WASHINGTON (AP) — It's no secret General Motors has been in trouble for a long time.
The nation's largest automaker has been teetering on the edge of collapse for months, losing billions of dollars, laying off thousands of workers and shuttering big factories as its vehicle sales plummeted. It's a black hole for cash, but billions from taxpayers has kept it from imploding.
The same goes for Chrysler, which also limped along for months before filing for Chapter 11 bankruptcy in April.
The automakers, two of America's most iconic companies, need court protection to cut debt and revamp operations free of creditors' clutches. That way, they hope, they'll emerge more competitive once the economy rebounds.
So what should you expect from a GM reorganization in bankruptcy court? Will it be different from Chrysler's? Does one company's case provide a roadmap to what might happen to the other? With GM, you might wonder: Why didn't they file for bankruptcy months ago — last year, even?
Here are some questions and answers about the road to bankruptcy court for both Chrysler and GM.
Q: Haven't the two companies been in danger of collapse since last year?
A: They have. Auto sales have been falling for the past several years, but they took a big nosedive last year.
There are many reasons for this, but the big ones are a painful combination of a bad economy, a big jump in gas prices last year, and an industry that was still churning out gas-sucking SUVs at a time when more American consumers were looking for cars that were cheaper to fill up.
Clear warning signs came last summer, when GM announced a restructuring. By the fall, after the stock market crash and freeze-up of credit that made it hard to raise money, it became clear that GM and Chrysler could collapse within weeks without new cash. By December, the pair started receiving $17.4 billion in hastily arranged government loans.
Q: So why didn't they just go straight into bankruptcy like other companies do?
A: The federal government feared bankruptcy would lead to chaos that would not only bring down the U.S. auto industry but rip a huge hole in the economy, at a time when it was already falling fast because of the housing and banking crises.
Here's why: Bankruptcy is rarely neat and tidy. Companies use it when they don't have enough money to cover their debts, which means it's up to the courts to figure out how to repay them. That usually means painful restructuring that includes selling off or liquidating assets, rewriting labor deals, and significantly shrinking the size of the company.
In GM and Chrysler's case, that could have led to huge layoffs and shutdowns at not only their own operations but also the thousands of companies that rely on them. The auto industry supports a vast network of manufacturers who make the raw materials, suppliers who build the parts, and dealers who sell the cars. States depend on those companies for tax revenues and communities need the jobs they bring to town.
Some estimates put the potential job losses at 3 million if the two companies failed.
Q: But aren't they going into bankruptcy now? What's the difference between now and then?
A: It's a matter of timing.
With the government's help, the two companies have already laid much of the groundwork for bankruptcy. That includes brokering new deals with unions, settling big chunks of their debt, and figuring out new ownership structures. Another key is that the government will provide more loans to help the companies stay running during bankruptcy.
It would have been hard to persuade any lender to do that if GM and Chrysler were on their own.
"They are too big to fail in an uncontrolled way," said Aaron Bragman, an auto analyst with the consulting company Global Insight. "Here we are seeing a controlled failure."
GM and Chrysler's troubles also came at a tricky time, during the transition between the presidencies of George W. Bush and Barack Obama. The short-term loans the Bush administration gave the automakers in effect gave Obama time to take office and figure out how he wanted to handle the matter.
Q: Wouldn't it have saved taxpayer money if Chrysler and GM had not gotten government loans?
A: That's unclear. The government has sunk about $25 billion into both and could lend GM up to $30 billion more to help it get through bankruptcy. Some have questioned whether the government will ever see that money again.
Much harder to calculate would be the effect on taxpayers if the companies went under. For example, states would probably see their unemployment benefit payments soar. The government's Pension Benefit Guaranty Corp. could have been on the hook for the company pensions. And the losses in tax revenues would have been huge.
Q: Would the companies have gotten out of bankruptcy more quickly if they went into it long ago?
A: If the government's plans for GM and Chrysler come true, they won't be bankruptcy that long. Chrysler could come out after around 30 days, while GM may last from 60 to 90 days. That's in part because much of the groundwork was done beforehand.
Bankruptcy cases can often move at a slow pace as the courts try to unwind a company. GM is such a huge company that unraveling it may have lasted a long time if they filed without the government's support. For example, the energy company Enron filed for bankruptcy in 2001 and didn't emerge until 2004 in what was one of the biggest cases in American history. GM will likely be as big or bigger.
Bragman said the backing of the Obama administration could help it move more quickly. But there is no guarantee it won't be dragged out given how complex GM is.
Q: So what does this all mean for car owners? Doesn't a long bankruptcy scare them off?
