Last week was a busy one for President Obama. First he reportedly finalized his plans for fuel economy increases for 2011 -- the first such increases in two decades. And then over the weekend, he rocked the auto industry when he demanded that GM CEO of 8 years, Rick Wagoner, resign. Rick Wagoner complied.
Now he has started off this week with a bang, one that's sure to leave the domestic automakers sweating. White House staff said early Monday that neither Chrysler nor GM submitted satisfactory plans and that they had rejected GM's request for $16.6B USD more in bailout funds and Chrysler's request for an additional $5B USD according to MSNBC. The decision sets up an endgame that may ultimately involve the demise of these two former bastions of the U.S. manufacturing and tech industry.
While denying full bailout funding, Washington has extended an offer of some assistance to GM and Chrysler under strict terms. In Chrysler's case, the government states that a thorough review revealed it unable to sustain as an independent business. The government suggests that Chrysler merge with Italian automaker Fiat SpA, which it already gave a 35 percent stake to several months ago.
White House officials say that it will offer up $6B USD in a one-time bailout offer to the pair if they can complete negotiations. The Obama administration hopes a deal with Fiat, which already saw its own successful turnaround a few years ago, could save Chrysler. However, if the pair cannot reach a deal the administration is prepared to walk away from funding, likely leaving Chrysler to its demise.
If this occurs, Chrysler's assets are likely headed for a complete sell-off. It has no funds for other alternatives, and it already has undergone a previous devastating bankruptcy.
For GM, Washington is demanding a massive restructuring of the company's leadership, which started with the removal of Rick Wagoner. The White House offered 60 days of operating money to sustain the company while it restructured, if it complies. Fritz Henderson, GM's president and chief operating officer, reportedly has become the new CEO in compliance with the plan. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., has taken over as the new chairman of the board.
According to White House officials, the majority of the rest of the board are expected to step down.
After 60 days, GM is likely on its own unless the Obama administration has a change of heart. GM has previously said that without bailout funds it cannot survive, and will be forced to liquidate. So while its terms are just slightly gentler than Chrysler's, it ultimately may meet the same end.
President Obama stated on Meet The Press over the weekend, "We think we can have a successful U.S. auto industry. But it's got to be one that's realistically designed to weather this storm and to emerge -- at the other end -- much more lean, mean and competitive than it currently is."
The Obama administration made the decision in the face of growing public discontent over the bailout. Administration officials said that GM and Chrysler had not made good on their promises, and that the administration was doing the companies a favor not calling in the billions in bailout loans -- yet. The White House remains optimistic that Chrysler and GM may survive, if they play by their rules. The Obama administration says GM, in particular, has the best hopes as they say it has strong research potential with programs like the Chevy Volt, and still enjoys a good brand name.
Despite slashing thousands of jobs, GM and Chrysler have a gargantuan task ahead of them in trying to survive. GM owes $28B USD to bondholders and $20B USD in retirement benefit and healthcare to former employees. Chrysler owes about $7B USD in debt, mostly to banks, and owes $10.6B USD in retirement and health care.
If either company fails to meet the government's terms, administration officials reportedly want a forced restructuring under court supervision, rather than Chapter 11 bankruptcy. Administration officials say that Chapter 11 is not their goal, but that there could be a "role for a court supervised process to effect the restructuring... different from Chapter 11." However, many within both companies and many financial analysts state that such restructuring is high infeasible and liquidation is the only possible outcome.
Regardless of what the end result is, it is clear that whatever form GM or Chrysler emerge in, they will be much smaller. In the process many tech professionals will be laid off, many dealerships will close, and many suppliers will likely fold. In this respect the recession has just claimed its largest casualty yet.