General Motors' bankruptcy filing Monday was sold by the company and the U.S. government as a positive: an opportunity for the automaker's expedited rebirth as a smaller, leaner, more consumer-focused corporation.
In reality, it's a risky play for the economy. If all goes according to plan, the impact should be confined mostly to the auto industry. If it comes apart, the fallout could drag the economy into a deeper recession.
GM became the fourth-largest company to file for bankruptcy protection in U.S. history, following by just 32 days Chrysler's bankruptcy filing. The filing came on a day when Chrysler's bankruptcy judge cleared the way for that company's sale to Italian automaker Fiat.
That was evidence, President Obama said, that it's possible for a carmaker to go through a quick bankruptcy procedure to clean up its balance sheet and emerge with its customer base intact.
Obama acknowledges GM's reorganization will take longer, because it's a much larger company with global operations. The U.S. government, which had lent GM $20 billion before its filing, will put up an additional $30.1 billion to finance the company's emergence from court protection. The initial investment is likely lost for good, but the government hopes to recoup the $30 billion in about five years.
The full impact of GM's bankruptcy filing on the economy's recovery from recession is unclear, but tough times are about to get tougher for the American auto industry — already hammered by collapsing sales — and many communities that depend on it.
As Obama put it Monday: "I will not pretend the hard times are over. Difficult days lie ahead. More jobs will be lost. More plants will close. More dealerships will shut their doors, and so will many parts suppliers."
But the industry contraction taking place clears the way for a stronger manufacturing base in the United States, Obama said. It's a sacrifice made today "so that your children and all of our children can grow up in an America that still makes things, that still builds cars, that still strives for a better future."
GM CEO Fritz Henderson said the bankruptcy filing is a once-in-a-lifetime chance to clean the company's woeful balance sheet and start fresh. The company will not fail again, he promised.
"The GM that many of you know — the GM that let many of you down — is history," he said during a news conference. "The new GM will be rededicated to our customers."
Working through the bankruptcy process quickly will be the key to getting consumers back on board, GM Chairman Kent Kresa says.
"We have to get through this turbulent period as rapidly as we can so people understand where they stand," he says. "If people don't know if they have a job, they certainly can't buy a car. That's a tough situation."
GM said it is hoping to get through the bankruptcy process in 60 to 90 days. It will operate as scheduled, with summer shutdowns at many plants, until it emerges from bankruptcy. The government is pushing for a new GM — a company with the old GM's best assets — to emerge by July 10, according to a Monday court filing. The unwanted assets will stay with the old company in bankruptcy court and be sold.
On Monday evening, U.S. Judge Robert Gerber gave GM immediate access to $15 billion of the government money and set a hearing on the proposed sale of assets in just 30 days. He'll rule on final approval for the rest of the money on June 25.
"We're going to move as quickly as we possibly can so we can start moving up the hill, instead of always moving down the hill," Kresa says.
But consumers may have already lost faith: GM's market share is hovering around 19% for the year, down from nearly 22% a year ago. The automaker has lost customers such as Las Vegas resident Cherie Cashio. She says she grew up driving GM vehicles, cars she thought were made by a "proud leader."
But now, "I can't say that any longer," Cashio says. Her family owns imports and a Dodge truck, and she doesn't expect to return to the GM fold. She expects GM to get complacent again, "when all the dust settles and the infusion of money clears."
And communities such as Spring Hill, Tenn., are hurting. Spring Hill was once a gem of GM's plants, home to the Saturn brand. Now it's on standby, waiting to see whether it will be chosen to make GM's new small car.
"Probably one of the worst things about it has been watching all the stress on workers' faces and their families' faces," says Darwin Bible of Darwin's Barber Shop near the plant. "There's been a lot of stress and fear."
The news can't make consumers feel better about buying a car. An additional 20,000 employees will lose their jobs. About 1,100 dealers have already been told they'll close; 1,000 more will be added to that list. And 14 plants will close by the end of 2010 — seven in Michigan, three in Ohio, and the rest in New York, Tennessee, Delaware and Indiana.
Additionally, companies across the USA are owed big bucks by GM, according to its filing: It owes $121 million to an ad company in Chicago, $17 million to Hewlett-Packard in California and $11.9 million to a Boston bank, to name a few. Most eventually will be paid, but there could be delays or renegotiation.
"It's certainly a stress test for the economy," says Dan Seiver, a finance professor at San Diego State University. The greatest impact will be felt in the already hard-hit Midwest, he says, but ripples will hit the entire nation.
