GM expects IPO to Reduce Taxpayers' Stake to about 43%

USA Today

The initial offering of General Motors stock is expected to raise about $10 billion in a sale that will cut the U.S. government's stake in GM to below 50%, three people briefed on the sale said.

GM common stock is expected to sell for $26 to $29 a share when the IPO takes place, tentatively Nov. 18, according to the three people, who asked not to be identified because they are not authorized to speak on the matter. That would value the company at more than $46 billion, roughly the same as Ford Motor.

U.S. taxpayers, who bailed out GM last year, would see their ownership drop from 61% to about 43%, not including any extra shares bankers could offer if there is strong demand, the people said.

GM has wanted to shed government control, contending that it hurts the company's sales and public image. The government will get most of the $10 billion and recoup another chunk of the more than $50 billion GM rescue.

GM will not make any money from the sale of the 365 million common shares that will make up the IPO but will sell roughly $3 billion in preferred stock that will convert to common stock in 2013, the people said. Preferred shares pay a set dividend and are more like bonds. GM will use that money to repay loans and make pension payments.

Terms of the sale are not final because GM's board could still change them, one of the people said. GM's final registration filing with the government is expected by today.

GM and its bankers then will begin a "road show" to woo investors, primarily pension and mutual funds, but also some large individual investors. Common shares worth roughly $2 billion would be sold to investors in the Middle East, Europe and Asia, one of the people said.

Bankers leading the sale are recommending that the final share price be revealed Nov. 17 and the sale take place a day later, according to the people.

GM is now a private company owned by the U.S. government, a United Auto Workers retiree health trust, the Canadian and Ontario governments and former GM bondholders.

The Canadian governments are expected to cut their stake from 11.7% to 9.6%, while the UAW trust would cut its stake from 17.5% to 15%, two of the people said.

GM has repaid or plans to repay a total of $9.5 billion in government loans, and the government hopes to recoup its remaining $40 billion investment with the initial stock sale and several follow-up sales.

The four owners hold about 500 million shares total, but the total shares for sale in the IPO and subsequent sales will be increased with a 3-to-1 or 4-to-1 stock split, one of the people said. The split, which will take place before the IPO, will create about 1.6 billion shares of GM common stock, one of the people said.

Obama Links Auto Industry Woes, Financial Overhaul

USA Today

 

 

Celebrating signs of a turnaround in the U.S. auto industry, President Obama said Saturday the financial system must be overhauled to prevent a repeat of the economic crisis that pushed carmakers to the brink.

Senate Democrats have set a test vote Monday on a bill that aims to protect the overall economy by imposing tighter regulations on the financial sector.

The auto industry was one of the biggest casualties of a recession fueled by risky lending and speculative trading practices of major financial institutions. But after shedding 400,000 jobs in 2008, bailed-out U.S. automakers are rebounding.

General Motors Co. said this week it will repay $8.1 billion in U.S. and Canadian government loans five years ahead of schedule. Chrysler LLC, now run by an Italian company, said it boosted its cash reserves by $1.5 billion despite a first-quarter loss of almost $200 million.

In his weekly radio and Internet address, Obama said that while the auto industry is on more solid footing, it will take more time for the economy to recover from the loss of 8 million jobs. He blamed the downturn on irresponsible risk-taking by Wall Street firms.

In a speech Thursday in New York in the shadow of Wall Street, Obama argued for new rules to protect consumers and hold financiers accountable. The changes would end taxpayer bailouts, bring complex financial dealings into the open and extend new rights and protections to consumers and shareholders.

"That's how after two very difficult years we'll not only revive the economy, but help to rebuild it stronger than ever before," he said Saturday.

The White House, in a report timed to GM's loan repayment, said the past nine months had produced the auto industry's strongest job growth in nearly a decade, with the addition of 45,000 jobs.

Democratic Senate Majority Leader Harry Reid has set a test vote on the financial overhaul bill for Monday, but conceded that the timetable could slip if bargaining with Republicans proved fruitful. Republicans say they don't agree the bill would end government bailouts and they want to keep negotiating.

Without an agreement with the Republicans, Democrats would need 60 votes to move forward in the Senate. They have 59 votes.

In the weekly Republican message, Sen. Kay Bailey Hutchison said Republicans aren't trying to block the bill but want to make sure it would end taxpayer bailouts.

"It's time for the name-calling to stop," Hutchison said. "Getting our economy back on track is too important to allow political games to sidetrack these efforts. Both parties agree that any financial regulation should do one essential thing: No company should be considered too big to fail.' And never again should taxpayers be expected to bail out those who made risky financial bets with other people's money."

McCain, Steele Oppose Auto Bailouts, Blame Unions

from mLive

Opinion: Rick Haglund

The Republican Party has long been known as the party of business.

But we're learning that not all businesses are welcome to the party, including:

• Companies with unionized work forces.

• Corporations that receive more money in federal loans from a Democratic administration than from a Republican presidency.

• General Motors Co. and Chrysler Group LLC.

Those are the only explanations I can offer as to why two of the nation's most prominent Republicans, Arizona Sen. John McCain and party Chairman Michael Steele, recently dumped on the recovery efforts of the two Detroit automakers.

McCain, speaking at a NASCAR race, no less, got all mavericky with reporters last Sunday, saying he was opposed to the federal bailouts of GM and Chrysler (after he was in favor of them), and predicted Chrysler would fail.

And Monday, Steele said GM's third-quarter loss of $1.2 billion is "further proof that President Obama's economic experiments are wrong for America."

Steele failed to mention, though, that Republican President George Bush started the experiment by approving $13.4 billion of the $50 billion loaned to GM.

GM said Monday it's doing well enough to start repaying some of it unused federal loans in December, years ahead of schedule.

The statements by Steele and McCain were, of course, calculated to build political support for their party by those who are opposed to organized labor and government intervention in the economy.

They also were misleading and an affront to the hundreds of thousands of men and women who are working to rebuild GM and Chrysler following bankruptcy reorganizations last summer.

McCain said the government had to lend GM and Chrysler $80 billion because the United Auto Workers union wouldn't renegotiate their "very generous contracts" to trim costs.

"It was all about the unions," McCain said, according to the Detroit News.

But the UAW did renegotiate its contracts with GM and Chrysler, taking what amounts to a $7 per hour cut in wages and benefits, and giving up the right to strike until 2015.

The union also agreed to accept large equity stakes in the company instead of cash to fund retiree health care benefits.

Rather than lend money to GM and Chrysler, McCain said the federal government should have let them go bankrupt and reorganize the way most troubled companies do.

Here's the problem: The near collapse of the banking industry in the fall of 2008 dried up the credit markets, making it virtually impossible for GM and Chrysler to find needed bankruptcy financing.

Their only option was to obtain so-called "debtor-in-possession" loans from the federal government. Otherwise, GM and Chrysler likely would have been liquidated.

Auto industry analysts said the liquidation of the two probably would have taken down the entire domestic auto industry, including Ford Motor Co.

Even the plants of nonunion Asian automakers in the South could have been shut for extended periods for lack of parts, some analysts concluded.

Is that the outcome McCain and Steele would have preferred?

Auto-Makers Want Europe To Continue 'Clunkers'

Story from the Wall Street Journal

Auto makers are pushing European governments to continue their "cash for clunkers" programs, fearing that the fragile industry may face a major slowdown if the rebate programs end.

The moves come as Germany and Britain are winding down their scrappage programs, which are aimed at getting buyers to turn in less-fuel-efficient vehicles and buy new cars with better mileage. Meanwhile, Ford Motor Co. and others say they are helping Russia get a scrappage program off the ground.

"We would like to continue the scrappage programs or we would like a more general winddown of the programs instead of letting them just come to a quick end," John Fleming, chief executive of Ford's European operations, said in an interview."

How long Europe continues the programs and any lasting effect from them could have implications for the U.S. The wildly successful U.S. "clunkers" program boosted sales to heights not seen in years. But the program's end last month also brought worries about how much U.S. sales would decline after the rebates expired.

