Thursday, April 30, 2009

QUESTIONS ABOUT THE CHRYSLER BANKRUPTCY?


If any of you have questions regarding Chrysler's bankruptcy over the next few months, please post them here in the 'comments' section or email us at ExcuseMeLeaders@gmail.com.

We will treat all questions as anonomous. We will answer all questions and post the best ones here on the blog.

Cheers, Mike

THE TREASURY IS NOT FOLLOWING THE RULES OF CHAPTER 11


In order for a successful out-of-court reorganization to be completed generally, the treatment of each of the stakeholders must follow the rules of a chapter 11 bankruptcy. If it doesn't follow those rules, the disadvantaged parties will force the company into bankruptcy to get better treatment.

This is what is happening this morning in Chrysler. The Treasury's proposal is treating the banks worse than a bankruptcy court would treat their loans. This goes against the rules of the game that have been in place since at least 1979 when the Bankruptcy Code was enacted. This is nicely set forth in this WSJ article that covers the decision on hedge fund holding Chrysler debt is facing. The call for 'shared sacrifice' is a little disingenuous because it doesn't fully credit that one class of creditors is senior to other classes.

I have posted before that there is a real danger to a precedent of not following the rules of the current Bankruptcy Code. The rights of lenders are factored into the loans banks make to borrowers. Ad hoc changes to those rights will result in some chaos and confusion in future lending.

The Treasury can accomplish its goals without igniting such chaos by following the rules. They work.

Cheers, Mike

Wednesday, April 29, 2009

WSJ LEADERSHIP LESSONS

The Wall Street Journal put together some interesting videos and text on leadership lessons. If you are interested in Leadership at all, give it a look.

Cheers, Mike

CHRYSLER AND ITS HOLDOUT BANKS


As Chrysler's reorganization negotiations speed toward tomorrow's deadline for a deal, certain parties in its bank group are holding out. The four agent lenders have agreed to terms based on their negotiations with Chrysler. However, there are 40 other banks, hedge funds and other debt holders that must agree to the terms or Chrysler will be forced to pay them off in full or, file for bankruptcy to force the holdouts to comply with the agreement.

Remember these banks are secured lenders. They have collateral and therefore rank ahead of all pre-filing creditors in a bankruptcy to the extent of the value of their collateral. There first may be a court hearing to value to banks collateral. This is always a sticky issue and very subjective. The banks have $6.9 billion of loans to Chrysler. Let's say simply that the court determines that the banks' collateral is worth $2 billion. This means that the banks' secured claim would be $2 billion and the banks would have an unsecured claim of $4.9 billion.

The banks' secured claim of $2 billion would have to be satisfied with cash or debt satisfactory to the banks as a class. This means that unlike an out-of-court restructuring which requires a 100% of the banks to agree, in a bankruptcy only a simple majority of the number of lenders holding at least two-thirds of the amount of the loans are required to approve the treatment.

Currently the NY Times reports the four bank agents alone hold over two-thirds of the amount, so it is a matter of getting a majority of the number. Some smaller debt holders may believe that the value of the banks' collateral is more than $2 billion and will therefore not vote for a lesser treatment. Or they may be playing the "hold-up value card." They are hoping that their claim can get better treatment because the amount is small and the cost of a bankruptcy is large. They may quietly get away with it. At least that is what they hope.

Even as you read, there is a lot of arm twisting going on and Ron Bloom, head of the Auto Task Force is invoking the name of President Obama more than once. Stay tuned.

Cheers, Mike

WINNING IN THE MARKET

There is an article in the WSJ about small businesses getting creative to offer new products to compete and win in a tough market. The article is New and Improved deals with the fact that you can not just sell the same products to the same customers in a tough economy unless you are satisfied with declining profits. You need to try new and improved approaches.

The lessons in the article can be applied to each of us personally in our careers, to the group we run, to the company we run or to any other organization of which we are a part. What do we do really well? Break it down to skills not just the product or service. What do we think the market will need going forward? How can we differentiate ourselves?

Yes, I realize these questions are pretty basic and taught in every marketing 101 course. However, we all fall into the trap of this is what we do/sell and when times get tough we just try harder to do whatever "it" is, instead of questioning the basic assumptions in a new light in a new market. The examples in the article are simple and refreshing.

Years ago, I was with the top leaders of one of the current Big Four Accounting firms. I was suggesting a new strategic direction that could differentiate the firm. The CEO responded that none of the other firms was heading in that direction and therefore he did not think they should try it. Hmmm, isn't that the definition of a differentiated strategy? I would have been fine with an answer that said he disagreed with me, as many do, but to dismiss it because no one else was doing it is how people miss opportunities. Don't miss your opportunity to create the new and improved version of yourself, your group, or your company!

Now, if I were an entrepreneur, I might have started a competing accounting service and maybe there would be the Big Five now. Oh well, spending time with all of you is more fun.

Until Next Time,
Gail

Tuesday, April 28, 2009

NOTE TO READERS



Please note that if you scroll down the right side of our blog, there are Twitter updates. These updates generally include a link to a breaking article or some current comment that most likely will not be posted on the blog directly. Also note at the bottom on the right are the leadership quotes of the day. The daily Churchill quote is usually good for chuckle or an insight.

The Administrator

LEADERSHIP ON COMMITTEES

There is an article in the WSJ How Group Decisions End Up Wrong Footed that is worth reading. Although the article is focused on committees selecting money managers, it made me think of the way committees in general operate and the leadership required to make sure they operate effectively.

There is a quote in the article about the fact that the best groups operate better than their best individual member and the worst groups operate worse than the worst member. The author of the article asserts that often committees fall into too much conformity or polarize into warring camps.

In my opinion, leadership skills are particularly important on committees since the people on the committee are not direct reports to the head of the committee. There are a few key elements to the success of a committee:
  • The leadership skills of the head of the committee
  • The skills and leadership strengths of the committee members
  • The clarity of the goal of the group and the roles of each member
  • The processes the group will utilize to gather facts and facilitate discussion
While I believe all these elements need to be in place for the committee to operate effectively, often it is the action or inaction of the team members that make the group ineffective. In Mike's post yesterday entitled Breathing and Living Leadership Everyday, he discussed that we should all think, act and speak as leaders everyday in everything we do.

However, we have all seen it happen when people leave their leadership skills at the door when they get on a committee. Sometimes I hear people say they did that to respect the leader of the group. Instead, I would submit that a good team member is a good leader. You can be respectful of the team leader's authority while still fulfilling your role on the team. During the group discussion, speak up and say what you really believe. If you agree, great. But if you do not agree, demonstrate leadership and have the courage to politely but forcefully make your case.

In addition, the leader of the committee needs to be a good facilitator so that all points of view are heard and that people feel free to disagree without allowing it to become a dysfunctional argument.

So the next time you are the leader of a committee, make sure you have all the elements of success in place. The next time you are on a committee make sure you remain a strong leader as well as a good team member.
Until Next Time,
Gail

CHAPTER 11, A NECESSARY PART OF CAPITALISM


I have been saving this article for a while. The author clearly lays out the argument for why chapter 11 is necessary in a capitalistic economy and why the auto companies need to go there if that is the right answer.

