General Motors holds a mirror up to America

By Robert Reich
Published: May 31 2009 21:03 | Financial Times

As president of General Motors when Eisenhower tapped him to become secretary of defence in 1953, “Engine Charlie” Wilson voiced at his Senate confirmation hearing what was then the conventional view. When asked whether he could make a decision in the interest of the US that was adverse to the interest of GM, he said he could.

Then he reassured them that such a conflict would never arise. “I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa. Our company is too big. It goes with the welfare of the country.”

Wilson was only slightly exaggerating. At the time, the fate of GM was inextricably linked to that of the nation. In 1953, GM was the world’s biggest manufacturer, the symbol of US economic might. It generated 3 per cent of US gross national product. GM’s expansion in the 1950s was credited with stalling a business slump. It was also America’s largest employer, paying its workers solidly middle-class wages with generous benefits.

Today, Wal-Mart is America’s largest employer, Toyota is the world’s largest carmaker and General Motors is expected to file for bankruptcy. And Wilson’s reassuring words in 1953 now have an ironic twist. There will be little difference between what is good for America and for GM because it is soon to be owned by US taxpayers who have forked out more than $60bn (€42bn, £37bn) to buy it.

But why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years. In the 1960s, consumer advocate Ralph Nader revealed its cars were unsafe. In the 1970s, Middle East oil producers showed its cars were uneconomic. In the 1980s, Japanese carmakers exposed them as unreliable and costly. Many younger Americans have never bought a GM car and would not think of doing so. Given this record, it seems doubtful that taxpayers will even be repaid our $60bn. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

It cannot be to preserve GM jobs, because the US Treasury has signalled GM must slim to get the cash. It plans to shut half-a-dozen factories and sack at least 20,000 more workers. It has already culled its dealership network.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganisation under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given carmakers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60bn to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Behind all of this is a growing public fear, of which GM’s demise is a small but telling part. Half a century ago, the prosperity of America’s middle class was one of democratic capitalism’s greatest triumphs. By the time Wilson left GM, almost half of all US families fell within the middle range of income. Most were headed not by professionals or executives but by skilled and semi-skilled factory workers. Jobs were steady and health benefits secure. Americans were becoming more equal economically.

But starting three decades ago, these trends have been turned upside down. Middle-class jobs that do not need a college degree are disappearing. Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.

Middle-class taxpayers worry they cannot afford to bail out companies like GM. Yet they worry they cannot afford to lose their jobs. Wilson’s edict, too, has been turned upside down: in many ways, what has been bad for GM has been bad for much of America.

GM to file for Chapter 11 protection

By Tom Braithwaite in Washington, Bernard Simon in Toronto, John Reed in London, Bertrand Benoit in Berlin and Julie MacIntosh in New York

Published: May 31 2009 23:29 Financial Times

General Motors will file for Chapter 11 protection on Monday in the biggest ever bankruptcy of an industrial company, tapping an additional $30bn in government financing and sparking a probable legal battle between the carmaker’s stakeholders.

President Barack Obama and Fritz Henderson, GM’s chief executive, will speak after the filing in New York, seeking to reassure workers, suppliers, dealers and car buyers that a reinvigorated GM can emerge from a court-supervised restructuring within 60-90 days.

GM will close 11 plants and idle three more as part of a “shared sacrifice” to rescue the failing company, US government officials said on Sunday evening. “Today will rank as another historic day for the company – the end of an old General Motors, and the beginning of a new one,” the White House said in a statement.

The carmaker employs 230,000 people globally, building more than 20,000 vehicles a day. More than 1m Americans depend on it for healthcare and retirement benefits.

The rapid restructuring of Chrysler, which is expected to exit bankruptcy within days, has increased hopes for a quick resolution of GM, but the 90-day timetable is still seen as ambitious given the potential for a serious legal challenge from disgruntled creditors.

