Friday, May 22, 2009

Will GM Be Forced Into Bankruptcy?

. Friday, May 22, 2009

By stockOzone team

Will General Motors (GM) be forced into bankruptcy next week, or won't it? That's the million-dollar question the business press cannot seem to agree on this morning. But what is absolute is that GM has reached a tentative agreement with the United Auto Workers union that will, according to the Detroit Free Press, "ultimately could give the union safer footing if the troubled automaker files for Chapter 11 reorganization." The Wall Street Journal leads with a potential downgrade to Great Britain's bond rating by Standard & Poor's Rating Service, which has changed its outlook on the country to negative. According to Bloomberg, GMAC (GMA), GM's finance and lending arm, has received $7.5 billion from the U.S. Treasury to expand auto-lending at Chrysler and was cleared to sell government-backed debt for the first time. American International Group (AIG) announced Thursday that Chief Executive Edward Liddy plans to step down after a tumultuous eight months at the helm of the polemical insurer, and, finally, Florida's BankUnited (BKUNA) was seized by the Federal Deposit Insurance Corp., marking the biggest bank failure this year.

The Washington Post and Reuters report (somewhat) contradictory takes on the future of GM, the former saying the automaker will be forced into bankruptcy some time shortly after the June 1 deadline for restructuring and the latter claiming that a bankruptcy proceeding is not impending. Both, however, agree that bankruptcy for the automaker in the end is likely and could happen in the next month or so. If GM does declare Chapter 11 bankruptcy, it would receive an additional $30 billion in government loans, bringing total federal aid received to $45 billion. Separately, the WP adds, Chrysler may be lifted out of bankruptcy protection as soon as next week.

Details of the tentative deal between the UAW and GM were not disclosed, but experts speaking with the Detroit Free Press and the New York Times, which leads its business section with the story, that a freshly signed contract is less likely to get torn up in bankruptcy court, and will apply additional pressure on GM bondholders to come to an agreement on a cash-for-debt swap for total $27 billion in bonds. However, according to the NYT, "there appears to be little chance that the required 90 percent of bondholders will agree to its terms, making the prospect of bankruptcy increasingly likely."

The S&P's warning to the U.K. on the state of its credit rating "sent waves across the Atlantic" as investors traded in U.K. bonds and currency for U.S. Treasurys, the WSJ says. The sell-off was only a temporary fix, though, as later in the day, worries about the U.S.'s own AAA rating put downward pressure on the price of Treasurys. The dollar, in turn, sunk to 0.8 percent to the euro, its lowest level against the euro in more than four months. Five years of insurance on $10 million in U.K. debt leapt to around $81,000 a year, from $72,000 earlier in the day. U.S. debt insurance cost the equivalent of $37,500, the WSJ says.

Treasury Secretary Timothy Geithner told Bloomberg TV yesterday that the Obama administration would work to reduce the budget deficit to about 3 percent of gross domestic product, from a projected 12.9 percent this year, words that were unable to assuage fears about the U.S.'s credit-worthiness. The government has said it expects the deficit to drop to 8.5 percent of GDP next year and then to 6 percent in 2011. Meanwhile, Bill Gross, co-chief investment officer at bond goliath Pacific Investment Management, predicted the U.S. would eventually lose its AAA rating.

The government's second infusion in GMAC--the first one came in December--includes $4 billion for the firm to originate loans to Chrysler buyers and sellers, according to a Treasury statement and reported by Bloomberg. The rest of the $7.5 billion loan will help GMAC meet the $11.5 billion it has been instructed to raise following the stress tests. The firm has also been green-lighted to sell $7.4 billion in debt backed by the FDIC, GMAC said in a separate statement. It was previously unable to sell debt because of its junk bond rating. In December, the firm was allowed to convert into a bank holding company to gain access to "rescue funds" and attract more retail deposits. According to the Associated Press, GMAC Bank will become Ally Bank today in an effort to re-brand itself.

Edward Liddy, who announced yesterday he would step down as chief executive of AIG after eight months, said "the job was too big and complex as currently designed, and that the company and its government backers would not find anyone else who could take it on for a salary of $1 a year, as he had," according to the NYT. He added that he expects his successor's salary to be much higher. Liddy took up the post with one day's warning in September after the previous three CEOs had been ousted. Since taking up the position, Liddy has been chastised for a contentious round of bonuses doled out to executives in insurer's financial product unit, which has been blamed for much of AIG's problems. This, and not his act of public service of "parachuting in" at the last minute is what he is likely to be best remembered for, Reuters points out.

BankUnited has been seized by the FDIC and sold to New York banker John Kanas and a group of private equity firms, the Miami Herald reports. BankUnited, which is the largest financial institution based in Florida and the largest bank to fail this year, reopened all of its 85 branches for regular business hours this morning under the new ownership. BankUnited was "dragged down by risky home mortgages that fizzled in the housing downturn" and is the third-largest in assets to fail since the downturn, following only IndyMac and Washington Mutual. The collapse will cost the FDIC insurance fund an estimated $4.9 billion.

Disclosure: Author does not own any of the stocks discussed here.

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