Without aid, GM, Chrysler could face bankruptcy

Published 12:28 am Tuesday, March 31, 2009

WASHINGTON — President Barack Obama asserted unprecedented government control over the auto industry Monday, bluntly rejecting turnaround plans by General Motors Corp. and Chrysler LLC, demanding fresh concessions for long-term federal aid and raising the possibility of quick bankruptcy for either ailing auto giant.

“I am absolutely committed to working with Congress and the auto companies to meet one goal: The United States of America will lead the world in building the next generation of clean cars,” Obama said in his first extended remarks on the industry since taking office nearly 10 weeks ago. And yet, he added, “our auto industry is not moving in the right direction fast enough to succeed.”

Obama, flanked by several administration officials at the White House, announced a short-term infusion of cash for the firms and said it could be the last for one or both.

Chrysler, judged by the administration as too small to survive, got 30 days’ worth of funds to complete a partnership with Fiat SpA, the Italian manufacturer, or some other automaker.

GM got assurances of 60 days’ worth of federal financing to try to revise its turnaround plan under new management with heavy government participation. That would involve concessions from its union workers and bondholders.

Who’s in, who’s out at GM

The administration engineered the ouster of longtime GM CEO Rick Wagoner over the weekend, an indication of its deep involvement in an industry that once stood as a symbol of American capitalism.

As a condition of GM’s government loans, the automaker is not allowed to pay severances to departing executives. But Wagoner, 56, will get a pension and other benefits worth an estimated $23 million for his nearly 32 years with the company.

Under Fritz Henderson, newly named as CEO, General Motors issued a statement saying it hopes to avoid bankruptcy, but will “take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process.”

The 25-year company veteran who inherits the fate of General Motors is known as someone quick to act. It remains to be seen, though, how much he’ll be allowed to do.

Henderson, 50, assumes control of the ailing automaker as members of the White House auto task force prepare to move into GM’s Detroit headquarters themselves to ensure GM makes the changes demanded by the Obama administration.

Henderson said Monday he thinks he, not the task force, will handle everyday management.

He earned a master’s degree in business administration from Harvard in 1984 and joined GM as an analyst that year.

Wall Street reacts negatively

Major indexes fell about 3 percent Monday, including the Dow Jones industrial average, which lost about 254 points but finished well off its lows. Financial stocks weighed heavily on the market amid worries that banks will need fresh injections of capital.

Fears of an automaker bankruptcy have been looming over investors for months, and Wagoner’s removal made the market uneasy not only about the industry, but the overall economy.

“It was a pretty sharp reminder that there are some difficulties here,” said Matt King, chief investment officer at Bell Investment Advisors, about Obama’s rejection of the auto plan.

Investors pummeled GM stock, as shares tumbled 92 cents, or 25.4 percent, to $2.70 on Monday. That is down 89 percent from the 52-week high of $24.24 on April 30, 2008.

Chrysler is privately owned.

What it means in the big picture

Obama is dealing with the beleaguered auto industry more sternly than he has with bailed-out banks and insurers as he takes the nation another step into uncharted government regulation of industry.

By now, it may seem obvious that the government is playing major roles in running huge corporations, including banks, insurance companies and automakers receiving billions of dollars in federal aid. Yet the message is still hard to absorb by many unions, retailers and, most visibly, executives who took big bonuses or chartered jets to congressional hearings where they sought the money to keep their firms afloat.

The administration, perhaps reflecting public sentiment outside Michigan, has shown less patience with the auto industry than with other troubled sectors.

It’s tightening its oversight of bailed-out financial companies, too, but it has generally been more lenient in terms of time, personnel and other factors. Nor has Obama demanded that financial-sector workers and unions make more “painful concessions,” although that sector is far less unionized than the auto industry.

Union contracts, it appears, are not as sacrosanct in the administration’s opinion as the one it has left intact at AIG, which provided politically radioactive retention bonuses to employees.

“I know that when people even hear the word ‘bankruptcy’ it can be a bit unsettling,” Obama said in his remarks at the White House.

