1 June 2009 
In a few hours I will offer my thoughts and reactions to the General Motors bankruptcy filing and the President’s noon announcement. For now, here is what I have been able to figure out from the White House fact sheet and secondary source reporting through CNBC and the Wall Street Journal. I assume that both sources are being fed directly from the White House, Treasury, and GM, so I think there is a high probability these sources are accurate.
Note that I do not generally intend to become a news source. I will instead focus on analysis. What you see below is a variant of something I whipped up this morning for my old Administration colleagues that I thought I would share with you as well.
In my experience both on the White House and on Capitol Hill, I found that it was sometimes helpful to my principal to collect and group information as you see it below. There are a lot of good reporters, but they sometimes structure their stories in ways that make it hard to understand. TV business news tends to release the information as it comes out. So while you could learn everything below from the WSJ, CNBC, and the fact sheet, I hope that the structure makes it easier to process.
This is the kind of presentation I might have dashed off for President Bush or Senator Lott for a big news item so they would not have to spend time digging through press coverage. This is one of those “fold it up and put it in your inside jacket pocket” memos. Also, as a principal it’s nice to know what you need to know. You can have the confidence that, if you know this information, you have a basic but thorough understanding of what’s going on. (Hint to my Hill friends: feel free to use this for your boss. You just saved an hour.)
Process
- GM’s bankruptcy filing was expected to be at 8 AM EDT in NY Southern District in Manhattan. (CNBC)
- Obama and GM CEO Fritz Henderson are scheduled to hold back-to-back press conferences beginning at noon today. (CNBC)
- They are using the same Section 363 process that Chrysler used. The new GM buys the good parts of the old GM. The old parts are liquidated. (White House fact sheet)
- “would allow a much smaller GM to emerge from court protection in as little as 60 to 90 days.” (CNBC) (This is a guess/spin. How optimistic is it? GM is much harder than Chrysler. -kbh)
- “Al Koch, a managing director at advisory firm AlixPartners, will be appointed chief restructuring officer in charge of liquidating those GM assets” (CNBC)
- “Autos task force will stay in business … shifting to an investment manager role” (CNBC)
In “the new GM,” ownership is:
- 60% of equity goes to the U.S. Government. USG also gets $8.8B in debt and preferred stock.
- UAW’s retiree pension/health plan (the “Voluntary Employee Beneficiary Association”) gets 17.5% of equity, plus:
- warrants to buy another 2.5% of equity;
- a $2.5 B note (three installments, ending in 2017); and
- $6.5 B in perpetual preferred stock (9% coupon).
- Approximately 12% of equity goes to the Canadian (and Ontario?) governments. They also get about $1.7 B in debt and preferred stock.
- Bondholders of old GM get about 10% of the equity, for giving up $27.1 B in unsecured debt. This was approved by bondholders representing 54% of unsecured debt. The other 46% are the biggest risk for the bankruptcy filing. (CNBC, WSJ)
- “Bondholders could take up to 25 percent of GM if it recovers to be worth what it was in 2004, before it began round after round of cost-cutting in what proved to be a failed bid to make up for lost sales.” (I need to understand this better.)
- Secured bondholders expect to be paid face value. (WSJ)
Governance of the new GM
- UAW’s VEBA can select one independent director, but cannot vote its shares or other governance rights(!) (White House fact sheet)
- “Canadian government will have the right to select one initial director.” (White House fact sheet)
- “The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by the VEBA and the Canadian government.” (White House fact sheet)
GM gets about $40 B of new cash to help pay its bills during bankruptcy. This is called debtor-in-possession (DIP) financing.
- U.S. Government: $30.1 B in new debtor-in-possession (DIP) financing. (WH fact sheet, CNBC)
- Governments of Canada & Ontario: $9.5 B
NewCo / OldCo
- “Today GM is announcing its intention to close 11 facilities and idle another 3 facilities.” (White House fact sheet)
- “[GM] has not provided an update target for job cuts but had been looking to cut 21,000 factory jobs from the 54,000 UAW workers it now employs in the United States.” (CNBC)
- “While the ‘new GM’ is expected to emerge quickly from court protection, the automaker’s shuttered plants, stranded equipment and other spurned assets would be left to liquidation in bankruptcy.” (CNBC)
- Previously announced: “closing more than a dozen factories and shedding the Pontiac, Saturn, Saab and Hummer brands.” (WSJ)
- GM will “shutter 2,600 dealers.” (WSJ)
- “The new GM will also pursue a commitment to build a new small car in an idled UAW factory.” (WH fact sheet)
- GM will shed more than $79B in debt. (WSJ)
- “GM at the last minute also found buyers for some unwanted subsidiaries, including German-based Opel, which is being acquired by a consortium led by Canadian auto-parts supplier Magna International Inc., and the Hummer brand, whose buyer remained undisclosed.”
