How General Motors Was Really Saved

Five years after an unprecedented government bailout theres no shortage of people

including President Obamataking credit for rescuing the most important industrial
company in American history. But the truth of what happened during !s darkest days
has never been told. "ntil now
For months the news was horrific# a pounding beat of warm$up obituaries for what once
had been Americas greatest and most influential corporation% eneral !otors. At deaths
door or already in the graveyard were Bear &tearns# 'ehman Brothers# !errill 'ynch#
A( and )itibank. *he mood was apocalyptic.
+ith car sales in a free fall from the worst economic downturn since the reat
,epression# ! was losing billions and running out of cash. By the time the com$ pany
closed its books on -../ it would be in the red by a staggering 01..2 billion. )hief
e3ecutive 4ick +agoner led the auto delegation in +ashington seeking government
funding to save the industry and keep ! out of bankruptcy.
Five years later# after an unprecedented government e5uity investment# ! is thriving
and the *reasury plans to sell its remaining stake in the coming months. +ith countless
articles and books now written about the ! restructuring and turnaroundnot to
mention three years of trumpeting by the Obama Administration taking full credit for the
turnarounds successthe most startling aspect of the prevailing narrative is that the core
of how the restructuring really happened# inside !# is yet to be fully told.
(n the popular version of the companys turnaround story# as ! teetered toward
li5uidation in -..2# an Obama$appointed &+A* team# led by financier &teven 4attner#
swept in and hatched a radical plan% *hrough a novel use of the bankruptcy code they
would save the company by segregating and spinning out its valuable assets# while
+ashington furnished billions in ta3payer funds to make sure the company was viable.
*he real ! turnaround story# significant in saving the auto industry and the economy# is
contrary to the one that has been published. (n fact# the plan that was developed#
implemented and then funded by the government was devised inside ! well before
President Obama took office. (n what follows# the inside story of this historic chapter in
American business unfolds# laying bare the key facts.
!s e3traordinary turnaround began long before +agoner went to +ashington in search
of a massive loan to keep ! alive. !y involvement in that story began in !s darkest
days# five years ago on &unday# 6ovember -1# -../# when ( visited +agoner at his home
that morning# presenting a novel plan to save eneral !otors.
As a consultant with e3pertise in restructurings and turnarounds# ( had completed a half$
do7en assignments at ! over the years. ( had worked with +agoner in 822- when he
became chief financial officer. ( was asked to come in for a two$year stint as )9O of
!s 6ational )ar 4ental# the first time ! had recruited an outsider to lead a
turnaround in one of its subsidiaries.
By -../ ( had over -. years of e3perience with the auto industry and almost 1. years of
working on turn$ arounds. But for the past eight years ( had backed away from business
and my firm# Ali3Partners# to care for my daughters after the death of my wife. ( was
essentially :retired. But !s enveloping crisis and my friendship with +agoner would
bring me out.
9arly on that 6ovember &unday# ( called +agoner at his home in a ,etroit suburb. (
asked to see him right away# e3plaining that ( had a new idea that could help save the
company.
*hree hours later ( walked through his front door and into his family room. ( knew
+agoner believed ! could not survive a bankruptcy. &tudies showed consumer
confidence would crash. 6o one would buy a car from a company that was bankrupt.
;owever# what ( knew about the economic crisis and !s rapidly deteriorating li5uidity
position told me the company had no choice but to prepare for a bankruptcy.
<et ( agreed with +agoner. For a global company as big and comple3 as !# a :normal
bankruptcy would tie up the companys affairs for years# driving away customers#
resulting in a tumultuous li5uidation. (t had happened to other companies a fraction of
!s si7e. (t would mean the end of !.
=( dont 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# 4ick. But it doesnt have to be a company$killing
bankruptcy#> ( said. =( think we can create a uni5ue strategy that allows ! to survive
bankruptcy.>
*o be sure# my idea# sketched out on a few pages# was provocative. ( knew as ( pitched it
to +agoner that it might raise eyebrows# if not outright ob?ection# from others who
believed their plans would be safer.
(n short# ( proposed that ! split into two very separate parts before filing% :6ew)o# a
new company with a clean balance sheet# taking on !s best brands and operations@ and
:Old)o# the leftover ! with most of the liabilities. All of the operational restructuring
to make the new company profitable would also occur before a bankruptcy filing so !
could go through bankruptcy in a matter of daysnot months or years with creditors and
other litigants fighting over the corporate carcass while the revenue line crashes.
