Fall from grace...GM finally files for bankruptcy

General Motors (GM), once the crown jewel of America's flourishing industrial sector and the world's No.1 automaker till not too long ago, filed for Chapter 11 bankruptcy on June 1. The Detroit auto major submitted its reorganization papers to a federal clerk in Lower Manhattan. This marked the largest bankruptcy filing in the history of American industry. US President Barack Obama marked the lowest point in GM's 100-year history - its bankruptcy filing - by barely mentioning it, instead focusing his remarks on the second chance GM will have to become a viable company with more government aid. He described the investment of more billions of taxpayer dollars in GM as necessary to avert a calamity that could hurt millions of people.

The Obama administration will commit another US$30bn on top of the US$19.4bn it has already given GM to cover its losses and fund its operations. The US government will get a 60% equity stake in the new company after restructuring, as well as US$8.8bn in debt and preferred stock. A trust established to fund health care benefits for retirees of the United Auto Workers (UAW) union will own 17.5%, and get the right to purchase another 2.5%.

The governments of Canada and Ontario will lend US$9.5bn and receive 12% of the equity in the new GM. Finally, bondholders who lent GM US$27bn will forgo much of what they are owed and instead get a 10% share of the new company plus the right to secure another 15%. In addition, investors who own 54% of those bonds have agreed to not fight plans for a quick bankruptcy.

GM employs 230,000 people around the world, building more than 20,000 vehicles a day. GM said it aims to emerge from Chapter 11 by August, shorn of much of its debt, four of its eight brands, and surplus plants and dealers.

Meanwhile, GM's European arm will be shielded from the bankruptcy after an 11th hour deal reached on May 30 that will see Magna International, the Canadian parts supplier, take over the business with financial backing from the German government. Fiat withdrew from talks with Berlin. GM's European operations include the Opel and Vauxhall brands. Under the signed Memorandum of Understanding (MoU) between GM and Magna, shares in GME will be transferred to a trust to protect it from a GM insolvency. GME will also receive €1.5bn in credit guarantees from the German government to keep it afloat while GM and Magna negotiate a final deal.