Report: GM Prepares for 'Surgical' Bankruptcy

The Treasury Department is directing General Motors to prepare for a bankruptcy filing by June 1, despite GM's assertion that it could still reorganize without such a filing, The New York Times reported unnamed sources as saying on Monday.

Members of President Obama's automotive task force are said to have been in discussion with GM officials and its advisers in Detroit and Washington last week and are expected to continue this week.

The White House-appointed autos task force has given GM 60 days to come up with a restructuring plan and it is trying to determine whether the automaker can be a viable company.

Quoting sources who had been briefed on the GM plans, the Times said the goal was to prepare for a fast "surgical" bankruptcy.

The automaker's strategy for a quick trip through bankruptcy court is likely to spark legal challenges from bondholders worried about getting steamrolled.

Key members of an ad hoc committee representing GM bondholders have begun preparing arguments against the auto maker's bankruptcy plan, according to people familiar with the strategy.

GM's leading bankruptcy plan would break the company into two parts: a good GM made up of strong assets, such as Chevrolet and the auto maker's Chinese operations; and a bad GM of underperforming assets and billions of dollars in obligations that essentially would be wound down in bankruptcy court.

Proceeds from the government's eventual sale of equity in the good company in part would go toward paying parties that have leverage over the auto maker. Those include the United Auto Workers union, which is owed tens of billions in health-care payments; and unsecured bondholders, who hold $29 billion in GM debt.

Even though unsecured bondholders would get stock in the good GM, the people familiar with the matter said bondholders are concerned that GM's so-called 363 sale unnecessarily pushes bondholders to accept hefty losses on their investments.

The threat of legal opposition is one reason GM management had resisted filing in bankruptcy court for protection from creditors. GM and the government have a handful of different game plans to emerge from bankruptcy court within a few months, rather than the typical stay of at least a year. But all those plans are subject to the discretion of a bankruptcy judge and the cooperation of stakeholders. "It's the ultimate democratic process," a GM executive said, summing up the complications that can arise in bankruptcy court.

Some bondholders fear GM's fast-track reorganization inappropriately mirrors what was done last fall when Lehman Brothers filed for bankruptcy protection as the U.S. financial system seized up. They draw a contrast to the dire situation at Lehman, which was believed to be melting so quickly that it required a quick sale of its trading operations to Barclay's Capital.

The Wall Street Journal contributed to this story