General Motors is Alive—For Now

Creditor lawsuit could undo auto bailout, force GM into bankruptcy, analysts say

October 8, 2012

A backroom deal hatched by General Motors during the auto bailout to fulfill the Obama administration’s demand for a quick bankruptcy could be reversed, draining the automaker of nearly all of its cash on hand and leaving it in worse shape than it was when it collapsed in 2009.

As GM teetered on the edge of bankruptcy in June 2009, it cut a $367 million "lock-up agreement" with several major creditors in order to prevent its Canadian subsidiary from going under. The move spared the subsidiary from fulfilling the $1 billion debt it owed the creditors—major hedge funds—ensuring that GM would not have to face bankruptcy courts in two nations, which could have delayed the company's recovery.

The trustee for (old GM) creditors shortchanged by the government-driven bankruptcy are now suing the hedge funds in a move that could undo the bailout.

"Many U.S. creditors waived their rights to object because the government wanted to push through the bailout for political reasons," risk analyst Chris Whalen said. "If they had continued through normal channels, they could have easily been in bankruptcy for five years. So they made sure these issues were not adequately briefed before the court."

The GM that exited bankruptcy was radically different than the one that entered. The Treasury Department arranged for the company to split into Motors Liquidation Co., known as "old GM," and created a "new GM" with the help of $30 billion from American taxpayers. Judge Robert Gerber, who approved the sale with little hesitation, could now reverse the entire auto bailout—and overturn one of President Barack Obama’s signature achievements.

"When I approved the sale agreement and entered the sale approval order I mistakenly thought that I was merely saving GM, the supply chain, and about a million jobs. It never once occurred to me, and nobody bothered to disclose, that amongst all of the assigned contracts was this lock-up agreement, if indeed it was assigned at all," Gerber said in July.

Industry experts say GM should be very concerned with the judge's reaction to the deal.

"The judge has made it very clear that he is greatly dissatisfied with the process," one analyst said. "He's basically implying that GM hid it from him and that reopening the sale is a possibility."

More is at stake than the roughly $1 billion that "old GM’s" spurned creditors are seeking, according to industry observers.

"The judge does not have a line item veto—he can’t just go in and take out money; he may have to reopen the entire bailout," one bankruptcy expert, who requested anonymity because he has current business with the automaker, told the Washington Free Beacon. "If he reopens, everyone can come back and fight over how the bailout should have happened."

"It could unravel the entire settlement," added a financier familiar with the situation. "They’d have to go back to the drawing board, wind back the clock to before the bailout."

In addition to the loss of taxpayer dollars, GM would face up to $30 billion in liabilities, according to another financial analyst.

"When they did the bankruptcy they shed all liabilities on old GM. If you reopen the sale, the liabilities—creditor lawsuits, product liabilities, personal injury claims—they all come back."

If the court decides to reopen the bailout, new GM could cease to exist, according to the bankruptcy expert. Its stock would be removed from all stock exchanges and the company would have to repay the $27 billion it owes the federal government—a major problem considering the company has just over $30 billion in cash.

"GM has plenty of cash, but that $30 billion doesn’t include their liabilities …  Treasury would have to turn around and give the money right back," a market observer said. "They’re burning through money right now. If they had to stop and repay Treasury, they’d cease to operate."

GM did not return requests for comment.

President Obama pledged that the bailout would pull the company through bankruptcy in record time. The cash injection from Treasury accomplished that goal, but the corners GM cut to ensure a smooth transition left many parties unhappy.

"They didn’t care about the company long-term," risk analyst Whalen said. "The process was politically driven to be done as fast as possible, focused on securing short term support from the [United Auto Workers union]."

The allegation of union favoritism has dogged the Obama administration throughout the auto bailout. In addition to General Motors Canada’s debt, Treasury faced similar charges while handling the bankruptcy of Delphi, GM’s independent parts supplier.

"The government did a sloppy job with the bailout," the bankruptcy expert said. "We have a fully functioning bankruptcy process based on centuries of common law, standard ways of doing things."

"The federal government didn’t want pension plans to bear any costs associated with traditional bankruptcies … and now you’re faced with this."

The Canadian and American governments played vital roles in the deal and pushed GM to negotiate as quickly as possible.

"Officials from the U.S. and Canada were very much involved—they were in the building when the deal was being negotiated," an insider familiar with the deal told the Washington Free Beacon.

The Treasury Department did not return emails for comment.

Investors have already expressed trepidation about putting money into GM. The lawsuit casts further doubt upon the future of the car company, the survival of which has been a key component of the Democratic ticket's campaign: Vice President Joe Biden is fond of proclaiming "Osama bin Laden is dead and GM is alive" on the stump.

However, if it is made to unwind the bailout, GM likely will be forced immediately into bankruptcy, which would leave it in a far worse position than it was before the 2009 bankruptcy.

"You never want to free-fall into bankruptcy," an industry insider said. "They went into bankruptcy in 2009 with a plan on getting out. If they were to enter it today, they couldn’t negotiate with creditors because everyone would be filing legal action against them."

GM’s own attorneys have admitted as much, saying in court documents that the lawsuit "could create a chaotic situation for GM Canada, spawn new litigation in other forums, and potentially provide a windfall to the noteholders."

GM’s stock has fallen nearly 40 percent since its record-setting IPO in 2010 after dismal European sales. In addition to owing U.S. taxpayers $27 billion, its lending arm, ResCap, a subsidiary of GM, has filed for bankruptcy after making risky gambles on the housing market.

"We have Pandora’s Box on our hands," said a financial analyst. "I guess that’s the nicest term I can find for clusterf—k."