Obama makes his big move on GM
Automaker to seek protection today; President to lay out turnaround scenario
WASHINGTON - President Obama will send
The bankruptcy case, to be filed in New York, marks a significant turning point for an industry that was once at the heart of the US economy. It is the culmination of a remarkable four months of confrontation between Washington and Detroit that is expected to result in a dramatic downsizing of the company. It also places the government in uncharted territory, as a business owner.
Reflecting the government's extraordinary intervention in industry, aides say, Obama plans to tell the nation that he believes GM can be brought back from the brink of insolvency, even if the company looks almost nothing like the titan of old.
He will spell out a strategy in which the shrunken GM can make money even if new car sales remain at a sluggish 10 million a year in the United States and even if GM, once the giant of the industry, holds only a 13 percent share of sales.
But to get there, American taxpayers will invest $30 billion more in the company, atop the $20 billion already spent to keep it solvent.
The company will also have to shed 21,000 union workers and close 12 to 20 factories, steps that most analysts thought could never be pushed through by a Democratic president allied with organized labor.
Forty percent of the company's 6,000 dealers will close; the workers' union will be forced to finance half of its $20 billion healthcare fund with stock of uncertain value in the restructured GM; and bondholders, including many retirees, will be forced to take stock worth 10 cents for every dollar they lent the company.
The company's last steps toward bankruptcy took place over the weekend as a majority of GM bondholders agreed not to challenge the filing in court and to exchange their debt for stock at about 10 cents of equity for every dollar owed by the company.
To assist in the restructuring, the automaker is expected to hire the consulting firm Alix Partners, which has worked on several major bankruptcies, including those for
Obama is taking several risks under the plan. None may be bigger than the decision that the US government will take a 60 percent share of the stock in a new GM, leaving taxpayers vulnerable if the overhaul is not successful. (Canada is taking a 12 percent stake.)
"We don't think that after this next $30 billion, they will need more money," one senior administration official said. "But the fact is there are things you don't know - like when the car market will come back and how much
The administration said it had concluded that if Washington just kept lending money to GM, loading it with debt, the company would be unable to both invest in its business and pay back the loans.
Obama is expected to argue that any alternative to his plan would be worse and that a liquidation of GM - the only other real option - would send the unemployment rate soaring over 10 percent and would radiate damage throughout the economy.
But aware of the hardships the plan will impose on regions across the country that depend on auto production, the White House is dispatching a dozen Cabinet members and other officials across four states this week to reassure residents.
With Obama setting off tomorrow for the Middle East and Europe, advisers said they wanted to demonstrate their concern to communities whose lifeblood - autos, auto parts, and the revenue they generate - will probably never regain its vibrancy of even a few years ago.
Aides say Obama will portray himself as a reluctant shareholder, eager to sell the company back to private investors, perhaps within six to 18 months.
In talking to reporters last night, however, a senior administration official acknowledged there was "an inevitable tension" between the desire to return the company to private hands quickly and the assumption the government might be more likely to recover its $50 billion investment in the company if it held onto the stock for an extended period.
Officials say the president will insist that once the government sets up new management and a board of directors, it will remove itself from GM's day-to-day operations. But even his aides anticipate intense pressure as the company's managers are called to testify in Congress and face questions like why they decided to build new cars in Mexico and South Korea, rather than in Michigan or the South.
"Congress and many Americans are going to say, 'If we own it, why can't we make these decisions?' " one of Obama's top economic aides said, "and it's going to be a challenge to answer that."
To ease the way, the White House yesterday briefed reporters on a new set of principles for how the government should behave as a majority shareholder. It argued that the government's role should be limited primarily to the beginning of the process - selecting a board of directors and hiring experienced managers - but that it should then recede, becoming a passive investor, one seeking to sell its stake quickly.
At the same time, Obama has laid out goals for all the Detroit automakers that will presumably affect their major strategic decisions. He has urged them, for example, to build smaller cars with dramatically better fuel efficiency. But under the new principles, the White House would be discouraged from getting involved in GM's decisions about when and where to build such a car, or how long to keep producing it if it sells poorly.
Six months ago, even the suggestion of such deep intervention into GM's operations would have raised huge objections. But by the time the denouement came, the company seemed almost relieved. Robert Lutz, GM's vice chairman, said that "for the first time in our history, the American auto industry has the ear of the administration. Their number one goal is to make us successful."
Nonetheless, Michael Useem, a professor of management at the Wharton School, said the decision would "mean a new chapter in the history books on American capitalism." He added, "How we think about American free enterprise is really hanging in the balance."