reporting from los angeles
In one of its boldest moves yet into a company’s corporate affairs, the Obama administration forced out the head of General Motors Corp. over the weekend and prepared to put both GM and Chrysler on a short leash to retool their operations.
The administration will announce today that it has rejected GM and Chrysler’s plea for an additional $22 billion in funding. Instead, it pushed Rick Wagoner out as GM chairman and chief executive, giving the company 60 days to restructure, while giving Chrysler 30 days to work out a merger with Italian automaker Fiat.
If they can’t show progress, Chrysler may be left to fail and GM may be dragged into bankruptcy, said senior administration officials, who requested anonymity so they could speak frankly.
With a deadline looming Tuesday to accept the companies’ restructuring plans or call in the government’s previous loans, the Obama administration will do neither. Instead, officials will give GM and Chrysler more time to make the changes necessary for long-term viability.
To date, the companies and their financing arms have received $24.8 billion in government loans. Administration officials declined to specify how much more money the administration would be prepared to lend the automakers to finish their restructuring plans.
Ford Motor Co. has not requested any aid from the government.
Appearing on CBS’ “Face the Nation,” President Obama said Sunday that the nation could 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,” he said, noting that that would “mean a set of sacrifices from all parties involved.”
Obama will call today for further sacrifices from stakeholders and even threaten to force bankruptcy or cut off aid entirely should significant progress not be made by the companies’ new deadlines.
In anticipation of more Rust Belt job losses, the president named Edward B. Montgomery as director for auto recovery, a new executive-branch czar charged with providing support to laid-off auto workers and their families.
And for consumers, the government will guarantee warranties on GM and Chrysler automobiles purchased in the next two months as a means of reassuring car buyers worried about the continued existence of the automakers.
“At the end of the day, if the consumer doesn’t start buying these vehicles, nothing else matters,” said Rebecca Lindland, auto analyst with I.H.S. Global Insight.
In laying out his strategy for addressing the challenges facing America’s automakers, Obama is standing up for an industry that is as huge -- with 240,000 automaker employees in the U.S. and many times that in companies such as parts suppliers -- as it is unpopular among critics from all sides of the political spectrum.
And though the president’s plan is decidedly tough, it also displays a deep desire to keep the industry alive and avoid the economic calamity that could come from its collapse, despite the increasingly long odds against it.
Since December, when President Bush agreed to lend the weakened companies a combined $17.4 billion, plus $7.4 billion to their lending arms, GMAC and Chrysler Financial, the sagging economy has taken a considerably larger bite out of auto sales.
In the first two months of the year, U.S. sales for GM and Chrysler have fallen 45%. That decline led members of an auto industry task force reporting to the president to conclude that restructuring plans submitted by the automakers last month were unsuitable.
Moreover, neither GM nor Chrysler was able to satisfy terms of the existing bailout loans, including orders to reduce unsecured company debt by two-thirds and cash obligations to retiree healthcare by half.
“We have unfortunately concluded that neither plan represents viability and does not warrant the substantial additional investments they requested,” an administration official said.
A new lifeline
But because the president “decided this was an industry of crucial importance to the country,” the administration is providing the two Detroit giants with an additional lifeline, short though it may be.
In doing so, however, the administration appears to be violating the terms of the December loan agreement with the automakers.
Under that agreement, the president or his designee had until Tuesday to determine whether they had met all the conditions for viability.
If not, repayment of the loans would have to take place in 30 days, although the deadline to comply could be extended an additional 30 days.
“We are not trying to delay the outcome of this process,” the official said. “We want to give these companies every opportunity to succeed.”
To that end, the auto task force decided that GM still could be made viable and opted to give it an additional 60 days to undertake major restructuring under new corporate leadership with an unspecified amount of “working capital” to get through that period.
If further gains in cost cutting and debt reduction are not made in that time period, the administration would probably force GM into bankruptcy, giving a judge 30 more days to do the heavy lifting -- with unions, bondholders, suppliers and franchise car dealers -- that could not be accomplished outside the courtroom.