Impact on suppliers
The most immediate economic fear is for GM's suppliers, which have been slammed with declining production schedules by all automakers in the past few months. When production slows, so does cash flow, and many smaller firms that make up to 70% of the parts that go into vehicles are filing for bankruptcy or simply closing.
Last week, Visteon and Metaldyne filed for court protection. Hayes Lemmerz International and Noble International filed earlier this year, and more are expected in the coming days.
"It's going to be a very ugly summer here, and we haven't even seen the first inkling of that yet," says Pat O'Keefe, managing director of Michigan turnaround firm O'Keefe & Associates. "These suppliers have been slugging it out for some time," and have no cushion left to make it through the downturn.
Failing suppliers could cause problems for other automakers, which so far have skirted the issues plaguing GM and Chrysler. Most suppliers make parts for multiple automakers, and the parts they manufacture are designed specifically for one type of vehicle.
If the company that makes door handles for GM closes, even temporarily, it could shut production lines at other automakers.
"It's going to affect the Toyotas, Hondas and Fords of the world, because they're going to have more unplanned downtime because of supplier shutdowns," says Laura Marcero, a restructuring specialist at Grant Thornton.
With GM and Chrysler both moving quickly to trim dealerships, states such as California, Florida and Texas may be in for some trouble. Those are the top three states for auto sales, according to the National Automobile Dealers Association. Car sales account for $190 billion in retail sales in the three states.
California already faces a severe recession, by some measures deeper than the national recession. The state is cutting back on services, cutting state workers' pay by 5%, reducing financial aid to students, slashing prison health care and threatening to shutter state parks.
Closing dealers' businesses could make things worse.
"It means Gov. Schwarzenegger has to make even more cuts," says Martin Weiss, president of Weiss Research and author of The Ultimate Depression Survival Guide.
The filing could have a broader impact on the economy. Weiss says he sees mortgage rates going up shortly, because every time the Treasury steps in to rescue another company, it damages the government's credibility in the bond market. Mortgage rates are tied to the government's long-term debt, and when investors begin demanding higher payouts on government debt, mortgage rates go up. Rates on 30-year loans rose last week and could keep going up, he says.
"It's one more poison pill the Treasury has to swallow, among many others, and it could be the straw that breaks the camel's back," says Weiss. "It could precipitate a sharper decline in the price of bonds and a deeper rise in interest rates than you would've seen otherwise."
Additionally, the way the government has gotten involved in GM and Chrysler could have a chilling effect on investments, says Peter Kaufman, president of Gordian Group's restructuring practice. The government helped negotiate a deal that got union workers a 17.5% stake in the restructured GM and bondholders a 10% stake in the company; that runs counter to bankruptcy laws, which would have treated both parties equally.
Bankruptcy laws make investments in U.S. companies seem relatively safe, Kaufman says. "Now, if you're going to be a lender here, you can no longer be certain of anything," he says.
Thomas Donohue, president of the U.S. Chamber of Commerce, says he's concerned the government's involvement could "put politics and special interests above sound business strategy and disrupt our nation's trading relationships across the world."
A quick exit?
GM and the Obama administration stressed that the bankruptcy process needs to move swiftly.
But opposition from the 46% of bondholders who didn't sign on to GM's debt deal could prolong the process, Kaufman says. Chrysler also had a deal with bondholders, but all but 30% signed on before it filed.
"Faster is always better than slower, but it's unclear how fast this is going to be able to go," Kaufman says.
Others say GM should take the time to work through bankruptcy carefully and emerge only when all of its issues are settled and the car market is showing signs of rebirth. If GM comes out of bankruptcy when buyers are still skittish, the whole process could be a failure, says Jim McTevia, principal of restructuring firm McTevia & Associates.
"They should sit there until it's safe for them to come out, so they don't come out bleeding again," McTevia says.
There are some who remain optimistic, saying GM's bankruptcy filing will put the company back on the path to success. Ray Young, the company's CFO, was smiling and upbeat.
"I feel really, really invigorated right now," he told reporters.
Once GM is smaller, and unburdened by its debt level, high labor costs and excessive number of dealers, the company has "a really good shot at a profitable industry on the other side of all of this," Marcero says. "It's just going to be a pretty difficult transition period to get through."
Contributing: Jayne O'Donnell in McLean, Va., Chris Woodyard in Los Angeles, Kevin McCoy in New York and Gannett
At work:General Motors autoworkers assemble Chevrolet Malibus and Saturn Auras at the GM Fairfax Assembly Plant in Kansas City. GM's problems have shut down plants and cost thousands of jobs.