D.C.’s bet on General Motors not a sure thing

updated 12:46 p.m. ET May 28, 2009

WASHINGTON - Government Motors.

A new name for Detroit's weakened auto giant GM is making the rounds, sometimes with irony, sometimes with dread, suggested by the deepest Washington industrial intervention in a half-century. The Obama administration is planting itself at the wheel of General Motors with a major ownership stake — and all that goes with it for the U.S. taxpayer.

The company appeared closer than ever to filing for bankruptcy protection on Wednesday after its bondholders turned their backs on a federally ordered offer to swap their debt for GM stock. If GM does file, the governments of the United States and Canada could end up with as much as 70 percent of a reconstituted GM when the court dust settles — with the biggest share by far held by the U.S. Treasury.

Administration officials portray themselves as reluctant players in this industrial drama, their hands forced by an economic and financial crisis so severe that inaction would have terrible and far-flung consequences. And they insist they have no intention of managing the day-to-day operations of GM or Chrysler, which is already moving through a swift reorganization in bankruptcy court.

But with its huge financial stake, the government has hardly been a passive observer.

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On March 31, President Barack Obama — a day after firing GM CEO Rick Wagoner — gave the company until June 1 to make aggressive cuts. It was the Treasury Department that instructed GM not to offer bondholders any more than 10 percent of company equity. And no corporate owner has as direct a line to Congress as the Treasury Department. Lawmakers last week were already pressuring Secretary Timothy Geithner to intervene in the planned closure of auto dealerships and complained about GM plans to import cars made in the company's Chinese plants.

Obama's auto task force has been working with General Motors, its union, bondholders and dealers to win concessions since February. The panel has been led by Steven Rattner, a former Wall Street financier and a top Democratic fundraiser, and Ron Bloom, a Wall Street turnaround specialist who has advised the United Steelworkers union. When Obama decided to oust Wagoner, it was Rattner who informed the GM executive.

"We've tried to be true to the president's basic principle that we should not be in the business of running the company," Bloom told The Associated Press. "We are the president's line people, making recommendations to the decision-makers on large amounts of taxpayer dollars. So we have a tremendous responsibility to be thoughtful about our recommendations on how those dollars get used. On the other hand, we are not the management of the company."

A bankruptcy court filing this week is unlikely. GM and the administration will probably wait until the June 1 deadline to announce a next move.

The federal government has already injected nearly $20 billion into GM. Helping it through bankruptcy court reorganization would require billions more — exactly how much would depend on the length of the proceedings.

By positioning itself to own a sizable majority of the company, the Obama administration is also assuming a greater stake than the 8 percent share it obtained in Chrysler's bailout. Chrysler could emerge from bankruptcy court as early as next week.

While even a speedy bankruptcy reorganization for GM would be a blow to the company's pride as an industrial giant, that step could be the best available. The company would emerge from court with a fraction of its current debt and so-called legacy costs for retirees, and with a more manageable dealer network. At issue is whether the proceeding itself would taint the company and damage its sales. So far, Chrysler's trip to bankruptcy court has not driven customers away.

Despite the relatively smooth experience with Chrysler, however, GM is a larger company that is more difficult to restructure. Chrysler has Fiat prepared to assume a portion of the company. No similar deal awaits GM. As a result, participants in the negotiations expect a GM reorganization to last longer.

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