GM Bailout: 60 Days to Show Results

Posted by: David Welch on March 30, 2009

President Obama has a clear message for General Motors and Chrysler. Come back with a better plan or the funds are cut off.

Senior Administration officials said on Sunday that after reviewing the plans submitted by GM and Chrysler on Feb. 17, the President and his top advisors have determined that, not only did the companies not finish the restructuring moves required of them to get more funding, but they need to go farther than the Bush Administration originally demanded.

But they won’t cut the two carmakers off, either. The Treasury Department will give GM 60 days to negotiate further cuts from the UAW, reduce its unsecured debt and show a plan that works.

The President’s Auto Task Force also decided that, contrary to Chrysler CEO Robert Nardelli’s claims that the company can stand alone, it needs a merger partner. The government has given Chrysler 30 days to seal its deal to give a minority stake to Fiat or it will be cut off. Treasury will fund both companies while they seek a better fix-it plan.

The government’s intent is clear. President Obama won’t throw money after two companies that have been lurching from crisis to crisis and losing ground to the Japanese and Koreans for years. They have to cut deep and show that they will be able to thrive. “It sounds like they figured it out,” says Maryann N. Keller, a longtime industry analyst who now sits on the board of Dollar Thrifty Rental Cars. “They won’t just put a feeding tube in these companies.”

In GM’s case, the government wants a clean slate before it gives the company real money. President Obama forced the resignation of GM Chairman and CEO G. Richard Wagoner Jr., giving his hand-picked successor Frederick A. “Fritz” Henderson the CEO job. GM director and former Northrop-Grumman CEO Kent Kresa will become Chairman of GM's board. GM will also have to replace more than half of its board, Treasury officials said. Picking Kresa, and not GM’s current lead director and Wagoner support George M.C. Fisher, is a clear sign that the administration wants change.

It won’t stop there. Treasury officials say that GM’s updated viability plan, which was submitted on Feb. 17, had rosy projections for market share and pricing. GM said it could hold 19% share in the U.S. by 2014, but its market share is under 19% in the last two months. Every lost point of market share means $2 billion in lost cash flow.

GM also relies on improved pricing on its cars, but Treasury officials think that will be tough to get given the economy.

Then there is GM’s huge debt burden. GM owes the United Auto Workers $20 billion to start a union led trust fund that will pay for retiree healthcare benefits. The Bush Administration wanted the UAW to take $10 billion in cash and the rest in stock. That may still happen, but Treasury officials think that GM needs to reduce its retiree costs further. GM and the Treasury Department are negotiating deeper concessions from the UAW on retiree benefits.

Bondholders may have to give more, too. GM has been trying to negotiate with them to drop their unsecured debt from $28 billion to about $9 billion. But bondholders have held out and even asked the government to help them recoup the debt. But the government is backing GM and thinks the bondholders may need to take less than one-third of their value of the bonds.

If GM can’t get all it needs done in 60 days, then the Treasury Department may force the company into a quick form of bankruptcy. Treasury officials have called it a surgical process in which GM would go in and shed some obligations to creditors and the union quickly. One senior Administration officials called it a “quick rinse.”

GM would be out of bankruptcy as fast as 30 days with less debt and the ability to make a profit at lower sales levels. But government officials didn’t say exactly how such a bankruptcy would work, except to say that it is within current bankruptcy code.

Administration officials also think Chrysler needs to negotiate away some of its $6.8 billion in secured debt, which company executives are trying to do. Chrysler has also failed to strike a refinancing deal for the billions it owes the UAW and the union’s Voluntary Employee Benefit Association, which is a trust fund that pays worker health-care costs.

But more to the point, Obama’s Administration doesn’t think Chrysler can make it alone. The company doesn’t generate enough cash or have the money to develop enough new models to survive by itself, senior administration officials say.

Treasury has given Chrysler 30 days to complete its deal to partner with Italy’s Fiat Auto or another major carmaker. If the company doesn’t find a partner, then it would be cut off from government funding. The Treasury Department also will not let Fiat own more than 49% of Chrysler until the U.S. carmaker pays all of its debt back.

Chrysler’s plan says the company can hold 10.7% market share over the next five years. Treasury officials doubt that, based on the company’s history of losing share.

The task force was harsh in its assessment of Chrysler, with officials singling out the inferior quality of its existing portfolio and its heavy-truck mix. A senior administration official noted specifically that Chrysler failed to get even one of its products recommended this year by the influential Consumer Reports magazine.

The task force also cited the company’s difficulty in meeting toughening federal fuel economy standards with a product portfolio so heavily tipped toward trucks and SUVs. The company has just four all-new products, apart from those contemplated with Fiat, planned between 2009 and 2014, the task force noted.

In the case of both GM and Chrysler, the Administration took a hard line on the viability plans. And there are no guarantees that the government will bail the companies out. Clearly the Administration would like to help the auto industry and keep the companies alive, but with so much public outrage over the banking and finance bailouts, they’re being very tough on Detroit. Since GM and Chrysler have submitted two restructuring plans without a green light, Obama has good reason.

