Crash Course

by Paul Ingrassia

  While Chrysler and General Motors struggled, Ford stayed out of the headlines, if not out of deep water. The company’s decision to forgo federal funding had been admirable but not entirely altruistic. Declaring bankruptcy, company officials knew, would mean wiping out existing shareholders—including the Ford family, which would lose control of the company. Family control was as sacred as the blue-oval logo.

  Nonetheless, going it alone was producing a peculiar set of problems for Ford. If Chrysler and GM should emerge from bankruptcy quickly, with far fewer dealers and much less debt, Ford could find itself at a disadvantage, like a family making full payments on its mortgage, while the folks next door got their payments cut.

  So the company pursued an out-of-bankruptcy restructuring, in effect, to reduce its debt load and its dealer body on its own. Ford brokered mergers between dealers, wiped out $10 billion of debt by exchanging it for stock, and even managed to sell $1.6 billion of new shares to the public—something neither Chrysler nor GM had a prayer of doing. Ford also convinced the union to accept reduced cash payments for the VEBA trust, to end the Jobs Bank, and to negotiate better work rules.

  All those measures mirrored what Chrysler and GM were doing—except that without taking government money and going through bankruptcy court, Ford couldn’t move as quickly. But there was an offsetting benefit: Ford was getting an unexpected boost in the court of public opinion. Radio talk shows were filled with angry references to GM as “Government Motors” and with callers vowing that the only American car they would buy henceforth would be a Ford.

  Ford started to gain market share, in contrast to the continuing declines at GM and Chrysler. The company still faced some heavy rowing to keep from being swamped. But its decision to steer an independent course, away from federal funding and bankruptcy, was paying off. Ford had gotten lucky, to a degree, but mostly it had taken the tough decisions to make its own luck.

  Throughout April and into early May, GM and the task force wrestled with the other b-word: brands. Harry Wilson’s initial bias was for a streamlined GM with just two domestic brands: Chevrolet and Cadillac. That would leave GM with one mass-market brand and a separate elite marque that, between them, could cover every segment of the market, just like Toyota and Lexus.

  Among the casualties, then, would be Saturn. Much had happened since its creation in 1985 to ensure, in Roger Smith’s words, “GM’s long-term competitiveness, survival, and success.” Now Saturn was becoming a casualty, sadly, of GM’s long-term failure. The special labor agreement, with its lofty language describing workers’ desire to “care about their jobs and each other,” had been scrapped years earlier. The factory in Spring Hill wasn’t even building Saturns anymore but Chevrolets instead. And some Saturn cars were being imported—imported!—from Germany. Without a distinct identity, Saturn’s sales had dropped to just two-thirds of their peak level in 1995. GM had no choice but to let it go.

  Adopting a two-brand lineup would also spell demise for Saab, Hummer, Pontiac, GMC, and Buick, which dated back to Billy Du-rant and the birth of General Motors in Flint. The luster had faded from Buick, which one auto-enthusiast website described that April as “an icon for retirement-home parking lots.” As for GMC, its trucks were basically Chevrolets with steroidal styling. To Wilson and his task force colleagues, Buick and GMC had become distractions instead of assets.

  Henderson and his team, however, fought to save them. Buick had quietly risen to near the top of the J.D. Power quality rankings, they argued, and the Buick Enclave SUV crossover was drawing buyers in their early fifties as opposed to those in their midsixties. (Besides, wasn’t sixty supposed to be the new forty?) Buick also had become a top seller in China, where it was viewed, perhaps improbably, as a symbol of American luxury.

  As for GMC, the dynamics of that debate spilled into the open in late April on an analysts’ conference call with Henderson. One analyst asked why GMC shouldn’t simply be folded into Chevy, since the trucks basically were the same.

  “Okay,” Henderson replied, “do you own a GMC?”

  The answer was no.

  Well, Henderson explained, GMC was “extremely profitable” because it carried more cachet than Chevrolet. “It wouldn’t make good business sense,” he added, “to try to collapse that into Chevrolet.”

