GM Declares Bankruptcy

General Motors, once the symbol of U.S. economic dominance, will declare bankruptcy on June 1 in a landmark setback for U.S. manufacturing.

The failure of GM will leave the government poised to control a business which was for years the world's biggest corporation and a hallmark of U.S. prosperity.

Senior officials detailed on May 31 what they hope will be a swift process in which GM should be able to reemerge from bankruptcy protection as a new, leaner company within 60 to 90 days.

The European Opel and Vauxhall subsidiaries are leaving the GM empire under a rescue engineered this weekend in Germany with support from a Canadian company and a Russian bank.

General Motors will enter the courtroom with billions in government financing and agreements already in place to cut labor costs, swap much of its debt for equity and reduce its liabilities by 50%. Officials said the process is expected to be similar to that of Chrysler, which is expected to emerge from bankruptcy protection this week after just over a month. However, the process will not be "as speedy as Chrysler because GM is a far larger, far more complicated global company," senior administration officials cautioned.

President Barack Obama is to hold a press conference at 11:55 am to discuss the state of the automotive industry.

Newly appointed GM chief executive officer Fritz Henderson, who is expected to continue to steer the new company, will speak to the media shortly afterwards.

"It'll have a huge impact in the United States because it's more than just a corporation -- it's an icon," said Gary Chaison, a professor of labor relations at Clark University. "It represented manufacturing supremacy and good jobs for American workers. That's gone."

GM will close 11 plants and idle three others as it slashes its operating costs in order to lower its break-even point by 40% in terms of overall U.S. industry sales.

The U.S .government will provide an additional $30.1 billion in financing to help GM restructure under court protection and will receive a 60% stake in the new company. It has already provided $19.4 billion in loans.

Officials cautioned that the Obama administration has no intention of nationalizing General Motors over the long term and will not be participating in its day-to-day operations. "The government has no desire to own equity stakes in companies any longer than necessary, and will actively seek to dispose of its ownership as soon as practicable," senior administration officials said in a media briefing. "The goal is to promote strong viable companies that can become profitable quickly and contribute to economic growth and jobs without government involvement."

The governments of Canada and Ontario, which have several GM factories, will provide an additional $9.5 billion in financing and receive a 12% stake.

Creditors holding about 54% of General's Motors bonds agreed to a plan that would swap $27.1 billion in debt for a 10% stake and warrants for an additional 15 percent stake, officials said.

Bondholders who rejected the plan could still fight it in court, but the government maintains they could end up with little or nothing if they take that path.

A retiree health care trust will receive a 17.5% stake in the new GM and $6.5 billion in preferred stock in exchange for forgiving much of a $20 billion obligation.

Employees will continue to be paid and GM will immediately seek permission to continue to pay suppliers and honor customer warranties.

GM will also offer about 40% of its dealers 18 months to wind down their operations and will immediately seek permission to honor incentives offered to its remaining dealers.

Media reaction to the plan ranged from optimistic to skeptical. The Detroit Free Press sought solace in the fact that "the Chrysler, GM and other bankruptcies in the automotive sector are meant to be transitions, not liquidations." But The Washington Post quoted a letter sent to Treasury Secretary Timothy Geithner by 20 members of the House of Representatives, who complained that "contractual rights of investors are being trampled by the government."