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.
Thursday, June 11, 2009
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.
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.
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!
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.
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.
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.
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.
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