Reader Comments

Wayne Walentowski

April 5, 2009 10:50 PM

With all the whining and complaining about GM and Chrysler bailouts, maybe our Democratic Representatives and President need to be reminded that it was these hard-working auto workers and retirees who pushed to get them elected. If they cause the Auto Companies to go into Bankrupcy, it's these people Congress is really screwing. I have always voted Democrat as ALL blue-collar should. But after the latest reports out of Washington, I'm questioning my decision. We made great history electing our first black President, but he sounds more like a Republican since he's been in office.
If he was as hard on the banks and investment companies as he is on the Auto industry, maybe we wouldn't be in this position. If they push GM and Chrysler into bankrupcy, alot of retired people would lose their pensions and the country would be in even worse shape. The auto industry needs his support to survive and bankrupcy isn't the answer. We need President Obama's help and Congress's help to pull the auto companies out of this situation with loans and understanding. The Blue-collar worker is the backbone of our country and we need help and I still think President Obama is the man to do it if he believes in us as we believe in him.

Michael Torre

May 1, 2009 2:29 PM

Wayne I agree, I just love (sarcastic tone) how the government will give AIG all this money when they (AIG) continue to screw over the American people, but the government is willing to watch these American auto companies fall apart. That makes no sense! Americans hold a lot of pride in their cars, if these auto companies go bankrupt I feel the American people will lose a lot of hope in the "American Dream". If someone from AIG get a $1,000,000 bonus then I want $85,000 to pay off my college loans, then I can spend my money on consumer goods boosting the economy.

Chris Davis

June 2, 2009 2:26 PM

GM has 178 billion in debt and only 70 billion in assets. They are only getting worse. Its stupid to bail out these companies. They are filing bankruptcy which means that anyone who owns stocks in this companies is going to have their stocks reduced to $0. So regardless of the input of the government the american people will get little back from it. When they go into bankruptcy. The money put in by the government is going to be collected by the companies that GM owes a debt to. Just let them settle in bankruptcy court without government help and let them free themselves of the debt without our help so they can start fresh.

Chris Davis

June 2, 2009 2:26 PM

GM has 178 billion in debt and only 70 billion in assets. They are only getting worse. Its stupid to bail out these companies. They are filing bankruptcy which means that anyone who owns stocks in this companies is going to have their stocks reduced to $0. So regardless of the input of the government the american people will get little back from it. When they go into bankruptcy. The money put in by the government is going to be collected by the companies that GM owes a debt to. Just let them settle in bankruptcy court without government help and let them free themselves of the debt without our help so they can start fresh.

Danny L. McDaniel

June 3, 2009 9:11 PM

The GM and Chrysler bailouts will ultimately end up similiar to the creation of Conrail in the 1970's. The federal government will first try to run both automakers as seperate entities but will eventually combine the two and make one big mess instead of two managable businesses. That is actually what happened to the railroads in the Northeast and Midwest when the government combines seven rail companies into one big organization.

GM is best to succeed in this but it will not be able to stand by itself until at 2015 0r 2016 at the latest. GM and Chrysler will become quasi-departments of the U.S. and will bleed the tresury for about a decade.

The only concern is that if the US gets involved with automobile manufacturing will they build cars similiar to the YUGO of the early 1980's? Clunkers that must be repaired constantly, no one wants, and have no resale value because they don't live long enough.

What is needed are tailfins and big engines! GM and Chrysler must look to the past to see the future without dwelling on nostalgia.

Danny L. McDaniel
Lafayette, Indiana

Javier Vallejo

June 17, 2009 11:55 PM

Might i suggest a higher import tax on foreign automibiles. This will draw more consumers to domestic automobiles, in turn reducing the astounding debt GM and crystler have collected

Javier Vallejo

June 17, 2009 11:55 PM

Might i suggest a higher import tax on foreign automibiles. This will draw more consumers to domestic automobiles, in turn reducing the astounding debt GM and crystler have collected

ps

June 18, 2009 4:24 PM

Conrail actually took several bankrupt railroads, got rid of unprofitable routes, cut costs and turned a profit or else CSX and Norfolk So wouldn't have bought them. But it took several years, not 60 days.

Jaxon

June 24, 2009 12:28 PM

Taxpayers do not have unlimited funds -- but the government continues to spend money like it's their own pocket book.

When capitalism's business cycle veers into discomfort (unemployment, slowing sales and borrowing, etc.) -- the State (government) now suppresses recession with monetary policy (making money cheap and abundant) and fiscal policy (quantitative easing, injections of liquidity, stimulus programs, etc.) so nobody feels pain. But the problems are still there, just hidden for a time by the bailouts. They will continue to grow until another bailout is needed (e.g. Chrysler).

Capitalists and those that embrace the free market reject this narrow notion for many reasons. Chief among them is that fact that experience and progress is the byproduct as we surmount difficulty. The Marines say, pain is weakness leaving the body. These downturns are inefficiencies leaving the system. These loans will be used to prop up inefficient systems. Nobody truly learns. Nobody truly grows. Nobody progresses.

--

Stop the paronioa: You do not need to boycott car manufactures that accept bailouts. Capitalism thrives when you make a decision that fits you. You should find the car that you want -- and that meet the criteria important to you. Car manufacturers that accept bailout money will be required to add inefficiencies to their business model and are at a disadvantage to produce the car that meets your needs the best. You should make car manufacturers and dealers compete for your business.

Sincerely,

Ford Fan

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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