WEBVTT 00:00:00.000 --> 00:00:02.100 Welcome back to the Deep Dive. Today, we are 00:00:02.100 --> 00:00:04.580 not just talking about a business story. We are, 00:00:04.679 --> 00:00:08.259 I think, talking about a moment where the tectonic 00:00:08.259 --> 00:00:10.640 plates of the American economy actually shifted. 00:00:10.720 --> 00:00:12.460 Oh, absolutely. It's one of those where were 00:00:12.460 --> 00:00:14.820 you when moments. But, you know, for the entire 00:00:14.820 --> 00:00:17.039 industrial world. It really was. It was the end 00:00:17.039 --> 00:00:21.199 of an era and the really messy, complicated beginning 00:00:21.199 --> 00:00:23.219 of a new one. That's the perfect way to put it. 00:00:23.320 --> 00:00:25.640 Messy is the word. So we are dialing the clock 00:00:25.640 --> 00:00:29.260 back to June 1st, 2009. It's a Monday morning, 00:00:29.379 --> 00:00:34.039 8 .800 a .m. Eastern Daylight Time. And the location 00:00:34.039 --> 00:00:36.979 is Manhattan, which is, you know, a bit of a 00:00:36.979 --> 00:00:39.700 clue right there. Right. Not Detroit. Not Detroit. 00:00:39.780 --> 00:00:42.259 We're in the Southern District of New York. And 00:00:42.259 --> 00:00:44.399 the headline flashing across every Bloomberg 00:00:44.399 --> 00:00:47.719 terminal and every CNN ticker was just, it was 00:00:47.719 --> 00:00:50.000 almost impossible to process. It was. General 00:00:50.000 --> 00:00:52.780 Motors files for Chapter 11 bankruptcy. The Titan 00:00:52.780 --> 00:00:55.399 falls. That was the sentiment everywhere, wasn't 00:00:55.399 --> 00:00:57.380 it? It really was. You have to remember for decades, 00:00:57.619 --> 00:01:00.359 I mean decades, the saying was, as GM goes, so 00:01:00.359 --> 00:01:03.840 goes the nation. And here was the nation's industrial 00:01:03.840 --> 00:01:06.620 engine, its biggest manufacturer, basically admitting 00:01:06.620 --> 00:01:08.780 it couldn't pay for gas. It was out of road. 00:01:08.939 --> 00:01:11.739 It was a cultural shock as much as it was a financial 00:01:11.739 --> 00:01:14.340 one. I want to pause on the scale of this because 00:01:14.340 --> 00:01:18.459 bankruptcy is a word we hear a lot. You know, 00:01:18.480 --> 00:01:21.430 we hear it with retail chains or like. some tech 00:01:21.430 --> 00:01:23.430 startup that burns through its cash. Sure, it's 00:01:23.430 --> 00:01:25.409 almost common now. But this was different. This 00:01:25.409 --> 00:01:27.650 was the fourth largest bankruptcy in U .S. history. 00:01:27.810 --> 00:01:30.829 Right behind Lehman Brothers, Washington Mutual, 00:01:30.829 --> 00:01:32.989 and WorldCom. That's the company it was keeping. 00:01:33.189 --> 00:01:34.670 But here's the distinction, and I think it's 00:01:34.670 --> 00:01:37.150 an important one. Lehman was a bank, you know, 00:01:37.150 --> 00:01:39.810 abstract financial instruments. WorldCom was 00:01:39.810 --> 00:01:43.430 telecom infrastructure and, let's be honest, 00:01:43.569 --> 00:01:46.299 massive accounting fraud. Right. Ones and zeros 00:01:46.299 --> 00:01:49.000 on a server somewhere. Exactly. GM was tangible. 00:01:49.180 --> 00:01:53.060 It was steel, rubber, glass. It was hundreds 00:01:53.060 --> 00:01:55.640 of thousands of human beings physically making 00:01:55.640 --> 00:01:57.799 things you could touch and drive. It was the 00:01:57.799 --> 00:01:59.819 real economy. That's what made it so terrifying. 00:02:00.120 --> 00:02:03.090 The numbers are frankly nauseating. I mean, you 00:02:03.090 --> 00:02:04.849 look at the filing, we're looking at assets of 00:02:04.849 --> 00:02:08.409 $82 .29 billion. And that sounds like a solvent 00:02:08.409 --> 00:02:10.310 company, right? That's a massive amount of stuff, 00:02:10.370 --> 00:02:13.870 factories, brands, inventory. $82 billion, of 00:02:13.870 --> 00:02:15.689 course. But that's only until you look at the 00:02:15.689 --> 00:02:17.610 other side of the ledger. The liability column. 00:02:17.849 --> 00:02:19.789 And that's where the story turns into a horror 00:02:19.789 --> 00:02:23.689 movie. They were carrying a debt load of $172 00:02:23.689 --> 00:02:29.550 .81 billion. Wait, say that again. $172 .81 billion. 00:02:29.849 --> 00:02:32.349 So they were underwater by nearly a hundred... 00:02:32.539 --> 00:02:36.000 billion. A hundred billion. It's a hole so deep 00:02:36.000 --> 00:02:38.340 light can't even escape it. The math just doesn't 00:02:38.340 --> 00:02:41.139 work. No. And the stakes weren't just about, 00:02:41.139 --> 00:02:43.560 you know, shareholders losing money on the stock 00:02:43.560 --> 00:02:46.319 market. If a software company goes under, OK, 00:02:46.400 --> 00:02:48.360 the servers get turned off. A few people lose 00:02:48.360 --> 00:02:51.349 their jobs. It's sad, but it's contained. This 00:02:51.349 --> 00:02:53.629 was not contained. If GM went under, I mean, 00:02:53.650 --> 00:02:56.550 really went under, as in full liquidation, you 00:02:56.550 --> 00:02:59.830 are talking about 91 ,000 U .S. employees directly 00:02:59.830 --> 00:03:01.750 on the payroll. And that's just the tip of the 00:03:01.750 --> 00:03:03.509 spear. That's not even the real number to be 00:03:03.509 --> 00:03:06.729 scared of. No, because then you have the thousands 00:03:06.729 --> 00:03:09.490 of dealerships. Yeah. And these are often the 00:03:09.490 --> 00:03:12.789 biggest tax revenue generators for small towns 00:03:12.789 --> 00:03:15.210 all across America. They sponsor the little league 00:03:15.210 --> 00:03:17.069 teams. They're part of the fabric of the community. 00:03:17.430 --> 00:03:19.569 Then you have the parts suppliers. The guy's 00:03:19.569 --> 00:03:22.729 making the seats, the glass, the tires, the wiring 00:03:22.729 --> 00:03:27.090 harnesses. If GM stops buying, they stop producing. 00:03:27.330 --> 00:03:30.449 The ripple effect was calculated to be just catastrophic. 00:03:30.550 --> 00:03:32.889 It would have plunged the entire Midwest into 00:03:32.889 --> 00:03:36.050 a depression, not just a recession. So our mission 00:03:36.050 --> 00:03:38.770 for this deep dive is to do a full autopsy on 00:03:38.770 --> 00:03:41.000 this event. We need to figure out two things. 00:03:41.479 --> 00:03:44.400 First, how does a company that literally defined 00:03:44.400 --> 00:03:47.580 American success in the 20th century manage to 00:03:47.580 --> 00:03:50.699 get itself $100 billion in the hole? Right, because 00:03:50.699 --> 00:03:52.520 that doesn't happen by accident. No, it takes 00:03:52.520 --> 00:03:54.520 years of effort to lose that much money. That's 00:03:54.520 --> 00:03:56.759 a good way to put it. And second, and this is 00:03:56.759 --> 00:03:58.780 the part that I think is most misunderstood even 00:03:58.780 --> 00:04:01.740 today, we need to understand the how of the rescue. 00:04:02.620 --> 00:04:04.439 Because they didn't just file for bankruptcy 00:04:04.439 --> 00:04:07.099 and reorganize like a normal company. No, they 00:04:07.099 --> 00:04:08.939 didn't have time for normal. They pulled off 00:04:08.939 --> 00:04:12.180 this incredible legal maneuver, a surgical Section 00:04:12.180 --> 00:04:15.439 363 sale, that is still studied in law schools 00:04:15.439 --> 00:04:17.579 and business schools today. It was a piece of 00:04:17.579 --> 00:04:21.259 legal wizardry, controversial, aggressive, and 00:04:21.259 --> 00:04:24.920 most importantly, incredibly fast. So let's start 00:04:24.920 --> 00:04:27.000 at the beginning. Or I guess the beginning of 00:04:27.000 --> 00:04:29.420 the end. Let's talk about the road to ruin. Because 00:04:29.420 --> 00:04:31.420 I think the popular narrative is simple. The 00:04:31.420 --> 00:04:33.959 2008 banking crisis happened. Nobody could get 00:04:33.959 --> 00:04:36.680 loans to buy cars. So GM went bust. And that's... 00:04:36.910 --> 00:04:38.689 That's too simple. It's letting them off the 00:04:38.689 --> 00:04:41.069 hook, isn't it? Completely. The 2008 crash was 00:04:41.069 --> 00:04:43.310 the bullet that finally killed the beast. But 00:04:43.310 --> 00:04:45.250 the beast was already dying of a dozen chronic 00:04:45.250 --> 00:04:47.550 diseases. It was already on its knees. You just 00:04:47.550 --> 00:04:50.350 have to look at the financials from 2005, a full 00:04:50.350 --> 00:04:52.410 three years before the Lehman Brothers collapsed. 