General Motors Is On The Brink of Bankruptcy

Posted by Cassie Nist - email

NEW YORK ( - General Motors, the nation's largest automaker and for decades an icon of American manufacturing, stood Sunday on the brink of bankruptcy and an effective government takeover.

Investors who own a majority of $27 billion in GM bonds agreed Saturday to not fight the plans for a quick bankruptcy process, according to a source familiar with the preparations for the filing.

The deal with bondholders' could make it easier for GM to restructure by neutralizing some of the opposition to a bankruptcy filing. But it does not wipe away the need for the company to seek court protection for making drastic reductions in dealer, labor and other costs.

President Obama will address the nation at 11:30 a.m. on Monday to discuss the bankruptcy, two officials close to the situation told CNN. 

It is expected that GM will detail some 20,000 job cuts and the closure of about a dozen plants by the end of 2010. The company has already said it will slash 40% of its network of 6,000 retail dealerships by next year as well, and drop four of its brands -- Hummer, Saab, Saturn and Pontiac.

The impact of GM's bankruptcy, which follows a Chapter 11 filing by Chrysler on April 30, will ripple across the nation to dealers, suppliers and other businesses large and small that work in the sector.

The company and Treasury Department officials, under direction of President Obama, have been trying negotiating for weeks with creditors and the United Auto Workers union.

The government, bondholders and a trust fund controlled by the UAW will wind up owning virtually all the stock in a reorganized GM.

 An effective government takeover -- even one that set out to be temporary -- marks a dramatic turn for century-old General Motors, which has been brought to a whisper of insolvency by plummeting auto sales and huge losses.

 GM has reported losses of more than $90 billion since 2005, while its share of the U.S. market has dropped to 19% from more than 40% in 1980.

 On Thursday, GM disclosed that it had reached a deal to give major bondholders essentially 10% of the company and rights to buy an additional 15%. The government would end up owning 72.5% and the UAW 17.5%.

 A Chapter 11 bankruptcy filing would aim to help GM emerge with only its more profitable plants, brands, dealerships and contracts. GM's unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind.

The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.

GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.

But more than $40 billion of federal help to GM will be converted into the 72.5% stake in the new company. Taxpayers would make back the money loaned to GM if shares of the new GM increase dramatically in value following an exit from bankruptcy.

GM is expected to have about $17 billion in debt following bankruptcy, significantly less than the $54.4 billion it owed as of March 31.

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