In that event, the government would provide bankruptcy financing to the automaker, then provide it additional aid afterward.
Although all stakeholders have warned of the toll of bankruptcy, the costs could be particularly high for holders of $27 billion in unsecured bonds in GM. They could lose every penny.
In requesting that GM’s top executive step down, the task force suggested that it is demanding more change at the company than Wagoner was able to deliver. A business school graduate versed in corporate ladder-climbing, Wagoner has spent his entire career at GM, beginning in 1977, and reached the chief executive position in 2000.
In his more than eight years at the helm, GM has lost $68 billion while the company’s stock has declined by 95%.
Wagoner’s compensation last year was valued at $14.9 million. Under terms of the federal loans authorized in December, he agreed to accept a salary of $1 this year, and he and other top GM officials are prohibited from receiving a severance package.
By calling for Wagoner’s departure, however, the administration is touching a dangerous nerve. By targeting him, Obama could be sending a message to executives across the country.
“If CEOs are going to be forced to resign as a condition for government funding, it’s going to reduce the number of companies that apply,” said Jeremy Anwyl, CEO of auto research website Edmunds.com.
GM board member Kent Kresa will act as interim chairman. Current President and Chief Operating Officer Fritz Henderson, another longtime GM employee who started at the company in 1984, will assume the CEO role.
A possible deal
For its part, Chrysler will be given a shorter time period to work with. It also faces considerably lower expectations from administration officials, who heavily critiqued the company’s lineup of vehicles, as well as the restructuring plan it submitted.
Chrysler has been negotiating a possible deal with Fiat since January. As part of any arrangement, Fiat, which has not sold cars in this country for two decades, would be expected to commit to build fuel-efficient vehicles in the U.S.
In the event of a workable plan, the government would consider lending Chrysler up to $6 billion to help pay for the merger if the two automakers come to an agreement.
“But if they can’t come to a satisfactory agreement and no other viable partnership arises, we will no longer be able to justify investing additional tax dollars into Chrysler,” a senior administration official said.
It was unclear whether the administration would call for repayment of the previous loans at that time, or just withhold any additional money.
Under the plan’s guidelines, the carmakers will put up 12% of the anticipated costs of warranty repairs, and the government will cover the remainder. If the companies return to financial stability, they will once again assume full responsibility for warranty coverage.
Both automakers will be asked to contribute to the program, which will guarantee the warranties of new GM and Chrysler cars purchased within the current restructuring period, even if the automaker goes out of business.
In a further nod to those worried about the effects of the industry’s plight on the individual, the president will create a new czar-type position to address the woes of those laid off by automakers.
He appointed Montgomery, a former deputy secretary of Labor, as director of recovery for auto workers and communities.
Continued restructuring will lead to even larger job losses -- GM alone pledged to cut 47,000 jobs in a business proposal that administration officials characterize as insufficiently ambitious.
Times staff writer Peter Nicholas in Washington contributed to this report.
(BEGIN TEXT OF INFOBOX)
Birth: Feb. 9, 1953, Wilmington, Del.
Title: GM chairman and chief executive
Experience: Started at GM in 1977 as an analyst. Named chief financial officer in 1992 and president in 1998. Became the youngest CEO in GM history in 2000. Became chairman in 2003.
Education: MBA from Harvard University in 1977; bachelor’s degree from Duke University in 1975.
Background: Wagoner played basketball for the Duke Blue Devils and had aspirations of going pro. He is married and has three adult sons.
Sources: Times research and wire services
(BEGIN TEXT OF INFOBOX)
Edward B. Montgomery
Birth: July 3, 1955, New York City
Family: Married in 1994 and has three children
Experience: Dean of the University of Maryland’s College of Behavioral and Social Sciences. Led the Labor Department’s review team for the Obama-Biden transition. Served as the department’s deputy secretary in 2000-01.
Education: Bachelor’s degree from Penn State in 1976. Master’s from Harvard in 1980 and a doctorate in economics from Harvard in 1982.
Interests: Scuba diving, rugby, squash, running and reading
Source: Times research