Wednesday, June 17, 2009

UK's Riversimple, China-based Horizon Fuel Cell debut 2-seat, hydrogen car prototype - WXIN

In a back page story on most almost defunct newspapers, a British company, with the assistance of a former Porsche executive has developed a car propelled by hydrogen which will be leased for the sum total of $315.00 per month, which includes all of the necessary fuel.  Imagine that, $315.00 per month for not only the car but the gas.  Oh yeah, and the vehicle produces exactly 0 emissions.  0.  The carbon footprint on this vehicle also 0.  Need for oil from hostile countries that fund and train terrorists with designs on destroying us..0 too.  Money in the pockets of greedy oil executives and oil companies... 0, 0..0 and 0.  Oh, I digress.  The response to this revelation and product that should have been hailed as something close to a cure for cancer, ho hum....., let's get back to Carrie Prejean 


Why no fanfare, excitement, government assistance for this remarkable company? Because this product does not fit within the existing  automobile infrastructure.  Same with Germany and Japan, the other two countries that build most world cars.  This is an example of how subsidies business can and will destroy innovation.  We don't need better cars, we need consumers to continue to purchase are bad cars.  Innovation is messy, it requires retraining and retooling.   Current auto executives will be out of work and we can't have that.  With the U.S. government essentially owning the means for 2/3rd of U.S. auto production, we are in a unique opportunity to capitalize on this new technology.  There really is no other option, or hope.

UK's Riversimple, China-based Horizon Fuel Cell debut 2-seat, hydrogen car prototype - WXIN

Monday, June 15, 2009

Commodity v. High Tech: How we need new technology in automobiles

I think you will notice that most of the companies that have filed bankruptcy over the past 9 months are producing commodities as opposed to high tech products. In fact, many high tech companies, including RIM and Apple are actually doing quite well. In contrast to lots of the other negative news out there, I think this is actually a good sign. Moreover, if the government takes note, it will encourage it to take the right steps with regard to the ongoing automobile bankruptcies.

A commodity, as defined by Webster's dictionary is:

A physical substance....... which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be.

High tech proprietary products, however, are not subject to the same economic principals as commodities. For instance, Apple has essentially been able to set the price of Iphones for the last few years. As such, it is generally better for a company to be selling high tech proprietary products, as opposed to commodities.

Alas, all products become commodities. Even Iphones are having significant pricing pressures as competitors such as the Palm Pre enter the market.

The genius of the U.S. capitalist system is that it has always provided the greatest incentive for the creation of high tech proprietary products. That is why we lead the way in early industrialization, the computer revolution, and the information technology boom. Unlike our European counterparts, we were not hamstrung by entrenched businesses and the business interference of royalty that were able to mold the laws and markets to encourage the continued purchase of their outdated and fungible products.

In contrast to the U.S., look at countries that really heavily or solely on a commodity based economy. Take for instance, Saudi Arabia. When the price of oil drops, so does Saudi Arabia's economy.

Unfortunately, while we have benefits by a diverse and fluid economy in which new technology is always replacing tired commodities, some businesses have worked against this dynamic system to stack the deck in their favor. Many of our industries have promoted laws and regulation that encourage the artificially inflated prices for their commodities. There is no better example of this than the pharmaceutical companies. The same companies that created lifesaving drugs during the first half of the 20th century, but morphed into sales, marketing and lobbying companies during the second half. Name one drug that has cured anything over the past 25 years. Can't, can you? However, you can probably name 5 diseases that didn't exist 25 years ago, and the corresponding drug that can "cure" it. Yes, I know, we are all grateful that "restless leg syndrome" has been eliminated from our life. All of this culminated with the Medicare Prescription Drug Modernization and Improvement Act, signed into law in 2003, which made it a crime to negotiate with the drug companies for lower prices.

Applied to the automotive industry and the recent bankruptcies, a substantial part of the vehicle has become a commodity. Don't cry to much, as the industry has had almost a century of operating as a high tech businesses with the same technology. That is why Hyundai has one of the top luxury cars in the world, the Genesis, at such a cheap price. The reason for this, is twofold. First, that the existing infrastructure is set up to make the internal combustion engine. I have blogged about this in detail, as well as the need for the government to facilitate a move to new technology. The second, is government incentives that encourage consumption of petroleum. This lead to GM tabling the eclectic car, though it had an over 12 year head start. This needs to be eliminated immediately. If higher gas taxes aren't palatable, substantial investment in new propulsion technology is crucial. After all, the Pruis, which is the only production car with a high tech engine is selling like crazy. Why? Well there is a certain amount of brand status, but also because it is a silent engine. This was emphasized on the show Weeds, where UTURN, the local drug dealer outfitted all of his couriers with Prius, so "no one knew when they were coming." If the current automotive bankrupties are done right, we can revolutionize the automobile with high tech proprietary technology, no one will know that America is coming, and we will rule the next generation of car manufacturing.

