The Administration Doesn't Like What GM and Chrysler Have to Sell

This is a bit of a bombshell. The WSJ is out with a report that the Obama administration may well let GM and Chrysler go Chapter 11. In fact, they say that Chrysler isn’t viable absent a merger of some sort with Fiat.

Here is the meat of the report from the Journal.

The administration’s auto team announced the departure of Mr. Wagoner on Sunday. In a summary of its findings, the task force added that it doesn’t believe Chrysler is viable as a stand-alone company, and suggested that the best chance for success for both GM and Chrysler “may well require utilizing the bankruptcy code in a quick and surgical way.”

The move also indicates that the Treasury Department intends to wade more deeply than most observers expected into the affairs of the country’s largest and oldest car company.

After over a month of analysis, the administration’s auto task force determined that neither company had put forward viable plans to restructure and survive. The verdict was gloomier for Chrysler. The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.

If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.

Despite the grim view of Chrysler, the task force said it had no intention of replacing CEO Robert Nardelli. Unlike Mr. Wagoner, who had been at the helm of GM since 2000, Mr. Nardelli is considered an auto-industry outsider who has only been in charge at Chrysler since the company was acquired by Cerberus Capital Management LP in 2007.

In addition to pushing out Mr. Wagoner, the task force said GM is in the process of replacing the majority of its directors. Kent Kresa, a longtime director, will serve as interim chairman. Mr. Wagoner will be replaced as CEO by Chief Operating Officer Frederick “Fritz” Henderson.

The administration said it would provide the company sufficient working capital for 60 more days, during which a revamped GM board and top management has to put forward a much more rigorous restructuring plan than it submitted last month.

“The administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future,” according to term sheets released by the White House Monday morning.

Administration officials made it clear that an expedited and heavily supervised bankruptcy reorganization was still very much a possibility for both companies. One official, speaking of GM, compared such a proceeding to a “quick rinse” that could rid the company of much of its debt and contractual obligations.

The clearest losers appear to be the thousands of bondholders and lenders to both GM and Chrysler. In both cases, administration officials said that the companies were burdened by inordinate amounts of debt that would have to be scrubbed. Chrysler’s survival, the administration said, would require “extinguishing the vast majority” of the company’s secured debt and all of its unsecured debt and equity.

Boy, this sure goes against the conventional wisdom floating around the last few days that had the Obamaites caving to a rescue. That, at first glance, isn’t the case at all. Most interesting is the shot at the bondholders. Are we finally going to see that group of investors take their deserved losses?

Monday is going to be a very interesting day. I suspect that the markets aren’t going to like this much. It appeared as if we were settling into some semblance of, if not normalcy, at least less of a crisis of the day scenario. This will dispel that notion for a few days.

To assure consumers reluctant to buy GM or Chrysler cars, the government plans to take the unusual step of guaranteeing all warranties on new cars from either company. These guarantees would lapse back to the companies once they return to health.

Disclosure: No position

Comments

[Mister Jimmy:]

You just can't help but be impressed by the outstanding leadership in the public and private sector, as well as the visionary public policy, that has brought our once-great nation to this day. The sneering and laughter has to be just as loud in Tehran and Baghdad as it is in Beijing and Tokyo.

Mar 30 06:30 AM

[car_guy:]

The administration is walking the fine line between destroying consumer confidence in the company (what is left of it) and putting enough pressure on the bondholders to get them to move. The 'quick rinse' terminology should scare the heck out of them since I assume they would be rinsed. The tone for Chrysler is expected since the administration doesn't want to be seen bailing out Cerberus.

Mar 30 06:51 AM

[Cobra 1:]

I have a renewed sense of faith (albeit very little) in the administration. Nothing else is forcing everyone to the table, maybe this will!!!!

Ive said it before, Ill say it again, GM can survive, but needs all hands on deck, not still fighting each other!

Mar 30 07:33 AM

[Juan Carlos...:]

It seems like time is running out for GM. Unfortunately, this may harm not only the US by the whole world. See my latest blog on EV World.Com to find out why this may produce a technological lag in the world.

Mar 30 08:20 AM

[elcopone:]

Juan Carlos,

Hate to break it to you but Toyota, Hyundai and Honda have been spending 5X more $$ in R&D than GM has for over a decade. So stop trying to scare people by saying that a GM restructuring it will harm the world due to a "technological lag." The Volt was mirage, a spin, nothing more. They technology in the Asians plug-ins is far superior anyway. Remember, GM decided that Hybrids were not worth investing in and instead decided to focus on SUV's and trucks. GM first hybrid came out 10 years after the Prius! So I'm not too concerned about the technological lag you speak of.

On the article, this firing and restructuring is well overdue and 20 years in the making. I applaud the Obama administration for their work here. Now, time to hold the financials to the same standard.

Mar 30 08:38 AM

[Mister Jimmy:]

"They technology in the Asians plug-ins is far superior anyway". Why, prey tell? You need to elaborate on a glib statement like that, elco.