  Put another way, a GMC truck adorned with a macho grille and marketed with country music commercials could be priced thousands of dollars higher than a nearly identical soccer-mom truck from Chevrolet. It was the sort of “badge engineering” that had blurred the differences among too many GM vehicles over the years, though it was reasonably more successful in GMC’s case.

  Buick and GMC created a dilemma for Wilson. He knew GM executives were adept at marshaling arguments for clinging to pieces of the company’s past, and this might be more of the same. Then again, the company’s numbers showed that GMC and Buick were profitable, and profits were something Wilson could understand.

  Besides, he didn’t want to step over the line between making suggestions and giving orders, at least not on the more refined aspects of brand strategy. Despite his initial misgivings, Wilson agreed to support a restructuring plan that included keeping both Buick and GMC.

  GM’s brand lineup was a little outside Wilson’s comfort zone, but the company’s capital structure was right in his sweet spot. He strongly believed that a structure similar to what the task force had arranged for Chrysler—with the union and Fiat taking 75 percent ownership—wouldn’t work for General Motors.

  There were all kinds of problems, really. Chrysler retained $17 billion of debt that it would have to repay. But that would be Fiat’s problem, assuming its efforts with Chrysler succeeded. (If not, well, repayment would be moot anyway.) GM’s debt burden would be its own.

  Nor was it realistic for the UAW to take GM stock for its VEBA, as the union had done for Chrysler. GM’s hourly workforce was several years older than Chrysler’s, on average, so the union couldn’t wait for stock in the restructured company to gain value.

  But the biggest difference, which no one dared say publicly, was that the task force deemed GM too big to fail, while Chrysler had been a close call. Restructuring General Motors with a minimal debt burden, Wilson believed, would create a capital structure like those of Toyota, Honda, and Volkswagen and give GM the best chance for success. The catch was that minimal debt meant maximum equity, and people weren’t lining up to get GM stock.

  That was no surprise, because GM was running out of money for the third time in five months. The company’s everyday expenses—paying salaries, purchasing parts, keeping the lights turned on—continued to outstrip its revenue, despite the previous cost cutting. On May 22 the Treasury loaned the company another $4 billion. That brought the total since December to $20 billion, if anyone was counting.

  Four days later GM’s debt-for-equity exchange offer expired. Not surprisingly, nowhere nearly enough debt-holders agreed to swap their notes for GM shares. The only thing left to do, aside from letting GM collapse, was for the government to step in.

  So it was that fifty-six years after “Engine Charlie” Wilson said what was good for America was good for General Motors, young Harry Wilson (no relation) was about to make America the largest shareholder in General Motors. The U.S. government—by default, because there were no other takers—would get 60 percent of GM’s stock in return for an additional $30 billion of financing. The Canadian government would get 12.5 percent, the UAW 17.5 percent, and the unsecured debt-holders 10 percent.

  Just as with Chrysler, the UAW wanted cash for its VEBA instead of GM stock of dubious value, even though the task force offered the union $6.5 billion in preferred shares, which would pay dividends immediately. When Gettelfinger got the government’s offer on the morning of May 20, he asked for time to think it over, and then walked the streets of Washington for two hours. Finally, he said yes.

  As for GM’s creditors, holders of the $6 billion in secured debt would be paid in full, in contrast
to Jimmy Lee and the secured creditors at Chrysler. GM had enough assets to pay its secured creditors if the company was liquidated, which wasn’t the case at Chrysler.

  But GM’s unsecured creditors, many of them small investors, would get just 12.5 cents on the dollar. There was no getting around the fact that GM’s bankruptcy was going to hurt a lot of people—dealers, employees, creditors, stockholders—even though the U.S. taxpayers were investing $50 billion in direct aid to save the company. (There would be more indirect aid.) That amount alone, then, was double the $25 billion “loan” that Detroit’s three car companies had sought from Congress, as a group, the previous November. Congressional skepticism about the $25 billion number was fully vindicated.

  The GM rescue terms fell into place without most of the tortured negotiations that were required for the Chrysler-Fiat deal, but there were other complications. GM’s financial structure was built on hundreds, even thousands, of transactions that had to be understood and in some cases unraveled.

