Pre-packaged Bankruptcy Is GM's Only Option - Barron's

by: SA Editor Eli Hoffmann November 29, 2008 | about stocks: F / GM / HMC / TM    
Eli Hoffmann

SA Editor
Eli Hoffmann

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Despite protestations from G.M.'s (GM) brass, bankruptcy may indeed be its best option, Barron's says. The dying automaker would need $100B to survive through 2009 in its current form - a massive sum it's unlikely to see from Congress, which is wary of throwing money at what many see as a flawed business model.

Mind you, a traditional Chapter 11 filing could quickly slide into Chapter 7 bankruptcy if GM (or Chrysler or Ford (F) a few months down the road) can't find anyone to lend them the money to keep operations running. That's why Barron's advocates a "pre-packaged bankruptcy" - in which a company enters bankruptcy protection with almost all of its financing in place - in this case backed by the government for a year or so. "In that time, and under the protection of the court, GM could begin to restructure its business with a much higher probability of long-term survival," Mark Bane, co-head of bankruptcy operations at the law firm of Ropes & Gray, says.

This would go a long way toward reassuring car buyers who might otherwise not want to purchase a vehicle from a bankrupt firm, for fear of not having warranties honored or parts being available - one of Detroit's arguments against Chapter 11. The plan needn't even be called a bankruptcy. Term it a financed reorganization, or whatever else might make it sound more palatable to GM's board.

Assuming they go down this road, what's the end of the story? To survive long-term, the Big Three will have to find a way to cut costs (duh), figure out how to make cars that Americans like, and shrink their bloated operations and dealer networks. Consider that U.S. automakers pay employees over $70/hour, compared with the $40/hour Toyota (TM) and Honda (HMC) pay their non-union employees.

GM would probably have to cut its 60K hourly-workers to about half of that, cut pay across the spectrum, close half of its plants, and wind down unprofitable brands (Saab, Pontiac, Hummer, GMC). Ford would have to say goodbye to Mercury. And Chrysler would likely have to close down everything except Jeep and its minivans - making it a likely takeover target for one of the other two, or a foreign carmaker.

Related Articles

This article has 49 comments:

  •  
    Nov 29 09:58 PM
    Given this scenario...so what would happen to the people that now have GM stock in their portfolios ? I was invested in Delta when they went into bankruptcy and guess what...when they emerged...they let us know that the stock symbol had changed and now my stock was worthless and that they were issuing new stock at $20.00 per share...all Deltas employees old stock was converted to the new stock....but us "non-employees&qu... (only because my wife had been laid off in Dallas) stock was worth zilch. I really learned my lesson at that point and time....mgt and employees gets their stock reissued...the outsiders stock is worthless. Would the same thing happen to GM stock holders? If so, there really wouldn't be much point in staying with GM stock now would it?
    Is this what the author of this article is advising?
    Reply | Link to Comment
  •  
    Nov 29 09:59 PM
    I worked for GM 70 dollars in Hour I wish. Get your facts right.
    Reply | Link to Comment
  •  
    Nov 29 10:07 PM
    How do the Authors of this article and others get that GM,s hourly salaries are over $70.00 per hour...it just isn't true. He really should read other articles from Seeking Alpha about the untruism of that figure.
    Another thing, during GM last contract settlements they have ALREADY slashed "newhires" salaries from $26.50 per hour down to $14.00 per hour. (would the author be willing to work for the same wages?) ....plus their benefits have also been reduced. GM has ALREADY been trying to survive...and have been trying to get cost down, for some while now.
    Reply | Link to Comment
  •  
    Nov 29 10:14 PM
    No one ever seems to mention that about 40% of Toyota's workforce is temporary employees that make $11 an hour and no benefits. These people often are able to get section 8 housing and food stamps. In other words the US taxpayers are subsidizing Toyota's labor costs because Toyota is to CHEAP to pay these people a liveable wage and make a commitment to them as permanent workers.

    I will NEVER, EVER, own a Toyota.


    On Nov 29 09:59 PM User 214846 wrote:

    > I worked for GM 70 dollars in Hour I wish. Get your facts right.
    Reply | Link to Comment
  •  
    Nov 29 10:30 PM
    Its a shame the media is never held accountable for false statements.Like the $70+ per hour. Pat tells what happened to Detroit.

    www.humanevents.com/ar...

