Lessons Learned from the Automotive Industry
The bankruptcies of Chrysler and GM offer lessons on how to build and protect wealth
In a recent tweet, Tesla’s CEO Elon Musk explained that he maintains an around-the-clock work schedule because “Ford & Tesla are the only 2 American car companies to avoid bankruptcy.”
This led us to consider the fate of Chrysler and General Motors, members of the “Big Three” that did indeed file for bankruptcy (in 2009).
While Mr. Musk focuses on his work schedule, the primary lesson we derive from these bankruptcies is that, when wealth is concentrated in a single company, the risk of that concentration must be carefully managed.
In addition, it is important not to overlook the risk in Non-Qualified Deferred Compensation (NQDC) retirement plans. These plans are unsecured and unfunded “promises to pay” from the sponsoring company.
For example, the “new” GM currently offers at least one such plan, noting that:
All amounts deferred under the Plan shall remain the sole property of the Company, subject to the claims of its general creditors and available for use by the Company for whatever purposes are desired. With respect to amounts deferred, a Participant shall be merely a general creditor of the Company and the obligation of the Company hereunder shall be purely contractual and shall not be funded or secured in any way.
When Chrysler filed for bankruptcy, 400 participants, including Chairman Lee Iacocca, lost their entire account balance, according to McDermott Will & Emery. While a “rabbi trust” was in place to help protect the plan, $200 million from the rabbi trust was used for company operations. Nearly eight years of litigation followed, resulting in still no recoveries for participants.
In short, the lessons we derive are (1) the risks of deferred compensation should be appreciated and actively managed – as the IRS allows, (2) rabbi trusts have their limitations, and (3) protracted litigation may not result in any meaningful recoveries.
For a comprehensive look at the risks of automotive companies, we recommend this list of defunct automobile manufacturers of the United States.