Mar 30 09:16 AM

[Juan Carlos...:]

elcopone,

I am afraid you just missed the whole point. In order to come up with a valuable argument into this dicussion, I suggest you first to find out what is the difference between a conventional hybrid and a plug-in hybrid car and between a conventional hybrid and a range extended electric car.


On Mar 30 08:38 AM elcopone wrote:

> Juan Carlos,
>
> Hate to break it to you but Toyota, Hyundai and Honda have been spending
> 5X more $$ in R&D than GM has for over a decade. So stop trying
> to scare people by saying that a GM restructuring it will harm the
> world due to a "technological lag." The Volt was mirage, a spin,
> nothing more. They technology in the Asians plug-ins is far superior
> anyway. Remember, GM decided that Hybrids were not worth investing
> in and instead decided to focus on SUV's and trucks. GM first hybrid
> came out 10 years after the Prius! So I'm not too concerned about
> the technological lag you speak of.
>
> On the article, this firing and restructuring is well overdue and
> 20 years in the making. I applaud the Obama administration for their
> work here. Now, time to hold the financials to the same standard.

Mar 30 09:21 AM

[IMWatchingU:]

If Toyota's CEO is compensated at 900k and GM's at 15 million, do we see a problem? How many levels below Wagner to do you have to go to get to 900k at GM?

I would ask a direct comparison of headcounts and compensation between Toyota and GM and Chrysler. Start with the top 5 levels. Force them to restrict compensation based on a multiple of the lowest paid worker. If the janitor doesn't get a raise, the exec is restricted.

If the administation wants change, start with these levels.

Mar 30 11:18 AM

[slowdown:]

Restate this - the Japanese governement has been spending 5X R&D not the car manufacturers. Our government instead subsidizes the oil industry to the tune of $33 bln annually.


On Mar 30 08:38 AM elcopone wrote:

> Juan Carlos,
>
> Hate to break it to you but Toyota, Hyundai and Honda have been spending
> 5X more $$ in R&D than GM has for over a decade. So stop trying
> to scare people by saying that a GM restructuring it will harm the
> world due to a "technological lag." The Volt was mirage, a spin,
> nothing more. They technology in the Asians plug-ins is far superior
> anyway. Remember, GM decided that Hybrids were not worth investing
> in and instead decided to focus on SUV's and trucks. GM first hybrid
> came out 10 years after the Prius! So I'm not too concerned about
> the technological lag you speak of.
>
> On the article, this firing and restructuring is well overdue and
> 20 years in the making. I applaud the Obama administration for their
> work here. Now, time to hold the financials to the same standard.

Mar 30 11:20 AM

[EdG:]

GM is a big company and therefore needs a viability plan based on sustainable volumes and margins. I think it was a mistake in the past to trust management consulting companies like McKinsey who recommended strategies based on high margin (though lower volume) products such as SUVs.

Therefore looking at the Government's statement rejecting its new business plan it looks like a more appropriate plan would be to: 1) concentrate on the high volume markets - North America, China and Europe with standardised car designs. This means a plan has to be in place for Opel/Vauxhall/Saab/Holden all could be rebranded GM. The best models no matter the "nameplate" should be in the salesrooms 2) Shake-up of overheads (I think this is best done in Chapter 11) but to start with management costs and non-direct benefits need to be lower than competitors 3) Cut dealers and part manufacturers drastically (cut the smallest 50% of both).

For Chrysler which is five times smaller you have to be more radical to survive. It is probable Daimler got rid of Chrysler because of the poor prospects of the current business. It is implicit in the governments rejection of their new plan that they will not be allowed to survive alone and therefore any successful plan will involve the current interested party - Fiat. A radical plan would be to specialise in the Van and SUV markets (due to decreasing competitive pressure by Ford and GM) while using spare capacity to sell and manufacture Fiat cars. There are also reasonable markets for Chyrsler's American Jeeps and Minivans overseas which Fiat would be required to Promote and Sell. A joint bailout package with Fiat's Italian government would sweeten the deal.

Mar 30 12:10 PM

[Mad Hedge F...:]

This is Obama's first high profile firing. I’ll tell you what GM’s problem is. My dad was a lifetime GM customer, religiously buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, “I didn’t fight the Japanese for four years so I could buy their cars.” (He was a Marine). GM’s problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks that brought them home from harm’s way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM’s problems really accelerated with the passing of the “greatest generation.” During the last 35 years, when Japan’s share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: “Nobody can tell GM how to build cars.” Maybe someone should tell them.

Mar 30 01:04 PM

[Paul Killinger:]

This fits B-O's goals nicely. The government will own and run the auto industry, and we'll all be driving Smart For Two's he thinks. Fortunately for us, we'll all wake up before that happens.

Mar 30 01:54 PM

[Cobra 1:]

Paul, I hope you are correct!

Just as it is not the governments job to manage (in any fashion!) the private sector, it is not the governments job to bail out companies that have failed!

