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GM’s trip is set for Chapter 11

Thursday, May 21, 2009

Daniel Howes

GM’s trip is set for Chapter 11

The voice on the other end of the line put it simply: Don’t expect anything before June 1.

But the executive’s tone spoke clarity and inevitability. There’s not much "probable" about it anymore, folks — General Motors Corp., barring some unforeseen miracle, will declare bankruptcy, altering forever the foundation of the Detroit and global auto industries.

To those routinely issuing predictions of the impending collapse even as they offer prescriptions they don’t have to execute, this corporate reckoning was preordained long ago. And it was accelerated by a tanking national economy and the weary frustrations of Bailout Nation and its leaders.

To those families and communities who will be forced to live with the consequences, whatever their bit roll in the causes, these are the days they probably thought they’d never see — and prayed they never would. But they will, as will their political leaders — governors, senators and congressmen — who failed to avert this outcome because their power is almost as spent as Detroit’s financial options.

The walk to a federal bankruptcy filing is set, coming as surely as the lines of damaging thunderstorms that pummel Metro Detroit every summer. Chrysler LLC filed first, a test-case for the Obama White House’s effort to rescue two-thirds of Detroit’s automakers by pushing them to the brink and through a New York bankruptcy court.

Last Friday, GM outlined a strategy to cut 1,100 dealers nationwide — a plan the automaker intends to complete in or outside of bankruptcy, GM’s top North American sales and marketing executive said. Mark LaNeve wouldn’t say, but the implication was clear: GM is headed for bankruptcy, lest current and future investors have any doubt, and this is what the automaker will do.

Tuesday, it looked as if the feds would seize control of GMAC. And the president unveiled stiff new federal fuel economy rules, a victory for coastal politicians, the environmental lobby and, in a twisted sense, automakers craving stability and predictability in draconian government regulations.

Wednesday, GM CEO Fritz Henderson and United Auto Workers President Ron Gettelfinger conducted their third straight day of high-level talks on a pre-bankruptcy deal that would cut GM’s labor costs and detail its financial obligations to a union-run trust fund for retiree health care.

The goal: Deliver a package in advance of next Tuesday’s deadline for GM’s bondholders to accept a debt-to-equity swap, unlikely to reach the government-required take rate of 90 percent. Which means the real deadline is sometime next week, before the president’s expressed deadline of June 1.

Today, the House Judiciary Committee, chaired by Detroit Rep. John Conyers, is scheduled to hold hearings on the implications of auto bankruptcies — namely, the impact of widespread job cuts and plants closings jointly engineered and executed by GM, Chrysler and Obama’s auto task force.

The walk continues into next week, fresh off Memorial Day. Sometime after midnight Tuesday, probably Wednesday morning, we’ll learn how many — or how few– GM bondholders will accept the automaker’s offer to exchange their debt for equity in a new GM. With thousands of unsecured bondholders, many of them ordinary individuals, don’t hold your breath.

Thursday, GM intends to issue payments to myriad suppliers, a precursor to a likely bankruptcy. Why? Because suppliers with outstanding bills would see their payments frozen by bankruptcy, increasing the risk they would stop shipments to GM and force a shutdown.

Remember, folks: The operating assumption of Team Obama, GM, Chrysler and its would-be partner, Fiat SpA of Italy, is that the insolvent U.S. automakers would be split into "good" and "bad" parts in bankruptcy, with the good pieces emerging from bankruptcy relatively quickly and in operating order.

And every deal the automaker does not have when it files Chapter 11 increases the time the surviving entity remains mired in court, imperiling jobs and its survival. Worse, players like the UAW risk seeing their contracts and obligations to their members reworked in bankruptcy if they don’t reach a deal before any filing.

Because it will come. Nearly a month ago, Chrysler reached its presidential deadline armed with requisite deals that were designed to facilitate bankruptcy, not avoid it. GM clearly is doing the same, which is no cause for joy or Schadenfreude.

It’s reckoning with reality.

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