    Who Killed Detroit?
    by Patrick J. Buchanan

    Who killed the U.S. auto industry?

    To hear the media tell it, arrogant corporate chiefs failed to foresee the
    demand for small, fuel-efficient cars and made gas-guzzling road-hog SUVs no
    one wanted, while the clever, far-sighted Japanese, Germans and Koreans
    prepared and built for the future.

    I dissent. What killed Detroit was Washington, the government of the United
    States, politicians, journalists and muckrakers who have long harbored a
    deep animus against the manufacturing class that ran the smokestack
    industries that won World War II.
    Reply | Link to Comment
  •  
    Nov 29 10:53 PM
    We better hope that no foreign country doesn't want an actual piece of America because without the Domestic Automobile Manufacturers there will be no one to retool for a CONVENTIONAL WAR, such as WWII. Do you actually think the japanese assembly plants would build tanks and planes for us? Please!!! By a piece of America, I am referring to our natural resources such as fresh water, fertile farmland or coal and natural gas. Wars will be fought over the dwindling supplies of fresh drinking water, food and energy that we are experiencing right now.
    Reply | Link to Comment
  •  
    Nov 29 11:39 PM
    I must admit that I am a GM retiree, Of course I want GM to prosper.
    After working there for over 31.5 years the company has given me a decent monthly retirement...but what some seem to fail to realize is the fact that we have EARNED it. I hear some authors of canceling retiree contracts cutting benefits....to that I say WOAH....STOP and THINK.
    The authors...(and it seems to be perpetuating from Seeking Alpha) are suggesting such deeds...Do YOU have retirement packages...Just "How would YOU like it if we were interfering with YOUR "livlehoods"... You can sit behind a computer just "writing to your hearts content"...what your personal/ professional opinions are...in another words ..."doing" ABSOLUTELY NOTHING.....yet trying to give you OPINIONS on the welfare of others...
    Sirs...I give you a "challenge" STEP away from your keyboards....WALK in the shoes of those that have diligently built automobiles for this Great Nation...put in all the Blood, Sweat and Tears of "our" profession....live OUR life....See what it is like to get YOUR hands dirty...I mean "work" ...REAL work....not just banging on a keyboard. And then and "only then" LISTEN to some of the proposal that people like YOU are suggesting....
    Yes give up your salaries...and work for those wages that you yourself are constantly ridiculing. Just DO IT. I'll guarantee that you wouldn't last more than 2 Days in an automotive plant.
    Reply | Link to Comment
  •  
    Nov 29 11:44 PM
    The 70 dollars an hour is the manufacturing cost of a GM vehicle, not what the employee makes. Hope this helps you further understand why the American auto companies are in this position.


    On Nov 29 09:59 PM User 214846 wrote:

    > I worked for GM 70 dollars in Hour I wish. Get your facts right.
    Reply | Link to Comment
  •  
    Nov 29 11:52 PM
    On another note,

    As for Rick Wagoner asking for bailouts for the Big 3....you have every RIGHT to question his personal habits (ie: flying in corporate jets) I don't blame you...nor the Senate for asking such questions. They are very pertinent questions and should expect answers. If Rick Wagoner expects the "hourly" side of the industry to accept concessions then HE should also be willing to "give up" some of HIS salary also...(which he was so "unwillingly to do.) In my opinion he made a "fool" of himself in front of the Senate a couple of weeks ago.
    Reply | Link to Comment
  •  
    Nov 30 01:16 AM
    The USA North American Operations (NAO) Automobile Industry GM, Ford and Chrysler have reached the end of its incubation stage of industrialization. They will downsize automobile production, merge, re-tool, design and build new factories and products to house humanity in our entire World. This new Global Industry will be the catalyst that drives our Civilization forward and out of the current Global Economic Crisis. I worked for both General Motors Corporation and Delphi Corporation for 27 years as an assembler, spot-welder, toolmaker journeyman, dimensional control inspector, team instructor, team leader, and machinist. This industry works as a military operation with the ability to correct for errors by using intelligent management, engineers, and organized union labor. Those who think this industry will not survive are mistaken. The planned framework has been in place since 1943 – 1945 during World War II in the U.S. Board of Economic Warfare. It is only a matter of when this industry will begin. It will happen as I stated to the President’s Council on Sustainable Development in 1994 at the Labor Department in Washington, D.C., and again to GM Management and the UAW in 1998 during the Industrial dispute that shut-down 25 assembly operations. Now, this industry will negate NAFTA, GATT, and WTO wage disparity. The World is now Global. A new Architecture for a new Global Civilization is about to blossom and evolve out of the moribund NAO Auto Industry.

