Federal Judge to Rule on GM Bailout- Back to Bankruptcy for GM?

Posted by Tina

2013 is looking like a blockbuster year with the fiscal cliff looming, politicians in full stand-off mode, and Obamacare taxes and regulations set to kick in. Just to add to the fun and games we learned today that a federal judge in New York may soon rule on a case that alleges a “backroom deal” between GM and the Obama administration. Judge Robert Gerber will decide if the deal should be reversed.

The Washington Free Beacon has the story:

At issue is a backroom deal hatched by GM to fulfill the Obama administration’s demand for a quick bankruptcy, draining the automaker of nearly all of its cash on hand and leaving it in worse shape than it was when it collapsed in 2009.
One condition of GM’s bailout was to shore up its overseas subsidiaries. On the eve of entering bankruptcy, the company cut a $367 million “lock-up agreement” with several major hedge funds to prevent GM Canada from failing. The agreement ensured that GM could spin-off its liabilities to “old GM,” while using a multi-billion dollar bailout to create a new company.

All of that could be reversed if bankruptcy Judge Robert Gerber reopens the process and rules in favor of old GM trustees, who are suing the hedge funds at the center of the lockout agreement.

“In this particular situation, there’s $1.3 billion in liabilities, but that’s just what’s officially back on the table if the court rules for old GM,” said a bankruptcy expert close to the negotiations. “If those go back on the table then everything could be back on the table and [new GM] would have to address them.”

Those liabilities, which include old GM’s debt and product liabilities that pre-date bankruptcy, are valued at $30 billion, a sum that would wipe out the company’s $34.6 billion cash reserves.

Wouldn’t it have been smarter to face the music in bankruptcy court?