A: Bankruptcy is never a good thing for sales. The administration has tried to reassure potential buyers and owners by saying it will back warranties of both companies. Sales have been bad for the past several months, but it is unclear if that is the result of the lingering threat of bankruptcy or simply an ongoing decline in auto sales.
What remains to be seen is whether buyers will still want a GM or Chrysler car after the two companies are revamped.
Q: What are the two companies hoping to get out of reorganizing in bankruptcy court?
A: In short, a new life.
Keeping both companies alive is considered a top priority by the federal government since hundreds of thousands of jobs depend on the U.S. auto industry. So the federal government, which is loaning billions to both companies, hopes that a court-approved reorganization can keep Chrysler and GM from bleeding money and eventually remake them as strong players in the world auto market.
Q: How would a GM bankruptcy reorganization be different from Chrysler's?
A: The major difference is size.
As the nation's largest automaker, GM would be one of the nation's biggest bankruptcy protection filings ever. GM made twice as many autos as Chrysler did last year (3 million versus 1.5 million), employs 235,000 people compared with Chrysler's 54,000, and has plants and operations in many more countries.
GM, which sells GMC vans, Buicks, Chevrolets, Pontiacs and Cadillacs, also has far more brands than Chrysler, which sells under the Jeep, Dodge and Chrysler brand names. (Though GM has said it plans to eliminate the Pontiac brand.)
Q: So what is the significance of GM's size in a bankruptcy case?
A: It means unraveling GM will be much more complicated than reorganizing Chrysler.
GM operates worldwide, selling cars in 140 countries and owning overseas brands like the Sweden's Saab, Britain's Vauxhall and Germany's Opel.
Separate deals will likely have to be struck to resolve issues related to GM's overseas holdings, and the German government is already trying to shield Opel and its 25,000 workers from a possible GM bankruptcy. GM will also likely have to navigate the bankruptcy law of the countries where it has plants and other facilities as it works to restructure.
A clear illustration of the difference in scale between GM and Chrysler is how much money will be spent on lawyers, consultants and others who will work on the two cases. Lynn LoPucki, a UCLA law school professor who has studied fees from 102 large public bankruptcies, estimates that fees in the Chrysler case will reach around $573 million. That's a huge sum, but consider the estimate for GM: $1.9 billion.
Q: How will these cases play out?
A: Both companies owe a lot of money and have received about $25 billion in government loans. The bankruptcy court will determine how the creditors get paid and in what order.
For Chrysler, that means figuring out how to deal with $6.9 billion in debt. For GM, it's trickier. On Wednesday, GM failed to persuade holders of $27 billion in bonds — GM debt — to exchange them for a 10 percent equity stake. (In other words, ownership of a portion of GM.) The idea was that this would have improved the company's health by reducing its debt.
The U.S. Treasury came back with a plan to sweeten the deal Thursday. Whether or not the bondholders accept it, though, it's still a near certainty that GM will need to file for bankruptcy protection.
It will also be up to the courts to approve the automakers' restructuring plans. Chrysler seeks an alliance with the Italian automaker Fiat and big ownership stakes for the United Auto Workers union and the federal government. GM has proposed handing over ownership to the UAW and its debt holders, along with a whopping 70 percent share to the federal government.
Other parties also have a stake in the cases, including the auto parts suppliers who may be owed money, the network of dealers that rely on the automakers for their stock, and employees and retirees worried about their jobs and preserving their benefits.
Q: With Chrysler going first, does it provide a blueprint for GM?
A: It does in some ways. Chrysler hopes to zip through its case in just 30 days, near light speed for a bankruptcy case. If that works out, GM may look to try to do the same so that it can exit bankruptcy quickly. The Obama administration thinks GM can finish its case in between 60 to 90 days.
GM may look to the Chrysler case to figure out what court to file in. Chrysler has made rapid progress in a New York federal bankruptcy court, and could be finished within the next several weeks. If the case continues to go well, GM may file there, LoPucki said. If it doesn't, GM could go elsewhere, like Wilmington, Del. — a jurisdiction that's known for handling big corporate bankruptcies.
One reason the Chrysler case has gone so smoothly is that there is already another company, Fiat, lined up to help it recover. In GM's case, there isn't such a deal. Some experts think the GM case will move more slowly as a result.
Q: What does bankruptcy mean for me if I own a GM or Chrysler or if am thinking about buying one?
A: Even though the companies face some big legal hurdles, you probably won't notice it much. Both are still selling cars, though they have announced plans to sharply cut back on the number of dealers they work with. And the U.S. government has pledged to back the warranties from both companies to reassure buyers.
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