Obama: GM Restructuring Plan 'Full of Promise'
Peter Whoriskey, Kendra Marr and William Branigin - Washington Post Staff Writers
General Motors filed for bankruptcy protection this morning in a move that President Obama said was necessary to restore the auto manufacturing giant to competitiveness and help ensure the survival of the domestic auto industry.
In a speech at the White House hours after GM filed for Chapter 11 bankruptcy protection in New York, Obama hailed GM's plan to emerge from its current woes as "credible" and "full of promise." But he also sought to reassure Americans skeptical about the plan's provisions to transfer a 60 percent ownership stake in the company to the U.S. government in return for an additional investment of about $30 billion during and after the bankruptcy process. The new infusion of cash will bring the total U.S. commitment to GM to about $50 billion.
"We are acting as reluctant shareholders, because that is the only way to help GM succeed," Obama said. "What we are not doing -- what I have no interest in doing -- is running GM." He vowed that the federal government would "refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions," and he promised that a private board -- not the government -- would "call the shots and make the decisions about how to turn this company around." For example, he said, the "new GM" would decide where to open new plants and what types of new cars to make.
"Our goal is to get GM back on its feet, take a hands-off approach and get out quickly," Obama said.
The bankruptcy filing marked 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.
In a 24-page filing in the U.S. Bankruptcy Court in the Southern District of New York, the storied automaker listed $82.29 billion in assets and $172.81 billion in debts on a consolidated basis.
GM also announced this morning that it will idle or close 14 manufacturing plants.
The plan cuts GM's 47 U.S. facilities down to 33 by 2012.
"Our manufacturing operations, which already are among the most productive in the industry, will emerge even leaner, stronger and more flexible, as part of the New GM, " Gary Cowger, group vice president of GM global manufacturing and labor relations, said in a statement. "Flexible manufacturing enables us to quickly respond to consumer preferences and changing market conditions."
Closed plants include assembly plants in Pontiac, Mich., and Wilmington, Del.; stamping plants in Grand Rapids, Mich., Indianapolis and Mansfield, Ohio; and powertrain plants in Livonia, Flint and Willow Run, Mich., Fredericksburg, Va., and Parma, Ohio.
GM's parts division announced today that it will cease operations at three parts distribution centers in Boston; Columbus, Ohio; and Jacksonville, Fla., by the end of this year.
The Obama administration had been pushing the bankruptcy as the most viable way to restructure General Motors, just 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.
In his remarks about the auto industry today, Obama praised the bankruptcy process that he said has put Chrysler on a path to viability in little more than a month through a purchase by Italian automaker Fiat.
"Today, after taking a number of painful steps and moving through a quick, efficient and fair bankruptcy process, a new, stronger Chrysler is poised to complete its alliance with Fiat," Obama said. He said this means that "tens of thousands of jobs that would have been lost if Chrysler had liquidated will now be saved."
Turning to the more complex case of GM, which he predicted would take longer to go through bankruptcy, Obama said the auto giant's plan meets his strict standards by streamlining the company's brands, cleaning up its balance sheet and making it competitive.
"Working with my Auto Task Force, GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again," he said. Under the plan, he said, a larger share of GM vehicle will be built in the United States, including fuel-efficient cars.
He said the deal is "tough" but "fair" and does not give "special treatment" to any of GM's stakeholders. He also reminded potential car-buyers that GM warranties "will be safe and government-backed" during the restructuring.
"I will not pretend the hard times are over," he said in comments directed at GM employees. "More jobs will be lost. More plants will close. More dealerships will shut their doors, and so will many parts suppliers.
"But I want you to know that what you're doing is making a sacrifice for the next generation . . . so that your children and all of our children can grow up in an America that still makes things, that still builds cars, that still strives for a better future."
He expressed confidence that the "new GM" will be able to "out-compete automakers around the world" and become an integral part of America's economic future once again. He then invoked the words of a former GM president, who stirred national controversy during his confirmation hearings to become defense secretary in the 1950s when he equated the national interest with that of GM.
"And when that happens, we can truly say that what is good for General Motors and all who work there is good for the United States of America," Obama said.
According to GM officials, the company aims to become a leaner and more agile by the fourth quarter of this year.
