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D.C.’s bet on General Motors not a sure thing

A new name for GM is making the rounds, sometimes with irony, sometimes with dread, suggested by the deepest Washington industrial intervention in a half-century.
GM Bondholders
General Motors once towered over the world’s manufacturing companies. Now it teeters on bankruptcy.Paul Sancya / AP
/ Source: The Associated Press

Government Motors.

A new name for Detroit's weakened auto giant GM is making the rounds, sometimes with irony, sometimes with dread, suggested by the deepest Washington industrial intervention in a half-century. The Obama administration is planting itself at the wheel of General Motors with a major ownership stake — and all that goes with it for the U.S. taxpayer.

The company appeared closer than ever to filing for bankruptcy protection on Wednesday after its bondholders turned their backs on a federally ordered offer to swap their debt for GM stock. If GM does file, the governments of the United States and Canada could end up with as much as 70 percent of a reconstituted GM when the court dust settles — with the biggest share by far held by the U.S. Treasury.

Administration officials portray themselves as reluctant players in this industrial drama, their hands forced by an economic and financial crisis so severe that inaction would have terrible and far-flung consequences. And they insist they have no intention of managing the day-to-day operations of GM or Chrysler, which is already moving through a swift reorganization in bankruptcy court.

But with its huge financial stake, the government has hardly been a passive observer.

On March 31, President Barack Obama — a day after firing GM CEO Rick Wagoner — gave the company until June 1 to make aggressive cuts. It was the Treasury Department that instructed GM not to offer bondholders any more than 10 percent of company equity. And no corporate owner has as direct a line to Congress as the Treasury Department. Lawmakers last week were already pressuring Secretary Timothy Geithner to intervene in the planned closure of auto dealerships and complained about GM plans to import cars made in the company's Chinese plants.

Obama's auto task force has been working with General Motors, its union, bondholders and dealers to win concessions since February. The panel has been led by Steven Rattner, a former Wall Street financier and a top Democratic fundraiser, and Ron Bloom, a Wall Street turnaround specialist who has advised the United Steelworkers union. When Obama decided to oust Wagoner, it was Rattner who informed the GM executive.

"We've tried to be true to the president's basic principle that we should not be in the business of running the company," Bloom told The Associated Press. "We are the president's line people, making recommendations to the decision-makers on large amounts of taxpayer dollars. So we have a tremendous responsibility to be thoughtful about our recommendations on how those dollars get used. On the other hand, we are not the management of the company."

A bankruptcy court filing this week is unlikely. GM and the administration will probably wait until the June 1 deadline to announce a next move.

The federal government has already injected nearly $20 billion into GM. Helping it through bankruptcy court reorganization would require billions more — exactly how much would depend on the length of the proceedings.

By positioning itself to own a sizable majority of the company, the Obama administration is also assuming a greater stake than the 8 percent share it obtained in Chrysler's bailout. Chrysler could emerge from bankruptcy court as early as next week.

While even a speedy bankruptcy reorganization for GM would be a blow to the company's pride as an industrial giant, that step could be the best available. The company would emerge from court with a fraction of its current debt and so-called legacy costs for retirees, and with a more manageable dealer network. At issue is whether the proceeding itself would taint the company and damage its sales. So far, Chrysler's trip to bankruptcy court has not driven customers away.

Despite the relatively smooth experience with Chrysler, however, GM is a larger company that is more difficult to restructure. Chrysler has Fiat prepared to assume a portion of the company. No similar deal awaits GM. As a result, participants in the negotiations expect a GM reorganization to last longer.

What's more, any government involvement as broad as Treasury's in GM presents a number of nettlesome issues, not the least of which is whether the administration can resist congressional entreaties to influence management decisions.

"The task force role in looking at GM is as a private equity model," Sen. Bob Corker, R-Tenn., a member of the Senate Banking Committee who stays in frequent touch with Geithner and Rattner, said in an interview. "It's most unusual. The government is highly involved and it's a threshold we should have never crossed."

Auto industry analysts say GM would need a firm line between its ownership and the people actually running the company's operations.

"Politicians and pressure groups and the like are not good business people and could very well lead the company in an unproductive direction — maybe a lethal one," said Gerald Meyers, a University of Michigan business professor and former chief executive of American Motors Corp.

The auto industry has economic tentacles that reach across the country. The Center for Automotive Research, in a study released this week, concluded that drawn-out, disruptive reorganizations for GM and Chrysler would result in 1.3 million job losses by the end of 2009. In contrast, successful reorganizations — those that conclude within three months — would cost an estimated 63,200 jobs this year and more than 179,000 in 2010.

"The intervention is necessary and appropriate," said Mark Zandi of Moody's, an economist who frequently advises Washington policymakers. "Without it, GM would go into bankruptcy and not come out. There would be wide-ranging negative impacts across the economy. Just when the fiscal stimulus is kicking in, this would derail it."

Governments have played roles propping up auto companies in the past with mixed results. When the Carter administration provided a $1.2 billion loan guarantee for Chrysler in 1980, the government received broad oversight of the company and an ownership stake. Chrysler was able to avoid bankruptcy, developed fuel-efficient K-cars and repaid the loans in 1983, seven years ahead of schedule.

But in Great Britain, the bailout of British Leyland in the 1970s and 1980s was largely a failure. The British automaker, which built the MG and Jaguar, suffered through declining market share, poor labor relations and foreign competition before it became MG Rover, which filed bankruptcy in 2005.

Some see the same in store for GM.

"This is a company that has had its up and downs," said Clifford Winston, an economist who has studied the auto industry at the Brookings Institution. "Why do we think the government is going to do a better job to turn things around?"

Sen. Debbie Stabenow, D-Mich., said the Chrysler intervention proved that the consequences of inaction are too great to ignore.

"The only reason that pensions and health care and the jobs have been protected is because the Obama administration was willing to come in with significant financing," she said. "Assuming GM goes into bankruptcy, the same will be true."