    Michael A. Grand, Futurist / Visionary
    Reply | Link to Comment
  •  
    Nov 30 01:49 AM
    The bankkruptcy will make the stockholders insolvent. GMAC will probably also go down the tubes..what a show for a major American Icon...well I have to say that they deserve it...anybody but the employees that buy a GM car now or in the future could be in for a shock..MarvinMBA
    Reply | Link to Comment
  •  
    Nov 30 02:38 AM
    cars are not assembled like they were in 1939. the only thing useful in making tanks at gm is the buildings themselves. the same thing is true at the toyota plants.

    if you are worried about somebody invading the USA - just start arming the population. get rid of any laws which prevents private citizens from owning assault rifles and automatic weapons. rocket propelled grenades and stinger missiles in the hands of properly trained citizens would be a larger deterrent than tanks.
    Reply | Link to Comment
  •  
    Nov 30 05:21 AM
    The $70 dollars an hour is an accurate number. No the employee's making the vehicles don't make that much but when you factor in health care costs, retirement, insurances, vacations, bonuses and the like this is where the $70 number comes in. Its not a real number as far as payout is concerned, but it is a real number when factoring in the cost of labor to the price of a vehicle. I worked in the auto industry for 33 years and that's how I know.

    Richard
    Reply | Link to Comment
  •  
    Nov 30 05:58 AM
    The Big Three all have the same Union contract that's why all three are all in such big trouble at the exact same time.

    John
    Reply | Link to Comment
  •  
    Nov 30 06:22 AM
    The unions are the cancer that eats out the heart of American industry. Their pernicious avarice has eventually sucked all of the life out of every industry they work at. They destroyed the American steel industry, and now they have brought about the eminent collapse of the Big-3 auto companies. Their workers must now learn what is the flip side of the juicy wages and benefits they have extorted over the years: job loss, pension reductions, and the black mark on their resumes when they go looking for that next job: "former union worker". I'll bet more than 75% will be passed on for employment because of that single fact.
    Reply | Link to Comment
  •  
    Nov 30 07:14 AM
    It is clearly the "BEST" option, but when has management, the unions or governments involved ever made the best decision based on long-term sustainability?

    More of the same, which will only perpetuate the cycle of boom/bust for the NA automakers. Sad, because GM could be a force globally if they only were proactive in managing their long-term obligations.
    Reply | Link to Comment
  •  
    Nov 30 08:30 AM
    Step 1 (For any Bankruptcy Plan): Stock Holders are SCREWED, so SELL, and SELL ASAP!!
    Step 2 (For any Bankruptcy Plan): The Auto Workers Union go down w/ the Ship, as they should, being an equal part to the DEATH of an AMERICAN Icon.
    Step 3 (Under Bankruptcy Protection): Figure a way to get the Labor Force to accept "Start Anew" Contracts that allow competiveness to Toyota (USA). This will never happen though, the AWU still gung up w/ the 1st sunken ship.
    Step 1-A (alternate to above): NO Bankruptcy. The FED GOVT. steps in to Form one US Auto Manufacturer (the sum of GM + F + Chrysler). Nope, it'll never happen either.


    SELL-SELL-SELL-SELL the Stock and let VW & Toyota serve our vehicular needs?