"Everyone is bracing themselves for a major slowdown, potentially next year," said Mark Fulthorpe, the director of European vehicle forecasts for CSM Worldwide. Pete Kelly, senior director in Europe for J.D. Power & Associates Automotive Forecasting, predicted that the slowdown would begin this fall and extend into the 2010 first quarter.

Tuesday, data from the European Automobile Manufacturers' Association showed that European new-car registrations, a measure of sales, rose 2.8% from a year earlier in July and increased 3% in August. The growth varied from country to country because of variations in the implementation of the incentives.

Individual European countries have implemented a dozen separate scrappage programs, and a 13th, in Greece, will go on line soon.

Ford estimates that scrappage programs will support the sale of three million vehicles in Europe in 2009 and 2010 and are the key reason total industry sales in the 19 largest European markets will be as high as 15.5 million in 2009, only about 7% to 10% below 2008 levels.

"The market in Europe is still very weak," Ford Chief Financial Officer Lewis Booth said in an interview at the Frankfurt auto show. "We'd rather see the end of scrappage arrive as the economies in Europe begin to recover."

France has indicated that its scrapping program will continue next year, though at reduced rates, to avoid a sharp sales drop. Currently, the French government offers €1,000 ($1,457) for the purchase of a new car if the owner scraps one that is more than 10 years old. "The French government has said it will phase it out progressively," said Philippe Varin, chief executive of PSA Peugeot Citroën SA.

But car makers in Germany doubt the popular car-scrapping program there is likely to be picked up again anytime soon. The government pumped €5 billion into the plan, which ran out at the start of this month. Nearly two million German consumers participated in the program, which largely benefited mass-market auto makers like Volkswagen AG and Ford.

But skeptics say the program simply delayed a slump. Though car orders still being processed will fuel sales for a few more months, some analysts say German car sales next year could drop by one million cars from this year's expected 3.5 million.

"We said from the beginning it is not what we support," said BMW AG's finance chief, Friedrich Eichiner, of the way the short-term incentives were structured. "Others demanded it, and now they got it."

New GM Chief Bends to Pressure

As Originally Posted to the Wall Street Journal

DETROIT -- Facing heavy government pressure, General Motors Corp.'s chief executive spent his second day on the job making a public break from his predecessor, sending a sharply different message of willingness to shake up the ailing auto maker.

In an interview with The Wall Street Journal, Frederick "Fritz" Henderson said he is prepared to do whatever it takes to reorganize the company, including taking GM through bankruptcy court. The longtime GM executive was anointed CEO after the White House pushed out his former boss, Rick Wagoner, who had resisted bankruptcy even after the auto maker determined it could probably survive a short-lived reorganization with government support.

Mr. Henderson, 50 years old, also praised what he called the Obama administration's strong voice of support for the company, saying it liberated GM to take restructuring action it had in the recent past thought impossible to pull off.

"They think that I can lead this company inside or outside of bankruptcy court," he said. He said he expects the Obama administration's auto task force to play an active role in forcing unions and surety bondholders to make major concessions.

Mr. Henderson and the company's new chairman, Kent Kresa, have little choice but to follow the administration's game plan, given the government's effective firing of Mr. Wagoner and public dismissal of GM's latest restructuring plan as too little, too late. In addition to removing Mr. Wagoner as CEO, the government also replaced him as chairman. In coming months, six more directors could be replaced.

White House officials said Sunday that Mr. Henderson will be the company's permanent CEO and they believe he can deliver a satisfactory reorganization in a timely manner. On Tuesday, one administration official said Mr. Henderson is CEO "as long as we're satisfied he's executing according to the strong wake-up call we gave GM."

Mr. Henderson will be paid a salary this year of about $1.3 million after taking the 30% pay cut that GM imposed on top management. He will not be paid the $1 a year salary Mr. Wagoner agreed to accept after GM was given government aid.

While Mr. Henderson promised "deeper and faster" action at GM, he didn't completely break with his predecessor on strategy. He played down the need for an entirely new labor contract, said the company won't kill any more brands than the three reductions prescribed by Mr. Wagoner, and said the company will work to maintain a leading market share in the U.S.

Mr. Henderson made clear that he will use the full force of government backing to extract more painful changes from GM's union and its unsecured bondholders, which together represent more than $50 billion in the auto maker's debt obligations.

Mr. Wagoner's tenure was marked by a dogged pursuit of market share. He won some concessions from the United Auto Workers, but blinked at confronting the union on more fundamental issues, such as drastically reducing retiree health care, that weighed on the bottom line.

For much of Mr. Wagoner's eight-year tenure as CEO, Mr. Henderson worked as a close lieutenant. He was dispatched to turn around GM operations in Asia and Europe, then returned to Detroit to work at Mr. Wagoner's side, first as chief financial officer and since last year as chief operating officer.

Noel Tichy, a professor at the University of Michigan Ross School of Business, said Mr. Henderson's long experience at GM isn't necessarily a recipe for success. "It's an unnatural act for an insider to be a transformational leader," he said. "He grew up in a culture that has not been able to change."

A native of Detroit, Mr. Henderson played baseball at the University of Michigan, got an MBA at Harvard and joined GM in 1984. His career at GM paralleled that of Mr. Wagoner in many ways. Like his predecessor, Mr. Henderson started in finance and did a stint in Brazil. Mr. Wagoner sent him to Asia in 2002 and then to Europe in 2004.

For part of his time overseas, his wife and two daughters lived in Miami. After he became CFO in 2005, he flew home from Detroit on commercial flights on weekends. That ended recently when he moved his family, and five cats, to a Detroit suburb.

He's still flying commercial now that GM has sold its corporate jets. Last month, to get to the Geneva car show, he passed on a direct flight and sat through a layover in Amsterdam. In Geneva, he stayed at a Ramada airport hotel.

In an interview last month, Mr. Henderson indicated he was coming to the conclusion that GM couldn't continue on the same course as it did in 2008. "I'm not doing this again," he said, referring to continually asking for more government support. "You don't want to be careening from crisis to crisis."

But even as Mr. Henderson carries some of Mr. Wagoner's strategy into his tenure, he is wrestling with ways to refine his approach to the company.

"Big is only helpful if you harness it," Mr. Henderson said of GM's position as one of the world's largest sellers of cars. "Otherwise it's just big."

Mr. Henderson said he will remake GM's U.S. lineup by de-emphasizing the longtime reliance on trucks and SUVs that led to the company's financial collapse last year. He said that, from now on, nearly every vehicle will need to "pay rent" and be a profitable venture.

For years, GM has failed to make money on smaller cars, in part because of labor costs. This led to a dependence on sales of trucks and SUVs, which generated huge profits earlier in the decade, but lost traction amid high fuel prices.

Revised labor contracts, including another employee buyout program currently being planned, will be a key ingredient in meeting this goal, he said. So will applying practices that Mr. Henderson picked up while running GM Europe, where GM doesn't sell trucks and SUVs.

Mr. Henderson has served in an office down the hall from Mr. Wagoner since late 2005, when he became chief financial officer. Since then, he has negotiated labor contracts, sold assets, and wrote viability plans needed to win government backing. He was named chief operating officer about one year ago. But his tenure has been marred by the company's performance over the past 12 months, during which it ran out of cash.

During a separate interview, GM's new nonexecutive chairman, Mr. Kresa, said Mr. Henderson is squarely focused on delivering on the administration's expectations. "Fritz understands the mandate, and he's about to do it," he said.

Mr. Kresa, a longtime board member and a former director at Chrysler LLC, said Mr. Wagoner may have been constrained in considering options for the company by the lack of clear support.

"The difference is we have a mandate from someone who has a lot of power who will back us...," he said. "Rick never had that mandate."

End Game For GM Bondholders

As Originally Posted to the Wall Street Journal

The steps taken this weekend by the Obama Administration to reach a resolution for the troubles in the automotive industry increase the chances of a bankruptcy filing by General Motors or its rival, Chrysler.

