The Obama administration has determined that neither Chrysler LLC nor General Motors Corp. can survive without dramatic changes in their businesses, and given them only weeks to completely restructure on a fast schedule that could involve a quick “dip” into bankruptcy, senior administration officials said Sunday.
The restructuring began right away Sunday, the eve of Mr. Obama’s public layout of his plan for the U.S. auto industry, with the White House asking longtime GM Chief Executive Officer Rick Wagoner to step down and be replaced by Fritz Henderson, GM’s current chief operating officer.
While Mr. Obama’s team has judged that GM could become viable with major sacrifices, it decided that Chrysler cannot survive as a stand-alone company, a senior administration official said.
The White House did not agree to give the two Detroit automakers the additional $21.6 billion in loans they were seeking, but it did say it would give them an unspecified amount of financing if they go through with the far-reaching reorganizations the White House is demanding.
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The two companies received a combined $17.4 billion in loans from the Treasury’s $700 billion bailout fund at the end of last year and were facing a deadline on Tuesday to make good on Bush administration reorganization demands.
But today, those demands would not go far enough to save the companies from bankruptcy, Obama officials said. In any case, neither company complied with the Bush demands, so they are now facing what appears to be even stricter terms from the Obama administration.
“Neither plan submitted by either company represents viability and, therefore, does not warrant the substantial additional investments they requested,” the administration official said, speaking on the condition of anonymity in detailing the companies’ new marching orders ahead of Mr. Obama’s formal announcement of the plan Monday.
The administration gave GM a further 60 days to come up with a reorganization plan, including drastic cuts in its $35 billion of debt as well as other major concessions from labor, dealers and suppliers, the senior administration official said. The administration wants GM to have a fresh start with new leadership to refashion the nation’s largest auto manufacturer into a completely new business, the senior administration official said.
Chrysler is being required to consummate its merger with Fiat SpA within 30 days as a condition of getting up to $6 billion in further loans. The administration determined that Chrysler would not survive as a stand-alone company, and if it does not find a partner, it will receive no further loans, most likely forcing the company into bankruptcy.
Because both companies need drastic reductions in their debts and other costs to stay in business and become profitable again, the administration is prepared to escort both companies through a kind of quick bankruptcy procedure that senior officials described as “surgical” and may take no longer than 30 days.
Under such a procedure, the Treasury would provide all the financing that would be necessary to make the bankruptcy restructuring successful and to relaunch the companies. GM has estimated that the government would have to provide as much as $100 billion in loans to keep it afloat during a bankruptcy reorganization.
The Treasury also will provide both GM and Chrysler whatever funding is necessary to get through the next one to two months until a final decision has been made on the fates of the firms.
Administration officials declined to specify how much in interim financing the companies are likely to receive, but said they had enough funds left in the Treasury’s $700 billion bailout fund to cover any new loans.
During the next few months of uncertainty hanging over the industry, the Treasury also will provide guarantees on the two companies’ warranty service “during this time of uncertainty,” in a move designed to prevent car buyers from shying away from GM and Chrysler out of concern about whether they can stand behind their new-car warranties.
Mr. Wagoner, who joined GM in 1977 and has served as the company’s chairman and CEO since May 2003, is associated with the company’s failed business strategy of the past and was a vigorous opponent of putting the auto goliath through what likely would be one of the biggest bankruptcies in history, which the administration is leaving open as a possibility.
The White House’s auto task force aimed sharp criticisms at Mr. Wagoner’s handling of GM matters, including the company’s reliance on heavy trucks and sports utility vehicles to make a profit and the lack of attractive fuel-efficient models in its lineup.
The White House said Mr. Wagoner’s plan to try to leapfrog Japanese and Korean competitors offering popular gas-electric hybrids with its all-electric Volt model, while promising, is unlikely to succeed any time soon, and the company faces deep losses for years to come without more drastic changes.
Chrysler, on the other hand, was deemed incapable of producing fuel-efficient models on its own. One of the Treasury’s new marching orders for the privately held firm is a requirement that Fiat help it to design and produce money-making small cars in the United States. Chrysler would also have to repay its government loans before Fiat could take more than 35 percent ownership in the American company.
In a hint at the dramatic demands the government is placing on two of Detroit’s Big Three, Mr. Obama said on CBS’ “Face the Nation” program Sunday morning that the industry must become more “lean, mean and competitive than it currently is” before it receives more government help.
“That’s going to mean a set of sacrifices from all parties involved management, labor, shareholders, creditors, suppliers, dealers,” Mr. Obama said. “Everybody is going to have to come to the table and say, ‘It’s important for us to take serious restructuring steps now in order to preserve a brighter future down the road.’ ”
The president said Detroit’s automakers have made progress in recent months to cut costs and streamline operations but “they’re not quite there yet.”
Both GM and Chrysler insist they have tried to reduce their debt by two-thirds and to persuade the United Auto Workers to accept several cost-cutting measures, including accepting shares of stock in exchange for half of the payments into a union-run trust fund for retiree health care.
The third of Detroit’s Big Three, Ford Motor Co., also is suffering from the economic recession and collapsing auto sales. But Ford was in a much better financial state than GM and Chrysler when the auto market hit the skids, prompted by a year of $4-per-gallon gasoline and a monumental credit crunch. Ford has not asked for loans, but has held out the possibility of doing so in the future.
GM and Chrysler employ about 140,000 workers in the United States. The companies support millions of U.S. jobs through such means as parts suppliers and auto dealers.
Sean Lengell contributed to this report.