00:04:52.769 --> 00:04:55.649 OK, so 2005, the economy is good. The housing 00:04:55.649 --> 00:04:57.670 market is booming. People are buying stuff. A 00:04:57.670 --> 00:04:59.930 booming economy. Everyone else was making money 00:04:59.930 --> 00:05:03.930 hand over fist. And GM in 2005 posts a loss of 00:05:03.930 --> 00:05:08.339 $10 .6 billion. billion in a good year. In a 00:05:08.339 --> 00:05:10.339 great year for the economy, it was a massive 00:05:10.339 --> 00:05:13.019 red flag that nobody or not enough people had 00:05:13.019 --> 00:05:15.240 attention to. Then you fast forward to 2007, 00:05:15.759 --> 00:05:18.240 still pre -crash. What happens then? It gets 00:05:18.240 --> 00:05:21.220 worse, a lot worse. In 2007, they post a loss 00:05:21.220 --> 00:05:26.959 of $38 .7 billion. $38 billion in one year. How 00:05:26.959 --> 00:05:28.699 is that even possible? Were they just setting 00:05:28.699 --> 00:05:30.959 piles of money on fire in the parking lot? In 00:05:30.959 --> 00:05:34.160 a way, yes. It comes down to what we call legacy 00:05:34.160 --> 00:05:36.540 costs. This is the key to understanding the whole 00:05:36.540 --> 00:05:39.819 mess. GM wasn't just a car company. It was something. 00:05:39.980 --> 00:05:42.600 It was a massive insurance company and a pension 00:05:42.600 --> 00:05:45.019 fund that just happened to make cars on the side 00:05:45.019 --> 00:05:47.839 to pay for it all. Explain that. They had hundreds 00:05:47.839 --> 00:05:50.860 of thousands of retirees. And through contracts 00:05:50.860 --> 00:05:54.220 negotiated with the UAW in the 50s, 60s and 70s, 00:05:54.220 --> 00:05:56.639 they were on the hook for full health care costs 00:05:56.639 --> 00:06:00.120 for life and defined benefit pensions. And then 00:06:00.120 --> 00:06:02.990 there was the famous jobs bank. Oh, we have to 00:06:02.990 --> 00:06:04.389 talk about the jobs bank. This sounds like an 00:06:04.389 --> 00:06:06.490 urban legend, but it was real. It was very, very 00:06:06.490 --> 00:06:09.250 real. Through union negotiations in, you know, 00:06:09.269 --> 00:06:12.430 arguably better times for the company, GM had 00:06:12.430 --> 00:06:14.550 agreed that if they didn't have work for an employee, 00:06:14.670 --> 00:06:17.730 say, a plant slowed down production for a few 00:06:17.730 --> 00:06:20.350 months, they wouldn't lay them off. OK, so what 00:06:20.350 --> 00:06:22.329 did they do with them? Instead, the employee 00:06:22.329 --> 00:06:24.790 would report to a jobs bank. They would literally 00:06:24.790 --> 00:06:27.790 go to a room on site, play cards, read the paper, 00:06:27.990 --> 00:06:30.709 maybe do some community service, and they would 00:06:30.709 --> 00:06:33.500 receive. nearly their full salary and benefits. 00:06:33.759 --> 00:06:36.680 So they're paying thousands of people full UAW 00:06:36.680 --> 00:06:42.180 wages to not build cars. For years. Because legally... 00:06:42.430 --> 00:06:44.470 Under the contract, they couldn't fire them. 00:06:44.649 --> 00:06:47.550 So when you ask how a company loses $38 billion 00:06:47.550 --> 00:06:51.069 in a year, it's because your fixed costs, the 00:06:51.069 --> 00:06:53.209 money you spend just to open the doors in the 00:06:53.209 --> 00:06:55.589 morning, are astronomical. And their competitors 00:06:55.589 --> 00:06:58.370 didn't have this. Not even close. Toyota or Honda, 00:06:58.509 --> 00:07:01.009 building cars in new plants in the South with 00:07:01.009 --> 00:07:03.509 non -union labor, they didn't have any of these 00:07:03.509 --> 00:07:06.129 legacy structures. Their cost per vehicle was 00:07:06.129 --> 00:07:08.490 thousands of dollars lower before they even turned 00:07:08.490 --> 00:07:10.470 on the assembly line. And management knew this, 00:07:10.490 --> 00:07:11.860 right? It's not like they were asleep at the 00:07:11.860 --> 00:07:13.819 wheel, forgive the pun. They knew they were in 00:07:13.819 --> 00:07:16.279 trouble. They did. They weren't idiots. In 2006, 00:07:16.519 --> 00:07:18.459 they approached the government, the Bush administration, 00:07:18.699 --> 00:07:20.939 trying to get financing specifically for those 00:07:20.939 --> 00:07:23.240 pension liabilities. They wanted a bailout before 00:07:23.240 --> 00:07:25.060 the bailout. And the government said no. The 00:07:25.060 --> 00:07:28.779 government said no. Then they tried to form a 00:07:28.779 --> 00:07:31.639 massive commercial alliance with Nissan and Renault, 00:07:31.680 --> 00:07:34.279 headed by Carlos Ghosn at the time. What was 00:07:34.279 --> 00:07:37.269 the idea there? To share platforms, share purchasing 00:07:37.269 --> 00:07:40.189 power and economies of scale. Basically, let's 00:07:40.189 --> 00:07:42.490 all get together and be too big to fail as a 00:07:42.490 --> 00:07:45.029 group. And that fell apart. It dissolved completely. 00:07:45.230 --> 00:07:47.629 There were cultural clashes, disagreements on 00:07:47.629 --> 00:07:49.750 what each company was actually worth. It just 00:07:49.750 --> 00:07:53.009 didn't happen. So GM is left alone, bloated with 00:07:53.009 --> 00:07:56.170 these legacy costs, bleeding cash, even in a 00:07:56.170 --> 00:08:00.509 good economy. And then 2008 hits. The Great Recession. 00:08:00.569 --> 00:08:02.550 The perfect storm. So you have a company that 00:08:02.550 --> 00:08:06.220 is already incredibly fragile. Then the housing 00:08:06.220 --> 00:08:08.240 market collapses. Lehman Brothers collapses. 00:08:08.660 --> 00:08:11.259 And the credit markets. They freeze solid. And 00:08:11.259 --> 00:08:13.060 this is the crucial part to understand for any 00:08:13.060 --> 00:08:15.660 car company. In the U .S., people don't buy cars 00:08:15.660 --> 00:08:17.500 with cash. No, of course not. They buy cars with 00:08:17.500 --> 00:08:20.860 loans. Right. And your local Chevy dealer doesn't 00:08:20.860 --> 00:08:23.939 own all the cars on his lot. He finances that 00:08:23.939 --> 00:08:26.120 inventory through a line of credit. So if the 00:08:26.120 --> 00:08:28.379 banks stop lending to consumers and they stop 00:08:28.379 --> 00:08:30.699 lending to dealers. The entire system just seizes 00:08:30.699 --> 00:08:33.820 up. The customers stop buying. Sales didn't just 00:08:33.820 --> 00:08:38.009 dip. they fell off a cliff. In 2008, sales for 00:08:38.009 --> 00:08:42.409 GM dropped by 45%. 45%. Imagine your personal 00:08:42.409 --> 00:08:44.970 paycheck getting cut in half basically overnight. 