General Motors, once a leading symbol of American business and manufacturing might, capped a stunning and painful collapse Monday morning by filing for bankruptcy, but President Obama predicted the company will emerge lean and profitable.
"What we have is a credible plan that is full of promise," Obama said, speaking four hours after the company's filing. Obama said the bankruptcy should not deter people from buying GM cars, vowing that "your warranties will be safe and government-backed."
The move came as longtime rival Chrysler was preparing to move out of bankruptcy after taking a month to reorganize under legal protection. GM's bankruptcy, being largely directed by the federal government, will be the largest industrial bankruptcy in U.S. history, and the fourth-largest overall and would vastly expand the government's reach into big business. The government has already bought into the banking and insurance sectors with enormous bailouts.
Late Monday, U.S. Judge Robert Gerber gave his initial okay to $15 billion in government financing the automaker can use for the next three weeks to begin restructuring. He said he will rule on the rest of the total $33.3 billion in financing on June 25.
"We're making these investments not because I want to spend the American' people's tax dollars, but because I want to protect them," Obama said. The President added that the government will not micromanage GM and hopes to get out of its ownership quickly.
"What I have no interest in doing is running General Motors," he said.
Experts said the bankruptcy filing was no surprise.
“It’s been a long time coming, but the reality of a GM bankruptcy is still a bitter pill to swallow -- it’s a bit like the Titanic sinking,” Stephen Pope, chief global strategist at Cantor Fitzgerald in London, told Bloomberg News. “This is a step they should have taken more than a year ago, which could have put them in much better shape before the economy went down.”
The longtime Dow Jones component was delisted from the New York Stock Exchange, its shares last trading at well under $1 and now virtually worthless. That move came as Citigroup, another former member of the 30-company Dow index was also delisted.
Although the federal government would take a 60% stake in the 100-year-old company, President Obama, who pushed the company to fire CEO Rick Wagoner earlier this year, has said the feds won't be involved in day to day operations and hopes to divest of the company as soon as possible.
GM planned to name turnaround specialist Al Koch as its restructuring officer, according to the Wall Street Journal. Some 56,000 auto workers and 3,600 dealerships will be counting on Koch to make the reorganization work. The Chapter 11 bankruptcy filing allows GM to shed $80 billion in debt, close 14 plants and 40% of its dealerships, lay off 21,000 workers and rework crushing labor contracts. On Monday afternoon the automaker announced it would close or idle 12 additional plants, which will displace 18,000 to 20,000 employees.
That would reduce the number of GM's plants to 33 by 2012, compared to 47 at the end of 2008.
One of Koch's main jobs will be to sell off certain GM brands with an eye toward dramatically shrinking the size of the company. Such names as Saturn, Hummer, Pontiac and Saab will be on the block. Officials expected to announce the buyer of Hummer today, while Judge Gerber set a hearing for GM's sale for June 30.
The company will hold onto its four core brands — Chevrolet, Cadillac, Buick and GMC.
Under GM's bankruptcy plan, the U.S. government will pour as much as $30 billion into the company -- on top of $20 billion already spent. The money will come from leftover Troubled Asset Relief Program funds -- the $700 billion fund used to bail out the financial industry.
The Canadian government, which has given the company $9.5 billion, will own a 12% stake. The United Auto Workers union would get a 17.5% stake in the company in return for assuming much of the health insurance liabilities due retired workers. Bondholders, who held $27 billion worth of GM debt, will get between 10% and 25% of the company, taking over part of the U.S. government's stake based on how successful its reorganization is.
Koch, a turnaround specialist and managing director at the advisory company AlixPartners LLP, will be the highest-ranking executive at GM from outside the company, the newspaper said. He will oversee approximately 60 Alix workers employed by GM and will report to GM Chief Executive Officer Frederick Henderson and the automaker’s board.
The 67-year-old Koch was interim chief financial officer of Kmart when it filed for Chapter 11 bankruptcy in 2002, the Journal said. Koch also spearheaded a turnaround of Champion Enterprises that allowed the manufactured-home builder to avoid bankruptcy.
If GM emerges from bankruptcy, Koch is expected to lead a new management team to wind down the “Old GM” and recast the company. One key in that plan is the electric-powered Chevrolet Volt, the much-anticipated model due out in 2010, with a sticker price of around $40,000. Estimates for how long GM might remain in bankruptcy range from 90 days to 18 months.
In another court proceeding, Chrysler won permission to sell key assets to Fiat, a major step toward emerging from bankruptcy after a little over a month of reorganizing.