Obama to Automakers: Ultimatums with Teeth

After pushing out General Motors’ (GM) CEO Rick Wagoner because of disappointment in his turnaround of GM, today President Obama outlined his latest deal with the automakers based on findings from the Auto Task Force that neither company has a viable plan forward. In an announcement to the press today, the President said he will give GM 60 days' worth of working capital to continue to allow the company breathing room from bankruptcy, but he is expecting a much more rigorous reorganization plan than the one submitted last month. Furthermore, in regards to Chrysler, Obama was more harsh, saying that he is giving the company 30 days of working capital in order to allow for a merging of operations with Fiat or another suitor. We wrote about this deal with Fiat back in January (How Much is Chrysler Worth? That Little?), but as of today nothing formal has materialized. Interestingly, Obama said that if this deal is not reached within 30 days there will be no more money coming for Chrysler, but if a deal is reached they could get another lifeline of up to $6 billion.

On this blog we have been vocal against the auto bailouts because the business models are unsustainable with massive legacy costs. In our mind, clearly there was no perfect solution, but the best way forward would have been reorganization through chapter 11 bankruptcy. However, those days prior to the initial bailouts are long gone and the companies continue to burn through cash like there is no tomorrow. However, this new attitude from the administration should at the very least get GM and Chrysler’s attention. The President said that he was not ruling out bankruptcy for GM either, but he wants to reevaluate the company after the next 60 days of working with the Auto Task Force. The President tried to assuage customer’s fears saying that as of today, car buyers should feel safer today than ever because the U.S. government will stand behind your warranty on any U.S. made car, should the maker go under. As the President stated,

“So it’s my hope that the steps I’m announcing today will have an effect. Will go a long way forward towards answering many of the people who have questions about the future of GM and Chrysler. But just in case they’re still nagging doubts, let me say it as plainly as I can, if you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, your warranty will be safe. In fact, there will be safer than it’s ever been because starting today, the United States government will back up those warranties.

This is probably the deepest intrusion of government into private industry yet in the Obama administration, but at this point there are few other options. He has restructured management at GM and is even forcing a merger at Chrysler, but nothing he has tried prior to this has yielded results. Many billions have already been sunk into the failing businesses, and to allow the companies to fail now would be a major blow to the economy that is just now starting to show signs of improvement. Chrysler CEO Bob Nardelli is now on the hot seat, as it is up to him to merge with someone or collapse. He has seen what happens when a CEO falls out of favor with the Administration and its Task Force. In the face of this new mandates, how happy is Ford (F) that they have stayed out from under the government’s clutches by not accepting government funds? There are still “nagging doubts” about Ford as well, but at least they are able to make their own business decisions unlike competitors Chrysler and GM.

Original post

Comments

[epeon:]

What Obama has done is virtually assured that GM will go into bankruptcy. This is probably the correct action. However, this means that a judge can (and probably will) tear up the union contract for retirees.


So, we have Obam basically busting the union?

Mar 30 01:47 PM

[reality chk:]

Some times tough medicine is hard to swallow. In the absense of an Industrial policy wondering why this task force is operating as guardian of an Industrial Policy?
Why did the banks and wall street scheme financial institutions don't get this much focus?

Mar 30 02:01 PM

[cynnatalie2000:]

GM is viable with UAW concessions. Chrysler is another story and the demise of Chrysler would probably help Detroit in the long run.

Mar 30 03:34 PM

[TB3:]

As I've stated in the past, Ford stands alone under the very capable leadership of Alan Mulally. I only hope if GM and Chrysler file for Chapter 11, it doesn't drag down key suppliers and with them Ford in the end.

Mar 30 04:02 PM

[Gravity404:]

What about the $26 billion we already gave them? and now we are letting them go bankrupt?? they should have filed before we gave them anything.

Screw nationalizing the banks, nationalize the auto industry.

Mar 30 04:16 PM

[Gravity404:]

When Obama starts making cars, I'll probably keep buying Lexus.

Mar 30 04:20 PM

[Sentinel:]

And what a damn shame that it took a Socialist Democrat to finally say to these giants of corporate capitalism no more coming to Uncle Sam with your hand out for taxpayer money. Let the marketplace be the judge.

