GM's Been on the Brink Before—Many Times

This isn't GM's first brush with death. Since 1910 the company has nearly disappeared three times—and come back stronger every time

By Ed Wallace

The executives at General Motors (GM) knew they were in trouble: Their negative cash flow had become intolerable, and their lending institutions had locked up. Bankers refused to lend the corporation any more money, fearing that they'd never see GM's current loans repaid, much less any new funds they might advance. New car divisions that had opened only a few years earlier were now huge money pits. And even those divisions whose sales had once shown incredible potential now had virtually no sales at all.

GM put some divisions and parts operations up for sale, but potential buyers showed little interest. GM cut the size of its workforce repeatedly but could not lower expenses quickly enough to match the fall-off in demand. Finally, GM's lead creditors met quietly at Chase Bank in New York, seeking to find out whether they could salvage any of their loans if they forced General Motors to liquidate.

The bankers hammered GM executives: Why did they insist on keeping different divisions, when it was obvious they were simply money pits? One GM executive explained that if the company failed, it had the potential to set off a nationwide panic, which could damage the improving consumer confidence just starting to take hold after the massive downturn in the economy. He also pointed out that the vehicles the bankers were calling foolish had been some of GM's most profitable vehicles just two years earlier. It couldn't be helped, he said, that the public had become so fickle and tightfisted, not when a massive economic contraction had just scoured the country.

The bankers had their doubts. But after looking at the facts they decided that if GM would dump its losing properties, effectively fire the CEO, and allow the bankers to elect the new board of directors, then GM would be advanced the funds to get past its current financial problems.

Boom and Bust

Welcome to September 1910, when the bankers revolted against Billy Durant's General Motors. Ten years later, GM would be back in the same financial mess as in 1910—too many divisions, too few making a profit, and doubts publicly raised as to whether the company could ever recover from a short period in history where they almost failed twice. It should also be noted that, at that time, from all outward appearances Ford Motor (F) was sitting pretty.

The history of large-scale industries tied directly to the American consumer has always been one of boom and bust. The immense amount of money needed to build factories, design products years in advance, support retail sales, and cover their products with service and parts has never been the favored business model of our financial industry.

For a very good reason, those industries are just as cash-intensive in good times or bad. Just as our airlines will soon shell out up to $200 million to buy one Boeing (BA) 787-9 Dreamliner so we can fly across the country for $300, it can cost multiples of that amount to create just one all-new vehicle—with absolutely no guarantee of an audience for the product once it's delivered. (To read more about the high cost of the Dreamliner, click here.)

Moreover, in periods where the economy turns south, the downturn is often far quicker than any large-scale consumer-based industry can properly respond to lowered sales. For example, many commercial airliners are sitting in the desert right now because airline travel has fallen off so far, but payments still have to be made on those jets whether they collect sand or flying miles. Like the airlines, the auto industry has to continue to amortize the costs of new products even if their sales volumes fall far below forecast.

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