WASHINGTON (CN) – President Barack Obama unveiled a $30 billion government commitment to General Motors on Monday, just hours after the carmaker filed for bankruptcy. The company listed $82 billion in assets and $173 billion in debts – more than $20 billion of it to the United Auto Workers union, GM’s second-largest creditor. The step would give the government roughly 60 percent ownership of the company and is part of a larger plan to once again make the carmaker profitable. “It’s not just any company we’re talking about,” Obama said. “It’s GM.”
General Motors’ Saturn unit, which became an industry darling after it was created in 1990, also filed for bankruptcy; GM says the brand will no longer exist after 2012.
General Motors and President Obama insist the company can come back, though industry watchers expect it will fire more than 20,000 union workers, and shut down more than a dozen factories and more than 2,000 of its 6,000 dealers.
Obama modeled the success of Chrysler after it declared bankruptcy a month ago. Obama said that the alliance of Chrysler with Fiat, an Italian car company, will save “tens of thousands of jobs that would have been lost.”
He also predicted that Chrysler would emerge from bankruptcy within the next few days.
Obama said the restructuring will help to ensure “that 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.”
“The U.S. Treasury does not believe or anticipate that any additional assistance to GM will be required,” a senior administration official said. “We intend for this to be a permanent resolution of the GM situation, and an ability for the company to go forward and be profitable.”
The government’s $30.1 billion investment comes just after the deadline that Obama gave GM to come up with a survival plan. The GM management team has now designed what Obama described as “a plan that meets the strict standards … laid out at the beginning, to streamline GM’s brands, clean up GM’s balance sheet, and make it possible for GM to compete and succeed.”
Obama confirmed the government’s investment, stating that “executing this plan will require a substantial amount of money that only a government can provide.”
The government will get about $8.8 billion in debt and preferred stock in the new GM, making it, as Obama said, a “reluctant shareholder” with a 60 percent ownership in the company.
The government will also have the right to appoint the directors, but apart from that, Obama promised that the government will not be running GM.
The arrangement will cut GM car production from 16 million a year to 10 million a year to more closely match the demand. The company currently sells about 9.5 million cars annually.
“More jobs will be lost,” Obama said. “More plants will close. More dealerships will shut their doors, and so will many parts suppliers.”
He listed the corresponding hits on the company’s employees and shareholders. “It will require the United Auto Workers to make further cuts in compensation and retiree health care benefits,” he said. “It will require GM shareholders to give up the remaining value of their shares.”
GM retirees will face different health-care benefits. The company will replace the old system, to which it has a $20 billion dollar obligation, with a new health-care benefits trust that GM will fund with preferred stock and three $2.5 billion payments ending in 2017.
Nonetheless, Douglas Elliott, a Brookings Institute fellow, wrote in a report that “GM’s pensions appear to be safe for now, as it appears quite unlikely that the pension plans will be terminated as part of this bankruptcy, principally because the UAW and the U.S. government do not want it to happen.”
But Kevin Hassett, a director of economic policy studies at the American Enterprise Institute, a conservative think tank, said in a phone interview that it is precisely because the employees aren’t sacrificing enough that the restructuring will fail.
“The reason why the auto makers are not viable economically is because they’ve got labor costs that are too high,” he declared. “The plan hasn’t reduced labor costs.”
Hassett explained that GM employees have agreed to give up cost of living increases, but that they will not be taking any reductions in pay. GM employees, he said, are already paid 50 percent more than Honda and Toyota employees.
“It’s dishonest to assert that they’ve made a sacrifice,” he declared.
Susan Helper, a professor at Case Western University, disagreed. She said GM employee wages are about the same as the wages paid by Toyota and Honda.
“We need to look back at 2007,” she said, when employees had their future health-care benefits cut in half, and new workers started at $14 an hour instead of at $20.
“Equal numerical sacrifice is not unfair,” she added. Bond holders make an investment that’s understood to be risky, she said, and payments to a pension fund are not supposed to be risky.
General Motors’ largest creditor is Wilmington Trust – $22.8 billion. Other multibillion-dollar creditors include Deutsche Bank, $4.4 billion, and the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers – Communications Workers of America – $2.7 billion.