Obama Said to Find Bankruptcy Likely for GM, Chrysler
By John Hughes, Linda Sandler and Rebecca Christie
April 1 (Bloomberg) -- President Barack Obama believes a quick, negotiated bankruptcy is the most likely way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.
Obama also is prepared to let Chrysler LLC go bankrupt and be sold off piecemeal if the third-largest U.S. automaker can’t form an alliance with Fiat SpA, said members of Congress who were briefed on the GM and Chrysler situation before the president said two days ago that the automakers’ viability plans were insufficient.
The president gave GM 60 days to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in its plan submitted last month. The “quick and surgical” bankruptcy his administration said was also an option appears to be inevitable, said the members of Congress and two other people familiar with the matter. Obama personally signed off on asking GM Chief Executive Officer Rick Wagoner to step down, which he did on March 29, they said.
A GM bankruptcy would mark the fall of a corporate icon that as recently as 2004 posted a $2.8 billion profit and in 1962 controlled 51 percent of the domestic car market. A plunge in sales of sport-utility vehicles and pickups as gasoline prices soared, coupled with the seizing up of credit markets, caused GM to lose $82 billion in the last four years and seek government help to survive.
Stock Falls
GM shares in Germany were trading down 3 percent at the equivalent of $1.88 as of 9:24 a.m. local time. The stock has lost 39 percent this year, giving a value of $1.18 billion.
“The president’s position has not changed,” a White House official said. “He remains committed to a significant restructuring without a bankruptcy if at all possible.”
“Our focus is on accelerating the speed of our operational restructuring and reducing liabilities and debt on the balance sheet,” GM spokeswoman Renee Rashid-Merem said in an e-mail. “GM will take whatever steps are necessary to successfully restructure our company.”
Chrysler will work with Fiat and the Obama administration “to secure the support of necessary stakeholders,” Chrysler said in a statement.
GM and Chrysler received $17.4 billion in aid since December to avoid bankruptcy as auto sales reached a 27-year low. The carmakers have been trying to shed debt and workers and trim health-care costs to win $21.6 billion in added assistance.
Insufficient
Obama said their recovery plans were insufficient. He gave GM a deadline to “fundamentally restructure” and said he would consider more aid for Chrysler only if it completed a partnership with Italy’s Fiat within 30 days.
Obama still expects GM to try to avoid bankruptcy through negotiations with bondholders and the United Auto Workers and for Chrysler to continue talks with Fiat, though administration officials aren’t optimistic, the people said.
Detroit-based GM must shrink $27.5 billion in debt that bondholders have been reluctant to exchange for equity and $20.4 billion in obligations to a union-run health-care fund. A bankruptcy may make recoveries for bondholders and the UAW more difficult.
“We’ll get it done in court or we’ll get it done out of court,” Fritz Henderson, who became GM’s CEO after Obama forced out Wagoner, said yesterday.
Creditors doubt an equity exchange can be completed before the 60-day government deadline to slash GM debt sufficiently, a person familiar with the matter said.
Quick Sale
The government probably is considering putting GM and Auburn Hills, Michigan-based Chrysler into bankruptcy and then quickly selling their best assets to form new companies, Rod Lache, a Deutsche Bank analyst based in New York, said in a note to investors on March 30.
The process, a “363 sale” that refers to a section of bankruptcy code, would be a way to keep the automakers from sitting in a prolonged bankruptcy that might undermine sales of their vehicles, Lache said.
“The administration is a bit more focused on a structured, or prepackaged, bankruptcy than some might think,” Representative Candice Miller, a Michigan Republican, told reporters yesterday. “There would be an outcome that would almost be predetermined, that could happen very quickly, and it would be much about renewal rather than destruction.”
GM has a contingency plan ready for a new company that would split off its best assets into an entity that might later be sold, advisers to the company and Obama’s auto task force said.
Dissident Creditors
Stakes of any dissident creditors, including bondholders, would be “crammed down” or forcibly reduced in a bankruptcy, according to the advisers, who declined to be named because GM and the government’s plan remains private.
GM’s new-company plan, which the people said was ready to go, would split the automaker into “good” and “bad” entities, the advisers said. The new GM would be powered by brands such as Cadillac and Chevrolet and valuable foreign operations. Unprofitable brands, such as Hummer, contracts with surplus dealers and financial obligations would be hived off in bankruptcy court, said one of the advisers.
While the new company could be created in 30 days or less, allowing GM to operate without interruption, bankruptcy may go on much longer, focused on bad assets, said a GM adviser.
Senator Carl Levin, a Michigan Democrat, said the public focus on a bankruptcy risks bringing about that very scenario.
Impact on Sales
“The more you talk about it publicly as a possibility, the more people have doubts as to whether they want to buy the cars in that company,” Levin told reporters yesterday.
“I know what they’re trying to do is signal to the bondholders that folks, you’ve got to come to the table,” Levin said of the Obama administration. “I would have done it differently.”
An auto bankruptcy may push production low enough to wipe four percentage points from U.S. gross domestic product in a single quarter, Deutsche Bank analyst Jim Reid said in note yesterday, city the bank’s economists. One-third of the three million people employed in the industry could also lose their jobs, Reid said. The bank’s price target for GM is zero.
To contact the reporters on this story: John Hughes in Washington at [email protected].
