Cost Of GM Rescue Likely To Rise

The federal government is taking dramatic action to steer GM through bankruptcy. The hope is to save jobs and help the company emerge with a healthier balance sheet and a better chance of succeeding in the marketplace. But the GM bailout has already costs American taxpayers billions and the price tag is likely to rise significantly.

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MELISSA BLOCK, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

Today, a landmark in the relationship between government and business: the federal government assumed a 60 percent stake in one of the biggest U.S. companies ever to file for bankruptcy.

President BARACK OBAMA: It's not just any company we're talking about, it's GM. It's a company that's not only been a source of income, but a source of pride for generations of autoworkers and generations of Americans.

BLOCK: President Obama spoke today of a new GM that can produce the high quality, safe and fuel-efficient cars of tomorrow and that is once more a symbol of America's success. The president also said he has no interest in, as he put it, running GM.

Pres. OBAMA: The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions.

SIEGEL: And echoing a pledge that he made during the Chrysler bankruptcy, Mr. Obama said that GM warranties will be honored and backed by the government.

NPR's Frank Langfitt reports.

FRANK LANGFITT: President Obama said he didn't want to do this; spending a fortune in taxpayer money to finance General Motors in bankruptcy is really unpopular. And for the new president, it's a political and financial risk. But the alternative of letting GM and Chrysler fail, Mr. Obama argued, was much worse.

Pres. OBAMA: In the midst of a deep recession and financial crisis, the collapse of these companies would have been devastating for countless Americans and done enormous damage to our economy.

LANGFITT: For a company that once ruled the world's car market, today's bankruptcy filing was humiliating.

But GM CEO Fritz Henderson described it as a new beginning.

Mr. FRITZ HENDERSON (CEO, General Motors): The GM that many of you knew, the GM that, in fact, had let too many of you down, is history.

LANGFITT: Henderson promised a leaner company devoted to its customers. And he said General Motors would not betray them again.

Mr. HENDERSON: We look forward to the chance to win your business and earn back your trust. Give us another chance.

LANGFITT: President Obama said GM would move swiftly through bankruptcy court, and in 60 to 90 days, he said, a healthier, stripped down version would emerge. The new company would focus on profitable brands, such as Chevrolet and Cadillac. Struggling brands such as Saturn and Hummer would be sold off.

Some have doubted the government's ability to push a big industrial company through court, but President Obama cited the recent remarkable experience of Chrysler. The company went bankrupt a month ago; a new Chrysler is expected to leave court in a few days.

Pres. OBAMA: Keep in mind, many experts said that a quick surgical bankruptcy was impossible. They were wrong.

LANGFITT: GM is filing for bankruptcy to wash away tens of billions of dollars in crippling debt. It owes that money to everyone from bondholders, the people it borrowed from, to assembly line retirees. But GM's return to success isn't certain. The company still faces a fiercely competitive market and the worse sales environment in more than a quarter century.

Ed Altman is a professor of finance at New York University's Stern School of Business.

Professor ED ALTMAN (Stern School of Business, New York University): I think this is a big gamble on the part of the government, on the part of GM itself, that the bankruptcy will work. And frankly, I'm quite skeptical given the fact that the rest of the competition is not going to sit back and say, oh, we have to now give them some market share because they are an American icon. It doesn't work that way, unfortunately.

LANGFITT: And after taxpayers have sunk all that money into General Motors, Altman wonders...

Prof. ALTMAN: If it doesn't go well, the question then is what do you do? Do you let them then liquidate or do you keep putting money, you know, good money after bad?

LANGFITT: The Obama administration said that won't happen. This is it for support for GM, said one senior administration official.

Some auto analysts are hopeful about the company.

Rebecca Lindland follows the car business for the firm IHS Global Insight. After GM gets rid of all those huge debts, she thinks the company could eventually make a profit and survive.

Ms. REBECCA LINDLAND (Director of Automotive Research for North and South America, IHS Global Insight): I think that we're reasonably optimistic that GM won't find itself in this position again.

LANGFITT: As to how much of that $50 billion we taxpayers might get back, well, neither GM nor the government is saying.

Brian Johnson is a financial analyst with Barclays Capital. Today, in a note to clients, he said this: if auto sales rebound quickly, taxpayers could get half of their money back in several years. But if sales remain relatively low, the government could end up losing more than $35 billion on General Motors.

Frank Langfitt, NPR News, Washington.

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Q&A: What's At Stake For The New GM?

