2008 Auto Industry Crisis Pushed Chrysler and GM Into Chapter 11 in 2009

At about 8 o'clock on the morning of 1 June 2009, General Motors filed for Chapter 11 in a federal court in Manhattan with US$172.81 billion of debt against US$82.29 billion of assets and about US$2 billion in cash. Its filing became the fourth-largest corporate Chapter 11 in American history. Barely a month earlier, Chrysler had gone the same way.

Behind both filings lay a simple squeeze: buyers abandoned thirsty trucks just as the financial system seized up. What followed was a rescue run by governments, a legal fight that reached the Supreme Court and the end of several brands.

What caused the 2008 auto industry crisis?

The crisis was the car trade's share of the 2008 financial crisis and the Great Recession. It touched European and Asian makers too, but it hit hardest in the United States, and Canada felt it through the Automotive Products Trade Agreement. Rising fuel prices, which had been climbing since the energy crisis of 2003 to 2008, discouraged people from buying SUVs and pickups.

That mattered because those vehicles were the pride and profit of General Motors, Ford and Chrysler, the Big Three, which had built their business around them. With few fuel-efficient models to sell, they watched sales slide, and by 2008 the financial crisis was pushing up the price of raw materials as well. Most manufacturers, Toyota among them, suffered double-digit declines and fought back with heavy discounts. North American buyers turned to smaller, cheaper imports from Japan and Europe, and the Big Three drew criticism for a range ill-suited to dear fuel.

Buyers abandoned thirsty trucks just as the financial system seized up.

How badly did the crisis hit carmakers outside Detroit?

Badly, and unevenly. Toyota reported a double-digit fall in June 2008 sales, blamed on slow sales of the Tundra pickup and shortages of the Prius, Corolla and Yaris. By 22 December 2008 it expected its first operating loss since 1938, of $1.7 billion, and cut its profit forecast to US$555 million from $13.9 billion. President Katsuaki Watanabe called the change in the world economy one that comes once in a hundred years. Toyota went to the Japanese government for loans, and later quit Formula One, on 4 November 2009, after eight seasons.

Honda left Formula One on 5 December 2008, and its directors took a 10% pay cut. Nissan trimmed 80,000 vehicles from early 2009 output, Suzuki about 30,000 from its Japanese production, and Mitsubishi cut planned output by 110,000 and ended night shifts at two factories. Subaru's parent withdrew from the World Rally Championship a day after Suzuki. Toyota's sales fell 33.9% and Honda's 31.6%.

Europe saw sales drop sharply too, and governments debated aid, particularly in France, Germany and Italy. PSA Peugeot Citroen expected sales to fall by at least 10% in 2009 after a 17% quarterly drop, and announced 2,700 job cuts, then 11,000 worldwide by February 2009, none expected in France. Renault's 2008 net profit of 599 million euros was down 78%, yet that still made it one of the few car makers to stay in the black. On 24 November 2008, Nicolas Sarkozy, then French president, and Germany's chancellor Angela Merkel agreed to back their industries. Fiat shut plants, then curtailed the closures after the Italian government moved to stimulate the sector.

South Korea told a different story. Hyundai-Kia overtook Honda in 2008 as the world's fifth-largest group and passed Ford in 2009 to rank fourth. It offered cheap, well-equipped cars, such as the Kia Picanto and Hyundai i30, backed by generous warranties, and a very weak won helped exports. Hyundai even let customers who lost their jobs return a new car for a refund. It was not immune: it cut production in December 2008 in the US, China, Slovakia, India and Turkey. SsangYong, owned by SAIC, was the worst hit, with sales down 63% in a quarter.

Why was General Motors so exposed?

General Motors was fragile before the crash. It lost US$10.6 billion in 2005. In 2006 it failed to win US government financing for its pension liabilities and to forge alliances with Nissan and Renault, and in 2007 its loss reached US$38.7 billion.

