GM's Rick Wagoner Gone, but Carmaker's Problems Remain

March 30, 2009 — -- The stock market skidded about 250 points on the day that President Obama rejected Detroit's restructuring plans and suggested that General Motors and Chrysler may need to file for bankruptcy.

While Obama spoke of an auto industry that can survive and eventually thrive by making tough decisions, investors were jarred by Obama's tough talk and tough action.Over the weekend, the president forced GM's CEO Rick Wagoner to resign.

And today, Obama gave the two struggling car companies more time to refine their plans, but indicated Chrysler might be allowed to collapse unless it hammered out a partnership with Italy's Fiat car company.

The Dow closed with a loss of about 250 points. The drop came after more than a week of encouraging increases in stock prices.

Hugh Johnson, of Johnson Illington Advisors, said that the markets are troubled by the possibility of a bankruptcy at General Motors of Chrysler.

He added, however, that what is really causing today's drop is a fear about how involved the government is getting in the operation of individual companies. Johnson said many investors are now wondering if the government will start seeking CEO changes in other sectors.

Read George Stephanopoulos' analysis of President Obama's decision on Detroit's carmakers here.

The federal government has invested hundreds of billions of dollars in the country's banks as well as insurance giant AIG.

"It's not nationalization, but it's close to it," Johnson said.

Obama warned Detroit today of tough times ahead, but said that this could be the moment that America's auto industry "marched into the future."

The president said that Chrysler and General Motors will not get the additional $21.5 billion they requested in February because the administration determined their viability plans were inadequate.

Obama indicated today that bankruptcy is a possibility for both auto giants. He stressed that it does not mean dissolving the companies but rather using the legal system to help them clear away old debts while business operations continue.

"What I am not talking about is a process where a company is broken up, sold off, and no longer exists. And what I am not talking about is having a company stuck in court for years, unable to get out," he said.

Administration officials said that using the bankruptcy code in a "quick and surgical way" could be the automakers' best options for digging out from under a mountain of debt.

In a statement, GM said it would take all necessary steps to restructure, including "a court-supervised process."

"Our strong preference is to complete this restructuring out of court," the company said.

Chrysler issued a statement shortly after Obama spoke saying it had reached agreement on a "framework" for a partnership with the Italian carmaker Fiat that Obama said could salvage the struggling American company.

Obama made it clear right at the start of his announcement that the blame for Detroit's woes was not to be placed at the feet of the American autoworkers. Instead, he pointed the finger at "a failure of leadership -- from Washington to Detroit" that drove the industry to these depths.

Nevertheless, Obama warned workers from the struggling industry that he cannot promise that the toughest days are behind them.

"These efforts ... will not make everything better overnight. There are jobs that cannot be saved. There are plants that will not reopen," he said.

Obama said he recognized that with this decision, his administration is asking these companies, unions and workers to make difficult choices and "painful concessions."

Obama: This May Be Moment the Car Industry Remakes Itself

"We cannot, we must not and we will not let our auto industry simply vanish," said the president. "But we also cannot continue to excuse poor decisions. And we cannot make the survival of our auto industry dependent on an unending flow of tax dollars. These companies -- and this industry -- must ultimately stand on their own, not as wards of the state."

Hitting an optimistic tone, the president also said that with patience, determination and ingenuity, "'then we will look back and say that this was the moment when America's auto industry shed its old ways, marched into the future and remade itself, once more, into an engine of opportunity and prosperity."

The administration is giving these companies just weeks to develop new strategies for survival, and on Friday leaders of the president's auto task force asked General Motors' CEO Rick Wagoner to tender his resignation, which he did.

But he added, "Let me be clear: The United States government has no interest or intention of running GM."

The president struck a balance between realism about the dire state of the auto industry and optimism that with a further restructuring, the industry would rebound and launch "a new beginning for a great American industry."

Obama also said, "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."