00:08:45.210 --> 00:08:47.070 But your mortgage and your credit card bills 00:08:47.070 --> 00:08:49.710 stay exactly the same. That's the liquidity trap 00:08:49.710 --> 00:08:51.730 they fell into. So what did that do to their 00:08:51.730 --> 00:08:55.570 bottom line in 08? In 2008 alone, GM lost another 00:08:55.570 --> 00:08:59.909 $30 .9 billion. But the loss isn't the scariest 00:08:59.909 --> 00:09:03.279 number. What is? The cash burn. Because you can 00:09:03.279 --> 00:09:05.019 have an accounting loss but still have cash. 00:09:05.379 --> 00:09:08.659 The scary number is that they spent $19 .2 billion 00:09:08.659 --> 00:09:11.840 of their actual cash reserves just to keep the 00:09:11.840 --> 00:09:14.059 lights on and pay those fixed costs. They were 00:09:14.059 --> 00:09:16.320 burning through almost $2 billion a month. In 00:09:16.320 --> 00:09:19.919 cash. Which brings us to November 7, 2008. The 00:09:19.919 --> 00:09:22.769 warning shot. GM puts out a statement that is 00:09:22.769 --> 00:09:24.870 terrifyingly blunt for a public company. They 00:09:24.870 --> 00:09:27.070 basically said, we will run out of cash by mid 00:09:27.070 --> 00:09:29.610 -2009. No, we will be unprofitable. No, we will 00:09:29.610 --> 00:09:31.509 have zero dollars in the bank, the corporate 00:09:31.509 --> 00:09:33.730 equivalent of sending out a flare. This brings 00:09:33.730 --> 00:09:36.190 us to the political theater of it all. Section 00:09:36.190 --> 00:09:40.129 2. The ultimatum and the political pivot. Because 00:09:40.129 --> 00:09:41.830 this wasn't just a business problem anymore, 00:09:41.950 --> 00:09:43.950 was it? Not a chance. It became a Washington 00:09:43.950 --> 00:09:47.110 problem overnight. A massive, toxic political 00:09:47.110 --> 00:09:50.509 football. And you had this awkward timing with 00:09:50.509 --> 00:09:52.289 the lame duck session of the Bush administration 00:09:52.289 --> 00:09:54.409 getting ready to hand over to the newly elected 00:09:54.409 --> 00:09:57.090 Obama administration. Exactly. And in the middle 00:09:57.090 --> 00:09:59.649 of this, you had the CEOs of the big three GM, 00:09:59.929 --> 00:10:03.789 Ford and Chrysler, flying to D .C. to beg Congress 00:10:03.789 --> 00:10:05.970 for money. And we have to talk about the Jets. 00:10:06.049 --> 00:10:08.950 Oh, the Jets. This is a masterclass in how not 00:10:08.950 --> 00:10:11.190 to read a room. It's almost unbelievable in hindsight. 00:10:11.450 --> 00:10:14.330 So set the scene for us. What happened? The country 00:10:14.330 --> 00:10:16.669 is in a full -blown panic. People are losing 00:10:16.669 --> 00:10:19.090 their homes, their jobs. The stock market is 00:10:19.090 --> 00:10:21.730 in free fall. Unemployment is skyrocketing. Complete 00:10:21.730 --> 00:10:24.649 economic terror. Total terror. And into this 00:10:24.649 --> 00:10:27.230 environment, these three CEOs, Rick Wagner of 00:10:27.230 --> 00:10:30.009 GM, Alan Mulally of Ford, and Robert Nardelli 00:10:30.009 --> 00:10:32.929 of Chrysler, each take their own separate private 00:10:32.929 --> 00:10:35.870 luxury corporate jet to fly to Washington, D 00:10:35.870 --> 00:10:38.450 .C. To ask for billions of dollars in taxpayer 00:10:38.450 --> 00:10:41.509 aid. It's almost cartoonishly villainous. You 00:10:41.509 --> 00:10:43.570 couldn't write it in a movie because people wouldn't 00:10:43.570 --> 00:10:47.009 believe it. And Congress just unloaded on them. 00:10:47.090 --> 00:10:48.929 They tore them apart. I remember watching it 00:10:48.929 --> 00:10:51.269 live. Representative Gary Ackerman from New York 00:10:51.269 --> 00:10:53.529 looked at them and said something like, there 00:10:53.529 --> 00:10:56.269 is a delicious irony in seeing you three arrive 00:10:56.269 --> 00:10:58.490 in private jets to tell us you're running out 00:10:58.490 --> 00:11:01.009 of money. It just destroyed their credibility. 00:11:01.210 --> 00:11:03.830 Any public sympathy they might have had, gone. 00:11:04.190 --> 00:11:07.590 Completely. They were humiliated. The optics 00:11:07.590 --> 00:11:10.049 were so bad that for the next hearing, they all 00:11:10.049 --> 00:11:13.570 had to make a big show of driving cars from Detroit 00:11:13.570 --> 00:11:16.389 to D .C. just to save face. A little late for 00:11:16.389 --> 00:11:18.889 that, I think. A little bit. But despite the 00:11:18.889 --> 00:11:21.610 PR disaster, the Bush administration, in its 00:11:21.610 --> 00:11:24.330 final days, realized they couldn't just let GM 00:11:24.330 --> 00:11:26.409 die on their watch right before Christmas. It 00:11:26.409 --> 00:11:28.289 would have been a political nightmare. So they 00:11:28.289 --> 00:11:31.529 stepped in. They did. In December 2008, the Bush 00:11:31.529 --> 00:11:34.509 White House used TARP funds, the Troubled Asset 00:11:34.509 --> 00:11:36.950 Relief Program, to provide a bridge loan. A bridge 00:11:36.950 --> 00:11:39.590 to where? Ideally, a bridge to the Obama administration. 00:11:40.029 --> 00:11:42.710 It was just enough cash to keep them alive for 00:11:42.710 --> 00:11:45.309 a few more months. But it came with some serious 00:11:45.309 --> 00:11:47.409 strings attached. Which were? They had to come 00:11:47.409 --> 00:11:50.370 back by March with a completely revised business 00:11:50.370 --> 00:11:53.269 plan that showed, credibly, how they could actually 00:11:53.269 --> 00:11:55.870 be profitable in the long term. So fast forward. 00:11:55.990 --> 00:11:59.549 It's now March 2009. President Obama is in office. 00:11:59.789 --> 00:12:01.990 He's dealing with the banking crisis, the housing 00:12:01.990 --> 00:12:06.149 crisis. And now this smoldering auto crisis has 00:12:06.149 --> 00:12:09.059 dropped on his desk. And he forms the Auto Task 00:12:09.059 --> 00:12:12.019 Force, led by guys like Steven Ratner and Ron 00:12:12.019 --> 00:12:14.899 Bloom. Their job was to figure out if these companies 00:12:14.899 --> 00:12:17.759 were even salvageable. And March 30th, the deadline 00:12:17.759 --> 00:12:21.519 hits. GM submits their plan. They do. And their 00:12:21.519 --> 00:12:24.179 plan basically was give us more money and we 00:12:24.179 --> 00:12:26.820 promise we'll slowly cut costs over time. It 00:12:26.820 --> 00:12:28.759 was more of the same, really. And what was Obama's 00:12:28.759 --> 00:12:31.960 response? A hard no. A very public no. He went 00:12:31.960 --> 00:12:33.940 on national television and rejected the plan 00:12:33.940 --> 00:12:36.480 outright. He said it didn't go deep enough. It 00:12:36.480 --> 00:12:39.379 avoided, and this was his phrase, the tough decisions. 00:12:39.559 --> 00:12:42.000 And to prove he wasn't bluffing, he took a scalp. 00:12:42.419 --> 00:12:45.840 A big one. A huge one. Rick Wagoner, the chairman 00:12:45.840 --> 00:12:49.350 and CEO of General Motors. A man who had been 00:12:49.350 --> 00:12:52.169 at the company his entire career worked his way 00:12:52.169 --> 00:12:54.889 up from the bottom. What happened to him? The 00:12:54.889 --> 00:12:57.769 Obama administration effectively demanded his 00:12:57.769 --> 00:13:00.470 resignation as a condition for any further government 00:13:00.470 --> 00:13:03.950 help. Yeah, that is profound. The president of 00:13:03.950 --> 00:13:06.710 the United States firing the CEO of a private 00:13:06.710 --> 00:13:08.730 corporation. It was completely unprecedented. 00:13:08.990 --> 00:13:11.830 It sent a massive shockwave through the business 00:13:11.830 --> 00:13:15.250 world. The message was crystal clear. If you 00:13:15.250 --> 00:13:17.850 take the government's coin. You play by the government's 00:13:17.850 --> 00:13:20.269 rules. And Fritz Henderson was installed as the 00:13:20.269 --> 00:13:22.710 new CEO. Right. And his mandate was basically, 00:13:22.850 --> 00:13:25.690 you have 60 days to come up with a plan for bankruptcy 00:13:25.690 --> 00:13:27.850 or we're cutting you off. So the administration 00:13:27.850 --> 00:13:30.789 was pushing them towards Chapter 11. Yes. The 00:13:30.789 --> 00:13:32.850 president argued that Chapter 11 was actually 00:13:32.850 --> 00:13:35.230 the most promising way to fix the company because 00:13:35.230 --> 00:13:38.210 it gave them the legal power to force concessions 00:13:38.210 --> 00:13:40.669 from bondholders and unions that they could never 00:13:40.669 --> 00:13:42.769 get in a normal negotiation. But there was a 00:13:42.769 --> 00:13:46.090 massive, massive problem with the idea of bankruptcy. 