Friday, June 12, 2009

Seinfeld Theory Argued In Coyotes Case - Bankruptcy Beat - WSJ

Could it be any cooler!  A bankruptcy lawyer in the Phoenix Coyote bankruptcy used a Seinfeld reference in the case--despite his wit, he lost.  Specifically, it was the returning the jacket for "spite" episode--which should have been as good of a reason as any to return a jacket.  I think that Seinfeld is significantly metaphoric, and there are a number of episodes that could be used in a legal case.  For one, I like the rental car episode, where despite the " reservation" there was no car.  Jerry noted that anyone can "take a reservation," but having the car is the hard part.  This is true in all types of cases, where anyone can make a representation with regard to a number of things, though it is a rare few that can come through on them.  Also, who can forget the final episode where Jerry and the gang were convicted mostly because the were of bad character.  As Baboo testified to, "you are bad man, a very bad man."  I have had the occasional client who lost a case simply because he or she was a "bad man."   Anyone else who can come up with a Seinfeld episode with legal parallels get's extra credit.  Come on, now!  Let's hear it.

Seinfeld Theory Argued In Coyotes Case - Bankruptcy Beat - WSJ

Thursday, June 11, 2009

Article - stock to be worthless.

Business psychology is absolutely amazing to me.  GM stock was trading at over $1.00 a share just  prior to the "imminent" bankruptcy filing.  It is still trading at over $.25 per share.  There is absolute no reason for this.  Any attorney will tell you that except in the most exceptional cases, common stock in a company that goes through a Chapter 11 bankruptcy is worth nothing.  There is a legal concept called the absolute priority rule--which must be adhered to in a bankruptcy plan--which requires that higher priority claims be treated "better" than lower priority claims.  As such, if the unsecured creditors receive less than the full value of their claim, the common shareholders must receive NOTHING.  GM was never going to be a 100% plan.  Despite the application of this fairly basic legal concept, it has taken the WSJ to break this story.   This proves a number of things, one being the stock market is entirely unrelated to rational business and legal concepts--suddenly ENRON's desire to trade in the weather doesn't seem that crazy.  However, rational markets should not allow this.  Finally, along with Britney Spears' proclamation that "I am not that innocent,"  the truism of GM stock worthlessness is revealed.

Article -

Wednesday, June 10, 2009

Illinois Bankers Association - Workshops

Tom Wallrich and I will be speaking at the Illinois Banker's Association Annual Convention in Las Vegas on the case study of a real estate workout.  

During their workshop presentation, we will focus on a case study of an actual real estate workout involving a national residential builder/developer and a national lender. The case study begins with pre-default loan management, analysis of the default process, continuing with negotiation and preparation of the forbearance agreement, dealing with interim management and control issues, and proceeding through foreclosure and post-foreclosure issues. This session also deals with the application of extraordinary remedies such as receiverships, involuntary bankruptcies and Chapters 7 and 11 bankruptcies. In addition, we will examine the bank’s resultant ownership of the collateral and its marketing, resale and ultimate final disposition.

Illinois Bankers Association - Workshops

Tuesday, June 9, 2009

Listen to AM950 KTNF | AM 950#edit-show_title

Listen to me on Air America speaking about GM.  I was on the June 1, 2009.  Just click on the link.  I was on the second half of the show.  

Listen to AM950 KTNF | AM 950#edit-show_title

Wednesday, June 3, 2009

Now Departing: GM’s Corporate Jets - Bankruptcy Beat - WSJ

Looks like auto executives at GM will be flying commercial, along with it's workers.  The horror, the horror!

Now Departing: GM’s Corporate Jets - Bankruptcy Beat - WSJ

GM goes bust: Bankruptcy, at last | The Economist

My favorite conservative magazine get's the GM bankruptcy wrong.  Though, it is appropriate for a magazine called the Economist to focus solely on the economics of the reorganization.  While I do not disregard how GM financial structure lead to its Chapter 11 filing, the reality is someone is going to have to address the technology behind the vehicles.  My Popular Mechanic will do a piece.

GM goes bust: Bankruptcy, at last | The Economist

Internet searches show brand damage for GM.

This will not be a shocker for anyone who has read my blog, but a review of the Internet searches since it filed bankruptcy on Monday illustrative that GM's brand is damaged. See attached link. The most common Internet search regarding GM is related to the bankruptcy, not a desire to buy a shiny new Corvette or any other GM car for that matter. This is consistent with how bankruptcy will damage any brand. As I said on Monday, while bankruptcy does a great job of managing existing debt, it without question damages revenue.

As such, without a cohesive business plan, the company will not survive a reorganization (or will liquidate shortly thereafter). And with all do respect to the political talents of Brian Deese, a Yale law graduate--who prior to this job was a political operative--is not qualified to put together such a plan. As a Democrat it is insulting that a purely political talent is being put in charge of this process. The reorganization of GM, and the saving of 3 million jobs, should not be politicized. I am not naive enough to believe that political consideration won't be a part of this process; however, all efforts should be to remove politics from these decision.