    WOW, what a mess!!
    Reply | Link to Comment
  •  
    Nov 30 09:04 AM
    How to Fix GM – Plan One
    1) Sell All of GMAC and the Insurance Business (Ditech)
    2) Cut down from five regional offices to two. One in Atlanta (east of the Mississippi River)and one in LA (west of Mississippi River). That means Chicago, New York, and Dallas are closed. With about 250 people working in each location (750 total) at an average of $100,000 each, that is a yearly savings of $75 million. Operation cost (rent, equipment, etc.) at the three locations will save another $1.8 million. Benefits for the 750 employees will save another (at $20,000 each) another $15 million.
    3) Next, there is an average of three offices per state (local offices in cities across the country), if we close them, that is another $3 million in office space.
    4) Next, the District Managers work out of their house and the Zone Managers (or whatever term is given to them), could be let go. They make around $150,000 a year and there are about 75 of them. Again, a savings of $11.25 million. With benefits, a total of $12.75 million in savings.
    5) Next, cut around 150 jobs at the Detroit GM Headquarters. A savings of around $18 million with benefits.
    6) Next, cut Buick down to two cars (Enclave and Lucerne), cut Pontiac to one (G6), cut GMC to two (Yukon and Sierra), cut Saturn to one (Vue) – and put all cars to a new umbrella called “United GM”. This will save GM billions. Also cut back on two Chevy models and two Cadillac models.
    7) Next, cut advertising in December, January, February, March, April, and May (with the exception of auto show advertising for a three week period during the show and its incentives). This will save GM around $1.4 billion.
    8) Sell all five planes. This will save GM $100 million in sales and another $100 million in yearly travel expenses for a total savings of $200 million dollars.

    Plan Two on Fixing GM
    How to save GM
    1) GM needs to cut their total car models to 25 (from 60). What they could do is get rid of all Buicks expect Lucerne and Enclave; get rid of all Pontiacs except G6; get rid of all GMCs except Sierra and Yukon; get rid of all Saturns except the Vue; get rid of Saab all together; get rid of at least three Chevy models; get rid of at least two Cadillac models.
    2) Get rid of half the dealerships. Chevy seems to have the best distribution so change the Chevy dealerships to Chevy, BPG, Saturn, and Cadillac
    3) Close at least three of the five regional offices
    4) Close all Zone offices and have employees work out of their homes
    5) Get rid of 50% or more of white collar workers in the field
    6) The factories will close based upon which models will be discontinued
    7) Have upper management take a 35% pay cut
    8) Have middle management take a 20% pay cut
    9) Cut advertising from $2.3 billion per year to $750 million
    10) Get rid of advertising groups and have national advertising only
    11) Get rid of co-op advertising dollars
    12) Get rid of all promotional advertising
    13) Cut all regional and national meetings that cost more than $100,000
    14) No parties for auto shows
    15) Have special cash incentives for cash only purchases
    16) Once the Volt battery is discovered, convert at least half the cars and trucks left after the cut to Hybrid
    17) Move 1/2 the engineers to be used to discover more fuel efficient standards and more alternative fuel / hybrid cars
    18) Sell all five planes and travel coach (a $100 million savings from cost of planes and a $100 million savings in yearly air cost for a total savings of $200 million).

    Reply | Link to Comment
  •  
    Nov 30 09:22 AM
    Here's the math I just did on my H/P calculator. In 1940 my father bought the biggest Ford sedan new for $900. I'm just guessing today's cost at $40,000 what with sales tax, registration and all the mandated ripoffs. Divide 40,000 by 900 and you get an increase of 44.4 times the 1940 cost. Now take the 68th 'root' of 44.4 and this will give you the average annual compounded increase in cost for the 68 years. This works out to 5.736% per year compounded. So you can figure that no matter WHAT the government says-------inflation is going to be 6% compounded (or more) for the rest of your life and beyond.
    Reply | Link to Comment
  •  
    Nov 30 10:10 AM
    The reasons for the failure of the American auto industry are
    1) Reliability issues of the 80 gave the worst image of quality and the perception hasnt changed despite the progress.
    2) The US auto industry essentially ignored and failed to capture the immagination and needs of the new genration, making the same ugly basic designs.
    3) Failing to recognize the needs of most immigrants; reliability, good gas milage, cost, and a half good looking design. Next time you get in the car, look at the drivers around you and do a little bit of statistics of your own.
    4) From (2) and (3), the US Auto industry isolated itself to a small segment of an aging "patriotic" population that would only buy American cars, despite its "short commings."

