Inside GM's bankruptcy filing

A look at the automaker's explanation for what went wrong is revealing for what it says, and what it glosses over.

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By Alex Taylor III, senior editor

GM's junk heap
Over its history General Motors has made its share of bad products. Some were poorly built, some were badly executed, others suffered from lousy timing.
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NEW YORK (Fortune) -- Ever since it filed for bankruptcy protection on the morning of June 1, General Motors has been energetically trying to get the word out that the new GM will be a much better company than the old GM. Executives have been interviewed on radio, appeared on television, and held endless rounds of conference calls with securities analysts and the media. The message, according to CFO Ray Young: "We will fix GM once and for all."

To spread the news, it has launched a new Web site, to give readers the 'latest updates on GM's progress." Events have taken on a relentlessly optimistic spin, packaging what ordinarily would be horrific news in the glossiest of wrappings. Reporting May sales, for example, GM declared they "clearly reflect consumer confidence in GM's long-term viability", even though they were down 30% from a year earlier.

But the affidavit filed by CEO Fritz Henderson as part of the bankruptcy filing tells a different story: How GM (GMGMQ), confronted by events beyond its control spent several years looking for a way out of its accelerating collapse. By the end, bankruptcy had become the only alternative.

One name is conspicuously absent from Henderson's 55-page narrative: former CEO Rick Wagoner, the man who preceded him at the head of the company and who led it up until the final days of the old company.

Henderson's account blames GM's decline on the expansion of strong global competitors with lower operating and legacy costs. His rear view vision is short: Henderson makes no mention of any actions before 2004 or any shortcomings on the company's part. GM, he said, "had recognized the need for bold action" but by the fall of 2008, the deepening recession, aggravated by the collapse of Lehman Brothers, made its survival impossible.

Henderson takes a peculiarly GM-centric view of some events. He writes that "GM was exploring strategic third-party alliances...beginning with GM's consideration during the summer of 2006 of a partnership with Renault-Nissan." He neglects to mention that GM was dragged into the talks by investor Kirk Kerkorian and then it all but scuttled any deal by asking for a huge cash payment. Henderson says merely that 'the parties were unable to reach agreement on acceptable terms."

Then came Chrysler. Henderson says GM started talks with Chrysler in the spring of 2007, the first time the company has confirmed their existence. Henderson says GM saw a merger "as having the potential to create significant synergies" that were greater than the equity value of either company. The first phase of discussions finally halted when GM concluded that a combination of the two companies "would only exacerbate GM's exposure to a dwindling U.S. auto market."

Nevertheless, GM went back and took another look at Chrysler a year later, in August 2008, and a possible hook-up remained a front-burner topic until November of that year. By then, the financial markets and operating conditions had sharply and rapidly deteriorated, making a deal impossible. Chrysler would go on to lose $16.8 billion in 2008.

By now GM was getting desperate. Much as Chrysler searched the world for partners and financing in its last months, GM was rattling its own tin cup. It hunted for potential equity investments from various foreign entities and sovereign wealth funds but failed because of the company's weak condition and poor prospects.

That was accompanied by a spike in oil prices to $150 a barrel and, even as fuel prices moderated in the fall, by "the worst economic downturn...since the Great Depression." During the summer, GM began rummaging around its attic for assets to sell. It thought it might get $500 million for Hummer. And a surprising value of $2 billion to $4 billion was placed on OnStar, GM's telematics service. Alas, "none of the foregoing was able to be consummated on reasonable terms." (Hummer's sale to a Chinese heavy equipment manufacturer, was announced June 2).

Thus, the run-up in gasoline prices, declines in the housing market, the freeze of equity and debt markets, and plummeting consumer confidence spelled the end by late September 2008. At that point, GM, which previously had rejected bankruptcy as unacceptable, realized it "had no choice but to reach out to the U.S. government for financial assistance."

After bouncing GM's first two viability plans, President Obama on March 30 said the government would keep the company going, but GM needed "a fresh start." Hence, the Chapter 11 filing.

For now, GM is essentially shut down, many of its plants closed for up to 11 weeks as it tries to work off an inventory of hundreds of thousands of unsold cars. The need for speed in bankruptcy court is obvious.

As Henderson says, "Any delay will result in irretrievable revenue perishability and the loss of market share. It will exacerbate and entrench resistance to General Motors' products".

But he adds, with emphasis, "There is no other alternative." He couldn't have said it any better. To top of page

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