Only reinforces the PRECEIVED....let me repreat.....the PRECEIVED notion that Obama and the Socialist Democrats are better at policing out of control, rapacious capitalism than the Republicans.

Mar 30 05:07 PM

[Alpha Dinar:]

The Chinese have an old saying, “Kill the chicken to scare the monkey.” The chicken is GM’s CEO, Mr. Wagoner. The monkey? CEOs of financial companies in the US. By ousting Mr. Wagoner, President Obama sent a strong message to the monkeys of US financials to participate in his TALF and PPIP government initiatives. If they don’t? They simply lose their jobs. The fact is that the government is the one with money and, consequently, the ones with the last say. The government already owns large stakes in various financials. As for financials it doesn’t have stakes in, they can merely convince the board that the CEO isn’t cooperating and that they will not receive any support as long as he’s there. The board will surely send the CEO jumping out of the window.

Why are banks reluctant to participate in these programs? Participating means a huge hit to the already minuscule capital at banks because they will be marking down a lot of their artificially high book values. This will mean capital injection by the government and shareholder dilution. On the other hand, the governments likes it and will be willing to provide capital because it potentially means the poison is out of the system and financials are healthy again (supposedly).

As I write this article, the S&P 500 is down 3.37%. The market is definitely showing its disapproval of this fierce government intervention. However, can we really oppose such action if we have been relentlessly waiting for the invisible hand to save us from this free-fall? Keynes was smart because he realized that there is a good reason why this hand was called the “invisible hand.” We can’t see it!

Mar 30 06:56 PM

[Miken:]

With respect to GM failing to meet the requirements of the loan guarantees, the cause of that failure is the Obama administration itself.

Imagine trying to force the bondholders, union, suppliers, dealers, etc. to the negotiations, only to have the legs cut from beneath you by Obama saying he was not going to allow the auto industry to fail. What incentive do the stakeholders to budge an inch have then? This move was either calculated to force the automakers into bankruptcy by manipulation, or dangerously naive. The negotiations were effectively done at that instant.

Now the administration is taking a do-over saying 'this time I'm really, really serious'. They are taking the John Wayne approach and it's almost comical if it weren't so tragic. The mulligan is at the cost of the CEO's job.

It's also the best manifestation to date of the elitist protection of the banking/Wall Street businesses. No banker has lost his/her job. Sure, the CEO's of AIG and the GSE's are gone, but no banks or Wall Street guys. Hmmmmm.

And what's the deal with the government refusing to take TARP money back from those who don't need it. This is getting better than an old Abbott and Costello routine.

I understand that the Obama team has never run anything bigger than a candy shop, but can we afford their learning curve??

Mar 30 07:45 PM

[Moon Kil Woong:]

No the deepest intrusion into into private industry has been funneling massive taxpayer money to AIG and the banking sector. Bankruptcy has been part and parcel of a working capitalist system for ages. It has been that way because it is honest, impartial, and it works.

If the administration alowed this to duplicate in the financial system we might get a lot of pain in the near term but after the hard rain the sky would clear. Personally, I'm getting sick of this constant financial drizzle. It's been going on for over a year now.

Mar 30 08:19 PM

[Deweyp:]

The whole point of Obama's speech and the position he has adopted was indeed to scare the bond holders and the union into taking action to relieve the debt load and change the union's position on work rules and benefits that have given the Asian transplants an advantage. I really don't think there was an intention to force GM into chapter 1

Mar 31 09:40 AM

[Deweyp:]

That was supposed to read "chapter 11"

Mar 31 09:41 AM

[Gravity404:]

wow, 6 thumbs down. I was making a comment on quality. Quality is key, and that is something missing from american auto makers for 40 years.

Mar 31 10:06 AM

[epeon:]

I don't see how one can perceive Obama's actions as anything but forcing a bankruptcy. He fires the guy who is against it. He says that the US government will honor the warranties (removing one big argument against bankruptcy). And, he says that the US will provide financing for a package bankruptcy (removing the other argument against bankruptcy). At this point, there is no longer a case against bankruptcy. Furthermore, after the firing of Waggoner, there will be no executive willing to fight it. So, bankruptcy it is.

Mar 31 10:46 AM

[henarl:]

Best thing Obama's done so far. About time! Now I hope he gets tougher with AIG and the banks.

Mar 31 06:50 PM