In a widely anticipated move, General Motors today became the second Detroit-based automaker to recently file for Chapter 11 bankruptcy. Despite receiving nearly $20 billion in loans from the U.S. Treasury Department, along with last-minute, debt-for-equity deals with bondholders and concessions from both its U.S. and Canadian worker unions, GM’s U.S. operations have joined rival Chrysler in court protection as both companies try to downsize themselves in a drastically depressed market.

In what amounts to a nationalization of GM by the federal government, the U.S. Treasury is providing the company with about $30 billion in debtor-in-procession financing to make it through bankruptcy—raising GM’s government assistance total to about $50 billion. The investment results in the Treasury gaining a 60-percent interest in GM. About 18 percent will be held by the United Auto Workers’ Voluntary Employee Beneficiary Association (VEBA), while the Canadian government will own about 12 percent. Unsecured bondholders and creditors will get the remaining 10 percent, as well as the potential to acquire another 15 percent down the road.

Under the terms of the reorganization and similar to the restructuring path forged by Chrysler, the sale of which to Italy’s Fiat has been approved by the U.S. Bankruptcy Court, GM will be split into two entities: a “good GM,” which includes the core Chevrolet, Cadillac, GMC, and Buick brands and the facilities to support those divisions; and a “bad GM,” comprised of redundant/unprofitable plants and the underperforming Hummer, Saturn, Saab, and Pontiac operations. The goal of the bankruptcy process is for the existing, overburdened automaker to turn over its best assets to a less debt-riddled “New GM.” The New GM is expected to emerge from court protection in 60–90 days as a leaner, more agile company with fewer brands, dealers, and long-term obligations. The leftover assets likely will be mired in Chapter 7 liquidation for much longer, however, as they are individually sold off or shut down entirely.

In addressing the media, both President Obama and GM president and CEO Fritz Henderson claimed that the federal government is a “reluctant investor” and will only be involved in the company’s most fundamental business decisions. Despite its backing of GM vehicle warranties and its status as a majority stakeholder, the government will not be involved in product development, they said. However, the Obama administration’s recently announced update to Corporate Average Fuel Economy (CAFE) standards already has shown this not to be the case. By requiring new cars and trucks to have a combined average of 35.5 mpg by 2016 (current levels are 27.5 mpg for cars and 23 mpg for trucks) the government is directly influencing the vehicles that we’ll be able to buy in the coming years. Specifically, cars and trucks will have to both shrink in size and lose weight—which costs money—or require significant amounts of new, expensive technology to improve their efficiency. So while your future Chevrolet dealer may carry a few token Camaros, Corvettes, and HD Silverados among a sea of tiny penalty boxes, expect to pay a lot more for Detroit iron of all types.

What’s more, this directive focuses on a political issue aimed at appeasing environmental worries, rather than making money. GM must return to profitability and pay back its government loans before the Treasury allows it to again become a publicly traded company. Yet there is little assurance that buyers will embrace these new, hyper-efficient vehicles en masse, particularly if gas prices don’t jump back into the four-dollar-per-gallon range. With billions of taxpayer dollars on the line, the Treasury is hedging GM’s business obligation to give consumers the cars and trucks they desire against the demands of its eco-constituents in Washington.

While the significant size and complexity of GM’s operations make a quick trip through Chapter 11 optimistic at best, the fact that Chrysler slipped through the process in little over a month makes it plausible that a revived GM could emerge by the end of summer. However, the problems remain sticky. For example, to what extent will the fallout of the reorganization affect the rest of the industry? And will the U.S. new-car market rebound enough for the so-called New GM to actually make money? We’ll have to wait to see, but the automaker says its lower operational costs will allow it to survive even if U.S. sales volumes maintain their current, dismal 10 million-unit-per-year pace. (Recent boom years saw American buyers snap up 15–17 million vehicles annually.) Let’s hope that’s the case, because sales likely won’t recover much until 2010—at the earliest. And without the funds for product development or a gas tax to keep fuel prices artificially high, GM—and the government—will find it increasingly difficult to sell the American public the efficient vehicles Uncle Sam believes they want.

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