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GM Files for Bankruptcy

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[source: Wall Street Journal]

New Era in Autos as GM Files for Bankruptcy

By KEVIN HELLIKER, NEIL KING JR. and JOHN D. STOLL

GM_logo.jpg

DETROIT -- General Motors Corp. filed for Chapter 11 bankruptcy early Monday, marking the humbling of an American icon that once dominated the global car industry and setting up a high-stakes gamble for

The question now facing 56,000 auto workers, 3,600 GM dealers and the Obama administration: Will it work?

The government, which will own a majority of the company, is wagering upwards of $30 billion that it can return GM to profitability, reversing a decades-long decline by shearing away liabilities and creating a freshly competitive car maker by summer's end.

The reorganization faces myriad risks, ranging from legal challenges to the uncertainty of when consumer demand for new cars will rebound. In becoming GM's new owner, the government is also entering largely unexplored terrain filled with political minefields, notably the possibility of meddling by Congress in the company's daily operations and business plans.

Even if a new GM emerges swiftly from bankruptcy, the administration will face a thicket of challenges, including closing more than a dozen factories and shedding the Pontiac, Saturn, Saab and Hummer brands. Shepherding these unwanted parts of GM -- the so-called Old GM -- through liquidation in court could take years, with potential extra costs to taxpayers if the process bogs down.

And unknown is how the cost of restructuring both GM and Chrysler LLC would have compared with the cost of letting both companies fail in terms of lost wages, disruptions among car-parts makers and the broader economic fallout. Chrysler, which could emerge from bankruptcy as soon as Monday, will be controlled by Italy's Fiat SpA under its own risky revamping.

In a potential sign of turbulence, secured lenders to GM, which are owed about $6 billion, expect the government to pay their claims at face value during court proceedings, but only if they release their claims against certain GM property, such as inventory, machinery and receivables. This could open the lenders to later demands they pay back part of the loans, if the collateral is deemed less valuable than initially agreed upon.

But there is a rosy scenario, too, according to government and industry officials as well as other experts. Bankruptcy should allow GM to pull off one of the most expedient downsizings in the industry's 120-year history. Long hampered by laws, union strife and management practices that kept it from fast action to fix problems, GM plans to eliminate almost all of its debt, halve its U.S. brands, shutter 2,600 dealers and rewrite labor contracts almost overnight.

Emerging sometime this summer would be a GM with a cleaner balance sheet and slimmer operations than the company that has posted deep losses since 2005. GM has burned through $33.6 billion in cash the past four years. Under its restructuring plan, GM will shed more than $79 billion in debt, gain work-force savings worth billions of dollars a year, close unneeded facilities and reduce its dealer network by 40%.

Sales consultant Ron Cruz hangs a red tag with a fixed, discounted price for this GMC Envoy SUV at the Martin General Motors dealership in Los Angeles Monday, Nov. 14, 2005.

Sales consultant Ron Cruz hangs a red tag with a fixed, discounted price for this GMC Envoy SUV at the Martin General Motors dealership in Los Angeles Monday, Nov. 14, 2005.

The Obama administration, for its part, has navigated the GM rescue so far with notable speed, clearing away many of the biggest obstacles in just months with less drama than many expected. In six to 18 months, GM could be a publicly traded company again, administration officials said.

Under the plan, the administration will spend a bit more than $30 billion to fund the bankruptcy and in exchange receive 60% of GM's stock, while the Canadian government will put in $9.5 billion for a 12% stake, senior administration officials said.

Over the weekend, owners of a majority of $27 billion in GM unsecured bonds agreed to a sweetened offer to trade their investment for stock. Days earlier, the United Auto Workers union signed off on a range of concessions.

GM at the last minute also found buyers for some unwanted subsidiaries, including German-based Opel, which is being acquired by a consortium led by Canadian auto-parts supplier Magna International Inc., and the Hummer brand, whose buyer remained undisclosed.

GM is expected to file its papers at 8 a.m. Monday in U.S. Bankruptcy Court in New York's Southern District in Manhattan, followed soon after by a speech by President Barack Obama. GM Chief Executive Frederick "Fritz" Henderson will then hold a news conference in New York outlining GM's plans.

Long-term success for the company depends on a critical question: When will consumer demand for new cars rebound, and with what force? New-vehicle sales in the U.S. have dropped nearly 40% since January, to an annual rate of fewer than 9.5 million a year. At that level, even Toyota Motor Corp., the world's biggest car maker, is losing money.

