The Original GM Bailout: Echoes
The bailout of the auto industry by the federal government after the 2008 financial crisis is fresh on the minds of many Americans, not least because it's a persistent topic of debate on the Republican campaign trail.
After receiving almost $50 billion in federal assistance, General Motors Co. has once again, by the estimation of some industry analysts, regained its position as the No. 1 automaker. Depending on whom you talk to, this was either a great success of limited government intervention or an intolerable market intrusion that will ultimately lead to ruin.
A look back at the first time GM received a bailout offers some perspective on this argument. In an eerily similar manner, the company’s first financial crisis allowed for innovations that made possible its future success -- and also sowed the seeds of some of its future problems.
In 1914, John Raskob and Pierre S. du Pont of the Du Pont Company in Wilmington, Delaware, became shareholders in a stable but financially vulnerable GM. By 1915, the two industrialists had been thrust into the company’s management after an ownership dispute erupted between GM founder William Durant and a group of Boston banks that had controlled the company under a five-year financing agreement.
Durant was eager to regain complete control of the company and was supported by Lewis G. Kauffman of the Chatham and Phenix National Bank of New York. Du Pont, Raskob and the Du Pont Company were all clients of Kauffman's. Because of his relationship with Kauffman, du Pont was invited to join the board of GM with the promise that Durant’s takeover was a certainty and the finances of the company were solid.
In fact, nothing was further from the truth.
Du Pont went to the next board meeting of GM on Sept. 16, 1915, and was drawn into a struggle over the company's ownership. A compromise allowed du Pont to name three neutral directors to the board to break the deadlock between the Durant camp and the Boston bankers. Du Pont chose his brother-in-law Lammot Belin, a Du Pont Company executive named J. Amory Haskell, and Raskob.
The new directors immediately sought to modernize and restructure GM along similar lines as Du Pont, but found their efforts blocked by Durant. GM's liquidity crisis, however, gave Raskob the leverage to push through a drastic restructuring of its management. He proposed that Du Pont purchase enough GM stock to stabilize the company. In doing so, Du Pont would have an opportunity to expand the market for many of its products, including fabrics and paints. Although Du Pont's board was hesitant at first to reach beyond its traditional business, Raskob's persistence and support from Pierre du Pont persuaded them to make the investment.
Du Pont's purchase of more than $25 million in GM stock would further secure Raskob’s place in the history of GM -- and in the company's long-term success.
The new GM was managed through a holding company, Du Pont American Industries, in which Raskob served on the executive committee. Raskob used his new power and Du Pont's leverage to finally restructure the automaker. Durant was fired, leaving Raskob, Pierre du Pont and Alfred Sloan, GM's president, in charge. Raskob started an executive-bonus plan to secure the loyalty of senior management and is credited with founding the General Motors Acceptance Corporation, or GMAC, in 1919.
GMAC allowed, for the first time, large-scale installment financing for car buyers, vastly expanding the industry’s potential customer base. But it later ran into trouble as it expanded into new businesses, such as originating and servicing mortgages. After being spun off in 2006, GMAC required bailouts from the Treasury Department in 2008 and 2009 of more than $17 billion as part of the government's efforts to rescue the auto industry.
Even so, Raskob's foresight saved GM from financial ruin and paved the way for great successes in the automobile industry in the 20th century. Whether the same will be said about GM's current leadership 100 years from now is an interesting question.
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