I have always been a “car guy”. I am not sure why. Dad wasn’t, except to the extent that being born in 1909 he saw the beginning of the automobile and was fascinated by all that that meant.
My Uncle Tebby (an affectionate nickname given by his older brother) used to tell me stories about sitting on the side porch of my Grandparent’s wonderful victorian in Utica, NY and trying, with eyes closed, to identify cars only by their distinctive sounds. When I go to car shows today and see the cars from that period, I love to hear them run and to imagine my uncle trying to figure out Reo or Mercer?
So I guess my “car guy” status has some basis in family history.
Over the years I have been fortunate enough to own and drive a wonderful variety of great cars but there is one brand that is my all time favorite, the Chevrolet Corvette.
Shortly after my university graduation, I got my first one. It was 1966 and a dealer in New York City sold me a beauty just like the one pictured here for $6,600.
It had a 427 cu in engine with 450 horsepower and rumbling side mounted exhaust pipes.
I was twenty-three.
Two years later, it was stolen putting a severe dent in my coolness factor.
Exactly thirty years later with the kids nearing completion of their college years, I got back in the game with a 1996 Collector’s Edition Corvette.
A magnificent car with thirty years of accumulated engineering improvements.
This was acquired with a two year lease so my coolness was again limited to a two year term.
Why the Corvette? Because I cared about all of the things that a red blooded boy would care about. Lots of power. Amazing handling and drivability. Huge torque available from those wonderful, big V8 engines, and the wonderful engineering of the Corvette folks. Finally, the price performance is great versus comparable “foreign” competitors.
Today, these beautiful cars are a bit out of reach of my senior citizen budget but worse than that, the company that makes them was taken over by the US Government under the guise of “saving them”. To me, GM now means Government Motors.
For seventy-seven of its one hundred and three years, GM was the largest car maker in the world. How many times did students of management look to GM to see how a company should be run. There were lots of utilitarian products and many “car guy” products. Besides my Corvettes, there was the GTO, Chevy 409, Camaro, and many others. GM could build ‘em and sell ‘em.
GM helped massively to win the second world war with amazing productivity. They drove American prosperity and impacted business-school curricula.
The trouble started in the seventies with the Japanese invasion. Quality and small became very important. Foreign competitors started building cars in the US with labor rates about half that of GM’s. To preserve market share the company used profit margin eroding sales incentives. Costs kept creeping up and up from untenable labor contracts, complex product lines, and general malaise.
In 2005, the company lost $8.65 billion but still had $34 billion in cash and could probably dig up $15 billion more by selling stuff. $49 billion, phew! They were, however, burning cash at about $1 billion per month. This burn rate included such cool things as the Jobs Bank where GM pays workers to not work. In 2005 it had been in effect for over twenty years… The Jobs Bank was costing them close to a billion a year in the last years of the decade.
In the midst of all of this, the CEO was insisting that bankruptcy was not in the cards. In November of 2008 he and other car company executives flew their private jets to Washington DC to appear before congress. Humorously, the members did a tsk, tsk on the private jet thing and said the CEO’s should cut their salaries to one dollar. Thus the members demonstrated their operational brilliance where auto manufacturing is concerned.
GM’s CEO still insisted that no bankruptcy was going to happen but could the government loan him a few bucks?
At the time many were saying what an enormous disaster a GM bankruptcy would be. Millions would be out of work. No one would buy their cars. Warranties would not be honored.
Bankruptcy has a place in helping the weak to return to strength and the fallen to cleanly stop doing business. There are many examples where the use of bankruptcy helped a company come out of the muck. Sure no examples are as big as GM but there is no reason in my mind why the process wouldn’t scale.
Companies continue to operate while in bankruptcy so why would MILLIONS be out of work? If the customers like the cars and they see a chance to get a deal, why would they disappear? If the rental car companies are worried about the secondary market for their fleets, some entrepreneur would come up with a company to move those cars into that market.
Rahm Emanuel, Obama’s Chief of Staff, amazingly said, “Never let a crisis go to waste”. This thought, more than rational thought, seemed to be behind the scary notions of a GM bankruptcy. In clear evidence of its decline as a viable source of business news, even Business Week had such a scare article.
The setup carefully done, there was only one answer. Let the government take over with its wealth of auto industry experience.
It started with the Bush Treasury Department throwing some money at them. Then, the CEO was fired at the request of the government’s “car czar”. These Czar’s are a creation of the Obama administration and seem to be designed to skirt the check and balance processes of our government. Sure the board fired the CEO, but in a very scary act for publicly owned companies, they were just doing the government’s bidding.
Now, with the government firmly in charge, the unthinkable bankruptcy quickly happened. It is my understanding that bankruptcy law is just that, law. It describes which creditors get what based on previous contractual agreements. Bondholders, for example, have a preferential position over certain other creditors. It didn’t work out that way though, as the government’s small, largely unaccountable, ad hoc task force made up of a handful of Wall Street expats, went to work.
Skipping over congressional oversight, the task force divided the spoils in a very interesting way. As it was happening, advisors for the bondholders said, “Both the union and the bondholders hold unsecured claims against GM. However, the union’s VEBA (a trust that pays health benefits to union retirees ) would receive a 50 percent recovery in cash and a 39 percent stake in a new GM for its $20 billion in obligations; while bondholders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 percent of the restructured company and no cash.”
Later some folks who do bankruptcy work said that the people with the money determine who is going to get what. In this case the government brought the money.
The bondholder’s advisors went on to say, “the offer… amounts to using taxpayer money to show political favoritism of one creditor over another.”
Never let a crisis go to waste.
Next, the company exits bankruptcy in record time. This is easier to do when terms are dictated without oversight and with little or no discussion amongst the parties.
As of today, an IPO has taken place for the “new” GM and the new CEO has said that the government has been paid back.
Paid back? The government gave GM $49.5 billion. $6.7 billion was a loan at 7%; nice considering that GM bonds were trading below junk status. The rest came in the form of a purchase of a 60.8% equity stake.
What was, “Paid back in full” as the CEO said? Not the $49.5 billion as it sounds but just the $6.7 billion loan. Did GM pay it back from some huge jump in earnings? Nope. They reached into a $13.4 billion portion of the $49.5 billion proceeds that had been set aside as a working capital account. They “paid back” the government with the government’s money.
Why on earth go through these gyrations? Well, it seems GM is looking for a further $10 billion loan from the Department of Energy to retool for the new CAFE standards.
Wow, Government Motors, sure doesn’t work like a true publicly owned company, like, say, FORD who took no government money and is doing well fixing problems similar to GM’s on their own!
The IPO? Well the stock sits a bit over $33. Most folks say, that for all of us taxpayers to break even it needs to reach around $52. What are the chances?
What are the chances especially when I would be so very reluctant to buy a car, even my most favorite car, from Government Motors, although it might benefit me, the taxpayer?
There are some great car guys working at GM. It is so sad that the company chose to go through what it is going through.
FORD is doing a 2011 Boss 302 Mustang… Hmmmm.