Under the restructuring plan, the surviving New GM would break even when the rate of all new-vehicle sales in America reaches 10 million a year. In the view of many analysts, economic recovery should unleash pent-up demand, pushing U.S. sales far past GM's break-even point, though probably not within reach of the historic peak of more than 17 million sales back in 2000.

Yet some worry the New GM will emerge under the same management as its predecessor, minus longtime Chief Executive Rick Wagoner. After pushing out Mr. Wagoner in March, the Obama car task force gave the top job at GM to Mr. Henderson, a 25-year veteran whose father worked at the company.

In an interview Thursday, Mr. Henderson said he understands that federal officials want results. "They're expecting that we'll get the job done," he said.

GM won't prosper without halting the lengthy slide in its U.S. market share, to 22% in 2008 from 45% in 1980. It faces the old perception of poor quality that turned swaths of the American market toward foreign-brand models.

"I won't buy another GM," said Dennis Brown, a banker in Cypress, Calif., whose 1980s-vintage Pontiac Fiero and Chevy Chevette suffered a litany of mechanical problems. Current GM models have fared better in quality rankings.

Beyond quality, trendsetters typically shun Detroit-brand cars, a problem that is especially prevalent among highly educated buyers who also tend to purchase higher-margin vehicles. Car buyers who are college graduates account for 70% of European-brand car sales in the U.S. and 55% of Asian brands -- but only 39% of Detroit-brand car sales, according to J.D. Power & Associates.

GM hopes to counter its image as a maker of gas guzzlers with the 2010 introduction of the electric-powered Chevrolet Volt. Administration officials have downplayed the market potential of the Volt because of its expected $40,000 price tag, compared with less than $25,000 for the popular Toyota Prius, a hybrid gas-electric. Even at $40,000, moreover, the Volt will struggle to break even because of the cost of its technology.

GM's new deal with the UAW, meantime, promises to deliver considerable cash savings, and has been billed as capable of putting GM's labor costs on a level playing field with key rivals such as Toyota and Honda Motor Co. GM cut hourly costs, such as overtime provisions, supplemental unemployment and entry-level pay rates, by at least $1.5 billion annually.

But the car maker will not be entirely out of the woods. It faces heavy retiree-related costs that will cut into profits on every car and truck it builds.

Because of the way the UAW health-care agreement is set up, GM will still be sending about $600 million to the union annually in the form of preferred stock dividends. Even if GM builds two million vehicles a year in the U.S., a stretch in the current 10-million annual market, it will spend $300 in retiree health-care costs per vehicle it builds in the U.S.

GM faces another challenge related to pension obligations. Once flush thanks to strong investments, GM's pension funds, covering nearly 500,000 Americans, have been drained by the decline in the stock market and by a move by the company to increase pension payments to offset falling health-care benefits and entice older workers to retire early.

As of Dec. 31, GM estimated its U.S. pension funds were underfunded by $12 billion to $13 billion, and would need "significant contributions" as early as 2013.

In its deal with the UAW, GM canceled some pension-benefit increases that were due to retirees. But GM may attempt to use bankruptcy protection to allow the Treasury to buy attractive assets of GM without assuming the related pension liabilities. On Feb. 17, GM asked the government to bail out the company's pension funds in coming years.

Write to Kevin Helliker at kevin.helliker@wsj.com, Neil King Jr. at neil.king@wsj.com and John D. Stoll at john.stoll@wsj.com

[Official Bankruptcy Filing]

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The saddest thing is that "As goes GM, so goes the nation" is still true.

Not looking too good at this point.

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No, it isn't....

I think that people who expect things to turn around anytime soon are dreaming.

Chris

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Hopefully GM will fail and go away completely. Companies that earn their success shouldn't have to compete with a company that gets rewarded for incompetence with a taxpayer funded bailout.

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Hopefully GM will fail and go away completely. Companies that earn their success shouldn't have to compete with a company that gets rewarded for incompetence with a taxpayer funded bailout.

That will also include Toyota, Honda, Porsche and practically every other manufacturer that has received under handed bailout from their respective governments. You are crying about $45 B spent on auto manufacturers when close to $1 T was lost by the banks and financial institutions which have never even created wealth of any sorts. Oh wait, never mind, you or your close ones might have a lot money invested in these institutions and would like to save at least some through other taxpayers rather than loosing everything. Or may be you work in one of those and are therefore calling the kettle black, or you are just ignorant.

