Obama Administration Gives Failing Grades To GM, Chrysler Plans

The Obama administration gave failing marks to the restructuring plans of General Motors Corp. (GM) and Chrysler LLC, a decision that moves the struggling auto makers - and a giant piece of the U.S. economy - closer to collapse.

Administration officials, briefing reporters ahead of a speech Monday morning by President Barack Obama, said the government will give the auto makers enough working capital to work with stakeholders to craft more aggressive strategies. It warned, however, that a "quick and surgical" bankruptcy may be each company's best chance for survival.

In GM's case, the government will provide working capital for 60 days. Though it said the company's current plan isn't viable, it expressed confidence the auto maker can survive. To help give GM a fresh start, the White House asked Chief Executive Rick Wagoner to step down.

The White House's view of Chrysler was more harsh: it doesn't believe the company is viable as a standalone entity. Chrysler's potential deal with Italian automaker Fiat (FIAZY), however, could provide a "path to viability," the administration said. The government will give Chrysler working capital for 30 days, a period it says is sufficient to wrap up the agreement with Fiat.

The administration said Fiat has committed to building new fuel efficient cars and engines in the U.S. as part of a deal with Chrysler.

If that deal is a success, the administration said it will consider investing up to $6 billion in Chrysler, an amount the company already has requested. If the Fiat deal doesn't come to fruition, however, Chrysler won't receive any more taxpayer funds, the administration said.

An administration official said he couldn't put a figure on the amount of working capital the government will provide while the auto makers hone their plans.

GM and Chrysler received a total of $17.4 billion in government loans in December, and have requested another $22 billion to keep them going through this year. Obama's auto task force has been combing through the firms' restructuring plans to judge if they merit the additional funds. The verdict released Sunday is that in the current form, the plans don't justify any new taxpayer resources.

Though it said it is not its goal, the administration said a structured bankruptcy could give GM and Chrysler their "best chance at success." The White House said it would provide debtor-in-possession financing if necessary in a quick, supervised court proceeding.

"Unlike a liquidation, where a company is broken up and sold off, or a conventional bankruptcy, where a company can get mired in litigation for several years, a structured bankruptcy process - if needed here - would be a tool to make it easier for General Motors and Chrysler to clear away old liabilities," the administration said in a fact sheet.

Under this method, the companies could "get on a path to success while they keep making cars and providing jobs in our economy."

An administration official said that process would be sharply different from an "uncontrolled" bankruptcy. The government, to the best of its ability, would not allow that happen, he added.

On Sunday, Obama said the auto makers would have to take more dramatic steps to receive more government assistance. "They're not there yet," he said on CBS News's Face the Nation.

"What we're trying to let them know is that we want to have a successful auto industry," he said. "It's got to be one that is realistically designed to weather this storm and to emerge at the other end much more lean, mean and competitive that it currently is."

The original December loans were given under the agreement that all sides would strike a compromise deal by Tuesday. The deal allows the government to call the loans if it isn't satisfied with the companies' viability plans. An administration official said the government won't call the loans, though. Doing so, he said, wouldn't be productive because it would hasten the companies' decline.

Both firms have been hammered by the economic slump, which has sapped demand for new vehicles. The White House said that since the initial loans were disbursed last year, the firms have failed to meet a series of benchmarks and been hobbled by a further deterioration in the economic climate.

An administration official acknowledged that both companies also have had difficulty negotiating with bondholders to ease their massive debt loads. Under existing loan agreements, GM is required to cut its $27 billion in unsecured debt to $9 billion through a voluntary bond exchange. That exchange has made zero progress, an official said.

Chrysler's $6.8 billion secured first lein debt also has been an obstacle. An administration official said the company's banks have been resolute about not modifying the debt.

Obama's stance on the auto makers, which he will detail in an 11:00 a.m. EDT speech at the White House, seeks to strike a balance between giving the sector one more lifeline and recognizing public sentiment against the use of taxpayer dollars to help companies that are widely viewed as victims of their own mismanagement.

To address potential consumer skepticism about purchasing a GM or Chrysler vehicle, the administration will stand behind the firms' warrantees during the crisis period. The warrantee program will be funded with a cash contribution from the auto makers and a government loan.

Obama also is set to name former Deputy Labor Secretary Ed Montgomery as Director of Recovery for Auto Communities and Workers. Montgomery will work with all stakeholders to make sure communities and workers can take advantage of all available resources and to ensure that stimulus funds are distributed efficiently.

-By Henry J. Pulizzi, Dow Jones Newswires; 202-862-9256; [e-mail]