Chances good that car titans could go bankrupt

WASHINGTON — President Obama's rejection Monday of restructuring plans offered by General Motors and Chrysler increases the likelihood that one or both automakers could declare bankruptcy.

Obama found the plans inadequate to turn the companies toward sustained profitability. The plans were required to be submitted before the government would give nearly $22 billion in taxpayer aid that the two companies sought.

Instead, Obama promised GM enough working capital to survive 60 days and Chrysler 30 days. The firms were sent back to revamp their restructuring plans, and the administration signaled clearly that bankruptcy, once unthinkable, is now an option for GM.

"We cannot and must not and we will not let our auto industry simply vanish," Obama said. At the same time, the president cautioned that he won't support "an unending flow" of tax dollars to bail out the firms. "These companies and this industry must ultimately stand on their own, not as wards of the state."

Late Monday, an administration official confirmed that a plan that would separate the "good" parts of GM from the "bad" was among options on the table.

Under such a plan, stronger GM divisions, such as Chevrolet and Cadillac, would avoid bankruptcy while the weakest, such as Saturn and Hummer, would enter bankruptcy with the hope that they could be sold or liquidated. The official, who wasn't authorized to speak publicly and requested anonymity, cautioned that no decision had been made on this plan or any other.

Obama said his automotive task force had concluded that GM must be vastly restructured to have any hope of survival.

Just weeks ago, both GM and the administration were confident bankruptcy could be avoided. It now appears likely. A senior administration official, discussing the matter on the condition of anonymity, emphasized that a "significant restructuring that employs parts of the bankruptcy code is the best way to turn GM around quickly."

Chrysler, the task force concluded, no longer is viable as a stand-alone company and must be merged or liquidated.

In a statement on its corporate Web site Monday, Chrysler Chairman and Chief Executive Robert Nardelli announced that his company, owned by Cerberus Capital Management, had reached a tentative "framework" toward a merger with Italian automaker Fiat.

"We are pleased that Chrysler, Fiat and Cerberus have reached agreement on the framework of a global alliance, supported by the U.S. Treasury," the statement said. "Chrysler has consistently said that the alliance with Fiat enhances its business model that expands its global competitiveness."

Chrysler later issued a clarification to its statement, saying the company remains short of a final deal and "substantial hurdles" must be resolved.

Obama confirmed his administration had asked GM Chief Executive Rick Wagoner to step aside. Wagoner's successor will be GM's operating chief, Frederick "Fritz" Henderson, whose résumé and compensation package are similar to Wagoner's.

Obama's auto task force chastised GM and Chrysler for not presenting realistic plans to produce more fuel-efficient cars profitably. The government now is setting manufacturing priorities for the automakers. Some automotive experts questioned the logic of forcing carmakers to produce hybrid vehicles.

"The market for fuel-efficient vehicles rises and falls with gas prices. Until there is a consistent and compelling reason for consumers to buy hybrids, such as stabilized gas prices, automakers cannot realistically turn over their product lines to that more-expensive, less-profitable product that has only achieved 2 percent market share after all these years in production," Michelle Krebs, editor of Edmunds AutoObserver, an online news site covering the auto industry, wrote in a commentary Monday.

Some Republicans immediately accused the president of imposing a state-driven industrial policy on private companies.

"This is a marked departure from the past, truly breathtaking, and should send a chill through all Americans who believe in free enterprise," Sen. Bob Corker, R-Tenn., said in a statement. He accused Obama of erecting an industrial policy that picks winners and losers.

The administration is working on a structured bankruptcy in which GM could use bankruptcy law to shed commitments to creditors and void union contracts after negotiating these changes first.

In theory, this would be a quick process.

"GM is a little bigger and more complex" than auto-parts supplier Delphi, which has been in bankruptcy since 2005, said George Magliano, director of North American automotive research for forecaster Global Insight. "It's going to take a lot longer than people think, that's the key bottom-line issue. You are going to have lawyers involved, you need funding. ... The government is now involved up to its armpits with this thing. It's not a 30- to 60-day process."

Even lawmakers from Michigan seemed resigned to bankruptcy proceedings.

"It's not the favorite option for anybody," said Sen. Carl Levin, D-Mich. "There's a risk, but again the president was so clear today, so absolutely firm ... absolutely committed to this industry. That means committed whether they can avoid going into bankruptcy, avoid being put there by creditors, particularly bondholders not willing to make the necessary compromise, or whether or not they can avoid it."

Trying to fight that image, administration officials rolled out a plan to provide a federal backstop for the warranty of any GM and Chrysler vehicle purchased in the current period of turbulence. Obama also promised to unveil soon a series of tax incentives for owners of older vehicles who are willing to trade them in on new fuel-efficient vehicles.

Two big hurdles remain at GM, which seeks more than $16 billion in additional taxpayer-bailout funds to stay alive. Its negotiations with the United Auto Workers and bondholders fell far short of what Obama's task force required by March 31.

GM has about $35 billion in debt — $27 billion unsecured and in the hands of bondholders. GM was expected to reduce that amount to $9 billion through a voluntary exchange of bonds for new shares of GM stock, but that hasn't happened yet.

Chrysler is smaller than GM, yet owes banks more than $8 billion, and the financially weakened banks want to be repaid.