New Reality for General Motors

Today’s lead article in The New York Times is titled, “Latest G.M. Plan Cuts More Jobs, Halves Dealers.” It describes a radical new restructuring program proposed by top executives of General Motors. The program is designed to convince the Obama administration to provide additional funds for the company.

The plan essentially makes over General Motors into an entirely different organization. Instead of the 395,000 employees at its peak, it will now have 38,000. Instead of 150 factories, it will have 34.

Even with all these sacrifices, the plan might still fail if it is not accepted by the bondholders. 90 percent of them must agree to the final terms by June 1, and they will be  paid off with 225 company shares, of rather dubious value, for every $1,000 in debt.

To make matters worse, the article notes that some of the bondholders may benefit from GM’s demise. These bondholders might have insured their investment against losses by arranging credit-default swaps with AIG.

I would hope that President Obama is looking for any excuse to help out the auto companies. After pumping so much money into the financial sector, the support sought by General Motors and Chrysler is pocket change in comparison.

And more importantly, their bankruptcy or even closing could have an irreparable psychological effect on the American consumer.