GM bankruptcy would be risky, but looks likely

GM spokesman Tom Wilkinson said GM’s board will meet later this week to decide its next move, but he would not say exactly when. He also would not say if the company would soon file for Chapter 11, nor would he reveal what percentage of bondholders took the offer.

“The principal amount of notes tendered was substantially less than the amount required by GM to satisfy the debt reduction requirement under its loan agreements with the U.S. Department of the Treasury,” GM said in a statement issued Wednesday.

One reason observers say a GM bankruptcy filing is all but certain is that the automaker this month notified 1,100 of its 6,000 dealers that their franchise contracts would not be renewed next year. The franchisees are protected by a byzantine network of state franchise laws, but those regulations would be effectively superseded by federal bankruptcy proceedings.

Under the latest government-run restructuring plan for GM, the Treasury Department will reportedly take a stake of about 70 percent in the revamped automaker and would get to name members to the new board of directors. GM has also reached a tentative agreement with the United Auto Workers to give the union a 17.5 percent stake in the new company as partial payment toward health benefits for retired workers.

Of course, bankruptcy would not necessarily be easy for GM. Risks remain, noted David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. He points out that GM is a much larger and far more complex company that Chrysler, with 244,500 employees compared with 54,000 at Chrysler. GM also has about twice the number of Chrysler dealers, about twice as many brands and, unlike Chrysler, significant operations in Europe, Asia and Latin America.

“If you look at the complexity of the company infrastructure and the number of players involved here — the union, the creditors, the dealers, the suppliers and the government — it’s an unholy cast of characters,” said Cole. “Any one of them could cause a problem, and bankruptcy laws are not well designed to deal with institutions of this complexity.”

Cole also warned that a failure of the “quick-rinse” bankruptcy for GM predicted by the administration could have deeper and more serious implications for the overall U.S. economy. He argues that if the planned bankruptcy process “blows up” it could lead to a “cascading failure,” pushing auto suppliers into bankruptcy and take down other automakers in the process.

“We are talking about the potential for a rapid collapse — it could trigger a national depression,” he said. “The automotive supply structure is in pretty serious trouble now, it’s not profitable and critical suppliers are on the edge of failure, so if we were to see a cascading failure it could quickly spread to the rest of the economy. That’s the scale of this industry.”

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