By John W. Schoen Senior producer
updated 3/30/2009 3:40:08 PM ET 2009-03-30T19:40:08

Obama to GM: Move over, I’m driving.

After several rounds of government assistance and missed deadlines for a plan to revive the auto giant, the White House on Monday finally lost faith in the company's ability to fix its own longstanding problems.

Despite months of negotiations with various stakeholders, the Obama administration refused to offer GM another round of bailout funds, saying the company's restructuring proposals didn't go far enough to make for a viable plan. To get further concessions from unions, creditors and investors, the White House held out the possibility of a bankruptcy filing.

No matter who takes the wheel, the ride is going to get rougher for GM dealers, customers, investors and employees. GM will need fewer workers, some of its storied brands will disappear and its investors and creditors are likely to lose money.

“Year after year, decade after decade, we've seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us,” Obama said in a White House speech announcing the government’s new plan. “We have reached the end of that road.”

The president, careful not to blame workers for the U.S. auto industry's woes, accused Washington and automakers' management of lax leadership. It was little consolation for workers, though. The president added that more of them likely would lose jobs and more plants would shut their doors.

General Motors' chief executive Rick Wagoner and the company's board of directors have already lost their jobs. Fritz Henderson, GM’s president and chief operating officer, became the new CEO. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., was named interim chairman of the GM board.

Critics of the company’s management say the government’s move is overdue.

“(It would be a) disaster to leave this firm into its own leadership with public money going in,” said Jeffrey Sonnenfeld,a professor at the Yale School of Management. “The board has been a disaster for decades. This was not a situation that was really precipitated by the global financial crisis. This is a company that made extraordinarily bad decisions."

The impact of the government’s decision will be felt unevenly among Detroit’s other two players. Chrysler, which was given an ultimatum to consummate a viable marriage with Fiat, quickly announced Monday that it had the framework for an alliance with the Italian auto maker. But CEO Bob Nardelli added that "significant hurdles" remained to a final deal.

Video: What happens to GM dealers?

Obama left open the prospect of additional funding for the combined company if it comes up with a workable plan. If it can't, Chrysler has limited options, including a trip to bankruptcy court.

The president himself raised the possibility Monday of controlled bankruptcy for one or both of the beleaguered auto giants.

Henderson, said Monday that the administration’s demands to clean up its balance sheet raised the risks that the company would need to restructure through a bankruptcy. He added that GM would prefer to avoid bankruptcy court, however.

The government has made clear throughout its talks with both car makers that they were running out of time. Now, the White House may also be running out of cash. Treasury Secretary Tim Geithner said Sunday the government’s $700 billion Troubled Assets Relief Program, or TARP, is down to about $135 billion. Much of that will be needed to fund the government’s aggressive plan to buy up bad bank assets. With little hope of getting additional TARP funding from Congress, the White House is running low on funds to continue to prop up automakers.

Rival Ford, already in a stronger financial position, has said it believes it can get back on its feet without government help. Ford can also look forward to a stronger competitive position after GM emerges as a smaller company with fewer brands and a stripped-down model line-up.

That means GM will need fewer workers — on top of the nearly 400,000 industry jobs lost in the past year — and further cuts in pay and benefits for those who remain. Even as he sought to reassure car buyers that the government was committed to fixing GM’s problems, Obama offered a grim forecast for the workers who remain.

“There are jobs that won't be saved,” he said. “There are plants that may not reopen. There's little I can say that can subdue the anger or ease the frustration of all whose livelihoods hang in the balance because of failures that weren't theirs.”

For workers who do manage to keep their jobs, the shrinking of GM will also likely involve further shrinking of their paychecks and benefits. The hope is those labor contracts can be renegotiated without a bankruptcy filing, but the threat of going to court gives the auto workers union less bargaining power.

"I think the UAW will have to take a number of steps in terms of relieving (GM) from some of the legacy costs to get General Motors into more of a competitive position," said Erich Merkle, an independent auto industry consultant.

The news also sent shock waves through the vast network of suppliers that serve all three U.S. automakers, and who collectively make roughly 70 percent of the content of a new car. Already weakened by slumping car sales, parts suppliers are running out of cash following steep auto production cuts late last year.

Earlier this month, the White House pledged up to $5 billion to tide them over. But suppliers are owed billions more by GM and Chrysler; cuts in those payments from a bankruptcy filing could prove catastrophic for the industry.

“At any given point in time, General Motors owes the suppliers around 15 percent of a full year's revenue," said Wilbur Ross, chairman of International Automotive Components Group. "Very few suppliers could afford to write off 15 percent of the year's revenue. They would simply have to go out of business.”

It’s not at all clear just how small the restructured GM will be. Car sales have crashed from annual sales of roughly 15 million to an estimated 9 million this year. GM’s latest restructuring plan reportedly was based on the industry returning to sales of 10.5 million a year, a target some believe is overly optimistic, at least in the short run.

“A million and a half cars times $20,000 a car is a huge number,” said Ross. “It's some $30 billion difference in revenue for the industry. I think the government is right: they have to be set to break even at a lower level than what they had anticipated.”

With production already cut to the bone, GM will likely have to shed many of its brands and produce fewer models.

"Many have argued, and I agree, that they could probably go right down to Chevrolet and Cadillac and that would be certainly manageable for them,” said Merkle.

That leaves GM dealers in something of a game of musical chairs: When the restructuring is over, eliminating brands will also mean eliminating dealer networks. Still, some dealers welcomed news that the tough measures proposed by the government might finally help GM turn the corner.

“These high fixed costs, labor agreements, legacy costs, high debt levels are not sustainable,” said Mike Jackson, CEO of AutoNation, the largest GM car dealer in the U.S. “If you're not going to deal with them now comprehensively, then when are you ever going to deal with that?”

Dealers were also pleased to hear the government’s promise to stand behind GM and Chrysler car warranties, hoping to ease worries of potential new car buyers that their dealer might not be around in a few years to stand behind those warranties.

But that assurance may not be enough to help revive stalled sales. Lease financing is still hard to come by. Lenders also may be less willing to write a new car loan if the future of the company selling the car is in doubt.

And with the prospect of bankruptcy back on the table, consumers may favor competitors who are on a sounder financial footing. Jackson cited research that 90 percent of consumers would shun a car company in bankruptcy.

“That's because it's a long-term investment," he said. "They're taking a risk on residual value, and they really care what's going to happen. And they have so many other choices right across the street. It's not like they've got to take an airline going a certain spot. They'll just cross the street and buy whatever they want.”

All of which made for little good news for GM investors, who have suffered by losses brought by GM’s financial spiral. GM stock — which traded for more than $40 less than 18 months ago — is now worth about as much as the price of a gallon of gasoline.

GM bondholders, who have also made concessions, face more givebacks. The government wants to cut GM’s outstanding debt levels by roughly two-thirds, offering bond holders GM stock in return for canceling that debt.

The hope is that the threat of a bankruptcy will help spur all of the parties to reach workable agreements that get GM and Chrysler back on their feet. But after months of talks, those negotiations won’t get any easier. That means a bankruptcy filing may be the only way to force resolution of the thorniest issues.

“I don't think they are going to make too much progress in the near future,” said Angela Somers, a lawyer at Allen & Overy who specializes in corporate restructurings, “I don't think the program is working. They had pretty simple benchmarks they were supposed to meet by this deadline. They haven't met any of them.”

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