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A post by Pat

The government is reportedly ready to engineer GM’s bankruptcy next week if bondholders don’t agree to accept 10-cents on the dollar. In that case, the feds will make another large infusion of tax money, around $30 billion, into GM, taking at least 50% ownership and four of the nine seats on the board. Yesterday the UAW announced an agreement reportedly similar to the Chrysler agreement, maneuvering to be in a better position vis-a-vis the bondholders in the event of bankruptcy. The UAW would own 39% of the restructured company. Canada is considering investing $3.5 billion for another one of the board seats if GM promises to maintain GM’s production level in Canada and the Canadian union makes concessions.

Details of the UAW concessions are being withheld until the rank and file have a chance to vote on it. The UAW Chrysler concessions included a reduction in break time from 46 to 40 minutes and two-year elimination of Christmas bonuses and cost of living increases. The major part of the deal involves the health care trust fund. GM anticipates 14,000 additional job cuts by 2010.

U.S. to Steer GM Toward Bankruptcy

The Obama administration is preparing to send General Motors into bankruptcy next week under a plan that would give the automaker tens of billions of dollars more in public financing as the company seeks to shrink and re-emerge as a global competitor, sources familiar with the discussions said.

The move comes as the administration prepares to lift the nation’s other faltering car company, Chrysler, from bankruptcy as soon as next week, industry sources said.

The shifts into and out of bankruptcy are landmarks in the Obama administration’s attempt to broker a historic restructuring of the U.S. auto industry in the space of months.

The legal tactic is viewed by some as the best means of reviving the companies. But the speed of the government-led transformation has triggered complaints that the rights of investors and dealers are being trampled. Meanwhile, fears that a bankruptcy could lead to cascading business failures are spreading throughout GM’s vast chain of suppliers.

William J. Holstein, the author of Why GM Matters: Inside the Race to Transform an American Icon thinks the government is wrong to force GM into bankruptcy. GM is not the same as Chrysler, he argues, because of its size, its impact on the economy and their investment in new technologies. GM, with its suppliers, represents 1% of the economy. He thinks the government should continue granting loans for a few more months and let management execute its plan.

Why a GM Bankruptcy Would Be a Disaster

President Obama is nearing the most important decision a President has made in modern times regarding the American economy. On or about June 1, he will push General Motors (GM), the nation’s largest industrial company, into bankruptcy. The key trigger may be on May 26, when GM’s offer to bondholders to accept 10¢ on the dollar fails to win acceptance from 90% of them, a criterion that Obama has set for continued loans to GM.

The Obama camp seems to believe that the Chrysler bankruptcy is a template for what it wants to achieve at GM, but that’s a critical mistake. Chrysler was a shell of a company, having been stripped of engineering and design talent by Daimler (DAI) and then mismanaged by private equity owner Cerberus Capital Management. The arrangement is to give the United Auto Workers 55% of Chrysler’s shares and to give management control to Italy’s Fiat (FIA.MI) group. This may work in political terms, but it’s not a real-world business arrangement. The supposedly rescued Chrysler is, in fact, a house of cards that almost certainly will come tumbling down.

GM, in contrast, has invested heavily in product development and new technologies, such as the lithium ion battery for the Chevrolet Volt. It was in the late stages of a transformation effort when the U.S. economy collapsed last fall.

Obama should not force such a company into bankruptcy because it cannot be “surgical” or “controlled,” as some in the Administration are stating. Bankruptcy lawyers are arguing that GM can emerge within 60 days, but that is highly suspect. Even a Section 363 bankruptcy, in which GM would be allowed to park bad assets like dealer franchise agreements and bonds in a “bad” GM that stays in bankruptcy, then reemerge as a “good” unencumbered GM is highly complex. The reasons are the sheer size of the company, its extensive global operations that account for more than half its sales, and the range of interest groups that will fight tenaciously for their piece of the pie.

We all know Obama’s ideas about pie.

It’s a calamity no matter what. Big Auto promised more than it could deliver thinking tomorrow would never come. Government is doing the same thing. The day of reckoning is coming. Forget about pie, we won’t even have crumbs.