American icon GM declares bankruptcy

2nd June 2009, Comments 0 comments

The failure of GM will leave the government poised to control a business which was for years the world's biggest corporation and a hallmark of US prosperity.

Washington -- General Motors, once the symbol of US economic dominance, declared bankruptcy Monday in a landmark setback for US manufacturing.

The failure of GM will leave the government poised to control a business which was for years the world's biggest corporation and a hallmark of US prosperity.

Senior US officials detailed Sunday what they hope will be a swift process in which GM should be able to re-emerge from bankruptcy protection as a new, leaner company within 60 to 90 days.

The European Opel and Vauxhall subsidiaries are leaving the GM empire under a rescue engineered this weekend in Germany with support from a Canadian company and a Russian bank.

General Motors entered the courtroom with billions in government financing and agreements already in place to cut labour costs, swap much of its debt for equity and reduce its liabilities by 50 percent.

Officials said the process is expected to be similar to that of Chrysler, which is expected to emerge from bankruptcy protection this week after just over a month.

However, the process will not be "as speedy as Chrysler because GM is a far larger, far more complicated global company," senior administration officials cautioned.

"It'll have a huge impact in the United States because it's more than just a corporation -- it's an icon," said Gary Chaison, a professor of labour relations at Clark University.

"It represented manufacturing supremacy and good jobs for American workers. That's gone."

The largest US automaker will close 11 plants and idle three others as it slashes its operating costs in order to lower its break-even point by 40 percent in terms of overall US industry sales.

The US government will provide an additional 30.1 billion dollars in financing to help GM restructure under court protection and will receive a 60 percent stake in the new company. It has already provided 19.4 billion dollars in loans.

Officials cautioned that the Obama administration has no intention of nationalizing General Motors over the long term and will not be participating in its day-to-day operations.

"The government has no desire to own equity stakes in companies any longer than necessary, and will actively seek to dispose of its ownership as soon as practicable," senior administration officials said in a media briefing.

"The goal is to promote strong viable companies that can become profitable quickly and contribute to economic growth and jobs without government involvement."

The governments of Canada and Ontario, which have several GM factories, will provide an additional 9.5 billion dollars in financing and receive a 12 percent stake.

Creditors holding about 54 percent of General's Motors bonds agreed to a plan that would swap 27.1 billion dollars in debt for a 10 percent stake and warrants for an additional 15 percent stake, officials said.

Bondholders who rejected the plan could still fight it in court, but the government maintains they could end up with little or nothing if they take that path.

A retiree health care trust will receive a 17.5 percent stake in the new GM and 6.5 billion dollars in preferred stock in exchange for forgiving much of a 20-billion-dollar obligation.

Employees will continue to be paid and GM will immediately seek permission to continue to pay suppliers and honour customer warranties.

GM will also offer about 40 percent of its dealers 18 months to wind down their operations and will immediately seek permission to honour incentives offered to its remaining dealers.

Media reaction to the plan ranged from optimistic to skeptical. The Detroit Free Press sought solace in the fact that "the Chrysler, GM and other bankruptcies in the automotive sector are meant to be transitions, not liquidations."

But The Washington Post quoted a letter sent to Treasury Secretary Timothy Geithner by 20 members of the House of Representatives, who complained that "contractual rights of investors are being trampled by the government."

Meanwhile late Sunday, New York bankruptcy judge Arthur Gonzales approved the sale of another troubled US automaker, Chrysler, to Italian Fiat, according to a ruling made available early Monday.

Gonzalez wrote in his ruling that he saw the Fiat transaction as "the only option that is currently viable."

Chrysler was forced to file for bankruptcy protection on April 30.

The new entity will be controlled by a consortium consisting of the Italian automaker Fiat, the United Auto Workers union's retiree health care trust fund, and the US and Canadian governments.


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