You should ride Trek carbon fiber bikes, at least those are made in America and feel proud of it. But then you would start complaining that the French manufacturer produces bikes that are $100 cheaper because they make third grade carbon fiber in China and you would rather have that because you are saving $100 on a $2,000 bike for which you are ready to forgo some other jobs in this country and be ready to ship it to China thus reducing the GDP. Shortsighted and egotistical people like yourself who look at the price rather than the value are the main cause why the country is in ramshackle.

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Oh wait, never mind, you or your close ones might have a lot money invested in these institutions and would like to save at least some through other taxpayers rather than loosing everything. Or may be you work in one of those and are therefore calling the kettle black, or you are just ignorant.

Nope, I'm unemployed like a lot of Americans these days. I used to work for Loral, which went through Chapter 11 recently...actually kept my job through the bankruptcy process, but was laid off in 2008. Also, lost a good part of the company match in my 401k that was invested in worthless Loral stock.

You should ride Trek carbon fiber bikes, at least those are made in America and feel proud of it.

I'd actually like to replace my old Giant Iguana with a new Trek, but first I need to find a job!

As for GM, the Saturn SL2 will be the first and last GM car I buy. I loved my Spring Hill built Saturn, with its dent resistant body panels, excellent reliability and ease of maintenance, but GM ruined Saturn by turning it into a standard GM division selling random rebadged GM products before killing it completely.

Shortsighted and egotistical people like yourself who look at the price rather than the value are the main cause why the country is in ramshackle.

Why would you say that? I'm one of the few who is willing to pay more for an American built product rather than support the Walmart-ization of America.

Edited by vt_hokie
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Nope, I'm unemployed like a lot of Americans these days. I used to work for Loral, which went through Chapter 11 recently...actually kept my job through the bankruptcy process, but was laid off in 2008. Also, lost a good part of the company match in my 401k that was invested in worthless Loral stock.

I'd actually like to replace my old Giant Iguana with a new Trek, but first I need to find a job!

As for GM, the Saturn SL2 will be the first and last GM car I buy. I loved my Spring Hill built Saturn, with its dent resistant body panels, excellent reliability and ease of maintenance, but GM ruined Saturn by turning it into a standard GM division selling random rebadged GM products before killing it completely.

Why would you say that? I'm one of the few who is willing to pay more for an American built product rather than support the Walmart-ization of America.

I stand corrected. But the fact remains, that you cannot be competitive in a market which is superficially free without needing some help from the government. It is government's fault for bringing us into this scenario. I am glad that you hate the Walmartization of the country and that you pay more for a made in America product than a Chinese or an Indian product. Why because this is the country which makes me live, eat and be safe when I sleep. Most others do not see it that way. I wish every one thinks that way.

Sorry that I assumed you to be stereotypical. At this time, everyone has to make sacrifices, and for the time being these sacrifices mean giving your tax money to a company which can actually create jobs and revitalize the economy rather than turning your back and leaving it altogether that is the only way you are going to get your money back. Soon you will turn your back on this own country.

Everyone on this website who is a GM fan has lost his/her brand or vehicle, but if you give an excuse of leaving because you were slighted not because of a superior product from another company, then your argument is shallow.

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Everyone on this website who is a GM fan has lost his/her brand or vehicle, but if you give an excuse of leaving because you were slighted not because of a superior product from another company, then your argument is shallow.

It's both. I feel slighted by GM but also found better products elsewhere. I bought a new Subaru Legacy 2.5i Limited in 2007. GM certainly offered nothing comparable in that price range. At least my Legacy was assembled in Indiana, even though it's a foreign make. I'd rather buy "foreign" car assembled in the US than an "American" car imported from Mexico, China, Europe, etc.

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A car's 'nationality' is based on where the company is headquartered, not where the product is slapped together in 60 minutes. No one calls mercedes SUVs 'American' because they are assembled in SC, so there's likewise no reason to put 'American' in quotes because a Chevy is assembled in Canada. Let's at least strive for consistancy.

Edited by balthazar
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A car's 'nationality' is based on where the company is headquartered, not where the product is slapped together in 60 minutes. No one calls mercedes SUVs 'American' because they are assembled in SC, so there's likewise no reason to put 'American' in quotes because a Chevy is assembled in Canada. Let's at least strive for consistancy.

I disagree, I care more about providing middle class jobs to Americans than where the fat cat execs are located. In any case, how would you classify cars like the Opels being brought over and sold as Saturns, or cars like the Korean designed and built Chevy Aveo?

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