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How General Motors Was Really Saved: The Untold True Story Of The Most Important Bankruptcy In U.S. History - Forbes

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Editor’s Note: Lots of people–including President Obama–have trumpeted their role in the success of the government-backed turnaround plan that saved General Motors, the most important industrial company in the history of the United States.

But on the fifth anniversary of the crisis, Forbes presents an exclusive, unprecedented look at what really happened during GM’s darkest days, how a tiny band of corporate outsiders and turnaround experts convened in Detroit and hatched a radical plan that ultimately set the foundation for the salvation of the company.

Author Jay Alix, one of the most respected experts on corporate bankruptcy in America, was the architect of that plan, and now, for the first time, he reveals How General Motors Was Really Saved.

Story at Dan Bigman's link above.

Basically, screw existing shareholders by siphoning all decent assets into a new company unsaddled by the debt of the old company:

In short, I proposed that GM split into two very separate parts before filing: “NewCo,” a new company with a clean balance sheet, taking on GM’s best brands and operations; and “OldCo,” the leftover GM with most of the liabilities. All of the operational restructuring to make the new company profitable would also occur before a bankruptcy filing so GM could go through bankruptcy in a matter of days -- not months or years with creditors and other litigants fighting over the corporate carcass while the revenue line crashes.

Seeking funding from the government, or any source, we would use Bankruptcy Code Section 363, which allows a company to sell assets under a court-approved sale. Typically, 363 is used to sell specific assets, from a chair and desk to a factory or division, but not the entire stand-alone company. Under this strategy GM could postpone filing a plan of reorganization and a disclosure statement, which consume months and fuel a blizzard of litigation while market share and enterprise value bleed away.

Why this is lauded is beyond me. This is appalling. They hacked the law to avoid paying back their debt.

Well, the bankruptcy code allows corporate moves to wash out debt to creditors, as equity owners are always already hosed.  That's it's purpose and everybody knows that, these guys weren't vestal virgins on either side.  

Whether or not something positive comes out of corporate assets after the fact is irrelevant to the creditors who are already screwed... except that those creditors would have argued for those assets AFTER the fact, but then again, everyone knows they were stupid and greedy for higher yield and were not getting collateralized ownership of the assets in the first place.  Not a lot of pity here... except for washing out the employee benefit plans--now that's egregious.

No bankruptcy is so bad with $40-50 billion of government money:

“We have to get government funding of $40 billion to $50 billion. Plus, we need an agreement with the government and GM’s board to do the NewCo plan. And we must put a qualified successor in place. It must be Fritz and not some government guy. It’s going to be painful for you, but you’ve got to stay on the horse until we get all three.”

Seems to me that the public paid for private risk that went bad.

Not nearly as much as we did for the real estate bubble bursting in 08, by an order of magnitude.  It's the same moral hazard and regulatory capture though.

It's hard to even think this high but GM as racked up $170 billion in liabilities:

On June 1, 2009 General Motors filed for bankruptcy in New York, with $82 billion in assets and $173 billion in liabilities. It was the largest industrial bankruptcy in history. Harvey Miller and his team masterfully defended and guided the NewCo plan through the bankruptcy court, successfully making it their own. New GM exited bankruptcy protection on July 10, 2009 -- in a mere 40 days, as designed. Fritz called and thanked me.

Seems like they got away with terrible management of the company, and a lot of people got screwed.

This article praises the speed with which they were able to do so.

Jay Alix just did a lot of people, including Obama, a huge service by taking all the credit.

Thanks, Jack Rivkin (@Jack_Rivkin), for the Twitter point to your compelling 2009 Contra Carbon blog post about William Holstein's op-ed piece in the New York Times titled “GM’s Secret Success".

Auto Bailouts Revisited and a Change of Heart"I have to say that, in spelling out the history of GM with a concentration on Wagoner’s roles in the more recent history, Holstein makes a very cogent case for why the “small” sum of $37 Billion compared to what has gone and will continue to go to the financial institutions, would be a very good investment on the part of the US government. He does see Chrysler ultimately being absorbed by another auto company, but makes a very strong case for GM. The case is based on a fairly detailed analysis of the changes that have been wrought at GM in terms of cost, design and new technologies. I was impressed. While Holstein wasn’t explicit on this point, one could imply from what he wrote, that the technological changes of which GM is in the midst, could be the foundation for a big piece of the type of innovation and growth that came out of the auto industry after WWII.

This is a bit of a stretch, but one could envision the manufacturing changes, on-board information systems driven by OnStar and the move toward electric and other drive trains as being a significant element in job creation, clean energy and energy independence, with ripple effects on other manufacturing efforts in the US and elsewhere. This could be a significant part of the revitalization of American industry based on technology and a willingness to change.

If Wagoner and his team actually can make it through this financial crisis, complete the restructuring of this behemoth of a company and become an example of what can be done in American industry, it would be a great success story in what will be a difficult period. No doubt, the equity value of the company could go lower or disappear in the near term, but this strikes me as a better bet than what one sees going on thus far with the stimulus package and the financial industry bail-outs."

More here

"I accept what Holstein has written, and I take back my view that a bankruptcy before money goes in would be a better course. I would urge all to at least read Holstein’s op-ed piece. might get you there." 

Thanks again.

Yeah, douchebaggery seems to earn a premium when you're mucking about from positions of power these days.

Though many have argued the "We're too big to fail" mantra for these situations.  President Nixon had the best rejoinder to that corporate bullshit solipsism back in the early 70's, "Well then, tell them to get smaller..."

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