GM: Done For

Saturday night’s agreement between a significant group of GM’s creditors, the company, and the US government has sealed the deal: GM will file for bankruptcy, most likely Monday. Thus ends an iconic chapter in American history. GM once was emblematic of American manufacturing prowess. It generated a full 3% of the country’s GDP back in the 1950’s. It was credited, more than once, with staving off national recession simply by cranking up its own production. And, of course, there was the famous rejoinder from its CEO Charles Wilson [a.k.a.’Engine Charlie’] when he was before a Senate conformation hearing: ‘What’s good for the US is good for GM, and vice versa.’

Now, not so much.

In truth the decline and fall of GM is a story worthy of the great Edward Gibbon whose ‘Decline and Fall of the Roman Empire’ is a mammoth read even in an abridged form. The tale is familiar: its cars were criticized as unsafe, it failed to adjust to higher oil prices, it could not compete with more nimble and cheaper foreign manufacturers, and above all else it failed to adapt its fundamental business model to the global market. It became a poster child for the bygone years of American industrial dominance in an era of high technology and service industry growth.

It’s failure is also the failure of middle America to adapt. The 1950’s model of high wage blue collar jobs, good benefits, and job security backed by big union clout served a couple of post-war generations well. It has left their heirs high and dry in run-down industrial towns shorn of income, hope and purpose. All that GM and the people who ran it for the past few decades have left is a shadow of what was once a mighty empire.

Will GM re-emerge?

Most likely. But there are very strong opponents of its bankruptcy plan even after the majority of bondholders have caved in. The main resistance will come from the dealership network where the economic deprivation and political clout converge in a potent way. Many dealers are local leaders in Chambers of Commerce dotted across the country. They spend big money at election time. Now might be a good time to collect on their largesse. The main approach of attack against the company’s plan is to claim that it is illegal. The veracity of this claim rests on the way in which GM is planning to re-emerge. When it moves out of bankruptcy there will be two GM’s: and “old GM” consisting of all the shuttered factories, the old debts, and discarded brands; and a “new GM” consisting of the remaining four brands and the infrastructure needed to make them. The bondholders have accepted a 10% share in the “new GM” while their debt goes with the “old GM”. They have thus contributed nothing to the newer company and may still collect a few cents on the dollar as the bits and pieces of the old company is sold off. This ‘something for nothing’ is what persuaded the bondholders to go along with the plan, but also means that they have been treated preferentially over and above other creditors with an equal claim in liquidation. A court may view this as illegal and render the whole plan improper. This would obviously trigger a round of heated negotiation and slow the entire process to a crawl.

And time is not in GM’s favor.

The company is bleeding cash at a prodigious rate, losing market share, and, most importantly, losing its share of customer loyalty. The longer the slow death lingers on the more difficult it will be to restore even a trimmed down GM to long term profitability.

As it is I am not sure that the “new GM” will have what it takes to survive in a world auto industry that still suffers from a vast over-capacity. The deal made in Germany Friday to sell GM’s European operations to Magna of Canada rather than to Fiat works against GM in the long run: Fiat would have consolidated the industry and shut down capacity. Magna is a new entrant. It is one of the world’s largest auto parts makers and currently assembles cars for other makers – it builds BMW SUV’s as a sub-contractor – but its acquisition of Opel from GM doesn’t help rationalize the auto industry at all. So, while over capacity looms over all the current car makers, it will have a disproportionate effect on the weaker: the “new GM” being on of them.

But that is all for the future.

Right now is time to mourn the passing of GM, and along with it a huge element of the post-war American success story.

These are odd times.

Addendum:

One reason that some bondholders may fight the GM plan in court is that they have insured themselves against loss of value in their bonds by purchasing credit default swaps. They would thus lose nothing. As long as their credit default swap counter-party is solvent and can pay-up. Then I suppose the counter-parties might support the GM plan so as to avoid having to pay out. Oh, what a tangled web this recession has become! Ugh.