The Rescue of the US Auto Industry, Module B: Restructuring General Motors Through Bankruptcy

Prior to the bankruptcy, GM had received $19.4 billion in bridge loans from the US Treasury (Treasury 2009e). On December 31, 2008, Treasury lent GM $4 billion and promised (Vlasic and Bunkley 2009) an additional $9.4 billion over two additional installments in January and February 2009 (Treasury 2009a; 2009b; Vlasic and Bunkley 2009). That initial $13.4 billion did not prove sufficient to keep GM afloat during the viability planning that was occurring during the winter and spring of 2009. The loan was expanded by $2 billion on April 22, 2009, and again by an additional $4 billion on May 20, 2009, for a total of $19.4 billion (Treasury 2009e). The purpose of the bridge loans was to sustain the company so that it could develop a plan for long-term viability. After submitting a number of plans to the government (as a condition to further funding) the administration determined that a restructuring via bankruptcy was the only available option.

Given the highly interconnected nature of the auto industry, in seeking to sustain GM, the government also provided assistance to several related parties: GM’s financing company, GMAC; auto suppliers; and warranty assistance to consumers (see other YPFS autos case studies). Assistance was also provided to Chrysler and similar related entities, all under the Automotive Industry Financing Program (AIFP) funded by TARP (Office of Public Affairs 2013).

Canada and Ontario’s total investment of $9.5 billion in new GM gave them an 11.7% stake in New GM, $1.7 billion in preferred shares/notes and the right to select one director (COP 2009). Describing the reliance on and tie to the United States auto industry of Canada’s (and even more specifically, Ontario’s) auto manufacturing industry, a government report said of the industry, “approximately 85 percent of cars produced in Canada are exported, and these exports are sent almost exclusively to the United States. Exported vehicles and parts represent about 15 percent of Canada’s manufactured product exports” (Auditor General of Canada 2014).

Canada’s investments were similar to the US investments. In April 2009, Export Development Canada (EDC) entered into a loan agreement to lend $2.4 billion in working capital to GM’s Canadian subsidiary, which included additional notes similar to the US loan agreement. In July, EDC lent an additional $3.9 billion to GM that was immediately converted into equity. The EDC also contributed $3.2 billion to the DIP facility. (Auditor General of Canada 2014; GM Co. 2010).

At the end of 2008, GM was the largest auto manufacturer in the world (Marr 2009). It played a significant role in the Midwest’s economy and in the broader auto manufacturing sector. In the speech outlining the GM bankruptcy, President Obama (2009b) said, “in the midst of a deep recession and financial crisis, the collapse of [GM] would have been devastating.” He promised that if GM would remake and retool itself, and if “their stakeholders were willing to sacrifice for their company’s survival and success . . . the United States government would stand behind them.”

Classifying GM as a Financial Institution

It was clear that letting GM fail and have to liquidate would have been too complicated, taken too long, and been too risky for the fragile state of the economy (See Key Design Decision 5 for more details). Initially, the Bush administration thought it needed new authority (beyond TARP) for an auto bailout and directed the auto companies to request assistance from Congress. However, when an agreement couldn’t be reached with Congress (Canis and Webel 2013), the administration decided that auto manufacturers would be classified as financial institutions and could therefore have access to the TARP funds from the Emergency Economic Stabilization Act of 2008 (EESA) (COP 2009). This was explained in two determinations sent to Congress, one each from the Bush and Obama administrations. The first determination made the broad claim that, “companies engaged in the manufacturing of automotive vehicles and the provision of credit and financing in connection with the manufacturing of such vehicles are ‘financial institutions’ for purposes of [TARP].” The second determination added to the first by tying the determination to the Automotive Industry Financing Program (AIFP) (Chrysler Group 2009). In court cases regarding the issue, the government explained that “Treasury, in determining what is a financial institution, looks at the interrelatedness [of the company and its financing arm]” (COP 2009). Since GMAC was undeniably a finance company, the parent company GM could also be considered a finance company and therefore have access to the TARP funds. The legal determinations carried through from the bridge loans to the DIP financing (COP 2011a).

GM Allowed to Follow Chrysler’s Example into Section 363 of Chapter 11 Bankruptcy

Chrysler had recently completed a 363 bankruptcy process (see Nye 2021b). GM was viewed as, “an outsize version” of Chrysler and would follow the same bankruptcy path (Rattner 2011). President Obama (2009b) said, “Chrysler’s extraordinary success reaffirms my confidence that GM will emerge from its bankruptcy process quickly, and as a stronger and more competitive company.”

