GM Heads Toward Bankruptcy

A slimmed down and possibly healthier version of Chrysler could emerge soon after a key bankruptcy court hearing in New York. The carmaker's bankruptcy is moving quickly. And as Chrysler appears on its way out of bankruptcy, General Motors could be on the way in.

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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris.

It was a pivotal day for the survival of General Motors and Chrysler. Bondholders have rejected a deal with GM, making it all but certain the company will file for bankruptcy. If that happens, GM will be the largest industrial bankruptcy in American history. The White House says it isn't giving up on brokering a last minute agreement.

BLOCK: Meanwhile, in a New York City courtroom today, Chrysler began its fight to get out of bankruptcy. It could do so within days. Frank Langfitt covers the auto industry for NPR. He was at the court in Manhattan today and he joins us now. And Frank, we're going to get to Chrysler in a moment, but first let's talk about GM. What happened with the company and with its bondholders?

FRANK LANGFITT: Well, GM owes bondholders about $27 billion. And what GM had wanted to do, it said it would wipe out this debt and in exchange it would give 10 percent ownership share to the bondholders in a new, reorganized General Motors. Well, the deadline to do this deal was midnight last night, and most of the bondholders rejected it. They're kind of worried that this new company isn't going to be worth that much anyway. And it seems like what they want to do is take their chances in court and hope that they can get more money.

BLOCK: And would there be any way for GM to avoid bankruptcy?

LANGFITT: Well, you know, as you mentioned there, the White House is holding out a small hope. But frankly, everybody else that I talked to seems to think that bankruptcy is inevitable here. The company can't really carry this debt going forward. It doesn't have enough money. Keep in mind that General Motors lost about - I think it was $6 billion in the first three months of this year. So what they really need to do is get a bankruptcy judge to kind of wash this debt of their balance sheet.

BLOCK: Well, the Chrysler bankruptcy has gone more quickly and more smoothly than a lot of people expected. If there is to be a GM bankruptcy, would it move that fast?

LANGFITT: People don't think so. You know, this is a much bigger company. Chrysler, it's mostly in North American. GM, it's global. They make the Opel brand in Europe, they have Buicks, they make Buicks in China. And they have creditors and suppliers all around the globe. Now, a GM bankruptcy is expected to take a lot more time, would be more complicated. Yesterday, while I was here in New York, I talked with Ed Altman, he's a finance professor at New York University's Stern School of Business, a top bankruptcy expert. And he said it's hard to do a quick bankruptcy when it involves laws in other nations.

Mr. ED ALTMAN (Finance Professor, New York University's Stern School of Business): Closing factories in foreign countries is generally much more difficult than it is in the United States - it's not easy here - but it's much easier. Even in bankruptcy, it's difficult in places like Germany, in places like Brazil.

BLOCK: Frank, what's the timeline here? If GM files for bankruptcy, when would that happen?

LANGFITT: It'd be very soon. The White House pointed out again today to everybody that it gave GM a restructuring deadline of Monday, June 1. But it could be earlier. Now, of course, the idea here is to kind of, in bankruptcy court, create a new, stronger GM without all those debts. And that company, we found out yesterday, the US and Canadian government would own up to 70 percent of it. So, people on the morning business shows today, they were calling it - GM: Government Motors.

BLOCK: Well, that leads us to Chrysler now. We mentioned that you were at court today in Manhattan for the bankruptcy hearing with that carmaker. What happened today?

LANGFITT: Well, this was the most important hearing in the case. And the judge has to decide whether to approve letting Chrysler sell its best assets - like the Jeep brand, the minivans - and to form a new company - only bidder is Fiat. The sales price is about $2 billion and it would be funded by us, the US taxpayers. The owners would include the US, the Canadian governments and the United Auto Workers.

BLOCK: And is there anything standing in the way of that sale to Fiat?

LANGFITT: It doesn't seem like that much. Most of Chryslers lenders - if you remember, early on, they wanted a lot more money out of this. President Obama stood up and called them speculators and I think he even sort of suggested they were being unpatriotic. So a lot of them folded their tents and left. There are still some people objecting to it. One is a group of Chrysler dealers, they're about to lose their dealerships. Chrysler's going to end their contracts. And so they tried to slow this down this morning, but the judge turned them down. There's also a couple of pension funds up in Indiana - police and teacher's pension funds. They had bought Chrysler bonds, they're fighting this too. But you know, Chrysler, in court there, they have the United States backing them. And this bankruptcy proceeding today, it feels a little like a freight train kind of, you know, moving down the tracks. And I'm not sure we see anybody likely to derail it right now.

BLOCK: Okay. NPR's Frank Langfitt speaking with us from New York. Frank, thanks a lot.

LANGFITT: Happy to do it, Melissa.

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Q&A: How Will GM Stay In Business?

