A GM Bankruptcy Would Reshape Industry's Role With US Government
01 Juni 2009 - 4:49AM
Dow Jones News
Monday's expected bankruptcy filing by General Motors Corp. (GM)
caps a dramatic series of events in the past year that have
reshaped the American car industry and its relationship with the
U.S. government.
GM had struggled financially for years due largely to high labor
costs and increased competition from foreign car companies. But
auto industry observers point to several factors to emerge since
last summer that pushed GM to the brink of collapse: a devastating
spike in gas prices, the freezing of credit markets and the
deterioration of the broader economy.
At the same time, the U.S. government took unprecedented steps
to keep GM afloat. It gave the company $19.4 billion in taxpayer
money, ousted its chief executive and became the direct overseer of
its restructuring. Washington's role is set to become even broader
in bankruptcy. The U.S. government will provide $30.1 billion in
financing for GM to restructure and will hold a 60% majority
ownership stake. Canada will provide $9.5 billion and will receive
approximately $1.7 billion in debt and preferred stock, and
approximately 12% of the equity of the new GM.
Signs of the depths of GM's financial troubles began to emerge
last summer. By July, the price of a gallon of gasoline had reached
$4, and a dramatic shift in consumer behavior had taken hold, with
consumers turning more toward fuel-efficient cars than SUVs and
trucks.
That scenario particularly spelled trouble for Detroit's Big
Three - GM, Chrysler, and Ford Motor Co. - who long ago made SUVs
and light trucks the linchpin of their product lines.
The growing financial crisis further cut into car sales, as
consumers pulled back spending and found it increasingly difficult
to qualify for car loans. The companies themselves also found it
nearly impossible to borrow money at reasonable prices on the open
market, and by late summer, there was talk that GM and Chrysler,
who had started to burn rapidly through their cash reserves, would
need some kind of handout from the government.
The situation worsened in the fall. Sales dipped even further as
rising unemployment and other problems associated with the economic
recession caused more and more consumers to put off car purchases.
By February, the seasonally adjusted rate for new cars and light
trucks fell to 9.12 million, far off from the 15.4 million vehicle
pace a year earlier.
David E. Cole, chairman of the Center for Automotive Research in
Ann Arbor, Mich., said the spike in gas prices played a role in the
auto makers' rapid decline, but that the credit freeze and
recession were far bigger factors. "That was the 500-pound
gorilla," he said.
By November, the former titans of American manufacturing had
been brought to their knees, with their CEOs appearing before
Congress begging for aid.
A little over a month later, after Congress failed to pass a
bailout bill, President George W. Bush's administration relented
and sent GM and Chrysler a lifeline using money from the
banking-rescue program, convinced that a collapse of one of the
auto makers would be catastrophic. President Barack Obama, shortly
after taking office, created an auto industry task force and
eventually set a June 1 deadline for GM to submit a viability plan
or enter into bankruptcy proceedings.
Josh Mitchell, Dow Jones Newswires, (202) 862-6637,
joshua.mitchell@dowjones.com