Taxpayers Could Lose Billions from General Motors Revamp

May 28, 2009— -- As the nation's largest automaker continues down the road towards a widely-expected pit stop in bankruptcy court, taxpayers could end up providing an additional $30 billion with no guarantee that General Motors will repay all of the money it has received.

That would be in addition to the nearly $20 billion the government had already pumped into the failing automaker .

"I don't know how much we're going to recover," a member of President Obama's administration told ABC News today.

The automaker faces a government-imposed deadline of Monday to either restructure or file for bankruptcy protection. Bankruptcy now seems the likely option, making GM the latest American icon to fall during this recession.

GM hopes for a quick restructuring that will eventually lead to a leaner, profitable company. But that move is likely to cost taxpayers billions of dollars.

General Motors today announced a new proposal offered to a number of bondholders as part of its ongoing restructuring process, but even that offer appears to be bringing the company into Chapter 11. The offer is contingent on GM filing for bankruptcy.

"Today's step is a positive step along the way to a successful restructuring," the administration official said this afternoon, steering clear of talk about bankruptcy, saying GM is a publicly-traded company and such a statement would have adverse impacts.

The proposal to the bond holders would swap out the more than $27 billion currently owed to them in return for 10 percent common equity in the newly restructured GM. In addition, the debt holders will have the right to purchase up to 15 percent in additional equity in the new company. Already, a group representing 20 percent of those debt holders have agreed to the terms.

Still, another group that represents average Americans who own GM debt today rejected the offer, saying the proposal is grossly unfair because it gives the UAW five times more dollar value per claim than the bondholders.

The Treasury has set a deadline of 5 p.m. Saturday for the bond holders to accept the plan. The administration official said it will review the number of bond holders who agree, how much they are owed and who they represent when deciding if enough have agreed to the proposal.

The official stressed that if the proposal was rejected by the bond holders "then they should expect to receive little or no recovery because the fact is that in bankruptcy or under bankruptcy rules the bondholders really have no argument for getting recovery."

The official did acknowledge that if the nation's largest automaker files for bankruptcy, it could take 60 to 90 days for the reorganized "New GM" to emerge. That compares to the expectation that "New Chrysler" will come out of bankruptcy within 30 to 60 days. The administration source said GM would take more time because it is three times the size of Chrysler, has more global operations and, overall, is vastly more complicated in every respect compared to Chrysler.

The "New GM," however, will not be a publicly traded company for at least 6 to 18 months, the official said. As outlined in GM's filing with the Securities and Exchange Commission, the U.S. government (along with the Canadian government) will own 72.5 percent of new company. The United Auto Workers' retiree health care plan (called the "VEBA") will own 17.5 percent and the old GM will retain 10 percent of the new company.

"We believe that this restructuring will truly create viability for GM," the official said.

The administration source said that GM's board would be reorganized with some new faces and some from the old board. The official emphasized, however, that President Obama and the government will not be calling the shots and that they hoped that the board will make decisions about management and operations like any other board.

The official said Obama will not be briefed on a regular basis on actions taken by the board.

The official said up to an additional $30 billion could potentially be provided to GM as it reorganizes during bankruptcy. The Canadian government is expected to provide up to $9 billion.

In return for taxpayer money, GM will owe the two governments a total of $8 billion and the Treasury Department expects to recoup taxpayer funds through the nearly 73-percent stake both governments will own in the new GM.

"One thing that we have said consistently is the money that was put into both Chrysler and GM under the original loan agreements on December 31, that was not put in with the context of any fundamental restructuring," said the official. "Therefore we never anticipated there being a significant recovery on that money that went into either of those two companies."

The official said the billions provided in the first three months of this year came during a "very awkward time in our political system," citing both the holidays, the political transition from President Bush to Obama and the inauguration. The official said that money for both Chrysler and GM "really unfortunately didn't accomplish anything."

"We hope to recover as many taxpayer dollars as we can," said the official. "If we end up with $50 billion invested in this company across both administrations, it would be wonderful to recover more than $50 billion."

The official was optimistic about GM and recovering taxpayer money.

"We feel very good about GM's prospects. We feel very good about recovering the money that was invested and will be invested as part of this fundamental restructuring. If we end up recovering the earlier money as well, then nobody will be happier than the auto team here at Treasury and the White House," they said.