GM Is Finally In Bankruptcy

Twenty months ago Rescap, a subsidiary of GMAC, was struggling as the housing market had begun its downturn. For years,Rescap was the crown jewel of GM's financial subsidiary and a steady source of cash when Cerberus bought 51% of GMAC from GM. While Rescap's financials started to deteriorate Chrysler was also starting to crumble under its massive levergage. At the time, most debt investors were concerned about Chrysler as their loans started to trade in the $70's but bankruptcy was not on the radar screen at that point. Rescap bonds also started to trade at big discounts but it was believed that Cerberus would solve the problems. General Motors was clearly affected by these events but the stock was trading in the low to mid 20's and nobody gave much thought to what this meant for GM.

During this period, we ran into a senior person at Cerberus and discussed the unthinkable scenario of a General Motors bankruptcy. The logic went like this. If the housing sector continues to deteriorate, could Rescap go into bankruptcy? If Rescap is bankrupt, does that drag down GMAC? If GMAC falls off a cliff and Chrysler is in a tailspin, could GM go bankrupt? The answer was yes but the chain of events seemed far fetched to most investors in 2007.

Here we are today and the unthinkable has occurred. GM is in Chapter 11 and the government has put forth billions of taxpayer dollars to restructure the company in bankruptcy. It is never a good situation when the government is involved and its majority ownership will likely lead to bad economic decisions. We can see from the new union agreement that the government, although it pushed all stakeholders to take some pain, clearly didn't go far enough. New hires will be paid on par with competitors but does anyone expect GM to bring on new employees anytime soon? Current workers held onto their escalated pay of about $100 per hour. Taxpayers should be outraged as our money has been used to save the company from liquidation and operationally GM's wages are still way too high. This was the time to put the auto industry on an even playing field with its foreign competitors and the government didn't do it. Now it is our problem.

Shareholders have been virtually wiped out, bondholders are equity holders, the unions have a board seat and a large ownership in the company, and the government now controls the future of GM. This is the largest industrial bankruptcy of all time but at least it was done in a controlled process.