I think this ties in very well with the comments that I have made regarding the negotiations between the Auto Task Force and Chrysler's banks. The banks must be wondering how did they ever get into this mess. Of course, they made these loans in the heady days of lending to hedge funds and private equity firms, which was only a couple of years ago.

As Chrysler hurtles toward a bankruptcy filing given the April 30 deadline to complete a restructuring, it is good to keep this article in mind. It is highly unlikely that there will be an agreement by all the stakeholders by April 30. Even if there is an agreement amongst all the largest stakeholders, the agreement will probably have to be implemented pursuant to a bankruptcy plan of reorganization. There are just too many moving parts that have to be coordinated, and any one of them could easily fall out of bed even if there is an agreement on a term sheet.

Cheers, Mike

Monday, April 27, 2009

BREATHING AND LIVING LEADERSHIP EVERYDAY

Someone once said, "Management is doing things right, Leadership is doing the right things!
Here is a very good article from the Baltimore Sun regarding how the military is redefining leadership. The US military has seen the battles it is fighting change from the types of battles it has fought in the past. As a result, the Leadership responsibility has been pushed down to very small units.

I believe that business leadership needs to be redefined also. Business leadership must be pushed down to the individual level going forward in order for businesses to have a chance at optimizing their results. All individuals should be required to think, act and speak as leaders. And they should be educated on how to do so.

This will require real leaders at the top of organizations. Too many organizations have faux leaders. You know this type of leader. It is usually someone who was proficient at some area in the company, such as sales or finance. The person then became the head of their department and then the head of a division or subsidiary or the whole company. They are now supposed to be leaders but all they ever were, was a great sales person, engineer, accountant, etc.

They have had little or no leadership training and worse, they are really not good with the employees who work for them. They are more concerned with how they look to others than actually leading. We all have worked for someone like this. Not only are they not leaders, but they are a formidable barrier to others demonstrating leadership.

Real leaders really care about the people that work for them. They are driven to serve and lead others for the benefit of all the stakeholders. They are a dream for employees to follow. Real leaders must realize they are also in the business of training other leaders. Gail and I believe that everyone should be trained and counseled to be the best leader they can be, even if no one may ever follow them. Just imagine if everyone that worked with you was focused on thinking, acting and speaking as a leader all the time. As a group, you would produce amazing results and have more fun than you could imagine!

As it says in the article, it is about Breathing and Living Leadership Everyday!

Cheers, Mike

Friday, April 24, 2009

CHRYSLER NEGOTIATIONS


My friend Evan Newmark blogs for the Wall Street Journal. He has an interesting piece today, with some video, that sets forth that Fiat is taking advantage of the US taxpayer in a big way. His view is that Fiat is starting discussions with GM to purchase its European Opel Division as a negotiating tactic with Chrysler. The theory is, "hey Chrysler, if you can't give us a deal that works for us, we will just do a deal with Opel".

Evan believes that the US taxpayer will ultimately take it on the chin. I hope he is wrong. He does agree with me that the Treasury's proposal to Chrysler's banks makes little sense. Also, please note it is extremely dangerous for the Treasury to ignore the banks senior legal position vis a vis all the other creditors. Valid first liens on collateral is a bedrock concept in lending. The consequences of ignoring the validity of these liens will potentially have a more negative impact on lending than the failure of Lehman.

Back to Fiat, I am always struck by the irony of situations. In 2000, Fiat was functionally bankrupt and GM owned part of Fiat and had an option to purchase the rest of Fiat. Or should I say, that Fiat had a 'put' that could make GM buy the rest of Fiat. Subsequently, Fiat forced GM to pay Fiat $2 billion to buy out the 'put'. Now Fiat is coming to the rescue of Chrysler.

By the way, what exactly is the operating plan that makes this such a great deal for Chrysler? Fiat has rode the CinqueCento to viability. It makes the Smart car look big. I don't expect a lot of Smart cars to be sold in the US and less CinqueCentos.

These are interesting times to be an old, retired workout guy.

Cheers, Mike

Thursday, April 23, 2009

ARE YOU READY FOR THE OPPORTUNITIES?

There is an article in the Wall Street Journal We've Been Here Before How companies survived earlier economic storms . The article covers specific examples of what certain companies did throughout history during very difficult economic times to not only survive but thrive. It is interesting and gives good examples that you can adapt for your business.

Certainly, I agree that how companies handle this crisis will create winners and losers. The concluding comment in the article is particularly interesting. It states that companies should be looking for the opportunities that lie within this economic crisis and be entrepreneurial.

What the article does not address is what those companies did before the crisis. We have a story in our book Trust Is Like A Bank Account. The moral of the story is that you have to make deposits in the good times, if you want to make withdrawals during tough times.

Let me use two of the article examples. The Heinz Co. was able to get employees to come back to work and wait for their wages until receivables were collected. This would require great trust that had to be built before the crisis. The other example was IBM that poured tons of money into R&D when everyone else was cutting R&D. In addition to conviction, this took the financial stability to afford that cash outlay when revenues were declining rapidly.

So let's look at the economic crisis of today. The companies that have strong balance sheets will be able to fair better then the over leveraged companies. They will also be able to be opportunistic and purchase assets at lower prices or make other investments as the economy bottoms out and begins to rebound. Even if you have a great idea on how to capitalize on the opportunities, you need the ability to pay for it.

The companies that have gained trust and good reputations will also be able to seize opportunities. Everyone is skeptical now. If you need someone to trust you it will only be because you invested in gaining their trust before the crisis.

Organizational culture is also something that needed to be built in good times. Does your company have the leadership talent and style to be opportunistic? If they were not good leaders before the crisis, they will not be able to push through their fear and grab hold of it.

Do you have a strong balance sheet, trust and the leadership culture and talent?
If not, start building now for the next crisis which will come and will be a different type of crisis.
If so, congratulations! Although the market is very tough right now, you will survive and thrive!
Until Next Time,
Gail

Wednesday, April 22, 2009

LAUGHTER IS SERIOUS BUSINESS

Most of you already know about Emotional Intelligence(EI). Well, now we have Social Intelligence. There is a good article in the Harvard Business Review Social Intelligence and the Biology of Leadership.

The article describes research in the field of social neuroscience-the study of what happens in the brain while people interact- that have taken the original ideas of EI to another level now referred to as Social Intelligence(SI). The main discovery is that certain things leaders do—specifically, exhibit empathy and become attuned to others’ moods—literally affect both their own brain chemistry and that of their followers. The bottom line is that followers literally mirror their leaders.

Empathy is another topic covered in the article. In many of the leadership workshops Mike and I do, we talk about empathy. I think it is one of the key attributes of a leader. Unlike sympathy, empathy still allows a leader to make the tough decisions but do them in an empathetic manner. Treat people the way you would like to be treated.

But my favorite part of the entire article is on laughter. Since employees do mirror the leader, the leader who laughs creates employees who laugh. The research shows that, all other things being equal, laughing employees in a good mood perform better.

