Monday, June 1, 2009; 12:33 PM
General Motors filed for bankruptcy protection this morning in a move that President Obama said was necessary to restore the auto manufacturing giant to competitiveness and help ensure the survival of the domestic auto industry.
In a speech at the White House hours after GM filed for Chapter 11 bankruptcy protection in New York, Obama hailed GM's plan to emerge from its current woes as "credible" and "full of promise." But he also sought to reassure Americans skeptical about the plan's provisions to transfer a 60 percent ownership stake in the company to the U.S. government in return for a massive infusion of cash.
"We are acting as reluctant shareholders, because that is the only way to help GM succeed," Obama said. "What we are not doing -- what I have no interest in doing -- is running GM." He vowed that the federal government would "refrain from exercising its rights as a shareholder" in all but the most fundamental decisions and would leave day-to-day operations to a private board.
"Our goal is to get GM back on its feet, take a hands-off approach and get out quickly," he said.
The bankruptcy filing marked the end of financial independence for the 100-year-old industrial leviathan that once conflated its interests with the country's and -- counting jobs at the company and its suppliers -- employed well over 1 million people.
In a 24-page filing in the U.S. Bankruptcy Court in the Southern District of New York, the storied automaker listed $82.29 billion in assets and $172.81 billion in debts on a consolidated basis.
GM also announced this morning that it will idle or close 14 manufacturing plants.
The plan cuts GM's 47 U.S. facilities down to 33 by 2012.
"Our manufacturing operations, which already are among the most productive in the industry, will emerge even leaner, stronger and more flexible, as part of the New GM, " Gary Cowger, group vice president of GM global manufacturing and labor relations, said in a statement. "Flexible manufacturing enables us to quickly respond to consumer preferences and changing market conditions."
Closed plants include assembly plants in Pontiac, Mich., and Wilmington, Del.; stamping plants in Grand Rapids, Mich., Indianapolis and Mansfield, Ohio; and powertrain plants in Livonia, Flint and Willow Run, Mich., Fredericksburg, Va., and Parma, Ohio.
GM's parts division announced today that it will cease operations at three parts distribution centers in Boston; Columbus, Ohio; and Jacksonville, Fla., by the end of this year.
The Obama administration had been pushing the bankruptcy as the most viable way to restructure General Motors, just as the government has been attempting do with Chrysler. Officials said their hope is that GM would emerge from the process smaller, with fewer workers and brands, less debt, but also more viable.
The case will be overseen by U.S. Bankruptcy Judge Robert E. Gerber, who joined the court in 2000 after more than 30 years in private practice. He has overseen the bankruptcies of cable company Adelphi and telecommunications firm Global Crossing.
Under the proposed restructuring, about 60 percent of the new GM would be owned by the United States, about 12 percent by the governments of Canada and Ontario, 17.5 percent by a union health trust, and 10 percent by the company's current bondholders.
The United States will invest another $30 billion during and after the GM bankruptcy process, officials said last night, bringing the U.S. commitment to $50 billion.
Following that infusion, "the U.S. Treasury does not believe or anticipate that any additional assistance to GM will be required," a senior administration official said last night, calling the restructuring a "permanent" solution.
"A court-supervised process and transfer of assets will enable a New GM to emerge as a stronger, healthier, more focused and nimbler company with a determination not to just survive but to excel," GM board chairman Kent Kresa said in a statement. "The Board concluded that the proposed transformation will maximize the value of the enterprise, and the return to the many stakeholders who have been involved with GM over the years."
Meanwhile, last night, a bankruptcy judge approved the sale of substantially all of Chrysler's assets to a group led by Italian automaker Fiat.
As the administration builds its case for another massive wave of government aid, it is dealing separately with accusations that its plan unfairly favors the United Auto Workers at the expense of the company's investors.
This morning, the U.S. Chamber of Commerce said its biggest concern with the bankruptcy is the "potential for governments and unions to influence production, product, workforce, and management decisions in ways that could jeopardize the automakers' chances for survival, put politics and special interests above sound business strategy, and disrupt our nation's trading relationships across the world."