On Saturday, Germany approved a last-minute deal to keep Opel, GM’s European arm that includes Vauxhall, afloat, agreeing €1.5bn (£1.3bn) of bridge financing while the US group negotiates a stake sale to Magna International, the Canadian auto group, and Sberbank, a Russian bank.

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Berlin also pledged to give Opel €4.5bn of credit guarantees once the sale is completed.

Berlin also pledged to give Magna €4.5bn of credit guarantees once the sale was completed.

Angela Merkel, German chancellor, discussed the agreement with Mr Obama before the announcement.

The bail-out of Opel has opened a deep rift in Germany’s government after Karl-Theodor zu Guttenberg, economics minister, said Berlin had yielded to “extortion” in keeping GM’s European operation afloat. On Saturday, he said: “I could not support the Magna concept and I always favoured an insolvency as a new beginning for Opel.”

The dispute has the potential to become explosive ahead of September’s election as it increases tensions between the free-marketeers in Ms Merkel’s camp and advocates of enhanced state intervention among her Social Democratic partners and others.

Lord Mandelson, the UK business secretary, on Sunday said he had received a “firm” commitment that Vauxhall production would continue in the UK, but added that he did not know whether any of the 5,500 jobs would be at risk.

GM on Saturday evening secured a debt-for-equity agreement from holders of 54 per cent of its $27bn (£16.7bn) bonds, boosting hopes of a speedy journey through court. Judges tend to look more favourably on plans that have broad approval from creditors. The government-brokered deal gives bondholders a 10 per cent equity stake in the restructured GM, with warrants for another 15 per cent.

The US and Canadian governments would initially own 72.5 per cent of the new GM, with the remaining 17.5 per cent held by a United Auto Workers union healthcare fund. The interests of existing shareholders would be wiped out.

However, that agreement is likely to draw strong objections from GM’s dealers and other creditors, who will argue that the plan is illegal, according to one person close to the matter.

Opponents to the plan are likely to argue that because the bondholders are not contributing anything to the “new” GM, they should not be awarded stock in the new company as part of a sale process.

A bankruptcy judge can rule that a company’s bankruptcy plan is illegal if it is actually just a reorganisation plan disguised as a sale process. In such cases, a judge may rule that certain creditors are being inappropriately awarded stakes in the new company.

Secured creditors will get a full recovery, in contrast to the situation at Chrysler where the government’s demand that banks and hedge funds took a severe haircut on the debt led to an acrimonious battle of words. An government official said the difference was the level of security, with GM’s senior creditors “amply secured”.

The US government will provide an additional $30.1bn in financing to get the company through bankruptcy and would take a 60 per cent stake and $8.8bn in debt and preferred stock in the new company.

“We intend for this to be a permanent resolution to the GM situation,” said a senior official from the Obama administration, adding that there should be no further taxpayer support.

Government officials stressed on Sunday night that they did not intend to interfere in the day-to-day operations of GM and would behave as an ordinary shareholder before selling the stake as soon as practical. “We did not seek or desire to have this equity position,” said one official.

The Canadian and Ontario governments — where some GM plants are located — will lend $9.5bn to the carmaker in exchange for $1.7bn in debt and preferred stock and 12 per cent of the equity.

GM will say that it aims to emerge from Chapter 11 shorn of much of its debt, four of its eight brands, and surplus plants and dealers. The new company would achieve break-even at 10m annual car sales compared with about 16m today.

A decline in car sales linked to the global economic downturn, together with several years of higher fuel prices and huge liabilities to workers’ healthcare and benefits had driven the company to the brink of failure before the intervention of the Bush administration last year and additional taxpayer support under the current Obama administration.

Al Koch, a managing director at AlixPartners, the restructuring specialist, will manage the process for GM, according to a person familiar with the matter.

GM is also likely to announce within the next day or two the long-awaited sale of Hummer, the large sport-utility vehicle that became an emblem of GM’s missteps.

Additional reporting by Nicole Bullock in New York