For my 30 year career, I have believed that we all spend so many hours at work that we might as well have a good time doing it. A few laughs and good stories during a meeting made it easier to attend so many of them. Now there is scientific evidence to prove the theory. The article ends with the most important line:

Laughter is serious business!

Until Next Time, keep laughing,
Gail

CHRYSLER'S LENDERS DEBT PROPOSAL - Eighth in a Series


According to the AP and other news sources, Chrysler's senior lenders have rejected the Obama Administration's directive to reduce their $6.9 billion of debt to $1 billion. They have also rejected the Bush Administration's less stringent requirement to write down 67% of their debt. The lenders have done this with good reason!

No one can ask the senior lenders of Chrysler to get the same treatment as the bondholders of GM for two important reasons. First, the bondholders have no collateral securing their loans. This means that in a liquidation, the bondholders and all other unsecured creditors (these are other lenders, employees, retirees, vendors and suppliers with no collateral) all share in the proceeds of free assets (those assets not used as collateral for other loans such as mortgages on facilities).

The loans of the senior lenders of Chrysler are secured by various assets of Chrysler. This means that before any other creditors get paid in a bankruptcy, the senior lenders get paid from the proceeds of their collateral in a liquidation or get cash or debt for the value of their collateral if the company reorganizes and emerges from bankruptcy. Further, if the senior lenders are not paid in full from their collateral in either cash or new debt, they get to share prorata with the unsecured creditors in the pool of assets that are left over.

So, there is no basis whatsoever to treat the secured senior lenders of Chrysler like they are unsecured bondholders. I am a little surprised that the Auto Task Force has taken this approach since they seem pretty on target on most of their other points. I must be missing something which hopefully will come to light soon.

Second, the way it should work is that a viable business plan for Chrysler should be agreed upon. This will demonstrate the amount of senior debt that can be serviced. Then the value of the senior lenders collateral needs to be determined. The senior debt should then be set at the lesser of the value of the collateral and the amount of senior debt that can be serviced.

I suspect that the collateral is worth more than the debt that can serviced. This means that excess of the value of the collateral over the debt that can be serviced needs to be satisfied with equity. I have worked extensively with Chrysler's senior lenders over the years on other matters. They will approach the situation as I have laid out. It is the basis for whatever counter-proposal they give the Treasury. I am also sure the Auto Task Force knows that also.

Cheers, Mike

Tuesday, April 21, 2009

HOW TO LOVE YOUR JOB

Do you love what you do? Do you get up every morning and approach your job with passion and excitement? Would you like to have that level of enthusiasm?

I loved Mike's post today and, as usual, I agree 100% with him. His post is about the leader's role and responsibility to help people follow their dreams.

Maggie Mistal's post is also great and addresses how people can and should change what they do to follow their dreams. This post is about how to make the most of the job you have right now.

Yesterday, I had a great day. I had coffee with friend and career coach Maggie Mistal and then dinner with my friend and co-author Mike Policano.

When Maggie and I were together I was asking her questions about exactly how she goes about her career coaching. Instead of just explaining it to me, she used about an hour to demonstrate her skills and approach by helping me to examine where I want to take my business at this point in my career.

She is outstanding! I strongly recommend her as a career coach to anyone. You can get to her blog and website by scrolling down on the right side of this blog.

I have never been a big fan of career coaches. But my discussion with Maggie was great. She knew how to ask probing questions that made me think deeply not only about what I was doing but why I was doing it.

Then I went to dinner with Mike and was telling him all about my discussion with Maggie. He and I got into a discussion about the many people we meet that do not like their job and clearly have no passion for their work.

I was saying that I have always been lucky and loved what I did for a living. This was even true of part time jobs while I was in college. All of a sudden it came to me. You can do what you love. Or, you can love what you do.

So, I agree with Maggie that people should follow their dreams. I also agree with Mike that leaders should help people follow their dreams. But what about making the most of what you have?

Look at the glass as half full. There must be aspects of your job that you like. What are they? Can you do more with that part of your job? Focus on the positives instead of the negatives. Spend more of your time on the parts that you like.

Can you add to what you do or your responsibilities? Can you take on a new initiative or special project within your company that would make your job more rewarding? Has your boss asked you to do something new? Say yes. Give it a try.

Many people that have a secure job right now, believe they can not make a change in this recessionary economy. Instead of feeling trapped, why not use this as an opportunity to reevaluate your position? Sometimes you hear people who were laid off from their position say it was the kick they needed to try something new and it worked out well.

Why not give yourself the kick. Make a decision today to love your job. By the way, employees that are passionate about their job perform better and get more promotions.

So remember, you can do what you love. But you can also love what you do.

Until Next Time,
Gail

LEADERS MAKE DREAMS COME TRUE

Maggie Mistral had a super post on "It is never to late to make your dreams come true." Please scroll down the right side of our blog to the link to Maggie's site. It is a very good piece on pursuing your dreams. I often say, "Do what you really want to do now, just in case you only live once."

This cuts two ways for leaders. Leaders, according to Drucker are in the business of removing obstacles so that people can maximize their achievements. I think very secure leaders go even further. They enable people to follow their dreams. Don't confuse me with a secure leader but, I have a story about that.

Twelve years ago, one of our senior guys, Al, stopped by my office around 8 in the morning. Al said, "Mike, do you have a couple of minutes?" I replied, "You are leaving aren't you." He was shocked, "How did you know?" I answered, "Al, don't play poker. It was written all over your face. Where are you going?"

Al said he had an opportunity to work on Wall Street and do distressed investing. I told Al, "You have to do this Al. It is so 'you'." Al looked a little perplexed. "Al, don't get me wrong. I would prefer that you stay with us. You are definitely a future partner. But, you love investing."

Al spoke about how he excited he was about the opportunity, but he that he was a little fearful of the opportunity. I told him, "Al, you have to do this. You don't want to look back when you are 60 and say 'what would have happened if I tried that Wall Street job'. In fact, I will make it easy for you. Go give it a try. If it doesn't work, you can always come back here."

Al looked stunned. "Really," he asked. "Yes", I told him. "But don't tell anyone else I told you this. The offer is not open to everyone." Al went on to a very successful career and was always a very good friend of our firm. Enabling others dreams to come true raises the level of one's leadership to place where incredible results can be achieved.

Cheers, Mike

Monday, April 20, 2009

WALL STREET COMP UNDER ATTACK!



Bloomberg reports that the Service Employees International Union pension funds has sent letters to 29 large financial institutions that it has investments in, demanding that those companies take actions necessary to recoup excessive incentive compensation previously paid to executives based on inflated earnings that were subsequently written off. Well, this will turn up the heat on Wall Street compensation.

The Street is already under fire from various corners for compensation levels that are far and beyond what others make (except for Major League Baseball players, who should beware). The Union threatens lawsuits if suitable actions are not taken. This may wind up being a real mess.

First of all, there is no doubt that a certain percentage of the executives that received excessive pay should be scrutinized. However, I believe that percentage is quite low. The vast majority of the executives were hard working individuals from all types of backgrounds. Further, many of these executives were paid substantially in the form of equity, much of which is either worth less or worthless.

