Treasury Department Directs GM To Get Ready For BK

The NYT is reporting that Treasury Department officials have directed GM to begin laying the groundwork for a bankruptcy proceeding by June 1. According to the Times, they want to be prepared to go through a “surgical” bankruptcy.

One plan under consideration would create a new company that would buy the “good” assets of G.M. 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 G.M.” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing, a person who had been briefed on the prospect said last week.

The rest of G.M. may require as much as $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.

All of that may look good on paper but the reality is that once the case enters the court, the administration, the company and the creditors are subject to the dictates of the judiciary. I suspect that any trustee is going to feel more than a little political pressure to watch out for the interests of the government. That same trustee is also going to be sensitive to any charges that he or she is acting in less than an impartial manner so the eventual outcome is highly uncertain regardless of how well planned.

The article also contains an interesting aside concerning GM’s pension plan.

One delicate issue for federal officials is the fate of G.M.’s employee pension plans, which could become the responsibility of the federal pension agency if G.M. seeks their termination.

G.M. faces an unfunded liability of about $13.5 billion for its plans, which had $84.5 billion in assets and $98 billion in liabilities as of Dec. 31. That amount could sink the pension agency, requiring its own bailout before a G.M. case could be resolved.

The White House has at least one option to protect the plan.

The Supreme Court, in a landmark 1990 case, ordered the LTV Corporation, a steel maker, to take back responsibility for its pension plans after it emerged from bankruptcy protection.

That illustrates beautifully how complex this issue has become. Were it only the bankruptcy of a very large company it would be difficult enough but the political ramifications are enormous. If the UAW does see pension benefits reduced substantially and permanently, they are going to feel as if their friends sold them out. Should the administration opt for some ad hoc solution that preserves benefits at the expense of normal procedure then it is certain to run into severe criticism.

GM can become a nightmare for the Obama administration. They cannot abandon the company and the unions entirely to the tender mercies of the bankruptcy courts but anything they do to mitigate the damage is going to entail collateral damage to some other constituency. I rather suspect they wish that the Bush administration had done the dirty work for them. At the same time, the Bush administration might very well have game planned this from the outset.

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