For the moment, GM’s benchmark debt issue is valued at about 15 cents on the dollar, down a few cents from Friday, according to KDP Investment Advisors. The bondholders, according to published reports, have been asking for as much as 33 cents on the dollar as part of some kind of pre-packaged bankruptcy filing.

But such a recovery rate may be optimistic, analysts say. Earlier today, President Obama said that “it will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts.” The administration’s actions this weekend were termed by Dan Alpert, managing director at Westwood Capital, as the removal of the “put to politics,” that is, the implied guarantee that the auto companies will continue to function, thus strengthening the bondholders’ position, much in the way Federal Reserve guarantees embolden risk-takers in a way they would not otherwise behave.

With that ballast removed, the expectations for recovery by the bondholders runs from about 15 to 20 cents, although it could be less. “The likely outcome is going to be more pain for all those involved, all direct and indirect stakeholders of General Motors,” says Sean Egan, co-head of ratings desk at Egan-Jones Ratings Co. “The equity they’ll receive will be nowhere near the face value of their debt.”

(Update: In a statement, the advisors to GM’s bondholder committee issue lukewarm support of the administration’s plans. They say that “all parties seem to agree that an out-of-court restructuring would be the preferred path to viability,” and that “bondholders are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity.” However, they note that “we have been very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan.”)

Shares of GM were down 21% on the New York Stock Exchange. The company’s outstanding senior debentures due in 2033 were traded above 90 cents on the dollar as late as October 2007 until falling sharply as the business floundered (see chart, below). Debtholders clearly understand the gravity of the situation — the company’s credit-default swaps, a measure of insurance against default bearing some resemblance to surety bonds, cost about $7.9 million upfront to insure $10 million in bonds for five years. The notional value — that is, the price of the underlying asset (the debt) insured by the CDS — of the outstanding credit default swaps is nearly $37 billion, according to Barclays Capital. GM has $45 billion in secured fixed debt.

Kip Penniman, automotive analyst at high-yield research firm KDP Investment Advisors, says that the likely outcome is a pre-packaged bankruptcy that is worked out in legal proceedings. “There has to be some enticement to get the bondholders to agree,” he says. “They do have leverage. They still have the legal obligation that GM owes them, and if they fail to honor that they will take them into bankruptcy.”

GM bond prices have declined sharply in the last few years. (Source: KDP Investment Advisors)

Opinion: Wagoner Had To Go

As Posted to the Wall Street Journal

What's good for General Motors really is good for America after all. And vice versa.

That's the best way to read the sad but necessary -- in fact, long overdue -- departure of General Motors CEO Rick Wagoner Sunday, at the behest of President Barack Obama's Automotive Task Force. Give the Obama team credit, too, for replacing most of GM's pet-rock board of directors, which put loyalty to Mr. Wagoner above duty to shareholders while the company imploded.

These steps add serious credibility to the task force's effort to force fundamental changes at GM and Chrysler, the two car companies getting federal aid. Chrysler was given 30 days to form an alliance with another car company, most likely Fiat. The task force concluded, correctly, that Chrysler can't survive as an independent company. GM has 60 days to offer a realistic survival plan with new concessions from bondholders and the United Auto Workers union.

Sound familiar? That's basically what the Bush administration told GM last December, before the Bushies bypassed Congress and doled out the first $13 billion. By extending the deadline yesterday, the task force risked coming across like a hapless parent saying to the misbehaving children, "Kids, this time I really mean it." But dumping the board and Mr. Wagoner -- just two weeks after the executive insisted his job was secure -- changes the game, as does the president's blunt talk yesterday. Mr. Obama raised the possibility of "using our bankruptcy code to help them restructure and emerge stronger."

I'll have to confess initial skepticism about the president's Automotive Task Force, but so far I'm impressed. Business executives are supposed to be hard-nosed realists, but we heard more realism from Mr. Obama yesterday than we've heard from Detroit in years.

Speaking of unreality, Michigan Gov. Jennifer Granholm said that Mr. Wagoner is a "sacrificial lamb," but that's only if you don't look at his record. Since Mr. Wagoner became CEO in June 2000, GM's stock price has declined from more than $70 a share to under $3. The past year has been brutal on all stocks, but even in 2005, when car sales stood at near-record levels, the company lost $10.6 billion and the stock had plunged nearly 75% from when Mr. Wagoner took the helm. GM also suffered a steady slide in its U.S. market share -- from 28% to 22% -- during the Wagoner era.

In 2001, Mr. Wagoner negotiated a European alliance with Fiat (yep, the same company now talking to Chrysler) on terms that could have forced GM to buy the Italian auto maker when Fiat was hemorrhaging money. GM had to pay $2 billion to buy its way out of that dilemma. Then Mr. Wagoner belatedly placed big bets on full-sized SUVs and pickup trucks just as gas prices started to soar and gas-electric hybrids got popular. GM's answer is the Chevy Volt, a more-advanced hybrid that's still two years from launch and will cost around $35,000 when it does appear.

"even in 2005, when car sales stood at near-record levels, the company
lost $10.6 billion and the stock had plunged nearly 75% from when
Mr. Wagoner took the helm"

The sad irony here is that Mr. Wagoner's path to prominence at GM began the last time a General Motors CEO was ousted -- though that time by the company's board instead of by the president of the United States. After the departure of Robert Stempel in November 1992, Mr. Wagoner was named GM's chief financial officer at age 39. He was the youngest member of a new executive team installed to fix the ailing company.

As GM recovered in the 1990s thanks to some good management decisions and a good economy, Mr. Wagoner continued his advance. He ran the company's North American operations and then became president and chief operating officer before becoming CEO at age 48. But along the way, a couple of crises seemed to dim Mr. Wagoner's ardor for reform.

One occurred in 1998, when GM took on the UAW at a metal-stamping plant in Flint, Mich., where workers had negotiated production quotas that they could fill with just five hours of work, though they were getting paid for a full eight hours. When GM responded by moving some of the metal-stamping machinery elsewhere, workers went on strike, shutting down dozens of other GM factories that depended on the parts made in Flint. When the strike ended 54 days later GM had lost $2.2 billion, as well as any determination to insist on work-rules changes from the union.

Then in December 2000, Mr. Wagoner's first major move as CEO was to announce the closing of Oldsmobile, which had shrunk to a fraction of its former sales. But the up-front announcement -- as opposed to a quiet buyout effort -- enabled dealers to demand top dollar for closing their franchise. It took GM nearly four years, myriad lawsuits and more than $1 billion to shut Oldsmobile down.

After those two episodes, say former General Motors executives, any discussion of further culling GM's lineup of eight different brands or of demanding major improvements in factory productivity became strictly off-limits with Mr. Wagoner. There was a "can't do" mentality that accepted too many brands, too many dealers and too many workers as immutable facts of life that could only be changed slowly and gingerly, if ever. That might have worked had Americans continued buying big pickups and SUVs at a record-setting pace for another decade or two. But that prospect never was realistic, even before car sales collapsed nine months ago. Mr. Wagoner stuck with overly rosy forecasts until the very end.

The good news for him is that he's now free to work for more than $1 a year -- the salary he reluctantly accepted as a condition of GM's first dollop of government dollars. Meanwhile, the two key questions for General Motors are who should lead the company and whether it really can successfully restructure without filing for bankruptcy.

On the first question, I'd vote for an outsider. Fritz Henderson, the company's president and GM lifer who's replacing Mr. Wagoner, might be very capable, but the plain fact is that GM is far too inbred. Over the years the company has launched successful innovations ranging from a joint-venture plant with Toyota in California to the Saturn subsidiary to modular auto-assembly techniques in Brazil, but has failed to capitalize on any of them.

Larry Kellner of Continental Airlines is one outside candidate worth considering. I've never met him, but he runs a terrific airline whose unionized employees really understand customer service. Lewis Campbell of Textron is another. He is (full disclosure) a personal friend. But he spent his formative years at GM, and thus knows something about the auto industry, before leaving nearly two decades ago.