00:13:46.389 --> 00:13:48.210 And this is something that terrified the auto 00:13:48.210 --> 00:13:50.950 task force. It's the warranty guarantee problem. 00:13:51.169 --> 00:13:54.590 Explain that logic. Why does a car warranty matter 00:13:54.590 --> 00:13:57.470 so much in a bankruptcy? Think about it from 00:13:57.470 --> 00:14:00.129 a consumer's perspective. You go to a dealership 00:14:00.129 --> 00:14:02.950 to buy a new Chevy Malibu. It costs, say, $25 00:14:02.950 --> 00:14:06.129 ,000. You are making that investment, assuming 00:14:06.129 --> 00:14:09.049 the car will run for 10 years, and if the engine 00:14:09.049 --> 00:14:11.350 blows up next week, the company will be there 00:14:11.350 --> 00:14:12.950 to fix it. That's a whole point of a warranty, 00:14:13.049 --> 00:14:15.090 sure. Now, imagine that company is in bankruptcy 00:14:15.090 --> 00:14:17.690 court. The news is full of stories saying they 00:14:17.690 --> 00:14:19.450 might be liquidated, they might disappear forever. 00:14:20.230 --> 00:14:23.049 Are you still going to spend $20 ,000 on that 00:14:23.049 --> 00:14:25.899 Malibu? No way. You're terrified that your warranty 00:14:25.899 --> 00:14:28.220 is basically a worthless piece of paper. Who's 00:14:28.220 --> 00:14:29.960 going to fix my transmission if the company doesn't 00:14:29.960 --> 00:14:32.860 exist in six months? Exactly. So the fear was 00:14:32.860 --> 00:14:35.899 that the moment GM filed for Chapter 11, new 00:14:35.899 --> 00:14:38.779 car sales would go to absolute zero. Instantly. 00:14:38.799 --> 00:14:41.620 All revenue would stop. The company would die 00:14:41.620 --> 00:14:44.100 on the vine in a matter of days. So how did they 00:14:44.100 --> 00:14:46.740 solve that? It seems like a catch -22. The U 00:14:46.740 --> 00:14:48.639 .S. Treasury did something truly extraordinary. 00:14:49.279 --> 00:14:51.759 They explicitly committed to funding a government 00:14:51.759 --> 00:14:55.320 guarantee of GM's warranty liabilities. They 00:14:55.320 --> 00:14:59.759 set aside up to $360 .6 million and said, to 00:14:59.759 --> 00:15:02.700 the American consumer, even if GM disappears 00:15:02.700 --> 00:15:05.240 from the face of the earth, the United States 00:15:05.240 --> 00:15:08.000 government will honor your warranty. That is 00:15:08.000 --> 00:15:11.059 wild. So Uncle Sam became the mechanic of last 00:15:11.059 --> 00:15:13.830 resort. It was the only way to build a firewall 00:15:13.830 --> 00:15:16.129 and keep consumer confidence from completely 00:15:16.129 --> 00:15:19.370 evaporating. It was a crucial and often overlooked 00:15:19.370 --> 00:15:21.230 piece of the puzzle. OK, so they've solved the 00:15:21.230 --> 00:15:23.529 warranty problem. They've got a new CEO. The 00:15:23.529 --> 00:15:26.210 clock is ticking. This moves us to Section 3, 00:15:26.370 --> 00:15:29.769 the surgical bankruptcy. This is the legal meat 00:15:29.769 --> 00:15:31.850 of the story. This is where it gets really fascinating. 00:15:32.110 --> 00:15:33.889 So June 1st arrives. They are going to file. 00:15:34.190 --> 00:15:36.190 But they don't just walk into a courthouse in 00:15:36.190 --> 00:15:39.129 Detroit. They pull what the sources call the 00:15:39.129 --> 00:15:41.549 Harlem Maneuver. This is a great piece of legal 00:15:41.549 --> 00:15:43.750 trivia. It's a classic example of what's called 00:15:43.750 --> 00:15:46.750 venue shopping. So usually a company files for 00:15:46.750 --> 00:15:48.529 bankruptcy where it's headquartered, which would 00:15:48.529 --> 00:15:51.250 be Michigan for GM. Or where it's legally incorporated, 00:15:51.549 --> 00:15:54.470 which for most big companies is Delaware. Right. 00:15:54.649 --> 00:15:57.929 But GM's lawyers didn't want Michigan or Delaware. 00:15:58.129 --> 00:16:00.269 They wanted the Southern District of New York, 00:16:00.409 --> 00:16:03.470 Manhattan. They wanted the judges. Why? What's 00:16:03.470 --> 00:16:05.620 so special about the judges in Manhattan? The 00:16:05.620 --> 00:16:09.500 SDNY has a global reputation for handling massive, 00:16:09.639 --> 00:16:13.240 complex financial collapses. Think Lehman Brothers, 00:16:13.539 --> 00:16:16.759 WorldCom. They're sophisticated, they're experienced, 00:16:16.940 --> 00:16:19.259 and more importantly, they understand what's 00:16:19.259 --> 00:16:21.720 called the melting ice cube theory. The melting 00:16:21.720 --> 00:16:24.100 ice cube. The idea that a bankrupt company is 00:16:24.100 --> 00:16:26.399 like an ice cube sitting on a hot table. Every 00:16:26.399 --> 00:16:28.460 minute it sits there in legal limbo, it gets 00:16:28.460 --> 00:16:32.559 smaller, value disappears, assets degrade, customers 00:16:32.559 --> 00:16:34.659 leave. So you need to move fast. You need to 00:16:34.659 --> 00:16:37.179 move incredibly fast. And the SDNY judges are 00:16:37.179 --> 00:16:39.720 known for speed. The new CEO, Fritz Henderson, 00:16:40.159 --> 00:16:42.860 wanted this thing done in 60 to 90 days. But 00:16:42.860 --> 00:16:45.659 to file in New York... GM needed a legal reason 00:16:45.659 --> 00:16:47.480 to be there. They needed a venue connection. 00:16:47.679 --> 00:16:49.840 They needed an address in Manhattan. Exactly. 00:16:50.059 --> 00:16:52.139 They couldn't just pick it out of a hat. So on 00:16:52.139 --> 00:16:54.659 the morning of June 1st, literally hours before 00:16:54.659 --> 00:16:58.519 the main filing, a single tiny dealership, Chevrolet 00:16:58.519 --> 00:17:00.940 Saturn of Harlem, filed for bankruptcy. Just 00:17:00.940 --> 00:17:03.750 one dealership. One dealership that just happened 00:17:03.750 --> 00:17:06.349 to be a wholly owned subsidiary of the Maine 00:17:06.349 --> 00:17:09.269 General Motors Corporation. Ah, I see where this 00:17:09.269 --> 00:17:11.470 is going. Once that small case was officially 00:17:11.470 --> 00:17:15.150 open in a Manhattan courtroom, the Maine GM Corporation 00:17:15.150 --> 00:17:19.049 could then file its own massive case as an affiliate 00:17:19.049 --> 00:17:22.309 of the Harlem dealership. It was a clever, legal 00:17:22.309 --> 00:17:25.150 backdoor way to get the judge and the courthouse 00:17:25.150 --> 00:17:27.849 they wanted. That is incredibly sneaky and incredibly 00:17:27.849 --> 00:17:30.849 smart. It's high stakes corporate law. And it 00:17:30.849 --> 00:17:33.329 worked. They got their case in front of Judge 00:17:33.329 --> 00:17:35.930 Robert Gerber, who was known for exactly this 00:17:35.930 --> 00:17:37.710 kind of work. So they're in the right court. 00:17:38.109 --> 00:17:41.210 Now, explain the surgical part, because most 00:17:41.210 --> 00:17:43.920 bankruptcies we hear about. like a Chapter 11, 00:17:44.099 --> 00:17:47.359 involve creating a plan of reorganization. Right. 00:17:47.559 --> 00:17:49.579 And that's a long, drawn out process. You have 00:17:49.579 --> 00:17:51.500 to sit down with all your different classes of 00:17:51.500 --> 00:17:54.000 creditors, the banks, the bondholders, the unions, 00:17:54.140 --> 00:17:56.539 the suppliers. You negotiate for months. Everyone 00:17:56.539 --> 00:17:58.160 gets to vote on the plan. There are objections. 00:17:58.539 --> 00:18:01.059 It can take years. It often takes years. GM didn't 00:18:01.059 --> 00:18:02.599 have years. They didn't have months. They had 00:18:02.599 --> 00:18:05.380 weeks. So they used a specific part of the bankruptcy 00:18:05.380 --> 00:18:09.000 code, Section 363. And what does Section 363 00:18:09.000 --> 00:18:12.589 do? Section 363 allows a company in bankruptcy 00:18:12.589 --> 00:18:15.609 to sell its assets free and clear of any liens 00:18:15.609 --> 00:18:18.089 or claims. It's usually used for small things 00:18:18.089 --> 00:18:21.130 like selling off a factory nobody wants or a 00:18:21.130 --> 00:18:23.809 division of the company. But GM used it differently. 