GM Files for Bankruptcy Protection

By Peter Whoriskey

General Motors filed for bankruptcy protection this morning, marking the end of financial independence for the 100-year-old industrial leviathan that once conflated its interests with the country's and -- counting jobs at the company and its suppliers -- employed well over 1 million people.

The Obama administration said yesterday that the purpose of the bankruptcy is to restructure the storied automaker, as the government has been attempting do with Chrysler. Officials said their hope is that GM would emerge from the process smaller, with fewer workers and brands, less debt, but also more viable.

The bankruptcy filing came at 8 a.m., according to the Associated Press, and was preceded by a bankruptcy petition from a GM affiliate, wire services reported. Meanwhile, last night, a bankruptcy judge approved the sale of substantially all of Chrysler's assets to a group led by Italian automaker Fiat.

The United States will invest another $30 billion during and after the GM bankruptcy process, officials said last night, bringing the U.S. commitment to $50 billion.

Following that infusion, "the U.S. Treasury does not believe or anticipate that any additional assistance to GM will be required," a senior administration official said last night, calling the restructuring a "permanent" solution.

Under the proposed restructuring, about 60 percent of the new GM would be owned by the United States, about 12 percent by the governments of Canada and Ontario, a union health trust would own 17.5 percent, and the company's current bondholders would get 10 percent.

But as the administration builds the case for another massive infusion of government money into the automaker, it is also dealing separately with accusations that its plan unfairly favors the United Auto Workers at the expense of the company's investors.

The fairness issue will be central as the GM bankruptcy case goes before a judge this week: Does the government-sponsored restructuring plan equitably accommodate all of the company's stakeholders?

It is a legal and a political question, pitting company workers against investors, and it will be debated in and out of court.

Similar complaints arose from Chrysler's creditors, mainly banks and hedge funds, but Obama dismissed some of the lenders as mere "speculators," and their legal claims have failed to gain traction in court.

GM's creditors, however, consist of thousands of investors, individuals as well as institutions. One group of individual investors, calling themselves the Main Street Bondholders, have already organized to protest their treatment. And their claims have been echoed by some in Congress.

"The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company's diverse group of bondholders," according to a letter from 20 House members, led by Rep. Jeb Hensarling (R-Tex.), to Treasury Secretary Timothy F. Geithner. "Contractual rights of investors are being trampled by the government under the rationale of 'extraordinary circumstances.' "

After the governments, there are two primary GM stakeholder groups to which the company owes $20 billion or more: the bondholders and the union's retiree health-care trust.

As the company has leaned toward bankruptcy, the union and the bondholders have regarded one other warily because in any restructuring their claims will be weighed side by side.

About $27 billion in GM bonds are held by institutions and individuals. They have been asked to give up those bonds in exchange for 10 percent ownership in the restructured company, along with the right to buy a larger stake later.

The retiree health fund of the United Auto Workers, by comparison, is owed $20 billion by GM. In exchange for that claim, the retiree health trust is being asked to accept a 17.5 percent stake in the company, as well as $9 billion in notes and preferred stock.

Critics say it is unfair that the restructuring plan gives the union health trust a larger share of the new GM than the bondholders. But administration officials defend the plan, offering several justifications.

First, they note that the terms of the proposed GM restructuring echo the terms laid out by the Bush administration in December, when it extended $13.4 billion in loans to GM.

The Bush administration's loan agreement required a 50 percent reduction or "haircut" for the union trust, but a 66 percent cut for the bondholders. The Obama deal requires larger cuts for both sides, though more for the bondholders.

Administration officials assert moreover that it makes business sense that different creditors are treated differently.

They note, for example, that the government has taken steps to protect customers who hold GM warranties, pledging to stand behind those agreements, as well as providing assurances to the company's suppliers. The GM restructuring plan deems it important to favor those two classes of creditors.

"If you eliminate the warranty holders' claims, those individuals are not likely to buy another GM car," an administration official said. "If you don't pay the suppliers and you put them out of business, well, it's hard to build cars without steering wheels. The union workers are no different. They don't have to show up again in the morning."

For the same reasons, there are a number of precedents for retiree health funds getting preferential treatment during bankruptcies, particularly in the steel industry in recent years when Bethlehem Steel and others were sold off.

"We felt that we needed the strong support of the union going forward," said Wilbur Ross, who ran the private-equity firm that acquired Bethlehem after its 2001 bankruptcy filing. "It's one thing to compromise a union contract. It's another thing to get them working with good morale.

"The only difference here is that you have the government playing the role of the vulture investor," Ross added. "They are the only ones willing to make this investment, so they're calling the shots."

A critical legal issue is whether the bondholders might be able to get more for their debt if the company were simply liquidated, the proceeds distributed among those with claims.

But administration officials say that the bondholders would receive even less for their investments if GM were liquidated. In that case, the company's other creditors, such as the government, would be paid off first, they note. Yesterday, it was announced that 54 percent of bondholders had approved the deal.

"By the time you finished liquidating GM, there would be nothing for them," an administration official said yesterday.

The Chrysler bankruptcy has gone far faster than many in the industry had predicted. Obama administration officials say the case of GM, a much larger and more global company, will probably take longer.

GM will close 11 factories and idle another three.

The president plans to speak this morning about the automaker's prospects, perhaps echoing a former GM president, who during his confirmation hearings to become defense secretary in the 1950s, testified that he saw little difference between the national interest and GM's.

"For the better part of a century, The General Motors Corporation has been one of the most recognizable and largest businesses in the world," the Obama administration said in a statement released last night. Monday "will rank as another historic day for the company -- the end of an old General Motors, and the beginning of a new one."

Staff writer Dana Hedgpeth contributed to this report.