U.S. wrestles with new role as owner
By: Eamon Javers
May 31, 2009 09:59 PM EST
Even as it gets set to announce the bankruptcy of General Motors Monday, the Obama administration is struggling to set parameters on how it will act after taking a 60 percent stake in the new company that emerges – and now that it has become the owner of a significant swath of Corporate America.
With the GM deal, the federal government adds the iconic car company to the businesses it owns all or part of, along with AIG, Freddie Mac, Fannie Mae, and other companies.
As part of a deal that the president will announce Monday morning, the government will inject $30.1 billion in new financing for the company and gain control of a number of slots on the board of directors.
In a conference call with reporters on Sunday evening, several senior administration officials said they expect the company to go through a 60-90 day bankruptcy that will let company shed about half of its crushing liabilities, and eventually restructure itself to a point at which it can reduce the number of cars it must sell in a year to break even from the current 16 million down to 10 million. Through April, the company was on pace to sell 9.5 million cars this year.
GM will also have to let thousands of workers go and close a score of plants across the country in an effort to get to profitability.
That puts the government in an awkward position – the Obama Administration wants to show that it is only in the car business temporarily, but that it can also be a good steward of taxpayer money – which could entail holding onto the government’s shares for a long period of time until the price rises enough to make a profit.
A senior administration official, who stressed that "we did not seek or solicit or desire this equity position," said that in all cases, the government will: Seek to sell its shares as soon as possible; to ensure a strong board of directors; to get the companies profitable quickly. And although the feds reserves a right to set conditions in advance, they intend to operate in a “hands-off and commercial manner.”
“The government will not interfere with or exert control of day to day company operations,” the official said, comparing the federal government to passive corporate investors in a company.
As a shareholder, government officials promise to tread lightly, too, voting its shares only on core “core governance issues,” which they said include the selection of a board of directors, major corporate events or transactions.
That might be easier said than done, though.
The government officials were immediately peppered with questions from reporters about a host of areas where they may feel extremely tempted to intervene – will the government allow GM cars to be made in China? Will the government impose any management changes? Will the government decide how much GM’s executives can be paid?
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In each case, federal officials said the decisions would be up to the company and its existing agreements with the United Auto Workers. Members of the new GM board of directors will be chosen without regard to politics, they said.
And although a senior administration official said this is to be the last taxpayer bailout of the struggling automaker – “there’s no plan of any kind, no contingency plan, anything of any kind to extend future support,” the official said – the officials made it clear at the same time that the White House’s auto task force will remain in place for the foreseeable future.
Asked how long that might be, a senior administration official said, “there’s a large number of people around the table who are looking with interest to hear how I answer this question.” But for now nothing will change. “The task force will continue to be very active.”
The General Motors investment will be a test of the federal government’s ability to restrain itself from meddling in the company’s day-to-day business on a range of issues from fuel-efficient cars to labor negotiations to overseas operations. The principles announced Sunday night are self-imposed and non binding, and as a 60 percent owner of the company, the government certainly has every right to tell the company what to do.
One senior government official framed those principles as part of a “much broader effort to articulate principles for the U.S. government’s investment in a series of other companies. This is more about how we can expect the government to act as a common shareholder in this and other cases.”
Another official, defending the government's decision to take a majority ownership stake in the world's second largest company by sales, said, "We had a a choice as guardians of taxpayer dollars to either take this equity that we could receive on behalf of U.S. taxpayers, or we could have simply left it behind and give it to others, and taxpayers would've been left far behind in the final outcome."
The specifics of the deal described to reporters are as follows:
• A corporate restructuring so that the company can break even selling just 10 million cars per year. Previously, the company needed to sell 16 million.
• Concessions from the UAW.
• Bondholders representing at least 54 percent of GM’s unsecured bonds have agreed to exchange their portion of the Company’s $27 billion unsecured debt for their pro-rata share of 10 percent of the equity of new GM, plus warrants for an additional 15 percent of the new Company.
• Plant closures including shuttering 11 facilities and idling another three.
• $30.1 billion of financing, which along with the money the government has already invested will give the feds $8.8 billion in debt and preferred stock in the new GM and approximately 60 percent of the equity of the new GM. The Treasury will also have the right to appoint several initial members of the board.
• The governments of Canada and Ontario will loan $9.5 billion, receiving approximately $1.7 billion in debt and preferred stock, and approximately 12 percent of the equity of the new GM.
• The new GM will honor existing consumer warranties.
All this comes even though auto industry experts said as recently as a few months ago that bankruptcy for a major car company would mean disaster, since people wouldn’t buy cars from a bankrupt automaker.
In December, UAW president Ron Gettelfinger said bankruptcy would make it nearly impossible to continue in business. “There’s no question in my mind that people would not buy their vehicles,” he told the New York Times at the time.
But there is no such talk this week, as GM gears up for what the officials call an expedited bankruptcy. Rather, officials on the call seemed confident that the new GM would emerge from the bankruptcy quickly, with several offering a timeframe of just 60 to 90 days.
“Today will rank as another historic day for the company—the end of an old General Motors, and the beginning of a new one,” said the government’s briefing document.
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