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President states that while the auto industry cannot be allowed to vanish the companies must be able to stand on their own and not become wards of the state.

Restructuring plans don’t go far enough

Here at Auto Credit Express, we were surprised that the plans of the auto companies were rejected by the President as not going far enough. In hindsight, however, it appears that the government is using this approach to put more pressure on stakeholders, as well as the unions, to force additional monetary as well as wage concessions from both sides.

Today, in a prepared statement, the president stated that, “We cannot, we must not, and we will not let our auto industry simply vanish.” But at the same time, “These companies – and this industry – must ultimately stand on their own, not as wards of the state.” He went on to state that the failure was not a result of the families and communities that have supported the auto industry. “Rather, it is a failure of leadership – from Washington to Detroit – that led our auto companies to this point.”

General Motors

By raising the specter of a possible bankruptcy, it appears that this move could force additional wage and monetary concessions from creditors and the union and could avoid a possible Chapter 11 from General Motors. To help in this process, GM will be guaranteed enough resources from the government to continue operations during the next 60 days. During this time, the company must come up with a plan that includes dealers, suppliers and the unions, in which the company must “fundamentally restructure in a way that would justify an investment of additional tax dollars.” GM will also be working with the automotive task force during this time to produce this business plan.

As part of a statement made in response to this address, here is what GM had to say: “Our strong preference is to complete this restructuring out of court. However, GM will take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process.”

Chrysler

Chrysler, on the other hand, has far less time – just 30 days, to negotiate a final agreement for a partnership with Fiat that’s agreeable to all the parties involved. This would enable the company to share in the Italian company’s small car technology and build more fuel efficient cars and engines here in the U.S. As part of the agreement, majority ownership in the company could not be taken by Fiat until the government loans are paid back.

If an agreement can be reached that satisfies the government, Chrysler could receive an additional $6 billion in government aid. Without an agreement, according to the President, “we will not be able to justify investing additional tax dollars to keep Chrysler in business.”

Contained in the response from Chrysler CEO Bob Nardelli was the following statement, “We are pleased that Chrysler, Fiat and Cerberus have reached agreement on a framework of a global alliance, supported by the U.S. Treasury… While we recognize that we still have substantial hurdles to resolve, Chrysler is committed to working closely with Fiat, the Administration, U.S. Treasure and the Task Force to secure the support of necessary stakeholders.”

Additional Government Initiatives

In order to aid the auto companies in their efforts to become profitable, the government will take a number of steps to help them, including the unprecedented step of underwriting new vehicle warranties from each company. According to the statement, warranties from both GM and Chrysler will have government backing: “starting today, the United States government will stand behind your warrantee.”

In addition, funds to purchase government cars will be accelerated through the budget process to accelerate Federal fleet purchases. The administration is also working through the Treasury Department’s Consumer and Business Lending Initiative to increase the flow of credit to auto finance companies.

To help spur auto sales, the IRS will begin a program to educate consumers about the tax benefits of buying a car with the possible deduction (if you itemize) of sales and excise taxes. Finally, the fleet modernization program (cash for clunkers) will be looked at if there are parts of the Recovery Act that could be trimmed in order to fund the program.

Auto crisis compared to a hurricane

As part of a new initiative, the position of Director of Recovery for Auto Communities and Workers (former Deputy Labor Secretary Edward Montgomery) will be created to cut through the red tape to assist those regions affected by the crisis by helping create new manufacturing jobs and new businesses in those areas hardest hit by plant closings and auto company restructuring

Finally, the President compared the current auto crisis to a natural disaster. “When a community is struck by a natural disaster, the nation responds to put it back on its feet. While the storm that’s hit our auto towns is not a tornado or a hurricane, the damage is clear, and we must respond.”

The Bottom Line

Today, it appears that a line has been drawn in the sand. Chrysler has 30 days to secure the support of its stakeholders as well as work through any obstacles in its “framework” agreement with Fiat, while General Motors has an additional 30 days to come up with a plan for a much smaller company that can be viable in the years ahead.

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Tags: auto loan

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