    Given that all these are management short sitedness, do they really deserve the million $ salalries? I think its time to offshore the management, for a change, and use the savings for survival!
    Reply | Link to Comment
  •  
    Nov 30 10:42 AM
    Big 3 need need leadership that will accept change. Bankruptcy is the easy way out. Make tough decisions now. Don't accept bankruptcy.
    Reply | Link to Comment
  •  
    Nov 30 10:55 AM
    I believe the dollar per hour figures referred to in the article for GM and Toyota includes benefits.
    Reply | Link to Comment
  •  
    Nov 30 11:00 AM
    As long as the officers and directors get the boot, any plan is OK by me. Ameica's automakers are unsustainable now, and prospects are worse, much worse, for the future.

    All salaries and wages need to be seriously reduced. All benefits neeed to be cut. If not, the Japanese, and Koreans will prevail. Is that what we want ?
    Reply | Link to Comment
  •  
    Nov 30 12:28 PM
    The Big Three have to go thru bankruptcy to get rid of their pension and medical obligations to retired workers (and, hopefully, old management as well). Rearranging financial obligations outside of bankruptcy won't work because the unions won't be able to accept any real package (retired members of the unions still vote; they are actually the majority or close to it in the unions).

    As far as other aspects of pre-packaged deal, all three have to drastically reshape their dealer networks (maybe a federal law preempting state franchise regulations would help here) and get rid of extra brands. GM only needs two, "Cheap" and "Expensive", for example. One could actually see the benefit of creating two new brands and closing franchises of the old ones (the strongest dealers could bid on them).
    Reply | Link to Comment
  •  
    Nov 30 12:40 PM
    When the Big3 carmakers submit their self-appraisals next week to Congress, the Administration would have had enough Business Case Analysis on hand to make the correct decision expeditiously. Time is of the essence as in battle. Let us face it, we (Management, UAW, consumers, taxpayers) lost the war of making competitive cars for the mainstream American. We have to admit that we lost it and that is just too bad. The competitors are watching as I wrote. Let us pick up the pieces and move forward. Regroup, re-energize, re-invigorate, re-vitalize, as in battle. In this new world environment we need new thinking and a new beginning. Put the past behind the back of our heads. We need the Horatio Gates and the Nathaniel Greene in this game. The American people will buy their cars in time soon.

    Let us pray that the Administration has the guts and the wisdom to do the right moves, and do it fast and decisively to remove uncertainties not only for the Big3, but for their suppliers, dealers, creditors. stockholders, and finally the tax payers
    Reply | Link to Comment
  •  
    Nov 30 01:39 PM
    Good point Fcountry.
    The college boys who spend their days tickling the computer key boards should give real work a shot. You're probably right. They would probably only last a day or two, if that. Let's see how they hold up under butt breaking work. What a sad scene that would be. The computer key board ticklers are pretty quick to reduce your pension, cut your health care benefits, and kick you to the curb. They actually believe the guys working the factory line, destroyed the US auto industry. Fools! They want to blame the line workers for the auto industry's policy of building cars that nobody wants to buy. It's been about 40 years since the US auto industry was issued the wake up alarm. The alarm said...Wake up! Start building energy efficient cars of quality. If you don't......The Japanese will. When the Japanese do, they will dominate the US market, and markets around the world.
    The leaders of the US auto industry are to blame, period. Plain and simple. They are a bunch of short sighted, greedy give me the money NOW, fools. The greedy fools bought Hummer.
    Tomorrow? What's that? Who cares about tomorrow.
    A tip of the hat to Fcountry.


