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GM: Government Motors About to Downshift into Bankruptcy

CBS Radio called at 6am to talk about a possible GM bankruptcy. Possible? On Monday's CBS News Early Show, I said that bankruptcy was a-coming by or on June 1.

The headlines this morning reconfirm that not-so-bold prediction. The government is going to pump another $50 billion into GM, on top of the nearly $20 billion already injected, for a 70 percent stake in the restructured company. That is not a typo -- seventy percent! One radio host asked whether that meant that GM cars would be boring, white sedans created by Uncle Sam's designers. The government maintains that it will not be involved in the day-to-day operations of the company.

The United Automobile Workers (UAW)' health care trust will own 17.5 percent of the company, and warrants equal to another 2.5 percent of GM in the future, in exchange for a bunch of retiree health-care concessions. The ownership position of GM's largest union was lower than many expected. It seems that the union brass realized that maintaining jobs with reduced benefits was better than holding out for more benefits from a broke company.

The missing link in the GM saga is the bondholders. The government will fully repay the $6 billion owed to secured lenders, including Citigroup and J.P. Morgan Chase. But the unsecured bondholders, who hold $27 billion in GM debt, want more than the 10 percent equity stake that the government offered. Bondholders are likely to take their chances in bankruptcy court, where they believe that a judge will be more inclined to recognize the strengths of their contract and case.

If you do the quick math, you realize that current stockholders will be essentially wiped out. What did they expect after GM insiders dumped shares earlier this month?

Will this bankruptcy be a good financial deal for the government? I doubt it. It's rarely profitable to dump money into a money-losing, moribund bureaucratic venture. That said, the government probably figured that the overall psychic cost of letting GM collapse and fizzle out was too great.

The most sobering numbers in this process are the ones that equate to human beings. In 2008, GM had 61,000. The company intends to reduce employment to 38,000 in 2010. 23,000 jobs have vanished and are not coming back.

Government Motors, here we come!

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