As for bankruptcy, President Obama and task force chief Steve Rattner clearly would rather avoid that, for both GM and Chrysler. Politically, it's a savvy move for them to give the companies one more chance to avoid bankruptcy. The president's words yesterday will make it hard for him to back down.

GM now needs concessions from the bondholders (who have $27 billion in unsecured debt) and the UAW. Basically, both parties will have to take GM stock in lieu of much of the cash they're owed. In the end, however, it's more likely that the union and the bondholders will find it easier to accept changes that are forced on them instead of suggested to them. That probably will mean bankruptcy, or something like it, before this saga ends.

Opinion: GM Bankruptcy? Tell Me Another

As Originally Posted at the Wall Street Journal

President Obama rightly says "sacrifices" must be made if GM is to emerge as a viable company. But there's one sacrifice he won't make: his re-election chances, by leaving the fate of the UAW truly up to a bankruptcy judge.

Keep that in mind amid the defenestration of Rick Wagoner, who was not as popular with UAW Chief Ron Gettelfinger as Mr. Wagoner's replacement, Fritz Henderson. Keep that in mind amid reports the administration favors a "quick and surgical" bankruptcy. It's a bluff. The same administration that inserted itself into GM's corporate governance to order the resignation of a CEO is hardly likely to defer to the prescribed legal order for a failing company, namely bankruptcy. Even a "prepackaged" filing runs too much risk of a judge imposing more "sacrifice" on the UAW than the administration is prepared to tolerate.

GM bondholders understand this: They've been intransigent precisely because they calculate the UAW is too important to Democratic electoral politics for Mr. Obama to risk losing control of the reorganization process to a bankruptcy judge.

The GM bailout has become a political operation run out of the White House. It will stay that way. Talk of UAW layoffs already disguises the fact that UAW workers are actually offered generous buyouts and early retirement -- they aren't just sent away with a last paycheck. What about Chrysler? A few weeks ago, Fiat was saying it would consider a merger if a loan from Washington was guaranteed. Now Washington is saying a loan will be forthcoming as long as Fiat does a deal. That's not an ultimatum -- that's a nod and a wink.

Mr. Wagoner did more than any GM executive to deal with the cursed legacy of 75 years of too much government attention. Not for him, though, and not for Team Obama, the real solution to make GM "viable": Getting rid of its North American business to end its UAW captivity.

That captivity, imposed by the 1935 Wagner Act, is the sole relevant factor distinguishing the Detroit Three from the world's other auto makers. The result is downright weird: "Our" auto companies operate in a world that's less "American," in a sense, than the Japanese and German companies that come here and enjoy a free labor market.

The Wagner world was given a second lease on life by a peculiar feature of Congress's 1975 fuel economy law. Known as the "two fleets" rule, it effectively forces Detroit to make its cheap small cars in high-wage domestic UAW factories, even if it means losing money on every car. The rule has no fuel-economy function. Its only purpose is to shield the UAW monopoly inside each Detroit auto maker from global labor competition.

You wouldn't have noticed, but a legislative accident two years ago almost stripped away the two fleets rule. A couple of Republican senators from the South took the lead in crafting the Senate's new fuel economy bill, and built it to please Nissan, which had railed against two fleets for its own reasons.

In the final bill, to no one's surprise, two fleets was quietly restored by Rep. John Dingell and Illinois Sen. Obama (among others) as a political favor to the United Auto Workers.

The UAW's Mr. Gettelfinger had testified, coyly, during Congressional hearings that failing to renew two fleets might cost 17,000 auto workers jobs building small cars. He didn't say that two fleets is in fact the fulcrum by which, for the past 30 years, the UAW has been able to defeat globalization.

He didn't say two fleets was the sine qua non for the past generation of the UAW's power to suck the Big Three dry.

Mr. Obama played the tough guy in getting rid of Mr. Wagoner, but he won't go after the labor monopoly. In fact, the union will emerge with a stronger grip on Detroit -- because it will be a major shareholder in a reorganized GM.

The irony is that Detroit has given plenty of evidence that it can make money, even with UAW overhead. Three of the top seven best-selling vehicles in February were Ford, Chevy and Dodge pickups.

Better than trying to rewrite GM's business relationships -- the job of a bankruptcy judge -- Mr. Obama might take up the duties of a president. He might try giving the country a coherent auto policy for a change. He could repeal two fleets so Detroit could build its small cars profitably offshore and tame the UAW monopoly in the process. He could dump CAFE or impose a $5 gasoline tax so at least customers would have a reason to buy the cars Washington is forcing Detroit to build.

None of this will happen. Mr. Obama will be content with incoherent policies that poll well -- which means GM, Chrysler and perhaps Ford eventually will need taxpayer subsidies as far as the eye can see -- or until a real bankruptcy sometime after November 2012.

Obama Seeks Concessions From UAW Retirees

As Originally Posted to the Wall Street Journal

DETROIT -- President Barack Obama's recovery plan for General Motors Corp. and Chrysler LLC appears to take aim at union retirees, a usually reliable Democratic constituency.

After studying the plight of the companies, the president's auto task force concluded GM and Chrysler's survival is dependent on greater concessions from the United Auto Workers union because the cost of funding retiree benefits had become unmanageable, especially given the downturn in global auto sales.

In his address Monday, Mr. Obama laid blame for GM and Chrysler's financial ills largely at the feet of the management teams at those companies. He called on hourly workers and retirees at the companies to be ready to accept more sacrifice if they hoped to keep their employers afloat.

The UAW appears to be standing firm that its members have made substantial concessions compared with other stakeholders. UAW President Ron Gettelfinger on Monday declined requests for interviews, but a person close to him said the union boss is determined not to consider further concessions unless bondholders and creditors agree to givebacks that cut GM's and Chrysler's debt.

Click Image to Enlarge

Some Democratic lawmakers have offered support for the union. On Monday, Sen. Carl Levin (D., Mich.) acknowledged the union would have to agree to more cuts to retirees' benefits, but added that investors in GM, not employees, would have to sacrifice the most. The three Detroit auto makers provide health care for more than one million Americans, including union retirees and their dependents. In 2007, the union agreed to allow GM, Chrysler and Ford Motor Co. to pay billions of dollars into a trust fund, known as a VEBA, or voluntary employee beneficiary association, that the union would manage and use to cover the cost of retiree health care.

Under the terms of the bailout loans GM and Chrysler have accepted from the federal government, they are supposed to renegotiate the VEBA agreements so they can put a combination of cash and stock into the funds or equity. GM is obligated to contribute about $20 billion in cash, in addition to $16 billion in funds it already committed, and Chrysler about $10 billion.

The task force found that GM's own plan to deal with retiree health care and pensions grows "to unsustainable levels, reaching approximately $6 billion per year in 2013 and 2014." To pay those bills, GM would need to sell 900,000 additional cars a year, according to the panel. GM sold 8.35 million vehicles around the world last year.

A union local president in Michigan said more could be done to reach a compromise on retiree health care. But the union leader who represents GM workers warned if the auto makers step back from their obligations to retired workers, the remaining cost of their health care will not go away.

Clem Wittman, 68 years old, spent three decades working the assembly line for GM, building Monte Carlos and Skylarks in Kansas City, Mo. On Monday, he watched as Mr. Obama outlined his plans for steering the future of GM and Chrysler without explicit mention of the retirees. "It was scary because he never mentioned the retirees and legacy costs," Mr. Wittman said. "What 85-year-old can go out and get another job?"

He takes 11 medications, including some which cost more than $100 a month, all covered by GM health-care programs. Mr. Wittman said that for 30 years he paid for those benefits and shouldn't be asked to give them back.

GM Says At Least Six More Will Go

As Originally Posted at the Wall Street Journal

At least six directors of General Motors Corp. will soon join former CEO Rick Wagoner in heading out the door.

The Obama administration said Monday that the embattled auto maker aims to replace "a majority of the board over the coming months." Federal officials also confirmed the appointment of Kent Kresa, a GM director since 1993, as its interim board chairman.