&eeking funding from the government# or any source# we would use Bankruptcy )ode
&ection 1A1# which allows a company to sell assets under a court$approved sale.
*ypically# 1A1 is used to sell specific assets# from a chair and desk to a factory or
division# but not the entire standalone company. "nder this strategy ! could postpone
filing a plan of reorganisation and a disclosure statement# which consume months and
fuel a bli77ard of litigation while market share and enterprise value bleed away.
+agoner listened# challenging every assumption. After discussing it with board members#
4ick asked me to come to ! and work on the plan# one of several alternatives !
would consider. ( volunteered to help ! on a pro bono basis. But what ( could never
anticipate was how deep and strong the opposition to my plan would ultimately be.
On *uesday# ,ecember -# ( pulled into !s ,etroit head5uarters at B am after most of
the companys e3ecutives had already arrived for work. ( was given a small cubicle and
conference room on the 1/th floor# a spacious but empty place that held !s corporate
boardroom and a warren of cubicles reserved for visiting e3ecutives and board members.
9ach day ( would be the sole person who got off the elevator on 1/# one floor down from
where +agoner and his team worked. (t was eerie and 5uiet# the main wall lined with
large oil paintings of !s past chairmen. (d walk past those gilded frames daily# feeling
the full weight of their ga7e# reminded of the history and past glory of what had been the
most powerful corporation on earth.
&pending 8/ hours a day digging through the numbers in !s filings# ( began working
in greater detail on the outlines of the plan and making some assumptions on what assets
should be transferred to 6ew)o and what would stay in Old)o# which ( dubbed !otors
'i5uidation. *here were thousands of crucial 5uestions that had to be asked and answered
with management% +hich brands and factories would surviveC +hich ones would the
company have to give upC +hat would be the endgame strategyC +hat would be the
enterprise value of 6ew)oC *he li5uidation value of Old)oC
+agoner and )OO Frit7 ;enderson were developing three alternative plans. First# they
hoped to avoid bankruptcy altogether# believing the government would provide enough
funding to bring ! through the crisis. At least two cabinet members in the Bush
Administration and others had provided assurances to 4ick and board members that
government help would be forthcoming.
&econd was a :prepackaged bankruptcy plan being developed by general counsel 4obert
Osborne with ;arvey 4 !iller# the dean of the bankruptcy bar and senior partner at +eil#
otshal D !anges. "nder this plan# ! would prepare a reorganisation in cooperation
with its bond creditors that would take effect once the company went into a )hapter 88
bankruptcy. *he goal of a so$called prepack is to shorten and simplify the bankruptcy
process.
!iller commanded great respect in bankruptcy circles and in the ! boardroom# and for
good reason. At the age of BE# !iller was the only attorney in the country who had
successfully dealt with as many high$profile bankruptcies. !iller was already in the
middle of the largest corporate li5uidation ever# at 'ehman Brothers.
And third was the 6ew)o plan# based on years of e3perience at Ali3Partners# where we
had a ma?or role in E. of the 8/. largest bankruptcies over 08 billion in the past 8E years.
! had also retained !artin Bienenstock# the restructuring and corporate governance
leader from ,ewey D 'eBoeuf# to help develop the 6ew)o plan as well.
(nside and outside !# the pressures mounted. 9ach day the company lost more money
and got closer to running out of cash. (n +ashington several prominent politicians began
calling for +agoners resignation. On ,ecember B# &enator )hris ,odd# the )onnecticut
,emocrat# told Face the 6ations Bob &chiefer that +agoner had to move on.
*he ne3t day ( went to see +agoner to offer encouragement and advice. (t is not unusual
for a )9O to lose his ?ob when his company is forced into bankruptcy and a ma?or
restructuring. (d seen this play out many times before and learnt the boss should never
volunteer his resignation without first putting in place the things that would help the
organisation survive. ( wanted to help fortify 4icks resolve and keep us all focussed on
the endgame.