GM intends to revamp its structural costs and balance sheet and lower its break-even point down to U.S. industry volumes of 10 million vehicles, substantially lower than the boom-era rate of 16 million vehicles, officials said.
GM's Chapter 11 case will be overseen by U.S. Bankruptcy Judge Robert E. Gerber, who joined the court in 2000 after more than 30 years in private practice. He has presided over the bankruptcies of cable company Adelphi and telecommunications firm Global Crossing.
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, 17.5 percent by a union health trust, and 10 percent by the company's current bondholders.
Following the infusion of an additional $30 billion, "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.
"A court-supervised process and transfer of assets will enable a New GM to emerge as a stronger, healthier, more focused and nimbler company with a determination not to just survive but to excel," GM board chairman Kent Kresa said in a statement. "The Board concluded that the proposed transformation will maximize the value of the enterprise, and the return to the many stakeholders who have been involved with GM over the years."
Meanwhile, last night, a bankruptcy judge approved the sale of substantially all of Chrysler's assets to a group led by Italian automaker Fiat.
As the administration builds its case for another massive wave of government aid, it is dealing separately with accusations that its plan unfairly favors the United Auto Workers at the expense of the company's investors.
This morning, the U.S. Chamber of Commerce said its biggest concern with the bankruptcy is the "potential for governments and unions to influence production, product, workforce, and management decisions in ways that could jeopardize the automakers' chances for survival, put politics and special interests above sound business strategy, and disrupt our nation's trading relationships across the world."
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 investorsknown as the Main Street Bondholders has already organized to protest its members' treatment. And its 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 each 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 chief financial officer Ray Young smiled as he told reporters about the company's bankruptcy filing today, saying "I've never been so invigorated in my life."
To GM executives, bankruptcy is an opportunity to fix the automaker once and for all.
GM began contingency planning in the fourth quarter of 2008 when the situation was grimmer, officials said. Since then, the U.S. government has guaranteed car warranties, reassured consumers and created a program to aid auto parts suppliers.
Without the support of the federal government and the governments of Canada and Ontario, GM would not be able to go through the bankruptcy process, said a source familiar with the matter.
"There's not enough credit in the market," the source said.
In anticipation of the filing, GM paid suppliers last week. And a vast majority of the automaker's suppliers will be a part of the new GM.
GM needs between $11 billion and $14 billion to fund its operations. But, battered by a global slowdown in sales, the company's cash reserve has fallen below that minimum operating requirement.
Today it announced that it will further reduce salaried employment in North America to 27,200, down from its year-end total of 35,100.
The company continues to weigh bids for Saab, Hummer and Saturn's distribution network. In addition to the plant closures, GM will continue with its extended summer shutdowns at multiple plants.
GM's headquarters will remain in Renaissance Center in Detroit.
Like Chrysler, GM is seeking a quick sale of most of its assets to the "new GM," in which the U.S. government will have a 60 percent stake.
The transaction "will enable New GM to become an engine of opportunity and prosperity for countless Americans," GM's chief executive, Frederick A. "Fritz" Henderson, said in a 98-page court document filed this morning. The alternative, he said, was liquidation and a loss of hundreds of thousands of jobs.
Henderson's narrative of what led the company to bankruptcy in many ways mirrors accounts shared by Chrysler executives in court over the past several weeks: foreign competition, high benefit costs to its employees, plunging sales, the economic downturn that led to a severe liquidity crisis and, finally, the failure to get concessions from enough creditors holding more than $20 billion in bonds.
As in the case of Chrysler, GM had also engaged in efforts to form alliances with other automakers, but to no avail, Henderson said, adding that the company had also discussed the possibility of receiving equity investments from various foreign entities and sovereign wealth funds.
In 2006, GM engaged in discussions with Renault-Nissan, but was unable to reach an agreement. In the spring of 2007, GM entered into high-level discussions with Chrysler corporate predecessor, DaimlerChrysler, regarding a potential acquisition of Chrysler. GM ultimately concluded that a GM-Chrysler combination would only exacerbate GM's exposure to a dwindling U.S. automotive market with mounting costs and supplier concerns, Henderson said.
Staff writer Dana Hedgpeth contributed to this report.