- The Washington Times - Friday, May 22, 2009

General Motors and the United Auto Workers on Thursday reached a deal that enables them to enter into bankruptcy at the end of the month with a united front against thousands of bondholders and dealers, who are being asked to bear the brunt of the cost of GM’s monumental looming bankruptcy.

The massive restructuring of GM is shaping up to be historic not only for transforming the largest U.S. manufacturer in the nation’s most important industry, but in sealing a political deal that fuses the interests of the union and car companies with the environmental allies of the White House with the overarching goal of creating a “greener” fleet of cars in the future.

In exchange for endorsing the White House mandate for much more fuel-efficient cars, the main sacrifice from unions in the deal is the acceleration of job losses as GM shuts 16 plants employing about a third of its 60,000 workers by 2010. But retirees and workers who stay on the job would be rewarded with 39 percent ownership of the company while the government, which has lent GM $15.4 billion, takes a 50 percent controlling stake.

Bondholders, an assorted group ranging from individual retirees to gigantic pension and mutual funds that lent GM $27 billion, are offered only a 10 percent equity stake in the company - a paltry sum that most bondholders have already rejected. Their reluctance to go along with the plan ensures that GM will have to go to bankruptcy court to force them to relinquish their claims against the company.

“The reality is that the direction of the auto industry restructuring is all about politics,” said Glenn Reynolds, analyst at CreditSights, an investor research group. “The political calculus says there is little risk in shafting bondholders. … All is fair in love, war, politics and apparently also bankruptcy” under the White House auto task force’s game plan, he said, noting that votes in Ohio, Michigan and other auto-producing states will be pivotal in upcoming midterm elections.

As the administration did with its successful gambit to quickly usher Chrysler into a bankruptcy reorganization biased in favor of unions and against creditors, the GM plan represents an “outright politically motivated wealth transfer” from lenders to unions, he said.

Mr. Reynolds contended that political goals motivated the White House to seek approval between unions and management ahead of the bankruptcy filing, along with a small but significant number of creditors who can help make a convincing case before the bankruptcy court that the reorganization is fair and should be expedited, Mr. Reynolds said.

While the administration won the support of Chrysler’s four largest bank lenders using the bargaining chip of bailout money the Treasury had provided, it gave much less to Chrysler’s other secured lenders and persuaded a Manhattan, N.Y., bankruptcy court to rule against them in key initial skirmishes. Only a small contingent of teacher and police union pension funds continues to fight against the Chrysler plan.

With GM, the White House is following much the same playbook, although GM’s bankruptcy is expected to be much bigger and more complex, analysts said.

The administration secured agreement ahead of time between management and labor in a deal that favors unions. Then, it aims to divide the company’s creditors by offering full reimbursement to GM’s secured lenders, who are owed about $6 billion, while offering very little to unsecured bondholders who are owed the biggest chunk of money.

Thousands of GM and Chrysler dealers, whose fates also are left up to the bankruptcy court, like the bondholders have the disadvantage of being dispersed and mostly unorganized, limiting their ability to sway the bankruptcy court.

The administration denied that its handling of the auto bailout is politically motivated or that it is treating bondholders unfairly.

“The president has been clear throughout this process that the government should engage in a fair and reasonable manner,” said an administration official. “Not a single creditor’s right has been unfairly altered during this process.”

In the Chrysler case, “the matter is now being managed in a bankruptcy court where all creditors have an opportunity to present their concerns,” the official said. “Even before the bankruptcy filing, the company’s restructuring plan was supported by a wide range of stakeholders, including the overwhelming majority of secured creditors.”

Another piece of the GM deal was put in place Thursday as the Treasury announced a $7.5 billion cash infusion for GMAC, the automaker’s financing arm. The Treasury said it expects to acquire more than one-third ownership in the finance company, which also is taking over financing for Chrysler’s dealers and customers.

“There is certainly a lot of politics behind these deals, in part because the unions did endorse Obama, and of course [House Speaker] Nancy Pelosi is heavily involved with the environmental groups,” said Rebecca Lindland, auto analyst at IHS Global Insight.

Analysts said the political victory behind the deals is more obvious than their business sense. President Obama was able to bring together two warring Democratic factions - environmentalists and unions that had resisted raising fuel efficiency standards in the past - in a major political achievement.

But whether the buying public will go along with the pact is a big question - and that will be the key factor that determines whether the companies become viable and profitable again in the future, said Ms. Lindland.

The big increase in fuel efficiency will require a major downsizing of America’s car fleet. But American consumers continue to prefer large cars, sport utility vehicles and trucks - an appetite that was hardly dented by last year’s brush with gasoline prices over $4 a gallon.

“My colleagues and I have spoken often about the potential for unintended consequences if the government tries to dictate consumer choice regarding vehicle purchases, but it falls on deaf ears in much of Washington,” Ms. Lindland said.

“We have seen minimal demand for subcompact cars and only a moderate, steady demand for slightly larger compact cars. We also have not seen any sustainable demand for hybrid [gas-electric] vehicles, which continue to be about 2 percent of the light vehicle market and have been for about five years,” she said.

The saving grace for the administration is technological advances may make it possible to ratchet up the fuel efficiency of cars and light trucks while still satisfying consumer demand for large, powerful vehicles, she said.

“We expect to see mild hybrids and downsized, turbocharged direct-injection engines that provide the consumer with the torque and power they expect,” she said. “Engines like the Ford Ecoboost have these types of characteristics, but of course this technology is not free and consumers will feel the impact in the price of vehicles.”

IHS expects the new technologies to drive the cost per vehicle up by $3,000 to $4,000, far more than the $1,300 estimated by the White House.

Auto workers in Michigan were relieved about the pact with GM, which must be ratified by the rank and file. Details of the agreement were not released by the union, but it is thought to give the union a 39 percent equity stake in the reorganized company in exchange for forgiving $10 billion of its debt to a retiree health care fund.

Also, like Chrysler’s compact with the union last month, the deal is thought to suspend performance and Christmas bonuses this year as well as eliminate cost-of-living adjustments through 2011. Laid-off workers would no longer receive nearly full pay but instead would get 65 percent to 70 percent of their base pay for a year or longer, depending on seniority.

“This is good news. It’s been long awaited. Now, everybody can take a breath. Not a deep breath, but a breath,” said UAW Local 652 President Mike Green, who represents about 2,000 auto workers in the Lansing, Mich., area.

“This is exactly what we have been working toward for months now,” Mr. Green said. “It tells me we are going to be in business. … Hopefully it isn’t going into bankruptcy, so I’m hoping this deal puts a lot of this behind us. We want to go back to focusing on building cars and doing the right things for the economy.”

c Andrea Billups and William Ehart contributed to this report.

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