The Exuberant Accountant - Scott Heintzelman

By the time you are reading this, GM may have already filed for bankruptcy.  It is hardly a surprise that the bondholders rejected the offer from GM.  On Tuesday when the union agreed to only take a 20% stake in the new company, many speculated that GM would offer the bondholders a much larger stake in the new company.  When they did not, the bondholders basically figured they would do better in bankruptcy court.

There are several things that I find interesting.  First, why did GM not sweeten the pot by offering bondholders more than the original 10% stake in the company?  They clearly had to know this would be rejected.  The bondholders have been saying as much for weeks.  It is my guess they wanted to enter bankruptcy, but felt obligated to keep up the public perception that they were trying to avoid it at all costs.  The reality is they needed to start over and bankruptcy was the only way to clean the slate.

During the past 6 months of the recession with talks of bailouts and stimulus, this story may be the most fascinating.  I have been following with interest and am fascinated with a President of the United States actively involved in a bankruptcy proceeding.

In May 2007, Cerberus paid an amazing $7.4 billion for an 80% stake in Chrysler.  At the time I thought this was a strange investment as Chrysler was struggling and had a huge debt load.  They will now lose the entire investment as a result of bankruptcy.

  Many companies are facing weak cash flow in the current economy and are failing to take the right corrective action steps. This will eventually lead to some hard decisions if the current management can not turn the company toward profitability. When things go badly for an extended period, there are generally four options that management can choose from: sale or merger, file for Chapter 11 of the Bankruptcy Act, file for liquidation under Chapter 7 of the Bankruptcy Act, or seek an informal reorganization – or "workout."

Informal reorganization, or "workout," is often seen by management, stockholders, and creditors as the best solution. This type of reorganization is seen by creditors and stockholders as a less drastic measure and, therefore, is often seen as an option that has the least to lose and the most to gain. This option also has the added benefit of usually being less expensive.

What went wrong?  As I am sure everyone else did this morning, I read with great interest the Lehman Brothers and the Merrill Lynch stories.  Could this have been prevented by better leadership?  Was greed the reason for these two storied firms failing?  I would enjoy hearing what you think.