The cost to wind down what remains of General Motors Corp after an asset sale to a US Treasury- backed buyer is rising, topping the $950 million set aside by GM and the government, executives for the auto maker testified.

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GM restructuring chief Albert Koch, who will run the so- called “old GM” if a sale is completed, said he anticipates a wind down will cost “slightly in excess of $1.25 billion.”

The funds will go to closing and selling plants the “new GM” will leave behind and to paying priority claims from creditors.

GM Chief Executive Officer Fritz Henderson also said the $950 million in cash GM and the Treasury agreed to leave behind after the sale to cover administrative claims and a wind-down likely won’t be sufficient. Henderson said on Wednesday at a hearing in US Bankruptcy Court in New York that environmental liabilities may drive the cost higher.

“It may be short to a certain degree,” Henderson said, referring to the money set aside. “We would hope the amount that was allocated would be sufficient.”

The Treasury has said it would leave sufficient cash in GM’s bankruptcy estate to fund a wind down, though it hasn’t provided a written commitment for more funding, Koch said. Without additional cash from the Treasury, old GM may have to sell some of its 10 per cent stake and warrants in the reorganised company to cover the shortfall, he said.

The executives were among the first witnesses to testify at the Detroit-based automaker’s sale hearing in which it is seeking approval of terms that would give the US government 60 per cent of the new GM for making $50 billion in bailout loans. A worker fund would get a 17.5 per cent stake for giving up health-care benefits, and Canadian government entities would get 11.7 per cent for their loans.

Bondholders and unsecured creditors would share 10 per cent of the equity, plus warrants, under the proposed plan.

A GM adviser said the stock and warrants going to old GM to pay bondholders and other unsecured creditors would be worth at least $7.4 billion.

Koch said he doesn’t expect to raise much cash selling the plants that the Treasury isn’t buying.

“It’s going to be very difficult to sell or dispose of them,” Koch said, noting that many have environmental contamination issues. The environmental liabilities are estimated at $530 million, he said.

The “heavy lifting” on winding down the business will be finished in two to three years, while other elements may “drag on” longer than that, Koch said. It will likely be early 2010 before the company is in a position to file a liquidation plan with the court, he said.

GM may seek to terminate retiree benefits for unionised retirees who aren’t represented by the United Auto Workers union as early as next week, and it expects to propose a mediation process to deal with tort claims, Koch said.

The Treasury is pushing for a speedy sale because it and GM are “concerned about the business status of the company in a bankruptcy,” Henderson said. The government has said it won’t continue to fund the $33 billion bankruptcy loan provided to GM if the judge doesn’t approve the sale of most of its assets by July 10. If the government pulled its funding, GM would liquidate, Henderson said.

The negotiations over the sale with the Treasury were long and difficult, Henderson said.

“I’ve not seen a more dedicated group than the auto task force,” he said. “They were tough on us when they needed to be. They were very powerful.”

Henderson’s predecessor, Rick Wagoner, was asked to step down by Steven Rattner, the head of the Treasury’s auto task force, in a one-on-one meeting, Henderson testified.

“Wagoner indicated to me he was asked to step down,” Henderson said. GM’s board didn’t ask for Wagoner’s resignation at a March meeting, said Henderson, who is a board member.

An auto task force adviser, Harry Wilson, is scheduled to testify tomorrow morning.

The case is In re General Motors Corp, 09-50026, US Bankruptcy Court, Southern District of New York (Manhattan).

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