The relationship between the purchaser and the auto manufacturer does not end at point of sale. In all situations there are warranties on the vehicles, and in as many as 90% of sales, financing of one kind or another is provided, often by a financing company affiliated with the manufacturer itself. The view was that a drawn out, traditional Chapter 11 bankruptcy would do irreparable damage to GM, or as Rattner described it, “[GM] would never survive the long, slow grind of a conventional bankruptcy” (Rattner 2011). In fact, the bankruptcy case of Old GM (renamed Motors Liquidation Company after the 363 sale) is ongoing as of the writing of this case in 2021 (United States Bankruptcy Court for the Southern District of New York n.d.).

The 363 sale “allows a bankrupt company to act quickly to transfer intact, valuable business units to a new owner. (The conventional bankruptcy process restructures the corporation as a whole.).” The 363 sale process had been used to salvage Lehman Brothers’ money management and Asia businesses in September 2008 (Rattner 2011).

GM filed for bankruptcy on June 1, 2009, with an expectation that the process would be completed 40 days later, by July 10, 2009 (Bosco and Plante 2013). The 363 sale was approved by the judge on July 5, 2009, and executed on July 10, 2009 (Gerber 2009; GM Co. 2009). The Chrysler bankruptcy’s 363 sale and had been completed in 31 days (Nye 2021b).

The bankruptcy was the result of the third in a series of progressively more strict viability plans that GM had been asked to develop (first by Congress, then as stipulated in the bridge loan agreement, and finally with help from the Obama administration itself) (GM and Treasury 2008; Pelosi and Reid 2008; GM 2009b). After months of discussions and negotiations between GM, its major stakeholders, and the administration, it was determined that bankruptcy was the only solution that would set GM on the path to long-term viability. It became clear that liquidation would have been too complicated, taken too long, and too risky for the fragile state of the economy (See Key Design Decision No. 5 for more details).

GM’s large European subsidiary Opel, which had $35 billion in annual sales with 55,000 employees, found itself in similar trouble as the parent company in the US. The company required funds to continue operating, and the US government wasn’t willing to pay for this. Despite initial indications that no one would provide the funds, Germany did come through with a €1.5 billion ($2.1 billion) bridge loan.^FNConversion comes from https://www.bloomberg.com/news/articles/2009-06-02/germanys-opel-bridge-loan-to-get-eu-review-under-subsidy-rules. The bridge loan was initially intended to provide funds only while Opel found a private-sector partner. However, when a deal was presented a few months later, GM’s new board of directors wasn’t comfortable with the deal and instead decided to restructure Opel (Rattner 2011).

Board and Management

In the final weekend of March 2009, GM CEO Rick Wagoner resigned at the request of the Obama administration (Wagoner 2009). The government was also able to select a new board of directors. This selection of new company leadership was emphasized by the Auto Task Force as critical to effecting the necessary change in culture at GM (Bloom 2009). GM was also subject to the executive compensation requirements associated with other TARP recipients under EESA (GAO 2009).

United Auto Workers Union

The union health insurance plan VEBA exchanged $20 billion in debt for 17.5% equity in New GM (Bosco and Plante 2013; Gerber 2009). They also accepted a decrease in labor costs that would bring GM’s average hourly wage down from the mid-$70s to the mid-$50s, more in line with the domestic plants of foreign auto manufacturers (Klier and Rubenstein 2013). GM also committed to reducing the number of plants, from 47 to 33 (Bosco and Plante 2013).

Bondholders

The bondholders were required to exchange their $27.2 billion in outstanding debt for a 10% equity stake in the New GM (Bosco and Plante 2013). They were also given “two warrants, each to purchase 7.5% of the post-closing outstanding shares of New GM, with an exercise price based on a $15 billion equity valuation and a $30 billion equity valuation, respectively” (Gerber 2009).

Dealerships

In the first viability plan GM submitted to Congress in December 2008, GM had committed to reduce dealerships from 6,450 to 4,700 by 2012 (GM 2008). By the end of the bankruptcy, they committed to reducing the number down to 4,100 (Bosco and Plante 2013).

In the Treasury’s announcement on May 31, 2009, that GM would file for bankruptcy the following day, they said, “The U.S. Treasury is prepared to provide approximately $30.1 billion of financing to support GM through an expedited Chapter 11 proceeding and transition the new GM through its restructuring plan” (Treasury 2009f). Government funding was deemed critical to the company’s successful restructuring because commercial funding was thought to be unavailable given the tightened credit markets (Rattner 2011).