Second, many of these executives had other alternatives to make at least as much with other organizations, including hedge funds, but were compensated highly to stay. I know, you are thinking, 'wouldn't it have been cheaper all around to let them go'.

Third, many of these same executives lost significant sums of their investments outside the equity in their employers. In fact, Goldman had to extend loans to many of their people in the first quarter to cover capital calls from some of their investments. Could be hard to get something back that isn't there anymore.

Fourth, I wonder, 'what are the tax considerations of giving money back?' They paid taxes when they received the compensation. I am not a tax guy, but, I don't think they get a deduction for giving the comp back.

Finally, the so-called guilty ones should be pressed to return some of their compensation, but it is probably a small number of people. I would advise them to focus on the enormous pay packages received by some of the disgraced, departed CEO's, but then, I am sure one of our attorney friends would say, 'on what legal basis?' Yes, this could get very sticky. Oh and by the way, they really were overpaid at almost all levels including those just out of school. Somehow over time, it just became the norm, however out of touch of reality it was.

Cheers, Mike

SUSAN BOYLE AND LEADERSHIP


Have you seen some of the YouTube postings on Susan Boyle? View this now! You won't be able to watch it only once and you will search YouTube for the follow-on press reports and interviews.

There is so much in this video, I don't know where to start and I certainly don't know where to end. It was inspirational. It was courageous. It was a lesson for leaders to judge people on what they bring to the table, not how they look or dress. It was about giving people a chance. It was about being yourself not anyone else. It was about the purposelessness of being cynical.

Gail and I were recently questioned about 'fear' at a recent conference. One of the attendees spoke of the fear of doing something. We responded that all humans, and therefore all leaders, have fears. Leaders acknowledge the fears and move ahead to achieve their goals. Susan Boyle moved ahead to achieve her goal.

By the way, were you able to keep a dry eye viewing the video?

Cheers, Mike

Friday, April 17, 2009

RATING AGENCIES

The WSJ did an article on possible changes in regulation and compensation of the rating agencies entitled SEC Puts Rating Agencies On Notice.

Every time there is a major fraud at a public company or some other event that causes a rapid decline in a company's stock, there is an outcry that the rating agencies did not do there job and changes are required. Then just as soon as some other event diverts our attention, the rating agency business model continues largely unchanged. Until the next crisis.

The issue once again is the perceived lack of independence of the credit rating agencies as they are paid by the company being rated. The SEC has told the rating agencies that there is more to do in regulating the credit rating firms.

The article includes the following paragraph:

"Ms. Schapiro on Wednesday said the performance of rating firms in mortgage-backed securities has "shaken investor confidence to its core." She was referring to criticism that firms gave overly optimistic ratings to mortgage-backed debt and were slow to make downgrades when defaults by homeowners rose."

I agree that the regulators need to look at the entire economic mess started with the mortgage backed securities and re-evaluate the regulatory rules and processes.

However, I also believe strongly in market demand. Where is the demand, from those that rely on these agencies for ratings, for more accurate and independent evaluations? If there was more market demand, there would be a quicker and better answer than we are likely to get solely from regulatory demand.

So here is a wild thought.

What if accounting firms issued a risk rating in addition to their audit opinion? This could be an overall business risk applied to debt and stock or separate risk evaluations.

I know, the accounting firms have their own issues.

But what a new mouse trap!

Thoughts? Alternative ideas?

Until Next Time,
Gail

CRITICAL VENDOR TREATMENT IN A GM BANKRUPTCY - Seventh in a Series



According to the Financial Times, GM is in the process of identifying which vendors are critical to their ongoing operations and must have their outstanding bills at the Chapter 11 filing date, paid in full. Normally, vendors are only paid partially for their outstanding bills and they are not paid until a plan of reorganization is confirmed by a bankruptcy court months or years later. Look for this to be a big battle. Here is why.

Usually the critical vendor list is a short list of vendors who are critical to the company. Further, those critical vendors on the list require to have their outstanding invoices paid as soon as possible so that they too don't have to file for bankruptcy. Over the years, the concept of critical vendor has been bent sometimes. In the potential bankruptcy case of GM, this will be a real barn burner. The list of vendors critical to GM will probably be extensive. The total amount of payments that GM will ask the court for permission to pay will be staggering. Think "auto supplier" bailout plan.

The other creditors, especially the bondholders, will object to many of these payments as, one, being unnecessary, and two, unfairly reducing the bondholders ultimate recovery. The bondholders will dispute that the all vendors are critical on one hand and will dispute that they need full payment of outstanding invoices on the other hand.

Remember, this is supposed to be a two-week bankruptcy.

Cheers, Mike

Thursday, April 16, 2009

"TEA PARTY" PROTESTS

Yesterday, April 15th, was tax day in the United States. This year it was marked by "Tea Party" protests in many cities.

The protest arguments can be summarized to the following: taxes are too high and expected to grow, bailout fatigue, and an anti big government sentiment.

There are articles in the NY Times and the WSJ. In addition you can read the left and right wing blogs if you are interested in mudslinging from both sides.

While I support the rights of all sides to be heard and believe peaceful dissent is critical for a democracy to properly function, I am mentioning the tea parties in this blog as I believe there are some leadership lessons embedded in these events.


Leaders Propose Solutions-

There was much discussion of what people were against but where were the leaders to propose alternative solutions? I have not seen any real leaders emerge to propose alternative solutions and a way forward.

Social Networking is Powerful-

These tea parties were arranged via social networking. Pretty powerful to see the numbers of people that can be mobilized. How are you using social networking to reach prospective clients; to reach your employees; and to stay in touch with how your brand is perceived in the market?

Until Next Time,
Gail

WELD GM & CHRYSLER TOGETHER? Seventh in a Series


An article posted on NY Times online makes the case for merging GM and Chrysler, not Chrysler and Fiat. The article makes the case that the two US auto manufacturers should be merged together. Take a look at the article to see the authors' case for the merger.

After you read the article, please note that in the troubled company world, putting two financially sick companies together never makes one healthy company. People often think it is a good idea. My experience over the past 25 years is that it is not a good idea. It looks good on paper, but it doesn't work in real life.

It is hard enough to restructure the operations of one broken company (a technical term). It is a large task to merge a broken company into a healthy company. Restructuring two broken companies at the same time and merging them is a recipe for disaster.

The managements have to be rationalized. The product lines have to be pruned and integrated. All of the manufacturing plants and marketing and administrative locations have to be dealt with in a logical manner. The work forces have to be combined and pruned. The dealers have to be greatly reduced. The supplies and the vendors have to be addressed by deciding which have to be cut and which have to be renegotiated. The UAW contracts have to be coordinated. The retiree liabilities have to be addressed. The cultures and work processes have to be merged and managed. And so on and so on.

So, like I said, putting two sick chickens together does not make one healthy chicken no matter what the Excel spreadsheet says.

Cheers, Mike

Wednesday, April 15, 2009

US ELECTRICUTY GRID PENETRATED. WHAT IS NEXT IN CYBER SECURITY?