Mr. Kresa, 71 years old, was CEO of defense contractor Northrop Grumman Corp. between 1990 and 2003, and previously served on the board of Chrysler Corp. One person close to the company described him as "a safe choice," because he was one of the few GM directors who had run a major industrial company.

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Dennis Carey, a longtime acquaintance of Mr. Kresa and a senior client partner at recruiters Korn/Ferry International, called the new chairman "a very down-to-earth, very pragmatic fellow who will do very well dealing with the government" on GM's behalf.

Mr. Wagoner was the only GM executive on the 12-member board. His successor, Frederick "Fritz" Henderson, will likely be nominated as a director, according to a GM spokesperson.

In a statement, Mr. Kresa said the GM board intends "to nominate a slate of directors for the next annual meeting that will include a majority of new directors." GM has scheduled that meeting for August. However, the statement added, "the specific individuals who will be nominated or choose not to run or leave the board are not yet known."

The decision by President Barack Obama's auto task force to replace most GM directors came amid some pressure by company bondholders and other industry experts who had advised the task force in recent weeks, according to people familiar with the discussions. During one meeting, the board was described as "a collection of failed CEOs," and the group was blamed for not prompting GM management to move faster in restructuring the company.

Among the GM board members who may be vulnerable is lead director George Fisher, a retired chairman and CEO of Eastman Kodak Co. Mr. Fisher has consistently backed Mr. Wagoner as the company racked up billions of dollars in losses in recent years. Mr. Wagoner also relied heavily on Mr. Fisher for advice, say people familiar with GM. Mr. Fisher didn't return a call Monday seeking comment.

Mr. Kresa and Philip A. Laskawy, Ernst & Young's retired chairman and CEO, tried for two years to persuade fellow GM directors to replace Mr. Wagoner and other key executives, recalled a second person familiar with the situation.

Messrs. Kresa and Laskawy believed that GM's management couldn't sufficiently change its corporate culture, this person said. Mr. Fisher disagreed, arguing that "we can't get anyone better" than Mr. Wagoner, this individual continued. The dissidents "fought the good fight and lost," the person said. Mr. Laskawy, recently named outside chairman of Fannie Mae, leads GM's audit committee. He didn't return a call Monday seeking comment.

Another longtime board confidant for Mr. Wagoner was Eckhard Pfeiffer, forced out as Compaq Computer Corp.'s chief in 1999. Mr. Pfeiffer couldn't be reached Monday for comment.

Of GM's 11 outside board members, seven have been in place since 2003, the year that Mr. Wagoner became chairman. Its newest member, appointed last year, is E. Neville Isdell, Coca-Cola Co.'s chairman and former CEO. The only active CEO now on the board is Kathryn V. Marinello, chairman and CEO of Ceridian Corp.

The board also includes Erskine Bowles, chief of staff for former President Bill Clinton and now president of the University of North Carolina. He didn't return a call for comment Monday.

Some governance experts consider GM's board fairly weak because it lacks individuals with auto-industry expertise and includes several retirees without recent corporate-management experience. John H. Bryan, for instance, retired in 2001 as CEO of Sara Lee Corp. and has been on GM's board since 1993.

The 72-year-old Mr. Bryan "has been away from business a long time," an acquaintance observed. And "he has been there [on GM's board] too long." Mr. Bryan, a key Obama fund-raiser, didn't return a call Monday seeking comment.

Directors with extensive GM service likely won't survive the boardroom shake-up, said Ralph Ward, an author of books about governance and editor of the publication Boardroom Insider. "The longer you have been" at GM, "the less likely you will be around," he predicted.

It may be easier to remove directors than to replace them, however. The government may encourage GM to add directors with more automotive or industrial know-how, some observers believe. But, Mr. Ward says, "It will be a nightmare situation to get good people."

Cash-For-Clunkers Plan Gains Speed

As Originally Posted to the Wall Street Journal

WASHINGTON -- A plan to give government cash to consumers who trade in their old cars gained sudden momentum this week after President Barack Obama supported the concept as part of his effort to revive the U.S. auto industry. But the so-called cash-for-clunkers plan still faces hurdles.

Bills by Rep. Betty Sutton (D., Ohio) and Sen. Dianne Feinstein (D., Calif.) would provide cash vouchers to buyers who turn in inefficient older cars and purchase newer ones with better gas mileage. The concept is similar to one that has been used in Europe to spur sales, most recently in Germany.

The idea had been attracting moderate interest in Congress for months. But in his sweeping remarks on the auto industry Monday, Mr. Obama said he wants to work with Congress to find ways to find money for such a program in his economic-recovery package.

"The president's statement accelerates our looking at all of these issues," said Rep. Sander Levin (D., Mich.), who supports the idea.

Ms. Sutton's bill would provide buyers vouchers of $3,000 to $5,000 if they turn in cars that are eight years old or older and buy new cars that get at least 24 miles per gallon on the highway or trucks that get 27 mpg. The money could also be used for mass transit.

In Ms. Feinstein's bill, which provides incentives of $2,500 to $4,500, the "clunker" could get no more than 18 miles per gallon. The new car would have to exceed fuel-efficiency standards for its class by at least 25%.

Ms. Feinstein's bill wouldn't cover vehicles that cost more than $45,000, while Ms. Sutton would cap the new car's price at $35,000.

The cash-for-clunkers concept is appealing to many lawmakers as a way to simultaneously boost the economy and help the environment. But it isn't clear whether the plan would violate international trade rules and where the funding would come from.

Daniel J. Weiss, senior fellow at the liberal Center for American Progress, said the stimulus contains $91 billion for clean energy, including $3.3 billion for clean vehicles, and some of that money could be used. The center estimates the cost of the programs at $1 billion to $2 billion a year.

Ms. Sutton's bill would apply only to cars made in North America, and some say that would run afoul of World Trade Organization rules. When Germany and other European countries created similar programs, the European Union declared that they would violate WTO rules if they applied only to cars made in those particular countries.

Ms. Feinstein's bill avoids this problem by applying to vehicles manufactured anywhere. But some supporters of the cash-for-clunkers idea prefer that it focus on helping U.S. auto makers.

"The goal of boosting sales and jump-starting our auto industry and stimulating our economy is one of the goals that cannot be sacrificed in this process," said Ms. Sutton. "But we are open to ideas that will help us accomplish that goal."

As for where to get the money, Mr. Obama said he wanted to "identify parts of the Recovery Act that could be trimmed." But it isn't clear what those parts would be, and any such trimming could prompt opposition from supporters of whatever program was losing money.

UAW Chief Has No Good Options

Gettelfinger Faces Making More Concessions or Seeing Chrysler, GM Pushed Into Bankruptcy
As Originally Posted to the Wall Street Journal

United Auto Workers President Ron Gettelfinger has squared off against plenty of auto executives. But now he may be facing an even tougher opponent: the U.S. government.

The Obama administration has made clear it is willing to push General Motors Corp. and Chrysler LLC into bankruptcy if the UAW and bondholders don't agree to cut costs. Bankruptcy would give the companies the ability to tear up their UAW contracts and impose another wave of deep cuts in auto workers' wages and healthcare benefits. At stake are the fortunes of about 141,000 UAW members -- down from 300,000 about five years ago -- and hundreds of thousands of retirees.

Mr. Gettelfinger has said repeatedly that the union has already made substantial concessions compared with other stakeholders and won't make any more until bondholders and other creditors agree to givebacks to reduce GM and Chrysler debt.

But the union chief has no good options. He either agrees to concessions or the car makers end up in bankruptcy, which would mean splitting them into good and bad companies, closing plants and giving up jobs. Pensions and retiree health care would likely be cut as well.

Mr. Gettelfinger has already announced his retirement, so he doesn't have to worry about winning another election. In theory, that makes it easier for him to accept unpopular terms. But he still has to win approval of any agreement from the rank and file, which must ratify any changes.

