Government Combs Through G.M.’s Survival Plan

March 16, 2009
 

Government Combs Through G.M.’s Survival Plan

WASHINGTON — Treasury officials and management experts hired by the Obama administration quietly began combing through General Motors’ latest downsizing plan in Detroit last week, in a last-minute effort to assess whether more government aid could make the company viable, or whether the better choice was a managed bankruptcy.

President Obama faces a deadline of March 31 to decide the fate of G.M., and by extension its huge network of suppliers. In interviews, however, administration officials said they would not be bound by that date, when Mr. Obama is scheduled to visit London for a summit meeting on the global economic crisis.

During the weekend, administration officials said they expected the team of about two dozen Treasury officials to continue working in Detroit this week, even while G.M.’s two top executives traveled to Washington to meet the task force that is assembling Mr. Obama’s options.

To judge whether G.M.’s reorganization plan is sufficient, the team has been delving into every aspect of the company’s management, including its somewhat upbeat estimate of how the car market will look when the recession ends — a market it projects at over 15 million cars annually, much higher than Chrysler’s forecast — as well as its designs for new products and its financial controls.

Administration officials said Sunday that the main standard they were using to measure the viability of G.M. was the probability of recovering additional taxpayer money used to help the company, should more aid be necessary. Asked about the mission of the team, a White House spokesman, Bill Burton, said: “The auto team is working to assess long-term viability within the context of the existing loan agreements, while recognizing that the economy has deteriorated since September 2008 and that both companies are now asking for more money.”

While administration officials say that no final decisions have been made, they appear to be giving more consideration than they were two months ago to a quick, managed bankruptcy. Mr. Obama has said he wants avoid that option, because it could further unnerve investors and radiate out through the company’s network of suppliers and dealers.

But the threat of a bankruptcy filing may be the only way to force concessions from bondholders, who hold $27 billion of the company’s unsecured debt. So far, the bondholders have shown little willingness to negotiate over a G.M. proposal that would give them a fraction of the face value of the bonds — as little as 16 cents on the dollar for some bonds in a deal that could leave them holding what may turn out to be worthless equity in G.M. The president’s task force has added a bankruptcy lawyer, Matthew A. Feldman of Willkie Farr and Gallagher, to its team, though officials said that the timing was somewhat coincidental because they had been seeking Mr. Feldman’s help for some time.

The face-off with the bondholders has quickly become a high-stakes game of chicken. The bondholders appear to be betting that Mr. Obama is not willing to take the political risk of letting the company that once defined the American car industry go bankrupt, a step that could render their bonds worthless.

The administration has a strong interest in trying to persuade the bondholders’ committee that if they have no other option for reorganizing the company, the government is willing to take that step. Senior administration officials who met with the United Automobile Workers union last week in Detroit say that while the meeting was cordial, the union was not ready to give any more concessions until it sees what happens with the investors who have lent G.M. billions.

“The union is wary of negotiating with themselves,” said one senior official involved in the talks. “They have been asked to give blood four times, and they want to see the bondholders give some before they do anything more.”

Another senior administration official, who declined to speak on the record because he was not authorized to talk about the negotiations, described talks with the bondholders as “the drama that will play out for the next two weeks,” as each side waits for the other to blink. “Is Obama willing to go the bankruptcy route?” the official asked. “He might be, if he thinks it’s the best way to save the most jobs, but we don’t know yet.”

That decision may have as much to do with negotiation strategies as it does with economic fundamentals.

“It seems that the dispute between G.M. and its constituents will not be settled with an economic solution,” said John Casesa, whose firm, Casesa Shapiro Group, advises auto companies. “This is now in the realm of politics. Is it more politically palatable for G.M. to go into a government-sponsored bankruptcy than to be sustained by more loans?”

The prospect of the bondholders taking huge losses is critical to the plan that G.M. submitted last month, in which it aimed to eliminate roughly two-thirds of its unsecured debt by March 31. Its other commitment was to reduce labor costs by the government-imposed deadline as part of the terms of the $13.4 billion in federal loans it already has. But with only two weeks to go, the company has been unable to get the union and its bondholders to agree on concessions to ensure G.M.’s long-term viability.

The U.A.W. has agreed to givebacks on job security and work-rule provisions of their national labor contract. But the union’s president, Ron Gettelfinger, has not yielded to pressure to accept G.M. stock in lieu of cash to finance 50 percent of a new health care trust for 391,000 U.A.W. retirees and surviving spouses.

G.M. owes more than $20 billion to the health care trust, which will assume responsibility for billions of dollars in annual medical bills for U.A.W. retirees beginning next year. Mr. Gettelfinger recently reached a deal with the Ford Motor Company to accept company stock to finance half of Ford’s health care trust.

But Mr. Gettelfinger has vowed not to make a similar deal with G.M. unless the company’s bondholders agree to swap their debt for equity in the company.

The bondholders are being asked to take equity in exchange for reducing G.M.’s $27 billion in unsecured debt by two-thirds. So far, a bondholders’ committee has resisted the debt-for-equity exchange, given G.M.’s depressed stock price and its uncertain future.

Bill Vlasic reported from Detroit.

 

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