This is the first right of passage for a socialist government! All of this has to stop! We need to stop bailing out any company, if they can not make it via a value to the market (that doesn't mean only jobs as a value) and not as Hitler did to make everyone an employee of the military, but to make a product that can hold its own weight and be profitable.

JMHO

Mar 30 03:21 PM

[a. palmer jr.:]

If GM hadn't crushed up all those EV-1s and kept that line of cars and perfected them, I think we would see a different GM today! The users of those cars seemed to really like them and I definitely think there was a market for them. GM chose the path to quick profits rather than smaller amounts of profits for many years. Now they're in a predictible situation..trying to sell 6000 lb suvs when people are finally wising up and moving away from them.

Mar 30 09:23 PM

[jadziasman:]

GM hasn't been a car company for at least 20 years. SUV's and trucks were its profit makers and like Ford, they were very good at producing them. Many, many people bought these vehicles too because they were durable and safe. Gasoline cost only became an issue recently. And then Depression set in, but that's another story.

Sure, the upper management of GM should have seen this coming and made the necessary changes (beginning in 1973). But, there's a lot of blame to share in the USA.

Our wasteful ways with energy have brought these once great auto corporations to their knees. Forget about global warming, it's the competition for dwindling resources from emerging competitor nations - and we're going to lose. Fuel conservation will be forced on us. When the dollar devaluation really hits - sometime in the next five years, gasoline will hit $8 to $10 per gallon. The US will be much like Great Britain, a former powerhouse fighting a perpetual recession.

We will be the ones riding the bicycles, mopeds and motorcycles. Who knows - maybe our citizens will lose some weight and our health care costs will decrease.

Mar 30 10:04 PM

[Mr. Ed, Jr.:]

"...the government plans to take the unusual step of guaranteeing all warranties on new cars ..."

I can hardly wait for the next townhall meeting....

Ordinary citizen: Mr. President, I have been very troubled by something that has been happening lately....for the past couple weeks, there is sometimes a yellow-ish-orange-ish light on my dashboard -- it's a Pontiac Sunfire, so your warranty is supposed to fix it-- but I called your Whitehouse switchboard and they were no help at all.... It's a four cylinder, I think-- I'm not really sure-- do you need to know that ? No ? Ok...

Mar 31 01:31 AM

[ajit:]

PEOPLE WHO LOVE GM CAR WANT IT .

BUT WHAT COMPANY ADM. IS DOING?

BRAND NAME VALUED AT?

LETS SEE NEW GM WITH NEW ADM.

BUT IT MUST SERVIVE .

LET IT BE FROM ANY COUNTRY ADM.

Mar 31 08:58 AM

[Larrysyr:]

I think you've hit on one of the problems. GM (and Chrysler) basically ignored the entry-level car market for years. We know it's much more profitable to sell mid-sized sedans or SUVs and trucks, but you don't get life-long brand loyalty unless you hook the customers young.

GM seemed to be getting the message when it initiated the Saturn division, but those cars turned out to be cramped and less than durable. The advertising was cute, but the cars ended up unappealing. And who can forget the Geo Metro, a fun little hatchback with all the peformance you'd expect from a riding lawnmower.

Chrysler did even worse with offerings like the Omni and Neon, which were priced low enough to sell, and then turned off the people who bought them.

These companies CAN do better, and some recent models like the Chevy Malibu show it. But I buy cars to get me from point A to point B reliably and in one piece. While I would like to see these companies successful, I wouldn't trust them to care about me as a customer until they lay down a drastically better track record.


On Mar 30 01:04 PM Mad Hedge Fund Trader wrote:

> This is Obama's first high profile firing. I’ll tell you what GM’s
> problem is. My dad was a lifetime GM customer, religiously buying
> a new Oldsmobile every five years. Once he even flew to Detroit for
> a factory tour and drove his new prize home. Thirty years ago I told
> him he was doing GM no favors by buying their cars, and the only
> way to force them to improve a tragically deteriorating product was
> to buy better made German and Japanese vehicles. This was right after
> the State of California forced auto makers to install seatbelts on
> new cars. Airbags and ABS brake systems were still years away. His
> response, “I didn’t fight the Japanese for four years so I could
> buy their cars.” (He was a Marine). GM’s problem is that my Dad passed
> away seven years ago. Of the original 17 million WWII veterans, 1,500
> a day are dying, and there are only 1.5 million left. All of them
> loved Detroit because it built great Jeeps, Sherman tanks, and half
> tracks that brought them home from harm’s way. Their kids prefer
> German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles.
> It is no coincidence that GM’s problems really accelerated with the
> passing of the “greatest generation.” During the last 35 years, when
> Japan’s share of the US car market climbed from 1% to 40%, I begged
> GM to mend their ways and build a quality, price competitive product
> that Americans wanted to buy. They answer was always the same: “Nobody
> can tell GM how to build cars.” Maybe someone should tell them.<br/>

Mar 31 11:37 AM