How the mighty have fallen

The New York Times has an article by David Sanger, Jeff Zeleny, and Bill Vlasic about GM's 'new start':

President Obama will push General Motors into bankruptcy protection on Monday, making a risky bet that by temporarily nationalizing the onetime icon of American capitalism, he can save at least a diminished automaker that is competitive. The bankruptcy, to be filed in New York, is a moment of reckoning for an industry that was once at the heart of the American economy. The process began early Monday with a bankruptcy filing by a GM affiliate, a dealership in New York City, which described the automaker as “a debtor in possession under Chapter 11”. The move was expected to be followed shortly by a bankruptcy filing by the corporation itself, and dozens of related companies.
GM’s bankruptcy petition culminates a remarkable four months of confrontation between Washington and Detroit that is expected to result in a drastic downsizing of the company. It also places the government in uncharted territory as a business owner, as it takes a sixty percent ownership stake in the company during its restructuring. Reflecting the government’s extraordinary intervention in industry, aides say, Mr. Obama plans to tell the nation on Monday that he believes GM can be brought back from the brink of insolvency, even if the company looks almost nothing like the titan of old. Meanwhile, a federal judge late Sunday night cleared a path for Chrysler to get out of bankruptcy by approving a sale of most of that carmaker’s assets to a new entity to be run by Fiat of Italy. Administration officials briefed reporters on the GM plans Sunday night, as President Obama began to inform members of Congress. In his remarks, Mr. Obama will spell out a strategy in which a shrunken GM can make money even if new car sales remain at a sluggish ten million a year in the United States and even if GM, once the giant of the industry, drops below its current twenty percent market share in this country. But, to get there, American taxpayers will invest an additional $30 billion in the company, atop $20 billion already spent just to keep it solvent as the company bled cash as quickly as Washington could inject it. Whether that investment will ever be recovered is still an open question.
The company will also have to shed 21,000 union workers and close twelve to twenty factories, steps that most analysts thought could never be pushed through by a Democratic president allied with organized labor. Forty percent of the company’s 6,000 dealers will close, the workers’ union will be forced to finance half of its $20 billion health care fund with stock of uncertain value in the restructured GM, and bondholders, including many retirees, will be forced to take stock worth ten cents for every dollar they lent the company.
The company’s last steps toward bankruptcy took place over the weekend as a majority of GM bondholders agreed not to challenge the filing in court and to exchange their debt for stock.
Lawrence Summers, who as head of the National Economic Council serves as one of the co-heads of the auto task force, argued in an interview on Sunday that the bailout of the auto industry was fundamentally different from the Mexican bailout in 1994, the Asian economic crisis in the late 1990s, and the continuing banking crisis. General Motors and Chrysler, he said, were “clear cases of insolvency,” in which mere loans would not accomplish the goal of getting the automakers past a temporary crisis. “There was no argument that they were solvent, no argument they could meet their obligations.” He said that left the Obama administration to decide whether to allow “a laissez-faire, uncontrolled bankruptcy, which would have had an enormous cost,” or a “controlled process,” in which the goal was to make sure that the auto companies not only restructured, but were not overburdened with debt. So, in return for what amounted to debtor-in-possession financing, Mr. Obama chose to accept equity in the new company— while insisting that he had no intention of exercising day-to-day control over the company. “It’s a fine line,” Mr. Summers said, “but we think it is manageable.”
To assist in the restructuring, the automaker is expected to hire the consulting firm Alix Partners, which has worked on several major bankruptcies, including those for Enron and Kmart. One of the firm’s partners, Al Koch, is expected to manage the liquidation of corporate assets that GM will shed during its Chapter 11 restructuring.
Mr. Obama is taking several risks under the plan. None may be bigger than the decision that the United States government will take its sixty percent share of the stock in a new GM, leaving taxpayers vulnerable if the overhaul is not successful. (Canada, for its part, is taking a twelve percent stake.)
