Obama Rocks GM's World, Gives Chrysler 30-Day Ultimatum

By KBB.com Editors on March 30, 2009 12:35 PM

Saying that the restructuring plans presented thus far by both General Motors and Chrysler fall short of the governments expectations for real long-term viability, the Obama administration has set forth a new series of demands that must be met before it will consider providing any additional bailout monies. Presented on the eve of the previously announced March 31 deadline, these sweeping dictates require both automakers to act quickly and far more decisively than they have thus far -- or face the continuing prospects of being forced into some type of bankruptcy.

In the case of GM, which was given a 60-day window to come up with an acceptable response, the first step was a decision by the Obama auto task force to have Chief Executive Officer Rick Wagoner and several other board members step down and out. Wagoner will be replaced by GM's current Chief Operating Officer Fritz Henderson, a man who has extensive experience in revamping the company's Asian and European wings and who also has played a central role in the current restructuring. To obtain the additional $16.6 billion it has requested, the government is demanding that GM put a finer focus on long-term production/marketing plans, find new ways to exact additional debt-reducing concessions from both its bondholders and the United Auto Workers, and to revisit its fundamental relationships with suppliers and dealers.

Chrysler, which is privately owned by Cerberus Capital Management, was given just 30 days to finalize its pending merger deal with Italy's Fiat S.p.A. if it hoped to remain eligible for an additional $6 billion in funding. Immediately following Obama's announcement, Chrysler released a statement indicating that it has reached a "framework accord" on a formal alliance with Fiat, although many details must still be resolved. To date, GM has received $13.4 billion and Chrysler $4.0 billion in federal assistance. During the course of this new extension period, the government vowed to do whatever is necessary to ensure that both companies can continue to function without interruption.

In outlining this extension of the original bailout program, President Obama indicated his continuing belief in and support for the domestic car makers, stating directly that: "We cannot, will not and must not let our auto industry vanish." Furthermore, to help allay consumer concerns about protecting their auto investments, he also indicated that no matter what may transpire -- including the possibility of a structured bankruptcy -- that the federal government would stand behind the warranty on any new domestic vehicle. Money to cover that contingency would be drawn from the $700 billion Troubled Asset Relief Program (TARP).

Obama also promised to begin working with congress on a number of related programs aimed at stimulating demand for new cars. Effective immediately, individual buyers will be able to deduct sales and excise taxes from their federal income taxed on any vehicle purchased from February 16th to December 31st of this year. The administration also will try to fast-track the purchase of new vehicles for use in government fleets as well as to institute new credits for private citizens who replace their existing cars or trucks with cleaner and more fuel-efficient alternatives.