Shares dive 16% on news of govt's directions
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(DETROIT) Shares of General Motors Corp (GM) plunged GM plunged 16.18 per cent to US$1.71 by noon yesterday after a report that the US Treasury was directing the carmaker to lay the groundwork for a bankruptcy filing by June 1.
Members of US President Barack Obama's automotive task force spent last week in meetings and on conference calls with GM officials and its advisers in Detroit and Washington. Those talks are expected to continue this week.
The goal is to prepare for a fast, 'surgical' bankruptcy, the people who had been briefed on the plans said. GM, which has been granted US$13.4 billion in federal aid, insists that a quick restructuring is necessary so that its image and sales are not damaged permanently.
The preparations are aimed at assuring that a GM bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly US$28 billion in debt into equity in GM and with the United Automobile Workers union, which has baulked at granting concessions without sacrifices from bondholders.
Mr Obama, elected with strong backing from labour, remained concerned about potential risk to GM's pension plan and wants to avoid harming workers, the sources said.
None of them agreed to be identified, because they were not authorised to discuss the process. Spokesmen for GM and the Treasury did not comment.
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One plan under consideration would create a new company that would buy the 'good' assets of GM almost immediately after the carmaker files for bankruptcy.
Less desirable assets, including unwanted brands, factories and health care obligations, would be left in the old company, which could be liquidated over several years.
Treasury officials are examining one potential outcome in which the 'good GM' enters and exits bankruptcy protection in as little as two weeks, using US$5-7 billion in federal financing, a person who had been briefed on the prospect said last week.
The rest of GM may require as much as US$70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories, according to legal experts and federal officials.
Since replacing Rick Wagoner on March 31, GM's chief executive, Fritz Henderson, has sent increasingly clear signals that bankruptcy is probable unless agreements are reached with labour and the bondholders by the administration's June 1 deadline.
Unlike Mr Wagoner, who refused until his final days at GM to consider a Chapter 11 filing, Mr Henderson has deployed staff to work with legal and government advisers, although he does not agree that bankruptcy is inevitable.
Last week, he said that GM was proceeding on a dual track, hoping to restructure out of court, but also preparing for a filing.
'If we need to resort to bankruptcy, we have to do it quickly,' Mr Henderson said in an interview with Canadian Broadcasting Corp.
John Paul MacDuffie, an associate professor at the Wharton School at the University of Pennsylvania, said that he saw little chance of an out-of-court restructuring, given that the Obama administration had rejected GM's proposed revitalisation plan in March.
It was submitted without the concessions that were required from bondholders and the union, and which have still not been reached.
'The simplest way to frame it is that they took the loans, there were conditions on the loans, they didn't prove their case for financial viability, and they didn't meet the deadline, either,' Prof MacDuffie said. -- NYT, Reuters
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