, however, was spread out geographically, rather than concentrated in the Rust Belt. So this was akin to amputating a toe to prevent gangrene from spreading. I'd be curious if anyone knows of any figures on the actual job loss.

(4) Did it help to have the government as DIP lender? That is, does public DIP financing actually facilitate reorganizations because the DIP lender's goal is reorganization, rather than maximization of its economic return? 

Again, I really am interested in hearing thoughts on this. 

 

Comments

I'm not sure it was such a sucsess as POTUS wants us to think. I don't know if the fisc will get its money back with a profit, as it did in the financial sector investments it made. I also don't think it was correct to say that there was major job loss "as a result of their bankruptcies". As is true of pretty much all bankruptcies, the "major job loss" was a result of pre-bankruptcy developments. A bankruptcy case is merely a forum for forcing everyone to face up to the realities of a bad business, or a bad capital structure.

The case was a good one as bankruptcies go because it was fast. Choices and options were forced to be made quickly because the government as DIP lender and 363 buyer just issued a "take it or leave it" deal and the senior lenders were forced, for political reasons in part and credit crunch reasons in other part, to take the deal. A lesson to be learned for dealing with other cases and even entire troubled sectors, perhaps: cut to the chase, fast.

What is most noteworthy is the goals of 11 were achieved without a plan. The operating business continued and became healthy due to sections 363 - 365. Sections 1121-29 were not relevant. They got rid of a lot of worthless fixed assets and bad contracts and the good business didn't have to spend a lot of pointless time in chapter 11 waiting to do so. Hopefully they spells the end of the Braniff doctrine and 363's as cost-effective solutions will be less questioned.

“Hopefully they spells the end of the Braniff doctrine and 363's as cost-effective solutions will be less questioned.”

Stripping unsecured debt off the assets without a plan or vote violates the Code absent “the exercise of extraordinary discretion”, like a fat channeling fund.

Who will do business with corporations absent some protection of unsecured creditors in bankruptcy?

Hopefully the Supreme Court can find a non-plan 363 sale which is not “statutorily moot” (like the Chrysler writ was) to finally decide the propriety of extinguishing unsecured claims without a vote, plan, adequate protection, or a channeling fund.

The stage is set for backlash.

Everyone must be weaned off of mothers milk before we are all doomed,

A succient explanation here:

http://billmoyers.com/episode/crony-capitalism/

The Nuclear incident in Japan might have something to do with it. Supply lines for a lot of competing car companies were disrupted.

They sold more cars - which is the biggest driver of earnings in a high fixed cost business like Auto manufacturing

US Light Truck Sales January 2008: about 16m
US Light Truck Sales January 2009: about 9m
US Light Truck Sales January 2010: About 10.5m
US Light Truck Sales January 2011: About 12.5m
US LIght Truck Sales January 2012: About 14.8m

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