Monday, June 1, 2009
General Motors Corp. filed for Chapter 11 bankruptcy early Monday, marking the humbling of an American icon that once dominated the global car industry and setting up a high-stakes gamble for U.S. taxpayers.
The bankruptcy filing, made in the U.S. Bankruptcy Court in Manhattan, marks the climax of a lengthy debate over the auto maker’s future after it sought a bailout from the U.S. government in December to stay alive. In the end, GM couldn’t complete its restructuring out of court and filed for bankruptcy-court protection to get billions more in aid from U.S. taxpayers.
The question now facing 56,000 auto workers, 3,600 GM dealers and the Obama administration: Will it work?
The U.S. government has agreed to provide GM with another $30 billion in aid, in addition to the $20 billion the auto maker has already borrowed, to see it through its restructuring and exit from bankruptcy protection. In return, the government will get a controlling stake in the company. The Canadian and Ontario governments are putting in $9.5 billion for a 12.5% stake.
The reorganization faces myriad risks, ranging from legal challenges to the uncertainty of when consumer demand for new cars will rebound. In becoming GM’s new owner, the government is also entering largely unexplored terrain filled with political minefields, notably the possibility of meddling by Congress in the company’s daily operations and business plans.
In bankruptcy, the auto maker will split apart into two companies: a leaner new GM and a so-called old GM, which will include the pieces that will be wound down. GM intends to accomplish the split through a Section 363 sale, which would transfer the new GM assets to an entity owned by the U.S. and Canadian governments, the United Auto Workers union and the company’s unsecured creditors.
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Even if a new GM emerges swiftly from bankruptcy, the administration will face a thicket of challenges, including closing more than a dozen factories and shedding the Pontiac, Saturn, Saab and Hummer brands. Shepherding these unwanted parts of GM — the so-called Old GM — through liquidation in court could take years, with potential extra costs to taxpayers if the process bogs down.
Monday, GM said it will shutter 17 factories and parts centers by the end of 2011, including seven factories in Michigan and plants in Ohio, Indiana and Tennessee. Two of the closures had been previously announced, including a castings factory in Massena, N.Y., which closed May 1. Three of the facilities to close are parts centers and three factories could reopen if market demand rebounds.
GM’s restructuring has been carefully planned by the company itself and the Treasury Department, but it faces some uncertainty now that its fate is in the hands of a bankruptcy judge. The judge chosen to handle the case will have a major impact on the outcome of the case, especially if dissident bondholders mount a legal challenge to the restructuring. There’s also the risk that consumers will be scared off by the company’s Chapter 11 filing, causing sales to fall even further.
And unknown is how the cost of restructuring both GM and Chrysler LLC would have compared with the cost of letting both companies fail in terms of lost wages, disruptions among car-parts makers and the broader economic fallout. Chrysler, which could emerge from bankruptcy as soon as Monday, will be controlled by Italy’s Fiat SpA under its own risky revamping.
Bankruptcy should allow GM to pull off one of the most expedient downsizings in the industry’s 120-year history. Long hampered by laws, union strife and management practices that kept it from fast action to fix problems, GM plans to eliminate almost all of its debt, halve its U.S. brands, shutter 2,600 dealers and rewrite labor contracts almost overnight.
Emerging sometime this summer would be a GM with a cleaner balance sheet and slimmer operations than the company that has posted deep losses since 2005. GM has burned through $33.6 billion in cash the past four years. Under its restructuring plan, GM will shed more than $79 billion in debt, gain work-force savings worth billions of dollars a year, close unneeded facilities and reduce its dealer network by 40%.