On 7 November 2008 GM reported that it expected to run dry by roughly the middle of 2009 absent government money, a merger or asset sales. Ten days later its executives, along with Ford's and Chrysler's, testified before Congress. The three failed to secure legislation for aid and were told to draw up new plans. GM submitted a Restructuring Plan for Long-Term Viability on 2 December; Congress declined to act, so the Bush administration gave GM a bridge loan on condition of a revised business plan. GM said it needed $4.6 billion within weeks, out of $18 billion it had already requested, and another $12 billion to avoid bankruptcy.

On 26 February 2009 GM announced that its cash reserves had fallen to $14 billion by the end of 2008. It had lost $30.9 billion in 2008, or $53.32 a share, and spent $19.2 billion of its reserves. Then, on 30 March 2009, President Barack Obama declined to give GM more aid and said its proposals had dodged hard decisions. He judged Chapter 11 the most promising way to cut its debts, because a court could compel bondholders and unions into settlements. Chief executive Rick Wagoner was forced to resign. Bondholders rejected the government's first offer, while the unions accepted preferential terms.

How did Chrysler's bankruptcy work?

Chrysler filed on 30 April 2009 with 24 affiliated companies in the federal bankruptcy court in New York, after failing to strike an out-of-court deal with creditors by the government's deadline. The company was controlled by Cerberus Capital Management, which had bought a majority stake in 2007 with other investors.

The US plan for both Chrysler and GM was a quick Chapter 11, with stakeholders lined up in advance to avoid a long fight. Four big financial institutions, among them JP Morgan Chase and Bank of America, had received Troubled Asset Relief Program funds and held 70% of Chrysler's bonds. They accepted 33 cents on the dollar. The remaining lenders, calling themselves the Committee of Chrysler Non-Tarp Lenders, accused them of a conflict of interest, though under government pressure most gave way and acceptance rose to 92%. Once in court, the government cut the offer to 29 cents.

Fiat was the partner. On 20 January 2009 it signed a non-binding term sheet that could give it up to 35% of Chrysler in return for platforms for smaller, more efficient cars, plus a swap of dealer and distribution networks. By mid-April its stake was reported as 20%. Fiat made clear that it would not proceed unless Chrysler struck a deal with the United Auto Workers and the Canadian Auto Workers, and an apparent union agreement emerged on 26 April.

The White House and Chrysler hoped for a surgical bankruptcy lasting 30 to 60 days. A government official said Chrysler would get $3 billion to $3.5 billion of debtor-in-possession financing and could receive up to $4.5 billion more on completion, a total of $8 billion of support on top of the $4.5 billion it had received in December 2008 under the Bush plan after Congress declined to act.

What did the bankruptcies mean for jobs and dealers?

Chrysler said it would stop most manufacturing on 4 May 2009. On 1 May its two Canadian assembly plants, Brampton and Windsor, shut indefinitely, affecting about 2,700 and 4,400 employees. Eight factories, five of them with a combined 4,800 workers closing in 2010, were outside the Fiat deal; they would be leased by the new company and then shut. President and vice chairman Tom LaSorda retired. On 14 May the company moved to end agreements with 789 dealerships, about 25% of its network.

Judge Arthur J. Gonzalez approved the sale on 31 May, rejecting more than 300 objections. A group of Indiana pension funds, which held about $42.5 million of the $6.9 billion of secured debt and had bought their bonds in July 2008 at 43 cents, appealed. They argued that the Treasury had treated secured creditors worse than unsecured ones, for the first time in more than 150 years of American bankruptcy law, and that this breached the Fifth Amendment. The appeals court affirmed the sale on 5 June, Justice Ruth Bader Ginsburg briefly stayed it on 8 June, and the Supreme Court denied the stay applications on 9 June. The sale closed on 10 June.

GM and Chrysler side by side

How did the General Motors bankruptcy work?

