Administration: 'Reluctant Equity Owner' in GM

On orders from President Barack Obama, U.S. taxpayers will provide another $30.1 billion in loans to General Motors.

WASHINGTON, D.C. (CNSNews.com) - On orders from President Barack Obama, U.S. taxpayers will provide another $30.1 billion in loans to General Motors as the auto maker enters bankruptcy, the Obama administration announced Sunday evening.

In a news release announcing the specific steps it will take to support GM, the administration also announced four specific management principles that will guide its actions - in the GM case and in other private-sectors intrusions.

As CNSNews.com has reported, Obama is acting on Monday without the prior approval of Congress or any legislation authorizing his actions. (See related story)

More taxpayer money for GM

Monday "will rank as another historic day for the company--the end of an old General Motors, and the beginning of a new one," the White House said in a news release on Sunday night.

President Obama planned to announce GM's restructuring strategy during a midday appearance at the White House on Monday. The announcement comes two months after Obama ordered GM to rework its business plan, accelerate its restructuring, and reduce its outstanding liabilities.

Satisfied that GM is making progress, President Obama "has deemed GM's plan viable and will be making about $30 billion of additional federal (taxpayer) assistance to support GM's restructuring plan," the White House said.

The deal will allow the Obama administration to select members of the GM Board of Directors and make other corporate governance decisions. The federal government will get $8.8 billion in debt and preferred stock in the restructured "new GM" and a 60-percent equity stake in the company.

The governments of Canada and Ontario will contribute $9.5 billion toward GM's restructuring in exchange for $1.7 billion in debt and preferred stock -- and approximately 12 percent of the equity of the new GM. Based on its substantial financial contribution, the White House said, the Canadian government will have the right to select one member of the new company's board of directors.

The "new" GM will establish an independent trust (VEBA) that will provide health care benefits for GM's retirees. The VEBA will receive a 17.5- percent equity stake in the new company and warrants to purchase an additional 2.5 percent. It will have the right to select one director.

Chapter 11 bankruptcy, which allows companies to continue operating while they restructure, was said to be unworkable by both auto executives and government officials in late 2008, when talk of an auto bailout first surfaced.

Last December, the Bush administration provided a $13.4 billion bridge loan to GM and a $4 billion loan to Chrysler after Congress rejected auto bailout legislation. The Bush administration used money from the Troubled Assets Relief Program (TARP), which Congress authorized only for financial institutions such as banks, insurance firms and credit unions. (See related story)

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In March, President Obama expanded the auto bailout plan to guarantee all GM and Chrysler warranties. Obama's auto task force also deemed the two companies' restructuring plans unsuitable, making Chapter 11 protection the only option for both companies.

GM will follow a similar course taken by Chrysler LLC, which filed for Chapter 11 protection in April and hopes to emerge from its government-sponsored bankruptcy this week.

"The President made clear throughout this process that every one of the company's stakeholders would be expected to sacrifice, and that none would receive special treatment because of the involvement of the government. The resulting agreement is tough but fair, and has garnered broad support from GM's major stakeholders," the White House said, noting that 54 percent of bondholders agreed to deal.

The United Auto Workers made steeper concessions under this agreement than what was requested under the Bush administration, the White House statement said. A new contract for pensions and health benefits was established.

As part of the agreement, GM will reduce its goal of 16 million in annual sales to 10 million. It also will close 11 facilities.

'Reluctant' government establishes 'ownership' principles

The Obama administration, apparently anticipating additional intrusion in the private sector, on Sunday announced the management principles that will guide its actions.

"Consistent with the goal of clearly limiting the government's role as a reluctant equity owner but careful steward of taxpayer resources, the Obama Administration has established four core principles that will guide the government's management of ownership interests in private firms," the White House said Sunday night.

The four principles, as described in the White House press release, are as follows (verbatim):

1. The government has no desire to own equity stakes in companies any longer than necessary, and will seek to dispose of its ownership interests as soon as practicable.

2. In exceptional cases where the U.S. government feels it is necessary to respond to a company's request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth. When necessary, these conditions may include restructurings similar to that now underway at GM as well as changes to ensure a strong board of directors that selects management with a sound long-term vision to restore their companies to profitability and to end the need for government support as quickly as is practically feasible.

3. After any up-front conditions are in place, the government will protect the taxpayers' investment by managing its ownership stake in a hands-off, commercial manner. The government will not interfere with or exert control over day-to-day company operations. No government employees will serve on the boards or be employed by these companies.

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4. As a common shareholder, the government will only vote on core governance issues, including the selection of a company's board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.

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