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Treasury Department Continues Maneuvering to Get General Motors out of Bankruptcy Court

A series of compromises are designed to quash objections and allow the New GM to emerge by summer's end.

by on Jun.29, 2009

Treasury Auto Task Force, Ron Bloom

How other groups fare as the case moves forward appears to be directly related to the threat they pose to the Treasury plan.

As the summer heats up, so is opposition to the proposed reorganization of GM by multiple groups who claim they are not being treated fairly. And since for every action there is a reaction, The U.S. Treasury Department is stepping up its maneuvering to keep its GM plan on track.

The latest such choreography saw trial lawyers receive a handsome sop over the weekend when GM agreed to allow product liability suits to continue on pre-bankruptcy GM vehicles, as TDB has reported.

Not only are the trial lawyers large contributors to the Democratic Party, who have resisted reforms to a system that sees most of the victim’s compensation redistributed to lawyers’ fees, but they represented a potentially massive roadblock to a quick emergence from bankruptcy for GM.

How other groups affected by GM fare as the case moves forward appears to be directly related to the threat they pose to the Treasury plan to do a so called section 363 sale that will preserve some of GM instead of liquidating all of it.

As in the Chrysler case, the strongest argument for this government plan is that more is saved and more – but not all — parties benefit from a quick resumption of business and the trimming back or elimination of as many liabilities as possible from the New GM. The argument also leaves room, as has now been demonstrated, for some political deals that change the terms of the two cases.

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In an earlier move less than three weeks after GM declared bankruptcy, Treasury rejected the request for additional funds for suppliers who are strapped because of the GM meltdown and cessation of production at virtually all of its North American plants.


 The Original Equipment Suppliers Association (OESA) had submitted a detailed plan to Treasury that called for “immediate actions” to stabilize a deteriorating situation in the country’s auto supply base. OESA pointed to 49 supplier insolvencies so far in 2009, and predicted an additional 60 supplier insolvencies in 2010. Lear Corporation appears to be the next large supplier that will fail, perhaps as early as this week.

The trade group cited a continued lack of available credit, severely reduced vehicle production levels, and planned summer shutdowns by GM and Chrysler as all worsening the financial state of fragile suppliers.

Treasury had already provided up to $5 billion in funding to assist suppliers back in March, and it’s estimated that about half of that was spent before the Chrysler and GM bankruptcies.

The big issue now facing the reeling supplier industry is an account receivables vacuum, which will occur because of the ongoing summer shutdowns by Chrysler and GM, as well as Ford and other automakers. This will hit supplier earnings through the second and third quarters of 2009 since the production cuts reduce cash flows to about  $36 billion from the Detroit 3 in a six-month period, which is down from the $60 to $84 billion in the same period last year.

On June 17th, the Treasury Department rejected the request for additional funds for suppliers.

At least two factors were in play, I think. First, the Obama Administration is increasingly under attack for supporting the financial and auto industries in the U.S. and bailouts are widely unpopular in opinion polls. The growing budget deficit is only making things worse.

Failing Suppliers Actually Helps GM’s Case

The second factor could be part of a more sophisticated strategy. The urgency of the situation at suppliers actually supports the need for a speedy approval of the GM 363 sale of good assets to a New GM, which is currently under debate.

Many special interest groups are opposing the sale and are trying to slow down the process, and a hearing is scheduled for next week.

By not granting funding to suppliers, the government is advancing its GM case, adding another good argument as to why the sale needs to move ahead quickly so that GM plants can reopen. GM’s lawyers have already filed this additional supplier argument in a court document late last week.

The other group with dimming prospects for a better deal is comprised of salaried retirees. The judge in the case has already denied their request for a benefits committee to negotiate for them.

Their pension, health care, and other benefits will be cut by up to two-thirds if the case proceeds the way Chrysler’s did.

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