Plan to save automaker has risks for economy

ByABC News
June 1, 2009, 11:36 PM

DETROIT -- 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.