There was an interesting article in the WSJ last week entitled Electricity Grid in US Penetrated by Spies. Apparently, cyberspies penetrated the U.S. electrical grid and left behind software programs that could be used to disrupt the system, according to current and former national-security officials.

The article notes that the review President Obama has ordered of cyber security of critical infrastructure industries is due out soon and the amount of money the government is spending in this area. The concept of spies is certainly exotic and it seems the intelligence agencies in the US and in countries around the world are appropriately focused on the subject as it relates to their own national security.

What I found most interesting in this article is that the intrusion was not detected by the companies whose systems were penetrated but rather were noted by US intelligence sources. I believe this will be one of the next big risks to be managed in the technology field and therefore a growth area for the technology firms and service providers.

Cyber security is an established discipline for business or information management computer systems. However, cyber security for manufacturing or operational computer systems is only beginning to be focused upon by most businesses.

Computer security for operating or manufacturing systems will continue to grow in importance and risk. The reasons for the increased risks is that these systems are no longer stand alone controlled systems. As more technology is continuously embedded into operating systems; companies are connecting their manufacturing and operating systems to other networks; and remote devices are being used to access these systems to get real time updates on manufacturing or operational status the risks increase that these systems can be penetrated.

This focus and attention to risk mitigation will start in infrastructure companies as they are right behind financial institutions in using technology in their operations and they are vital to every country's national security, it will quickly spread to all businesses. All companies are aware of the risks in information systems and are in varying stages of monitoring and controlling those risks. But that only addresses information technology (IT). What happens when you take the "I" away and instead look at the risks of all the technology you have deployed in your organization?

Do you know what the total technology risks are in your organization? Do you know what the monitoring and mitigation plans are to manage the risks? Have you thought about the opportunities this might create for your business to prepare to solve one of the next big risks to face companies around the world?

Until next time,
Gail

IF GM FILES FOR BANKRUPTCY, LOOK FOR THE FILING TO OCCUR IN NY OR DELAWARE - Sixth in a Series



Why NY or Delaware? Why not in Detroit for the home field advantage? There are many hurdles to be overcome in a quick bankruptcy for GM. First, there is that sticky UAW situation. To get the UAW on board in two weeks means that the UAW will continue to work even though the resolution of significant liabilities and benefits will not be resolved for months. Possible, but how likely?

How about the dealers? The dealers of the bad asset brands will have to await the fate of their brands. But the dealers for the good asset brands will have to addressed in two weeks. Which dealers will survive and which will GM look to close? And all of these dealer contracts are governed by individual state franchise laws. I am not sure that can be resolved in two weeks.

What about all the plants and locations? Some of those plants make products for good asset brands and bad asset brands. Some good asset locations have to be closed and others consolidated. A number of these locations are outside the United States which should add wrinkles. And wrinkles always add delay. Decisions have to be made in two weeks. What about the objections of landlords and mortgage holders?

What about the treatment of the continuing vendors and suppliers? Will their claims receive different treatment depending on whether or not they supply a good asset brand? After all, many of these suppliers and vendors are highly dependent on receiving payments from GM. Sounds like a lot to me.

It sounds like a lot to occur in two weeks because of the process. Even if some of the decisions are made before the bankruptcy filing, the affected parties are entitled to their day in court. They will need an appropriate length of time to put forth their objections and be heard.

So, why a chapter 11 filing in New York or Delaware? First, please note that the Federal bankruptcy court is a court of equity, not a court of law. This means that the bankruptcy judge has great leeway in determining in his or her on discretion what is the best course of action for the matter at hand. The reason for a filing in one of these two bankruptcy courts is the extensive experience of their judges. The vast majority of large and complex corporate bankruptcies have been filed in these two jurisdictions since the Bankruptcy Code became effective in 1979.

In order to have a two-week bankruptcy, the judge will have to be very experienced in dealing with large bankruptcies and be very comfortable in deciding that protecting the value of the company over the objections of various parties comes first. Only an experienced judge will be able to pull this off. While one might be inclined to file in Detroit because of a natural hometown bias, upon reflection, the GM management, board and advisors might be better off in NY or Delaware. Rest assured, even as you read this, there is a heated discussion going on amongst these parties on where to file.

Cheers, Mike

Tuesday, April 14, 2009

HOTELS OF ALL TYPES SUFFERING



According to the NY Times, hotels of all stripes, low end, high end and ultra luxury are suffering due to declining occupancy. I first posted a few months ago about the issues that luxury resort properties are facing as corporate outings are now more rare than a Chicago Cub playoff win.

In 1990 the hotel industry hit a wall and a number of hotels and their owners went into bankruptcy. We should expect to see a number of bankruptcy filings over the next several months just like in 1990 and 1991. Quite simply, the first wave of hotels are those that cannot service the debt on the property. Many of these hotels are owned by third party investors and the hotel management companies will be scrambling to control the damage to their brands. The next wave will be those properties with lower levels of debt but whose operations are so dire that there is little prospect of generating positive cash flows.

Hotels and resorts will be closing and investors and lenders will take more hits to their balance sheets. While some see the markets bottoming out, I see commercial real estate as the next problem area for banks and investors. Only time will tell.

Cheers, Mike

Monday, April 13, 2009

OBAMA EXHIBITS LEADERSHIP AGAINST PIRACY


It is about time someone exhibited some leadership in the efforts against the Somali pirates according to the WSJ. Thank you President Obama for stepping up. It is the right thing to do. But my question is, where are all the world's other leaders?

Saudi Arabia is in the neighborhood. What are they doing? How about Egypt? What are they doing? How about the European nations? Germany? France? Italy? How about others exhibiting leadership and carrying some weight on this issue?

Leadership now people!

Cheers, Mike

GM PREPARING FOR QUICK BANKRUPTCY? Fifth in a Series

CNBC, amongst others, has reported in this article that the Treasury has instructed GM to prepare for a quick bankruptcy. What does that mean?

First of all, I don't know how a two week bankruptcy can occur for GM. And I have been involved in a two week bankruptcy. A number of years ago, I worked on Abbott Dairies located in Philadelphia. Farmland Dairies had entered into an agreement to buy Abbott just prior to Abbott filing for bankruptcy. Abbott closed down for a week and the bankruptcy judge held an auction. A week later Abbott was sold to Farmland.

In this situation there is unlikely to be a bidder for GM in whole. And if there were buyers for GM in parts, it would take much longer than two weeks. So, the thought might be that the so-called good assets and related operating liabilities would go into a new entity called "Newco". The equity of Newco would probably then be issued and held by the bankrupt estate holding all of the 'bad assets' and all the liabilities. The equity might then be held until it can be valued as part of a plan of reorganization that would be voted on by all the claimants. That will probably take over a year and the actually resolution of all the assets and liabilities remaining will probably take years.

More to come on this groundbreaking bankruptcy as events unfold. Check out other article references in my Twitter comments.

Cheers, Mike

Friday, April 10, 2009

THE OTHER SIDE OF THE STORY


Leaders know there is always another side of the story. When people used to come into my office to complain about someone, I would always ask them, 'what did the other person say when you told them?' In the beginning, the answer always was, 'I haven't told them.' I would reply, 'Ok, get back to me after you have spoken to them.' After a while, our people knew to first get the other side of the story.