00:18:24.009 --> 00:18:27.009 GM used it to sell the entire company or at least 00:18:27.009 --> 00:18:28.869 all the good parts of it. Wait, sell it to who? 00:18:29.369 --> 00:18:31.289 They were broke. Who was the buyer? The buyer 00:18:31.289 --> 00:18:34.009 was a brand new company created out of thin air 00:18:34.009 --> 00:18:36.309 by the U .S. Treasury. And this is the absolute 00:18:36.309 --> 00:18:38.930 core concept of the entire bailout. This is the 00:18:38.930 --> 00:18:42.250 old GM versus new GM split. OK, let's break this 00:18:42.250 --> 00:18:44.549 down very carefully for everyone listening. We 00:18:44.549 --> 00:18:47.309 have two baskets. Exactly. Imagine two big baskets. 00:18:47.410 --> 00:18:51.650 Basket A is new GM. The technical name was NGMCO 00:18:51.650 --> 00:18:54.630 Inc., which stood for NGM Company Incorporated. 00:18:54.750 --> 00:18:57.349 Very creative. Very creative. Into this new GM 00:18:57.349 --> 00:19:12.259 basket, they use the section. The healthy organs. 00:19:12.619 --> 00:19:14.940 The healthy organs. And then you have the ownership 00:19:14.940 --> 00:19:18.519 of this new basket. Who owns New Diem? And this 00:19:18.519 --> 00:19:20.380 is where the government comes in. Big time. The 00:19:20.380 --> 00:19:23.839 U .S. Treasury took a 60 .8 % ownership stake. 00:19:24.079 --> 00:19:27.279 The UAW Union's retiree health crust, the VBA. 00:19:27.980 --> 00:19:31.779 got 17 .5%. The Canadian and Ontario governments, 00:19:32.039 --> 00:19:35.779 who also put in bailout money, got 11 .7%. And 00:19:35.779 --> 00:19:38.259 what about the bondholders, the people GM owed 00:19:38.259 --> 00:19:41.019 billions to? They got the remaining 10%, and 00:19:41.019 --> 00:19:43.539 they were furious about it, but they had to take 00:19:43.539 --> 00:19:45.779 it. So the government literally owned the majority 00:19:45.779 --> 00:19:48.039 of America's largest car company. Yes, hence 00:19:48.039 --> 00:19:50.059 the nickname that stuck for years, government 00:19:50.059 --> 00:19:53.569 motors. Now, what goes into basket B? The old 00:19:53.569 --> 00:19:56.150 GM. Everything else. All the toxic waste. The 00:19:56.150 --> 00:19:58.970 billions upon billions in unsecured debt. The 00:19:58.970 --> 00:20:01.730 bad labor contracts. All the closed factories 00:20:01.730 --> 00:20:03.670 that needed to be environmentally remediated. 00:20:03.769 --> 00:20:06.309 All the pending lawsuits. All of that stayed 00:20:06.309 --> 00:20:08.589 behind in the old legal entity. And what was 00:20:08.589 --> 00:20:10.430 that old entity called? It was officially renamed 00:20:10.430 --> 00:20:13.470 Motors Liquidation Company. And its stock ticker 00:20:13.470 --> 00:20:17.210 symbol changed from GMGMQ to MTLQQ. And what 00:20:17.210 --> 00:20:18.869 happened to that basket? What was its purpose? 00:20:19.150 --> 00:20:22.069 It was left to die. Its only job was to exist 00:20:22.069 --> 00:20:24.319 in bankruptcy. Corpsey Court for years, slowly 00:20:24.319 --> 00:20:27.420 selling off whatever scrap it could. An old factory 00:20:27.420 --> 00:20:29.700 for pennies on the dollar to pay back its creditors, 00:20:29.720 --> 00:20:32.279 a tiny fraction of what they were owed. So what 00:20:32.279 --> 00:20:34.019 about the shareholders? This is the critical 00:20:34.019 --> 00:20:37.160 question. If I was a retiree and I own GM stock 00:20:37.160 --> 00:20:40.559 on May 31st and this whole split happens on June 00:20:40.559 --> 00:20:44.500 1st, do I now own stock in the shiny new GM? 00:20:44.880 --> 00:20:47.859 No. And this is the part that burned thousands 00:20:47.859 --> 00:20:50.640 and thousands of small retail investors who didn't 00:20:50.640 --> 00:20:52.000 understand what was happening. What did they 00:20:52.000 --> 00:20:55.380 own? If you own GM stock, you owned a piece of 00:20:55.380 --> 00:20:58.099 the old GM. You owned a piece of the Motors Liquidation 00:20:58.099 --> 00:21:00.720 Company. You owned a piece of the toxic wastebasket. 00:21:00.779 --> 00:21:03.380 Correct. Which had no real assets and all the 00:21:03.380 --> 00:21:06.000 debt. The company's management was legally required 00:21:06.000 --> 00:21:08.240 to be explicit about this. They put out statements 00:21:08.240 --> 00:21:10.500 saying there will be no value for the common 00:21:10.500 --> 00:21:13.799 stockholders of old GM. Zero. But people didn't 00:21:13.799 --> 00:21:15.809 believe it. People didn't understand it. They 00:21:15.809 --> 00:21:18.210 saw the stock still trading under the new ticker 00:21:18.210 --> 00:21:21.210 MTLQQ. And they thought, oh, GM is in bankruptcy. 00:21:21.289 --> 00:21:23.609 It's cheap. It's a buying opportunity. It's bound 00:21:23.609 --> 00:21:26.549 to recover. They were buying shares of a corpse. 00:21:26.670 --> 00:21:28.930 That is just tragic. People buying the stock 00:21:28.930 --> 00:21:31.170 thinking it's a dip when it's actually a funeral. 00:21:31.849 --> 00:21:34.890 It really highlights the danger of not understanding 00:21:34.890 --> 00:21:37.309 the complex mechanics of corporate bankruptcy. 00:21:37.970 --> 00:21:41.109 The old stock was wiped out completely. And as 00:21:41.109 --> 00:21:43.660 a final symbol of this shift. GM was kicked out 00:21:43.660 --> 00:21:45.859 of the Dow Jones Industrial Average, right? Yes, 00:21:46.000 --> 00:21:50.099 effective June 8, 2009. After decades as a bellwether 00:21:50.099 --> 00:21:52.940 of the American economy, it was removed and replaced 00:21:52.940 --> 00:21:56.200 by Cisco Systems. The old industrial economy 00:21:56.200 --> 00:21:58.660 being replaced by the new tech economy. You couldn't 00:21:58.660 --> 00:22:00.700 ask for a more perfect symbol. It was the end 00:22:00.700 --> 00:22:02.640 of an era, written on the stock ticker. So the 00:22:02.640 --> 00:22:05.900 new GM drives away, effectively debt -free. How 00:22:05.900 --> 00:22:08.059 much debt did they actually shed in this process? 00:22:08.359 --> 00:22:10.720 It was staggering. Old GM went into bankruptcy 00:22:10.720 --> 00:22:14.839 with about $94 .7 billion in debt. New GM emerged 00:22:14.839 --> 00:22:17.880 with only $17 billion. You just evaporated almost 00:22:17.880 --> 00:22:22.059 $80 billion in liabilities. Poof. Gone. Left 00:22:22.059 --> 00:22:24.480 behind in the liquidation company. Imagine you're 00:22:24.480 --> 00:22:26.740 trying to run a race with a 100 -pound backpack 00:22:26.740 --> 00:22:29.500 on, and suddenly someone just cuts the straps. 00:22:29.779 --> 00:22:32.980 You are going to run a lot faster. But to run 00:22:32.980 --> 00:22:35.440 faster... they also had to lose some weight from 00:22:35.440 --> 00:22:37.900 the company itself. Which brings us to section 00:22:37.900 --> 00:22:42.279 four, the garage sale. The brand restructuring. 00:22:42.319 --> 00:22:44.660 This is the emotional part for the car lovers, 00:22:44.819 --> 00:22:46.500 for the people who grew up with these brands. 00:22:46.660 --> 00:22:49.700 It really is. Because for years, GM was defined 00:22:49.700 --> 00:22:53.059 by its brands. Alfred Sloan's old strategy of 00:22:53.059 --> 00:22:55.960 a car for every person purpose. A brilliant strategy 00:22:55.960 --> 00:22:59.940 in the 1930s. But by 2009, it had become a mess 00:22:59.940 --> 00:23:02.859 of overlapping, cannibalizing products. They 00:23:02.859 --> 00:23:04.740 had too many brands that were all competing with 00:23:04.740 --> 00:23:06.500 each other. So they had to choose the survivors. 