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GM Tails Chrysler Into Bankruptcy


Iconic automaker to undergo government-led facelift.

It's official: General Motors (GM), the world's largest car company for more than 75 years, will drag its $82 billion in assets and $173 billion in liabilities into bankruptcy court.

The long-awaited move leaves the US government as GM's majority owner. Washington is betting more than $50 billion in taxpayer money that its turnaround plan can transform GM into a slimmed-down, dynamic powerhouse in the rapidly changing global automotive industry - despite mountains of debt, labor disputes, high fuel prices, and anemic sales.

The GM bankruptcy will allow its new public-employee chieftains to more quickly downsize the bloated firm, shuttering dealers, ditching struggling brands like Hummer and Saturn, as well as rapidly renegotiating labor contracts. According to the Wall Street Journal, the protection of Chapter 11 bankruptcy will also enable the company to rid itself of nearly $80 billion in debt.

And although GM's bankruptcy filing may speed its way through the courts, as did Chrysler's (and the company could emerge from bankruptcy as early as this week), the 2 failed automakers' cases couldn't be more different.

First, the sheer size of GM -- with nearly 3 times the assets and a fraction of the debt Chrysler had when it filed for bankruptcy protection April 30 -- will make its proceedings infinitely more complex. Pacifying a web of creditors, dealers, labor groups, and investors will be no easy task.

In addition, when GM eventually does emerge from bankruptcy, around 60% of its equity will be owned by Uncle Sam, since more than $50 billion in government loans will be converted to equity.

By contrast, Chrysler used bankruptcy protection in part, to cement a sale of key assets to Italy's Fiat, which will own the new Chrysler in conjunction with labor unions, while the government holds a small, less-than-10% stake. Congressional meddling into its new Detroit-based Frankenstein's monster could hold up decisions at GM, as major as which brands to scuttle to trivialities like which brand of paperclips to use.

The Obama Administration reiterated that government ownership will be transitory, predicting that GM could once again be a public company within 6 to 18 months. During that time however, competitors like Ford (F), Toyota (TM) and Hyundai can leap ahead as GM focuses on cleaning up old messes and charting a new path for the future. Analysts say, however, that a new government-enhanced GM could emerge with an unfair advantage over companies like Ford that didn't need to be bailed out.

Finally, and perhaps more importantly, GM must regain the trust of a country whose loyalty to the brand was based not on quality craftsmanship or reliability, but on patriotism. Without a dedicated client based in the United States that buys its cars because they are superior to those manufactured by its foreign competitors, the restructuring of GM will fail in even its most modest aims.

The automobile may have been invented in the United States, but its construction was perfected elsewhere. The turning of that tide will be the ultimate test of this brave new era in American car-making.
No positions in stocks mentioned.

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