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Could General Motors (GM) Be Headed For Bankruptcy This Week?

 December 10, 2012 01:59 PM

(By Rich Bieglmeier) A little noticed story in the Washington Free Beacon on December 6, 2012 warned, "A New York federal judge may rule imminently on a case that could reverse the General Motors (GM) bailout and send the company back into bankruptcy, according to sources close to the case."

It all dates back to the bailout in 2009. A payment of $367 million was made to hedge funds to stop the funds from forcing GM Canada into bankruptcy over 1.3 billion in liabilities. Canada's bankruptcy process could have derailed Uncle Sam's bailout in the states. This deal was never reviewed by Judge Robert Gerber who okayed the expedited bankruptcy, putting all the bad stuff in "Old GM" and all the good stuff in "New GM."

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According to the Free Beacon article, judge Gerber isn't all too happy about the last minute deal not crossing his desk before his decision. In July the judge said, "When I heard about that, it wasn't just a surprise, it was a shock." He added, "When I approved the sale agreement and entered the sale approval order I mistakenly thought that I was merely saving GM, the supply chain, and about a million jobs. It never once occurred to me, and nobody bothered to disclose, that amongst all of the assigned contracts was this lock-up agreement, if indeed it was assigned at all."

In addition to Gerber's unhappiness, unsecured creditors believe the $1.3 billion belongs to them, and that's what the judge will be deciding on shortly. An analyst told the Beacon, "The judge has made it very clear that he is greatly dissatisfied with the process, he's basically implying that GM hid it from him and that reopening the sale is a possibility."

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Of course, GM says it isn't so; however, Chief Financial Officer Daniel Ammann is on the record saying, "A lawsuit over some Canadian notes may harm the company by as much as $918 million, or 50 cents a share."

Based on Judge Gerber's comments about saving "about a million jobs," iStock believes he will not reopen the case. Rather, we feel the judge will make his unhappiness known by smacking the company with the $1.3 billion hit, maybe more. With 1.57 billion shares outstanding, the total could add up to twice Ammann's projection of 50 cents per share.

Since it is a onetime event, the loss would hurt, but wouldn't be as devastating as reopening the 2009 bankruptcy process. However, with dealership inventory piling up, General Motors (GM) could be in for a rough couple of quarters, despite robust car sales.

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