General Motors Corp filed for bankruptcy today, forcing the 100-year-old car manufacturer, which was once seen as a symbol of American economic might and dynamism, into a new and uncertain era of government ownership.
The bankruptcy filing is the third-largest in US history and the largest ever in US manufacturing.
The decision to push GM into a fast-track bankruptcy and provide $30 billion of additional taxpayer funds to restructure the automaker is a huge gamble for the Obama administration.
But in a sign of progress in the government's high-stakes effort, a bankruptcy judge approved the sale of substantially all of US carmaker Chrysler's assets to a group led by Italy's Fiat in an opinion filed late yesterday.
Following the bankruptcy filing, GM shares were removed from the Dow Jones industrial average and delisted by the New York Stock Exchange as "no longer suitable for listing."
Chrysler's bankruptcy, also financed by the US Treasury, has been widely seen as a test run for the much bigger and more complex reorganization of GM.
US President Barack Obama said that concessions by labour and creditors achieved a viable and achievable plan for GM to complete its restructuring and have a chance to succeed.
"I am absolutely confident that if well-managed, a new GM will emerge that can ... out-compete automakers around the world and that can once again be an integral part of America's economic future," President Obama said.
The administration's ambitious plan for GM is for a quick sale process that would allow a much smaller company to emerge from court protection in as little as 60 to 90 days.
In bankruptcy, GM will divide in two: a leaner "New GM" and "Old GM" - which will include the parts of GM that will eventually be liquidated. GM said the split would be accomplished through what is called a Section 363 sale. The new GM assets would transfer to an entity owned by the US and Canadian governments, the UAW and GM's unsecured creditors.
GM said in court documents that the 363 sale has to be quick as the US Treasury has made clear it will finance New GM only if the sale transaction is approved by July 10.
"Now the hard part begins, which is making GM and Chrysler competitive. If they don't do that, then we'll be doing this all over again in a few years," said Christopher Richter, a car analyst at CLSA Asia-Pacific Markets in Tokyo.
"The immediate implication is that the companies are going to get smaller and so market share is up for grabs, which means that rivals like Toyota, Honda, Nissan and Hyundai are going to gain share."
Indeed, one of GM's major challenges will be to create a streamlined offering of vehicles that are affordable, stylish and fuel-efficient.
"People forget that very high oil prices were one of the triggers for this recession," Daniel Yergin, chairman of Cambridge Energy Research Associates, said at the Reuters Global Energy Summit on Monday. "General Motors was thrown on its back by what happened at the gasoline pump."
Since the start of the year, GM has been kept alive by US government funding as a White House-appointed task force vetted plans for a sweeping reorganisation that will be undertaken with $50 billion in federal financing.
By taking a 60 per cent stake in a reorganised GM, the Obama administration is gambling that the carmaker can compete with the likes of Toyota after its debt is cut by half and its labour costs are slashed under a new contract with the United Auto Workers union.
The federal government of Canada as well as the province of Ontario agreed to provide another $9.5 billion to GM in a late addition to the plans for the bankruptcy.
GM plans to close 11 US facilities and idle another three plants. It has not provided an updated target for job cuts but had been looking to cut 21,000 factory jobs from the 54,000 UAW workers it now employs in the United States.
The GM plant closings will affect 18,000 to 20,000 UAW workers in the United States.
Officials involved in the planning for GM said the White House was a "reluctant investor" in GM, but had to prevent a liquidation that analysts say would have cost tens of thousands of jobs at a time when the economy is mired in recession.
GM alone employs 92,000 in the United States and is indirectly responsible for 500,000 retirees.
Reuters