GM files for bankruptcy

US car manufacturer to be split into two companies after filing in New York court.

    GM will be handed $30.1bn by the government to finance the company's reorganisation [AFP]

    "The collapse of these [auto] companies would have been devasting for countless Americans and caused damage to our economy," he said at the White House on Monday.

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    "If they retooled themselves it would be good for American workers ... and America's economy."

    However he warned revamping GM would come at "a cost" both to US workers and the nation's already ailing economy.

    "I will not pretend the hard times are over ... more jobs will be lost and more plants will be closed ... But I'm confident, if well managed, that a new GM will emerge ... that can once again be an integral pary of America's economic future," he said.

    Al Jazeera's Rob Reynolds in Washington DC says Obama tried to present GM's move and the swiftness of Chrysler's apparent recovery from bankruptcy protection as hopeful signs, but politically many are unhappy about the huge expenditure of taxpayers' money.

    Job losses

    The reorganisation of GM will be financed by $30.1bn from the US government - on top of the $20bn it has already handed the company - giving it a 60 per cent equity stake in the car firm.

    The White House announced on Sunday that this would be the last public money GM gets and the company will be allowed to fail if the restructuring does not work.

    A US federal bankruptcy judge had earlier approved the sale of most of US auto giant Chrysler's assets to Italy's Fiat firm, moving the US auto giant closer to a swift exit from its own bankruptcy protection.

    GM also said on Monday it would permanently close nine more plants and "idle" three others in order to cut production and labour costs.

    Al Jazeera's John Terrett in New York says that while the GM move is momentous in US business history not much will change, as a US judge will run the company day to day with the hope of getting the firm out of bankruptcy protection in around two to three months.

    Despite the news US stocks rose on Monday, with the Dow Jones Industrial Average index closing up 221.11 points, or 2.60 per cent, to end unofficially at 8,721.44.

    Detriot's decline

    "Now the hard part begins, which is making GM and Chrysler competitive - if they don't do that, then we'll be doing this all over again in a few years"

    Christopher Richter, car industry analyst

    Monday's bankruptcy filing capped a three-decade-long decline for the Detroit car maker.

    Jennifer Granholm, the state governor of Michigan, that is also home to Chrysler and Ford, said that the bankruptcy filing would be tough for Detroit, but offered some hope for the future.

    "This summer, it's going to be really, really tough in Michigan," she told CNN television. "But at the end of this, we can finally see that we are hitting bottom."

    "These auto companies ... have been in the middle of restructuring plans since the year 2000, so we have lost hundreds of thousands of jobs and the uncertainty of not knowing when bottom was going to arrive has made it much more difficult.

    "You have to get through this restructuring in a way that positions them for success and not for failure, and ultimately the taxpayers will get their money back."

    Christopher Richter, a car industry analyst at CLSA Asia-Pacific Markets in Tokyo, said: "Now the hard part begins, which is making GM and Chrysler competitive. If they don't do that, then we'll be doing this all over again in a few years."


    But Timothy Geithner, the US treasury secretary, expressed optimism that US car firms would emerge from bankruptcy and said the administration would seek to sell its share as soon as reasonably possible.

    "We want a quick, clean exit as soon as conditions permit," Geithner said while on a trip to Beijing.

    "We're very optimistic these firms will emerge [from restructuring] without further government assistance."

    Carved up


    GM will be carved up into two new companies.

    "Old GM" will have all the "bad" assets such as the rundown car plants and brands such as Pontiac, Hummer and Saturn in it, while "New GM" will contain all the "good" parts such as money-making car plants and popular brands such as Chevrolet, Cadillac, GMC and Buick.

    GM's debt

    GM's total liabilities of $185bn break down into:

    $27bn in unsecured debt
    $25.5bn in government and bank loans
    $20bn owed on healthcare and pensions
    $112.5bn in other debt

    The path for Monday's filing was cleared after shareholders agreed to accept a deal to swap the firm's $27bn debt for stock in the new restructured version of the car maker.

    At a meeting over the weekend, 54 per cent of shareholders decided to exchange their unsecured bonds for a 10 per cent share in the new firm and warrants to purchase a greater share of the new GM in the future.

    The 54 per cent represents only $14.6bn of debt, and GM would like to clear all of its $27bn unsecured debt, but establishing bondholder support in advance increases the likelihood of a judge applying the improved offer to all of the firm's unsecured debt.

    Founded in 1908, GM rose to dominate the US and global car industries under the stewardship of Alfred Sloan, its then chief executive, who famously pledged the firm would deliver "a car for every purse and purpose".

    By the mid-1950s, at the peak of its success, GM had about 514,000 employees and it accounted for about half of US new car production.

    But in recent years, GM and the US car industry in general has been hit hard by a slump in sales amid a recession in the US and the global financial crisis, cutting thousands of jobs and closing plants and dealerships.

    SOURCE: Agencies


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