Tags: Mike Caggeso

U.S. Treasury to GM: Prepare for Bankruptcy

By , Money Morning •

By Mike Caggeso
Associate Editor
Money Morning

The U.S. Department of Treasury is directing General Motors Corp. (GM) lay the groundwork for a bankruptcy filing by the automaker's June 1 deadline to restructure or have the plug pulled on more federal emergency loans, The New York Times reported.

Last week, GM and members of President Obama's task force meet in person and talked on conference calls, sources told the Times. Talks are expected to continue this week, but the Treasury's goal is a speedy "surgical" bankruptcy for GM.

One of the plans the Treasury is considering would involve creating a new company that would buy GM's better assets immediately after the bankruptcy filing. Bad assets would be left in the old company and liquidated in the coming years, the Times reported.

One potential outcome would be a "good GM" enters bankruptcy protection and leaves it in as little as two weeks using $5 billion to $7 billion in government financing.

Two weeks ago, the Obama administration gave GM another financial lifeline, but under the condition that Chief Executive Rick Wagoner resign from his post. Even as GM's ship continued to sink, Wagoner repeatedly said that long-term price tag for bankruptcy filing is higher than more bailout money.

Though Wagoner's replacement, Fritz Henderson, doesn't want GM is file for bankruptcy, his language has continually genuflected to believing filing for bankruptcy is inevitable. 

"We think GM's new CEO, Fritz Henderson, is simply not as opposed to a filing as his predecessor," JPMorgan Chase & Co. (JPM) analyst Himanshu Patel said in a note for clients on Monday, Reuters reported. "Henderson has always had a more sobering assessment of the sustainability of GM's liabilities."

So far, the government has given GM $13.4 billion in emergency loans. It has until June 1 to turn its business model around, and that involves putting out two major fires: convincing bondholders to exchange about $28 billion in debt into GM equity; and convincing the United Automobile Workers' to make more concessions - the latter being more difficult without bondholders making a sacrifice.

Today's report sent GM shares down more than 17% at one point.

In 1970, GM had nearly 60% of the U.S. automobile market, and imports' share was below 10%. Today GM's market share is little more than 20%, and imports and domestically produced automobiles of foreign brands dominate the market.

Privately held Chrysler LLC is also in the government's crosshairs. Chrysler has until the end of April complete a merger with Italy's Fiat SpA. (OTC ADR: FIATY), which agreed to take a 35% stake in Chrysler in January. 

If Chrysler succeeds, the administration will provide another $6 billion loan, on top of the $4 billion it received in December.

"What we're asking for is difficult," President Obama said yesterday. "It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It'll require creditors to recognize that they can't hold out for the prospect of endless government bailouts."

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