Tuesday, March 31, 2009

Obama expands government's role in auto industry

Obama expands government's role in auto industry

By JIM KUHNHENN

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President Barack Obama's extraordinary auto industry intervention is assertive and coldly pragmatic, with a dose of caution and a sentimental nod to the automobile's place in the American psyche.

Obama's curt rejection of General Motors' and Chrysler's restructuring plans and his abrupt move to muscle out GM's CEO set the stage for a major realignment of the U.S. auto industry. He bluntly raised the prospect of a "prepackaged bankruptcy" that would reorganize the companies quickly under court protection.

But Obama did not upend Detroit in one single swoop. He gave each company a second chance at a federal bailout — 60 days for GM and 30 for Chrysler — though it was evident that from now on little would remain the same.

"We've reached the end of that road," Obama declared Monday.

The administration's analysis of the viability of the two auto giants was merciless and remarkably specific in its critique of their business practices. It said GM's underperforming dealers were a drag on the company and its car of the future, the plug-in Chevrolet Volt, held promise but was too expensive. As for Chrysler, the president said it could only survive with an international partner, the Italian carmaker Fiat SpA.

All in all, the administration and its auto task force concluded that the automakers' plans to change their mix of products, fix their balance sheets, reduce production capacity and launch new vehicles were simply too slow.

"There seems to be a major difference of opinion between the auto task force and GM not about what's desirable, but what's realistic over some undefined business cycle," Malcolm Salter, a professor emeritus at Harvard Business School who has advised Ford and GM, said in an e-mail.

Yet Obama also conceded the intangible nature of the auto industry as a national symbol, and made it clear he would not let it succumb under his watch. He called the industry an emblem of the American spirit and a pillar of the economy.

"We cannot, and must not, and we will not let our auto industry simply vanish," he said.

The forced ouster of GM CEO Richard Wagoner, the detailed review of the companies' business models and the overt threat of bankruptcy represented an increasingly hands-on approach by the government to institutions receiving federal assistance in the midst of the economic crisis.

But the White House on Monday downplayed the difference between Obama's treatment of the automakers and the less stringent conditions it has placed on the financial industry in return for financial infusions worth billions of dollars.

White House spokesman Robert Gibbs said each institution has distinct effects on the economy and, as a result, the government's response to each would be specific to their circumstances.

The president was hardly ambiguous about his desire to use the beleaguered state of the industry to press one of his top policy agendas — an energy policy that emphasizes the manufacture of fuel-efficient, environmentally friendly cars.

"The United States will lead the world in building the next generation of clean cars," he said.

Obama's restructuring conditions include concessions from bondholders, the investors who hold GM and Chrysler debt, as well as from the United Auto Workers, which represents the industry work force. "It will require unions and workers who have already made extraordinarily painful concessions to do more," Obama said.

A committee of GM bondholders issued a statement Monday saying bondholders were willing to exchange "a substantial part" of their debt for stock in the company. But the statement said the committee was "very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan."

Though administration officials insisted Monday that bankruptcy was not a preferred option, the president went out of his way to explain what a court-overseen restructuring would entail. He stressed that bankruptcy would help Chrysler and GM clear old debts and place them on a sustainable path. "What I'm not talking about is a process where a company is simply broken up, sold off and no longer exists," he said.

The idea of using a speeded-up bankruptcy process for the auto industry circulated in Congress last November. But both executives and labor leaders objected to the idea even with the backing of federal guarantees, saying it would taint the companies with consumers and risk retiree health benefits.

A Chapter 11 bankruptcy allows a company to stay alive and retain control of its assets while paying off creditors and reorganizing. In the process, they raise capital, downsize and renegotiate contracts. The companies would still need billions in government assistance, however, because the companies would not find easy access to financing in the currently frozen credit markets.

To encourage consumers to buy new cars, Obama announced that the government will now back new car warranties issued by GM and Chrysler, assuring car owners that their purchases will be protected. The administration also was pursuing other measures that were not tied directly to GM or Chrysler, and would also help their competitors.

The Internal Revenue Service announced a new plan to allow taxpayers to deduct the sales tax and excise tax on any new car they purchase, whether foreign or domestic. Obama said he also was working with Congress on "cash for clunker" legislation that would reimburse car owners who turn in an older car for a new, more fuel-efficient vehicle.

A senior Obama administration official said GM and Chrysler would put together the revised plans with help and advice from the Treasury Department and the auto task force. The official was not authorized to speak publicly about the discussions.

"They're taking significant responsibility now here for the future of the industry and there's upside and downside to that," Sen. Carl Levin, a Michigan Democrat who has been active in helping the industry survive, said of the administration's role. "Hopefully there's enough people who know enough about the industry who understand the risks of one course or another."

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