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Feds declare GM, Chrysler not viable, refuse more aid

WASHINGTON — President Barack Obama on Monday will reject requests for almost $22 billion in new taxpayer bailout money for General Motors Corp. and Chrysler, saying the car makers have failed to take steps to ensure their viability.

The government sought the departure of GM chief Rick Wagoner and said the company needed to be widely restructured if it had any hope of survival. It said it would provide the company with 60 days operating capital to give it time to undertake reforms.

The government will grant Chrysler 30 days operating funds, but said it must merge with another carmaker in order to remain viable. Talks with Italian carmaker Fiat are underway.

The administration also announced a warranty guarantee plan that administration officials hope will give consumers enough confidence that they will continue to buy the companies' vehicles.

GM and Chrysler have already received $17.4 billion in government rescue money. The two companies faced a Tuesday deadline for the government to approve plans they'd submitted weeks ago in hopes of persuading the Obama administration that they could remain in business anad deserved additional money.

But the decision from Obama was no.

The administration, however, did not demand repayment of the earlier loans. It also did not completely slam the door on the additional $21.6 billion the carmakers sought, but sent the two back to the drawing board.

A senior administration official, briefing reporters late Sunday night on the condition of anonymity in order to speak freely, said Obama will call for more sacrifice from carmakers, their investors and automotive unions.

The official said there were encouraging signs that the Chrysler merger with Fiat will happen soon. The administration wants this deal to happen, but has tried to avoid too big a stake by Fiat for fear that taxpayers would be funding a foreign takeover.

Fiat will commit to produce fuel-efficient cars and engines in the United States, and will be limited to a 49 percent stake until all taxpayer loans have been repaid. There are no expected leadership changes at Chrysler, given the ongoing merger talks.

Another senior administration official, also demanding anonymity, denied that the administration required Wagoner's ouster. But officials acknlowledged they wanted a fresh start at GM and Wagoner agreed to step aside. Other executives are also expected to depart.

The government laid out its case against the companies in two extraordinary documents that assessed their management structure, distribution systems, manufacturing capabilities and products — none of which drew much praise.

The government's assessment of Chrysler's prospects was particularly damning.

It noted that none of Chrysler's current models were recommended in a recent article by Consumer Reports and that every one of its brands ranked in the lower quartile for quality in an assessment by J.D. Power.

It said the company is too dependent on its truck and SUV business and had only a 3 percent share of the small-car market, even though that segment makes up 21 percent of car sales overall. Noting that Chrysler's strength is in trucks, SUVs and mini-vans, all vehicles with relatively low fuel efficiency, the government said it was unlikely Chrysler would be able to meet new government standards for fuel consumption.

GM, too, was criticized for being dependent on the sale of trucks and SUVs for its revenue.

The quality of its products also was a concern. While GM has worked hard to improve quality, "lingering consumer perception is that GM makes lower-quality cars . . . which in turn leads to greater discounting, which harms GM’s price realizations and depresses profitability."

The government said that GM had not done enough to rid itself of underperforming dealers and that its large number of vehicle lines was a distraction to its management.

The government offered a bleak assessment of the prospects for GM's much heralded Chevy Volt electric car, noting that GM was a full generation behind Toyota in "green powertrain development."

"While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable," the government assessment said.

Given all that, the government assessment found that GM's proposed plan was too optimistic in foreseeing "only a very moderate decline" in market share. GM’s market share in the United States stood at 45 percent in 1980, dropping to 36 percent by 1990 and 29 percent in 2000. Today, GM’s share of the U.S. automarket is approximately 22 percent.

Still, the report concluded that the company can be saved if it undertakes major restructuring. “It is strongly believed, however, that such a substantial restructuring will lead to a viable GM,” the report said.

In their briefing for reporters, administration officials said GM has made no progress in talks with its bondholders. It has about $35 billion in debt, $27 billion of it unsecured and at risk if GM is forced to file for bankruptcy. GM was expected to reduce that amount to $9 billion through a voluntary exchange of bonds for new shares of GM stock.

Bondholders have instead sought government help, officials said, suggesting they are betting that there won’t be a bankruptcy. Officials, however, did not rule out the possibility of a so-called surgical bankruptcy under which GM could be sent into protection from creditors for a 30-day period after most details had been worked out in advance.

Under normal circumstances, banks would provide the long-term financing to help the two carmakers restructure but these are not normal times. In fact, banks have received hundreds of billions of taxpayer dollars to stay afloat and the government is the only game left in town.

Chrysler is a smaller company than GM yet it owes banks more than $8 billion and these financially weakened banks are not in a forgiving mood.

Wagoner’s departure from GM is surprising given that he has been the public face of the struggling carmaker and has worked at GM at home and abroad since 1977, rising to CEO in 2000.

Wagoner's long tenure saw days of glory, but GM was caught flatfooted as its fleet was heavy with trucks and sports utility vehicles that got weak fuel mileage as rising gasoline prices sent consumers looking for more fuel-efficient vehicles. GM was last profitable in 2004.

Most of the banks receiving government assistance have replaced their top officials, and the administration gains a measure of political cover for its rejection of the auto bailout by bringing in a new team of leaders.

In an interview with the CBS Sunday morning show Face the Nation, Obama hinted that changes were coming for the carmakers.

“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 told host Bob Schieffer, who asked if the carmakers were there yet. “They're not there yet.”

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