From my perspective +agoner had been unfairly treated by many politicians and the
media. &ince taking over as )9O in -...# working closely with Frit7 and vice chairman
Bob 'ut7# 4ick orchestrated large# dramatic changes at the company. *hey closed !s
5uality# producti$vity and fuel$economy gaps with the worlds best automakers# winning
numerous car and truck awards. *hey built a highly profitable business in )hina# the
worlds biggest potential car market. *hey reduced the companys workforce by 8F1#...
employees# to -F1#.... *hey reached a historic agreement with the "A+ 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 08.. billion in
unfunded retiree obligations. And he was able to accomplish all these changes without
causing massive disruptions among !s dealers or ma?or strikes with the unions.
+ar room% +agoner and Ali3 saved ! with one of corporate Americas greatest ;ail
!arys# but neither stayed with the company
"ltimately# those structural changes positioned the company not only to survive but also
to bring about the e3traordinary turnaround. But now# with the economy and the company
in free fall# all of that hard work seemed to be forgotten.
(t was late in the day on ,ecember /# around E%1. pm# when ( walked into +agoners
office.
=4ick# do not resign or even offer to resign#> ( told him. ='ater you may have to fall on
your sword to get the funding deal done with the government# but dont do it until we get
the three things we need. (f youre going to be killed on the battlefeld# we need to make it
worth it.>
=And what is that e3actlyC> he pressed me.
=+e have to get government funding of 0F. billion to 0E. billion. Plus# we need an
agreement with the government and !s board to do the 6ew)o plan. And we must put
a 5ualified successor in place. (t must be Frit7 and not some government guy. (ts going to
be painful for you# but youve got to stay on the horse until we get all three.>
+agoner was already there. ;e had no intention of resigning and was determined to
complete his mission. ( gave him a bear hug# letting him know he had my full support.
+hen we gathered for a telephonic board meeting on ,ecember 8E# the mood was urgent#
the tension high. Only two weeks after arriving at ! ( was about to present the plan to
the board of directors in a conference room outside +agoners office. Also on the phone
were the companys lawyers and investment bankers.
A &piderphone was in the middle of the table for what would be a historic meeting of the
board.
Only three days earlier the &enate had abandoned negotiations to provide funding for the
auto industry. &uddenly a free$fall bankruptcy within days loomed large. )onsideration of
the 6ew)o plan# now refined with the help of chief financial officer 4ay <oung and other
senior finance staffers# took on greater urgency as we were ?ust two weeks away from
running out of cash.
=( know the company has many lawyers and bankers working on other approaches#> (
said. =( know many of the people doing the work# and (ve worked with many of them
over the years. But ( have an alternative strategy for the boards consideration. ( suspect
there might be some controversy over it# but ( believe this could be lifesaving for eneral
!otors.>
After carefully laying out the details and time se5uence of the 6ew)o plan# ( drew to a
close.
=+ell#> one director asked over the phone system# =( want to hear what ;arvey !iller has
to say about this. (s there a precedent for this# !r !illerC>
!illers deep baritone voice filled the room# pointing out that the idea was unorthodo3
and lacked precedence.
Other attorneys chimed in# claiming the plan oversimplifed the situation and there would
be ma?or problems with it. <et another added that this would not be viewed well by the
court and doubted any ?udge would allow it. )ollectively# they characterised it as a long
shot# discouraging the directors from thinking the plan could ever succeed.
;earing all the disapproving words amplified from speakers in the ceiling# ( felt
ambushed by general counsel Osborne# who was strongly advocating for a prepack$ aged
bankruptcy strategy# which he believed was the only way to go. "nbeknownst to me he
had previously proposed the idea to !s board# naively believing ! could complete a
prepack bankruptcy in 1. days.
!s most senior leaders had been working with me on the 6ew)o plan around the
clock. ( felt strongly this alternative approach could succeed# and ( knew that any other
type of )hapter 88 strategy would kill vehicle sales and lead to the demise of !. 6ow it
seemed as if the 6ew)o plan could be dead on arrival.
=(f the attorneys feel this is a waste of time and corporate resources# ( dont know why we
would pursue this#> stated another director.
A chilling silence descended upon the room# broken by Gent Gresa# the former )9O of
6orthrop rumman and a ! board member since -..1.
=( understand this has some risk attached to it# but were in a very risky state right now#>
he said. =And ( understand it may even be unusual and unprecedented. But its certainly
creative# and 5uite frankly# its the most innovative idea weve heard so far that has real
potential in it. ( think it deserves further consideration and development.>
4ick then addressed another lawyer on the call# !artin Bienenstock.