"We don’t think that after this next $30 billion, they will need more money,” one administration official said. “But the fact is there are things you don’t know— like when the car market will come back, and how much Toyota and Honda and Volkswagen will benefit from the chaos.”
Mr. Obama is expected to argue that any alternative to his plan would be worse, and that a liquidation of GM— the only other real option— would send the unemployment rate soaring over ten percent and would radiate damage throughout the economy. But aware of the hardships the plan will impose on regions across the country that depend on auto production, the White House is dispatching a dozen Cabinet members and other officials across four states this week to reassure residents. Aides say Mr. Obama will portray himself on Monday as a reluctant shareholder, eager to sell the company back to private investors, perhaps within six to eighteen months.
Officials say the president will insist that once the government sets up new management and a board of directors, it will remove itself from GM’s day-to-day operations. But even his aides anticipate intense pressure as the company’s managers are called to testify in Congress and face questions like why they decided to build new cars in Mexico and South Korea, rather than in Michigan or the South. “Congress and many Americans are going to say, if we own it, why can’t we make these decisions?” one of Mr. Obama’s top economic aides said, “and it’s going to be a challenge to answer that.”
To ease the way, the White House briefed reporters on a new set of principles for how the government should behave as a majority shareholder. It argued that the government’s role should be limited primarily to the beginning of the process, but that it should then recede, becoming a passive investor, one seeking to sell its stake quickly. At the same time, Mr. Obama has laid out goals for all the Detroit automakers that will presumably affect their major strategic decisions. He has urged them, for example, to build smaller cars with significantly better fuel efficiency.
Six months ago, even the suggestion of such deep intervention into GM’s operations would have raised huge objections. But by the time the denouement came, the company seemed almost relieved. Robert Lutz, GM’s vice chairman, said that “for the first time in our history, the American auto industry has the ear of the administration. Their number one goal is to make us successful.”
Nonetheless, Michael Useem, a professor of management at the Wharton School at the University of Pennsylvania, said the decision would “mean a new chapter in the history books on American capitalism.” He added, “How we think about American free enterprise is really hanging in the balance.”
For Mr. Obama, whose ascent to the White House depended on carrying states across the industrial Midwest, the political risk is significant. The GM bankruptcy will ripple across several states where hundreds of parts suppliers and car dealerships face imminent closings. Indeed, the four states where Cabinet secretaries are focusing their efforts this week— Indiana, Michigan, Ohio, and Wisconsin— all were carried by Mr. Obama last November. It was the first time Indiana has supported a Democratic presidential candidate in 44 years. These Main Street political challenges will almost certainly be an issue for Democrats on the ballot in next year’s midterm election campaign and in the president’s own re-election effort in 2012. If those jobs shift to nonunion plants in the South, where German and Japanese carmakers have built their facilities, or overseas, Mr. Obama could face criticism inside his own party. “It is unacceptable to ask workers to subsidize the exportation of their own jobs,” said Representative Dennis Kucinich, Democrat of Ohio, whose district includes Cleveland. “The taxpayers’ investment should be used to protect American plants so that American workers can build the next generation of automobiles.”
In his presidential campaign speeches last year, often delivered in the shadow of closed manufacturing plants, Mr. Obama bluntly conceded that most of the jobs would not come back. Instead, his administration is pointing to investments that the economic recovery act will make in communities.
Rob McNabney, chairman of the Madison County Democratic Party in Anderson, Indiana, a onetime booming automotive center, said the problems for Mr. Obama were severe. “He’s going to be judged by what he does,” Mr. McNabney said.

Rico says ain't the world funny; the Russians and Chinese are getting out of state-controlled corporations, and we're getting into them... But he laid out the salvation of the auto industry earlier, so he'll only mention it again: customers order a car, the factory builds the car and delivers it, the customer drives away happy. Six weeks delay, max (and less as they figure out how to do it), but no inventory except parts...