General Motors filed for Chapter 11 bankruptcy protection Monday as part of the Obama administration’s plan to shrink the automaker to a sustainable size and give a majority ownership stake to the federal government.
GM’s bankruptcy filing is the fourth-largest in U.S. history and the largest for an industrial company. The company said it has $172.81 billion in debt and $82.29 billion in assets.
“The General Motors board of directors authorized the filing of a Chapter 11 case with regret that this path proved necessary despite the best efforts of so many,” GM Chairman Kent Kresa said in a written statement. “Today marks a new beginning for General Motors. ... The board is confident that this New GM can operate successfully in the intensely competitive U.S. market and around the world.”
As it reorganizes, the fallen icon of American industry will rely on $30 billion of additional financial assistance from the Treasury Department and $9.5 billion from Canada. That’s on top of about $20 billion in taxpayer money GM already has received in the form of low-interest loans.
Late Monday, U.S. bankruptcy court judge Robert Gerber gave interim approval for the Detroit-based automaker’s use of a total of $33.3 billion in bankruptcy financing, with $15 billion available for use over the next three weeks. He will rule on final approval of the financing on June 25. Gerber also approved GM’s sale procedures, setting a sale approval hearing for June 30.
“Our agreement with the U.S. Treasury and the governments of Canada and Ontario will create a leaner, quicker more customer and completely product-focused company, one that’s more cost competitive and has a competitive balance sheet,” CEO Fritz Henderson said at a news conference in New York. “This new GM will be built from the strongest parts of our business, including our best brands and products.”
The Detroit automaker said warranty coverage, service and customer support will continue uninterrupted, plants will continue to make cars and trucks, and essential suppliers and GM’s 235,000 employees worldwide will continue to be paid. GMAC Financial Services said in a statement that it will continues to provide automotive financing to GM and Chrysler dealers and customers, and the federal Pension Benefit Guaranty Corp. said workers’ pension plans remain safe.
GM will follow a similar course taken by smaller rival Chrysler LLC, which filed for Chapter 11 protection April 30. A judge on Sunday gave Chrysler approval to sell most of its assets to Italy’s Fiat, moving the U.S. automaker closer to a quick exit from court protection, possibly this week.
The plan is for the federal government to take a 60 percent ownership stake in the new GM. The Canadian government would take 12.5 percent, with the United Auto Workers getting a 17.5 percent share and unsecured bondholders receiving 10 percent. Existing GM shareholders are expected to be wiped out.
GM shares fell as low as 27 cents in Monday morning trading, their lowest price in the company’s 100-year history, but rebounded to rise 10 cents from Friday’s close to 85 cents in afternoon trading. On June 8, Cisco Systems Inc. will replace GM in the Dow Jones industrial average, which excludes companies that have filed for bankruptcy. Standard & Poor’s also will remove GM from its S&P 500 index Tuesday, with secondary education provider DeVry Inc. taking the automaker’s place.
The government’s partial stake in GM comes on top of a far smaller ownership of Chrysler, as well as significant federal equity in banks, the AIG insurance giant and two mortgage industry titans — all victims of an economic crisis unrivaled since the Great Depression.
But the president said the actions were part of a “viable, achievable plan that will give this iconic company a chance to rise again.”
The president said the government would refrain from playing a management role in all but the most critical areas.
“Our goal is to help GM get back on its feet ... and get out quickly,” he said.
Henderson declined to offer a firm timeline for how long it would take the government to sell its stake in GM, but he indicated it could take some time.
“These are a substantial block of shares,” Henderson said. “This is a question of years, not months.”
GM said it expects the bankruptcy court process to last 60 to 90 days. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership network.
“We’re confident that we will move fast,” Henderson said. “Not with a sense of urgency. We’re talking about pure unadulterated speed.”
GM said Monday that it will permanently close nine more plants and idle three others.
The Pontiac, Mich., and Wilmington, Del., assembly plants will close this year, while plants in Spring Hill, Tenn., and Orion, Mich., will shut down production but remain on standby. One of the idled plants, or GM’s Janesville, Wis., plant that closed in April, will be retooled to build a small car that GM had originally planned to build in China.
Seven powertrain and parts stamping plants will be closed starting in June 2010, while an additional stamping plant will be idled but remain in a standby capacity.
GM will move forward with four core brands — Chevrolet, Cadillac, Buick and GMC — and cut four others. The company plans to cut 21,000 employees, about 34 percent of its work force, and reduce its 6,100 dealers by 2,600. GM said it was finalizing a deal to sell Hummer, and plans for Saturn are expected to be announced within weeks.
