GM Files for Bankruptcy Protection; Judge OKs Chrysler Asset Sale
After pushing the company into bankruptcy, President Barack Obama said Monday that it was part of a”viable achievable plan that will give this iconic company a chance to rise again.”
He acknowledged that the government’s continued support could prove controversial. Seeking to ease those concerns, Mr. Obama said, “What I am not doing, what I have no interest in doing, is running GM.”
The president said auto executives “will call the shots and make the decisions about turning this company around.” He said the government would refrain from playing a management role in all but the most critical areas.
“We are acting as reluctant shareholders, because that is the only way to help GM succeed,” he said.
Listen to President Obama discuss GM’s filing:
General Motors CEO Fritz Henderson said the new GM will be a leaner and quicker company that’s more focused on its customers and its products. He said the new GM will be built from the strongest parts of its business, including its best brands and best products.
Listen to Henderson’s opening statement at GM’s Monday news conference:
GM’s bankruptcy filing is the fourth-largest in U.S. history and the largest for an industrial company. The company said it has $172.81 billion in debt and $82.29 billion in assets.
Trading of GM shares was halted early Monday after they plunged Friday as low as 74 cents, the lowest price in the company’s 100-year history. GM will be kicked out of the Dow Jones industrial average because rules established by the News Corp. unit that oversees the index prohibit it from including companies that have filed for bankruptcy.
The plan is for the U.S. government to take a 60 percent ownership stake in the new GM. The Canadian government would take 12.5 percent, with the United Auto Workers getting a 17.5 percent share and unsecured bondholders receiving 10 percent.
“The reorganization faces myriad risks, ranging from legal challenges to the uncertainty of when consumer demand for new cars will rebound,” the Wall Street Journal reported. “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.”
Albert Koch, who helped Kmart Corp. through its Chapter 11 reorganization, will serve as GM’s chief restructuring officer.
Beyond the bankruptcy announcement Monday, GM is expected to reveal 14 plants it intends to close or idle. One of those plants, however, will be retooled to build a small car.
GM’s filing comes 32 days after a Chapter 11 filing by Chrysler, which also was hobbled by plunging sales of cars and trucks as the worst recession since the Great Depression intensified.
Chrysler, another troubled U.S. automaker, filed for bankruptcy protection on April 30. On Sunday night, a New York bankruptcy judge gave approval for the bulk of its assets to be acquired by a group headed by Italy’s Fiat automaker and avoid liquidation.
“Chrysler has a new lease on life,” President Obama said in a statement hailing the news Monday morning. “We said this process would be completed quickly and efficiently, and that’s exactly what has been accomplished today.”
GM and the Treasury Department have been guiding GM toward a rescue plan that will give taxpayers a significant stake in the company. GM has already received about $20 billion in government loans and faced a Monday deadline to submit an acceptable restructuring strategy.
GM will move ahead with four core brands — Chevrolet, Cadillac, Buick and GMC — and cut four others. The company plans to cut 21,000 employees, about 34 percent of its work force, and reduce the number of dealers by 2,600, according to media reports. GM said it was finalizing a deal to sell Hummer, and plans for Saturn are expected to be announced within weeks.
“There is still plenty of pain to go around, but I’m confident this is far better than the alternative,” said Sen. Carl Levin, D-Mich., according to the Associated Press. “It’s a new beginning, it’s a rebirth, it’s a new General Motors.”
In a conference call with reporters Sunday, senior administration officials outlined guidelines for the government’s approach to its majority stake in the company, which will include an “extremely disciplined” approach to its shareholder rights and no expected involvement in the company’s day-to-day operations.
The government guided plan lays out a framework that would allow GM to work quickly to shed cumbersome assets and emerge as a smaller, more tightly focused company with a shareholder structure consisting of the U.S. and Canadian governments, United Auto Workers Union and bondholders.
Administration officials expect the court-supervised bankruptcy process to last 60 to 90 days.
In Midwestern states like Michigan, where automakers are still key employers, concerns were strong about the possible impact on jobs and the recession-weary economy.
“It’s the auto apocalypse now, not just for Michigan, not just for manufacturing, but for America,” said Rep. Thaddeus McCotter, R-Mich., according to the New York Times.
A large group of GM bondholders issued a statement Sunday saying 54 percent of bondholders had agreed to exchange their unsecured bonds for a 10 percent stake in a newly restructured company, plus warrants to purchase an additional 15 percent share.
The acceptance of sufficient number of bondholders is seen as pivotal in moving the company through bankruptcy quickly. It is believed that GM’s bonds are held by tens of thousands of investors, ranging from institutions to individuals.
Bondholders rejected an initial debt equity swap deal floated early last week. After the first deal failed, a critical group of bondholders signaled Thursday they would accept a sweetened agreement that offers them up to a one-quarter stake in the company if they drop opposition to the automaker’s plans to reorganize. Bondholders faced a Saturday deadline to indicate they would not oppose the sale process as planned.
The New York Times reported that groups representing some individual GM investors, who purchased the company’s bonds for as little as $25 apiece, said they still planned to contest the reorganization plan. The bulk of GM’s bonds are held by large institutional investors.
The company’s reorganization plans were also propelled forward Friday when the United Auto Workers union agreed to a cost-cutting deal, and on Saturday, when Germany’s finance minister said a plan was approved for Canadian auto parts maker Magna International Inc. to move ahead with a rescue of GM’s Opel unit.
Under the terms of a typical bankruptcy case, the company files a plan of reorganization that must be voted on by creditors. In each class of creditors, the plan would have to be approved by holders of two-thirds of the claims and a majority of the number of individual creditors who vote.
But in the GM case, it appears the company will sell some or all of its assets to a new entity that would become the new GM, rather than submit a plan to reorganize the old company, according to the AP.
The emerging plans faced scrutiny from lawmakers and others over the weekend.
“I think the government auto bailout was a big mistake,” Sen. Mitch McConnell, R-Ky., said Sunday on CNN’s “State of the Union” program. “We could have let these companies go through the bankruptcy process much earlier … without all of the additional government money, and ended up in the same place.”
GM has been losing market share since the early 1980s when it commanded 45 percent of the U.S. market. Its bankruptcy filing is expected to be one of the largest and most complex in U.S. history.
“It really was the first vast paternalistic corporation that people could rely on for insurance, health insurance, and retirement benefits. Remember, in the ’50s, you know, skilled labor was something of a shortage. General Motors really needed to keep labor on board,” Dan Neil, automotive critic for the Los Angeles Times, told the NewsHour on May 27.
“It sold mobility in a country that was obsessed with mobility, both real and social. And you couldn’t ask for a more sort of symbolic company than GM.”