The $30.1 billion was spread over two drawdowns. The first funding was made on June 3, 2009, for $23 billion and the remaining $7.1 billion was released on the day of the 363 sale, July 10, 2009 (Treasury 2009g). For specific details of the loan including interest rate, maturity, payments, restrictions, and events of default, see Miller et al. 2009 and GM 2009d.

After making internal calculations about how much money the New GM would require, the Auto Task Force realized “that too much new debt would leave the company groaning under a potentially unmanageable load of fixed liabilities—much like the old GM” (Rattner 2011). They realized that the new funds would have to come in the form of equity. Some on the Auto Task Force were concerned about the government owning such a large company; however, given the alternatives, the Auto Task Force pushed forward with their recommendation that the funds come in the form of equity (Rattner 2011). When the 363 sale was finalized, the Treasury’s DIP loans were converted into $2.1 billion in preferred shares in New GM and 60.8% of the outstanding common stock of New GM (Gerber 2009).

In President Obama’s June 1, 2009, speech outlining the GM bankruptcy plan, he described the situation that the US government would be in as majority shareholder of the largest auto manufacturer as an “unwelcome position” (Obama 2009b). In the administration’s restructuring plan, they described how they would vote their shares as follows, “the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions” (Treasury 2009f). Similarly, Rattner described it as being as “short and nonintrusive as possible . . . first . . . setting business goals and guidelines and picking executives and directors . . . [then] step back and let the board and management run the company” (Rattner 2011).

Beyond selecting leadership, the administration included in the credit agreements “vitality commitments” that prevented the auto manufacturers from moving jobs outside the US (GAO 2009; Goolsbee and Kruger 2015).

The Auto Task Force was established on February 20, 2009, and consisted of administration leadership, including: Secretary of the Treasury, Director of the Office of Management and Budget, National Economic Council Director, Chair of the President’s Council of Economic Advisers, Environmental Protection Agency Administrator, and the Director of the White House Office of Energy and Climate Change. The Auto Task Force also included the following cabinet secretaries: Transportation, Commerce, Labor, and Energy (Treasury 2009c). Analysis for the Auto Task Force was often conducted by Official Designees that were appointed by the administration (Treasury 2009c). They were responsible for the auto industry research, analysis, negotiations, and policy recommendations. The Task Force also relied on outside consultants (for example, BCG) and bankers (for example, Rothschild) (Rattner 2011). The Auto Task Force’s work was mostly complete with the finalization of the Chrysler and GM bankruptcies in July 2009 (Geithner 2009).

The US government’s plan was to exit the “unwelcome position” as majority shareholder in GM “as soon as practicable” (Obama 2009b; Rattner 2011). GM made its final loan repayment to the Treasury on April 20, 2010; this left only Treasury’s shares in GM (Office of Public Affairs 2013; Treasury 2010a). Treasury sold shares as part of GM’s initial public offering on November 18, 2010 (Treasury 2013). The next month GM repurchased the Treasury’s $2.1 billion in preferred shares, which left Treasury with just common shares remaining (Treasury 2010c). Those common shares were sold between December 2012 and December 2013 (Treasury 2013). See Figure 2 for more details on the wind down of Treasury’s stake in GM.

A significant portion of the headline communication regarding the US government’s auto rescue was done by the White House. President Obama gave a number of major speeches during the spring and summer of 2009 outlining in detail what the administration was doing (Obama 2009a; 2009b). A special task force, the Auto Task Force, was organized within the administration, and members of that team made appearances on television on a number of occasions to explain decisions that had been made (Treasury 2009c; Goolsbee 2009).

Following significant decisions, the administration published fact sheets and timelines of the plans and steps taken (Treasury 2009d; Treasury 2009f; Office of Public Affairs 2013). Rattner (2011) describes an internal process he developed when making decisions, “I knew that part of my job was to be sensitive to the politics, particularly where taxpayer dollars were concerned. I developed what I thought of as ‘the Washington Post test’: How would the public react to [the headline of the decision being made]?”

Although a private company following the bankruptcy, Treasury required New GM to file voluntarily quarterly reports with the SEC after the bankruptcy. The reports contained all of the information that a typical SEC filing would (COP 2009).

The US Congress held multiple hearings and issued a number of reports regarding the government’s actions in the auto industry (COP 2009; COP 2011a; COP 2011b; Canis et al. 2009; Canis and Webel 2013). The Government Accountability Office (GAO) issued a number of its own reports specific to the government’s investments in the auto industry (GAO 2009; 2011). Because GM received funds from TARP, the Office of the Special Inspector General for TARP (SIGTARP) also included reviews of actions related to GM in its quarterly reports to Congress (SIGTARP 2009).