By Jason Simpkins
Managing Editor
Money Morning
General Motors Corp. (GM) shares plunged more than 25% yesterday (Monday) - sparking a widespread stock-market sell-off - after U.S. President Barack Obama rejected turnaround plans that would have brought GM and Chrysler LLC billions in government rescue money and told the carmakers that bankruptcy might provide the best pathway for them to restructure.
"What we're asking for is difficult," President Obama said yesterday. "It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It'll require creditors to recognize that they can't hold out for the prospect of endless government bailouts."
The administration said the plans submitted by GM and Chrysler were unsatisfactory in almost every way and noted that if the automakers want additional taxpayer assistance, they'll have to accommodate the administration's vision for a leaner, cleaner and more competitive industry. Indeed, President Obama made it clear that GM and Chrysler must survive without becoming "wards of the state," and said the companies will have one final chance to "fundamentally restructure" and secure federal funding.
The government will provide both companies with enough working capital to operate over a predetermined period of time. GM will have 60 days to make a final push toward viability, and Chrysler - which the administration says can no longer stand alone as company - will have 30 days.
If Chrysler succeeds, the administration will provide another $6 billion loan, on top of the $4 billion it received in December. The government did not explicitly state how much more taxpayer money would be made available to GM. GM received $13.4 billion from the government last year.
The possibility that GM could come away empty-handed caused investors to torpedo its shares: GM's shares plunged 92 cents each, or 25.4%, to close at $2.70 each yesterday. Chrysler is privately held.
The bankruptcy fears also helped short-circuit a broad stock-market rally that has lasted for most of this month. The Dow Jones industrial Average skidded 254.16 points, or 3.27%, to close at 7,522.02, while the broader Standard & Poor's 500 Index dropped 28.41 points, or 3.48%, to finish the day at 787.53.
Administration officials outlined objectives for both companies. The first stipulation for Chrysler is that the company alters its partnership with Italy's Fiat SpA (OTC ADR: FIATY), which in January agreed to take a 35% stake in Chrysler.
Chrysler and Fiat have already agreed to important changes to the original agreement, the administration said. Those changes include assurances that all government loans will be repaid before Fiat is able to take a controlling stake in Chrysler, and that production will remain in the United States.
"We are pleased that Chrysler, Fiat and Cerberus have reached an agreement on the framework of a global alliance, supported by the U.S. Treasury," Chrysler said in a statement.
Along with Fiat, Chrysler must:
The administration's auto task force took a much more favorable view of General Motors, but did not rule out bankruptcy for it, either.
"The Administration does believe that there is a path to a viable GM and is confident that the company can emerge from this crisis as a strong, competitive business," the Task Force said. "However, this will require a more aggressive strategy to transform the company's operations than the current management has designed and deeper stakeholder concessions than those specified in the initial loan agreement."
The government wasted no time with its overhaul of GM, requiring Chief Executive Officer G. Richard Wagoner Jr. to resign immediately.
"On Friday I was in Washington for a meeting with administration officials," Wagoner said in a statement. "In the course of that meeting, they requested that I 'step aside' as CEO of GM, and so I have."
Fritz Henderson, GM's chief operating officer, will replace Wagoner. GM will also replace most of its board. Kent Kresa will serve as interim chairman.
President Obama said Wagoner's dismissal was less about retribution or incompetence than it was about giving the company a fresh start.
"This is not meant as a condemnation of Wagoner, who's devoted his life to this company and has had a distinguished career; rather, it's a recognition that it will take a new vision and a new direction to create the GM of the future," Obama said.
Both Treasury officials and private sector auto industry and restructuring experts will work closely with GM in an effort to revive the company.
According to the task force, these industry and restructuring experts will help focus restructuring process on:
As with Chrysler, the task force said an expedited, court-supervised process to extinguish unsustainable liabilities may be needed. However, officials also said the administration "is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future."
No such assurance was offered to Chrysler.
The goal of the Obama administration extends beyond returning GM and Chrysler to profitability, to ushering in a new era of technological advancement and more fuel-efficient vehicles.
"I'm confident that if each are willing to do their part, if all of us are doing our part, then this restructuring, as painful as it will be in the short term, will mark not an end, but a new beginning for a great American industry - an auto industry that is once more out-competing the world; a 21st century auto industry that is creating new jobs, unleashing new prosperity, and manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future," Obama said yesterday.
Part of the reason the administration required Chrysler to partner with Fiat was that, in addition to managerial expertise, the Italian carmaker has more fuel-efficient technology.
And in addition to the capital and direction being offered directly to GM and Chrysler, the Obama administration aims to create an incentive program meant to increase the companies' car sales. Obama will work with Congress to use parts of the $787 billion economic stimulus package to fund a program that would give consumers a "generous credit" when they replace an older, less fuel-efficient car and buy a new, cleaner vehicle.
"I am absolutely committed to working with Congress and the auto companies to meet one goal: The United States of America will lead the world in building the next generation of clean cars," Obama said.
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