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GM, in Game of Chicken, Steps on Accelerator

GM yesterday announced the latest version of its restructuring plan, which the government has demanded by the end of May. The plan goes into considerable detail on the steps being taken to eliminate brands and reduce the overall cost structure in line with a projection of a U.S. market of only 10 million cars sold per year. However, the main issue facing GM in its efforts to avoid bankruptcy is its balance sheet, and so its announcement is more a negotiating gambit than a solution.

GM currently has $27 billion in unsecured debt, about $20 billion in obligations to the Voluntary Employee Benefit Association for health care benefits, and at least $15 billion in loans from the Treasury Department. The goal, according to today's plan, is to reduce that debt by $44 billion. The provision that has gotten the most attention is the conversion of at least half of the Treasury debt to equity, in exchange for a 50 percent stake in the company's common stock. In that negotiation, GM will be aided by Treasury's independent desire to see GM survive without the risk of bankruptcy. Dealing with the private bondholders will be another story.

As part of the restructuring plan, GM announced a bond exchange program under which bondholders would get common shares currently worth about 41 cents for each $1 in bonds they exchange. GM had been negotiating with some of the banks that own large amounts of its bonds; but in a conference call for bloggers yesterday afternoon, chief finance officer Ray Young said that this was no longer a negotiation. "The offer is on the table," he clarified. Bondholders are free to "express their opinions" about the offer. But ultimately, he said, they have to decide whether they want to take the 41 cents in common stock or risk a bankruptcy proceeding in which they might or might not get more in cash.

This, of course, is the latest round in an ongoing game of chicken between GM and Treasury on one side, and the bondholders on the other. While the debt-for-equity offer may in fact be better than what the bondholders might expect from a bankruptcy court, they are betting that at the last moment the government will swerve, because it does not want to take the risk of bankruptcy and everything that might mean for GM's workers and suppliers. So GM's only hope of getting 90 percent of bondholders to agree to the exchange is being able to threaten credibly that this is their last, best, and final offer. It's a little like selling a car.

As far as selling cars is concerned, Young said that GM is not projecting a return to 2006-07 sales levels until 2014. Given that cars break down, and that most working Americans need cars in order to get to work, this is a reasonably pessimistic forecast, and if GM can get its cost structure down to the 10 million-car level, it should stand a reasonable chance of surviving. The question is whether GM will get that chance.

--James Kwak

By James Kwak  |  April 28, 2009; 6:06 AM ET
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According to the GM CEO's testimony during the hearings, this story is inaccurate.

GM had $0 in "unsecured debt" at that time. 100% of it's debt was "secured" by pledged assets. The subsequent bailout money is the only "unsecured" debt (no assets pledged as collateral).

The UAW will own 50%, the taxpayers 50%, and the stockholders/bondholders 50%. Obama will pay for "his" share with money not worth the ink on the paper. It's a win-win except no one skrewed in the deal (most of the remaining 300 million Americans) will ever buy a GM product so the Federal Govt. must buy 100% of production.

Posted by: wmboyd | April 28, 2009 8:19 AM | Report abuse

I wonder how GM's executive management decided to aim for a domestic car market of 10 million new cars sold annually. That compares to roughly 16.5 million new cars sold in 2006, a precipitous drop.
In GM's discussions with Treasury, how long are both sides are expecting the domestic auto market to remain at these strikingly lower sales levels? Isn't there an opportunity for GM to both follow consumer preference toward fuel-efficient cars, as well as to shape consumer preference toward cost-efficient cars, as well. Mark;

Posted by: mark631 | April 28, 2009 9:17 AM | Report abuse

Automotive sales will never return to the 2006 levels. The Obama administration is pushing tons of money towards mass transit and will penalize personal auto use with increased fuel and highway use taxes.

Posted by: jdcw | April 28, 2009 9:42 AM | Report abuse

If bond holders get nothing what would future bonds holders get? The question is if government owns GM when will it be a private company?

There is something wrong with the news about GM. It makes no sense. But than again our government makes no sense since the last I heard about WMD in Iraq.

It seems more likely that of government will end up in bankruptcy the way it is spending money or take on the imagine of 1923 Germany. Maybe we can than have a new currency back by land instead of just more paper.

Whatever the result I would ignore what comes from the government and newspapers. And newspapers are not looking much better than GM right now. Later the government will not be looking very good either. If only we could stop the world and get off.

Posted by: artg | April 28, 2009 10:16 AM | Report abuse

Is the Administration going to accept the proposal that we as taxpayers accept 50% ownership of GM? If so: i) Who will be the CEO, CFO, other key executives and product design teams responsible for production? ii) Will the Administration be determining who these people are? iii) What competence does the Administration have for intervening in the affairs of GM? iv) What specific performance criteria will be set for GM and what will be the sanctions for failing to meet them? v) What will be the benefits of success and consequences of failure for the taxpayer? - John Herbert (an Obama supporter -- at least up until now).

Posted by: jdhwp | April 30, 2009 10:28 AM | Report abuse

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