=+ell# (ve actually studied the problem# too# and theres a way for this to work#> said
Bienenstock. =Almost all bankruptcies are uni5ue and the )ode does allow for the
transfer of assets. ( cant imagine a ?udge taking on this problem and not wanting to solve
it. +eve done a preliminary analysis# and its not as cra7y as it sounds. (ts uni5ue and
compelling.>
=Okay# weve heard both sides of it#> 4ick said after others spoke# smartly bringing the
debate to a reasonable close. =( suggest we continue working to develop both the prepack
plan and the 6ew)o option# while seeking the funding to avoid )hapter 88 if at all
possible.>
*he meeting ad?ourned without a vote. ( left the room disappointed to hear Osbornes
legal chorus so dead set against 6ew)o and surprised their remarks had stopped all real
discussion of the plan. But ( also was relieved the plan was not completely dead# at least
not yet.
Over the ne3t weeks ( worked closely with Bienenstock# assistant general counsel !ike
!illikin# Al Goch of Ali3Partners and ! senior vice president Hohn &mith on the
6ew)o plan. +e huddled do7ens of times with +agoner and ;enderson to work out
which brands ! would ultimately have to give up I;ummer# &aturn# &aab and PontiacJ
and which ones it would keep I)hevrolet# )adillac# !) and BuickJ. (nformed debate
and deep analysis of structural costs led to decisions about pro?ects# factories# brands and
countries.
On &unday afternoon# !arch -2# +agoner called me. (t was a call ( had hoped would
never comebut here it was.
=Hay#> he said# =( wanted to give you a heads$up. *he Administration wants me to step
aside. *he President is going to hold a press conference tomorrow morning.>
+agoner told me ;enderson would be named )9O. =+hat about the bankruptcyC> (
asked.
=*heyre enamoured with the 1A1 6ew)o plan. *hey seem bound and determined to
make us file )hapter 88 and do 6ew)oK *his is really tough#> he said.
=(m so sorry#> ( said# pausing# =butK you got the money. *heyre doing the 6ew)o
plan# and Frit7 is your successorK <ouve succeeded. <ou got the three things.>
4ick responded with resigned acknowledgment# then said# =Please help Frit7 in any way
you can#> before hanging up.
4icks personal sacrifice was not in vain. !onths of hard work had paid off. *he assets
and liabilities had been selected.
*he 6ew)o legal entities and 0FE billion ta3$loss strategy had been developed. *he
strategy ( pitched to +agoner in his living room four and a half months earlier was the
plan chosen by *eam Auto in a meeting on April 1# -..2 in +ashington.*reasury agreed
to fully fund 6ew)o with e5uity# and thus it became the chosen path to save the
company.
By late April# 6ew)o implementation was well under way. *he bankruptcy filing would
occur in 6ew <ork within weeks. !y partner# Al Goch of Ali3Partners# would become
the chief restructuring officer running Old)o# now officially named !otors 'i5uidation#
(nc. (n my notes# ( ?otted% =!y work is finished... impact from this day forward will be
negligibleK *reasurys in con$ trol. *ime to get back to my girls.>
On Hune 8# -..2# eneral !otors filed for bankruptcy in 6ew <ork# with 0/- billion in
assets and 08B1 billion in liabilities.
(t was the largest industrial bankruptcy in history. ;arvey !iller and his team
masterfully defended and guided the 6ew)o plan through the bankruptcy court#
successfully making it their own. 6ew ! e3ited bankruptcy protection on Huly 8.# -..2
in a mere F. days# as designed. Frit7 called and thanked me.
*here would be many other twists and turns to !s narrative# but the company got its
fresh start using the 6ew)o plan# and the industry was saved with government funding
from both Presidents Bush and Obama. (n !arch -..2# President Obama cited a =failure
of leadership> as his reason for forcing out +agoner.
(n fact# it was +agoners e3ercise of leadership through years of wrenching change and
then simultaneously seeking government funding while developing three restructuring
plans that put ! in position to survive the worst economic collapse since the reat
,epression and complete its turnaround# which# ironically# became a key campaign issue
in the re$election of Barack Obama in -.8-.