00:23:06.680 --> 00:23:08.440 They whittled it down to the core four. Chevrolet, 00:23:08.619 --> 00:23:11.230 Cadillac, GMC, and... Buick. Those were the ones 00:23:11.230 --> 00:23:13.190 that would form the foundation of the new GM. 00:23:13.349 --> 00:23:15.490 Now, Buick, I feel like we have to address the 00:23:15.490 --> 00:23:17.829 elephant in the room here. In 2009, in America, 00:23:17.970 --> 00:23:21.450 Buick was seen as, well, a car for grandparents. 00:23:21.789 --> 00:23:24.269 That's putting it kindly. So why keep that and 00:23:24.269 --> 00:23:26.569 kill off a brand like Pontiac, which at least 00:23:26.569 --> 00:23:28.470 had some history of excitement and performance? 00:23:28.869 --> 00:23:33.099 The answer is one word, China. Really? Absolutely. 00:23:33.480 --> 00:23:36.579 In China, Buick is a massive prestige brand. 00:23:36.799 --> 00:23:40.000 It has a historical connection. The last emperor 00:23:40.000 --> 00:23:43.359 of China drove a Buick. Sun Yat -sen, the founder 00:23:43.359 --> 00:23:45.960 of the republic, drove a Buick. For historical 00:23:45.960 --> 00:23:48.740 reasons, it was seen as a premium, almost luxury 00:23:48.740 --> 00:23:51.019 status symbol. So while it was dying in the U 00:23:51.019 --> 00:23:53.039 .S.? It was practically printing money for GM 00:23:53.039 --> 00:23:55.160 in China. It was one of their most profitable 00:23:55.160 --> 00:23:57.299 operations anywhere in the world. If they had 00:23:57.299 --> 00:23:59.339 killed the Buick brand globally, they would have 00:23:59.339 --> 00:24:01.700 destroyed their most important and fastest growing 00:24:01.700 --> 00:24:04.660 overseas market. Wow. So the American lineup 00:24:04.660 --> 00:24:07.319 of a classic American brand was saved entirely 00:24:07.319 --> 00:24:11.220 by Chinese consumers. 100%. If Buick had to rely 00:24:11.220 --> 00:24:14.180 only on the U .S. market for survival, it would 00:24:14.180 --> 00:24:16.279 have been gone. No question. Okay. So let's talk 00:24:16.279 --> 00:24:17.539 about the ones that didn't make it, the trimmed 00:24:17.539 --> 00:24:19.619 fat. Let's start with Pontiac. The excitement 00:24:19.619 --> 00:24:23.539 division. GTO, Firebird, Trans Am. So much history 00:24:23.539 --> 00:24:25.960 there. So much. But what was the problem with 00:24:25.960 --> 00:24:28.500 it by 2009? The problem was that for the past 00:24:28.500 --> 00:24:31.380 15 years, it had just become rebadged Chevrolets 00:24:31.380 --> 00:24:33.799 with extra plastic cladding and, you know, a 00:24:33.799 --> 00:24:37.079 red dashboard. It had lost its soul. The G8 was 00:24:37.079 --> 00:24:38.940 a great car at the end, but it was too little, 00:24:38.980 --> 00:24:41.559 too late. And they just shut it down. Yeah. On 00:24:41.559 --> 00:24:45.059 April 24, 2009, even before the bankruptcy, they 00:24:45.059 --> 00:24:46.880 announced it was over. There was no buyer. It 00:24:46.880 --> 00:24:49.400 was just going to be discontinued. A slow fade 00:24:49.400 --> 00:24:51.920 to black. And then there's Hummer, the ultimate 00:24:51.920 --> 00:24:55.359 symbol of the pre -recession cheap gas era. Hummer 00:24:55.359 --> 00:24:58.680 was a victim of timing more than anything. When 00:24:58.680 --> 00:25:02.019 gasoline is $1 .50 a gallon, everyone wants a 00:25:02.019 --> 00:25:04.359 giant military -style truck. It looks powerful. 00:25:04.680 --> 00:25:06.960 But when gas hits $4 a gallon and the economy 00:25:06.960 --> 00:25:09.779 crashes. Driving a 9 -mile -per -gallon tank 00:25:09.779 --> 00:25:12.220 to the grocery store suddenly looks ridiculous 00:25:12.220 --> 00:25:14.819 and incredibly expensive. The market for it just 00:25:14.819 --> 00:25:16.960 vanished overnight. But they did try to sell 00:25:16.960 --> 00:25:18.900 it, right, to a Chinese company? They did, a 00:25:18.900 --> 00:25:21.640 company called Sichuan Tangzong. which was a 00:25:21.640 --> 00:25:23.779 heavy machinery maker. They had a deal in place, 00:25:23.859 --> 00:25:26.140 but the Chinese government itself in Beijing 00:25:26.140 --> 00:25:28.200 actually blocked the deal. They were trying to 00:25:28.200 --> 00:25:30.559 push their domestic auto industry towards more 00:25:30.559 --> 00:25:33.039 fuel efficient, environmentally friendly cars. 00:25:33.339 --> 00:25:35.960 The last thing they wanted was to import a brand 00:25:35.960 --> 00:25:39.480 that was the symbol of gas guzzling excess. So 00:25:39.480 --> 00:25:41.660 the deal fell through and Hummer was declared 00:25:41.660 --> 00:25:44.960 defunct in May 2010. And then there's Saturn. 00:25:45.599 --> 00:25:48.079 I wonder if it's a bit. It was launched as the 00:25:48.079 --> 00:25:50.720 different kind of car company. No haggle pricing, 00:25:50.940 --> 00:25:54.400 friendly dealers. Saturn had a genuine cult following, 00:25:54.539 --> 00:25:56.900 and they were so close to being saved. This was 00:25:56.900 --> 00:25:59.420 a real nail -biter. What happened? Roger Penske, 00:25:59.539 --> 00:26:01.779 the racing legend, the trucking and dealership 00:26:01.779 --> 00:26:04.559 mogul, put together a deal to buy the brand, 00:26:04.720 --> 00:26:06.859 the dealerships, everything. That sounds like 00:26:06.859 --> 00:26:09.019 a dream team. Penske running Saturn would have 00:26:09.019 --> 00:26:10.559 been amazing. It would have been fascinating. 00:26:10.880 --> 00:26:14.259 But here's the snag. Penske is a dealer and a 00:26:14.259 --> 00:26:17.000 logistics guy. He doesn't manufacture cars. He 00:26:17.000 --> 00:26:18.720 needed someone to build the cars for him after 00:26:18.720 --> 00:26:20.940 the GM supply ran out. Okay, so who was he going 00:26:20.940 --> 00:26:23.180 to partner with? He was in deep talks with Renault 00:26:23.180 --> 00:26:25.799 Samsung in South Korea to supply the next generation 00:26:25.799 --> 00:26:28.220 of vehicles that would be badged as Saturns. 00:26:28.500 --> 00:26:31.160 And the deal was apparently all but done. At 00:26:31.160 --> 00:26:33.700 the 11th hour, the Renault board in France rejected 00:26:33.700 --> 00:26:36.059 the deal. We still don't know the exact reasons 00:26:36.059 --> 00:26:38.940 why, but with that, Penske's supply chain disappeared. 00:26:39.680 --> 00:26:42.480 He had a brand and a dealer network, but no cars 00:26:42.480 --> 00:26:45.420 to sell. He had to walk away. Wow. So Saturn 00:26:45.420 --> 00:26:47.579 died because of a boardroom decision in Paris? 00:26:47.859 --> 00:26:50.599 Essentially, yes. It was declared defunct in 00:26:50.599 --> 00:26:54.660 October 2010. And finally, Saab, the quirky Swedish 00:26:54.660 --> 00:26:58.759 jet fighter brand. Saab was just a long, painful 00:26:58.759 --> 00:27:02.640 saga. GM sold it to a tiny, obscure Dutch supercar 00:27:02.640 --> 00:27:05.359 maker called Spiker Cars. It was like a minnow 00:27:05.359 --> 00:27:07.660 swallowing a whale. It never had a chance. And 00:27:07.660 --> 00:27:10.259 it failed. It failed spectacularly. Saab limped 00:27:10.259 --> 00:27:12.079 along for a couple of years and then went bankrupt 00:27:12.079 --> 00:27:14.700 for good in 2012. So the landscape of the American 00:27:14.700 --> 00:27:16.799 highway really changed. We lost a lot of variety. 00:27:16.960 --> 00:27:20.339 We did. And GM also tried to scrub its own corporate 00:27:20.339 --> 00:27:22.359 identity from the cars. Do you remember the little 00:27:22.359 --> 00:27:24.819 GM chiclet? The little blue square logo on the 00:27:24.819 --> 00:27:26.500 door panel? Yeah. Yes, the Mark of Excellence 00:27:26.500 --> 00:27:29.079 logo that was on every single GM car, no matter 00:27:29.079 --> 00:27:31.019 the brand. They stripped it off. They went for 00:27:31.019 --> 00:27:33.980 a corporate invisible brand architecture. They 00:27:33.980 --> 00:27:36.059 wanted you to buy a Chevy because it was a Chevy, 00:27:36.220 --> 00:27:39.299 not because it was a GM product. The GM name 00:27:39.299 --> 00:27:42.839 itself had become toxic. They were ashamed of 00:27:42.839 --> 00:27:46.000 the parent brand and what it represented. Bankruptcy 00:27:46.000 --> 00:27:49.220 and failure. That is a powerful marketing shift. 