WASHINGTON — President Barack Obama's rejection Monday of restructuring plans offered by General Motors and Chrysler increases the likelihood that one or both carmakers could declare bankruptcy.
Obama found the plans inadequate to turn the companies toward sustained profitability. The plans were required to be submitted before the government would give nearly $22 billion in taxpayer aid that the two companies sought.
Instead, Obama promised GM enough working capital to get through the next 60 days and Chrysler the next 30 days. The firms were sent back to revamp their restructuring plans, and the administration signaled clearly that bankruptcy, once unthinkable, is now an option for GM.
"We cannot and must not and we will not let our auto industry simply vanish," the president said. At the same time, he cautioned that he won't support "an unending flow" of tax dollars to bail out the firms. "These companies and this industry must ultimately stand on their own, not as wards of the state."
Late Monday, an administration official confirmed that among the options on the table is a plan that would separate the "good" parts of GM from the "bad."
Under such a plan, the stronger GM divisions, such as Chevrolet and Cadillac, would avoid bankruptcy while the weakest, such as Saturn and Hummer, would enter bankruptcy with the hope that they could be sold or liquidated. The official, who wasn't authorized to speak publicly and requested anonymity, cautioned that no decision had been made on this plan or any other.
Obama said that his automotive task force had concluded that GM must be vastly restructured to have any hope of survival.
Just weeks ago, both GM and the administration were confident that bankruptcy could be avoided. Now it appears likely. A senior administration official, discussing the automakers' plight on the condition of anonymity in order to speak freely, emphasized that a "significant restructuring that employs parts of the bankruptcy code is the best way to turn GM around quickly."
Chrysler, the task force concluded, is no longer viable as a standalone company and must be merged or liquidated.
In a statement on its corporate Web site Monday afternoon, Chrysler Chairman and Chief Executive Robert Nardelli announced that his company, which is owned by Cerberus Capital Management, had reached a tentative "framework" toward a merger with Italian carmaker Fiat.
"We are pleased that Chrysler, Fiat and Cerberus have reached agreement on the framework of a global alliance, supported by the U.S. Treasury," the statement said. "Chrysler has consistently said that the alliance with Fiat enhances its business model that expands its global competitiveness."
Later Chrysler issued a clarification to its statement, saying the company remains short of a final deal and that "substantial hurdles" must first be resolved.
Obama confirmed that his administration had asked GM Chief Executive Rick Wagoner to step aside. Wagoner's successor will be GM's operating chief, Frederick "Fritz" Henderson, whose resume and compensation package is similar to Wagoner's.
Obama's auto task force chastised GM and Chrysler for not presenting realistic plans to produce more fuel-efficient cars profitably. The government is now setting manufacturing priorities for the carmakers. Some automotive experts questioned the logic of forcing carmakers to produce hybrid vehicles.
"The market for fuel-efficient vehicles rises and falls with gas prices. Until there is a consistent and compelling reason for consumers to buy hybrids, such as stabilized gas prices, automakers cannot realistically turn over their product lines to that more expensive, less profitable product that has only achieved two percent market share after all these years in production," Michelle Krebs, editor of Edmunds AutoObserver, an online news site covering the auto industry, wrote in a commentary Monday.
Some Republicans immediately accused the president of imposing a state-driven industrial policy on private companies.
"This is a marked departure from the past, truly breathtaking, and should send a chill through all Americans who believe in free enterprise," said Sen. Bob Corker, R-Tenn., in a statement. He accused Obama of erecting an industrial policy that picks winners and losers.
Senate Minority Leader Mitch McConnell, R-Ky., added in a statement, "We are now told these two companies are getting their last check from the taxpayers, and that if they don't finally come up with truly viable plans then they'll be forced into bankruptcy. Unfortunately, we've heard this before, from both this and the previous administration."
Bankruptcy experts were more forgiving of Obama.
"I want to know the Republican who in their heart of hearts would be willing to say the only carmakers making cars in the United States will be Ford, Toyota, Nissan and BMW," said Douglas Baird, a bankruptcy expert at the University of Chicago School of Law.
Talk of industrial policy or the nationalization of GM misses a vital point, he said.
"The alternative is not simply letting GM go through a bankruptcy. GM will not survive in bankruptcy or outside of bankruptcy without federal assistance," Baird said. "Some companies, like some horses, should be taken out to the back pasture and shot. If you don't have a government intervention, it will die."
Bankruptcy conjures up negative images of shuttered, rusting factories. The administration is working on a structured bankruptcy in which GM could use bankruptcy law to shed commitments to creditors and void union contracts after negotiating these changes first.
In theory, this would be a quick process.
"GM is a little bigger and more complex," than auto-parts supplier Delphi, which has been in bankruptcy since 2005, said George Magliano, director of North American automotive research for forecaster Global Insight. "It's going to take a lot longer than people think, that's the key bottom line issue. You are going to have lawyers involved, you need funding . . . the government is now involved up to its armpits with this thing. It's not a 30-to 60-day process."
Even lawmakers from Michigan seemed resigned to bankruptcy proceedings.
"It's not the favorite option for anybody. There's a risk, but again the president was so clear today, so absolutely firm . . . absolutely committed to this industry. That means committed whether they can avoid going into bankruptcy, avoid being put there by creditors, particularly bondholders not willing to make the necessary compromise, or whether or not they can avoid it," said Sen. Carl Levin, D-Mich.
Trying to fight that image, administration officials rolled out a plan to provide a federal backstop for the warranty of any GM and Chrysler vehicle purchased in the current period of turbulence. Obama also promised to unveil soon a series of tax incentives for owners of older vehicles who are willing to trade them in on new fuel-efficient vehicles.
Two big hurdles remain at GM, which seeks more than $16 billion in additional taxpayer bailout funds to stay alive. Its negotiations with the United Auto Workers union and bondholders fell far short of what Obama's task force required by a March 31 deadline.
GM has about $35 billion in debt — $27 billion of it unsecured and in the hands of bondholders. GM was expected to reduce that amount to $9 billion through a voluntary exchange of bonds for new shares of GM stock, but that hasn't happened as yet.
"The union is waiting for the bondholders and the bondholders are definitely playing chicken," Magliano said, suggesting that they've been holding out for a better deal but may now be left with a weaker hand. Several financial news wires reported late Monday that bondholders are now being offered just 16 cents on every dollar of credit they'd extended and that credit-protection costs soared after Obama's announcement.
Chrysler is smaller than GM, yet it owes banks more than $8 billion, and the financially weakened banks want to be repaid.
(David Lightman and William Douglas contributed to this article.)
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