Future
- “The U.S. Treasury does not anticipate providing any additional assistance to GM beyond this [new $30.1 B] commitment.” (White House fact sheet)
- “As a result of this restructuring, GM will lower its breakeven point to a 10 million annual car sales environment. Before the restructuring, GM’s breakeven point was in excess of 16 million annual car sales.” (White House fact sheet)
- “The administration said the goal of the restructuring was to help GM be profitable in a year when the industry sells 10 million vehicles, versus the 16 million it sold in 2007.” (CNBC)
- “GM will continue to honor consumer warranties.” (WH fact sheet)
- GM is being removed from the Dow Jones Industrial Average 30 (“the Dow”), along with Citigroup. They will be replaced by Cisco and Travelers. (CNBC)
Update: If you’re really into this topic, you can read the Administration’s background briefing (for the press) that they held last night.
Very helpful summary, Keith. Thanks!
I guess WWII is finally over – and we lost.
I think in the case of GM and the bankruptcy there are two important questions the economics team has to ask itself:
First can US automakers, in general, and new GM, in particular be competitive? Unlike other industries where the US has lost market share to overseas production, the US auto industry has lost market share to foreign producers operating in the United States. So yes, it would seem that a restructured US auto producer could be competitive. While chapter 11 filing can help with its debt overhang and the legacy costs there are important issues that need to be resolved and this leads to the second question.
Second. What are the benefits and the costs of a restructured GM? Clearly, those who benefit are the employees of GM and the suppliers that keep their jobs. Had GM not received support from the government last fall it is likely that GM would have gone into liquidation. The GM workers and suppliers that lost their jobs would have probably faced pretty high displacement costs and re-employment costs. The currently employed autoworkers gained. If a viable GM emerges, consumers may benefit from the increased competition that keeps prices down as well as an increase in variety. As for the losers. It appears the GM bond holders are likely to come out on the losing end of this deal. Also one wonders if the type of deal will create other problems in capital markets making it more difficult to raise funds. The tax payers may lose as well. If a viable GM emerges and the government sells off its 60% ownership how much revenue is this likely to raise? I suspect it will be less than $50 billion.
Can GM emerge as a standalone company? Even though GM may be able to strip a fair amount of the debt and legacy costs, they still must overcome some long term problems. They still must comply with all the regulations and CAFE standards imposed on the entire auto industry. More importantly, they must find a business model that works. Growing up GM, I constantly heard how they `now’ understand their competition and how they understand the consumers. In fact, if I had a dollar’s worth of GM bonds for every time I heard this statement, I would own 10% of the company. Will new form of entrepreneurship capital emerge that can reinvent their business model?
Finally how long will the government have ownership in GM. The main problem with government ownership in any company is that that the diverse interests of the government all try to achieve objectives other than producing cars that satisfy the wants of consumers. As a result, this will lead to inefficient production and higher costs; something GM is trying to move away from. I am sure the Obama’s economic team is aware of this and they can move ownership back into the hands of the private sector.
And the real million/billion dollar question is – After all this taxpayer money being shoveled off the truck to keep the corpus alive, will anyone buy the cars NewCo produces ?
I have my doubts.
“After all this taxpayer money being shoveled off the truck to keep the corpus alive, will anyone buy the cars NewCo produces?”
That would depend on wether they make products people want at a price people are willing to pay. In other words they need to stop doing what they have been doing for the last decade and start running a bussiness. I doubt Obama Corp will do this.
Does anyone else see a scary resemblance in what happened to GM (unsustainable cost growth of lifetime pensions and retirement health care), and the direction the US government is heading? No doubt the executives of 20 years ago saw that the business plan didn’t work and if left alone, would eventually bankrupt the company. So they left the problem for the next guy…and the next guy.
If left alone, the US Gov’t will be in the same boat in the not so distant future. I wonder if the Chinese Gov’t will be saying the same thing US taxpayers are now. “How much money are we going to have to dump in? Maybe we should just have let them fail.”
Is there an assumption that the projected six million drop in demand for new vehicles will be proportional to the current market shares?
Speaking as a consumer, there is no way in hell that I would ever buy a “Government Motors” vehicle, any more than I would buy one from the DMV or Post Office. And, yes, I have purchased several new GM vehicles in the past.
Think about it. Designed by Pelosi and the like, but with all the quality and attention to detail of the DMV, by workers who are now pretty sure they will be protected no matter what. (They are likely wrong, but that changes little or nothing.)
The same is true of Chrysler, but there already was little or no chance that I would buy one of their vehicles.
Keith,
a few questions:
1. do you think it is fair to the retiree with this deal?
