White House Shreds Auto Restructing Plans

President Obama today announced that they have turned down the restructuring plans submitted by General Motors and Chrysler. GM apparently did not meet certain promises made in exchange for the $13.4 billion in government loans. Obama cited a failure in leadership in Detroit and Washington. My February 16th post GM Time To Pay the Piper outlines GM's misfortunes.

Apparently, the automotive task force was not convinced that the revised plans were viable, therefore the auto companies should not receive additional bailout money.

There have been over 400,000 jobs lost in the automobile sector in the last year. That includes manufacturers, dealers, and suppliers. Currently, Michigan which has the most automobile employees has over 10% unemployment.

“We cannot, we must not, and we will not let our auto industry simply vanish,” the president indicated in his speech. Obama will give GM 60 days to submit a new viability plan meanwhile providing operating money to GM. The automobile task force will find new management for GM, CEO Rick Wagoner was asked to resign yesterday. Fritz Henderson, GM's President and Chief Operating Officer will be the new CEO. New directors will now make up the majority of the GM Board of Directors If the new restructuring plan is approved permanent loans will follow.

Chrysler has less time than GM, they must reach a deal with Fiat SpA within thirty days. Fiat will be allowed to buy up to 35% of the struggling automaker. The Fiat deal would give Chrysler some small car designs with good fuel economy. Fiat would get stock for transferring the technology. If Chrysler is successful $6 billion in permanent loans would follow.

It is possible that if one or both companies do not put together a successful business plan, the auto task force will sponsor a structured bankruptcy. This would allow the companies to operate, reduce debt and restructure without fear of creditors.

This is a sad day for the auto industry! There will probably be many more people laid off due to this severe downturn. I am of the opinion that a government sponsored bankruptcy is the only way to get either of the companies turned around. GM will probably survive in a much smaller reorganization, Chrysler may not survive!