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For G.M., a Step Toward Bankruptcy and a New Start
President Obama will push General Motors into bankruptcy protection on Monday, making a risky economic and political bet that by nationalizing for a period of years the onetime icon of American capitalism, he can save at least a diminished automaker that is competitive.
The bankruptcy, to be filed in New York, marks a significant turning point for an industry that was once at the heart of the American economy. It culminates a remarkable four months of confrontation between Washington and Detroit that is expected to result in a drastic 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, Mr. Obama plans to tell the nation on Monday that he believes G.M. 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 shrunken G.M. can make money even if new car sales remain at a sluggish 10 million a year in the United States and even if G.M., once the giant of the industry, holds only 13 percent share of sales.
But to get there, American taxpayers will invest another $30 billion in the company, atop $20 billion already spent just 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 health care fund with stock of uncertain value in the restructured G.M., 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 G.M. 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 Enron and Kmart. One of the firm’s partners, Al Koch, is expected to manage the liquidation of corporate assets that G.M. will shed during its Chapter 11 restructuring, people with knowledge of the bankruptcy strategy said.
Mr. Obama is taking several risks under the plan. None may be bigger than the decision that the United States government will take a 60 percent share of the stock in a new G.M., leaving taxpayers vulnerable if the overhaul is not successful. (Canada, for its part, 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 Toyota and Honda and Volkswagen will benefit from the chaos.”
The administration said it had concluded that if Washington just kept lending money to G.M., loading it with debt, the company would be unable to both invest in its business and pay back the loans.
In his remarks on Monday, Mr. Obama is expected to argue that any alternative to his plan would be worse, and that a liquidation of G.M. — 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 Mr. Obama setting off on Tuesday 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 likely never regain its vibrancy of even a few years ago.
Aides say Mr. Obama will portray himself on Monday as a reluctant shareholder, eager to sell the company back to private investors, perhaps within six to 18 months.
However, in talking to reporters on Sunday evening, a senior administration official acknowledged that there was “an inevitable tension” between the desire to return the company to private hands quickly, and the assumption that 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.
On Monday, Mr. Obama is expected to argue that any alternative to his plan would be worse, and that a liquidation of G.M. — 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.
Aides say Mr. Obama will portray himself on Monday as a reluctant shareholder, eager to sell the company back to private investors, perhaps within 6 to 18 months.
Officials say the president will insist that once the government sets up new management and a board of directors, it will remove itself from G.M.’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 Mr. Obama’s top economic aides said, “and it’s going to be a challenge to answer that.”
To ease the way, the White House on Sunday 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, but that it should then recede, becoming a passive investor, one seeking to sell its stake quickly.
At the same time, Mr. 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 significantly better fuel efficiency.
Six months ago, even the suggestion of such deep intervention into G.M.’s operations would have raised huge objections. But by the time the denouement came, the company seemed almost relieved. Robert Lutz, G.M.’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 at the University of Pennsylvania, 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.”
For Mr. Obama, whose ascent to the White House depended on carrying states across the industrial Midwest, the political risk is significant.
The G.M. bankruptcy will ripple across several states where hundreds of parts suppliers and car dealerships face imminent closings.
Indeed, the four states where Cabinet secretaries are focusing their efforts this week — Indiana, Michigan, Ohio, Wisconsin — all were carried by Mr. Obama last November. It was the first time Indiana has supported a Democratic presidential candidate in 44 years.
These Main Street political challenges will almost certainly be an issue for Democrats on the ballot in next year’s midterm election campaign and in the president’s own re-election effort in 2012. If those jobs shift to nonunion plants in the South, where German and Japanese carmakers have built their facilities, or overseas, Mr. Obama could face criticism inside his own party.
“It is unacceptable to ask U.S. workers to subsidize the exportation of their own jobs,” said Representative Dennis Kucinich, Democrat of Ohio, whose district includes Cleveland. “The taxpayers’ investment should be used to protect American plants so that American workers can build the next generation of automobiles.”
In his presidential campaign speeches last year, often delivered in the shadow of closed manufacturing plants, Mr. Obama bluntly conceded that most of the jobs would not come back. Instead, his administration is pointing to investments that the economic recovery act will make in communities.
Rob McNabney, chairman of the Madison County Democratic Party in Anderson, Ind., a onetime booming automotive center, said the problems for Mr. Obama were severe. “He’s going to be judged by what he does,” Mr. McNabney said. David E. Sanger and Jeff Zeleny reported from Washington, and Bill Vlasic from Detroit for the New York Times. For more news and information, click the link below for the New York Times. Support the New York Times and your local newspaper.
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