    On Nov 29 11:39 PM Fcountry wrote:

    > I must admit that I am a GM retiree, Of course I want GM to prosper.
    >
    > After working there for over 31.5 years the company has given me
    > a decent monthly retirement...but what some seem to fail to realize
    > is the fact that we have EARNED it. I hear some authors of canceling
    > retiree contracts cutting benefits....to that I say WOAH....STOP
    > and THINK.
    > The authors...(and it seems to be perpetuating from Seeking Alpha)
    > are suggesting such deeds...Do YOU have retirement packages...Just
    > "How would YOU like it if we were interfering with YOUR "livlehoods"...
    > You can sit behind a computer just "writing to your hearts content"...what
    > your personal/ professional opinions are...in another words ..."doing"
    > ABSOLUTELY NOTHING.....yet trying to give you OPINIONS on the welfare
    > of others...
    > Sirs...I give you a "challenge" STEP away from your keyboards....WALK
    > in the shoes of those that have diligently built automobiles for
    > this Great Nation...put in all the Blood, Sweat and Tears of "our"
    > profession....live OUR life....See what it is like to get YOUR hands
    > dirty...I mean "work" ...REAL work....not just banging on a keyboard.
    > And then and "only then" LISTEN to some of the proposal that people
    > like YOU are suggesting....
    > Yes give up your salaries...and work for those wages that you yourself
    > are constantly ridiculing. Just DO IT. I'll guarantee that you wouldn't
    > last more than 2 Days in an automotive plant.
    Reply | Link to Comment
  •  
    Nov 30 01:55 PM
    The depth of the problems faced by the 3 American auto makers requires that all three should go into bankruptcy under a common bankruptcy judge and master in bankruptcy with the objective of rationalizing the research, development, product portfolio, manufacturing, marketing, service/warranty and financing into one global competitive and profitable company. This is something the US taxpayer can invest in. Without this bottom-up rationalization, there is no hope for any one of these failed management organizations.

    Even if we still had a healthy investment banking community and a strong economy, this would be a daunting challenge for private capitalism.

    Now, it needs to be led by the best experts in Congress, Judiciary, and Administration who have our entire national interest at stake, including return on our investment in this industry.

    I am not a big fan of Mitt Romney as a political figure but he may have the best set of skills and relationships to accomplish this enormous task. His father was the head of an American car company and he has led a successful investment company.

    If the Obama folks and congress want to reach out to get problems solved, he may be a good choice to lead this critical effort for the future of our country.
    Reply | Link to Comment
  •  
    Nov 30 03:58 PM
    akhait,

    I have a very open and honest question for you...

    IF GM was to go into bankruptcy (as you are suggesting) ..[quote}
    "to get rid of their pension and medical obligations to retired workers (and, hopefully, old management as well")

    Then what is to happen to us (retirees) ? Are we just left "out on the street"with no money...and no benefits? Is that what you are suggesting? Are you willing to give up YOUR retirement?...Do you want others suggesting ways to financially RUIN everything that you have worked for? What is your suggestion for compensation (if any)?
    There are many of us who have invested in our OWN company (GM) only to see our investments "tank"...bec... of the Wall Street
    mess....so first we lose our money...now there are people like you who want to trash our retirement income and our benefits also? What if your Mother, Father, Uncle or Aunt worked or the automotive industry...would you be suggesting the same?

    What about those of us who have worked there ALL our lives...building YOUR cars ...which I must admit is NOT an easy job....(you should try it sometime).

    I think that is a GREAT idea ...akhait...and all the other "carslayers"... next time that you and yours decide that it is time to purchase a new vehicle, don't just simply buy one....BUILD it YOURSELF....build one for your friends and family....build one for people that you don't even know. Build them for YEARS.

    Your car builders try to achieve what America wants...when gas was cheap...people wanted Trucks and SUV's we built LOTS of them...look how many are out on the road they are EVERYWHERE. Were people "forced" to buy them? We built what they wanted. Once gas went up (whose fault is THAT?....sue your market makers and the oil companies)...but to blame us is ludicrous.
    AS for Hybrids....the auto industry is trying to come up with alternatives....yet the science of building "perfect BATTERIES" is just now being perfected. Would you want a carbuilder to put just "any ole" battery in your vehicle...and then you would have to replace such an expensive item (boy you would be complaining THEN)...but NO the automotive people wanted to come up with the Solution for dependable batteries for your vehicle first. I guess that YOU could have given them the solution...but did you?
    Reply | Link to Comment
  •  
    Nov 30 04:07 PM
    Two points here:

    This Big 3 bankruptcy sham is an obvious class war designed to benefit the elites and destroy the middle class.

    Chinese carmakers SAIC and Dongfeng have plans to acquire GM and Chrysler.
    Reply | Link to Comment
  •