Administration Officials: GM Plan 'Not Viable'

Senior administration officials said that the General Motors plan, in its current form, "is not viable and will need to be restructured substantially."

The good news for General Motors, which has already received $13.4 billion in loans, is that the Obama administration is slightly less pessimistic about its chances of surviving. Officials concluded that General Motors' game plan "is not viable as it is currently structured," but they believe the company could come up with a credible plan with more aggressive restructuring.

"They're not quite there yet," Obama said Sunday.

Wanting a fresh start, leaders of the president's auto task force told Wagoner to tender his resignation, which he agreed to do. The company needed to turn a new page, a senior administration official explained.

Obama emphasized this morning that the move was not intended as a "condemnation" of Wagoner, a 30 year veteran of General Motors, but rather "a recognition that it will take a new vision and new direction to create the GM of the future."

Another official insisted there was no quid pro quo requiring Wagoner to leave if the company wanted further government support.

In addition to Wagoner's departure, GM will start the process of replacing a majority of its board in the next few months.

General Motors now has 60 days to develop a "leaner, more conservative but in some ways more aggressive business plan," as one administration official put it. The White House wants a General Motors' plan that more aggressively tackles its debt and its underperforming dealers and brands, and is more realistic about sales.

Obama said that over this period, the White House would work closely with General Motors to develop a better business plan.

"They must ask themselves: Have they consolidated enough unprofitable brands? Have they cleaned up their balance sheets or are they still saddled with so much debt that they can't make future investments? And above all, have they created a credible model for how to not only survive but succeed in this competitive global market?" Obama asked.

"We are very confident that General Motors can survive and thrive as a company," a senior official said. "We believe it has many, many assets, including its global brand. Its R&D has made a lot of progress" in making cars "more attuned to the marketplace."

Message for Chrysler More Discouraging

The Obama administration's message for Chrysler is more discouraging. It's essentially merge or die, and you have 30 days to come up with a plan.

The president said that the White House auto task force determined that Chrysler must seek a partner in order to stay viable.

An administration official said the White House believes that Chrysler's plan is "not likely to lead to viability on a stand-alone basis" and assailed "the inferior quality of its existing product portfolio" and over-reliance on trucks.

The administration is urging the company to merge with Fiat and will offer capital to help bring that about. If Chrysler and Fiat are able to reach an agreement, the administration will consider loaning up to $6 billion to Chrysler. If the two companies cannot reach an agreement, the offer will be withdrawn.

"We will not be able to justify investing additional tax dollar to keep Chrysler in business," Obama said.

Chrysler welcomed the options laid out by the administration today.

"Chrysler has consistently said that the alliance with Fiat enhances its business model that expands its global competitiveness. We appreciate the willingness of the [White House's Auto] Task Force, along with industry and financial experts, to consult closely with us in order to achieve this significant step," said bob Nardelli, Chrysler LLC chairman and CEO, in a statement.

The Obama administration would not specify how much capital it might entail to keep either company going for another 30 to 60 days.

The president also made two other key announcements today.

First, Obama announced a government-backed warranty program for all new GM and Chrysler vehicles purchased during this reconstructing period.

A fund will be set up equal to 125 percent of the total cost to pay for warranty service. The automakers will contribute 15 percent while the government will provide 110 percent, with the money coming from the economic stabilization funds. A separate company will hold the funds and pay the claims even if one of the auto manufacturers goes into bankruptcy or goes out of business.

Second, Obama announced that Edward Montgomery would serve as director of recovery for autoworkers and communities. Montgomery, a labor economist and former deputy secretary of labor, will coordinate the administration's efforts to help autoworkers, communities and regions adversely affected by the failure off the automakers to find new jobs, businesses and industries.

Obama compared this new position to a federal coordinator appointed after a natural disaster.

"When a community is struck by a natural disaster, the nation responds to put it back on its feet. While the storm that's hit our auto towns is not a tornado or a hurricane, the damage is clear, and we must respond," he said.