“UAWs retiree pension/health plan (the Voluntary Employee Beneficiary Association) gets 17.5% of equity, plus:
warrants to buy another 2.5% of equity;
a $2.5 B note (three installments, ending in 2017); and
$6.5 B in perpetual preferred stock (9% coupon). ”
2. what is your opinion on the success of GM? How could they compete with the same “thinking head”. I feel that the “GM Head” is not uptodate with today’s economy, what make you think otherwise?
I hope you include answers to my questions on your write up. I enjoy reading you articles very much.
thida
Actually, they didn’t punt it and leave it for their successors, they knew they were being bled to death by onerous government regulations and a non-competitive UAW agreement.
Once the Flint strike was settled in the late 1990′s the die was cast so to speak. The UAW determined to try and ride out the storm without a systematic restructuring of their agreements. Everyone knew the money would eventually run out, no one knew what the actual event would be that would tip them over.
If anyone thinks that forcing GM to assemble a small car for CAFE purposes in the States under UAW conditions, that they were going to import, will improve their financial situation is crazy. Part of GM’s current woes (amongst many others) is that they must make at a loss small cars that no one wants in UAW factories. I have seen the number as high as a $2000 loss per vehicle. What is going to change enough to move that number to a profit?
There is a study by some Canadian professors that shows that employee-run companies – companies owned by ESOPs as well as those where acquired through bankruptcy – that found that these companies “deviate more from value maximization, spend less on new capital [i.e. capital spending, not capital raising], take fewer risks, grow more slowly, create fewer new jobs, and exhibit lower labor and total factory productivity. These results are highly robust.”
My question, therefore, is how, when, and where I can sell my interest in GM?”
I guess WWII is finally over – and we lost.
you have no idea how right you are.
Why is no one pointing out how both the government and UAW get extra benefits that the bondholders do not. In addition to their common equity stakes, the government gets $8.8 bn in debt and preferred stock and the UAW get $2.5bn in debt and $6.5bn in preferred stock. The Canadian govt also gets about $1.7bn in debt and preferred. Not only is this almost $20bn in extra value that is not shared with the bondholders. It is a drag on profitability because it needs to be paid back before value is shared with the rest of the shareholders. More insidiously, debt and preferred stock come before common equity in a (true) bankruptcy ordering. Thus, in the next GM bankruptcy (and most people think there will be one) the government and the UAW will be first in line. Their $20bn in senior claims is likely to extinguish all the value available at that time (hard to imagine GM filing for bankruptcy again if it is worth $20bn). This would leave them with 100% ownership among them. I haven’t seen any paper comment on this angle.
JEM,
I couldn’t agree more. Well put.
Today I have heard it all…now GM and Chrysler are shutting down and turning there backs on the dealers that were there for them for years, decades, and even a century. I know for a fact that GM shut down dealers that they didnt politicaly like. They can do that now because bankrupcy allows that. Nothing has changed…GM is now choosing who will be there hen pecked dealers..I have a question…what does closing dealers down do to the structure of GM or Chrysler…nothing the dealers are there best customers….it has always been said that the manufacturer sells retail to the dealers and they sell wholesale to the public.
There are people out there that will challenge what i have to say but im telling you i know inside information. I was a dealer in the 80′s and the 90′s and was pushed out by GM and roger smith and GM’s plan 2000. The public never heard, the public never knew. I am fortunate enough to still have friends at GM who i comunicate with…its a joke. I know of at least 6 people who have lost their jobs with GM because the top of the heap dosent know how to run GM.
In Australia, Holden (the local GM manufacturer) have just secured a $200m line of credit (that’s on top of $150m green car grant) but who knows how this tax payer money will be spent? Still too reliant on large car manufacture I think.
After the economic chaos subsides, we will need to face the facts the major national governments own the big companies which is something we have never had to face before. It will be interesting to see the repercussions of this. Even here in Australia, our government is only too willing to "bail out" large corporations – I understand that this is to keep some sort of stability in the economy but long term, who pays back our government debts?
These car grants are a hiden money maker i think. In August 2009, the Obama administration announced a $2.4 billion investment in hybrid cars. These cars did not even over take diesel cars for having the green car of the year so what benefit are these cars. They cost more and although they are suppost to be eco friendly cars they also will be very expensive to mend wants they are damaged and they will never last as long as diesel or petrol cars. Which brings me to my next point once these cars are past there sell by date will the cash for clunkers legislation come back into place?
Nice Deb states – “The GM bankruptcy plan typifies what Rush Limbaugh is calling Obamas socialist trifecta: Socialism, protectionism, cronyism.”
Rush Limbaugh bought a new Chevy Tahoe on Monday June 1, 2009. The very same day that the government stole General Motors. He mentioned that on his show on Tuesday.
Jim – “My question, therefore, is how, when, and where I can sell my interest in GM?
You do not own have any interest in GM. Private shareholders get 0% of the takeover. The government gets 70%, the unions will get the rest.