It is pragmatically, and politically imperative that a plan is set forth quickly. Michigan Governor referred to a Green Industrial Revolution (my words) in her speech on Monday. That is a great tag line, but substance is needed. A Manhattan project of automobile propulsion could put the US on the forefront of the auto industry for the next 50 years. The alternative is not good.

Monday, June 1, 2009

GM Files Bankruptcy Today

For all (that me be all of one) who have been reading my blog for the past few weeks, you know that I have been ridiculing the press for the adjectives used to set forth the "when" of GM's bankruptcy filing. Well, they got the last laugh, as GM, the icon of U.S. Industrial strength and reach, filed bankruptcy today.

Here is what we know. We know who will own the company after the bankruptcy reorganization. It will be a three way split with government (as the majority owner) and the UAW and bondholders taking an approximately even split. The reason for the delay, and for all the adjective wars in the papers (as prompted by the parties) was to get initial agreement from the secured bondholders for this equity split. Without that, the bondholders could have essentially forced GM to liquidate. For anyone who has technical interest in the whys, it is due to the definition of a secured claim under 11 U.S.C. §506, and how those claims can be treated in a bankruptcy plan pursuant to 11 U.S.C. §1129. Well, let's just say, they needed their agreement.

Other things we know. That the Company is listing debts as approximately 175 billion with assets of approximately 85 billion. As the assets are generally listed at liquidation value on bankruptcy schedules, in terms of it's balance sheet, GM is not in that bad of shape. There are many companies operating very profitably in this country with hard asset to debt ratio's significantly worse than GM's 1(asset) to 2(liability) ration. Think about any small business you know, restaurant, service station, etc. which has substantial debt and essentially no assets. This is why bankruptcy is such a powerfull, important and necessary business tool; it saves businesses in which their aggregate is more valuable then their parts. What this means in the case of GM, is that it is really not a balance sheet problem, but a profit and loss problem. This fact is emphasized by the fact that the U.S. government already contributing 20 billion, and committing to another 30 billion. The government money wasn't used to pay old debt, but was used to cover operating losses.

Despite this, the bankruptcy is being reported as a standard fresh cash reorganization. See attached link. In other words, the bondholder debt write-off will make the company's balance sheet healthy again.

Thinking about GM as I would any bankruptcy, the first question I always ask is whether, forgetting about the unsecured debt(or in the case of GM unsecured debt, and bondholder debt), can the company make money. When the company's financial problems are a result of an acute circumstance (such as the loss of one key customer, a spike in commodity prices, dramatic changes in debt service) the answer is often yes, and the company is a good bankruptcy candidate.

To emphasize this point, I actually draw a timeline, and put the filing date as a vertical line. I ask this question more than once, because it the one critical question that and if the debtor gets wrong, the case will fail. After all, bankruptcy is not intended to save all companies, merely profitable companies. In this case, I am sure that GM's bankruptcy attorneys asked this question, and I am sure they got some kind of answer like this: "if the bondholders go away, sure, we make money."

This my friends, is what is scaring me.

Why am I scared you ask? Because I don't necessarily believe that answer. I really believe, as I have blogged about in the past, that GM financial issue is one of a lack of revenue, and not debt structure. What I mean by that, is the company doesn't make enough money to survive regardless of what the debt is. In fact, we already know this, as the government is going to have to put in at least 30 billion more dollars, even though GM will not be paying any of it's debt. Think about this, a company with over 85 billion dollars of hard assets can't make any money. Ouch! You have to be a pretty bad business person to be given 85 billion dollars, and not be able to make money with it. In fact, Bernie Maddoff did better than that.

To make matters worse, a dirtly little secret of bankruptcy is that a Chapter 11 filing actually depresses revenues. This is logical in that people shy away from brands they are unsure will be supported. So, unless this has been factored into the equation, the 30 billion is probably light.

Why else am I nervous. Well, this seems to be bankruptcy being conceived and planned by politicians and lawyers. I am a lawyer, third generation actually, and am proud of what I do, and my profession, but let me tell you another dirty little secret: LAWYER DON'T MAKE PROFITS. We facilitate, restructure, sometimes streamline, be we don't produce upside. In fact, profits and growth make us nervous, as it means that someone is taking a risk. Now I am not suggesting that this process could have been done without lawyers. Nor am I suggesting that the government was wrong in intervening. As I have said before, 3 million jobs are at stake, as well as the fate of one American city(no joke).

However, there needs to be a business vision. For GM restructure to be successful, someone is going to have to re conceive and reinvision the American car company in a way that makes it relevant to consumers again. And that means, as I have said before, at a minimum the scrapping of the internal combustion engine; which will require an entire rebuilding of the infrastructure. So far, none of these issues have been discussed, or at least reported. This are big elephants in the room! I would love to see a true business genius--Bill Gates, Warren Buffet were are you?--brought into this process to oversee the business aspects of the restructure.

This is about all we know now, though I am sure we will know more soon. I sincerely hope that we hear a more detailed reorganization plan, and that we see engineers and entrepreneurs working on the GM restructuring team.