- The Washington Times - Monday, June 1, 2009


General Motors filed the largest ever industrial bankruptcy Monday morning under a strategy mapped out by the White House to quickly reorganize the venerable Detroit company in two to three months.

In its landmark filing before the U.S. bankruptcy court in Manhattan, the company said it had $172.81 billion in debt and $82.29 billion in assets — putting it only behind the Goliath bankruptcies of Lehman Brothers, Worldcom and Enron in size. But GM’s sprawling operations around the world and huge workforce put its case in a class by itself.

GM’s historic filing came as the Manhattan court approved the sale of Chrysler to a consortium led by Italy’s Fiat automaker, in a critical step that will enable the smaller automaker to quickly emerge from a bankruptcy process that started only a month ago. The White House has said the Chrysler case is a model for GM’s.

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But the bankruptcy will create hardship and unemployment in many communities as GM shutters nine plants and idles three more in its efforts to downsize and increase efficiency. Among the factories that will be closed is an assembly plant in Wilmington, Del., and a powertrain plant in Fredericksburg, Va. Other plants will be shut temporarily in hopes that demand for new cars will pick up in later years.

“I recognize that this may give some Americans pause,” said President Obama, addressing the controversy in a statement at noon Monday. “The hard times are not over.”

But he insisted his plans for GM and Chrysler will be successful at launching an all new auto industry in the United States that focuses on making small, fuel-efficient cars. Both companies after bankruptcy will be rid of huge debts that held them back from being competitive in the past, he said.

“The GM of the future will be different than the GM of the past,” he said, insisting it will be a good investment for taxpayers and workers.

The White House laid out details of the plan Sunday after a last major piece fell into place with over half the company’s bondholders giving their assent to the reorganization. In a key last-minute development, senior administration officials said the White House pared its ownership share of the reorganized company to 60 percent from 72.5 percent to accommodate bigger shares for the investors and Canadian government, which is providing GM with $9 billion in aid.

The U.S. government’s majority ownership in the century-old automaker is intended to compensate for $50 billion in total financing provided by U.S. taxpayers, including $30 billion during the bankruptcy and $20 billion before the filing. But analysts warn that taxpayers are never likely to see all their money returned — and the senior officials did not dispute that.

Mr. Obama and senior administration officials have stressed that federal involvement with the companies has been forced by circumstances, and the administration is reluctantly giving the government ownership of the nation’s largest manufacturing firm.

“My preference would have been to stay out of it completely,” Mr. Obama said in an interview with NBC over the weekend.

The sweeping restructuring and downsizing aims to make GM profitable at a level of 10 million annual car sales in the United States — above the current sales rate of about 9 million but far below the 16 million in annual sales that were needed to keep GM afloat in the past.

GM would close down 11 factories and idle three, and would be required to make subcompact cars in the United States that would result in 70 percent of the cars sold here being made here.

The Canadian government would gain a 12 percent share in the company and appoint one member to the new board of directors. The United Auto Workers union would gain up to 20 percent ownership and would appoint a nonvoting board member. The rest of the reorganized GM’s board of directors would be appointed or approved by the U.S. government.

But administration officials insisted that they have no intent for the government to direct day-to-day operations of the company. They said they also would not put government employees on the board of directors or at company facilities.

Despite their denials, analysts say the government’s hand can been seen in most of the key components of the reorganization plan, from the new focus on making small, energy-efficient cars in the United States to the generous compensation to GM’s union for what many regard as small sacrifices such as postponing raises for a year or two.

The last-minute agreement of 54 percent of investors holding $27.2 billion of GM bonds was a key development that likely will smooth the way for a quick bankruptcy, analysts said. With the approval of more than 1,000 major bondholders — including mutual funds Pimco, Franklin and Fidelity — the plan is likely to be viewed favorably by the court, which has largely agreed to a similar bankruptcy plan offered by Chrysler a month ago with most lenders on board.

Responding under a Saturday deadline laid down by GM and the White House, the major bondholders agreed to a sweetened offer to forgive their share of the company’s $27.2 billion in debt in exchange for a stake of up to 25 percent in the newly reorganized GM, said a spokesman for the bondholders.

Thousands of smaller investors holding GM bonds did not accept the offer, however, and have said they would fight the plan in court. By some estimates, the bondholders still would receive less than 10 cents on the dollar under the plan.

A Main Street bondholder group that is affiliated with the conservative 60 Plus Association for seniors has said it still objects to the more favorable deal offered to GM’s union, which would receive a 20 percent share to extinguish about $11 billion in debt.

Investors who approved the plan cited the sacrifice the U.S. government made to give them a greater share of the company. While the federal government would still own a majority stake in the company under the plan, the Treasury Department could not gain repayment of the $50 billion provided by taxpayers unless the company’s stock price hits unprecedented levels.

“The willingness of the Treasury to face the likelihood of eating a major loss down the line to get this deal done … only partly eases the pain for bondholders,” said Glenn Reynolds, an analyst with CreditSights, an investor research group.

Still, “the deal at least now offers a realistic chance of at least a small slice of upside that did not exist in the original, obscenely uneconomic deal” offered by the White House’s auto task force, he said.

In addition to the “taxpayer falling on the auto task force’s sword,” he said the company’s stock will have to “dramatically rebound” for bondholders to enjoy a “meaningful recovery” of their money.

Mr. Reynolds said Congress is likely to delve into whether the White House should have “served up the bondholder and the taxpayer” so that the United Auto Workers could receive a disproportionate share in the company.

Richard Beales, an analyst at Breakingviews.com, an investor news service, said the bankruptcy reorganization has been structured to ensure that unions get the best recovery on their obligations.

By contrast, taxpayers and bondholders will get only “scrapyard recoveries” that represent pennies on the dollar, he said.

By one estimate, once the newly reorganized GM starts issuing stock again, its market value would have to jump to an unprecedented $69 billion for the taxpayers to recover their money. Bondholders could cash in their shares at market valuations of $30 billion or lower.

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