GM: Government Motors About to Downshift into Bankruptcy

CBS Radio called at 6am to talk about a possible GM bankruptcy. Possible? On Monday's CBS News Early Show, I said that bankruptcy was a-coming by or on June 1.

The headlines this morning reconfirm that not-so-bold prediction. The government is going to pump another $50 billion into GM, on top of the nearly $20 billion already injected, for a 70 percent stake in the restructured company. That is not a typo - seventy percent! One radio host asked whether that meant that GM cars would be boring, white sedans created by Uncle Sam's designers. The government maintains that it will not be involved in the day-to-day operations of the company.

The United Automobile Workers (UAW)' health care trust will own 17.5 percent of the company, and warrants equal to another 2.5 percent of GM in the future, in exchange for a bunch of retiree health-care concessions. The ownership position of GM's largest union was lower than many expected. It seems that the union brass realized that maintaining jobs with reduced benefits was better than holding out for more benefits from a broke company.

The missing link in the GM saga is the bondholders. The government will fully repay the $6 billion owed to secured lenders, including Citigroup and J.P. Morgan Chase. But the unsecured bondholders, who hold $27 billion in GM debt, want more than the 10 percent equity stake that the government offered. Bondholders are likely to take their chances in bankruptcy court, where they believe that a judge will be more inclined to recognize the strengths of their contract and case.

If you do the quick math, you realize that current stockholders will be essentially wiped out. What did they expect after GM insiders dumped shares earlier this month?

Will this bankruptcy be a good financial deal for the government? I doubt it. It's rarely profitable to dump money into a money-losing, moribund bureaucratic venture. That said, the government probably figured that the overall psychic cost of letting GM collapse and fizzle out was too great.

The most sobering numbers in this process are the ones that equate to human beings. In 2008, GM had 61,000. The company intends to reduce employment to 38,000 in 2010. 23,000 jobs have vanished and are not coming back.

Government Motors, here we come!

For more information on "Life After GM", continue on MoneyWatch.com

Comments

[illusionpainter]

My husband is voting NO on the UAW Contract today. GM's decision to close a smaller amount of plants mean they will only close 14 plants instead of 16. However, they still intend to take OUR U.S. TAX DOLLARS and increase production in Korea, China and Mexico. Then the plan to increase their foreign built imports by double, 370,000 to 760,000. So in other words, they are taking your and my tax dollars to pay wages of foreign workers while they fire U.S. workers!!!!! My unemployment check's federal taxes will be paying someones wages that took my job, says my husband.

They took the retirees eye care and dental care away. Upped their co-pays for drugs to $25 per prescription and we all (active/retired employees) have to mail in our prescriptions or they aren't covered at all. They have $100 co-pay on ER visits, even if they broke their arm or are having chest pains. They have to pay their Dr. $275 of care before their insurance kicks in. Their whole retirement pay has been cut too. Some argue they don't deserve or need these benefits. They paid part of their wages for 30+ yrs. for those benefits.M­ost of them had PSP through the company they paid 100% of their own money into for extra retirement money. It was mostly in GM stock, they lost most of it. What do people want from them?

That's just about the retirees, the employees got ***** too.......

[Jill Schlesinger - Huffpost Blogger]

Thanks for providing the perspective from the front line...the­re is nothing like having the real effects of policy laid out for those of who are sideline observers.

[DanBest]

"It's rarely profitable to dump money into a money-losing, moribund bureaucratic venture"

I agree. Wait. Are we talking about the banks?

[KillTheMessenger]

The banks made money until last quarter and they are making money, again. GM hasn't made a dime for at least 40 consecutive quarters minus one or two where they played an accounting trick.

Quite the difference, isn't it?

[Jill Schlesinger - Huffpost Blogger]

Great observation!

[Vinca]

I am very angry, becauseGM plans to give jobs to a foreign company, and then plans to ship cars to America and expect jobless Americans to buy them . NO WAY HOSE. Lou Dobbs poll showed 97% were angry about that. Give Americans jobs so they can buy American cars.

[Jill Schlesinger - Huffpost Blogger]

See the post above from illusionpa­inter...

[WritusMaximus]

California asking the fed government to guarantee California's loans and China warning US not to print more money are two major stories not appearing at Huff Po. With so much negative news lately, including Obama declaring on C-Span that we've already run outta money, Huff Po probably ran outta room.

[JulieSA]

Absolutely. I've noticed the same lack of coverage of those subjects on this site.

Our unprecedented spending is the 800 gorilla that everyone here is ignoring. Oh, except on tax day, when they were mocking the tea party protesters for daring to bring it up.

[DanBest]

"Our unprecedented spending is the 800 gorilla that everyone here is ignoring. "

The spending is unprecedented because of the eight year binge that proceeded it was unprecedented. We initiated two wars and didn't account for them in the budget. We gave billions away in tax breaks to rich citizens that didn't need nor deserve them. We gave pharmacuetical companies a government sponsored plan to gouge the US consumer by paying more for drugs that US public research helped develop. We ran up the largest defecit in history. Now where were the teabaggers then? On vacation? They only NOW noticed the problem? No, Julie, they aren't modern day Cassandras warning us of our doom. They were partisan hacks who came late to the party to blame the new boss for what the old boss did. That is why they are irrelevant.

[Hailmaryyy]

"With all the focus on auto bail-outs it seems Washington can’t see the forest for the trees. It is true that General Motors, Ford and Chrysler have long-term legacy employment costs that render them less competitive than foreign auto manufacturers that do not bear those same costs. It is also true that General Motors and Chrysler were financially unprepared to weather the severe downturn in the economy forcing them to go hat in hand to the federal government. But Washington is missing the point in its handling of the auto industry. Right now even foreign auto makers without legacy costs are losing money. The reason is American citizens, and others around the world, do not have adequate access to available auto credit on reasonable terms. How can we know whether or not GM, Ford, or Chrysler can become competitive if the environment is such that no one can succeed?"

http://escapethenewgreatdepression.com

[KillTheMessenger]

Boring. One more apologist for failed American companies. And no, it was not "legacy costs" which have put these companies in but good old fashioned poor management. Just like last time. And the time before.

[Vinca]

It's like a slap in the face of American taxpayers, for GM to take taxpayer money to give jobs to China, and expect Americams to buy their cars. It will help China's economy, of course. Both Ralph Nader and Sherrod Brown, think it's a bad thing.