  Its vast debt structure included bonds issued through a paper company in Nova Scotia so they would be eligible for purchase by Canadian pension funds, under Canadian law. It turned out, however, that most of the Nova Scotia bonds were owned by New York hedge funds anyway. Likewise, GM had a joint-venture factory with Suzuki in Canada that had stopped making Suzuki vehicles years ago. But Suzuki remained a 50 percent owner anyway because that made the factory eligible for low-cost loans from Japanese banks.

  Then there was Delphi, which GM had propped up with $12 billion in payments over the last three years—nearly double what Steve Miller had originally demanded—hastening GM’s own demise. Now GM agreed to take back several big Delphi plants, undoing the reason it had spun off Delphi a decade earlier. The rest of Delphi would be sold with financial assistance from GM—that is, from the U.S. taxpayers.

  Meanwhile GM’s Opel subsidiary in Europe was failing as well and seeking assistance from the German government. Sergio Marchionne tried to sweep in with a no-cash purchase, just as he had engineered with Chrysler. The German government rebuffed him, however, determined to steer Opel into other hands.

  On top of all this, GM had more than 800,000 contracts worldwide with companies that supplied everything from advertising to windshield wipers. There wasn’t nearly enough time to review all of them, but thousands would have to be “diligenced” to get a sense of the company’s financial commitments. The analysts and financiers poring over GM’s books now grasped why the finance people instead of the “car guys” had run General Motors for so long. They were the only people who could understand the place.

  The task force was so swamped, sorting through all this, that it asked GM and the UAW, on their own, to negotiate new work rules that would save the company money. Without adult supervision (or even young adult supervision), the company and union negotiators quickly reverted to old form. While they agreed to abolish the Jobs Bank, as at Chrysler, the contract’s “new attendance procedure” still allowed an employee to have six unexcused absences without getting fired. Harry Wilson wouldn’t even know about that until he read it in the newspapers, a week or two later.

  GM’s countdown to bankruptcy began on Friday, May 29, with two days of board meetings at the GM Building in New York. Henderson, Ray Young, and a small army of lawyers reviewed the company’s planned Chapter 11 filing, the proposed structure of the new company, and myriad other issues. The marathon meetings were surreal, in a way, because the Treasury’s task force was the real power at General Motors, not the company’s board of directors. But legally, just as only GM’s board could accept Rick Wagoner’s resignation, only the board could officially approve a bankruptcy filing.

  On Saturday night an exhausted Young left the GM Building about ten P.M. He walked down to Mickey Mantle’s, where he grabbed a burger and a beer and sat alone watching the Red Wings Stanley Cup playoff game. He had gone from being afraid of bankruptcy to being almost relieved that it was about to happen. The next day—Sunday, May 31—GM’s board convened again at eight P.M.; most of the directors dialed in by phone. By eight-forty-five P.M. they formally authorized a bankruptcy filing for the next morning.

  During more than a century of existence, the company of Billy Durant, Alfred Sloan, and Harley Earl—and, yes, of Roger Smith and Rick Wagoner too—had made history. It had defined American corporate power, with everything from manufacturing might to muscle cars. Now just seven months after celebrating its hundredth birthday, General Motors was about to make history of a different sort.

  At six A.M. on Monday, June 1, thirty-six-year-old David Markowitz boarded an Amtrak train in New York for Washington. The young task force member had been working three days without sleep while reviewing thousands of GM documents. But sleep could wait. He was invited to attend Obama’s speech that day and wasn’t about to miss meeting the president.

  At 6:03 A.M. a small army of lawyers began hauling documents into U.S. Bankruptcy Court in lower Manhattan. The first one they filed was a bankruptcy petition for Chevrolet-Saturn of Harlem, Inc. The dealership was owned by General Motors, and its filing established jurisdiction for the parent company’s case to be heard in New York. For a host of logistical reasons, nobody wanted to file this case in Detroit.

