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Obama: GM, Chrysler Must Restructure or Face Bankruptcy
Obama said the carmakers need more radical changes to prevent them from becoming "wards of the state"
By Amanda Ruggeri
Posted March 30, 2009
In a dramatic move, the Obama administration announced today that restructuring plans issued by General Motors and Chrysler are untenable, upping the likelihood of bankruptcy among the Big Three and effectively launching one of the biggest instances of government intervention the recession has yet seen. "These companies and this industry must ultimately stand on their own, not as wards of the state," President Obama said this morning. "After careful analysis, we've decided that neither goes far enough."
In rejecting the viability plans that were submitted by GM and Chrysler in response to a government stipulation to be met before the companies received any more federal funding, the administration laid out its own program. It includes continuing to pump money into the automakers for a brief period as they come up with better plans for restructuring. If those programs don't seem tenable, the companies may be left to file for bankruptcy.
Although a bankruptcy filing could be part of the companies' "fresh start," Obama emphasized that it would not be "a process where a company is simply broken up and sold off to where it no longer exists." Instead, he said, it would mean "using our existing legal structure as a tool" that could help GM and Chrysler clear away their debts quickly, "even as workers are staying on the job."
The company that could be headed for bankruptcy first is Chrysler, which, Obama said, "needs a partner to remain viable." The administration will continue propping up Chrysler for 30 more days to allow it to finalize an ongoing plan to merge with the Italian carmaker Fiat. If it's successful, Chrysler may get up to $6 billion in added loans from the government; otherwise, it won't see any more. Shortly after Obama's speech, Chrysler said in a statement that it had taken another step toward that final deal, having "reached agreement on a global alliance" with Fiat. But Chrysler has said it will have to declare bankruptcy by the end of the month unless it gets $11 billion in aid, on top of the $4 billion it has already received.
Since GM has fared better in its efforts, the administration has given it two more months to present a plan that will cut costs significantly, during which time the company will be aided with an unspecified amount of "adequate working capital," Obama said. One step already taken was to oust CEO Rick Wagoner, who was in charge as GM lost nearly $73 billion between 2005 and 2008. Wagoner had been making a $1 annual salary.
The Bush administration extended $17.4 billion in loans to GM and Chrysler in December, and the companies have asked for $22 billion more, which they say is necessary to survive through the year.
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And this from the WSJ:
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MARCH 30, 2009, 7:39 P.M. ET Bankruptcy Leads Possible Plans for GM, Chrysler
By JEFFREY MCCRACKEN, MONICA LANGLEY and JOHN D. STOLL
WASHINGTON -- The Obama's administration's leading plan to fix General Motors Corp. and Chrysler LLC would use bankruptcy filings to purge the ailing companies of their biggest problems, including bondholder debt and retiree health-care costs, according to people familiar with the matter.
The move would in essence split both companies into their "good" and "bad" components. The government would like to see the "good" GM to be a standalone company, according to an administration official. The "good" Chrysler would be sold to Fiat SpA, assuming that deal is completed, this person said.
GM and Chrysler have had bankruptcy attorneys devising plans for such a move in recent months.
President Barack Obama's task force has told both companies that the administration prefers this route as a way to reorganize the two auto makers, rather than the prolonged out-of-court process that has thus far frustrated administration officials.
GM looks increasingly like it will be forced into filing for bankruptcy protection, sometime in mid-to-late May, in a plan where the automaker breaks into two companies, the surviving entity a "new GM" that maintains key brands such as Chevy and Cadillac and some international units, say several people familiar with the situation.
Stakes in this new GM could be given to creditors and UAW members. It is also possible the new company could be sold whole or in parts to investors.
The auto makers could avoid bankruptcy in the next two months. And there is some brinksmanship still going on in GM's high-level talks with bondholders, union members and creditors.
A key ingredient is getting the UAW to agree to an entirely new labor contract, including major reductions in health-care benefits, according to several people involved in the matter. "That's the No.1 wildcard here," one of these people said Monday.
Under this plan, the "good" GM would not be expected to hold the tens of billions of dollars in retiree and health care obligations that hurt the auto maker in recent decades. Instead, those obligations would be transferred to an "old GM," made up of less-desirable brands like Hummer and Saturn, and underperforming plants and other assets. This part of GM would likely sit in bankruptcy much longer while a buyer is sought for the parts or it is wound down. Proceeds from the sale of old GM would go to pay claims to various creditors, including GM retirees.
"That is the plan, to the extent it comports with the bankruptcy laws," said one person familiar with the matter.
Some of the New GM-Old GM is laid out in the GM viability plan the company sent to the federal government last month. In it, GM estimates that it would shrink from 22% of the U.S. market to about 19%.
At Chrysler, bankruptcy would be used to force new labor contracts and rework debt deals with secured creditors. People working on Chrysler's behalf say the deal is risky, because the company is still not convinced that it could survive even a short-term bankruptcy. It could be done in order to meet the Obama administration's demand that Chrysler's creditors agree to huge reductions in their expected recoveries on Chrysler debt.
Also Monday, new GM Chief Executive Frederick "Fritz" Henderson told employees and dealers that the company will end up in bankruptcy court if it does not significantly accelerate its restructuring efforts in the next 60 days, according to a dealer who watched a broadcast of a meeting with Mr. Henderson.
