By Peter Whoriskey and Kendra Marr
Washington Post Staff Writers
Tuesday, March 31, 2009
President Obama had a mixed message yesterday for the U.S. auto industry. He praised the struggling companies as "an emblem of the American spirit," but used his toughest language yet to demand that manufacturers, their creditors and their union cut costs further or face bankruptcy.
The president's threat dramatically ramps up the pressure on General Motors and Chrysler to trim their workforces and product lines, while pushing the union and creditors to agree to trade benefits and debt for company stock.
"If all of us are doing our part, then this restructuring, as painful as it will be in the short term, will mark not an end but a new beginning for a great American industry," Obama said in announcing his plans for the industry.
Should bankruptcy become necessary, Obama said, he would press for a process that would allow the companies to keep operating while clearing away the "old debts that are weighing them down." The companies would not be liquidated, he said.
But the stern words essentially kick-started efforts begun in December to get the companies and their stakeholders to reach agreements to streamline operations. None of the players want to declare bankruptcy, and its prospect is intended to compel all sides to make concessions.
Obama said Chrysler had 30 days to finalize an alliance with the Italian carmaker Fiat, reasoning that the American carmaker cannot be viable on its own. He gave GM about two months to streamline its operations and cut costs.
"Over the next 60 days, we will work around the clock, with all parties, to meet the aggressive requirements that have been set by the task force, and to make the fundamental and lasting changes necessary to reinvent GM for the long-term," GM's new chief executive Frederick A. Henderson said in a statement.
Henderson replaces former chief executive and company chairman G. Richard Wagoner Jr., who stepped down over the weekend at the behest of the White House. The ouster angered some at the company, who viewed it as a political move.
Yesterday on NBC's "Today Show," Michigan Gov. Jennifer Granholm (D) said Wagoner "clearly is a sacrificial lamb."
But Wagoner has accepted the decision, sources said.
"He's philosophical about it," said Bob Lutz, a vice chairman of GM. "He knows it's not a question of his having failed or not achieving much success. What people have not understood is that he has been in the process of saving GM for 10 years.
"But Rick understands that if a team keeps losing games that people will want to get rid of the coach. Is he happy? Hell no. But he understands."
Wagoner will remain with the company in an unspecified role in which he will draw a salary of $1 a year.
If he leaves the company, he would become eligible for retirement payments worth an estimated $20 million. During each of the first five years of retirement he would receive $4.5 million, the company said. He would also receive an $69,000 annuity for life.
Officials at the Treasury Department, chastened by the furor over large bonus payments at American International Group, are seeking a means to block those payments to Wagoner, a source familiar with the matter said.
Moreover, under the terms of GM's loan agreement, GM is barred from paying its former chief executive a cash severance. While the automaker was not contractually obligated to pay Wagoner a severance before it received the loans, the board could have voted to pay him a severance of up to about $17.1 million, according to an analysis by Equilar, an information services company specializing in executive compensation.
Regardless of such attempts to cut his compensation, Obama praised Wagoner during yesterday's announcement.
"This is not meant as a condemnation of Mr. Wagoner, who has devoted his life to this company and has had a distinguished career," Obama said. "Rather, it's a recognition that it will take new vision and new direction to create the GM of the future."
In order to win more federal aid, the companies must now restructure, according to the dictates of the Obama administration.
Rejecting both companies' current business plans, the president's autos task force faulted the companies for clinging to overly optimistic assumptions about their future market share, for an overemphasis on big trucks, and for failing to meet consumer demand for smaller cars that has been met by foreign competitors.
Moreover, the task force characterized the Chevy Volt, the electric-powered car that GM had touted as the flagship of its future, as too expensive compared with its gas-powered peers to be viable in the near term.
Under Treasury's revised terms for the proposed Chrysler-Fiat alliance, Fiat initially would take a smaller 20 percent stake in Chrysler, down from 35 percent according to a person familiar with the plan who was not authorized to speak publicly. Fiat's stake would grow if the company does well.
For both companies, one of the most critical problems is the volume of debt they carry.
GM, for example, has $27 billion in outstanding bonds and owes its retiree health plan an estimated $20 billion.
Under existing federal loans worth $17.4 billion, the companies were supposed to reach an agreement by today with the union and other creditors to reduce their debt load, but neither has done so.
Now the possibility of bankruptcy is likely to push the union and the companies' creditors back to the negotiating table.
"Without the threat of bankruptcy you can't do anything," said David Cole, chairman of the Center for Automotive Research.
As recently as last week, GM's bondholders, for example, essentially rejected the sacrifices that the Bush administration had called for in December. But yesterday, they softened. Advisers to a committee of GM bondholders said "bondholders have been and remain willing to reduce GM's future debt burden."
"We look forward to working with the company and the task force to configure an exchange that will maximize the chances of a successful out-of-court restructuring," they said in a statement. "All parties seem to agree that an out-of-court restructuring would be the preferred path to viability."
Sen. Carl M. Levin (D-Mich.) said bondholders now face a "stark choice."
"Their option again is to either take a haircut or to take a bath," he said on a conference call with reporters yesterday.
For dealers and suppliers, who are already running on low on cash because of slumping sales, the next round of concessions could be very difficult.
"It's the ultimate sacrifice of going out of business," said John McEleney, chairman of the National Automobile Dealers Association.
Staff writer Shailagh Murray contributed to this report.