The third of the one-time Big Three, Ford Motor Co., has also been stung hard by plunging sales of cars and trucks, but it avoided bankruptcy by mortgaging all of its assets in 2006 to borrow roughly $25 billion, giving it a financial cushion GM and Chrysler lacked.
Ford issued a statement Monday saying it “remains absolutely committed to continuing to make progress on our transformation plan without accessing emergency taxpayer assistance from the U.S. government.”
The bankruptcy filing represents a dramatic downfall for GM, which was founded in 1908 by William C. Durant, who brought several car companies under one roof and developed a strategy of “a car for every purse and purpose.” Longtime leader Alfred P. Sloan built the global automaker into a corporate icon.
GM first sought help from the Bush administration and Congress last year as it was in the midst of being staggered by $30.9 billion in losses and seeing its cash resources shrink by more than $19 billion.
Consumers, worried about the economy and the future of GM, shied away from the company’s cars and trucks this year even after President George W. Bush promised loans and Obama followed through with billions more in assistance — plus a stiff set of new requirements GM was ordered to meet.
When GM failed to do so by a March 31 deadline, Obama forced out CEO Rick Wagoner and replaced him with Henderson.
Wagoner served at the helm since 2000 and was the face of GM when he first flew on a company jet to ask Congress for aid. After a firestorm of negative publicity, Wagoner rode in a hybrid Chevrolet Malibu from Detroit to Washington for a second set of withering questions before lawmakers.
But that amounted to only a sideshow as the automaker’s financial position worsened. Its revenues plunged almost 50 percent in the quarter ended March 30 and it racked up another $6 billion in losses.
The Henderson-led GM faced a government-imposed June 1 deadline to restructure, slash costs and modify contracts with its union and dealers. But meeting most of those demands, plus a late agreement by many bondholders to swap the $27 billion in debt they are owed for shares in a new GM, were not enough to prevent the court filing.
Some bondholders might still fight GM’s reorganization plan, but the company and Treasury hope the 54 percent who supported the debt-for-equity offer will convince the judge that its a fair deal.
“There is no other sale, or other potential purchasers, present or on the horizon,” Henderson said in an affidavit filed Monday in bankruptcy court. “The only other alternative is the liquidation of the debtors’ assets that would substantially diminish the value of GM’s business and assets, (and) throw hundreds of thousands of persons out of work and cause the termination of health benefits and jeopardize retirement benefits for current and former employees and their families.”
It was an all-out sprint to Monday’s filing, as GM quickly sought to nail down deals with its union, bondholders and sell off brands along with most of its Opel operations in Europe to appear in court with a near-complete plan to quickly emerge with a chance to become profitable.
The German government on Sunday agreed to lend GM’s Opel unit $2.1 billion, a move necessary for Magna International Inc. and Russian-owned Sberbank to acquire 55 percent of the company.
In the U.S., the UAW’s ratification of concessions, announced Friday, will save GM $1.3 billion per year. The new deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.
It moves billions in retiree health care costs off GM’s books. In exchange for its ownership stake, $6.5 billion of interest-bearing preferred shares, and a $2.5 billion note, the trust will take on responsibility for all health care costs for retirees starting next year. Higher health care costs alone accounted for a $1,500-per-car cost gap between GM and Japanese vehicles.
GM will offer buyouts and early retirement packages to all of its 62,000 hourly workers to shrink employment. The company also has about 29,000 white-collar employees, according to court documents. In contrast, GM employed 618,000 Americans in 1979, more than any other company.
GM earlier outlined a plan to cut about 1,100 of its dealers by the end of 2010. It also plans to shed about 500 dealerships that market the Saturn, Hummer and Saab brands.
A person familiar with GM’s plans said the automaker has no plans to accelerate the dealership cuts that were already announced. The person spoke on condition of anonymity because the details have not been made public.
The person said dealerships that the company is planning to terminate began receiving wind-down agreements Monday. Those agreements, if dealers sign them, will allow targeted dealers to receive compensation and support from GM as they close down their franchises and sell off inventory.
But just cutting labor and overhead costs won’t be enough to save the company. It also has been working to streamline its engineering and design, as well as standardize many parts so they can go into multiple models.
The once powerful GM earns a place in history as the largest U.S. industrial company to file for bankruptcy protection, and the fourth-largest company overall to do so based on its $82.29 billion in assets as of March 31.
Lehman Brothers Holdings Inc.’s Sept. 15 bankruptcy filing is the nation’s largest with $691.1 billion in assets, and it likely served as a catalyst for GM and Chrysler’s downfall, as it hastened the erosion of credit markets, making it impossible for GM to borrow money and difficult for consumers and dealers to finance new vehicles.
Washington Mutual Inc. and WorldCom Inc. are the second and third largest U.S. companies to file for bankruptcy protection.