In my business development consulting practice I encounter situations where filing for reorganization with protection of Chapter 11 of the Bankruptcy Code (Federal Law) seems to be an option. Consequently I follow with interest some of the more high profile cases. I am amazed at the application of this Federal Law. I was thinking it seems the rules are at times re-written for the convenience of special interests.
This email from Newt is a great report on the recent bankruptcies of Chrysler and GM. This is well worth paying attention to since the issues are not about Chrysler and GM, it is about the breakdown in our political and judicial system.
Newt’s entire email follows. Thank you Newt Gingrich.
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Email Me, Steve Pohlit to schedule A No Obligation ConsultationOn Building Your Business Profits. Need more customers? Let’s discuss how to use cutting edge Social Media Marketing in the revenue building cycle of your business to drive your profits sky high. If your company is not growing revenue and profits, if your company is not cash flow positive Click Here for more information about Turnaround Consulting Services for Business In Crisis
There was a time when we would have called it a scandal.
In 1921, oil tycoon Harry Sinclair gave several prize head of cattle and around $269,000 to President Harding’s Secretary of the Interior, Albert Fall.
In return, Sinclair got the exclusive rights to drill in an oil field in Wyoming. Sinclair’s no-bid contract became the Teapot Dome scandal, the most notorious example of political corruption in America prior to Watergate.
Between 2000 and 2008, the United Auto Workers (UAW) union gave $23,675,562 to the Democratic Party and its candidates.
In 2008 alone, the UAW gave $4,161,567 to the Democratic Party, including Barack Obama.
In return, the UAW received 55 percent of Chrysler and 17.5 percent of GM, plus billions of dollars.
But nobody’s calling this a scandal. It’s time we start.
The almost $24,000,000 the UAW has given to Democrats since 2000 compares with the $193,540 the union has given to Republicans.
In the 2008 presidential election, President Obama was by far the biggest recipient of UAW contributions, raking in $27,340 compared to the $10,600 given to Hillary Clinton, the No. 2 recipient of UAW money.
And so it was no surprise to the cynical Washington political class when the payback began with the Chrysler bankruptcy.
In a rigged proceeding in which the federal government disregarded bankruptcy law in favor of the political outcome it desired, the Chrysler bankruptcy laid the predicate for the much larger General Motors bankruptcy to come. Against law and precedent, the unions were moved to the front of the line when it came to who would benefit from the bankruptcy.
The Obama Treasury Department strong-armed Chrysler’s creditors into a deal in which the UAW was given 55 percent ownership of the company while Chrysler’s secured creditors – investors who would have received priority in a non-political bankruptcy proceeding – were left with just 29 cents on the dollar.
Some of these secured creditors, led by a group of Indiana retirement funds, are fighting back. They’ve charged in court that the Chrysler bankruptcy violated the bankruptcy laws and violated their rights as senior lenders.
On Monday, the Supreme Court put a hold on the Chrysler bankruptcy to hear their case.
We don’t yet know which way the high court will rule, or if it will rule at all. But we do know what’s at stake. Indiana State Treasurer Richard Mourdock put it well:
“The issue of secured creditors’ rights is bigger than Chrysler. It’s an essential foundation of our capital markets. And fundamentally, this is about the law.”
But the Chrysler bankruptcy was just prelude to the Obama-Administration-brokered General Motors bankruptcy deal announced last week.
The GM deal is yet another example of rank, taxpayer-financed political favoritism.
Once again, the big losers are GM’s bondholders, who include substitute teachers in Florida and retired tool and dye supervisors in Michigan. They hold $27 billion in GM debt but are receiving a 10 percent stake in the new company.
In contrast, the UAW, which is owed about $20 billion from GM, is walking away with 17.5 percent of the company and a cool $9 billion in cash.
According to one analysis, while the bondholders will be lucky if they recover 15 cents on the dollar, the UAW can expect to recover up to 60 to 70 cents on the dollar – four to five times what the bondholders will receive.
As Barron’s Magazine wrote, “Never has an American union done so well at the expense of shareholders and creditors”.
Of course, the Obama Administration has assured us that the United Auto Workers has made “substantial concessions” as part of the bankruptcies that have literally saved the union from extinction.
But as no less than the Washington Post put it, the “union concessions were ‘painful’ only by the peculiar standards of Big Three labor relations: At a time when some American workers are facing stiff pay cuts, UAW workers gave up their customary paid holiday on Easter Monday and their right to overtime pay after less than 40 hours per week. They still get health benefits that are far better than those received by many American families upon whose tax money GM jobs now depend.”
Union members also preserved their right to have six unexcused absences from work before they can even be considered to be fired.
Can you feel the pain?
It is a sign of the degree to which raw politics has dominated its handling of Chrysler and General Motors that the Obama Administration has a 31-year-old who has not yet graduated from law school determining the fate of two multi-billion dollar companies.
For their political support of the Democratic Party, the auto unions have been rewarded, not just with ownership stakes in two giant companies, but with ongoing protection and subsidization by the U.S. taxpayers.
