General Motors on the road to bankruptcy

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The Independent Online

General Motors, the largest US car manufacturer, appeared on the road to a bankruptcy filing yesterday, as new details emerged of the Obama administration's plan to restructure the company.

Shares in GM plunged by more than 16 per cent in New York on reports that executives are preparing a "surgical bankruptcy" procedure that could split the company into two parts. Out-of-date factories, unwanted brands such as Hummer and Saturn, and tens of billions of dollars in liabilities for pensioners and to bondholders would be loaded into a "bad GM" that would be liquidated over many years. Meanwhile, the government would pump up to $7bn (£4.7bn) into a "new GM" that would be purchased from bankruptcy.

GM's chief executive, Fritz Henderson, who replaced Rick Wagoner last month, is still hoping to gain the concessions from unions and bondholders needed to avoid bankruptcy, but players inside the Obama administration increasingly believe that a bankruptcy filing will be the most efficient means of achieving a restructuring.

The Treasury department has hired Boston Consulting, the management consulting firm, to advise it.

Sources say that GM is making "intense and earnest" preparations for a filing. The notion of a "quick-rinse" bankruptcy that could be completed within weeks was first raised at the end of March, when the government rejected GM's own turnaround plan. The company has been operating since last December only thanks to emergency loans from the US taxpayer. The government has pumped more than $13.4bn into GM, fearing that its collapse could lead to hundreds of thousands or millions of job losses.

The currently favoured plan resembles the bankruptcy of Lehman Brothers, the investment bank, last September. Barclays cherry-picked the best of its trading businesses in an acquisition two days after the filing, while the rump is being wound down or sold off. The rump of GM, with unfunded pension and healthcare obligations to its retired workers, could take $70bn of government financing to fully liquidate, although taxpayers can expect to see much of that recouped, perhaps through the sale of stock in "new GM".

Bondholders who have lent some $29bn to GM have been holding out against government calls for them to convert the majority of their investment into equity, in the hope of limiting the haircut they must take. It is understood that they have lodged objections to the plan to break the company into two, and are considering opposing the Obama plan in court.

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