GM bankruptcy seen as tale of best, worst of assets

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When General Motors Corp. files for bankruptcy protection this week, a Dickensian tale of two legal processes will unfold.

In one, a judge will be told that a new entity will emerge within three months with prized assets and a plan to revisit the best of times when GM was the world’s largest carmaker. In the other, Bleak House comes to bankruptcy court as creditors shut out of the new entity will be told to argue for perhaps years about who gets company properties the new GM doesn’t want.

In the rosy scenario, the new company, armed with vehicles from GM’s Cadillac, Chevrolet, Buick and GMC divisions, plans to begin making money again within 60 to 90 days, while a bankruptcy court sells or liquidates unprofitable brands such as Saturn and Hummer. Saab already is in bankruptcy.

Chrysler, GM’s smaller rival, is on schedule to create a similar new company even faster, stripped of billions in debt and stocked with viable vehicle models, with the approval of a bankruptcy judge in charge of its reorganization.

“They are clearly trying to clear a path for a very quick Chrysler-style case,” said Stephen Lubben, a bankruptcy-law professor at Seton Hall University School of Law in Newark, N.J. “They will use the bankruptcy code to separate ‘good GM’ from ‘bad GM.'”

Stock below $1

GM on Friday fell below $1, the minimum price normally needed to trade on the New York Stock Exchange, and closed at the lowest level in 76 years.

In creating the good company, the U.S. plans to speed GM’s progress by turning more than $50 billion of loans into a 72.5 percent equity stake for the government, slashing company debt to about $17 billion, excluding financing obligations to suppliers and warranty programs, according to a regulatory filing last Thursday.

With unions accepting pay cuts, GM also will compete better in world markets with Japan’s Toyota Motor Corp., which overtook it as the world’s largest automaker last year, ending GM’s 77-year reign.

The new agreement with the United Auto Workers union, ratified by U.S. employees Friday with 74 percent voting in favor, may save the automaker $1.3 billion annually and includes plans to retool an idled plant to build small cars in the U.S. GM didn’t identify the plant, which will be capable of building 160,000 cars annually, or say when it would begin production. Without the labor pact, the plant would have closed.

The new GM will take some liabilities with it such as an auto supplier financing program and warranty obligations. Detroit-based GM had global liabilities of $176.4 billion as of Dec. 31, 2008.

Biggest losers

The UAW union represents the “big winners” in the bankruptcy, while U.S. taxpayers are the biggest losers, said Edward Altman, a professor at New York University’s Stern School of Business.

“The bill is now up to $50 billion or more,” Altman said Friday on Bloomberg Television. “The government will now have stock in the company, more than 72 percent. It is a big uncertainty if the company will do well.”

The company needs to overhaul its board and management after the firing of Chief Executive Officer Rick Wagoner, Jerome York, a former director for the automaker, told Bloomberg Television in a subsequent interview.

When you analyze the capabilities and skill sets of the various directors who have sat on the board, there was no automotive experience,” York said. “There was to my knowledge not one director with substantial expertise in labor relations.”

Chrysler is the template for the maneuvers and bickering GM is likely to go through. Out of court, Obama’s team successfully pressured secured creditors to accept Chrysler’s plan for a streamlined, best-assets company run by Italy’s Fiat SpA.

Chrysler dissidents

In court, a bankruptcy judge last week was dealing with Chrysler dissidents such as Indiana pension funds. They argued the company and the Obama administration were taking their property unconstitutionally, ignoring bankruptcy priority rules and violating the TARP law by giving money to automakers, which aren’t the financial institutions the law was designed to help.

The law firm that represented dissident Chrysler lenders is now is seeking to advise some GM dissidents. Thomas Lauria, a lawyer with the New York-based White & Case firm said GM’s plan to reward the union trust goes far beyond the priority the bankruptcy code mandates of $10,000 per employee.