U.S. Urges GM to Consider Bankruptcy
Government Plan to Split Ailing Brands From Stronger Ones Is an Option, Firm Says
Thursday, April 2, 2009; Page A14
The Obama administration's auto task force has pressed General Motors to consider a form of bankruptcy that would split the company in two, with one entity containing the unprofitable units and the other in essence becoming the new GM consisting of the company's more successful brands, people familiar with the matter say.
The company prefers not to ever enter bankruptcy because the mere word would stir fear among consumers and further damage sales. But GM will be forced to do so if it fails to win concessions from its bondholders, union and dealers within 60 days. Then bankruptcy court would compel GM stakeholders to make sacrifices, rehabilitating the company by clearing away billions of dollars of debts from its balance sheet.
"They're all options. They're all being studied," Kent Kresa, GM's new chairman, said in an interview. "The preferred [option] is to do it outside of bankruptcy."
Kresa said he is going to meet with the Obama administration next week in Washington as part of the government's ongoing oversight of the company.
A possible bankruptcy filing is not GM's only preoccupation.
Kresa said Steve Rattner, chief of the president's auto task force, has directed the board to overhaul itself, and Kresa has proposed naming a new majority slate by August.
"In my discussions with Steve [Rattner] to date, he made it clear that it's a responsibility of the board to reconstitute and reenergize itself," Kresa said. The government is "a major owner -- a debt holder -- and as such they are someone that needs to be listened to, and I certainly intend to."
While a debate has erupted in Congress over how far the government should intervene in a company's operations, Kresa deemed the present situation appropriate.
"They should operate very much the way a major owner should -- demanding that certain things happen," he said. "I don't see them micromanaging the business -- and I don't think they want to."
Kresa was selected last week by the president's auto task force to lead the company board. A former chairman of Northrop Grumman, Kresa had been a GM director since 2003.
It is unknown which of the 12 board members might leave, but Kresa said John H. Bryan, a former chairman of Sara Lee, has been planning to step down. Bloomberg reported yesterday that Erskine Bowles also offered his resignation. Bowles is president of the University of North Carolina and served as President Clinton's chief of staff.
Meanwhile, a team at GM is studying the best means of having the quickest and least disruptive form of bankruptcy, and one of the options is a process under which the company would be split up.
Under such a scenario, the most desirable parts of GM, such as Cadillac and Chevrolet, would be sold to become part of a new company. Other brands that have struggled would remain in the old firm. Exactly how much the various stakeholders would be paid under this scenario is still being determined, and aspects of the proposal are in flux, people familiar with the matter said.
GM is counting on the government's backing -- and taxpayer financing -- to help speed its path through a bankruptcy process that would allow the company to continue to build and sell cars while it restructures operations and sheds debt.
The company also considered a form of reorganization known as a prepackaged bankruptcy in which GM would secure agreements with all its creditors before filing for protection. But people at GM and the Treasury Department said that approach could be more time-consuming and difficult to pull off.
All parties, though, are venturing into uncharted territory. There are few precedents for a bankruptcy involving a manufacturer as sprawling as GM.
"This is very atypical," said Steve Jakubowski, a Chicago bankruptcy attorney and the founder of a bankruptcy blog. "But you have some high-powered bankruptcy lawyers here who are crafting some ideas that they hope are going to fly."