How General Motors Was Really Saved: The Untold True Story Of The Most Importa...

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Dan Bigman, Forbes Staff

I'm Managing Editor for Business News at Forbes

B U S IN E SS | 10/30/2013 @ 6:10AM | 21,624 views

How General Motors Was Really

Saved: The Untold True Story Of
The
Most Important Bankruptcy In
U.S. History
Editor’s Note: Lots of people–including President Obama–have
trumpeted their role in the success of the government-backed
turnaround plan that saved General Motors, the most important
industrial company in the history of the United States.

But on the fifth anniversary of the crisis, Forbes presents an

exclusive, unprecedented look at what really happened during
GM’s darkest days, how a tiny band of corporate outsiders and
turnaround experts convened in Detroit and hatched a radical
plan that ultimately set the foundation for the salvation of the
company.

Author Jay Alix, one of the most respected experts on corporate

bankruptcy in America, was the architect of that plan, and now,
for the first time, he reveals How General Motors Was Really
Saved.

For months the news was horrific, a pounding beat of warm-up obituaries for
what once had been America’s greatest and most influential corporation:
General Motors. At death’s door or already in the graveyard were Bear
Stearns, Lehman Brothers, Merrill Lynch, AIG and Citibank. The mood was
apocalyptic.

With car sales in a free fall from the worst economic downturn since the Great
Depression, GM was losing billions and running out of cash. By the time the
company closed its books on 2008 it would be in the red by a staggering
$30.9 billion. Chief executive Rick Wagoner led the auto delegation in
Washington seeking government funding to save the industry and keep GM
out of bankruptcy.

Five years later, after an unprecedented government equity investment, GM is

thriving and the Treasury plans to sell its remaining stake in the coming
months. With countless articles and books now written about the GM
restructuring and turnaround–not to mention three years of trumpeting by
the Obama Administration taking full credit for the turnaround’s success–the
most startling aspect of the prevailing narrative is that the core of how the
restructuring really happened, inside GM, is yet to be fully told.

In the popular version of the company’s turnaround story, as GM teetered

toward liquidation in 2009, an Obama-appointed SWAT team, led by
financier Steven Rattner, swept in and hatched a radical plan: Through a
novel use of the bankruptcy code they would save the company by segregating

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and spinning out its valuable assets, while Washington furnished billions in
taxpayer funds to make sure the company was viable.

The real GM turnaround story, significant in saving the auto industry and the
economy, is contrary to the one that has been published. In fact, the plan that
was developed, implemented and then funded by the government was devised
inside GM well before President Obama took office. In what follows, the
inside story of this historic chapter in American business unfolds, laying bare
the key facts.

GM’s extraordinary turnaround began long before Wagoner went to

Washington in search of a massive loan to keep GM alive. My involvement in
that story began in GM’s darkest days, five years ago on Sunday, Nov. 23,
2008, when I visited Wagoner at his home that morning, presenting a novel
plan to save General Motors.

As a consultant with expertise in restructurings and turnarounds, I had

completed a half-dozen assignments at GM over the years. I had worked with
Wagoner in 1992 when he became chief financial officer. I was asked to come
in for a two-year stint as CEO of GM’s National Car Rental, the first time GM
had recruited an outsider to lead a turnaround in one of its subsidiaries.

By 2008 I had over 20 years of experience with the auto industry and almost
30 years of working on turnarounds. But for the past eight years I had backed
away from business and my firm, AlixPartners, to care for my daughters after
the death of my wife. I was essentially “retired.” But GM’s enveloping crisis
and my friendship with Wagoner would bring me out.

Early on that November Sunday I called Wagoner at his home in a Detroit

suburb. I asked to see him right away, explaining that I had a new idea that
could help save the company.

Three hours later I walked through his front door and into his family room. I
knew Wagoner believed GM could not survive a bankruptcy. Studies showed
consumer confidence would crash. No one would buy a car from a company
that was bankrupt. However, what I knew about the economic crisis and GM’s
rapidly deteriorating liquidity position told me the company had no choice
but to prepare for a bankruptcy.

Yet I agreed with Wagoner. For a global company as big and complex as GM,
a “normal” bankruptcy would tie up the company’s affairs for years, driving
away customers, resulting in a tumultuous liquidation. It had happened to
other companies a fraction of GM’s size. It would mean the end of GM.

“I don’t think the company will survive a bankruptcy,” he told me. “And no
one has shown me a plan that would allow it to survive a bankruptcy.”