This came to mind as I read this NY Times blog. The author appears to monitor public filings of publicly-held companies for executive perks. This particular blog entry focuses on the company paid airline travel of Xerox's CFO, Lawrence Zimmerman. The blog points out that Larry lives in Colorado and Xerox pays for his commercial flights every week from Colorado to Connecticut. The blog is basically calling him out on this perk.

My first thought was, 'some perk, commuting every week from Colorado on Friday afternoons and Monday mornings. These are the two worst travel days of the week.' My second thought was, 'what could the other side of the story be?'

Here is a hypothetical other side of the story. Larry was a 31 year veteran with IBM who retired in 2001. Larry spent a large part of his time with IBM living abroad. In 2002, Anne Mulcahy, CEO of Xerox needed an experienced CFO with recognized integrity to replace the former CFO who was let go due to his role in an accounting scandal. Anne was having a tough time finding the right person, especially since she was in the process of restructuring $7 billion of bank debt and initiating a large scale operational restructuring. This was a difficult situation in which to recruit an experienced CFO.

So, let's say that Larry was a reluctant candidate for the position. Let's say that he had just retired four months earlier and his wife was thrilled they had finally settled down in Colorado. Perhaps Anne said, 'Larry, we need you. We will do whatever we need to do to make it easy on you and your family.'

Larry may have said, 'Anne, I would be happy to help, but I can't move to Connecticut. We just finally settled down in Colorado.' Maybe Anne told him that Xerox would pay for him to fly back and forth each week. I used to fly up to three round trips a week. It is not fun especially with the security these days.

So maybe Larry said 'yes' even though it would be very tiring and wearing to travel roundtrip from Denver to LaGuardia every week and to be away from home every week. And now he sees that the NY Times posts a blog insinuating that he is the recipient of an expensive perk. Did the author just take the public filing statement and run with it? Or did the author google Larry to find out 'the other side of the story'? I don't know and maybe there is another side to this story!

Leaders always consider that there is another side of the story when confronted with a situation. Make sure you do also.

In the interest of full disclosure, I met Larry when he first joined Xerox. The company was in the throes of various issues which threatened its future viability at the time. Larry has been an integral part of the team that turned Xerox around.

Cheers, Mike

Thursday, April 9, 2009

THE LINKS NOW WORK IN GAIL'S POSTS FOR THIS WEEK

Several of you emailed me to let me know that the links in this week's posts were not working. I have now corrected the issue and all links work. Thank you for letting me know and sorry for any inconvenience.
Gail

WOMEN'S BUSINESS NETWORKS

For those of you that have been following the posts under Women Leaders, I have some interesting news.

On 4/1/09 Forbes magazine launched Forbes Woman. Read the welcome letter from publisher Moira Forbes.Let's all follow it and see how it progresses.

One of the first articles by Sylvia Ann Hewlett is consistent with many of our posts in the Women Leaders category.

Ding, Dong, The Witch is Dead covers several topics we have all discussed such as Personal Advisory Boards, the Old Girl's Club, and the fact that women should help other qualified women the way they would any other affinity group in which they participate.

Let's follow this new Forbes Woman and see where it goes.

By the way, I had lunch last week with the CEO and Founder of Girls For a Change. She has dedicated her career to helping young girls build the necessary self esteem to succeed in the future.

We discussed possible ways to link professional women's networking and leadership development with her organization. Maybe there is a way to help a girl and a professional woman at the same time. Stay tuned.

Until Next Time,
Gail

TIMES OF CRISIS ARE TIMES FOR LEADERS TO RISE

Times of crisis over the centuries have provided the opportunities for individuals to show up as great leaders. Sometimes it is an Eisenhower, a Churchill or a Lincoln, other times it is a Ghandi, a Mother Teresa or a Helen Keller. David Rothkopf, a contributor to The Washington Post, wrote an article titled, Where are the Leaders?

Leaders are often 'discovered' during times of crisis. Mr. Rothkopf is disappointed with the leadership or lack thereof in the government right now. Peel the onion after Obama and you wonder, where are the leaders? Why haven't they showed up? Is it the vetting process that Congress uses? Is it the money?

What are you doing to lead in your company? And what are you doing to train more leaders?

Steve, thanks for the article reference.

Cheers, Mike

Wednesday, April 8, 2009

LEADERS DO THE RIGHT THING

Warren Bennis has a great quote, "Managers do things right. Leaders do the right thing." Share this quote with your people. More importantly, share this with the people you to whom you report. It is a subtle, non-threatening reminder to people in senior positions that it is about doing the right thing.

Cheers, Mike

JOBS, JOBS, JOBS

It seems like everyone you talk to lately is looking for a job for themselves or a colleague. I know that we are all helping in any way that we can and opening up our networks to them. But many times that is not enough.

There are a few areas that are still hiring. Read in Fortune Magazine about areas such as Healthcare, Government and Restructuring firms. Or read Maggie Mistal's thoughts on your dream job. See in our blog list and connect direct to her post.

But most of all it seems to me you need to be creative, flexible, determined and connected to land a job in these tough times. Hmmm, some of the same attributes you need to be successful once you get the job.

This post is also for those of you that still have your positions. Stay on top of your game in order to keep it and help those that need your help. Not only is helping others the right thing to do, but you may need help in a few months, if the economic climate gets worse.

Until Next Time,
Gail

Tuesday, April 7, 2009

INVEST NOW FOR THE FUTURE

We all are aware that smart companies with good leadership will emerge from this crisis and beat their competition. We also know that investing now is the key to accomplishing that goal.

So why will so few companies actually do that? Because, it takes courage. But strong leaders act courageously.

Several articles I read recently reinforce the need to invest now. There is an article today in the WSJ that reports good news. R&D spending seems to be holding. There is a Fortune article that is particularly interesting. This article is about using ATM or Kiosk technology when checking into a hospital.

I hope the hotel industry reads this article! Why is it that hotels start the process when you show up? I digress. This seems like a different post for a different day. Back to this post.

The hospital ATM is great for two reasons. ATM's are not new technology. Therefore, every time someone finds a new use for an old technology there is an even bigger payoff as all the bugs are worked out and older technology is cheaper.

But in this case they also combined new technologies with the ATM and made a fully integrated system including electronic health records. Very cool.

Investing for the future means different things in different industries and in different companies. I use it hear in its broadest context. It may mean R&D to your company; or using technologies in new ways; or it may be hiring for the future; or retraining employees to be ready for the future.

Your strongest competitor is investing for the future. Are you?

Until next time,
Gail

A LEADERSHIP LAPSE & AN EARTHQUAKE IN ITALY



Interesting article from Bloomberg regarding the earthquake tragedy in Italy. It appears that a local scientist recently predicted the earthquake based on the analysis of seismic data and recent tremors. However, he predicted it would occur on March 29 instead of April 5. The Civil Protection Agency met on March 31 and concluded that the local scientist was wrong and was even considering charging the scientist with falsely alarming the public. Well, so much for that.

