Obama: GM, Chrysler Must Restructure or Face Bankruptcy

In a dramatic move, the Obama administration announced today that restructuring plans issued by General Motors and Chrysler are untenable, upping the likelihood of bankruptcy among the Big Three and effectively launching one of the biggest instances of government intervention the recession has yet seen. "These companies and this industry must ultimately stand on their own, not as wards of the state," President Obama said this morning. "After careful analysis, we've decided that neither goes far enough."

In rejecting the viability plans that were submitted by GM and Chrysler in response to a government stipulation to be met before the companies received any more federal funding, the administration laid out its own program. It includes continuing to pump money into the automakers for a brief period as they come up with better plans for restructuring. If those programs don't seem tenable, the companies may be left to file for bankruptcy.

Although a bankruptcy filing could be part of the companies' "fresh start," Obama emphasized that it would not be "a process where a company is simply broken up and sold off to where it no longer exists." Instead, he said, it would mean "using our existing legal structure as a tool" that could help GM and Chrysler clear away their debts quickly, "even as workers are staying on the job."

The company that could be headed for bankruptcy first is Chrysler, which, Obama said, "needs a partner to remain viable." The administration will continue propping up Chrysler for 30 more days to allow it to finalize an ongoing plan to merge with the Italian carmaker Fiat. If it's successful, Chrysler may get up to $6 billion in added loans from the government; otherwise, it won't see any more. Shortly after Obama's speech, Chrysler said in a statement that it had taken another step toward that final deal, having "reached agreement on a global alliance" with Fiat. But Chrysler has said it will have to declare bankruptcy by the end of the month unless it gets $11 billion in aid, on top of the $4 billion it has already received.

Since GM has fared better in its efforts, the administration has given it two more months to present a plan that will cut costs significantly, during which time the company will be aided with an unspecified amount of "adequate working capital," Obama said. One step already taken was to oust CEO Rick Wagoner, who was in charge as GM lost nearly $73 billion between 2005 and 2008. Wagoner had been making a $1 annual salary.

The Bush administration extended $17.4 billion in loans to GM and Chrysler in December, and the companies have asked for $22 billion more, which they say is necessary to survive through the year.

As well as specifying the next steps for the auto giants, Obama outlined new plans aimed at fixing the auto industry in general and helping its workers. Pointing out that the industry has shed 400,000 jobs during the recession and that 1 in 10 Michigan residents is unemployed, he said he will launch an initiative to revive the country's most affected communities by trying to create business and manufacturing opportunities.

To encourage car purchases, meanwhile, Obama announced that as of today, the government will guarantee any new-vehicle warranties of American-made cars—even if those companies go bust. And if a car is purchased between February 16 and the year's end, consumers will be able to deduct the cost of any sales and excise taxes.

Coming on the heels of outrage over executive compensation, the stern warning to cut the purse strings reflects the White House's wariness of continuing to dole out cash to struggling industries. But the moves also mean significant government intervention into the industry in one last attempt to save thousands of manufacturing jobs across the country—and to recoup taxpayers' funds. If Chrysler is allowed to simply liquidate, for example, taxpayers would get back only about 5 percent of the money they've loaned the company.

"It's a failure of leadership from Washington to Detroit that led our auto companies to this point. Year after year, decade after decade, we've seen problems papered over and tough choices kicked down the road," Obama said. "We as a nation cannot afford to shirk responsibility any longer."

• Read "10 Winners in the Recession."