- The Washington Times - Wednesday, May 27, 2009

The White House is driving General Motors Corp. toward a bankruptcy reorganization that would grant the government as much as a two-thirds stake in the battered automaker, while consigning bondholders and unions to minority shares.

GM’s bankruptcy now appears more likely than ever within days as the government declined to significantly increase the share of the company offered to bondholders from the 10 percent level they previous rejected. Meanwhile, the United Auto Workers union revealed that its retiree health care fund would receive no more than a 20 percent share of the company.

Within two months, the U.S. and Canadian governments together under the plan would own nearly 70 percent of the storied Detroit company, which is considered the backbone of the U.S. auto and manufacturing sectors, according to sources familiar with the discussions. Canada would receive a small share in exchange for assisting GM, but the sources declined to be more specific.

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The overwhelming share of the company the government is giving itself much exceeds the 50 percent share originally reported last month and angered bondholders who feel that the government should have offered more to investors in light of the union’s agreement to halve its earlier reported 39 percent share.

“The government is going to get more? Talk about making this worse,” said Bill Zastrow, 59, a small-business owner in Massachusetts with $240,000 invested in GM bonds. “I would have thought that would give them the opportunity to do the right thing and sort of even things out.”

The White House defended the giant stake it is taking in the nation’s largest manufacturer, saying the move was necessary to make sure taxpayers profit from what is likely to be a very expensive investment in GM as it goes through bankruptcy.

GM earlier this year estimated that it would take $100 billion in financing to usher the company through a bankruptcy reorganization - on top of the $19.4 billion in loans the Treasury has already provided GM - meaning it could rival or surpass the record $138 billion taxpayer bailout of American International Group Inc.

Administration officials declined to say how much they expect the bankruptcy to cost, but seemed confident that they could limit the costs by ramming the restructuring plan through the bankruptcy courts with record speed as they have with the Chrysler reorganization.

The administration’s ambitious goal of completing a GM bankruptcy within 30 to 60 days was bolstered Tuesday by a district court decision rejecting a move by Chrysler lenders to block the White House’s restructuring plan for that company.

A group of Indiana pension funds had sought to block the sale of Chrysler assets to a group led by Italian automaker Fiat, arguing that the reorganization plan with the White House violated the Constitution by seeking to circumvent its property rights and bankruptcy protections established for lenders.

But the U.S. District Court in Manhattan declined to stop the Chrysler sale, paving the way for the most critical part of the White House plan to clear a Manhattan bankruptcy court. Chrysler’s lenders may still appeal the case.

The victory in the Chrysler case - a major bankruptcy reorganization in size and complexity - has emboldened the White House, which now expects Chrysler to emerge from bankruptcy in close to a month in what would be an unprecedented accomplishment for the government.

Given how easily and quickly the government swept aside roadblocks in the Chrysler case, the White House is more confident than ever that a GM reorganization could be accomplished within two months, although it concedes that any GM case would be more complex and prolonged, the sources said.

One area where the White House conceded the GM case is likely to be more complicated is in resolving issues related to GM’s $27 billion of public debt. Securities laws require the company to follow procedures and post notifications that weren’t required with Chrysler’s privately placed debt.

While the government’s ownership and involvement in GM would be far beyond anything experienced previously, the White House denies that its goal is to control the company.

After appointing several members from the private sector to a newly reorganized GM board, the White House will refrain from involving itself in the company’s day-to-day management, the sources said.

“We will discharge our responsibility as shareholders … but we will play as minimal a role as we can responsibly play,” said a source familiar with the discussions.

The United Auto Workers ratified its part of the reorganization plan Tuesday, but the company’s bondholders held out. The union’s retiree health care fund would receive a 17.5 percent share of the reorganized company’s stock, along with warrants for an additional 2.5 percent share and $6.5 billion in preferred shares.

The bondholders had until midnight Tuesday to collectively agree to a plan giving them 225 shares of common stock for each $1,000 in debt, or 10 percent of the company. The White House indicated it might allow GM to sweeten the deal marginally to attract more support.

The negotiations with bondholders could be extended by GM if the company thinks that would help to secure the 90 percent approval of bondholders needed to avoid bankruptcy. The White House has given GM a Monday deadline to obtain agreement from all parties or file for bankruptcy.

Mr. Zastrow, the Massachusetts bondholder, said the reorganization plan “was designed to fail from the outset” because it gave so little to bondholders. Many investors accuse the government of setting them up to take the blame for forcing GM into bankruptcy.

The White House is “either ignorant of or arrogant toward the individual bondholders who will be severely hurt by this inequitable offer,” said Chris Crowe, a home inspector from Lakewood, Colo., who stands to lose most of his $115,000 GM bond investment for retirement and college savings.

• William Ehart contributed to this report.

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