By Peter Whoriskey and Kendra Marr
Washington Post Staff Writers
Friday, March 27, 2009
President Obama said yesterday that his administration will offer the auto industry an aid package that will require General Motors and Chrysler to make "painful" and "pretty drastic" changes.
The aid package for the companies will be unveiled in the next several days, he said, and will be contingent upon the companies adopting business plans that reflect the fact that they have a smaller share of the auto market.
"We will provide them some help," Obama said during an online "town hall" event.
"I know that it is not popular to provide help to autoworkers -- or to auto companies -- but my job is to measure the costs of allowing these auto companies just to collapse," he said.
GM announced yesterday that it was already in the process of a vast restructuring. About 7,500 union workers, or about 12 percent of the company's U.S. hourly workforce, have signed up to take buyouts and early retirement packages. These employees must leave the company no later than Wednesday.
In extending $17.4 billion in government loans to GM and Chrysler in December, the Bush administration called for significant sacrifices by stakeholders, their creditors and the United Auto Workers.
Yesterday, Obama did not specify the type or depth of the cuts the government will seek.
"If they're not willing to make the changes and the restructurings that are necessary, then I'm not willing to have taxpayer money chase after bad money," Obama said. "And so a lot of it's going to depend on their willingness to make some pretty drastic changes. And some of those are still going to be painful, because I think you're not going to see a situation where the U.S. automakers are gaining the kind of share that they had back in the 1950s."
In all, the companies have asked for $21.6 billion, which would come in addition to the bridge loan deals in December. The intervention amounts to one of the government's largest efforts ever to prop up a single industry.
GM spokesman Greg Martin said via e-mail that the company appreciates that "the President recognizes a healthy domestic auto industry contributes to our nation's economic strength. Additional support should help us accelerate our efforts to reinvent GM and the cars and trucks we build."
The downturn has cut auto sales that hovered around 16 million in recent years to an annual pace of about 9 million so far in 2009, and both GM and Chrysler could have been forced into bankruptcy without federal assistance.
Their failure would represent a powerful blow to the U.S. economy. The two companies employ about 132,000 people in the United States, and companies in their supply chain employ another 500,000.
So far, even the cuts that the Bush administration called for when it offered the $17.4 billion loan package have proven difficult to implement.
Under the loan terms, GM was supposed to strike a deal with its bondholders by March 31 so that they would agree to swap two-thirds of their $27 billion in bonds for an equity stake in the company.
Likewise, GM and Chrysler were supposed to strike a deal with their retiree health plans, under which the health plans would agree to forgo billions in payments from the auto companies in exchange for an equity stake.
There is no framework in place for either of those required agreements, however.
In recent days, lawmakers have singled out GM's debt holders for their reluctance to make concessions. Rep. Gary Peters (D-Mich.), whose suburban Detroit district is home to Chrysler, called the bondholders a "linchpin in this whole process."
"There needs to be more movement on the part of the creditors," he said.
Some of the largest owners of GM debt -- Franklin Templeton, Fidelity, Pimco and Loomis Sayles -- are the same institutional investors that comprise GMAC's top bondholders. When GMAC asked bondholders to swap their investments, so that it could become a bank and access the Treasury Department's financial rescue plan, many rebuffed the request. Yet the finance arm was still able to persuade the Federal Reserve to accept its bank application and received $6 billion in loans anyway.
This investor group could be trying to call the government's bluff again, said David Whiston, an auto analyst at Morningstar. "If you're a creditor and you think an entity is too big to fail, why should you participate in a debt-for-equity swap?" he said.