00:27:49.380 --> 00:27:51.759 Yeah. To actively admit that your own corporate 00:27:51.759 --> 00:27:54.660 name is poison. It was a necessary survival tactic. 00:27:55.240 --> 00:27:58.140 Let's move to Section 5, the human and financial 00:27:58.140 --> 00:28:01.500 cost. Because we talk about brands dying, but 00:28:01.500 --> 00:28:03.720 brands don't have families to feed. People do. 00:28:03.859 --> 00:28:05.920 This is the heavy part. The restructuring was, 00:28:06.019 --> 00:28:09.240 I mean, it was brutal on the human level. Let's 00:28:09.240 --> 00:28:11.200 start with the dealerships. Because these weren't 00:28:11.200 --> 00:28:13.799 just corporate -owned stores. These are franchises, 00:28:13.819 --> 00:28:16.319 family businesses. Right. A dealership in a small 00:28:16.319 --> 00:28:18.900 town is usually a multi -generational, family 00:28:18.900 --> 00:28:21.019 -owned business. It's the sponsor of the high 00:28:21.019 --> 00:28:22.940 school football team. It's a pillar of the community. 00:28:23.220 --> 00:28:24.990 And what happened to them? In the transition 00:28:24.990 --> 00:28:28.109 from old GM to new GM, they used the bankruptcy 00:28:28.109 --> 00:28:30.910 process to terminate hundreds of franchise agreements. 00:28:31.309 --> 00:28:34.710 The dealership network was cut from about 5 ,900 00:28:34.710 --> 00:28:38.490 down to about 5 ,000. So nearly 1 ,000 businesses 00:28:38.490 --> 00:28:41.549 were just told, you're out. Basically, they received 00:28:41.549 --> 00:28:43.589 a form letter in the mail saying their franchise 00:28:43.589 --> 00:28:45.990 agreement would not be assumed by the new GM. 00:28:46.650 --> 00:28:49.769 It was cold. It unleashed a fury of lawsuits 00:28:49.769 --> 00:28:52.509 and political blowback. But legally, because 00:28:52.509 --> 00:28:54.849 New GM was a new company, it didn't have to take 00:28:54.849 --> 00:28:57.289 them. Devastating for those families. What about 00:28:57.289 --> 00:29:00.589 the factories? They closed 13 plants across the 00:29:00.589 --> 00:29:03.250 country. The number of U .S. plants went from 00:29:03.250 --> 00:29:06.690 47 down to 34. And the workforce, the employees? 00:29:06.890 --> 00:29:09.609 U .S. employee count went from 91 ,000 down to 00:29:09.609 --> 00:29:14.230 68 ,500. So over 20 ,000 jobs. Evaporated. Gone. 00:29:14.369 --> 00:29:16.930 And we are talking about, you know, minimum wage 00:29:16.930 --> 00:29:19.470 gig economy jobs. These were high paying UAW 00:29:19.470 --> 00:29:22.609 union jobs, good wages, pensions, health care, 00:29:22.710 --> 00:29:24.730 the kind of jobs that support a middle class 00:29:24.730 --> 00:29:27.710 life. When you lose 20 ,000 of those jobs, you 00:29:27.710 --> 00:29:30.609 don't just affect 20 ,000 families. You devastate 00:29:30.609 --> 00:29:33.150 entire zip codes. Towns like Flint, Pontiac, 00:29:33.250 --> 00:29:35.950 Detroit, Lordstown, they took a massive, massive 00:29:35.950 --> 00:29:37.329 hit that some of them still haven't recovered 00:29:37.329 --> 00:29:39.589 from. And even at the top, they cut perks, right? 00:29:39.690 --> 00:29:42.160 Like the corporate jets. Oh, yeah. One of the 00:29:42.160 --> 00:29:45.059 very first motions filed in bankruptcy court 00:29:45.059 --> 00:29:48.180 was to void the leases on seven corporate jets 00:29:48.180 --> 00:29:50.559 and a private hangar at the Detroit airport. 00:29:51.240 --> 00:29:53.519 After that PR disaster, the jets had to be the 00:29:53.519 --> 00:29:55.700 first thing to go. So let's talk about the cost 00:29:55.700 --> 00:29:57.819 of the taxpayer, because this is the question 00:29:57.819 --> 00:30:00.180 I always hear at the bar. You know, we bailed 00:30:00.180 --> 00:30:01.740 them out. Did we ever get our money back? And 00:30:01.740 --> 00:30:05.500 the answer is it's complicated. It really depends 00:30:05.500 --> 00:30:07.259 on how you do the math. There are two ways to 00:30:07.259 --> 00:30:08.980 look at it. OK, let's do the simple math first. 00:30:09.319 --> 00:30:11.339 Cash in, cash out. All right. The U .S. Treasury, 00:30:11.559 --> 00:30:14.200 through the TARP program, invested a total of 00:30:14.200 --> 00:30:19.279 $51 billion to create and fund the new GM. $51 00:30:19.279 --> 00:30:22.380 billion. And in exchange, they got that 60 .8 00:30:22.380 --> 00:30:24.880 % ownership stake. Correct. Then over the next 00:30:24.880 --> 00:30:27.460 few years, as GM recovered and went public again, 00:30:27.700 --> 00:30:30.660 the Treasury slowly sold off that stake on the 00:30:30.660 --> 00:30:32.980 open market. They sold the stock back to private 00:30:32.980 --> 00:30:35.359 investors. Right. They finished selling the very 00:30:35.359 --> 00:30:38.319 last share in December of 2013. The total amount 00:30:38.319 --> 00:30:40.000 they recovered from all those sales was about 00:30:40.000 --> 00:30:44.200 $39 billion. Okay, so $51 billion out, $39 billion 00:30:44.200 --> 00:30:47.619 back in. That's a loss of $12 billion. Correct. 00:30:47.680 --> 00:30:50.799 The final direct cost of the GM bailout to the 00:30:50.799 --> 00:30:53.000 U .S. Treasury was a loss of between $11 and 00:30:53.000 --> 00:30:55.960 $12 billion. So the critics can point to that 00:30:55.960 --> 00:30:59.740 and say, see, a waste of taxpayer money. We lost 00:30:59.740 --> 00:31:03.299 $12 billion. They can, and they do. But, and 00:31:03.299 --> 00:31:05.589 this is a very big but. You have to look at the 00:31:05.589 --> 00:31:07.190 alternative. You can't just look at the cost. 00:31:07.250 --> 00:31:08.930 You have to look at the cost of doing nothing. 00:31:09.069 --> 00:31:11.309 What would that have been? The Center for Automotive 00:31:11.309 --> 00:31:13.609 Research, a respected think tank, ran a study 00:31:13.609 --> 00:31:16.190 on this. They modeled what would have happened 00:31:16.190 --> 00:31:19.029 if GM had been forced into a full liquidation. 00:31:19.029 --> 00:31:20.769 If they had just locked the doors and sold off 00:31:20.769 --> 00:31:23.279 the parts. If GM had locked the doors, the cascade 00:31:23.279 --> 00:31:25.500 of failures in the supplier network would have 00:31:25.500 --> 00:31:28.660 been so severe that Ford and Chrysler would have 00:31:28.660 --> 00:31:30.960 been forced to stop production, too, because 00:31:30.960 --> 00:31:33.059 they all use some of the same critical parts 00:31:33.059 --> 00:31:36.119 suppliers. So it wasn't just GM at risk. A GM 00:31:36.119 --> 00:31:38.480 failure would have taken Ford down with it, even 00:31:38.480 --> 00:31:40.839 though Ford didn't take a bailout. Exactly. The 00:31:40.839 --> 00:31:42.859 entire North American auto industry would have 00:31:42.859 --> 00:31:45.440 ground to a halt. The study estimated that the 00:31:45.440 --> 00:31:49.480 bailout saved, directly and indirectly, 1 .2 00:31:49.480 --> 00:31:52.500 million jobs. across the economy. A million jobs. 00:31:52.799 --> 00:31:57.240 And it preserved $34 .9 billion in tax revenue 00:31:57.240 --> 00:31:59.900 that those 1 .2 million workers and all those 00:31:59.900 --> 00:32:01.859 companies would have paid. So if you do the math 00:32:01.859 --> 00:32:07.079 that way, we spent $12 billion to save $35 billion 00:32:07.079 --> 00:32:10.579 in taxes, not to mention avoiding a million people 00:32:10.579 --> 00:32:12.980 on unemployment. That is the return on investment 00:32:12.980 --> 00:32:15.660 argument. That it wasn't a gift to a car company. 