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Obama Defends General Motors Bankruptcy Plan
Monday, June 1, 2009
Photo by Alex Wong / Getty Images
U.S. President Obama pushed a humbled General Motors Corp. into bankruptcy on Monday and said the federal government will act as "reluctant shareholder" when it assumes a 60 percent ownership of the smaller carmaker that emerges.
The president said he hopes GM — once a proud symbol of American capitalism — would emerge quickly from bankruptcy court and pledged up to $30 billion in additional federal assistance to help it get on its feet.
The government's partial stake in GM comes on top of a far smaller ownership of Chrysler LLC, as well as significant federal equity in banks, the AIG insurance giant and two mortgage industry titans — all victims of an economic crisis unrivaled since the Great Depression.
Republicans lobbed questions in Obama's direction even before he finished speaking.
"The only thing it makes clear is that the government is firmly in the business of running companies using taxpayer dollars," said House Republican Leader John Boehner of Ohio.
"Does anyone really believe that politicians and bureaucrats in Washington can successfully steer a multinational corporation to economic viability? It's time for the administration to fully explain what the exit strategy is to get the U.S. government out of the boardroom once and for all," Boehner said.
But the president said the actions were part of a "viable, achievable plan that will give this iconic company a chance to rise again."
Speaking at the White House, where he was flanked by Cabinet secretaries and top economic advisers, he added, "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.
"Our goal is to help GM get back on its feet ... and get out quickly," he said of the federal government.
Bankruptcy Would Be The Fourth-Largest In U.S. History
General Motors entered its Chapter 11 bankruptcy court filing at the same time Chrysler is looking to emerge after a two-month reorganization. Over the weekend, a bankruptcy judge gave the No. 3 automaker approval to sell most of its assets to Italy's Fiat, part of a plan under which the U.S. government will own somewhat less than 10 percent of the firm.
Ford Motor Co., the other large U.S. automaker, has said it can weather the current economic and industry crises on its own.
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.
"The General Motors board of directors authorized the filing of a Chapter 11 case with regret that this path proved necessary despite the best efforts of so many," a company statement said.
"Today marks a new beginning for General Motors. ... The board is confident that this New GM can operate successfully in the intensely competitive U.S. market and around the world."
As it reorganizes, the fallen icon of American industry will rely on $30 billion of additional financial assistance from the Treasury Department and $9.5 billion from Canada. That's on top of about $20 billion in taxpayer money GM already has received in the form of low-interest loans.
The plan is for the federal 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. Existing GM shareholders are expected to be wiped out.
Albert Koch, who helped Kmart Corp. through its Chapter 11 reorganization, will serve as GM's chief restructuring officer.
Automaker Closing Nine More Plants, Idling Three
GM also revealed Monday that it will permanently close nine more plants and idle three others. The Pontiac, Mich., and Wilmington, Del., assembly plants will close this year, while plants in Spring Hill, Tenn., and Orion, Mich., will shut down production but remain on standby. One of the idled plants will be retooled to build a small car.
Seven powertrain and parts stamping plants will be closed starting in June 2010, while an additional stamping plant will be idled but remain in a standby capacity.
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.
The sale to Fiat means Chrysler could be out of bankruptcy within the government's original time frame of 30 to 60 days. Chrysler's plan gives a 55 percent stake of the new company to a union-run trust for retirees. Fiat gets a 20 percent stake to Fiat that can ultimately grow to 35 percent. The U.S. and Canadian governments get smaller pieces.
The third of the one-time Big Three, Ford Motor Co., has also been stung hard by the sales slump, but it avoided bankruptcy by mortgaging all of its assets in 2006 to borrow roughly $25 billion, giving it a financial cushion GM and Chrysler lacked.
'It's A New Beginning; It's A Rebirth'
GM will move forward 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. 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-MI). "It's a new beginning; it's a rebirth; it's a new General Motors."
GM, whose headquarters towers over downtown Detroit, said it believed the filing was not an acknowledgment of failure but a necessary way to cleanse itself in an orderly fashion of problems and costs that have dogged it for decades.
GM shares fell as low as 27 cents in Monday morning trading, their lowest price in the company's 100-year history. The News Corp. unit that oversees the Dow Jones industrial average said GM will be kicked out of the index on June 8 and be replaced by Cisco Systems Inc. The index's rules prohibit it from including companies that have filed for bankruptcy.
The Henderson-led GM faced a government-imposed June 1 deadline to restructure, slash costs and modify contracts with its union and dealers. But meeting most of those demands, plus a late agreement by many bondholders to swap portions of the $27 billion in debt they are owed for shares in a new GM, were not enough to prevent the court filing.
Henderson and Chrysler President Jim Press are scheduled to appear before a Senate committee Wednesday to address concerns about hundreds of dealership closings as the two automakers work through their government-led bankruptcies.
It was an all-out sprint to Monday's filing, as GM quickly sought to nail down deals with its union, bondholders and sell off brands and along with most of its Opel operations in Europe in an effort to appear in court with a near-complete plan to quickly emerge as a leaner company with a chance to become profitable.
The German government on Sunday agreed to lend GM's Opel unit $2.1 billion, a move necessary for Magna International Inc. to acquire the company. The Canadian auto parts supplier will take a 20 percent stake in Opel, and Russian-owned Sberbank will take a 35 percent, giving the two businesses a majority. GM retains 35 percent of Opel, with the remaining 10 percent going to employees.
Impact On GM Employees
In the U.S., the UAW's ratification of concessions, announced Friday, will save GM $1.3 billion per year. The new deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.
It also moves billions in retiree health care costs off GM's books. In exchange for its ownership stake, $6.5 billion of interest-bearing preferred shares, and a $2.5 billion note, the trust will take on responsibility for all health care costs for retirees starting next year. Higher health care costs alone accounted for a $1,500-per-car cost gap between GM and Japanese vehicles.
GM will offer buyouts and early retirement packages to all of its 61,000 hourly workers as it plans to shrink overall employment. The company also has about 27,000 white collar employees. In contrast, GM employed 618,000 Americans in 1979, more than any other company.
Earlier, the automaker outlined a plan to cut about 1,100, or 40 percent, of its dealers by the end of 2010. It also plans to shed about 500 dealerships that market the Saturn, Hummer and Saab brands.
But just cutting labor and overhead costs won't be enough to save the company. It also has been working to streamline its engineering and design, as well as standardize many parts so they can go into multiple models.
The once powerful GM earns a place in history as the largest U.S. industrial company to file for bankruptcy protection, and the fourth-largest company overall to do so based on its $82.29 billion in assets.
Lehman Brothers Holdings Inc.'s September 2008 bankruptcy filing is the nation's largest with $691 billion in assets and very likely served as a catalyst for GM — and Chrysler's — downfall, as it hastened the erosion of credit markets, making it more difficult for consumers and dealers to finance new vehicles.
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