Obama tells GM, Chrysler to restructure or face bankruptcy

WASHINGTON – President Barack Obama’s rejection yesterday 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.”

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 matter 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 yesterday 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 resumé and compensation package is similar to Wagoner’s.

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.

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.”