For Mr. Gettelfinger, it's the biggest challenge he has faced. "If a settlement isn't reached and GM goes into bankruptcy, it could be a black mark against the union for decades," says Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. "Gettelfinger is good at bargaining, but this isn't bargaining. The union doesn't have the right to strike, and he's already been told what the outcome will be." A UAW spokesman said the union didn't have any comment Tuesday.

The situation is made more difficult because it comes on top of prior concessions, Mr. Chaison says. Negotiations led by Mr. Gettelfinger two years ago resulted in new GM workers being paid lower wages than existing workers and a trust to cover retiree health coverage. At the time, the concessions were touted as a major restructuring of the UAW's historically generous contracts.

The UAW and auto makers face some of the same challenges -- mainly huge legacy costs, overcapacity and foreign competition -- that hobbled the domestic steel industry between 2000 and 2003. In working through those problems, several steelmakers went bankrupt, eventually emerging with new ownership and labor accords that restructured retiree health obligations.

Billionaire investor Wilbur Ross, who runs distressed asset specialist WL Ross & Co., bought out and consolidated bankrupt steelmakers, working with the steelworkers union to create new contracts. One of the biggest challenges facing Mr. Gettelfinger will be balancing the needs of active workers and retirees, Mr. Ross says. "There's obviously much heavier government influence in this situation than there was in steel," he adds, and U.S. car makers could even come out of the restructuring as the lowest cost producer.

The three Detroit auto makers provide health care for more than one million Americans, including union retirees and their dependents. In 2007, the UAW agreed to allow GM, Chrysler and Ford Motor Co. to pay billions of dollars into a trust fund, known as a VEBA, or voluntary employee beneficiary association, that the union would manage and use to cover the cost of retiree health care.

Under the terms of the bailout loans GM and Chrysler have accepted from the federal government, the companies are supposed to renegotiate the VEBA agreements, persuading the UAW to take equity in exchange for half the companies' payments to the VEBA. Labor costs also have to be cut to match those of Japanese auto makers. Some estimates have put the hourly compensation gap between Detroit auto makers and the Japanese at $10 an hour, though UAW officials say that's too high.

One UAW worker, 56-year-old Jeff Hall, a GM maintenance pipe fitter in Pittsburgh now on layoff, says he remains a supporter of Mr. Gettelfinger. But he doesn't like the union leader's options. "It seems like the government and everyone is encouraging bankruptcy. To me that is going to be a disaster."

Accepting more concessions could also hurt the union's ability to grow at healthy companies. The UAW has been unable to organize U.S. workers at plants run by foreign auto makers. Accepting more cuts to GM wages and benefits would make organizing elsewhere even more difficult because the union would have little of value to offer nonunion workers, says John Russo, co-director of the Center for Working-Class Studies at Youngstown State University.

Ford Fears Rivals' Revamps

As Posted to The Wall Street Journal

Having declined federal loans, Ford Motor Co. has been watching the car industry's bailout drama from the sidelines. But now, company officials worry that a bankruptcy filing by a cross-town rival could severely disrupt Ford's operations.

A bankruptcy reorganization by either General Motors Corp. or Chrysler LLC -- as suggested by President Barack Obama this week -- could damage the networks of suppliers and dealers shared by Detroit's three auto makers, throwing uncertainty into Ford's parts deliveries and its retail operation.

Moreover, Ford officials are concerned that bankruptcy could allow GM or Chrysler to restructure more fundamentally and exact deeper concessions from unions and bondholders. That could leave a rival in better competitive shape than Ford, unless Ford can gain the same concessions.

Ford, which is trying to engineer a turnaround on its own, has already reached agreements with its union to reduce wages and restructure retiree health care costs. It also offered bondholders a deal to shed some debt. The company has said the steps will put it in a better position than competitors to ride out the recession.

Ford expects to report another deep slide in car and truck sales of at least 40% when March figures are disclosed by auto makers Wednesday. But George Pipas, Ford's sales analyst, said the company also expects to post its largest retail market share for a single month in more than two years.

The auto-supply industry serves multiple car manufacturers but operates on thin profit margins that could evaporate if one of the auto makers stopped paying for components under bankruptcy or went out of business.

"The collapse of one of our competitors would have a severe impact on Ford and our transformation plan, because the domestic auto industry is highly interdependent," Ford Chief Executive Alan Mulally warned late last year in testimony before the U.S. Senate. "It would also have devastating ripple effects across the entire U.S. economy."

Even without a bankruptcy, some Ford officials fear that the uncertainty surrounding the car makers over the next few months could keep shoppers from considering a vehicle from a domestic maker.

"I think the Obama announcement is a near-term depressant on auto sales and the economy," said one Ford official Tuesday. "It introduces uncertainty and confusion among most consumers. And it's the uncertainty that's driving consumers into the cave."

To reassure jittery customers, Ford on Tuesday introduced a plan that will cover car payments for up to a year if a customer loses his or her job. Under the program, , Ford also is offering 0% financing on some vehicles. The job-protection program started at Hyundai Motor Co. and was quickly matched Tuesday by GM.

To be sure, Ford has been able to move much further and faster in trimming costs and debt than its two domestic competitors, which are propped up by $17.4 billion in U.S. loans approved in December. And it also has started to see some promising sales trends, with more consumers gravitating from the other car makers toward Ford's vehicles.

"I think it's more important that in the last 60 days, we've gotten more consideration for our new products." Ford sales chief Jim Farley said in an interview Tuesday, downplaying the potential impact of a GM or Chrysler bankruptcy on his company. "There's concrete research around this."

He cited CNW Marketing research that shows in the first two months of the year, 19% of consumers who had planned to buy a GM car instead bought a Ford, Lincoln or Mercury. And some 15% of people who set out to buy a Chrysler or Dodge in January instead switched to one of Ford's brands.

Ford has also been able to continue to invest in new products. A person familiar with the company's plan confirmed Tuesday that its Chicago assembly plant has been selected to produce a new version of the Explorer sport-utility vehicle for 2011, which will lead to the callback of hundreds of laid-off full-time workers.

Ford's healthier prospects were the principal reason the United Auto Workers union approached Ford months ago in the hopes of setting a floor that would be matched by agreements at GM and Chrysler, according to people involved in the talks.

Union members reopened their Ford contract to make concessions in cost-of-living increases, vacation, overtime and the so-called jobs bank, which paid laid-off workers. The union also agreed earlier this month to let Ford use stock instead of cash to fund up to half its future obligations to a retiree health-care fund.

Ford says those givebacks will reduce its average hourly labor cost, including benefits, to $55, putting the auto maker on a clearer path toward competitiveness with foreign makers that build vehicles in the U.S., which have total labor costs of about $49 an hour.

Ford estimates the savings to be as much as $375 million this year and $500 million or more in subsequent years.

Ford's finance arm doubled the size of one part of a planned debt buyback to $1 billion after seeing significant investor interest. Ford announced the buyback in early March in an effort to retire up to $10.4 billion in debt through a combination of cash and stock.

Ford on Wednesday will offer buyouts to all 42,000 of its U.S. hourly workers. But company officials expect a relatively low take rate because workers worry it may be difficult for them to find other jobs.

Company officials say they're confident that if the UAW or debt holders make new cost-cutting deals with GM and Chrysler, the Dearborn, Mich., company could return to the bargaining table to match the gains.

But a nagging concern remains: So far, GM, Chrysler and their stakeholders haven't budged in their negotiations, and the Obama administration has set a strict timetable for the two companies to reach agreements to qualify for further government aid.

To get those deals done, President Obama said, GM and Chrysler may have resort to a bankruptcy filing, which could result in much deeper cuts.

A Shotgun Wedding For Chrysler, Fiat

Originally Posted to Forbes

Time is running out for Fiat and Chrysler to become fast friends.

The U.S. government has threatened to suspend federal aid for Chrysler unless it secures a deal with the Italian carmaker within 30 days, senior administration officials told Forbes. (See “Obama Takes The Wheel In Detroit.”) Chrysler, along with General Motors, has already received $17.4 billion in federal loans and has asked for billions more.

