As the subprime mortgage crisis hit the economy in late 2008, American automakers General Motors, Chrysler, and Ford lost customers. New vehicle sales in the United States decreased by 37%; General Motors sales slipped 41% (Stoll, Dolan, McCracken, & Mitchell, 2008, December 3). GM’s credit rating nosedived (S&P cuts General Motors, 2008, November 7) as they hemorrhaged cash. By November, the companies’ CEOs travelled to Washington, DC seeking aid from the government (McCraken & Stoll, 2008, October 27). Executives relayed that they would likely run out of cash by the end of 2008.
The Bush Administration provided $13.4 billion to GM in December 2008 through the Trouble Asset Relief Program (TARP), and the Obama Administration negotiated a plan to provide additional assistance in exchange for concessions from GM. CEO Rick Wagner and several board members were replaced, and GM entered a fast-line bankruptcy in which they shuttered some of their brands (e.g., Saturn and Pontiac) and reduced the job force (Rattner, 2009, October 21; see White House Fact Sheet below). In June, GM filed for bankruptcy reorganization and in July, they exited bankruptcy (Woodyard, 2013, December 9). At this time, the U.S. government held a 61% percent stake in the company. When GM was relisted as a public company in November 2010, the U.S. Treasury sold almost half of their stock in GM for $13.5 million. By December 2013, the U.S. government had sold all of its shares in the company.
At the time, public opinion was divided. Some though GM should face bankruptcy. Others supported the bailout, not just because it would save the industry but because it would preserve jobs. Even now, people disagree about whether the bailout was the correct course of action (see Boudette, 2013, December 9).
More relevant to this website is the impact of the bailout on the ignition switch recalls. Some pundits blame government intervention in 2008-2009 for creating the conditions leading to the faulty ignition switches. My assessment is that the cultural norms were in place long before the bailout, as evidenced by the slow-to-act approach taken by engineers and investigators between the early 2000s, through the bailout, until 2013. It’s possible that cost-cutting from the bankruptcy process exacerbated a focus on reducing cost, but the Valukas report does not ever refer to the bailout.
The government task force overseeing GM’s restructuring also did not know of the looming crisis (Former U.S. Auto Advisor, 2014; Kary & McCracekn, 2014, April 3). Given how little GM itself knew, I do not doubt the truth of these assertions.
The biggest impact of the bailout relates to their standing as defendants in civil lawsuits. As I discuss in the post “Ruling Shields GM From Ignition Suits,” because of a liability clause in GM’s bankruptcy, the “New GM” is protected from legal suits related to the ignition switch. Experts believe that GM would have been forced to pay billions of dollars had the suits gone forward.
Boudette, N. (2013, December 9). Did Detroit receive America’s most successful bailout? Wall Street Journal. Retrieved from http://blogs.wsj.com/corporate-intelligence/2013/12/09/did-detroit-receive-americas-most-successful-bailout/
Former U.S. auto advisor: GM recall crisis ’emblematic’ of cost culture. (2014). Automotive Digest. Retrieved from http://automotivedigest.com/2014/05/former-u-s-auto-adviser-gm-recall-crisis-emblematic-cost-culture/
Kary, T., & McCracken, J. (2014, April 3). U.S. government said unaware of GM faulty switches in bailout. BloombergBusiness. Retrieved from http://www.bloomberg.com/news/articles/2014-04-03/u-s-government-said-unaware-of-gm-faulty-switches-in-bailout
McCracken, J., & Stoll, J. D. (2008, October 27). Bankruptcy fears rise as Chrysler, GM seek federal aid. Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB122506556122670509
Rattner, S. (2009, October 21). The auto bailout: How we did it. Fortune. Retrieved from http://archive.fortune.com/2009/10/21/autos/auto_bailout_rattner.fortune/index.htm
S&P cuts General Motors to CCC+. (2008, November 7). BloombergBusiness. Retrieved from http://www.bloomberg.com/bw/stories/2008-11-07/s-and-p-cuts-general-motors-to-ccc-plus-businessweek-business-news-stock-market-and-financial-advice
Stoll, J. D., Dolan, M., McCracken, J., & Mitchell, J. (2008, December 3). Big Three seek $34 billion aid: GM, Chrysler warn of collapse this month as lawmakers explore bankruptcy. Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB122823078705672467
Woodyard, C. (2013, December 9). GM bailout played out over five years.
USA Today. Retrieved from http://www.usatoday.com/story/money/cars/2013/12/09/gm-bailout-timeline/3929953/