“Filing bankruptcy may be inevitable, Rick. But it doesn’t have to be a

company-killing bankruptcy,” I said. “I think we can create a unique strategy
that allows GM to survive bankruptcy.”

To be sure, my idea, sketched out on a few pages, was provocative. I knew as I

pitched it to Wagoner that it might raise eyebrows, if not outright objection,
from others who believed their plans would be safer.

In short, I proposed that GM split into two very separate parts before filing:
“NewCo,” a new company with a clean balance sheet, taking on GM’s best
brands and operations; and “OldCo,” the leftover GM with most of the
liabilities. All of the operational restructuring to make the new company
profitable would also occur before a bankruptcy filing so GM could go through
bankruptcy in a matter of days–not months or years with creditors and other
litigants fighting over the corporate carcass while the revenue line crashes.

Seeking funding from the government, or any source, we would use

Bankruptcy Code Section 363, which allows a company to sell assets under a
court-approved sale. Typically, 363 is used to sell specific assets, from a chair

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and desk to a factory or division, but not the entire stand-alone company.
Under this strategy GM could postpone filing a plan of reorganization and a
disclosure statement, which consume months and fuel a blizzard of litigation
while market share and enterprise value bleed away.

Wagoner listened, challenging every assumption. After discussing it with

board members, Rick asked me to come to GM and work on the plan, one of
several alternatives GM would consider. I volunteered to help GM on a pro
bono basis. But what I could never anticipate was how deep and strong the
opposition to my plan would ultimately be.

***

On Tuesday, Dec. 2, I pulled into GM’s Detroit headquarters at 7 a.m. after

most of the company’s executives had already arrived for work. I was given a
small cubicle and conference room on the 38th floor, a spacious but empty
place that held GM’s corporate boardroom and a warren of cubicles reserved
for visiting executives and board members.

Each day I would be the sole person who got off the elevator on 38, one floor
down from where Wagoner and his team worked. It was eerie and quiet, the
main wall lined with large oil paintings of GM’s past chairmen. I’d walk past
those gilded frames daily, feeling the full weight of their gaze, reminded of the
history and past glory of what had been the most powerful corporation on
earth.

Spending 18 hours a day digging through the numbers in GM’s filings, I began
working in greater detail on the outlines of the plan and making some
assumptions on what assets should be transferred to NewCo and what would
stay in OldCo, which I dubbed Motors Liquidation. There were thousands of
crucial questions that had to be asked and answered with management:
Which brands and factories would survive? Which ones would the company
have to give up? What would be the endgame strategy? What would be the
enterprise value of NewCo? The liquidation value of OldCo?

Wagoner and COO Fritz Henderson were developing three alternative plans.
First, they hoped to avoid bankruptcy altogether, believing the government
would provide enough funding to bring GM through the crisis. At least two
cabinet members in the Bush Administration and others had provided
assurances to Rick and board members that government help would be
forthcoming.

Second was a “prepackaged” bankruptcy plan being developed by general

counsel Robert Osborne with Harvey R. Miller, the dean of the bankruptcy
bar and senior partner at Weil, Gotshal & Manges. Under this plan, GM would
prepare a reorganization in cooperation with its bond creditors that would
take effect once the company went into a Chapter 11 bankruptcy. The goal of a
so-called prepack is to shorten and simplify the bankruptcy process.

Miller commanded great respect in bankruptcy circles and in the GM

boardroom, and for good reason. At the age of 75 Miller was the only attorney
in the country who had successfully dealt with as many high-profile
bankruptcies. Miller was already in the middle of the largest corporate
liquidation ever, at Lehman Brothers.

And third was the NewCo plan, based on years of ?experience at AlixPartners,
where we had a major role in 50 of the 180 largest bankruptcies over $1
billion in the past 15 years. GM had also retained Martin Bienenstock, the
restructuring and corporate governance leader from Dewey & LeBoeuf, to
help develop the NewCo plan as well.

Inside and outside GM, the pressures mounted. Each day the company lost
more money and got closer to running out of cash. In Washington several
prominent politicians began calling for Wagoner’s resignation. On Dec. 7
Senator Chris Dodd, the Connecticut Democrat, told Face the Nation’ s Bob
Schieffer that Wagoner had to move on.

