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Auto Bailout

General Motors: 60 Days to Show Results

President Barack Obama has a clear message for General Motors (GM) and Chrysler: Come back with a better plan or the taxpayer funds are cut off.

Senior Administration officials said on Sunday, Mar. 29, that after reviewing the plans submitted by GM and Chrysler, the President and his top advisers 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 further than the Bush Administration originally demanded.

But the Obama Administration won't cut the two carmakers off, either. The Treasury Dept. will give GM 60 days to negotiate further cuts from the UAW, reduce its unsecured debt, and show a plan that works, according to senior Administration officials. The President's auto industry 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 (FIA.MI) or it will be cut off.

The government's intent is clear: President Obama won't throw money at 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 Automotive Group (DTG). "They won't just put a feeding tube in these companies."

GM's Viability Plan Too Rosy for Treasury

In GM's case, the government wants a clean slate before it gives the company a substantially larger loan package. President Obama forced the resignation of GM Chairman and CEO G. Richard Wagoner Jr., giving his handpicked successor Frederick "Fritz" Henderson the CEO job. GM director and former Northrop Grumman (NOC) CEO Kent Kresa will become chairman of the 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 supporter 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's plan 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 health-care 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 GM needs to reduce its retiree costs. GM and the Treasury Dept. are negotiating deeper concessions from the UAW on retiree benefits.

For GM, a Quick Bankruptcy Is Possible

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 the value of their bonds.

If GM can't get all it needs done in 60 days, senior Administration officials said, then the Treasury Dept. 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 official 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.

Administration officials also think Chrysler has too much debt and 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 Assn., 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.

Chrysler's Deadline for a Fiat Deal

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

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 companies, the Administration is taking a hard line on the viability plans, and is demanding tougher action. There are no guarantees that the government will continue bailing them out.

With David Kiley in Detroit.
Welch is BusinessWeek's Detroit bureau chief.

Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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