GM Files for Chapter 11 Bankruptcy

General Motors, the world's second largest automaker, filed for bankruptcy protection yesterday.  The company took $19 billion in U.S. government-backed loans in a last-ditch effort to remain solvent, but a drastically weakened market has hampered efforts.

For the first five months of 2009, GM'S domestic sales have been cut almost in half.

GM's bankrupcy filing is the fourth largest in history, and is expected to last at least through the summer.  With $172 billion in debt, and $82 billion in assets, the company's filing is even larger than the Enron collapse.  Only the bankruptcies of Lehman, Drexel Burnham Lambert, and WorldCom were larger.

Decades of mismanagement have seen revenues steadily decline, and an American public grow weary about the automaker's vehicles.  High labor costs, and increased supply with wavering demand, have led to the automaker's current state.  What sets this case apart is the government's wish to see GM emerge as a healthier, stronger company.  The federal government will assist General Motors in the sale of its assets to a new, streamlined GM.  Those assets seen as being more toxic to the health of the company will be liquidated.

When a new GM emerges, the U.S. Treasury will be the majority owner, holding 60% of the company.  While some have leapt to call this a plunge into socialism, the administration has made it clear that the government will be looking for a way to divest out of GM in a way that is potentially profitable for the American taxpayer.

The Canadian government will receive a 12% stake in the firm, and the right to choose a new board member.  The health care trust of the United Auto Workers union will take 17.5%, while current GM bondholders will recieve 10%.  Those holding GM common stock will likely see the value of their shares reduced from $0.75 to nothing.

An experienced justice has been tapped to preside over the case.  Judge Robert Gerber previously presided over the Adelphia Communications Corporation and Global Crossing telecom bankruptcies.

In the interim, the U.S. Treasury will lend an additional $30 billion to General Motors so the company can continue operations during the Chapter 11 bankruptcy proceedings.  The White House is making a clear statement that no additional cash will be made available to the automaker.

A top aid in the Obama administration said, "This is it for support for GM, and on a go-forward basis, GM’s position will be the same as that of any other company in the United States,” according to the Detroit Free Press.

GM could emerge from bankruptcy within three months.  Over the next year, hourly workers will be cut from 54,000 to 40,000 in the U.S.  3,400 management positions will also be axed.  Additionally, the company will shutter nearly 42% of its U.S. dealerships, while closing 14 domestic factories.

Pension plans for both hourly and salaried workers will remain intact.