Obama Administration Gives Failing Grades To GM, Chrysler Plans
March 29 2009 - 11:30PM
Dow Jones News
The Obama administration gave failing marks to the restructuring
plans of General Motors Corp. (GM) and Chrysler LLC, a decision
that moves the struggling auto makers - and a giant piece of the
U.S. economy - closer to collapse.
Administration officials, briefing reporters ahead of a speech
Monday morning by President Barack Obama, said the government will
give the auto makers enough working capital to work with
stakeholders to craft more aggressive strategies. It warned,
however, that a "quick and surgical" bankruptcy may be each
company's best chance for survival.
In GM's case, the government will provide working capital for 60
days. Though it said the company's current plan isn't viable, it
expressed confidence the auto maker can survive. To help give GM a
fresh start, the White House asked Chief Executive Rick Wagoner to
step down.
The White House's view of Chrysler was more harsh: it doesn't
believe the company is viable as a standalone entity. Chrysler's
potential deal with Italian automaker Fiat (FIAZY), however, could
provide a "path to viability," the administration said. The
government will give Chrysler working capital for 30 days, a period
it says is sufficient to wrap up the agreement with Fiat.
The administration said Fiat has committed to building new fuel
efficient cars and engines in the U.S. as part of a deal with
Chrysler.
If that deal is a success, the administration said it will
consider investing up to $6 billion in Chrysler, an amount the
company already has requested. If the Fiat deal doesn't come to
fruition, however, Chrysler won't receive any more taxpayer funds,
the administration said.
An administration official said he couldn't put a figure on the
amount of working capital the government will provide while the
auto makers hone their plans.
GM and Chrysler received a total of $17.4 billion in government
loans in December, and have requested another $22 billion to keep
them going through this year. Obama's auto task force has been
combing through the firms' restructuring plans to judge if they
merit the additional funds. The verdict released Sunday is that in
the current form, the plans don't justify any new taxpayer
resources.
Though it said it is not its goal, the administration said a
structured bankruptcy could give GM and Chrysler their "best chance
at success." The White House said it would provide
debtor-in-possession financing if necessary in a quick, supervised
court proceeding.
"Unlike a liquidation, where a company is broken up and sold
off, or a conventional bankruptcy, where a company can get mired in
litigation for several years, a structured bankruptcy process - if
needed here - would be a tool to make it easier for General Motors
and Chrysler to clear away old liabilities," the administration
said in a fact sheet.
Under this method, the companies could "get on a path to success
while they keep making cars and providing jobs in our economy."
An administration official said that process would be sharply
different from an "uncontrolled" bankruptcy. The government, to the
best of its ability, would not allow that happen, he added.
On Sunday, Obama said the auto makers would have to take more
dramatic steps to receive more government assistance. "They're not
there yet," he said on CBS News's Face the Nation.
"What we're trying to let them know is that we want to have a
successful auto industry," he said. "It's got to be one that is
realistically designed to weather this storm and to emerge at the
other end much more lean, mean and competitive that it currently
is."
The original December loans were given under the agreement that
all sides would strike a compromise deal by Tuesday. The deal
allows the government to call the loans if it isn't satisfied with
the companies' viability plans. An administration official said the
government won't call the loans, though. Doing so, he said,
wouldn't be productive because it would hasten the companies'
decline.
Both firms have been hammered by the economic slump, which has
sapped demand for new vehicles. The White House said that since the
initial loans were disbursed last year, the firms have failed to
meet a series of benchmarks and been hobbled by a further
deterioration in the economic climate.
An administration official acknowledged that both companies also
have had difficulty negotiating with bondholders to ease their
massive debt loads. Under existing loan agreements, GM is required
to cut its $27 billion in unsecured debt to $9 billion through a
voluntary bond exchange. That exchange has made zero progress, an
official said.
Chrysler's $6.8 billion secured first lein debt also has been an
obstacle. An administration official said the company's banks have
been resolute about not modifying the debt.
Obama's stance on the auto makers, which he will detail in an
11:00 a.m. EDT speech at the White House, seeks to strike a balance
between giving the sector one more lifeline and recognizing public
sentiment against the use of taxpayer dollars to help companies
that are widely viewed as victims of their own mismanagement.
To address potential consumer skepticism about purchasing a GM
or Chrysler vehicle, the administration will stand behind the
firms' warrantees during the crisis period. The warrantee program
will be funded with a cash contribution from the auto makers and a
government loan.
Obama also is set to name former Deputy Labor Secretary Ed
Montgomery as Director of Recovery for Auto Communities and
Workers. Montgomery will work with all stakeholders to make sure
communities and workers can take advantage of all available
resources and to ensure that stimulus funds are distributed
efficiently.
-By Henry J. Pulizzi, Dow Jones Newswires; 202-862-9256;
henry.pulizzi@dowjones.com