GM headquarters i i

With an additional $30 billion investment, the U.S. government — and taxpayers — have become the majority owner of the new GM. Bill Pugliano/Getty Images hide caption

itoggle caption Bill Pugliano/Getty Images
GM headquarters

With an additional $30 billion investment, the U.S. government — and taxpayers — have become the majority owner of the new GM.

Bill Pugliano/Getty Images

For decades, General Motors has been an icon of American industry. Its decision on Monday to file for bankruptcy protection marks a humbling moment for the industrial giant.

With the U.S. government agreeing to become the majority owner, the hope is that a new, healthier version of the company will emerge. Here, a look at what the future holds for the new GM.

What's significant about this bankruptcy filing?

U.S. taxpayers will become majority owners of the humbled car giant, providing an additional $30 billion in assistance. In total, GM will have received nearly $50 billion in federal loans.

As part of GM's restructuring, the new company's financial liabilities will be slashed by more than 50 percent.

How soon will GM emerge from bankruptcy?

The government says it expects GM will need 60 to 90 days to emerge from bankruptcy protection as a new, slimmed-down company. That time frame appears possible, given the month or so that it will take Chrysler to emerge from Chapter 11 bankruptcy protection. (On Sunday night, a federal bankruptcy judge approved Chrylser's plan to to sell the bulk of its assets to Italy's Fiat.)

What might a smaller GM look like?

As part of cost-reducing measures, GM will sell off Saab, Saturn, Hummer and Pontiac in bankruptcy court. The new GM will emerge from bankruptcy with its stronger brands including Chevy, Cadillac, Buick and GMC.

The new GM will also be a lot smaller in terms of its employees. 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. On Monday, a GM spokesman said that the company is likely to lose an additional 4,000 salaried employees owing to layoffs, sale of brands, retirement and attrition.

What role will the Obama administration play in managing GM?

The U.S. government will become a majority owner of the new GM: It will receive a 60 percent ownership stake in the new company, along with $8.8 billion in debt and preferred stock.

"We are acting as reluctant shareholders," President Obama said Monday, "because that is the only way to help GM succeed." The administration's goal, he said, was to get GM back on its feet and to exit from the ownership role quickly.

Canada and the province of Ontario are also lending $9.5 billion to the company in exchange for a 12 percent ownership stake.

Will the U.S. government be involved in day-to-day operations?

The Obama administration says it will stay out of the day-to-day management of the company. That said, the U.S. will have the power to choose most of the board of directors; Canada and Ontario will be able to pick one of the directors.

Still, critics such as House Republican Leader John Boehner of Ohio questioned whether the U.S. government should be taking on such an unprecedented role in the future of GM. "Does anyone really believe that politicians and bureaucrats in Washington can successfully steer a multinational corporation to economic viability?" Boehner said Monday. "It's time for the administration to fully explain what the exit strategy is to get the U.S. government out of the board room once and for all."

Is taxpayer money at risk in this arrangement?

The Obama administration says that it does not want to hold its equity stake in GM "any longer than necessary" and that it will sell its shares as soon as "practicable."

If the government sells its shares before GM's stock begins to rise, U.S. taxpayers could lose some of the nearly $50 billion that has already been invested in the company.

James Angel, an associate professor at Georgetown University's McDonough School of Business, estimates that the government will hold its shares for three to five years.

"I think they will be very tempted to wait for the stock to rise to the point where they can say, 'Hey, we made a profit on this,' " he says.

Will GM need to draw on more taxpayer money in the future?

That's the big question.

The Treasury Department hopes the $30 billion will provide a "permanent resolution" for the company, a senior government official said Sunday night. The official said that Treasury doesn't anticipate needing to provide any additional financial assistance to GM.

The White House said that a slimmed-down GM will have a stronger chance of returning to profitability. As a larger firm, GM needed to sell about 16 million vehicles annually to break even. The new GM will need to hit a goal of about 10 million annual vehicle sales — only about a half-million more vehicles than it currently sells.

What does this mean for consumers who own a GM vehicle?

All warranties will be honored by the new GM. There is a question mark, however, for consumers who may want to purchase a Saturn, Saab, Hummer or Pontiac in the next year or two, since GM will sell off these companies as part of the bankruptcy proceedings.

What does it mean for the existing dealers and suppliers?

It's not entirely clear yet. GM says that it plans to close at least 14 factories and parts centers throughout the U.S. by the end of 2011, and this will undoubtedly have some effect on the industry at large.

Overall, the company said it expects to retain just 33 of its U.S. facilities by 2012 — down from the 47 it had at the end of 2008.

The White House said it expects that any dealers that are shut down will have 18 months to wind down their operations.

With additional reporting by Frank Langfitt

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