GM Bailout: 60 Days to Show Results

By David Welch and David Kiley

President Obama has a clear message for General Motors and Chrysler. Come back with a better plan or the funds are cut off.

Senior Administration officials said on Sunday that after reviewing the plans submitted by GM and Chrysler on Feb. 17, the President and his top advisors have determined that, not only did the companies not finish the restructuring moves required of them to get more funding, but they need to go farther than the Bush Administration originally demanded.

But they won’t cut the two carmakers off, either. The Treasury Department will give GM 60 days to negotiate further cuts from the UAW, reduce its unsecured debt and show a plan that works.

The President’s Auto Task Force also decided that, contrary to Chrysler CEO Robert Nardelli’s claims that the company can stand alone, it needs a merger partner. The government has given Chrysler 30 days to seal its deal to give a minority stake to Fiat or it will be cut off. Treasury will fund both companies while they seek a better fix-it plan.

The government’s intent is clear. President Obama won’t throw money after two companies that have been lurching from crisis to crisis and losing ground to the Japanese and Koreans for years. They have to cut deep and show that they will be able to thrive. “It sounds like they figured it out,” says Maryann N. Keller, a longtime industry analyst who now sits on the board of Dollar Thrifty Rental Cars. “They won’t just put a feeding tube in these companies.”

In GM’s case, the government wants a clean slate before it gives the company real money. President Obama forced the resignation of GM Chairman and CEO G. Richard Wagoner Jr., giving his hand-picked successor Frederick A. “Fritz” Henderson the CEO job. GM director and former Northrop-Grumman CEO Kent Kresa will become Chairman of GM’s board. GM will also have to replace more than half of its board, Treasury officials said. Picking Kresa, and not GM’s current lead director and Wagoner support George M.C. Fisher, is a clear sign that the administration wants change.

It won’t stop there. Treasury officials say that GM’s updated viability plan, which was submitted on Feb. 17, had rosy projections for market share and pricing. GM said it could hold 19% share in the U.S. by 2014, but its market share is under 19% in the last two months. Every lost point of market share means $2 billion in lost cash flow.

GM also relies on improved pricing on its cars, but Treasury officials think that will be tough to get given the economy.

Then there is GM’s huge debt burden. GM owes the United Auto Workers $20 billion to start a union led trust fund that will pay for retiree healthcare benefits. The Bush Administration wanted the UAW to take $10 billion in cash and the rest in stock. That may still happen, but Treasury officials think that GM needs to reduce its retiree costs further. GM and the Treasury Department are negotiating deeper concessions from the UAW on retiree benefits.

Bondholders may have to give more, too. GM has been trying to negotiate with them to drop their unsecured debt from $28 billion to about $9 billion. But bondholders have held out and even asked the government to help them recoup the debt. But the government is backing GM and thinks the bondholders may need to take less than one-third of their value of the bonds.

If GM can’t get all it needs done in 60 days, then the Treasury Department may force the company into a quick form of bankruptcy. Treasury officials have called it a surgical process in which GM would go in and shed some obligations to creditors and the union quickly. One senior Administration officials called it a “quick rinse.”

GM would be out of bankruptcy as fast as 30 days with less debt and the ability to make a profit at lower sales levels. But government officials didn’t say exactly how such a bankruptcy would work, except to say that it is within current bankruptcy code.

Administration officials also think Chrysler needs to negotiate away some of its $6.8 billion in secured debt, which company executives are trying to do. Chrysler has also failed to strike a refinancing deal for the billions it owes the UAW and the union’s Voluntary Employee Benefit Association, which is a trust fund that pays worker health-care costs.

But more to the point, Obama’s Administration doesn’t think Chrysler can make it alone. The company doesn’t generate enough cash or have the money to develop enough new models to survive by itself, senior administration officials say.

Treasury has given Chrysler 30 days to complete its deal to partner with Italy’s Fiat Auto or another major carmaker. If the company doesn’t find a partner, then it would be cut off from government funding. The Treasury Department also will not let Fiat own more than 49% of Chrysler until the U.S. carmaker pays all of its debt back.

Chrysler’s plan says the company can hold 10.7% market share over the next five years. Treasury officials doubt that, based on the company’s history of losing share.

The task force was harsh in its assessment of Chrysler, with officials singling out the inferior quality of its existing portfolio and its heavy-truck mix. A senior administration official noted specifically that Chrysler failed to get even one of its products recommended this year by the influential Consumer Reports magazine.

The task force also cited the company’s difficulty in meeting toughening federal fuel economy standards with a product portfolio so heavily tipped toward trucks and SUVs. The company has just four all-new products, apart from those contemplated with Fiat, planned between 2009 and 2014, the task force noted.

In the case of both GM and Chrysler, the Administration took a hard line on the viability plans. And there are no guarantees that the government will bail the companies out. Clearly the Administration would like to help the auto industry and keep the companies alive, but with so much public outrage over the banking and finance bailouts, they’re being very tough on Detroit. Since GM and Chrysler have submitted two restructuring plans without a green light, Obama has good reason.

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