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GM’s auditors raise the specter of Chapter 11

DETROIT — Of all the words in General Motors Corp.’s 402-page annual report, none is more jarring than two written by the company’s auditors: “substantial doubt.”

The doubt, according to Deloitte & Touche LLC, is about whether GM can overcome its staggering losses and generate enough cash to stay in business, or remain a “going concern” as accountants would say.

GM concedes in the report filed Thursday that it’s on the edge of bankruptcy and won’t be able to avoid it unless it gets more government money and successfully executes a huge restructuring plan.

It’s no surprise that auditors would question GM’s viability. The Detroit-based behemoth lost $30.9 billion last year, is living on $13.4 billion in government loans, and is seeking up to $30 billion as it tries to survive the worst auto sales climate in 27 years.

But the auditors’ comments are serious because the threshold for raising such concerns is tilted heavily in favor of companies, and often they can negotiate them away, said John Pottow, a University of Michigan Law School professor who specializes in bankruptcy.

“If you get a qualified going concern audit letter like this, that suggests you are in extreme financial distress and very likely may file for bankruptcy,” he said.

U.S. Sen. Charles Grassley, the top Republican on the Senate Finance Committee, said the auditors’ concerns mean the government will likely have to provide more help to GM. The senator from Iowa called for a “restructured bankruptcy” involving the government.

“It would be a process of bankruptcy but be worked out outside of the court in mutual agreement to bondholders, stockholders, management, in this case, the federal government, because we’ve got a lot invested there, and also the unions,” Grassley said in a conference call with reporters from his home state.

Ray Young, GM’s chief financial officer, said in an interview Thursday that GM can accomplish its restructuring goals without bankruptcy.

The company is making progress in negotiations to swap debt for stock and to gain concessions from the United Auto Workers union, he said.

“One thing for certain is there’s going to be recovery,” Young said. “We just need to take advantage of this situation to streamline, downsize, get ourselves leaner, so that when the recovery occurs we will emerge as a far stronger company.”

In its annual report filed with the Securities and Exchange Commission, GM also disclosed that Chief Executive Rick Wagoner received a pay package worth $14.9 million in 2008, although $11.9 million of his compensation was in stock and options whose value plummeted to $682,000 as GM’s share price sank.

GM shares, which lost 87 percent of their value in 2008, fell 34 cents, or 15.5 percent, to $1.86 Thursday.

Both GM and Chrysler LLC, which also has received government loans, face a March 31 deadline to get signed agreements for concessions from debtholders and the UAW to show the government they can become viable again.

If they can’t reach the necessary deals, the government could recall the loans and force the companies into bankruptcy protection.

Chrysler, which so far has received $4 billion in government loans and is seeking another $5 billion, likely will receive a “going concern” letter from its auditors, although it won’t be made public because the company is privately held, Pottow said.

Ford Motor Co. has said it plans to make it through the industry’s slump without government help. Ford lost $14.6 billion last year, but there were no warnings from auditors in the annual report the Dearborn company filed last month.

Even automakers like Toyota Motor Corp. are struggling as U.S. sales have fallen to the worst levels since December 1981.

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