Fiat and Chrysler announced in January that the two were entering a partnership in which Fiat would take 35.0% of Chrysler in return for sharing its technology and product platforms with the firm, and not pay any cash toward the investment, with a final accord between the two to be announced in April.

Chrysler is expected to tap into Fiat’s product line of smaller cars. (See “The Steal Of The Century.”)

But analysts were cautious about whether the carmakers would meet the 30-day deadline. "I give a potential deal a 50.0% probability,” said Martino de Ambroggi, an analyst with Equita SIM. “It depends on the agreement with U.S. aid, trade unions and suppliers. Fiat is like a spectator right now. The deal will go ahead in the case of the survival of Chrysler, which is not in the hands of Fiat.”

Fiat has been cautious about a potential partnership with debt-laden Chrysler. The Italian automaker said earlier this month that it would not take on Chrysler's debt, current or future. The company said it "intends to make absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness to Chrysler." (See “Fiat, Chrysler Clash Over Debt.”)

“I would not rate it as a "good deal" but as a "good opportunity" because the capacity of Chrysler to become profitable has to be checked in the medium- to long run,” Ambroggi said.

Fiat CEO Sergio Marchione has said that in order to survive, a carmaker needs to sell between 5.5 to 6 million units per year. But Fiat and Chrysler are still well below this level by more than 2 million units, Ambroggi added. “The deal would allow Fiat to become larger and to take advantage of geographical diversification and common platforms, but it’s not a secret that Fiat is looking for a third partner to join the venture."

Shares of Fiat (nyse: FIA - news - people ) fell 6.3%, or 33 euro cents (44 cents), to 4.94 euros ($6.51) in Milan.

Granholm: Wagoner Was Sacrificial Lamb

As Originally Posted to The Wall Street Journal

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The governor of Michigan says Rick Wagoner, the General Motors chairman and CEO forced out of his job in the Obama administration’s final effort to revive the ailing U.S. auto industry, is a “sacrificial lamb.”

Interviewed Monday on NBC’s “Today” show, Governor Jennifer Granholm noted that Wagoner has worked for GM for more than 30 years and was trying to turn the company around.

She said that Wagoner agreed to step aside for the good of the car maker and its workers.

The Obama administration announced late Sunday that neither GM nor Chrysler has come up with acceptable business plans to merit receiving additional federal bailout money. The two automakers were each given a brief deadline to try one last time to persuade Washington they’re worth saving.

President Obama Wants To Shake Up GM, Chrysler

Originally Posted at Politico

In surprising findings to be outlined at the White House on Monday, President Obama has concluded that neither GM nor Chrysler as they now exist deserve more bailouts. But the White House is sparing them for a month or two, and is promising American consumers that the government will stand behind warranties if the automakers fail.

Most remarkably, the administration demanded that GM CEO Rick Wagoner resign so the company could remake itself “with a clean sheet of paper.” And he did, effective immediately. The administration also said GM has been given a “goal of replacing a majority of the board over the coming months.”

The administration found that both carmakers had failed in their viability assessments as required under the terms of the massive government loans they’ve already received, and determined that neither should receive another bailout. [ Chrysler viability assessment ]

“We have unfortunately concluded that neither plan submitted by either company represents viability, and therefore does not warrant the substantial additional investments that they requested,” a senior administration official told reporters on a conference call Sunday night.

Obama is to deliver his “remarks about the American automotive industry" at 11 a.m. ET.

Under the hard-nosed “Obama Administration New Path to Viability for GM & Chrysler,” GM is getting 60 days of “working capital” – money to pay bills during the restructuring. The administration did not specify an amount.

Chrysler is getting just 30 days to reach a long-discussed deal with Fiat, the Italian carmaker. The government would lend the new venture as much as $6 billion.

“Chrysler is a more difficult situation,” the official said. “Chrysler is unfortunately not viable as a stand-alone company. … If [Chrysler and Fiat] cannot come to a satisfactory agreement … and if no other viable partnership emerges for Chrysler, we will not be able to justify investing additional American tax dollars into Chrysler.”

The administration said both companies may need to restructure using the protection of courts, under a form of bankruptcy.

The White House held a Sunday night conference call with members of Congress from auto-producing states, and the lawmakers were far from satisfied.

"Tough love hurts," said a source familiar with the discussions. "The members received the briefing with a sense of anxiety.” The source said the timeline and funds to be announced Monday are "not good enough."

The shove to Wagoner, a 30-year GM veteran, came from the Treasury-led Presidential Task Force on the Auto Industry, which Obama named in February in lieu of a “car czar.” It is the most vivid example so far of the extraordinary new role that the government, as controller of the bailout purse strings, is playing in American business.

A senior administration official said there was no “quid pro quo” for Wagoner’s departure: “The task force asked, and he agreed to leave GM.”

The warranty program, a surprise offering, is designed to encourage consumers to buy cars without having to worry about whether or not the manufacturer will be out of business by the time something breaks. The administration is promising to “stand behind new cars purchased from GM or Chrysler during this period … of uncertainty.”

“No American should worry in buying a car from Chrysler, GM over this next period of time,” said the official, who added that the administration has no cost estimate for the “Warranty Commitment Program.”

The administration also announced that to help the affected communities, it is naming a Director of Recovery for Auto Workers and Communities. The post will go to Edward Montgomery, a labor economist and former Deputy Secretary of Labor, whose job will be to “work to leverage all resources of government to support the workers, communities and regions that rely on the American auto industry.”

In stark language, the administration’s five-page “Determination of Viability” for GM spells out the harsh findings: “General Motors has not satisfied the terms of its loan agreement. … It is strongly believed, however, that … a substantial restructuring will lead to a viable GM.”

The five-page findings for Chrysler say: “Chrysler has not satisfied the terms of its loan agreement. … The Chrysler plan is not likely to lead to viability on a standalone basis.”

Obama plans very tough rhetoric in his remarks Monday, with aides saying he will say explicitly that even greater sacrifice will be required from everyone involved with the auto industry.

“That’s just the unfortunate fact of life,” the official said. “It doesn’t make any of us happy. But we view ourselves as the custodians of taxpayer dollars, and we really want to be sure that when they are put to work, they are put to work in a thoughtful way, with every expectation of recovery.”

The companies can expect little leeway in the future.

“Look, we are not trying to delay the outcome of this process,” the official said. “The president has established very firm, very clear, unambiguous, unchangeable deadlines and guidelines for which the government will invest new money. And we intend to stick to those. … I hope everyone on this call gets the fact that this is not business as usual. This is a new approach that we are very emphatic about. Having said that, we want to give these companies every opportunity to succeed.”

Officials made it clear that Chrysler is much worse off than GM.

“If you even look at Chrysler’s own viability submission, you’ll see that based on their own assumptions, they kind of eke it along,” the official said. “They really never generate positive cash flow. They’re never in a position, really, to pay down their debt. It’s not … a very realistic or workable place for a company to be.”

The official said that the administration views GM, on the other hand, as “a much substantial collection of assets, a much more substantial collection of brands.”

“If you look at things like Consumer Reports’ ranking of cars, you’ll see very great differences between those two companies,” the official continued. “General Motors' Malibu won the car of the year award last year. Chrysler has zero cars – no cars – that are recommended by Consumer Reports.”

The official added: “There are certainly lots of fine Chrysler cars out there and we’re not trying to dissuade anyone from buying them. But we are attempting to make these viability assessments.”

Obama To GM, Chrysler: Plans Not Acceptable

Original Post from MSNBC

WASHINGTON - The White House says neither GM nor Chrysler submitted acceptable plans to receive more bailout money, setting the stage for a crisis in Detroit and putting in motion what could be the final two months of two American auto giants.

President Barack Obama is sending a blunt message to Detroit automakers: To survive — and win more government help — they must remake themselves top to bottom. Driving home the point, the White House ousted the General Motors chairman as it rejected GM and Chrysler’s restructuring plans.

