US President Barack Obama gave failing automakers General Motors (GM) and Chrysler a bitter choice: another attempt at painful restructuring on their own soon or bankruptcy court where a judge would do it for them.
After forcing GM chief Rick Wagoner to resign and giving Chrysler 30 days to merge with Italy’s Fiat, Obama raised the bankruptcy specter on Monday “as a mechanism to help them restructure quickly and emerge stronger.”
Even as he was outlining a fresh chance for the automakers to cut their own way out of the financial thicket, Obama brought the stigma-inducing concept of a court-directed reorganization out of the shadows.
Fears about the industry’s future sent stocks plummeting, with the Dow Jones industrial average losing about 254 points. GM plunged US$0.92, or 25.4 percent, to US$2.70. Chrysler is not publicly traded.
Whether the US industrial icons manage their own reorganization or have it forced on them in federal court, auto workers, GM and Chrysler creditors, their giant supply chains and car dealers all stood to take enormous financial hits. But Obama sought to soften the blow.
“What I am not talking about is a process where a company is broken up, sold off, and no longer exists,” Obama said. “And what I am not talking about is having a company stuck in court for years, unable to get out.”
He also told auto buyers that the government was now standing behind GM and Chrysler service warranties and would provide tax incentives to new customers.
But as the US economic recession deepened and the auto giants sought more taxpayer money, the president was performing radical surgery that he foreshadowed even when he was running for office.
During the campaign Obama was openly critical of the auto industry, voicing deep dissatisfaction with the way it had done business and the gas-guzzling vehicles it produced.
Declaring Monday morning that he no longer would “excuse poor decisions” as the companies tried to survive on “an unending flow of tax dollars,” Obama said: “These companies and this industry must ultimately stand on their own, not as wards of the state.”
Obama stepped in after deciding GM and Chrysler had submitted unacceptable restructuring plans in return for billions more dollars they said was needed to stay in business. The struggling companies were already being kept afloat with huge emergency government rescue loans. GM had received US$13.4 billion; Chrysler US$4 billion.
The two companies employ about 140,000 workers in the US, and tens of thousands of more jobs could be in jeopardy in associated industries and businesses.
Ford Motor, the third of the industry’s Big Three, has taken no government money and is not affected.
In return for Wagoner’s resignation and a shake-up in the auto giant’s board, the administration will provide GM 60 days of operating money to work out an acceptable restructuring in the face of an inevitable bankruptcy should it fail.
As a sweetener, Chrysler could get up to US$6 billion if it completes the alliance with Fiat within 30 days. Chrysler and Fiat have been in talks, but Obama forced the issue. If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leaving Chrysler destined for a complete sell-off. No other money is available.
At GM, president and chief operating officer Fritz Henderson takes over as CEO, the company said in a statement released early on Monday. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman, was named interim chairman of the GM board.
New directors will make up the majority of GM’s board, the statement said. The directors who will be replaced have not yet been named.
Chrysler’s proposed deal with Fiat would give the Italian company a 35 percent stake in the US automaker and entree into the US market. In return, Chrysler would get badly needed small-car technology.