General Motors used a trick of court geography. The first filing on 1 June 2009 came from Chevrolet-Saturn of Harlem, a Manhattan dealership that GM owned itself. Its filing declared GM a debtor in possession and allowed the parent company to file in its preferred venue, the Southern District of New York, instead of Delaware, where it was incorporated, or Michigan, where it was based. GM's lawyers wanted the New York court for its reputation for expertise in bankruptcy. Judge Robert Gerber took the cases. Chief executive Fritz Henderson said at a press conference that he wanted the process to move quickly, and President Obama spoke from the White House.

Among the first motions was one to cancel the leases on seven corporate jets and a hangar at Detroit's airport, which the company had been unable to shake off the year before. The court gave interim approval for US$15 billion in loans, a lifeline for a company with US$2 billion in cash. In court, the Treasury said that no one else could supply the money and that without it GM would have to liquidate. Motions to pay key suppliers and employees passed without substantial objection.

The deal worked as a section 363 sale. Because the assets were priced so high, only one bidder emerged: NGMCO Inc, known as New GM, which was formed by the US government with a 60.8% stake, the Canadian and Ontario governments with 11.7%, a union health fund with 17.5% and unsecured bondholders with 10%. The seller was Motors Liquidation Company, or Old GM. The court's timetable set 19 June for objections, 22 June for competing bids and 10 July as the deadline to complete the sale, and the new entity closed the purchase on that day.

Normal business carried on throughout: pay, warranties and customer services were uninterrupted. Operations outside the United States were left out of the filing. On 8 June GM left the Dow Jones Industrial Average, replaced by Cisco Systems. Some observers argued that creditors holding credit default swaps had an incentive to push GM into bankruptcy, as it would trigger a payout, though no one could tell who held the swaps.

Government backing also covered the warranties. The Treasury committed on 29 March 2009 to guarantee GM's warranty liabilities up to US$360.6 million and advanced a loan for that amount on 27 May, with a special subsidiary set up to run the programme.

What happened to Hummer, Saturn, Saab and Opel?

Hummer was announced for discontinuation on 1 June 2009. A sale to the Chinese firm Sichuan Tengzhong, worth about $150 million to GM, was agreed on 9 October, but on 24 February 2010 GM said it could not be completed. No buyer was found, and Hummer was declared defunct on 24 May 2010.

Saturn was due to go to Penske Automotive Group, announced on 5 June 2009, with GM to keep building the Aura, Outlook and Vue for two years. Penske wanted more time while it sought replacement vehicles from Renault for 2012, and by 30 September the deal had fallen through. Saturn was declared defunct on 31 October 2010.

Saab drew a bid on 16 June 2009 from Koenigsegg Automotive and Norwegian investors that collapsed on 24 November. GM sold it instead to Spyker Cars on 23 February 2010, and Saab collapsed in 2012 after filing for bankruptcy under Spyker. Opel and Vauxhall were due to pass to a consortium led by Sberbank, Magna and Opel employees and dealers, with GM keeping 35%, but the GM board decided on 3 November 2009 not to sell. They were later sold to Groupe PSA for $2.3 billion.

What does the 2008 car crisis mean for drivers today?

For owners, the immediate point was reassurance: warranties were honoured during the GM bankruptcy and backed by the Treasury. The longer story is about what cars buyers got. North American shoppers moved to smaller, fuel-efficient models, the Chrysler deal was to bring Fiat's fuel-efficient technology to the American brand, and Hyundai-Kia's rise showed what affordable, well-built cars with generous warranties could do in a downturn. Chrysler's dropping of 789 dealerships and the demise of Saturn, Hummer and Saab changed what was on sale and where to buy it.

Where this goes next

The plans of 2009 set the timetable. The new GM intended to issue shares in an initial public offering in 2010. Chrysler's submission to the US government promised nine Fiat-derived vehicles over four years starting in 2010, among them four hybrid-electric and battery-electric models, and eight Chrysler plants were to close in 2010. In Europe, car registrations rose to 894,730 in February 2014, after six years of decline.