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The next day I went to see Wagoner to offer encouragement and advice. It is
not unusual for a CEO to lose his job when his company is forced into
bankruptcy and a major restructuring. I’d seen this play out many times
before and learned the boss should never volunteer his resignation without
first putting in place the things that would help the organization survive. I
wanted to help fortify Rick’s resolve and keep us all focused on the endgame.

From my perspective Wagoner had been unfairly treated by many politicians

and the media. Since taking over as CEO in 2000, working closely with Fritz
and vice chairman Bob Lutz, Rick orchestrated large, dramatic changes at the
company. They closed GM’s quality, productivity and fuel-economy gaps with
the world’s best automakers, winning numerous car and truck awards. They
built a highly profitable business in China, the world’s biggest potential car
market. They reduced the company’s workforce by 143,000 employees, to
243,000. They reached a historic agreement with the UAW that cut in half
hourly pay for new employees and significantly scaled back the traditional
retiree benefit packages that had been crippling the company, while also
funding over $100 billion in unfunded retiree obligations. And he was able to
accomplish all these changes without causing massive disruptions among
GM’s dealers or major strikes with the unions.

Ultimately, those structural changes positioned the company not only to

survive but also to bring about the extraordinary turnaround. But now, with
the economy and the company in free fall, all of that hard work seemed to be
forgotten.

It was late in the day on Dec. 8, around 5:30 p.m., when I walked into
Wagoner’s office.

“Rick, do not resign or even offer to resign,” I told him. “Later you may have
to fall on your sword to get the funding deal done with the government, but
don’t do it until we get the three things we need. If you’re going to be killed on
the battlefield, we need to make it worth it.”

“And what is that exactly?” he pressed me.

“We have to get government funding of $40 billion to $50 billion. Plus, we
need an agreement with the government and GM’s board to do the NewCo
plan. And we must put a qualified successor in place. It must be Fritz and not
some government guy. It’s going to be painful for you, but you’ve got to stay
on the horse until we get all three.”

Wagoner was already there. He had no intention of resigning and was

determined to complete his mission. I gave him a bear hug, letting him know
he had my full support.

***

When we gathered for a telephonic board meeting on Dec. 15, the mood
was urgent, the tension high. Only two weeks after arriving at GM I was about
to present the plan to the board of directors in a conference room outside
Wagoner’s office. Also on the phone were the company’s lawyers and
investment bankers.

A Spiderphone was in the middle of the table for what would be a historic
meeting of the board. Only three days earlier the Senate had abandoned
negotiations to provide funding for the auto industry. Suddenly a free-fall
bankruptcy within days loomed large. Consideration of the NewCo plan, now
refined with the help of chief financial officer Ray Young and other senior
finance staffers, took on greater urgency as we were just two weeks away from
running out of cash.

“I know the company has many lawyers and bankers working on other
approaches,” I said. “I know many of the people doing the work, and I’ve
worked with many of them over the years. But I have an alternative strategy

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for the board’s consideration. I suspect there might be some controversy over
it, but I believe this could be lifesaving for General Motors.”

After carefully laying out the details and time sequence of the NewCo plan, I
drew to a close.

“Well,” one director asked over the phone system, “I want to hear what
Harvey Miller has to say about this. Is there a precedent for this, Mr. Miller?”

Miller’s deep baritone voice filled the room, pointing out that the idea was
unorthodox and lacked precedence.

Other attorneys chimed in, claiming the plan oversimplified the situation and
there would be major problems with it. Yet another added that this would not
be viewed well by the court and doubted any judge would allow it.
Collectively, they characterized it as a long shot, discouraging the directors
from thinking the plan could ever succeed.

Hearing all the disapproving words amplified from speakers in the ceiling, I
felt ambushed by general counsel Osborne, who was strongly advocating for a
prepackaged bankruptcy strategy, which he believed was the only way to go.
Unbeknownst to me he had previously proposed the idea to GM’s board,
naively believing GM could complete a prepack bankruptcy in 30 days.

GM’s most senior leaders had been working with me on the NewCo plan
around the clock. I felt strongly this alternative approach could succeed, and I
knew that any other type of Chapter 11 strategy would kill vehicle sales and
lead to the demise of GM. Now it seemed as if the NewCo plan could be dead
on arrival.

“If the attorneys feel this is a waste of time and corporate resources, I don’t
know why we would pursue this,” stated another director.

A chilling silence descended upon the room, broken by Kent Kresa, the former
CEO of Northrop Grumman and a GM board member since 2003.

