Forbes: Is A Bankrupt GM Good For America?

As it takes a controlling stake in General Motors, the Obama administration is betting that it can rapidly bring the company out of bankruptcy, just as it has recently done with Chrysler.

"Our goal is to get GM back on its feet, take a hands-off approach and get out quickly," said President Obama at the White House Monday, just hours after GM filed for Chapter 11 bankruptcy in a New York court. In its 24-page filing, the company showed that it was encumbered with $173 billion in liabilities compared to $82 billion in assets.

Under the terms of the largely pre-arranged bankruptcy, U.S. taxpayers will own 60% of a new General Motors when its court-supervised restructuring is completed in 60 to 90 days. The Canadian and Ontario governments will own 12%, the United Automobile Workers union 17.5% and unsecured bondholders 10%.

In addition, the U.S. government plans to pump an additional $30.1 billion into the company on top of the $19.4 billion it had already invested, and to convert most of that into equity in the new GM, leaving the automaker with a healthier balance sheet. Senior administration officials have said they do not intend to invest any more money into the company.

GM Chief Executive Frederick "Fritz" Henderson called the bankruptcy filing a defining moment for the company. "The GM that let too many of you down is history. Today marks the beginning of what will be a new company."

GM's bankruptcy filing comes just as Chrysler is reemerging from its own government brokered bankruptcy. Sunday night, a New York judge approved the $2 billion sale of nearly all of Chrysler's assets to the Italian company Fiat. The restructuring took just 31 days.

But GM, the United States' largest automaker, is a far more complicated company than Chrysler, which the president also acknowledges. With its control over GM, the Obama administration begins a risky chapter in its efforts to nationalize companies for the well being of the economy at large. Although the administration is pushing the company into bankruptcy, it is effectively creating a new national champion, opening itself to criticism about how much influence the government will have in GM until it emerges as a public company again.

"Our biggest concern ... 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," said U.S. Chamber of Commerce President and Chief Executive Thomas Donohue in a statement Monday.

Obama has vowed that the administration will take a hands-off approach. "What we are not doing—what I have no interest in doing—is running GM," he said. The company will continue to be run by a private board of directors, some of which are on GM's current board, though the administration retains the power to remove board members if necessary. Henderson is expected to remain as the company's chief executive, at least for now.

But Obama warned that the company's restructuring will take a "painful toll" on many Americans. "More jobs will be lost, more plants will close," he said.

GM says it will shutter 11 factories and put three others on "standby status" to reopen when industry sales rebound. The plants slated to close include two assembly plants in Michigan and Delaware; three stamping plants in Michigan, Indiana and Ohio; and six power train factories, including three in Michigan, and one each in Ohio, Virginia and New York. The total number of employees affected was not known. GM is expected to begin offering buyouts to some 21,000 GM hourly workers shortly.

The company's manufacturing plan reduces its total number of assembly, powertrain and stamping facilities in the U.S. from 47 in 2008 to 34 by the end of 2010 and 33 by 2012. The plan will allow GM to achieve full capacity utilization of its assembly operations in 2011, two years ahead of what it had earlier proposed to the government, resulting in lower fixed costs per vehicle sold.

One of the plants on standby notice will gear up to produce about 160,000 new subcompacts a year, most likely the Chevrolet Spark, which GM had originally intended to import from China. In the past, GM could not make small cars profitably in the U.S., but new labor concessions ratified last week, in advance of GM's bankruptcy filing, enable GM to close the wage and benefit gap with its foreign-based rivals.

"With these agreements, there's no excuse for these companies not to build in the U.S.," says United Autoworkers Union President Ronald Gettelfinger.

As part of the bankruptcy agreement, the U.S. government will hold $8.8 billion in GM debt and preferred stock. The Canadian governments will lend GM $9.5 billion, most of which will be converted into equity. Canada will wind up with $1.7 billion in debt and preferred stock.

The UAW agreed to forgive $20 billion that GM owes to a trust fund to pay retiree health care benefits. In exchange, the union will receive a 17.5% stake in the new GM, plus $6.5 billion in preferred shares, a $2.5 billion note and a warrant to purchase a further 2.5% of GM in the future. In total, the changes will save GM $13 billion, the union said.

But some groups are concerned that the administration is trampling bankruptcy law by giving the UAW trust a greater stake in the new company than secured creditors receive. That criticism was also levied at the administration after a UAW trust received a 55% stake in the company, while secured creditors took $2.25 billion for the $6.9 billion they were owed.