Ingrassia: After The Fall, GM's Year of Climbing Back

Ingrassia: After The Fall, GM's Year of Climbing Back

By Michelle Krebs June 1, 2010

As anniversaries go, June 1 doesn't come close to V-E Day, Neal Armstrong's lunar landing or even Goose Goslin hitting into four double plays in one game. (It was April 28, 1934, in case you forgot). June 1 is the day in 2009 that General Motors, once the richest and most powerful company on earth, declared bankruptcy with the financial support of the United States government. Chrysler had taken the plunge two months earlier.

It's a good time to take stock and ask some basic questions.

Was the government's rescue of GM and Chrysler the right thing to do?

Will we taxpayers get repaid in full?

And will the new General Motors and Chrysler forge secure, prosperous futures?

The short answers are yes, probably not and nobody really knows. But of course the answers are rather more complicated than that.

To answer the first question, it's critical to remember the American economy was in free-fall in the autumn of 2008. Lehman Brothers and AIG had failed, and Merrill Lynch had come close. That wasn't the cause of Detroit's problems; the companies had been bleeding billions for years. But it did leave GM and Chrysler, whose managements had been particularly inept, facing outright collapse.

Without government intervention both companies would have been liquidated under Chapter 7 of the bankruptcy code, instead of reorganized under Chapter 11. Maybe private investors would have moved in to pick up the pieces. But that process would have been uncertain and might have taken years.

During that time the collateral damage would have been enormous. Many companies that make car components would have collapsed. That would have wreaked havoc on the Japanese, German and Korean "transplants" that build cars in America, because they use the same suppliers, by and large, as the Detroit companies.

Back in 2008 transplant executives were expressing dire fear -- confidentially, of course -- about the consequences of a GM and Chrysler collapse. A broad swathe of the industrial Midwest would have been an economic sinkhole, and the shock waves would have spread across the country.

Two U.S. presidents from different parties and different ideologies, George W. Bush and Barack Obama, reached the same conclusion. The companies had to be restructured to prevent an economic crisis from becoming a catastrophe. The truth was neither man liked the idea. But some things in life are like changing a diaper: You just have to hold your nose and do it. So they did.

I sympathize with argument that bailouts foster moral hazard, meaning reckless economic behavior without fear of consequences. But Obama's auto task force imposed enormous pain across the board, and rightly so. Executives and workers lost jobs. Bond-holders took deep haircuts. Shareholders got wiped out. Those consequences were painful indeed, despite the bailouts.

Many of the worst union abuses, such as the infamous Jobs Bank that paid workers indefinitely for not working, were wiped away. The United Auto Workers union's supposed "victory" in getting 55 percent of Chrysler really was a defeat. The union wanted the money Chrysler owed it for retiree health benefits to be paid in cash, not in stock. The UAW really wanted to milk the company, not to own it.

As to the question about the taxpayers getting repaid, well, the price tag was high -- more than $100 billion all told. That includes some $50 billion for General Motors and $16 billion more for GMAC, its destitute financial arm that's now called Ally Bank. (Whose ally?) Then there was $8 billion for Chrysler, $5 billion for the parts suppliers and billions more for the cash-for-clunkers program, pension-guarantee payments, and so on.

We almost certainly won't get all that back.

Even getting repaid for just the aid provided to GM and Chrysler is problematic. The U.S. government owns some 61 percent of GM's shares, for which it paid around $42 billion. Meanwhile, Ford's total market capitalization is just shy of $38 billion.

It's hard to imagine 61 percent of General Motors will be worth more than all of Ford when the new GM makes an initial public stock offering, perhaps late this year but more likely in 2011. Especially because in the first quarter of this year, Ford was nearly three times as profitable as GM.

Which leads to our final question: Can General Motors and Chrysler make it in the long term? GM's first-quarter profit was $865 million. That's almost exactly the amount the company saved ($863 million) from lowering its debt-service payments compared with last year. Thanks to the government, huge swathes of GM's debt got wiped away in the bankruptcy.

But earnings are earnings, and GM's shareholders -- that is, all of us -- should welcome them. Even more encouraging was GM executives didn't use the first-quarter profits to declare victory, as the old regime did too early and too often.

Chrysler has more cash on hand than was projected when it went into bankruptcy. And it's a small enough company that one or two successful new models will make a difference. But its fate will be uncertain until cars developed by Fiat, which now runs Chrysler under the government's rescue plan, are launched in a year or so. The company's survival chances depend on them.

The real issue for both GM and Chrysler -- and Ford, for that matter -- is whether their corporate cultures can evolve from one of entitlement to enlightenment. This includes not only executives and managers but also the workers represented by the UAW.

The Jobs Bank is gone, thanks only to the government's insistence. So are "inverse layoffs," in which senior workers volunteered for the Jobs Bank at virtually full pay while bumping junior workers back to the assembly line. (Yes, the system really was that perverse.)
 
The UAW, along with the Detroit Three, must embrace reinvention if America's native auto industry is to survive and prosper. It would be nice to hear union leaders stand on the same stage with executives and say that.

About the Author

Paul Ingrassia, a contributor to Edmunds.com, has reported on the auto industry for 25 years, winning a Pulitzer Prize in 1993 for his coverage in The Wall Street Journal.  His recent book about last year's bankruptcies at GM and Chrysler, titled Crash Course: The American Automobile Industry's Road from Glory to Disaster, was published by Random House and excerpted by AutoObserver. His last post for AutoObserver.com looked at what could go wrong with Ford with everything currently going right.

 

Editor's Note: This post is part of a month-long series about the "new" GM. The series is a collaboration with sister Edmunds.com Web sites AutoObserver.com, InsideLine.com, and GreenCarAdvisor.com.  The entire series can be found on a specially designated section of AutoObserver.com

 

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.