The fairness issue will be central as the GM bankruptcy case goes before a judge this week: Does the government-sponsored restructuring plan equitably accommodate all of the company's stakeholders?
It is a legal and a political question, pitting company workers against investors, and it will be debated in and out of court.
Similar complaints arose from Chrysler's creditors, mainly banks and hedge funds, but Obama dismissed some of the lenders as mere "speculators," and their legal claims have failed to gain traction in court.
GM's creditors, however, consist of thousands of investors -- individuals as well as institutions. One group of individual investorsknown as the Main Street Bondholders has already organized to protest its members' treatment. And its claims have been echoed by some in Congress.
"The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company's diverse group of bondholders," according to a letter from 20 House members, led by Rep. Jeb Hensarling (R-Tex.), to Treasury Secretary Timothy F. Geithner. "Contractual rights of investors are being trampled by the government under the rationale of 'extraordinary circumstances.' "
After the governments, there are two primary GM stakeholder groups to which the company owes $20 billion or more: the bondholders and the union's retiree health-care trust.
As the company has leaned toward bankruptcy, the union and the bondholders have regarded each other warily because in any restructuring their claims will be weighed side by side.
About $27 billion in GM bonds are held by institutions and individuals. They have been asked to give up those bonds in exchange for 10 percent ownership in the restructured company, along with the right to buy a larger stake later.
The retiree health fund of the United Auto Workers, by comparison, is owed $20 billion by GM. In exchange for that claim, the retiree health trust is being asked to accept a 17.5 percent stake in the company, as well as $9 billion in notes and preferred stock.
Critics say it is unfair that the restructuring plan gives the union health trust a larger share of the new GM than the bondholders. But administration officials defend the plan, offering several justifications.
First, they note that the terms of the proposed GM restructuring echo the terms laid out by the Bush administration in December, when it extended $13.4 billion in loans to GM.
The Bush administration's loan agreement required a 50 percent reduction or "haircut" for the union trust, but a 66 percent cut for the bondholders. The Obama deal requires larger cuts for both sides, though more for the bondholders,
Administration officials assert moreover that it makes business sense that different creditors are treated differently.
They note, for example, that the government has taken steps to protect customers who hold GM warranties, pledging to stand behind those agreements, as well as providing assurances to the company's suppliers. The GM restructuring plan deems it important to favor those two classes of creditors.
"If you eliminate the warranty holders' claims, those individuals are not likely to buy another GM car," an administration official said. "If you don't pay the suppliers and you put them out of business, well, it's hard to build cars without steering wheels. The union workers are no different. They don't have to show up again in the morning."
For the same reasons, there are a number of precedents for retiree health funds getting preferential treatment during bankruptcies, particularly in the steel industry in recent years when Bethlehem Steel and others were sold off.
"We felt that we needed the strong support of the union going forward," said Wilbur Ross, who ran the private-equity firm that acquired Bethlehem after its 2001 bankruptcy filing. "It's one thing to compromise a union contract. It's another thing to get them working with good morale.
"The only difference here is that you have the government playing the role of the vulture investor," Ross added. "They are the only ones willing to make this investment, so they're calling the shots."
A critical legal issue is whether the bondholders might be able to get more for their debt if the company were simply liquidated, the proceeds distributed among those with claims.
But administration officials say that the bondholders would receive even less for their investments if GM were liquidated. In that case, the company's other creditors, such as the government, would be paid off first, they note. Yesterday, it was announced that 54 percent of bondholders had approved the deal.
"By the time you finished liquidating GM, there would be nothing for them," an administration official said yesterday.
The Chrysler bankruptcy has gone far faster than many in the industry had predicted. Obama administration officials say the case of GM, a much larger and more global company, will probably take longer.
"For the better part of a century, The General Motors Corporation has been one of the most recognizable and largest businesses in the world," the Obama administration said in a statement released last night. Today "will rank as another historic day for the company -- the end of an old General Motors, and the beginning of a new one."
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