GM Plan Would Lead to Majority Government Ownership
by Jason Lomberg, Technical Editor
President Obama once declared, “The United States government has no interest in running GM. We have no intention of running GM.” But recent developments could leave the federal government with majority ownership of GM.
On February 17, GM submitted its “2009 – 2014 Restructuring Plan” to the Treasury Department. Highlights included:
• ‘Fewer, better’ vehicles in U.S. supporting Chevrolet, Cadillac, Buick and GMC,
• Renewed commitment to lead in fuel efficiency, hybrids, advanced propulsion,
• All major U.S. introductions in 2009-2014 are high-mileage cars and crossovers.
On March 30th, Obama’s Auto Task Force summarily rejected the plan, stating, “the GM plan, in its current form, is not viable and will need to be restructured substantially.” In regards to GM’s renewed focus on advanced technology vehicles, the Task Force stated, “While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable.” GM has until June 1st to submit a viable (in the government’s opinion) restructuring plan.
GM’s new plan includes cutting 21,000 jobs, killing the Pontiac, and a debt-for-equity offer. GM is offering to swap 27 billion in bond debt for GM stock. The government has already loaned GM $15.4 billion, and GM has offered the government more than 50 percent of its stock in exchange for cancelling about $10 billion in government debt. In other words, the federal government would own more than 50 percent of GM.
If GM doesn’t submit a viable plan by June 1st, they’d be forced into bankruptcy (specifically, Chapter 11). Under Chapter 11, debtors have 120 days to submit a “plan of reorganization,” which is voted on by interested creditors. Plans must be approved “by a majority vote in number of claims and at least 2/3 in dollar value, within each class.” Sound familiar? Restructuring plan…plan of reorganization…the two are very similar save for one factor: government control. Although a “plan of reorganization” must be approved through bankruptcy court, the requested “restructuring plan” can be exclusively vetoed by the government’s Auto Task Force. No 2/3 majority is needed for approval, either.
The danger is clear: the government could acquire 50 percent GM stock, and it could still lead to bankruptcy. In that case, the government would have voting power over GM’s plan of reorganization. The Chapter 11 code explicitly states, “If the United States is a creditor or equity security holder, the Secretary of the Treasury may accept or reject the plan on behalf of the United States.” Many feel that GM is inexorably heading towards bankruptcy. GM’s CEO, Fritz Henderson, says bankruptcy is not preferred but is “probable.”
The government’s Auto Task Force had this to say: “Today's bond exchange filing represents an important step in GM's effort to restructure its company." But they stopped short of giving a definitive yes or no. If the restructuring plan is rejected, GM will file for bankruptcy. If approved, GM’s plan would lead to majority government ownership. The government may end up having it both ways.
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Note: The preceding represents the view of the editor and not necessarily ECN.