The President has said repeatedly that he wants to get out of the auto business as soon as possible. But does anyone seriously believe that he would accept an arrangement in which GM becomes profitable at the expense of the union and its gold-plated benefits?
Having spent $50 billion to “save” GM and the UAW, does anyone really believe that the Obama Administration will now allow economics and not politics to dictate its future decisions?
In the GM and Chrysler bankruptcies, the Obama Administration has trampled on the rule of law.
It is using the taxpayers’ money to pay back a political group for its political contributions.
There was a time when we would have called that a scandal.
The phrase “cash is king” is widely recognized because it is true. When you solidify cash flow you solidify your business.
Cash of course can be borrowed. For many companies, traditional sources of financing are nearly non existent. Lines of credit are being tightened and there is little or no room for loan covenants variations. In this and all situations, the sooner management accepts responsibility for the state of their business, the sooner they are in a mindset for moving the business forward. What are the primary options for restructuring a business facing these circumstances? The primary alternatives are:
1. Secure a lending facility from a source that is not a traditional bank.
2. Negotiate a new note with your existing bank – very unlikely right now.
3. File a restructuring plan under Chapter 11 of the US Bankruptcy code – an action of last resort and very costly.
4. Sell the business: viable if your business is attractive to a strategic buyer. You will need a creative contract if you expect to get much more than having your personal guarantees removed from the debt.
5. Close the business and do something else. You may feel you may want to do that but be careful since if your business assests upon liquidation do not cover the senior debt, your personal assets may be at risk. In this environment institutions are taking homes .
You may be thinking the above is written for a business experiencing losses in market share and profits. Companies with bright pictures being painted are experiencing the impact of banks not lending. The money channeled to banks from the government is not flowing through to companies deserving loans.
For this reason, alternative sourcing of funds is often needed. A lot of time and energy can be spent finding the right deal or you can select a firm with the contacts that will get this done quickly on your behalf.
Last week I was in a meeting discussing options, strategies and pricing for services. It is very common for owners to begin calculation how much money firms make when a deal closes. This money is commonly called success fees. I explained that success fees are in proportion to the solution delivered. The right professional firms have the experience and the contacts to move quickly and get results. How valuable is that when considering the alternatives?
Sharing with all my readers the energy of peace, happiness and abundance
Email Me, Steve Pohlit to schedule A No Obligation Consultation On Building Your Business Profits. Need more customers? Let’s discuss how to use cutting edge Social Media Marketing in the revenue building cycle of your business to drive your profits sky high.
(Please Note: the best course of action is to take bold steps before have to file for Chapter 11 or worse a dissolution. I am experienced with crisis management, turnaround management and bankruptcy. Contact Me if you are worried about your business.)
Chapter 11 comes with a great cost including, legal, accounting and filing fees. The most significant cost is often the distraction of management’s attention from the core processes of the business. This filing raises more questions than it answers. The effectiveness of the company’s infrastructure in identifying and correcting the real reasons for losses should be under microscopic scrutiny.
Retail is won or lost one transaction at a time. It looks like Circuit City has a no profit pattern. It seems like this pattern is the core issue that should be resolved during this opportunity for reorganization. If not, the Chapter 11 reorganization will likely move to dissolution.
Ultimately, secured lenders will be fine. Vendors will be paid for new deliveries but are at great risk of not being paid in full for invoices related to deliveries prior to the filing. Landlords of closed locations can now begin to plan on what to do with that space as lease payments will be terminated during the Chapter 11 process. Other leases are likely to be renegotiated. Of course, there are large numbers of people who are now not working just as the holiday season is near for them and their families.
There is very little sunlight shining through with this picture. The glimmer of opportunity is for a structural reorganization to be defined and implemented that strengthens the core business. Should that occur, the purpose of Chapter 11 will have been fulfilled.
All Business Crisis Management and Business Turnaround consulting work is done with the direct involvement of Steve Pohlit, President of International Busines Consulting Resources.
I follow the five step process outlined on the main page my business crisis management site -click here. I will do everything possible to avoid a legal reorganization under the Federal Bankruptcy code. When that vehicle is necessary to protect your business, it must be a last resort. The reason is that the administrative costs of reorganization under Chapter 11 of the US Bankruptcy Code are huge. There are attorney fees, administrative fees of the court, trustee fees and professional accounting fees. All of these costs must be paid by the assets of the business or from concessions made by creditors. If your business is struggling, the sooner you call so we can begin addressing your core weaknesses the better.
My experience includes very successful business turnarounds outside of bankruptcy court, successful turnarounds with the protection of the US Bankruptcy court and failures within the US Bankruptcy Court. I have turned around my own business that I purchased and was failing. I have worked with small and large companies, public and private. If you are concerned about the strength of your business you want someone who has personally been through the process as a business owner as well as an advisor. My business experience is extensive. If your business can be turned around, we will do it.
Steve Pohlit, President
3651 LIndell Rd., Suite D162
Las Vegas, Nevada 89103
12233 94th St N
Largo, Florida 33773
Direct Phone Contact: 727-587-7871