Monday, April 27, 2009

U.S. Could Be Majority Stakeholder in Automaker Bailout

Sources: Wall Street Journal, U.S. Would Hold Majority Stake Under New GM Plan; Financial Times, US to take Majority GM Stake

A new plan to save major U.S. automaker General Motors (“GM”) involves plant closures, job losses, and an aggressive debt-for-equity swap making the U.S. government the majority stakeholder. GM is working to meet a June 1 deadline to produce a viable turnaround plan to get government assistance—or face bankruptcy.

So far, GM has received $15.4 billion in emergency assistance from the U.S. government, and it is seeking $11.6 billion more with the plan. The plan would require the government to hand over half of its debt for equity in GM—in effect, forgiving half of GM’s debt to the government in exchange for a large stake in the company. GM officials have left open the possibility for government representation on the Board of Directors—though the Treasury has not shown any interest in actually running the company, but is more concerned with getting the company to run smoothly for its shareholders and other constituencies. GM’s clear preference is to stay out of bankruptcy—but company officials said that if the debt-for-equity plan fails, it will be forced to seek protection under U.S. bankruptcy laws.

Current GM bondholders have until May 26 to vote on the plan—but some bondholders said there is little incentive to accept the plan because it strongly favors the government and unions, and suggested that it might be more favorable to seek a solution in bankruptcy proceedings. Sources close to a committee representing GM bondholders said that they are close to proposing a counter-offer in the next ten days. They said the payoff to bondholders that GM is offering is less than what GM offered other parties, including unions and taxpayers—and is less attractive than the last plan GM offered bondholders.

If the plan succeeds, GM will cut 13 of 47 plants and 7,000 more jobs by the end of 2010. GM will also close the 83-year-old Pontiac brand and cut its dealership network from 6,200 to 3,600 by the end of 2010.

Questions for Discussion:

What does this mean for other U.S. automakers (like Chrysler) and other major industries in the U.S.? What does this mean for taxpayers? Is the debt-for-equity swap the right approach?

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