GM Files for Bankruptcy

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Alix and Bienenstock proposed the idea to GM management in November of last year and then to GM's board in December. Both bought into the idea, but only if they couldn't accomplish what the company needed outside of court, say sources involved with creating the strategy. When the Obama Administration's auto task force came on the scene in February, GM advisers pitched them on the 363 sale and a more traditional prepackaged bankruptcy in which terms would be negotiated with all parties in advance, but GM would remain one company. That was shot down by treasury.

President Obama's auto task force, headed by former private equity executive Steve Rattner and erstwhile United Steelworkers negotiator Ron Bloom, took to the the idea as a better way to ditch liabilities such as dealers, brands, and debt.

The 363 sale proposal gained steam among the key players because it was a way to show that a new GM was being created. It could be presented to the public, much as Treasury is doing now, that GM is getting a fresh start, it will emerge from bankruptcy quickly, so no one should fear buying the company's cars. One sticking point between Treasury and former Chairman G. Richard Wagoner Jr. was his public opposition to bankruptcy. That played at least some part in the administration's decision to fire him, though mostly they needed a scalp to show the public.

Once the task force decided on the 363 sale as the likely outcome, Bienenstock told its members that GM was loaded with too much debt. Even the bankruptcy scenarios would leave the company burdened with borrowings. GM would just replace bond and union debt with Treasury loans. Treasury officials agreed and in April decided they would have to take a major stake in GM rather than just lend the company billions and leave the debt on the balance sheet, say sources involved with the restructuring. The task force and its advisers reckoned they would have a better chance of seeing GM succeed if it were stripped of debt. Then the government may be able to get its investment back by taking equity in a healthy company rather than loaning to one that's heavily in debt.

But while the Obama Administration clearly expects GM's bankruptcy to be similarly speedy, it will be more complex. That's because Chrysler had a smaller group of creditors who agreed to a deal in advance. GM has thousands of bondholders who are likely to oppose the breakup. Treasury officials said 54% of GM's bondholders agreed to accept the exchange and hence will not fight the 363 sale or restructuring plan in court. But others could put up resistance.

Even a minority of bondholders can delay the process, says S. David Cohen, a professor at Pace University School of Law. Creditors get to vote only on the final restructuring plan, Cohen says. But the 363 sale gets done before the restructuring plan is submitted to the bankruptcy judge. Since splitting GM in two through the 363 sale accomplishes most of the company's reorganization, some creditors might hire counsel to fight it if they don't feel they are being treated fairly. They may think that once the sale is done and it restructures the company, voting against the reorganization plan would be futile. So they may pitch their fight early in the bankruptcy process by fighting the 363 sale.

"Some creditors would oppose the 363 because it gets you a long way toward the restructuring plan," Cohen says. "I can see counsel opposing this on grounds that it does an end run around creditors' voting rights." While they may fight, Cohen says they will have a tough time proving that the 363 sale is not in GM's best interest.

If GM is able to move through court relatively quickly, it may defy those who predicted catastrophe for such a massive bankruptcy. The company will still face a horribly slumping economy, and it will have to fight its own battered image. But if American consumers give the new GM a look, it could finally emerge a winner.

Welch is BusinessWeek's Detroit bureau chief.

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