G.M.'s death spiral accelerates

As bankruptcy day approaches, thousands of dealerships get pink slips and the UAW is hammered again. Meanwhile, bondholders complain about a raw deal from the government. Get in line!

Published May 15, 2009 2:06PM (EDT)

If Thursday's spike in jobless claims was partially attributable to Chrysler layoffs, as some press reports have suggested, then worse is to come, judging by the news from General Motors.

Bloomberg is reporting that G.M. is "is sending termination notices today to 1,100 U.S. dealers with about $2.5 billion in unsold vehicles." In separate news, the automaker is supposedly near a deal with the UAW that would cut its labor costs and health benefit obligations, and result in another 20,000 layoffs.

Both moves are just a prelude to the bankruptcy filing that seems increasingly inevitable. According to the Journal's analysis, the goal is to get major deals in place before going before the bankruptcy judge, in the hopes of achieving an accelerated proceeding.

The big sticking point there, however, will be the unsecured bondholders, who are already screeching that the the government is running roughshod over their legal rights. To which the Treasury appears to be responding: So what?

Another critical task for the auto maker will be to persuade a bankruptcy judge that unsecured bondholders -- owed at least $27 billion -- are being treated fairly in a reorganization. GM has offered them 10 percent of the company's equity.

The bondholders, who say the offer is equivalent to four cents on the dollar, have fired back with a counterproposal asking for 58 percent of the new GM's equity, and a bigger slice than the UAW's. But administration officials, emboldened by concessions wrested from Chrysler LLC's lenders, are taking a hard line, according to people close to the Treasury.

These people say the Obama administration wants a GM bankruptcy "to be as clean as possible," but isn't "going to pay ransom to bondholders."

The White House has clearly made a political calculation that showdowns with bondholders play well with the public, if not on the Wall Street Journal editorial page. But even if Treasury wins again, ultimately, the news from G.M. is bleak. The company that emerges from bankruptcy will be a shadow of its former self: Thousand of workers will lose their jobs, retirees will see benefits slashed, and communities all across the country will see gaping holes where dealerships once stood.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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