- The Washington Times - Tuesday, March 31, 2009

The White House’s unexpectedly harsh treatment of Chrysler LLC and General Motors Corp. stunned both Wall Street and Detroit on Monday, making it clear that bankruptcy is a live option - even a preferred one - to achieve a quick and radical restructuring of the auto titans.

President Obama on Monday touted the benefits of a rapid reorganization in which the government would escort the companies through a prearranged bankruptcy. The tactic would allow the automakers to extract deep cuts from bondholders, car dealers, employees, retirees and possibly even executives, including departing GM chief executive Rick Wagoner, who is due to receive pension benefits totaling $20.2 million.

“Both need a fresh start” if they are to avoid becoming “wards of the state,” the president said in announcing the plan. “That may mean using our bankruptcy code as a mechanism.”

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Talk of bankruptcy pushed the Dow Jones Industrial Average down more than 250 points and sent shock waves through the Midwest. The notion of seeking court protection has long been taboo in Detroit; both companies largely ruled it out in their recent filings to the government, contending consumers would avoid buying cars from a company that might not be around to service them later. The Obama administration trumped that argument by introducing a program that would use government loans to guarantee new-vehicle warranties.

The threat of forcing the companies into bankruptcy within weeks produced an immediate result from Chrysler. The automaker announced Monday that it is moving quickly to clinch its merger with Italian automaker Fiat SpA along the lines demanded by the White House, which had concluded that Chrysler could not survive as a stand-alone company.

On Wall Street, the administration’s announcement pummeled the stock and bond markets, where many investors had expected a more generous program of loans and forbearance for the Detroit companies. The prospect of what could be the biggest bankruptcy in history helped send the Dow down by more than 3 percent, led by a 25 percent drop in GM stock to $2.70.

The news also rocked the bond market because GM has been the largest issuer of corporate bonds. The White House wants to largely wipe out the company’s $27 billion in unsecured bond obligations.

“The auto rescue plan is rightly aggressive,” said Edward Hadas, an analyst at Breakingviews.com, a British financial think tank. “The once-mighty carmaker now seems destined for bankruptcy - a fate Wagoner fiercely resisted.”

The White House faces a “formidable task” trying to quickly transform the auto giants after decades of bad choices and missed opportunities, he said. “The sharp recession has turned these long-standing problems into a cash flow disaster.”

The government of Canada joined Mr. Obama Monday in rejecting the auto companies’ restructuring plans as inadequate and demanding more aggressive action to restore the industry.

“The auto companies have come some distance, but they need to go further,” said Michael Bryant, Ontario minister of economic development.

“Even with the additional funding the government will provide in the coming weeks, the risk of bankruptcy remains high,” said Robert Shultz, an analyst at Standard & Poor’s Corp. “This is because of highly uncertain consumer demand and other serious risks, including persistently weak credit markets and potential auto supplier failures.”

The administration made it clear that its willingness to keep giving loans to Detroit is not “open-ended,” Mr. Shultz noted, and any further financing will be linked to a complete restructuring, possibly through bankruptcy, which the White House auto task force concluded may offer the companies their “best chance for success.”

Fritz Henderson, who was installed by the White House Sunday night as GM’s new CEO, said he accepted the administration’s demands for “fundamental and lasting changes.” The company still hopes to avoid bankruptcy, he said, but a successful restructuring “could include a court-supervised process.”

In preparing the public for what could be a massive bankruptcy, the administration set up a program to guarantee the automakers’ warranties so that new-car buyers won’t have to worry about service down the road. Mr. Obama also threw his support Monday behind a $5,000 tax credit for people who trade in older gas guzzlers for new, more fuel-efficient cars.

Chrysler is under the gun to merge with Fiat in the next month or lose government funding. As part of the merger plan, Fiat must assist Chrysler in designing and building fuel-efficient cars in the United States. Chrysler, which is owned by the Cerberus private equity firm, also must achieve dramatic cost-saving deals with its bondholders and labor union.

GM was given 60 days to achieve a monumental turnaround that has eluded the goliath despite repeated downsizings and significant labor concessions in recent years. The White House will be installing a whole new board of directors for GM, after ousting Mr. Wagoner.

Kent Hughes, technology director at the Woodrow Wilson International Center for Scholars, said Mr. Wagoner was made a scapegoat.

“Rick Wagoner made many of the right changes” and tried to keep morale high at the struggling manufacturer, he said. “In the end, however, he was cast as a symbol of an American auto industry that needed more radical change.”

While “Detroit has made many mistakes,” Mr. Hughes said, “we have all contributed to Detroit´s woes” by demanding low gas prices and large cars, and allowing Detroit’s competitors in Japan and South Korea to manipulate their currencies to gain a price advantage.

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