Mr. Henderson said "we'll be in bankruptcy" if the company cannot meet the U.S. government's demands for faster progress on its turnaround plan, this dealer said.
Mr. Henderson told employees that the Obama administration was disappointed with the company's viability plan, feeling it didn't move fast enough or cut deeply enough into the company's debt. GM was told it didn't leave enough money in the company's pockets to get it through a full business cycle, either, according to the dealer.
GM was also told in no uncertain terms that it must learn to make money on smaller cars–not just trucks and sport-utility vehicles, the dealer said.
Warning that they can't depend on unending taxpayer dollars, President Obama on Monday gave GM and Chrysler a brief window to craft plans that would justify fresh government loans.
"We cannot, we must not, and we will not let our auto industry simply vanish," President Obama said at the White House.
"What we are asking is difficult," he said. "It will require hard choices by companies. It will require unions and workers who have already made painful concessions to make even more. It will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts."
The remarks came a day after the administration ousted GM Chief Executive Rick Wagoner and rejected the restructuring plans that GM and Chrysler had hoped would lead to another infusion of government cash. Instead, the White House is giving GM 60 days to come up with a strategy for viability. Chrysler has a month to wrap up a partnership with Italy's Fiat.
Under the revised terms of a proposed alliance between Chrysler and Fiat, the Italian company would take an initial 20% stake in the U.S. auto maker, down from a 35% stake under its January pact, a person familiar with the transaction said Monday.
Fiat has been in negotiations with the Obama administration's task force, and the government said on Monday that Fiat is viewed as the only route to survival for Chrysler.
"We believe we will arrive at a result that will establish a credible future for this crucial industrial sector," Fiat Chief Executive Officer Sergio Marchionne said in a statement.
GM on Monday said it will address "the tough issues to improve the long-term viability of the company," including the restructuring of its financial obligations, as it responded to Washington's calls for stronger plans to stay afloat.
The administration says a "surgical" structured bankruptcy may be the only way forward for GM and Chrysler, and President Obama held out that prospect Monday.
"I know that when people even hear the word 'bankruptcy,' it can be a bit unsettling, so let me explain what I mean," he said. "What I am talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success; a tool that we can use, even as workers are staying on the job building cars that are being sold."
GM said it prefers to complete its restructuring out of court, saying it would complete a more accelerated and aggressive restructuring to put the company on sound long-term financial footing.
"We have significant challenges ahead of us, and a very tight timeline," said new GM CEO, Mr. Henderson. "I am confident that the GM team will succeed and that a stronger, healthier GM will play an important role in revitalizing America's economy and re-establishing its technology leadership and energy independence."
The auto makers, hobbled by the economic downturn and years of reliance on sport-utility vehicles, will receive an unspecified amount of working capital from the government while they hone their new plans.
Without a Fiat deal, the administration said Chrysler won't receive any more taxpayer dollars. The administration expressed confidence GM can survive with more drastic action.
GM and Chrysler received a total of $17.4 billion in government loans in December and have requested roughly another $22 billion to keep them going through this year. President Obama's auto task force combed through the firms' restructuring plans to judge if they merit the additional funds. The verdict released Sunday is that in their current form, the plans don't justify any new taxpayer resources.
If Fiat and Chrysler reach a definitive alliance agreement, the government would consider investing as much as $6 billion more in Chrysler.
Despite the grim view of Chrysler, the administration's task force said it had no intention of replacing CEO Robert Nardelli. Unlike Mr. Wagoner, who had been at the helm of GM since 2000, Mr. Nardelli is considered an auto-industry outsider who has only been in charge at Chrysler since the company was acquired by Cerberus Capital Management LP in 2007.
In addition to pushing out Mr. Wagoner, the task force said GM is in the process of replacing the majority of its directors. Kent Kresa, a longtime director, will serve as interim chairman. Mr. Wagoner will be replaced as CEO by Mr. Henderson, who has been serving as chief operating officer.
Administration officials on Sunday made it clear that an expedited and heavily supervised bankruptcy reorganization was still very much a possibility for both companies. One official, speaking of GM, compared such a proceeding with a "quick rinse" that could rid the company of much of its debt and contractual obligations.
The clearest losers appear to be the thousands of bondholders and lenders to both GM and Chrysler. In both cases, administration officials said that the companies were burdened by inordinate amounts of debt that would have to be scrubbed. Chrysler's survival, the administration said, would require "extinguishing the vast majority" of the company's secured debt and all of its unsecured debt and equity.
To assure consumers reluctant to buy GM or Chrysler cars, the government plans to take the unusual step of guaranteeing all warrantees on new cars from either company. These guarantees would lapse back to the companies once they return to health.
Mr. Wagoner had managed GM through some of its most difficult moments. The company hasn't logged a profit since 2004, reporting losses since then of $82 billion. It nearly ran out of money at the end of 2008 before the Treasury Department provided emergency loans. GM's stock was trading above $70 when Mr. Wagoner took over as CEO in June of 2000. The shares closed last week at $3.62, placing the company's market capitalization at $2.21 billion. In Monday trading on the New York Stock Exchange, GM shares were down 76 cents, or 21%, to $2.86.
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So yes, it seems that bankruptcy is a strong possibility being floated both by GM and Chrysler execs and the Obama administration. (Not that there is much of a difference between the two now.
