President Obama, in an interview with CBS’ Face the Nation on Sunday, said American automotive companies must do more to receive additional funds from the government.’
General Motors and Chrysler have avoided bankruptcy because of $17.4 billion given in government loans.
Both have used most of their funds, but the economic downturn has led to the worst decline in auto sales in 27 years, so both companies are requesting more.
GM wants another $16.6 billion. Chrysler – rationally at least in comparison – wants $5 billion more.’
Obama’s auto industry task force has concluded that Chrysler cannot survive as a stand-alone company. A proposed alliance with Italian automaker Fiat, if finalized by April 30, would warrant another $6 billion in government funds to Chrysler, Obama’s team said.
A deadline for today has been set for GM and Chrysler to submit completed restructuring plans meant to show their willingness to sacrifice now to succeed later.’
Neither company is expected to finish its work. GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in debt, mainly to banks. GM also owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.’
Though continuing to bail out these companies seems unproductive now, if they were to fail, the consequences might be dire.
In February, GM said it intended to cut nearly 20 percent of its work force, about 47,000 jobs, close hundreds of dealerships and focus on its four core brands – Chevrolet, Cadillac, GMC and Buick.’
Many jobs were lost, and the economy took another hit. 47,000 jobs is insubstantial compared to what would be lost if the company were to reach bankruptcy.
Obama, like much of the American public, is in favor of an American auto industry, but one that can support itself.’
‘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 said. ‘That’s going to mean a set of sacrifices from all parties involved – management, labor, shareholders, creditors, suppliers, dealers. Everybody is going to have to come to the table and say it’s important for us to take serious restructuring steps now, in order to preserve a brighter future down the road.’
GM’s chairman and chief executive, Rick Wagoner, is resigning. Wagoner’s step-down is aptly timed as much of GM’s failures have been attributed to his poor decisions.’
GM will not comment at this time on Wagoner’s rumored leave, but the British Broadcasting Corp. is reporting that he was specifically asked to step down as a condition of additional loans from the U.S. government.
Obama cannot afford to give the appearance of using tax dollars to reward executives who have done a poor job, especially after the scandal surrounding AIG and its lavish bonuses. He has stated that he will be taking a tough stance with the automakers.
‘ ‘Bankruptcy could void the warranties,’ UH political science professor Timothy Howard said.’
Having previously worked for Goodyear, Howard said he knows of contracts Goodyear and other companies have made with American automakers. Voided warranties, as well as loss of contracts and jobs, is likely why the Obama administration continues to throw money at these companies, but are they too big to fall?
‘ ‘The market hates uncertainty,’ Howard, who owns a few American-made cars, said. ‘Luckily, I have all of mine paid off.’
Obama is set to announce a plan Monday that will include government backing of warranties for both GM and Chrysler vehicles. The plan will be set up to give consumers confidence to buy, even if one or both companies are forced into bankruptcy.
The basic gist of a free market is that a person or company rises and falls on its own merit.’
So is this the death of capitalism – or since this is the biggest government intervention in the financial system since the Great Depression, could the U.S. rebuild and become even stronger than it was before, as it did after the Depression?