A deadline for the auto industry

What happened

President Obama this week delivered an ultimatum to the auto industry, demanding that General Motors and Chrysler reinvent their companies in much leaner form or face an end to federal bailout funds. Obama and his auto-industry task force rejected a restructuring plan submitted by the two floundering auto companies, and in an indication of its displeasure, the task force forced out GM CEO Rick Wagoner. GM was given 60 days to submit a new restructuring plan, while Chrysler was given 30 days to complete a merger with the Italian company Fiat. “This restructuring, as painful as it will be,” said Obama, “will mark not an end but a new beginning for a great American industry.”

If Chrysler and GM cannot satisfy Obama’s terms, the government will lead them through what it is calling “surgical” bankruptcies. The auto giants would continue manufacturing cars while being split into “good” and “bad” components, with the bad portions assuming the companies’ pension and health-care obligations, which total tens of billions of dollars.

What the editorials said

Obama’s ultimatum was “believable, sharp, and necessary,” said The Washington Post. GM is mired in debt to creditors that won’t renegotiate, and it has failed to extract necessary reductions in benefits from the autoworkers’ union. Chrysler is simply no longer viable as an independent company and needs Fiat’s expertise in making small, efficient cars. To stay in business, the White House is saying, these two companies must embrace truly radical change—and it’s a demand Obama has a right to make, after $17.4 billion in taxpayer bailouts thus far.

Actually, Obama is beginning to sound like the hapless parent of a spoiled teenager, said the Los Angeles Times: Just one more chance and then you’re really in trouble, I mean it! It’s time for both companies to declare Chapter 11, so they and their bondholders can shed some of their costly obligations, and reassume control of their own destiny. “We’re more comfortable letting the stakeholders decide what the firms should look like in the future, rather than have the administration decide what’s best for them and the car-buying public.”

What the columnists said

Obama just sent “a chilling message” to anyone who believes in the free market, said Daniel Howes in The Detroit News. The federal government, which “doesn’t own a single share” of GM, ousted a sitting CEO over the wishes of a company’s directors. A good CEO, too, said William J. Holstein in The New York Times. Under Wagoner, GM forced concessions out of the unions that allowed it to shed workers and trim wages, and redesigned the manufacturing process so that its cars were equal in quality to those of the Japanese automakers. But the people needed “a scapegoat,” so Obama gave them one.

You can’t be serious, said Paul Ingrassia in The Wall Street Journal. Since Wagoner assumed control a decade ago, GM’s market share went from 28 percent to 22 percent, and its stock price has plummeted from $70 a share to under $3. He bet heavily on gas-guzzling SUVs and pickup trucks just as gas prices rose, and failed to shut down any of GM’s redundant brands. “Business executives are supposed to be hard-nosed realists, but we heard more realism from Mr. Obama this week than we’ve heard from Detroit in years.”

But if Obama is suddenly so hard on Detroit, said Andrew Leonard in Salon.com, why has the president been “so soft on Wall Street?” My guess is that Obama knows the public is fed up, and is trying out a new get-tough stance on the auto companies, in preparation for giving ultimatums to the most troubled banks and financial institutions, such as Citigroup, Bank of America, and AIG. Watch out, Wall Street: “The big reckoning is still coming.”

What next?

GM’s new CEO, Fritz Henderson, said this week that it was “more probable” now that the company would end up in bankruptcy. The company that emerges, whether as a result of that process or of independent restructuring, will be significantly smaller than the current one, said Bill Vlasic and Nick Bunkley in The New York Times. Tens of thousands of jobs will be cut, retired autoworkers will lose some of their benefits, thousands of dealerships will be closed, and brands such as Hummer, Saturn, Buick, Pontiac, and GMC will be downsized or eliminated.