  The main filing, at 7:57 A.M., stated that GM’s $172 billion of liabilities overwhelmed its $82 billion of assets. And that the company’s $59.5 billion in stock market value in April 2000—two months before Wagoner became CEO—had been all but wiped out. “There are no realistic alternatives” to bankruptcy, the filing added. “There are no merger partners, acquirers or investors willing and able to acquire GM’s business … The transaction [bankruptcy] is the only realistic alternative for the company to avoid liquidation that would severely undermine the automotive industry.” It was all sadly and horribly true.

  The company would be split into “New GM”—Cadillac, Chevrolet, Buick, GMC, and other viable assets—and “Old GM,” the discards. Those included Saturn, Saab, Hummer, Pontiac, and a bunch of other stuff, which would be sold if buyers could be found, or else liquidated. GM’s restructuring plan called for closing up to fourteen more factories and lopping off another twenty thousand employees by the end of 2011.

  As it happened, Jerry York’s warning in January 2006, that GM could go under in a thousand days, had been only thirty days off. GM had tumbled over the waterfall, though the government tugboat was standing by to salvage part of the wreckage and to pick up survivors.

  At eleven-thirty young Markowitz was walking into the White House, where the president would speak, when he suddenly felt faint, his legs started to wobble, and he realized he wasn’t going to make it. Wilson propped him up and walked him over to the White House doctor’s office. It looked like he wouldn’t meet the president after all.

  Nine minutes before noon Obama began his speech by announcing some good news. In the wee hours of the morning, even before GM’s crack-of-dawn filing had begun, the bankruptcy court had approved Chrysler’s restructuring plan. Chrysler had sped through bankruptcy court like a hot rod, handing Obama and the task force a major victory.

  The president couldn’t resist crowing a little, even though the bankruptcy court’s decision faced an appeal to higher courts by disgruntled Chrysler creditors. “Keep in mind,” the president said, “many experts said that a quick, surgical bankruptcy was impossible. They were wrong.”

  He went on: “Earlier today, GM did what Chrysler has successfully done and filed for Chapter 11 bankruptcy with the support of its key stakeholders and the United States government. In all likelihood, this process will take more time for GM than it did for Chrysler because GM is a bigger, more complex company. But Chrysler’s extraordinary success reaffirms my confidence that GM will emerge from its bankruptcy process quickly, and as a stronger and more competitive company.”

  After he finished, Obama walked down to his doctor’s office to get a couple Tylenol pills. Markowitz, still in a blur, sensed a sudden commotion around him, but
he wasn’t sure what was happening. A few minutes later he found himself shaking hands, groggily, with the president of the United States.

  The handshake, though happenstance, was well deserved. Markowitz and the other automotive neophytes on the task force had brought more common sense to GM than the company had seen in decades. The Jobs Bank was ridiculous. So were mountains of debt, crippling work rules, eight different brands, and dozens of different “look-share” cars that were almost alike. They were like GM’s dirty family secrets, known by all but never publicly acknowledged, much less resolved.

  Shortly after Obama spoke, Henderson convened a press conference in New York and tinged his remarks with contrition that would have shocked his predecessors from GM’s glory years. “Give us another chance,” he implored those watching on TV. “The GM that many of you knew, the GM that in fact had let too many of you down, is history.” His words suggested that the company had learned some hard lessons, though only time would tell.

  “From here on, we move up,” Henderson added. “This is not the end of General Motors but the start of a new and better chapter, one that needed to happen and one that begins today.” The chapter would be new, all right, but almost certainly not better than GM’s dominant days of yore—which in retrospect had been too good for the company, blinding it to the need to keep the customer first. General Motors was going to be just another company now. It would be big and important, but not like “Microsoft and Apple and Toyota all rolled into one,” as the next day’s Wall Street Journal described the company’s glory days.

  The Economist marked GM’s bankruptcy with a cover story illustrated with a metallic dinosaur, made of car parts, dripping oil from its mouth. The headline said, appropriately: “Detroitosaurus Wrecks.”

  General Motors had virtually invented the modern corporation, with professional managers, as opposed to family founders, presiding over decentralized operations that were governed by central financial control. It had pioneered modern marketing, public relations, and the hierarchy of brands that made automobiles vehicles for social as well as physical mobility. It had set standards for everything from style and design to corporate healthcare plans.