GM Could Be Split In Bankruptcy

Administration's scenario could see GM split in two, with a workable component emerging within 30 days and remaining half left in bankruptcy court to be liquidated.

WASHINGTON (AP) -- President Barack Obama's assertion that he will not let U.S. automakers vanish is a double-edged sword.

It offers assurances and hope to a beleaguered industry and its customers. But it also lessens the leverage Obama desperately needs to win concessions from bondholders and labor.

Washington and Detroit increasingly seem resigned to the likelihood of some kind of bankruptcy for General Motors Corp. -- and perhaps for Chrysler LLC. So getting the parties to give ground is the biggest stumbling block.

The president portrays bankruptcy, designed to make a company leaner but viable, as a way for the automakers to "quickly clear away old debts." If restructuring ends up in court, the administration envisions a scenario where GM could be split into two parts, with a workable component emerging within 30 days. The second part would be left in bankruptcy court, ostensibly to be liquidated.

Speed is hardly guaranteed.

A GM bankruptcy would be one of the most complicated court-overseen restructuring ever. With operations around the globe, GM has more than $170 billion in liabilities and assets of $110 billion.

The government has invested in GM and Chrysler in hopes of saving them -- $13.4 billion for GM, $4 billion for Chrysler. What's more, Obama emphasized this week that he did not endorse a path "where a company is simply broken up, sold off and no longer exists."

With that statement, the president removed one potential incentive for a deal with bondholders and the United Auto Workers.

Peter S. Kaufman, president of the Gordian Group, which advises corporations on restructuring, said that without the threat of liquidation or the ability to force a restructuring over the objections of the bondholders, a company such as GM might have more difficulty securing agreement.

"Now you have everybody around the table saying, 'Why should I give my best deal?' -- government has been funding, and government admits we won't allow a liquidation," Kaufman said. "That's not a great dynamic to getting a deal done."

The talk of bankruptcy came as U.S. auto sales plummeted again in March compared with a year ago. But improvement over February sales gave rise to some optimism the market may have reached the bottom.

GM has softened its position on bankruptcy. Former chief executive Rick Wagoner said last month that a 30- or 60-day prepackaged bankruptcy could lead to a long proceeding and liquidation of the company.

But his successor, Fritz Henderson, told reporters Tuesday that some form of bankruptcy was "certainly more probable" and if GM were unable to restructure by June 1, it would be forced into bankruptcy. "It's pretty clear. The government was unequivocal," Henderson said.

In a report to the administration on Monday, GM said it is "prepared and would consider in-court options. Such options would be enhanced by the administration's commitment to back GM customer warranties and to provide support for a rapid emergence from any in-court process."

Obama did offer such warranty-backing. It was a unique new role for the government, expanding from guaranteeing high-finance investments to auto parts.

But the administration made clear it was dissatisfied with the progress that GM and Chrysler had made toward an out-of-court restructuring. Unions will have to make more concessions, Obama said, and creditors must come to realize "that they can't hold out for the prospect of endless government bailouts."

Treasury Secretary Timothy Geithner said Wednesday it will require plenty of restructuring. "They made a fair amount of progress, but they're not there yet," Geithner said in an interview with NBC from London, where he is attending an international economic summit with Obama.

For a bankruptcy to move quickly through the court, the government and the auto companies would have to negotiate the terms of bankruptcy now, not on June 1 when the current deadline for GM to submit a new plan expires.

Common ground among labor, bondholders and others with a stake in GM has not been easy to achieve.

"The same obstacles that may prevent them from coming up with an acceptable plan, which is to bring along the UAW and bondholders, may be exactly the same obstacles that would make a quick or prepackaged bankruptcy impossible," said Marina Whitman, a business professor at the University of Michigan and a former executive and economist at GM.

Sen. Carl Levin, a Michigan Democrat who has been involved in negotiations to save his state's main industry, said he would have preferred that Obama's discussions with the automakers over bankruptcy had been far less public.

Asked what the administration should tell bondholders, Levin said: "Privately tell them their alternative is they are either going to get a haircut or take a bath."

Another question mark is how the company's dealership network would respond to bankruptcy. Auto dealerships are protected by state franchise laws if automakers break contracts, making it expensive to shutter them. When GM closed its Oldsmobile line of cars in 2004, it cost the company more than $1 billion to buy out the dealers.

The plan GM submitted to the administration called for reducing its dealership network from 6,246 in 2008 to 4,100 in 2014. The Obama administration, however, concluded that GM's pace for eliminating unprofitable or underperforming dealers was too slow and too expensive.

Associated Press writer Ken Thomas contributed to this report.

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