This morning President Obama will formally announce his plan for Chrysler and General Motors, the two ailing automakers seeking billions of dollars in additional assistance.*
But one element of the administration’s strategy leaked out on Sunday afternoon: GM CEO Rick Wagoner is history.
As a condition for extending more financial assistance, Obama demanded that Wagoner resign. The administration relayed this request on Friday. Wagoner officially stepped down on Sunday.
It would be a mistake to assume Obama thinks Wagoner or the rest of GM’s current management are solely responsible for the company’s problems. But Obama wants to transform GM, both culturally and structurally. Such a transformation necessarily begins at the top. As one expert told the New York Times, Wagoner is “a victim of problems that his predecessors did not solve, but he’s also responsible for where G.M. is today.”
Wagoner’s resignation is the big headline as I write this. But it’s safe to assume there will be more news by the time Obama is done talking on Monday morning. As you listen to what he says, and read about his administration’s intentions, here are a few things to keep in mind.
Stay clear on the meaning of “viability.” Under the terms of the rescue package that President Bush implemented back in January, the government must declare by March 31--that is, today--whether Chrysler and GM have met the criteria for “viability.” They very clearly have not, since renegotiated deals with the bondholders, the unions, and other interested parties are still pending--and the companies themselves will collapse without more infusions of govenrment money.
But viability by March 31 was a somewhat arbitrary deadline anyway, set without any clear rationale. And it’s not entirely surprising that the companies need more money, given that auto sales have deteriorated more than anybody expected even a few months ago.
The important question right now is what happens next--whether, with additional reworking of contracts and more financial support, the companies might become viable in the future. So pay close attention to Obama’s language. Does he believe there’s a future for these auto companies? Both of them or just one? And under what conditions?
Watch the union-bondholder standoff. In GM’s case, the primary (though hardly only) obstacle to re-negotiating contracts is a standoff between the bondholders and unions. Each side has dug in its heels, refusing to make further concessions until the other one does. And while I haven’t done much independent reporting on this, the emerging consensus seems to hold that the union is a lot more willing to compromise than the bondholders are.
Among those who have criticized the bondholders is Steven Rattner, head of the administration’s automobile task force. "I think bondholders are being quite difficult," Rattner told the Detroit Free Press. "I've been in many difficult discussions with bondholders and this one is certainly right up there.”
It will be interesting to see whether Obama or his advisers push the bondholders (or the unions) harder on Monday.
Listen for the “B” word. During the frenzied debate in December and January, many observers--this writer included--suggested that simply letting the companies go bankrupt was highly unadvisable. To successfully reorganize under bankruptcy, a company must get debtor-in-possession (DIP) financing. But DIP money would be impossible to raise in this financial environment.
In addition, bankruptcy is a messy process. As creditors fight over assets, litigation can overwhelm the company trying to reorganize itself. Among those who would feel the impact would be the automakers’ suppliers, who are also struggling and could ill afford disruptions in their payments.
Since that time, experts have come forward to explain how a limited bankruptcy proceeding, perhaps through a so-called 363 sale, could avoid some of those pitfalls. (For more on this, here's some commentary from Harvard Law Professor Mark Roe.) But government would have to steer the process and provide the DIP financing. It would also have to guarantee warranties, so consumers would feel confident buying cars from companies in the midst of bankruptcy proceedings.
Will Obama or his advisers talk up that option, explicitly or implicitly? It would make sense. Keep in mind that making the threat of bankruptcy seem credible may be the only way to force compromises from various stakeholders. And the only way to make the threat of bankruptcy seem credible may be to make the option a serious possibility--for real.
The Collateral Damage: Rescue or no rescue, the Detroit Three are going to keep getting smaller. That means more layoffs in parts of the country that are already suffering. My home state of Michigan, for example, now has an unemployment rate of 12 percent--highest in the nation. Whatever Obama decides, it's about to get higher.
What can the administration do to minimize the short-term pain? And what can it do to help displaced workers find well-paying, stable employment in the future? There's still a lot of recovery money to be spent. Maybe that's the place to start.
*Update: The administration has leaked details of the plan. See the item above.