Obama's plan for GM, Chrysler hints at bankruptcy

If the auto industry doesn't come up with better plans, they may be forced to restructure through bankruptcy, Obama warned Monday.

The road forward for much of the auto industry could be the road through bankruptcy.

That was the stern message from President Obama as he delivered a long-awaited response to the request by General Motors and Chrysler for government assistance.

Government aid is still likely to flow, to prevent the dire consequences for the economy of a sudden collapse in one of America’s largest manufacturing industries.

But President Obama said that the two struggling carmakers haven’t yet submitted restructuring plans that can justify more taxpayer support. If they want more taxpayer money, he said, they must come up with better plans.

The president also warned that the restructuring may end up happening in a way that both companies hope to avoid: bankruptcy.

And for Chrysler, winning federal funds now hinges on partnering with another firm.

“While Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plans they develop,” Mr. Obama said Monday morning, flanked by members of his task force on the auto industry. “That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger.”

This doesn’t mean bankruptcy is inevitable.

The companies have hoped to avoid this, for several reasons. Consumers could become even more wary of buying cars. And entering a court-supervised restructuring could become a long and messy affair.

But bankruptcy now looks like a strong possibility, and Obama tried to prepare the companies and the public for it in his speech. However, he also emphasized that he was not referring to a situation where the firms end up in court for years, or shut operations and liquidate all their assets.

“What I am talking about is using our existing legal structure as a tool that, with the backing of the US government, can make it easier for General Motors and Chrysler to quickly clear away old debts … so they can get back on their feet,” he said.

In or out of bankruptcy, however, getting back to profitability won’t be easy.

The stock market value of auto companies fell Monday as the dire situation sank in with investors.

Sales have plunged – hit first by rising gas prices, then by job-market uncertainty and a credit crunch that affects the cost and availability of consumer loans.

Already, government loans have helped GM and Chrysler keep operating for the first months of the year.

While Ford Motor Co. is surviving without such aid, the industry essentially now has the federal government as a business partner.

In that context, Obama’s speech directed the way forward for the industry.

GM and Chrysler will continue to get support for another month, so that they can seek greater concessions from creditors, and so that Chrysler can try to firm up an all-important alliance it is developing with Italy’s Fiat.

The industry must move toward a new business plan built around leadership in clean-car technology. The goal, Obama said, was to make sure the US “will lead the world in building the next generation of clean cars.”

As a bridge into the future, the government plans to provide key support for these companies. This includes loans conditioned on restructuring. It also includes tax breaks for consumers to buy a new car this year, and possibly other consumer incentives. And to reassure an uncertain public, Obama said that the government will stand behind the warranties for GM and Chrysler cars.

“We cannot, we must not, and we will not let our auto industry simply vanish,” said Obama.