Thanks to decades of mismanagement, General Motors Corp. (NYSE: GM) is on the brink of bankruptcy. It has about six weeks to accept the outlines of a Treasury plan and fill in its blanks.
And GM will not simply be liquidated -- instead, $77 billion more in taxpayer money (on top of the $13.4 billion it has already received) will be needed for GM to die a good death and be reborn as a smaller company.
How will this work? Using a section 363 bankruptcy, about which I posted here, the good part of GM -- such as Chevrolet, GM's Chinese operations, and Cadillac -- will go into a new company in the next two weeks with the help of $7 billion in U.S. debt. And the bad part -- everything else will require $70 billion more in U.S. debt to cover GM's health care obligations and the liquidation of the factories making all of GM's other products.
Still unresolved in this plan is the fate of a $13.5 billion gap between GM's pension assets and its liabilities, as well as how much of a haircut the holders of $29 billion in GM bonds will be forced to take. Finally, there's the matter of whether this restructured GM will be able to attract any customers -- who might be nervous about whether a bankrupt company can stand behind its warranties.
Meanwhile, there is wonderful news for Boston Consulting Group, which will get $5 million in fees to develop a business plan for GM. And S&P is earning its fees by announcing that GM and Chrysler are likely to default on their debt obligations -- too bad they didn't make that call a few years ago when it could have helped saved people from losing money.
No word on how the U.S. will get back the $90 billion it will have lent GM to cover all its mistakes. And all the GM stockholders -- who have already lost 98 percent of their investment since Rick Wagoner took over -- will see that remaining 2 percent wiped out.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in GM securities.
Closing Bell: Dubai sends jitters throughout the market (S, BBY)
Heinz looking good after the second quarter?
Why isn't Bank of America updating its shareholders on CEO situation?
Reader Comments (Page 1 of 1)
4-13-2009 @ 10:40AM
babyraymond8 said...
Who cares about the stockholders. My heart goes out to the workers. What a sham white collar AIG executives who caused this economic mess get to keep million dollar bonuses while the blue collar lunch pale worker gets the screwing again.
4-13-2009 @ 11:21AM
Donovan said...
Who the hell cares about GM's warranties.
GM is in, and has been in financial trouble for a few years now. The quality of their vehicles reflects that. More plastic, less metal, cheaper overall interior's, carpeting cloth and leather. imported engine, electrical and body parts. Their vehicles may be assembled in the U.S. But their loaded with foreign part.
4-13-2009 @ 3:01PM
william lindblad said...
What Al Capp the cartoonist said - what is good for general bullmose is good for the country. What is bad for the general will be bad for the country. I don't think that anyone understands the far reaching consequences of this potential bankruptcy which are going to be more of a disaster than what was believed would happen with AIG. Our industrial base of already a shambles and this will take down much more of the little that remains. We are already a nation of imports that has debased the coinage and now the printing presses run 24/7 making money that is sure to become inflated. If product production becomes a thing of the past than surely, consumption has to slow as well. That is not a road to economic recovery.
4-13-2009 @ 8:43PM
Duke said...
$77 billion, a billion is a thousand million. $77 billion to bailout GM? Good lord is that expensive. It will cost the taxpayer no matter which way GM goes. It is time to pay the GM workers, all of them, not just the new hires that $14.50 an hr., right now. Why does the taxpayer have to pay for this?
4-14-2009 @ 12:59AM
ij70 said...
77 billion is cheap.
Figure this: GM will need about 10-20 billion every month. Let us be conservative, GM will need 10 billion every month. 10 billion times 10 months is 100 billion. 100 billion is more then 77 billion, therefore it makes sense to spend 77 billion now and save 23 billion.
Note. This just this year. What if this goes on next year? 10 billion every month, month after month... for how long? Until it reaches trillion?