The real question here is, 'Where was the leadership of the Civil Protection Agency?' Did they take the easy way out by not forewarning the population? Were they afraid of being embarrassed if they were wrong? Were they hoping it would go away on its own? Did they send out any steps to be followed by the populace in the event of an earthquake?

There are a lot of questions and at least one answer. The leadership was lacking and many suffered because of it. Will the leadership do the right thing next time?

Since this link with numerous photos.

Cheers, Mike

Monday, April 6, 2009

FORD CONTINUES TO LEAD BY EXAMPLE


As I sit here at the Renaissance Center, GM's Corporate HQ, (No, I am not working on GM. I am here for the Final Four.), I am taking stock of Detroit and its desperate attempt to save an industry and in turn, save itself. And across my screen is news of the debt for equity swap that Ford has just accomplished. As a result, Ford will save $500,000,000 in interest every year. This swap is further detailed in this WSJ article.

Ford was said to have effectively purchased approximately $10 billion of debt for approximately 38 cents on the dollar. This will provide more breathing room for Ford as it tries to weather the slide in auto sales without requesting government aid.

No one know whether Ford can make this work without aid. But you have to give their leadership credit for the moves they are making. It should not go unnoticed that their CEO, Allan Mulally, is relatively new at Ford and an industry outsider. As I sit here at GM HQ, I wonder if the GM board is noticing where Mulally didn't come from.

Cheers, Mike

SOME EMPHATHY FOR RICK WAGONER

Good leaders are empathetic by nature. I often made great connections with CEO's and owners after I started my own firm because I started to see life through a different set of eyes. When meeting alone with CEO's in a financial crisis, I would make observations on how they were feeling at the time. Almost every time, the CEO would look at me relieved that someone understood how they felt about what was going on. Being empathetic led to a number of long-lasting relationships.

Gail and I were speaking this morning and the topic of empathy and Rick Wagoner, the former CEO of GM, came up. It is probably time to be a little empathetic to Rick Wagoner. I don't know Rick, but I am sure he is probably a good guy. He spent his entire career working for and then running an icon of American industry. When he became GM's CEO, he inherited a number of legacy issues and a business on the decline. He tried as hard as he could to fix GM in what he thought was the best way.

Unfortunately, one of the almost fundamental truths about corporate financial crisis is that the CEO who has presided over the company for the past several years or more, is not the person who can lead the company out of the crisis. The current CEO is too invested in the current ways of business and can't see what an outsider can see. It is called "being human". A flaw we all suffer with from time to time.

GM requires such radical change so quickly, it was not possible for a CEO of eight years to cut deep enough, quick enough. It also was not possible for him to threaten bankruptcy which is necessary to get the various stakeholders to give the required concessions. He was probably too close to the situation and too personally invested to be objective. He is not a bad guy. He is just human, like the rest of us and he deserves a little empathy.

Cheers, Mike

Friday, April 3, 2009

BASEBALL, RECESSION, SALARIES AND TICKETS PRICES


With the baseball season about to start, I thought I would make some comments on the effect of the recession. One of the questions we all have about the recession is, "Will there be a shift in how people think about spending money?"

Take major league baseball for instance. Back in the 1950's, baseball was commercial, but less commercial. Players work rights were restrained which kept salaries capped, so many of the players lived in local middle class neighborhoods. Families could afford to go to games and it was a very accessible form of entertainment.

Today, Major League Baseball looks very different. Well, this shouldn't be a surprise. Ticket prices have risen to crazy levels. The baseball players union is the strongest union in the US. Do players that make an average of over $2.5 million per year need such a strong union? The number of players making double digit millions per year is staggering. Cities have taken on enormous debt burdens to build new stadiums and line the pockets of players and owners even further. This CNBC article reports that teams have tickets they can't sell.

So maybe the recession will bring back some sanity and common sense regarding the economics of sports. I had Yankee tickets from 1994 thru 2007. The seats became available to me in a struck of good fortune. They were in the first row. In 1994 the price of one ticket for one game was $17. An unbelievable value of $1400 for all 81 home games. Through the '90's the ticket price went up modestly every year. Over the last four years however, it the prices went higher and higher. All of a sudden, in around 2005 they were $100 each, then $150 each in 2007 and then unbelievable they went up $100 in one year to $250 in 2008.

But that wasn't really unbelievable, that was yet to come. For 2009 in the new stadium, the same seat, to watch the same team is $2500 a ticket. Yes that is $2500 for one seat to one game. Apparently, it includes some food. Don't believe it? Go to the Yankee website. Off course, I voted with my feet and exited the tickets a few years. It is no surprise to me that the Yankees still have some of those tickets for sale.

The real question is, will people from the companies that paid $2500 for one ticket for each game for 81 games actually show up in the seats and risk being ridiculed for spending that money while laying people off?

Cheers, Mike

RESPONSIVENESS TO WHISTLE BLOWERS AND EARLY WARNING SIGNS

There are several root cause reasons for why we find ourselves in this global economic mess and a few critical improvements needed to learn from our mistakes and reduce future risk.

One thing that I feel must be done after reading about the Madoff and other frauds, as well as Mike's post on Wednesday Leaders Do The Right Thing, Even At Personal Risk is more serious and timely response to whistle blowers/early warnings.

There is now evidence that there were both whistle blowers and early warning signs about the Madoff mess that went unanswered. There have been several others over the years. Why bother to have the SEC enforcement and investigations groups or company hotline systems, if there is not timely follow up on the issue?

But I believe an even bigger issue is when people raise early warning signs and are ignored. Have you ever been in a meeting in which everyone has fallen in love with an idea and you or someone else questions it? You quickly feel alone and as an outcast.

What is great about early warning signs is the word early. That way you can actually do something to correct the issue before it goes too far. But that only works if people are willing to raise the issues.

In this case, I am discussing early warning signs in the broadest manner. Someone challenging an idea; questioning the assumptions; coming at the issue from a new/different perspective; raising concerns about the level of risk; making statements such as this doesn't seem right; etc.

This seems a good time for us all to ask ourselves the following questions:

Are you as a leader creating a culture in which people feel free to raise their concerns and challenge the popular point of view?

Are you as a leader comfortable that these questions or concerns are given serious consideration and not cast aside too quickly?

Are you as a leader comfortable with your organization's process and handling of whistle blower reports?

More to come on the root causes of this crisis and some of the future changes needed to reduce future risk.
Until next time,
Gail

Thursday, April 2, 2009

KPMG SUED ON NEW CENTURY AUDIT


According to the WSJ, KPMG, one of the remaining four large international accounting firms, is being sued by creditors of bankrupt subprime lender New Century. While these kinds of lawsuits take a long time to get to fruition, many investors and creditors will be watching this one closely. If it ends badly for KPMG, others may initiate lawsuits against the auditors of other subprime lenders. Given how pervasive and large the losses were, it could wreck havoc on the accounting profession.

The large accounting firms are already down to the Big Four from the Big Eight 15 years ago. To give you an idea of how large theses firms are, Number 5 is about 10-15% of Number 4. The markets can barely be served by four large firms and cannot easily withstand another large firm merging or going out of business.