“I understand this has some risk attached to it, but we’re in a very risky state
right now,” he said. “And I understand it may even be unusual and
unprecedented. But it’s certainly creative, and quite frankly, it’s the most
innovative idea we’ve heard so far that has real potential in it. I think it
deserves further consideration and development.”

Rick then addressed another lawyer on the call, Martin Bienenstock.

“Well, I’ve actually studied the problem, too, and there’s a way for this to
work,” said Bienenstock. “Almost all bankruptcies are unique and the Code
does allow for the transfer of assets. I can’t imagine a judge taking on this
problem and not wanting to solve it. We’ve done a preliminary analysis, and
it’s not as crazy as it sounds. It’s unique and compelling.”

“Okay, we’ve heard both sides of it,” Rick said after others spoke, smartly
bringing the debate to a reasonable close. “I suggest we continue working to
develop both the prepack plan and the NewCo option, while seeking the
funding to avoid Chapter 11 if at all possible.”

The meeting adjourned without a vote. I left the room disappointed to hear
Osborne’s legal chorus so dead set against NewCo and surprised their
remarks had stopped all real discussion of the plan. But I also was relieved the
plan was not completely dead, at least not yet.

***

Over the next weeks I worked closely with Bienenstock, assistant general
counsel Mike Millikin, Al Koch of AlixPartners and GM senior vice president
John Smith on the NewCo plan. We huddled dozens of times with Wagoner
and Henderson to work out which brands GM would ultimately have to give
up (Hummer, Saturn, Saab and Pontiac) and which ones it would keep

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(Chevrolet, Cadillac, GMC and Buick). Informed debate and deep analysis of
structural costs led to decisions about projects, factories, brands and
countries.

On Sunday afternoon, Mar. 29, Wagoner called me. It was a call I had hoped
would never come–but here it was.

“Jay,” he said, “I wanted to give you a heads-up. The Administration wants

me to step aside. The President is going to hold a press conference tomorrow
morning.”

Wagoner told me Henderson would be named CEO.

“What about the bankruptcy?” I asked.

“They’re enamored with the 363 NewCo plan. They seem bound and
determined to make us file Chapter 11 and do NewCo. … This is really tough,”
he said.

“I’m so sorry,” I said, pausing, “but … you got the money. They’re doing the
NewCo plan, and Fritz is your successor. … You’ve succeeded. You got the
three things.”

Rick responded with resigned acknowledgment, then said, “Please help Fritz
in any way you can,” before hanging up.

Rick’s personal sacrifice was not in vain. Months of hard work had paid off.
The assets and liabilities had been selected. The NewCo legal entities and $45
billion tax-loss strategy had been developed. The strategy I pitched to
Wagoner in his living room four and a half months earlier was the plan
chosen by Team Auto in a meeting on Apr. 3, 2009 in Washington. Treasury
agreed to fully fund NewCo with equity, and thus it became the chosen path to
save the company.

By late April NewCo implementation was well under way. The bankruptcy
filing would occur in New York within weeks. My partner, Al Koch of
AlixPartners, would become the chief restructuring officer running OldCo,
now officially named Motors Liquidation, Inc. In my notes, I jotted: “My work
is finished … impact from this day forward will be negligible. … Treasury’s in
control. Time to get back to my girls.”

On June 1, 2009 General Motors filed for bankruptcy in New York, with $82
billion in assets and $173 billion in liabilities. It was the largest industrial
bankruptcy in history. Harvey Miller and his team masterfully defended and
guided the NewCo plan through the bankruptcy court, successfully making it
their own. New GM exited bankruptcy protection on July 10, 2009–in a mere
40 days, as designed. Fritz called and thanked me.

There would be many other twists and turns to GM’s narrative, but the
company got its fresh start using the NewCo plan, and the industry was saved
with government funding from both Presidents Bush and Obama. In March
2009 President Obama cited a “failure of leadership” as his reason for forcing
out Wagoner. In fact, it was Wagoner’s exercise of leadership through years of
wrenching change and then simultaneously seeking government funding
while developing three restructuring plans that put GM in position to survive
the worst economic collapse since the Great Depression and complete its
turnaround, which, ironically, became a key campaign issue in the reelection
of Barack Obama in 2012.

This article is available online at:

http://www.forbes.com/sites/danbigman/2013/10/30/how-general-motors-was-really-saved-
the-untold-true-story-of-the-most-important-bankruptcy-in-u-s-history/

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