GM/SHARES (UPDATE 1):UPDATE 1-GM shares slump as bankruptcy fear grows
General Motors gm shares fell 16.2% Monday as fears it will file for bankruptcy protection grew.
The government gave the automaker until June 1 to negotiate concessions from its bondholders and union to qualify for more federal bailout loans. Otherwise, it could be pushed into a bankruptcy filing.
GM and Chrysler are operating on a combined $17.4 billion in government loans, and the two automakers have asked for $21.6 billion more. President Obama said two weeks ago that he doesn't believe either automaker can be viable unless they make significant changes fast. His auto task force gave Chrysler only until May 1 to complete its proposed combination with Fiat.
David Cole, chairman of the Center for Automotive Research, says GM needs that June 1 deadline to force everyone to make hard decisions.
"They need aggressive bankruptcy talk," he says. "It's a cage match between the bondholders and GM, and the government is the referee. … It's like they're saying, 'If there isn't a deal, the referee is stepping out and letting in some lions.' "
GM's shares closed at $1.71 Monday, down 33 cents and nearing its 52-week low of $1.66.
Himanshu Patel, an analyst for JPMorgan, says two "subtle but critical items" have changed in the past two weeks that increase GM's bankruptcy odds. First, GM's new CEO Fritz Henderson has said he's willing to take GM into bankruptcy court if that's needed. Former CEO Rick Wagoner had long resisted the idea, fearing sales would immediately dry up.
Second, Patel says the government task force that is overseeing the loans to the automakers and deciding on more "may have come to a sobering realization" that GM has too much debt to pay back, even if sales rebound to an industrywide level of 15 million cars and trucks per year. So far in 2009, sales have been running at a pace that would fall below 10 million vehicles this year.
"If the government has now truly realized that it will eventually have to 'restructure' its own loans to GM, a bankruptcy may be much more politically necessary," Patel says.
Taxpayers would be more accepting if the government was forced by a judge to forgive some loans than if the government itself decided to do that, he says.
If GM files for bankruptcy, it will likely split the company into two parts: the "bad" GM and the "good" GM.
The bad company could include pensions, underperforming brands and plants, and much of its debt. The good company would move on with the healthier brands and plants.