New General Motors Essay

Submitted By Thingsastray01
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The Auto Bail Out Of 2008
Andrew Peterson
HPU

In December 2008, after years of decline that finally caught up with Chrysler and General Motors. Unlike Ford, which had moved aggressively to fix its longstanding problems — predominantly by shedding unprofitable subsidiaries and renegotiating labor agreements — GM and Chrysler were still weighed down by incompetence and inefficiency.
Both automakers were troubled with labor contracts that undermined their flexibility and saddled them with a huge amount of retiree pension and health-benefit costs. For years, both companies had also been losing market share. GM had lost $40 billion in 2007, and in 2008 alone saw its sales decline by 45%. Chrysler, meanwhile, was weakening under the inept management of Cerberus Capital, which had bought the company in the spring of 2007 from the German automaker Daimler. By 2008, Chrysler's market share had been declining precipitously for a decade, falling by more than 30% in that year alone.
Finally, the onset of the credit crunch and financial crisis in the fall of 2008 proved to be the companies' death knell. But though their fates seemed to be sealed, both automakers brazenly refused to make plans for bankruptcy filings. They assumed that the federal government would not allow them to suffer the same fate as most other poorly managed companies in America. So they pleaded for a federal bailout, arguing that Washington's failure to provide one would result in the companies' liquidation. And liquidation, they argued, would eliminate thousands of jobs at the companies themselves, not to mention thousands more at suppliers and dealers. It would also destroy the companies' underfunded retiree pension and health benefits and might in turn impose those obligations on the taxpayer. With the economy already reeling from the financial crisis, the automakers insisted, the shock of massive auto-industry layoffs would be too much to take.
On December 11, 2008, the House of Representatives buckled under the automakers' demands, voting in favor of a $14 billion bailout. The next day, however, the Senate voted down the legislation. A week later, President George W. Bush and Treasury Secretary Henry Paulson intervened. Announcing that the administration would offer the automakers loans with terms similar to the ones Congress had voted down, Bush gave GM and Chrysler three months to develop restructuring plans and prove they could become viable companies. To help the automakers through that phase (and a possible Chapter 11 bankruptcy), the administration extended them $17.4 billion from the Troubled Asset Relief Program, which had originally been set up to buy assets and equities from the financial sector in the wake of the mortgage crisis.
In March 2009, when the lifeline extended by the Bush administration had run out, President Obama stepped in. The administration forced out the CEO of General Motors, Rick Wagoner, and gave Chrysler 30 days to finalize a merger with the Italian automaker Fiat. In exchange, the companies received another (and even larger) round of government loans. In the end, almost $77 billion in TARP funds was diverted to GM and Chrysler.
But in spite of the generous loans, extensions, and second chances, the Obama administration finally concluded that the companies' restructuring plans were insufficient. In the spring of 2009, it directed both automakers to proceed into Chapter 11 bankruptcy. In both cases, bankruptcy involved creating new companies — the so-called "new Chrysler" and "new GM" — in which the federal government would have a significant stake, and to which the bulk of the assets of the original companies (including all of their plants, equipment, brands, and trademarks) would be sold. The original companies, meanwhile, would settle their obligations to creditors and shed those assets that would not be transferred to the new companies. Their shareholders would be all but wiped out.
The…