March 30 (Bloomberg) -- President Barack Obama gave General Motors Corp. and Chrysler LLC deadlines to “fundamentally restructure” or lose government aid that has kept them alive.

Obama rejected the companies’ recovery plans and forced GM Chief Executive Officer Rick Wagoner to resign. He gave GM, the biggest U.S. automaker, 60 days to develop a new strategy. Obama said No. 3 Chrysler can’t survive on its own and gave it 30 days to complete a partnership with Italy’s Fiat SpA.

In a decision that surprised lawmakers and analysts with its toughness, Obama said at the White House today “we cannot continue to excuse poor decisions” and “cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars.” The administration may use bankruptcy to “help them restructure quickly and emerge stronger,” he said.

GM and Chrysler received $17.4 billion in aid since December to avoid bankruptcy as auto sales reached a 27-year low. The carmakers have been trying to shed debt and workers and trim health-care costs to win $21.6 billion in more assistance.

“The president’s decision to not move forward with bridge loans was unexpected,” said Representative Mike Rogers, a Michigan Republican. “We need decisive and immediate help, not being told to go sit in the corner and wait quietly until the president decides what he is going to do.”

Forced Resignation

The administration obtained Wagoner’s resignation before announcing its conditions for continued support. Fritz Henderson, GM’s president and chief operating officer, becomes CEO. GM also will replace most of its board and must increase its reliance on fuel-efficient vehicles, under findings of the administration’s auto task force, headed by former investment banker Steven Rattner. Chrysler CEO Robert Nardelli was allowed to keep his position.

“This is not meant as a condemnation of Mr. Wagoner, who has devoted his life to this company,” the president said. “Rather, it’s a recognition that it will take new vision and new direction to create the GM of the future.”

The removal of Wagoner and the demand that Chrysler ally with Fiat underscore the administration’s conclusion that the automakers had not done enough to prove they can survive, even when the industry emerges from the worst U.S. auto market in 27 years. The moves also may reflect growing criticism of bailouts following the $700 billion in aid approved for the financial industry.

“This was a much more thoughtful and realistic response to the Chrysler and GM situation than we were getting indications of last week,” said Maryann Keller, an independent auto analyst and consultant, in an interview today with Bloomberg Television.

Working Capital

Obama said GM will get “adequate working capital” over the next 60 days, during which time the administration’s auto task force will work with the company to assess whether the company has consolidated enough brands and its debt load.

“We cannot and must not, and we will not, let our auto industry simply vanish,” the president said at the White House.

Senator Carl Levin, a Michigan Democrat, said he was saddened by Wagoner’s departure, a decision he said Obama didn’t consult him about. Obama showed he was “absolutely committed” to the auto industry and to building the next generation of automobiles, Levin said. “There was a lot here to be very positive about,” Levin told reporters on a conference call.

Obama said conditions at Chrysler are “challenging,” and a review of the No. 3 automaker shows “that Chrysler needs a partner to remain viable.” Chrysler and Fiat said today they agreed on a “framework” for an alliance, with Chrysler adding that “substantial hurdles” remain.

Chrysler Corp., as it was known then, took out $1.2 billion in government-backed loans in 1980 and repaid the money in 1983.

GM Shares Plunge

GM plunged 92 cents, or 25 percent, to $2.70 at 4:15 p.m. in New York Stock Exchange composite trading. The shares tumbled 87 percent last year, the most among the 30 stocks in the Dow Jones Industrial Average.

GM’s $3 billion of 8.375 percent notes due in 2033 fell 2 cents to 16 cents on the dollar in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 52 percent.

A more aggressive survival plan would boost the value of equity and new bonds that noteholders would receive in an exchange aimed at cutting $27.5 billion in GM debt, advisers to a committee of bondholders said today in a statement. Bondholder representatives met with Obama’s auto task force on March 5, and expressed concern that the restructuring plan didn’t go far enough to ensure GM would stay out of bankruptcy.

Ford’s Bonds

Bonds of Ford Motor Co., the second-biggest U.S. car company and the only one to reject government aid, gained 38 percent this month on average as the automaker asked investors to swap debt at a premium to trading prices to help it avoid bankruptcy or a government bailout.

Obama said the government “has no interest or intention or running GM. What we are interested in is giving GM an opportunity” to emerge from its financial crisis.

During a grace period, automakers, creditors, unions, and other stakeholders “must produce plans that would give the American people confidence in their long-term prospects,” Obama said.

A resort to bankruptcy, if required, wouldn’t be used to break up the companies, he said. Instead, the automakers would use the bankruptcy process, with the backing of the government, to clear away old debts “so they can get back on their feet.”

An administration summary of its plans said that “a structured bankruptcy process -- if needed here -- would be a tool to make it easier for General Motors and Chrysler to clear away old liabilities so they can get on a path to success while they keep making cars and providing jobs in our economy.”

Using Bankruptcy

Senator Bob Corker, a Tennessee Republican, said Obama’s auto task force will use the bankruptcy code to decide what GM “looks like” and is even determining who sits on its board. “I consider that to be an odd place, an unusual place, in this country for the government to be,” Corker told reporters.

White House spokesman Robert Gibbs said the administration isn’t pushing for bankruptcy and there’s “no pre-determined deal.”

“If that was the case we would have done that today,” Gibbs said in an interview. “Where this ends up is going to be determined in the next 30 to 60 days.”

A bankruptcy filing for GM has become “more probable,” while still not the automaker’s preferred method of survival, Henderson, the company’s new CEO, told reporters today on a conference call.

Wagoner’s Pensions

Wagoner, GM’s departing CEO, may be eligible for pensions valued at $20.2 million as of the end of 2008, according to a regulatory filing. He isn’t eligible for severance pay. The “specifics on any compensation” are still being reviewed, company spokeswoman Renee Rashid-Merem said.

Obama told industry workers, a crucial constituency, that while there may be more pain to come, “I will fight for you. You are the reason I am here today.”

He said he’s appointing Edward Montgomery, a former deputy Labor Department secretary “to cut through red tape and ensure that the full resources of our federal government are leveraged to assist the workers, communities, and regions that rely on our auto industry.”

Obama said he was also using the government’s $787 billion stimulus program to accelerate purchases of government cars and would work with finance companies to increase credit to consumers and dealers.

New Buyer’s Benefit

At the same time, the Internal Revenue Service will conduct a campaign to alert consumers of a new tax benefit, permitting a federal deduction of state and local sales taxes for auto purchases made between February 16th and the end of this year. It may lead to as many as 100,000 new car sales, the president said.

GM intends to offer incentives meant to reassure consumers that buying its vehicles isn’t risky, people familiar with the plans said. The company will compensate buyers for lost resale value in the future, as well as let customers who lose their jobs return autos without penalty, said the people, who asked not to be identified before the program starts April 1.

To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Doron Levin in Southfield, Michigan, at dlevin5@bloomberg.net.

Last Updated: March 30, 2009 18:31 EDT