Indeed. But many other events, including plunging job rates and savings accounts, have unsettled Americans even more.

What they’re saying

“We were pretty excited about the news. Having the government say ‘go ahead and buy an American car’ is great — that’s always positive, ” said Bart Bunnell, general manager of Dwayne Lane’s Everett Chrysler Jeep and Dodge dealership.

Larry Brown, political director for the International Association of Machinists, AFL-CIO District 751, also viewed the administration’s moves as positive.

“Things have to be done in a way that makes sure all of the stakeholders benefit from these investments,” he said. “And that’s one of the things I appreciate about what I’m hearing — or what I think I’m hearing — from the Obama administration. This can’t just be about the CEOs or the stockholders.”

Many assembly-line autoworkers reacted with skepticism and anger Monday, suggesting that the people who put the country on wheels get treated differently than the wizards of Wall Street.

“It’s the age-old Wall Street vs. Main Street smackdown again,” said Brian Fredline, president of UAW Local 602 at a plant near Lansing. “You have all kinds of funding available to banks that are apparently too big to fail, but they’re also too big to be responsible.”

“But when it comes to auto manufacturing and middle-class jobs and people that don’t matter on Wall Street, there are certainly different standards that we have to meet — higher standards — than the financials. That is a double standard that exists and it’s unfair,” Fredline said.

Chrysler Chairman Bob Nardelli sought to assure customers, dealers, suppliers and employees that the automaker “will operate ‘business as usual’ over the next 30 days” while working closely with the government and Fiat to secure the support of stakeholders.

Sergio Marchionne, CEO of Fiat, issued a statement calling the Obama administration’s involvement “tough but fair, and we believe we will arrive at a result that will establish a credible future for this crucial industrial sector and that assigns the right priority to the repayment of U.S. taxpayers’ funds.”

Government warranties

Along with harsher demands, Obama offered support Monday for General Motors Corp. and Chrysler LLC, hoping to soothe consumers’ fears about buying new vehicles from automakers teetering on the brink of bankruptcy.

The main source of support is the Warranty Commitment Program, which has been designed by the Treasury Department to ensure that customers buying a new vehicle will still have a warranty even if GM or Chrysler slides into bankruptcy and is forced to restructure — or, even worse, liquidate its assets.

Many consumers — reasonably enough — say they wouldn’t buy a car from a bankrupt automaker. So the government has taken steps to ensure that the buyers of GM and Chrysler cars won’t be left out in the cold.

Starting Monday, consumers who purchase a GM or Chrysler vehicle will have their warranties honored in the event that the maker of their car or truck goes into bankruptcy.

The government will finance the companies’ cost to repair covered vehicles at the dealership or through a third party. The funds will be set aside in a separate federal account. The companies will provide 15 percent of their expected warranty costs, with the government covering the rest.

World reaction

Canadian officials said Monday they agree with Obama that neither General Motors nor Chrysler has proposed sweeping enough changes to justify further long-term bailouts.

But Canada will go ahead with up to 4 billion Canadian dollar ($3.2 billion) in interim loans to keep the companies afloat temporarily. Canadian Industry Minister Tony Clement said without the interim funding they would not have been able to meet payroll.

In Asia, Japan’s Nissan and Toyota say their critical North American business would be hurt by the collapse of one of the U.S. automakers because they share the same parts suppliers, such as Delphi Corp., Bosch Auto Parts and TRW Automotive.

In Europe, Germany’s BMW AG and Daimler AG both fell around 8 percent, while France’s Renault SA and PSA Peugeot-Citroen SA dropped nearly 10 percent. In Tokyo, shares of Toyota fell 3.7 percent, Honda Motor Co. shed 6.7 percent, and Nissan Motor Co. dived 7.7 percent.

“A healthy U.S. auto industry is in the best interests of everyone,” said Alan Buddendeck, corporate vice president of global communications at Nissan Motor Co., Japan’s third-biggest carmaker.