Obama is set to elaborate on that message Monday when he announces what his White House told reporters over the weekend: Neither GM nor Chrysler submitted acceptable plans to receive additional federal bailout money.

Obama is scheduled to speak on the government’s plans to help the automotive industry at 11 a.m. ET.

GM chairman Rick Wagoner became the most conspicuous casualty of that decision, forced out Sunday as the White House indicated Detroit must make management and other changes if it hopes to survive — and that the Obama administration will have a hands-on role in those changes.

Michigan Gov. Governor Jennifer Granholm said Wagoner “clearly is a sacrificial lamb” who stepped aside “for the future of the company and for the future of jobs.” She spoke on NBC’s “Today” show Monday.

Obama said the companies must do more to receive additional financial aid from the government.

“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,” Obama said on CBS’ “Face the Nation” broadcast Sunday.

Frustrated administration officials, speaking on condition of anonymity ahead of Obama’s announcement, said Chrysler has been given a 30-day window to complete a proposed partnership with Italian automaker Fiat SpA. The government will offer up to $6 billion to the companies if they can negotiate a deal before time runs out. If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leaving Chrysler destined for a complete sell-off.

Shawn Morgan, a Chrysler spokeswoman, declined to comment ahead of Obama’s announcement.

For GM, the administration offered 60 days of operating money to restructure. Officials say they believe GM can put together a plan that will keep production lines moving in the coming years.

New directors will now make up the majority of GM’s board. Fritz Henderson, GM’s president and chief operating officer, became the new CEO. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., was named interim chairman of the GM board.

“The board has recognized for some time that the company’s restructuring will likely cause a significant change in the stockholders of the company and create the need for new directors with additional skills and experience,” Kresa said in a written statement.

The Obama administration move comes amid public outrage over bonuses paid to business leaders and American International Group executives — set against a severely ailing economy.

GM failed to make good on promises made in exchange for $13.4 billion in government loans. Chrysler, meanwhile, has survived on $4 billion in federal aid during this economic downturn and the worst decline in auto sales in 27 years. In progress reports filed with the government in February, GM asked for $16.6 billion more and Chrysler wanted $5 billion more. The White House balked and instead started a countdown clock.

Two people familiar with the plan said bankruptcy would still be possible if the automakers failed to restructure. Those officials spoke on condition of anonymity because they were not authorized to make details public.

An exasperated administration official noted that the companies had not done enough to reduce debt; in some cases, it actually increased during this restructuring and review process. GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.

GM and Chrysler employ about 140,000 workers in the U.S. In February, GM said it intended to cut 47,000 jobs around the globe, or almost 20 percent of its work force, close hundreds of dealerships and focus on four core brands — Chevrolet, Cadillac, GMC and Buick.

Wagoner Agrees To Step Aside

Original Post at Detroit Free Press

President Barack Obama's rescue plan for Detroit automakers will be unveiled Monday, but one condition became clear today: the resignation of General Motors Corp. Chairman and Chief Executive Rick Wagoner.

As a condition for additional government aid to GM, the Obama administration asked Wagoner to step aside, which Wagoner agreed to do today, people familiar with the plan said. Wagoner’s move, effective immediately, ends a 31-year career with GM.

Not since President Franklin Roosevelt considered taking control of Ford Motor Co. in 1943 from a failing Henry Ford has the federal government pushed for such sway in the management of Detroit’s automakers.

The tack suggests a hard-nosed approach from the Obama administration toward the automakers, bondholders and the UAW, all of whom have yet to reach agreements on key concessions, despite months of talks.

Obama will unveil the new rescue plan for GM and Chrysler in a White House ceremony this morning.

It was not clear who would replace Wagoner; chief operating officer Fritz Henderson would appear to be the most likely candidate. GM declined to comment.

A tumultuous 31-year career ends

“It’s time to stop whining and play the game.”

That was Wagoner six years ago, laying out a vision of a booming market for GM’s vehicles around the world and defending an aggressive campaign of rebates that spurred GM’s sales.

But his resignation on Sunday put an abrupt close to his 31-year career with the automaker.

Even though Wagoner had overseen a company that’s lost $82 billion over the past four years, he had faced few serious challenges to his leadership, the exception being a drive in 2006 by billionaire investor Kirk Kerkorian for an alliance with Renault-Nissan than Wagoner blunted.

“I’m disappointed but not surprised,” said David Cole, chairman of the Center for Automotive Research. “One of the things we recognize is that any kind of aid for industry, whether it is the financial or the auto industry, is quite politically unpopular. If you are in the government’s position, you need to be able to show the heads that have come from this.”

News of Wagoner’s departure caught many in Detroit off guard, especially after his determination to stay in office despite what seemed like continuous pressure from some corners of Wall Street and Washington to step down.

Asked about the development late Sunday, one top GM executive confided: “You know as much as we do.”

The change comes as GM is undergoing sweeping restructuring efforts, which include cutting 47,000 jobs by the end of the year, scaling back its dealer network by about 25% by 2012 and eliminating brands and models.

“I’m not necessarily sure it’s the best idea” for Wagoner to leave now, said Aaron Bragman, an industry analyst from IHS Global Insight. “You’re changing captains in the middle of the rapids here.”

It wasn’t clear today who would replace Wagoner, or why the government had asked him to leave. The most obvious candidate to step into his roles would be Chief Operating Officer Fritz Henderson, with Chief Financial Officer Ray Young also possibly moving up.

The news sent new rounds of anxiety through the workforce. GM hourly worker Randy Halazon, 51, of Vassar, near Flint, has spent a combined 31 years at GM and the automaker’s parts spinoff Delphi. He said he is more concerned than ever about the GM’s future, fearing the change in leadership might mean a greater likelihood of bankruptcy.

“I think it would be a bad deal,” Halazon said.

While Wagoner will likely be remembered as the CEO at the helm when GM required at least $13.4 billion in government aid to stay alive, some of successes under his watch include development of the Chevrolet Volt, an electric-drive vehicle slated for the market in late 2010, and a renewed partnership with the UAW that brought about a 2007 labor agreement that significantly changed the company’s cost structure.

Early in his tenure as chief executive, Wagoner outlined a strategy for GM to focus on developing countries where the auto industry still had large potential growth, such as Brazil, Russia and China. By 2005, GM was selling more vehicles overseas than in North America and GM was the No. 1 car company in China, with the Buick brand in China outselling its U.S. base.

But Wagoner could never halt the steady decline of GM’s market share in the United States, fueled by rising foreign competition and GM’s higher costs, which eventually allowed Toyota Motor Co. to surpass GM as the world’s largest automaker last year.

When he took over as chief of GM North America in 1994, the company held 33% of the U.S. market. Last year, GM’s sales fell to 22% of the market.

The declining market share foretold of GM’s bleak future. The company last made money on an annual basis in 2004, and recorded a $38.7 billion loss in 2007.

Wagoner’s friends and associates always described him as a naturally friendly man who could summon the edge needed to run an enterprise the size of GM when necessary. He only rarely showed emotion in public; once cursing a writer for a Los Angeles newspaper who had written that Wagoner did not like the Pontiac Aztek.

The Aztek debacle in 2000 became a touchstone for Wagoner’s tenure, and the off-base vehicles that GM was building earlier in his career. While Wagoner defended the vehicle and the GM process that created it, he also went looking for someone to rework the company’s product line.

The search ended when Wagoner hired former Chrysler executive Bob Lutz out of retirement in 2002. Lutz eventually succeeded in giving design a higher priority, generating models such as the Chevrolet Malibu that were competitive with the top Japanese models.

Several industry observers today said Wagoner would do what he thought was best for the company – including stepping down if needed. Duane Paddock, a New York Chevrolet dealer who is the co-chair of GM’s national dealer council, said he believed Wagoner could have fixed the company.

“But if his decision, for whatever reason, is to move on then I feel he is making the decision because it’s the right decision for the long-term viability for General Motors,” he said.