Government rides along with GM on trailblazing route

WASHINGTON — Now that General Motors has filed for bankruptcy protection from its creditors — a humbling moment for an icon of American manufacturing — the question from Wall Street to Main Street is whether its nationalization and restructuring plan can work.

The bankruptcy filing, encouraged by the Obama administration, is a high-stakes gamble that GM, with the help of an additional $30 billion in U.S. taxpayers' support, can emerge as a smaller, more nimble company free from the debt and other burdens that long have plagued it.

The U.S. government will own a 60 percent stake in a privately held GM when it emerges from bankruptcy, and the company will be a private rather than publicly traded firm for a period the government hopes will be no longer than 18 months.

Analysts call the Obama strategy a gamble, given the reputation for inferior products GM must overcome. In laying out his vision for GM, however, the president said his team had at least given the carmaker a fighting chance.

"Instead of taking so much stock in GM, we simply could have offered the company more loans. But, for years, GM has been buried under an unsustainable mountain of debt," President Obama said Monday. "And piling an irresponsibly large debt on top of the new GM would mean simply repeating the mistakes of the past."

Fritz Henderson, the automaker's CEO, said he understood the company had a tremendous credibility problem with consumers.

"The only way to convince people is to produce results," he said.

For a period that Obama hopes will be no longer than 90 days, GM will ask a bankruptcy court to free it from some of its debt and rearrange its obligations to suppliers and other creditors.

The automaker will close 11 to 14 plants, complete a steep reduction in salaried and hourly workers and shed brands such as Saturn and Hummer and a large part of its 3,600 dealers.

There will be lots of losers, and while that's normal during any bankruptcy proceeding, this one will be wildly different.

The U.S. taxpayer, through the government's 60 percent ownership stake in the company that emerges, is the biggest stakeholder. There has never been a bankruptcy proceeding quite like what awaits GM.

"This is historic. One of the reasons is because of the size," said Sheon Karol, a turnaround specialist for CRG Partners, a consultancy that works on corporate restructuring.

"But large companies can also be restructured if there is the creativity and the determination," Karol said. "A large company can and often is restructured, but there has to be both of those."

Although Obama and members of his automotive task force say they will play no part in decisions about where to close plants and which suppliers to keep or cut, those decisions will have political consequences. GM will make the decisions, but the company now answers to the Obama administration.

"There is now a question about the political aspect that is a novel factor in this Chapter 11," said Karol, who has helped restructure grocer Winn-Dixie and other large corporations in bankruptcy. "I think that a concern one has to have in this situation is ... that the tool of Chapter 11 should not be dulled by political considerations, and I think that is going to be one of the challenges."

Members of Congress already are sharpening their knives in hopes of influencing the process.

It's also not clear how a new privately held GM, which no longer will have to make public regulatory filings to shareholders, would communicate its decisions.

The partial nationalizations of Bank of America, Citigroup and insurer American International Group since September have been marked by political fallout when taxpayers lent money and companies still paid lucrative executive bonuses, used corporate jets and hired well-heeled lobbyists.

Steve Rattner, head of Obama's automotive task force, said late Monday that GM was being encouraged to communicate as if it were still a publicly traded company. That means it's likely to issue reports on sales and earnings, and Rattner said GM would be encouraged to report something similar to regulatory filings when it made significant changes that affected stakeholders.

In an immediate change, shortly after GM's bankruptcy filing in New York, an announcement came that it would be removed from the Dow Jones industrial average.

The deletion marked a low point in the carmaker's 100-year history, and its removal from the list of blue-chip companies served as a powerful reminder of how far it has fallen since the U.S. recession began in December 2007.

Also Monday, turnaround specialist Albert Koch, who helped retailer Kmart emerge from bankruptcy, was named the chief restructuring officer at the new GM.

Henderson said Koch would be in charge of administering the assets that wouldn't be acquired by the new GM emerging from bankruptcy.

There was immediate speculation about Henderson, who became the CEO when the administration "encouraged" Rick Wagoner to give up the post March 30. Like Wagoner, Henderson is a career GM executive with a virtually identical career trajectory, linking him to what Obama called "the end of an old GM."

Rattner said Henderson's fate depended on the new GM board.

"Every CEO in America serves at the pleasure of the board," Rattner said, adding that Henderson has delivered on what was asked and "he's running and running hard."

Under the restructuring plan, Canada's federal and Ontario provincial governments together will take a 12.5 percent stake in GM. Union workers, through a trust, will own 17.5 percent and bondholders 10 percent.

U.S. taxpayers will contribute $30 billion and the Canadian federal and provincial governments $9.5 billion to the turnaround effort, and $10 billion will come from the debt-for-equity exchange with GM bondholders, who took steep losses in exchange for the possibility of large gains if and when the carmaker gets back on its feet.

Late Monday, U.S. Judge Robert Gerber gave interim approval for the government bankruptcy financing, with $15 billion available for use over the next three weeks. He will rule on final approval of the financing June 25.

The judge also set GM's sale hearing for June 30, putting the automaker on a path similar to that of Chrysler, which held its sale hearing about 30 days after filing for Chapter 11.

Objections in GM's case are due June 19, with competing bids required to be submitted by June 22.

GM has struggled to make and sell 16 million autos a year to turn a profit. That break-even point will drop to 10 million under the new company, not much more than the current sales numbers of 9.5 million.

GM also has committed to producing a small, fuel-efficient vehicle in the United States as a condition of its deal with auto unions.

Information from The Associated Press is included in this report.