00:32:15.759 --> 00:32:18.559 It was an emergency investment in macroeconomic 00:32:18.559 --> 00:32:21.339 stability. That makes the $12 billion loss look 00:32:21.339 --> 00:32:23.140 like a pretty cheap insurance policy for the 00:32:23.140 --> 00:32:25.099 entire economy. It does. But it doesn't make 00:32:25.099 --> 00:32:27.359 it any less controversial, does it? Because the 00:32:27.359 --> 00:32:29.599 government explicitly picked winners and losers. 00:32:29.880 --> 00:32:32.099 How so? The bondholder's sophisticated investors 00:32:32.099 --> 00:32:34.619 who lent GM money got crushed. They got maybe 00:32:34.619 --> 00:32:37.299 10 cents on the dollar. Meanwhile, the UAW's 00:32:37.299 --> 00:32:39.259 health fund was protected and given a huge stake 00:32:39.259 --> 00:32:41.859 in the new company. That created a lot of legal 00:32:41.859 --> 00:32:43.559 and political anger that last night. lasted for 00:32:43.559 --> 00:32:46.680 years. People felt the rules of capitalism were 00:32:46.680 --> 00:32:49.619 bent to favor a political constituency. So let's 00:32:49.619 --> 00:32:51.400 wrap this up with the aftermath. Section six 00:32:51.400 --> 00:32:55.240 emergence. How fast did this whole surgical bankruptcy 00:32:55.240 --> 00:32:57.119 actually happen? This is the mind blowing part. 00:32:57.240 --> 00:32:59.180 We talked about how the courts in New York move 00:32:59.180 --> 00:33:01.779 fast. Yeah. The bankruptcy was filed on June 00:33:01.779 --> 00:33:05.500 1st. The Section 363 sale of the assets from 00:33:05.500 --> 00:33:08.579 old GM to new GM was approved by the judge and 00:33:08.579 --> 00:33:12.240 closed on July 10th. 40 days. 40 days. 40 days 00:33:12.240 --> 00:33:14.759 to restructure one of the largest and most complex 00:33:14.759 --> 00:33:17.440 corporations in the history of the world. It 00:33:17.440 --> 00:33:20.099 was absolute lightning speed. Unheard of. And 00:33:20.099 --> 00:33:25.220 on July 11th, 2009, new GM wakes up. What does 00:33:25.220 --> 00:33:28.160 it look like? It looks healthy. For the first 00:33:28.160 --> 00:33:30.500 time in decades, it has a clean balance sheet. 00:33:30.579 --> 00:33:33.599 It has that manageable $17 billion in debt instead 00:33:33.599 --> 00:33:36.980 of nearly $100 billion. And it has over $40 billion 00:33:36.980 --> 00:33:40.200 in cash in the bank taxpayer cash, mostly ready 00:33:40.200 --> 00:33:42.039 to be invested in new products and technology. 00:33:42.119 --> 00:33:44.500 And a new board of directors. The old guard was 00:33:44.500 --> 00:33:46.599 gone. Completely gone. The government cleaned 00:33:46.599 --> 00:33:49.259 house. Ed Whitaker, the former CEO of AT &T, 00:33:49.299 --> 00:33:51.019 was brought in as the new chairman. They brought 00:33:51.019 --> 00:33:53.359 in people from telecom, from finance, from outside 00:33:53.359 --> 00:33:55.779 the auto industry. They intentionally broke up 00:33:55.779 --> 00:33:57.680 the Detroit Old Boys Club. And they went public 00:33:57.680 --> 00:34:00.440 again pretty quickly, right? The IPO? November 00:34:00.440 --> 00:34:04.519 of 2010. Less than 18 months after emerging from 00:34:04.519 --> 00:34:06.480 bankruptcy, they launched one of the biggest 00:34:06.480 --> 00:34:09.539 IPOs in history. General Motors was back on the 00:34:09.539 --> 00:34:11.440 New York Stock Exchange. But not the old stock. 00:34:11.639 --> 00:34:15.960 No. A brand new ticker symbol. GM. The old ticker 00:34:15.960 --> 00:34:20.119 symbol, MTLQQ, eventually flatlined to zero and 00:34:20.119 --> 00:34:22.639 was canceled, disappearing forever. This whole 00:34:22.639 --> 00:34:25.900 story, it's so complex, it feels like a heist 00:34:25.900 --> 00:34:28.179 movie, but a legal one. That's a great way to 00:34:28.179 --> 00:34:30.599 describe it. It was a rescue mission that used 00:34:30.599 --> 00:34:33.260 the tools of a heist. They used the power of 00:34:33.260 --> 00:34:35.639 the bankruptcy court to tunnel in, grab the good 00:34:35.639 --> 00:34:37.840 assets, and steal them away from the bad debt 00:34:37.840 --> 00:34:40.460 to save the patient's life. So as we close out, 00:34:40.480 --> 00:34:42.300 I want to leave the listener with a final thought. 00:34:42.639 --> 00:34:45.820 We use the phrase, too big to fail. But the story 00:34:45.820 --> 00:34:49.559 of GM is more complicated. GM did fail. It absolutely 00:34:49.559 --> 00:34:51.800 failed. It went bankrupt. The management was 00:34:51.800 --> 00:34:53.719 fired. The shareholders were completely wiped 00:34:53.719 --> 00:34:56.480 out. The bondholders took massive losses. That 00:34:56.480 --> 00:34:59.000 is a crucial distinction. The corporation failed. 00:34:59.079 --> 00:35:01.559 The investors in that corporation failed. But 00:35:01.559 --> 00:35:04.760 the operations, the factories, the jobs, the 00:35:04.760 --> 00:35:07.420 engineering talent, the supply chain were deemed 00:35:07.420 --> 00:35:10.039 too important to the country to be allowed to 00:35:10.039 --> 00:35:13.300 stop. It creates this. fascinating and maybe 00:35:13.300 --> 00:35:16.440 dangerous precedent. If you are big enough and 00:35:16.440 --> 00:35:18.940 integrated enough into the economy, the government 00:35:18.940 --> 00:35:22.119 will let your corporate shell die legally, but 00:35:22.119 --> 00:35:24.219 they will reincarnate your productive body so 00:35:24.219 --> 00:35:26.099 the economy keeps moving. It's the difference 00:35:26.099 --> 00:35:28.139 between saving the capitalists and saving the 00:35:28.139 --> 00:35:30.519 capital. In this case, we save the capital, the 00:35:30.519 --> 00:35:33.159 machines and the workers. We let the capitalists, 00:35:33.159 --> 00:35:35.440 the shareholders and many of the lenders take 00:35:35.440 --> 00:35:38.070 the hit. But the flip side of that is we also 00:35:38.070 --> 00:35:40.130 let the new GM walk away from so many of its 00:35:40.130 --> 00:35:41.969 past mistakes. Yeah. They left the pollution 00:35:41.969 --> 00:35:44.250 at old factory sites, the bad contracts, the 00:35:44.250 --> 00:35:46.829 pending lawsuits. All of that was left behind 00:35:46.829 --> 00:35:48.969 in the old GM grave for someone else to deal 00:35:48.969 --> 00:35:51.849 with. Is that fair? That is the $172 billion 00:35:51.849 --> 00:35:54.909 question, isn't it? It saved an industry, but 00:35:54.909 --> 00:35:57.190 it completely rewrote the rules of bankruptcy 00:35:57.190 --> 00:35:59.769 for megacorporations. It proved that Section 00:35:59.769 --> 00:36:02.449 363 could be used to effectively nationalize 00:36:02.449 --> 00:36:05.449 and then reprivatize an American icon in 40 days. 00:36:05.650 --> 00:36:07.469 So here's something to think about. If you're 00:36:07.469 --> 00:36:09.869 listening to this in a car, take a look at the 00:36:09.869 --> 00:36:12.650 logo on your steering wheel. If it's a GM car 00:36:12.650 --> 00:36:15.550 from before mid 2009, it was built by a ghost. 00:36:16.010 --> 00:36:18.690 a company that legally no longer exists. And 00:36:18.690 --> 00:36:20.949 if it's from after mid -2009, it was built by 00:36:20.949 --> 00:36:22.789 a completely different company, one born in a 00:36:22.789 --> 00:36:25.269 courtroom in Manhattan, bankrolled by your tax 00:36:25.269 --> 00:36:27.389 dollars and carrying none of the baggage of its 00:36:27.389 --> 00:36:29.889 ancestor. And that is a legacy that is still 00:36:29.889 --> 00:36:31.889 driving down the road today. Thanks for diving 00:36:31.889 --> 00:36:33.409 deep with us. We'll catch you on the next one.