As our team has been sponsored by General Motors, I have followed GM’s fortunes with a bit more than passing interest for the past six years. I will add, however, that I have followed this as an interested amateur, rather than a professional financial analyst. What I am posting here is my understanding of the situation – which contains some truth (hopefully!) – but can hardly be regarded as a complete and definitive explanation.
I don’t know how much of the international aspect of GM’s bankruptcy has been covered in the American media, however as shown in the link posted by Karthik, the Canadian and Ontario governments are also a significant part of the current process. I suspect other governments (Germany/Opel, Australia/Holden, etc.) may also be involved. GM is a BIG company, and this is not just an American story.
There have been a number of factors that have contributed to the current situation, not least of which is health care benefits owed to American employees (most Canadian health care costs are a govenment responsibility) and pension benefits owed to workers around the world.
Frankly, I have some sympathy for a company when their main financial problem stems from taking decent care of their employees. Yeah, this wasn’t exactly an act of generousity (see CEO pay packages if you would like an example of that), rather the result of some very challenging labour relations. Nonetheless, I think GM has been a good corporate citizen in many ways, sponsorship of FRC being but one.
Unfortunately, it seems, that the health care and pension funds were not “fully funded”. In other words, there wasn’t enough money in the fund to pay out the benefits that were promised. In Canada and, I believe, the US, it is a government responsibility to establish rules surrounding private pension funds to ensure they are properly costed and funded and the government in Canada, at least, didn’t do a particularly good job in this regard. So I do see that “the government” (keeping in mind that the US, Canadian and Ontario governments at least are involved in North American operations, and other governments with overseas operations) in Canada, at least, was part of the problem and should be part of the solution.
This was compounded by high fuel prices, which caused consumers to switch to more fuel efficient vehicles a year or two before GM was ready for that to happen, a crash in the stock markets – which devalued GM’s pension and health funds, AND the sub-prime mortgage mess in the USA which made it more difficult for people and companies around the world to arrange financing… and if you can’t get financing for your new Pontiac Solstice, then you might not be able to buy it. In short, GM was doing a mighty job of struggling with some serious long-term issues and obligations when it was nailed with an economic “perfect storm” hardly of its own making.
At this stage, therefore, it appears that GM is no longer able to pay all of its debts. Bankruptcy is a natural, and sensible protection for creditors (people who are owed money) to help ensure that a person or company is paid back as much of what they are owed as is possible. It also helps to ensure that people are paid back in the proper order.
By reorganizing GM will have to convince a court that this arrangement provides the maximum benefit for creditors in terms of the amount that they will likely be paid on the debt owing to them over the long term.
As Andrew points out, this means that a lot of debt “disappears”. That is money that GM owes, but simply cannot pay. That sucks for the creditors, but is how bankruptcy works. It isn’t a good thing but, like amputation, is sometimes neccesary. The important part is that GM will be able to pay employees (albeit under slightly different terms), service waranties, continue profitable products (GMC and Chevy trucks will ALWAYS have a market, even if it isn’t as huge as it once was) and introduce new products. GM retirees and those receiving health benefits will also continue to receive benefits… although possibly at a reduced level. Yes, there will be billions of debt left unpaid… but there are also billions of dollars of debt that the new GM will pay off.
As for the shareholders, as Andrew correctly points out, they are the absolutely last priority to be paid. That is because shareholders are owners, as opposed to creditors, and is one of the risks of purchasing stock. So rather than saying that they “get the shaft”, I would suggest that is simply one of the downsides of owning a business when it goes bankrupt… it doesn’t matter if you own GM, or a corner store… if your company goes under, you get what is left after everyone else is paid. On the other hand, bankruptcy is actually part of a framework which protects owners from being personally liable for the debts the company owes.
That is hardly the complete story… but might help explain some of what is going on. Chrysler faced many of the same problems. Ford, I understand, was able to re-finance much of its debt prior to the sub-prime debt crisis in the USA, and also had good earnings from a strong European division, thus avoiding… or at least postponing… a day of reckoning.
My goal is to have our team find some new sponsors, to keep GMC as part of our team name in recognition of all they have done for us, and to be around to work with them when… not IF, but WHEN… they are able to support FRC once again. It may be sooner than we think… they have some great new product coming out.
Phew… I didn’t mean to type that much.
Jason
