“How did you go bankrupt?”
“Two ways. Gradually, and then suddenly.” Ernest Hemingway, The Sun Also Rises
By early 2008, the cracks were becoming apparent. Daimler-Chrysler had bailed out of Chrysler, selling it to Cerberus Capital Management. Ford had built a pillow fort of sorts against economic disaster by mortgaging every conceivable part of the company.
And G.M.? It was the epitome of “pay no attention to the man behind the curtain.” G.M. Chief Executive Rick Wagoner, Vice Chairman Robert Lutz and Chief Financial Officer Fritz Henderson gazed confidently out from the pages of the 2007 annual report, which was a masterpiece of spin.
Only at the end of the first page of platitudes did a number jump out: in 2007, G.M. experienced a paper loss of $38.7 billion. It blamed the scary looking number on an accounting change that led to a net loss per share of $65.45.
Even more frightening numbers lay a few lines above in its financial highlights. There was a negative 21.4 percent profit margin, reflecting the accounting change. The year before, it had squeaked out a 1.1 percent profit margin, although the number was negative in 2005.
Everything could be explained away by the accounting change, G.M. contended. Except, it couldn’t. G.M. was drowning. It had lost nearly six points of market share since 2003. To be sure, its Detroit rivals had also lost share. But Toyota and its international rivals were gaining what the Detroit companies lost.
Chrysler was drowning, too. Perhaps because it was the smallest company, its decline got less attention than G.M., and perhaps its past and current corporate owners weren’t upset to be overshadowed.
Daimler booked a deep loss to unload Chrysler onto Cerberus. The total purchase price of $7.4 billion by the private equity firm was a fraction of the $37 billion that Daimler had paid for Chrysler in 1998 - proof of how much Chrysler’s value had slid.
“We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome," said John Snow, the chairman of Cerberus and the U.S. Treasury secretary from 2003 to 2006.
"A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations."
Less than two years later, Cerberus would no longer own Chrysler, and Chrysler would precede G.M. into bankruptcy court.