Time is running out for General Motors Corp. to either restructure or file for bankruptcy protection under Chapter 11. The U.S. automaker faces a Monday deadline set by the federal government to decide. With too few of its bondholders willing to allow the automaker to exchange bond debt for company stock, the company is expected to file for bankruptcy.

Here, a look at the challenges GM faces as it moves forward.

Chrysler is already in bankruptcy protection and is trying to finalize its sale to Italy's Fiat. What are the options for GM?

GM's board plans to meet to decide what steps it might take now that its plan to exchange $27.2 billion in debt for 10 percent of its stock is no longer viable.

This week, the Treasury Department sweetened the deal offering bondholders up to 25 percent of the new GM. Bondholders have until 5 p.m. Saturday to accept or reject the offer.

With the approaching Monday deadline, analysts expect that the company will also have to seek bankruptcy protection in order to survive. Bankruptcy experts have insisted for months that the automaker should file for protection in light of its enormous liabilities and losses.

The government hopes Chrysler moves out of bankruptcy within a matter of weeks. How would a GM bankruptcy compare?

Auto analysts say that GM is likely to follow the same template as Chrysler, but any GM bankruptcy will ultimately be a lot more complicated.

"Chrysler was essentially a North American operation with some minimal presence in overseas markets," says Paul Eisenstein, bureau chief for The Detroit Bureau, an independent auto news service. "General Motors is a massive entity — truly global, with more than half of its business — in terms of unit sales — coming from abroad."

In the U.S., GM is about twice the size of Chrysler, but when you factor in its international operations GM is about four to five times larger. If GM files for bankruptcy protection, then it also stands to lose 100 percent ownership in many operations overseas including those in Europe, Latin American and Eastern Europe.

"With GM you're shedding numerous brands simply by shutting them down as is the case with Pontiac," Eisenstein says. "Some are being sold off, like Hummer. We're waiting to see what happens with Saab and Saturn."

What's happening with Chrysler?

Chrysler is holding out hope that its deal with Fiat Group SpA, which is scheduled to close by June 15, will allow the company to survive intact rather than being dismantled and sold off in pieces. But the agreement still faces opposition from bondholders, dealers and former employees.

Chrysler and GM have inherent differences when it comes to how the companies are structured. Chrysler was taken over by a private equity fund, while GM remains a publicly traded company.

How much money has the federal government spent on GM so far, and how much more might it need to invest in the company if it goes into bankruptcy?

GM has received $19.4 billion in federal loans. This money may be written off or converted to equity under bankruptcy protection. Some analysts, however, estimate the company may need an additional infusion of $35 billion or more.

On Thursday, GM said in a SEC filing that it will need at least $30 billion in additional financing.

In the case of Chrysler, the government put money into the company before bankruptcy and then added two additional infusions — one to wind down operations and a second to help the new company that emerges stay afloat.

GM's larger size and more complex operations will likely determine how much money it will require. With bankruptcy protection on the horizon, the government's stake in the company could expand to 72.5 percent — up from the 50 percent that was cited in the automaker's regulatory filings. And the Canadian government may contribute up to $8 billion in exchange for equity in the company.

GM's failure would have a big impact on the economy, which is struggling to emerge from a deep recession. The company has said it will need to cut thousands of jobs and dealerships. How many jobs are involved?

It's unclear exactly how many jobs will be at stake. Eisenstein, of The Detroit Bureau, estimates as many as 40,000 jobs could be cut.

GM has already said that restructuring — in or outside of bankruptcy protection — will reduce its U.S. work force from 91,000 total workers at the end of 2008 to 71,250 by the close of 2009. The downsizing will affect 17,000 hourly workers and 2,750 salaried workers. Tom Wilkinson, a spokesman for GM, says these reductions are due to layoffs, the sale of brands, retirement and attrition. By year end, the number of hourly workers will be reduced to 45,000 from 62,000; the number of salaried workers will decline to 26,250 from 29,000.

Filing for bankruptcy protection offers some advantages for GM, including allowing the company to terminate contracts with dealers, which the automaker is presently prohibited from doing under state law.

And then there are GM's suppliers, which have also received federal help. How would GM's bankruptcy affect them?

If GM follows the path of Chrysler, then it will continue to pay most auto parts suppliers on time. That means there will be little disruption for suppliers in the short term. But it doesn't mean that they will be out of the woods or that their business will improve.

Analysts worry that the real cash crunch for suppliers will come in July or August, at which point they will no longer be able to rely on a cash supply from either GM or Chrysler.

"But the reality is that suppliers have been devastated even before a bankruptcy at GM, so any sort of setback could be fatal or near-fatal for many suppliers who are already on life support," Eisenstein says.

And it's not just GM or Chrysler suppliers that stand to lose. Eisenstein says suppliers for Toyota and Honda could also be hurt by any further downturn.

With reporting by NPR's Joshua Brockman, Frank Langfitt and The Associated Press

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