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GM to reorganize in government-led bankruptcy

(Agencies)
Updated: 2009-06-01 17:27

WASHINGTON - General Motors Corp., the century-old automaker battered by the economic downturn, mounting debt and management problems, will file for bankruptcy Monday.

The move will give the government a 60 percent ownership stake and an unprecedented role in reshaping the auto industry.

It will be the largest industrial bankruptcy in US history and the fourth-largest overall.

President Barack Obama planned to announce his support for General Motors as it enters bankruptcy protection, vowing to provide billions more in government aid and protect the taxpayers' investment without interfering with the company's day-to-day operations. GM President and CEO Fritz Henderson was holding a news conference in New York immediately following Obama's address from the White House.

A General Motors logo is seen at a dealership in Montreal, May 31, 2009. General Motors Corp and the U.S. government finalized plans on Sunday for the battered automaker to reorganize, as a majority of debtholders helped clear the way to a massive bankruptcy filing expected on Monday. [Agencies]

Administration officials said late Sunday the federal government would provide an additional $30 billion to GM - which has already received about $20 billion in government loans - to help it restructure through bankruptcy. GM will follow a similar course taken by Chrysler LLC, which filed for Chapter 11 protection in April and hopes to emerge from its government-sponsored bankruptcy this week.

The officials, speaking on condition of anonymity in advance of Obama's public remarks, said the administration expects the court process to last 60 to 90 days. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership network. The company will move forward with four core brands - Chevrolet, Cadillac, Buick and GMC.

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 was announcing plans to close 11 facilities, idle three others and name the buyer of its Hummer division. GM's stock dropped to its lowest price in company history Friday, closing at just 75 cents. The shares will be virtually worthless in a Chapter 11 reorganization.

Special coverage: Global Auto Industry Woes Related readings:  Geithner pledged deficits cut, but GM bill grows  Official: US gets 60% of GM after bankruptcy  GM prepares for bankruptcy protection announcement  GM prepares for Ch. 11 bankruptcy  GM bondholder deadline passes, focus now on Ch. 11

 

"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. "It's a new beginning, it's a rebirth, it's a new General Motors."

The bankruptcy represents a dramatic downfall for GM, which was founded in 1908 by William C. Durant, who brought several car companies under one roof and developed a strategy of "a car for every purse and purpose." Longtime leader Alfred P. Sloan built the global automaker into a corporate icon.

The billions in federal loans will come from the $700 billion rescue fund for the financial sector, representing another significant intervention into private enterprise. The Treasury has used funding to stabilize banks, take a majority ownership in insurance conglomerate American International Group and guide Chrysler through bankruptcy.

Despite its large ownership stake in GM, administration officials said the government intends to avoid interfering with routine management decisions and would strive to shed its ownership stakes "as soon as practicable."

But the arrangement was fraught with potential conflicts. Daily operations will be carried out by GM's management but the administration will play a role in selecting a majority of the new board of directors.

Obama ordered the firing of former GM CEO Rick Wagoner and instructed GM to trim itself to a break even point of 10 million US car sales a year instead of its previous break even point of 16 millions vehicles.

GM planned to name turnaround executive Al Koch, who helped Kmart Corp. through its Chapter 11 reorganization, to serve as its chief restructuring officer, said a person familiar with the matter. The person, who spoke on condition of anonymity, was not authorized to speak about the appointment publicly.

Ahead of its bankruptcy filing, GM rushed to win concessions from stakeholders.

A group of large, institutional bondholders, representing 54 percent of GM bondholders, agreed to exchange their unsecured bonds for a 10 percent stake in a newly restructured company, plus warrants to purchase a greater share later. They had balked at an earlier offer that gave them 10 percent of the company.

The United Auto Workers union agreed to a cost-cutting deal last week.