Bankruptcy looms for GM, Chrysler

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.”

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