Unfortunately, the accounting firms are deep pockets in situations where the other culpable parties don't have pants let alone pockets. KPMG will fight this vigorously. And while the plaintiffs have little to lose, I am concerned about one statement in the article that came from the complaint. Apparently the complaint alleges that certain KPMG auditors advised the senior partner on the engagement that some items were not properly accounted for and the senior partner overruled them to protect the firm's fees. That is a damaging allegation and, if true, will be difficult to mitigate. Accounting firms usually rely on the process of conducting good audit procedures which is not expected to catch everything. You can read the complaint via this CNBC article.

I was involved in a litigation against an accounting firm many years ago. It was a jewelry manufacturing company that had gone bankrupt due to inventory falsifications. I represented the committee who was suing the accounting firm. During discovery, I found a memo from a staff person that said, and I paraphrase, "As I tested the gold inventory, I was struck by the annual enigma, 'what is gold and what isn't gold?'

The staff person went on to conclude that he couldn't tell what was gold or what carat type the gold was that he counted. He concluded that the quantities were right but that he couldn't conclude as to the value since it didn't know if it was gold at all. The memo was in the workpapers and the audit partner admitted he never followed up on the memo. The insurance company settled during discovery for the full amount of the insurance and unfortunately, the accounting firm went out of business. It is ugly stuff.

Cheers, Mike

Wednesday, April 1, 2009

THE THREAT OF BANKRUPTCY FOR GM IS NECESSARY FOR AN OUT OF COURT WORKOUT - Fourth in a Series

As I had written in February, the legitimate threat of a bankruptcy that is endorsed by the government and the company is a requirement to getting a restructuring done outside of bankruptcy. Here is how it works.

Various stakeholders, especially the bondholders and bank lenders, have been assuming that the the bankruptcy of GM is unacceptable to President Obama and to then GM CEO Rick Wagoner. If the lenders believe that, then they would conclude, and obviously did conclude, that they could hold out for a better deal than GM was offering them. In fact the bondholders were looking to reduce their debt to 50% rather than to the 33% that the Bush Administration mandated. Wagoner played right into the bondholders hands by publicly stating that a chapter 11 filing would be the death of the company.

GM's ONLY bargaining chip is the likely treatment of the bondholders in a bankruptcy. The company must demonstrate that bankruptcy is an acceptable, albeit not preferred, alternative. The company must then demonstrate what happens to the bondholders in a GM bankruptcy. For illustrative purposes only, the threatened treatment of the bondholders might be something like this. GM could show that the debt capacity of GM is very low and that instead of the bondholders getting the 50% they want, or the 33% first offered, they would get a maximum of 10%. In fact, if I was the CEO, I would tell the bondholders that the most likely case would be that they would get no debt and only equity in a much smaller GM that they would have to share with other stakeholders like the UAW and its legacy liabilities.

I would also tell the bondholders and other lenders that marketplace uncertainties require virtually no debt so that GM can withstand further deterioration in volume and in pricing. And so that GM can have to time required to restructure its operations and product offerings. I think this is what the new CEO is doing and it is the right thing. It is just another reason, an important reason, why Wagoner had to go away. No one would believe him if he said the a chapter 11 filing was now 'ok'.

Here is an opinion piece from the WSJ with another take on the bankruptcy threat.

Cheers, Mike

LEADERS DO THE RIGHT THING, EVEN AT PERSONAL RISK


Iris Mack was an analyst with the Harvard Management Company that managed Harvard's endowment. According to this article in The Harvard Crimson, Iris, who was formerly an analyst at Enron, wrote an email to one of the leaders of the endowment pointing out that she believed that certain managers were trading derivative contracts without understanding the amount of risk involved.

It was a brave thing for Iris to do. It was the right thing to do. It is what Leaders do. Unfortunately, as you might suspect, Iris's comments were not well received. She was in fact let go. As the article goes on to point out, she was right of course.

I will say the following often for the foreseeable future. Leadership is about doing the right thing over making money. Look at the crisis we are in now. It was caused by a lack of leadership where making money was more valued than doing the right thing.

Now what is required is that Leaders must rise in this crisis and do so by doing the right thing. People are looking for leadership in every corner of the world right now. They are there, but they must have the courage of their convictions to step up. As you evaluate leaders going forward, look first are they doing the right thing? The right thing may not always be clear. But the wrong thing is often black and white.

Cheers, Mike

WHY WAGONER, WHY NOT BANK CEO'S?


A couple of people have asked me why Wagoner was removed but not any of the bank CEOs?

First of all, as usual, I have no inside knowledge. Second, as usual, I will comment anyway. In the Wagoner case, outside parties were put on a task force that was empowered to review the viability of GM's restructuring plan.

Clearly that task force came to the conclusion that the restructuring plan put forth by Wagoner was inadequate. The underlying operating assumptions were optimistic, the restructuring did not go far enough in cutting brands, plants, employees, dealers, costs etc. Moreover, the plan did not provide a capital structure that provided the platform for a viable company. At that point, I speculate that the task force concluded that Wagoner was not capable of producing and implementing a plan that cut the operations deep enough in a quick enough period of time. Therefore, the task force recommended to President Obama that Wagoner step down as a condition of any other financial assistance from the government.

Contrast that to the process used with the banking industry in general. Under a different administration, TARP funds were made available in order to stem a systemic run on the world-wide global financial industry which was ironically triggered by the refusal of the Fed and the Treasury to deal with Lehman Brothers in a more proactive manner.

There was no task force of outsiders empowered to review viability plans put forth by incumbent bank CEO's. There were no viability plans required at all. Sure new CEO's were put in at Fannie Mae and Freddie Mac. But these were two quasi-government entities anyway. I am ok with that initially. No one had the time to request and receive a viability plan from anyone.

However, now is a different story. But you have to look institution by institution. JP Morgan for instance is probably the strongest large financial institution. Jamie Dimon, CEO, is well-respected it is highly likely he only accepted TARP funds because he was forced to do so. Look for JPM to repay the TARP funds by June 30, 2009.

Ken Lewis, CEO of Bank of America, has come under attack. Some of it is warranted and some may not be. I have a suspicion that he would have walked from Country-Wide before closing if not for some helpful nudging from the government to carry through. I also believe that the government orchestrated the acquisition of Merrill by Bank of America at the same weekend meetings that Lehman was allowed to fail in a freefall. So, I suspect the government will be hard pressed to push Lewis too far.

Pandit at Citibank, may be a different case. Although he has been CEO for just over a year, he chose not to start selling pieces of Citi when he came on board. (See my previous posts on Pandit and Citi in the banking category). Also, not only did Citibank receive TARP funds, it also received an emergency funding, not once, but twice. I believe the Obama administration should now require Citibank to submit a viability plan which should be evaluated by a separate task force. Citibank should have its feet held to the fire and Pandit should be held accountable to produce an acceptable restructuring/divestiture plan to pay back the funds.

Hopefully as things calm down a little, the Citibank situation can be addressed.

Cheers, Mike