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GM falls into bankruptcy – US government steps in

Auto giant succumbs to 'worst of all options' amid Republican talk of 'socialism'

General motors, the humbled car manufacturer that was once synonymous with America's manufacturing might, will announce today that it is filing for bankruptcy as part of a radical restructuring that will see majority ownership in the company pass to the US government.

Officials said that CEO Fritz Henderson will hold a news conference on the company's future in New York this morning. There was little doubt last night that he will confirm GM will seek bankruptcy protection, a step that would have seemed unthinkable until recently. President Barack Obama will make a statement of his own on GM's fate from the White House, sources said.

The last obstacle to the filing was cleared at the weekend after a slim majority of the company's bondholders agreed to a revised offer whereby debt will be traded for equity. Days earlier a similar deal had been struck with the United Auto Workers union. Bondholders will collectively hold 10 per cent of the company and the UAW 17.5 per cent, which could grow to 20 per cent.

This morning's announcement will mark the largest manufacturing bankruptcy in American history. Both the company itself – which had previously insisted that filing for bankruptcy would be the worst of all options – and officials in the Obama administration will now be hoping that GM will emerge from the process as quickly as possible, perhaps within two months.

Already there are some critics suggesting that henceforth GM should stand for Government Motors. There are Republicans on Capitol Hill ready to lambast the White House for a solution that will cost taxpayers money they are unlikely ever to get back. So far the federal government has given $20bn to the company. By the time the restructuring is over, the bill may rise to $50bn.

"This is a sad day," Senator Richard Shelby, a senior Republican, said of the deal. "This was a great company ... But they're where they are ... they were mismanaged for a long time. Look at the wealth they've lost, the prestige they've lost. It's just not a good day." He said by agreeing to take a stake that might top 72 per cent in a new GM, the government was on "the road to socialism".

But in a television interview, President Barack Obama defended the arrangement. "My preference would have been to stay out of it completely," he said. "But the alternative was to potentially see a liquidation bankruptcy in which an enormous institution with a huge impact on our economy, particularly in Midwestern states, simply gets broken up into pieces, and in the current deep recession that we're in, [that] could have had horrendous effects in terms of the overall economy."

General Motors has been scrambling for a solution since the end of March when the Obama administration gave it just 60 days to finalise its restructuring plans. One of the most important steps came last week when it completed negotiations to end its majority stakeholding in Opel and Vauxhall in Europe, protecting them and their employees from sharing the trauma of bankruptcy.

Details are expected this morning of further plant closures in the US. The company is a shadow of its former self, with an American workforce of 88,000 compared to 618,000 three decades ago when it dominated the market with brands like Chevrolet and Pontiac.

Not that GM is alone in its distress. Chrysler, which has suffered similar contractions, is in bankruptcy already and is expected to learn from a judge this morning whether its proposed marriage with Fiat of Italy meets with approval. If so, the company may emerge from protection within a matter of days.

No one can say whether the medicine of restructuring will be sufficient to save GM but some experts are optimistic. "They have an opportunity now," Arthur Wheaton, the director of labour studies at Cornell University, suggested. "This is a good chance for them."

However, few expect the market for new cars to pick up quickly even if the recession eases this year, as competition from low-cost foreign rivals will continue to be fierce.

GM should emerge from bankruptcy a more competitive and leaner player, however, not least because of its deal with UAW, under which the union agreed to a wage freeze and a no-strike promise that will run until 2015.